UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 27, 2017

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________ to _______________________

Commission File No. 0-209

BASSETT FURNITURE INDUSTRIES, INCORPORATED

(Exact name of Registrant as specified in its charter)

Virginia	54-0135270
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

3525 Fairystone Park Highway

Bassett, Virginia 24055

(Address of principal executive offices)

(Zip Code)

(276) 629-6000

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes    X    No             

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    X    No             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	Accelerated filer	X
Non-accelerated filer	(Do not check if a smaller reporting company)
	Smaller reporting company
	Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes          No      X      

At June 16, 2017, 10,724,586 shares of common stock of the Registrant were outstanding.

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

ITEM		PAGE
PART I - FINANCIAL INFORMATION
1.	Condensed Consolidated Financial Statements as of May 27, 2017 (unaudited) and November 26, 2016 and for the three and six months ended May 27, 2017 (unaudited) and May 28, 2016 (unaudited)
	Condensed Consolidated Statements of Income and Retained Earnings	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
3.	Quantitative and Qualitative Disclosures About Market Risk	33
4.	Controls and Procedures	34
	PART II - OTHER INFORMATION
1.	Legal Proceedings	36
2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	36
3.	Defaults Upon Senior Securities	36
4.	Exhibits	36

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE PERIODS ENDED MAY 27, 2017 AND MAY 28, 2016 – UNAUDITED

(In thousands except per share data)

	Quarter Ended						Six Months Ended
	May 27, 2017			May 28, 2016			May 27, 2017			May 28, 2016
Sales revenue:
Furniture and accessories	$	100,294		$	92,990		$	193,992		$	185,392
Logistics		13,831			13,677			26,025			28,148
Total sales revenue		114,125			106,667			220,017			213,540
Cost of furniture and accessories sold		44,981			42,419			86,879			84,405
Selling, general and administrative expenses excluding new store pre-opening costs		61,075			58,088			119,599			117,045
New store pre-opening costs		469			307			1,275			446
Income from operations		7,600			5,853			12,264			11,644
Gain on sale of investment		3,267			-			3,267			-
Impairment of investment in real estate		(1,084	)		-			(1,084	)		-
Other loss, net		(678	)		(600	)		(1,411	)		(1,257	)
Income before income taxes		9,105			5,253			13,036			10,387
Income tax expense		3,263			1,868			4,333			3,768
Net income	$	5,842		$	3,385		$	8,703		$	6,619
Retained earnings-beginning of period		131,178			123,176			129,388			120,904
Cash dividends		(1,073	)		(998	)		(2,144	)		(1,960	)
Retained earnings-end of period	$	135,947		$	125,563		$	135,947		$	125,563
Basic earnings per share	$	0.55		$	0.31		$	0.82		$	0.61
Diluted earnings per share	$	0.54		$	0.31		$	0.81		$	0.61
Dividends per share	$	0.10		$	0.09		$	0.20		$	0.18

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE PERIODS ENDED MAY 27, 2017 AND MAY 28, 2016 – UNAUDITED

(In thousands)

	Quarter Ended						Six Months Ended
	May 27, 2017			May 28, 2016			May 27, 2017			May 28, 2016
Net income	$	5,842		$	3,385		$	8,703		$	6,619
Other comprehensive income:
Recognize prior service cost associated with Long Term Cash Awards (LTCA)		(932	)		-			(932	)		-
Amortization associated with LTCA		24			-			24			-
Income taxes related to LTCA		350			-			350			-
Amortization associated with supplemental executive retirement defined benefit plan (SERP)		94			92			187			183
Income taxes related to SERP		(36	)		(36	)		(71	)		(70	)
Other comprehensive income, net of tax		(500	)		56			(442	)		113
Total comprehensive income	$	5,342		$	3,441		$	8,261		$	6,732

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MAY 27, 2017 AND NOVEMBER 26, 2016

(In thousands)

	(Unaudited)
	May 27, 2017			November 26, 2016
Assets
Current assets
Cash and cash equivalents	$	29,798		$	35,144
Short-term investments		23,125			23,125
Accounts receivable, net		19,486			18,358
Inventories		58,093			53,215
Other current assets		8,599			10,727
Total current assets		139,101			140,569
Property and equipment, net		106,900			104,655
Deferred income taxes		8,112			8,071
Goodwill and other intangible assets		17,512			17,360
Other		5,471			7,612
Total long-term assets		31,095			33,043
Total assets	$	277,096		$	278,267
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	20,858		$	21,281
Accrued compensation and benefits		12,889			13,602
Customer deposits		22,649			25,181
Dividends payable		-			3,218
Current portion of long-term debt		3,346			3,290
Other accrued liabilities		11,847			10,441
Total current liabilities		71,589			77,013
Long-term liabilities
Post employment benefit obligations		13,714			12,760
Notes payable		631			3,821
Other long-term liabilities		4,177			3,968
Total long-term liabilities		18,522			20,549
Stockholders’ equity
Common stock		53,623			53,615
Retained earnings		135,947			129,388
Additional paid-in capital		410			255
Accumulated other comprehensive loss		(2,995	)		(2,553	)
Total stockholders' equity		186,985			180,705
Total liabilities and stockholders’ equity	$	277,096		$	278,267

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED MAY 27, 2017 AND MAY 28, 2016 – UNAUDITED

(In thousands)

	Six Months Ended
	May 27, 2017			May 28, 2016
Operating activities:
Net income	$	8,703		$	6,619
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		6,706			5,611
Provision for asset impairment charge		1,084			-
Gain on sale of investment		(3,267	)		-
Tenant improvement allowance received from lessors		715			590
Deferred income taxes		318			1,198
Excess tax benefits from stock-based compensation		327			41
Other, net		960			697
Changes in operating assets and liabilities:
Accounts receivable		(904	)		2,436
Inventories		(4,535	)		5,062
Other current assets		2,128			(1,451	)
Customer deposits		(2,532	)		(3,867	)
Accounts payable and accrued liabilities		(211	)		(5,926	)
Net cash provided by operating activities		9,492			11,010
Investing activities:
Purchases of property and equipment		(9,172	)		(14,116	)
Proceeds from sales of property and equipment		63			577
Proceeds from sale of investment		3,592			-
Acquisition of retail licensee store		(655	)		-
Other		223			-
Net cash used in investing activities		(5,949	)		(13,539	)
Financing activities:
Cash dividends		(5,363	)		(4,145	)
Proceeds from the exercise of stock options		221			114
Other issuance of common stock		-			176
Repurchases of common stock		(82	)		(1,930	)
Taxes paid related to net share settlement of equity awards		(474	)		-
Repayments of notes payable		(3,191	)		(4,920	)
Proceeds from equipment loans		-			6,692
Net cash used in financing activities		(8,889	)		(4,013	)
Change in cash and cash equivalents		(5,346	)		(6,542	)
Cash and cash equivalents - beginning of period		35,144			36,268
Cash and cash equivalents - end of period	$	29,798		$	29,726

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.

The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our wholly-owned subsidiaries of which we have a controlling interest. In accordance with ASC Topic 810, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees nor any other of our counterparties represent VIEs.

Revenue from the sale of furniture and accessories is reported in the accompanying condensed consolidated statements of income net of estimates for returns and allowances.

Revenues from logistical services are generated by our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”) which we acquired in fiscal 2015. Sales of logistical services from Zenith to our wholesale and retail segments have been eliminated in consolidation, and Zenith’s operating costs and expenses are included in selling, general and administrative expenses in our condensed consolidated statements of income.

2. Interim Financial Presentation

All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The results of operations for the three and six months ended May 27, 2017 are not necessarily indicative of results for the full fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 26, 2016.

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter. Our effective tax rates of 35.8% and 33.2% for the three and six months ended May 27, 2017, respectively, and 35.6% and 36.3% for the three and six months ended May 28, 2016, respectively, differ from the federal statutory rate primarily due to the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation and the Section 199: Domestic Production Activities Deduction. During the six months ended May 27, 2017 and May 28, 2016, our income tax provision includes excess tax benefits on stock-based compensation in the amount of $327 and $41, respectively.

3. Business Combination – Licensee Store Acquisition

During the six months ended May 27, 2017, we acquired the operations of the Bassett Home Furnishings (“BHF”) store located in Columbus, Ohio for a purchase price of $655. The store had been owned and operated by a licensee that had determined that continued ownership of a BHF store was no longer consistent with its future business objectives. We believe that Columbus, Ohio represents a viable market for a BHF store.

The purchase price was allocated as follows:

Inventory	$	343
Goodwill		312
Purchase price	$	655

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

The inputs into our valuation of the acquired assets reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 inputs as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures. See Note 4.

The pro forma impact of the acquisition and the results of operations for the Columbus store since acquisition are not material to our consolidated results of operations for the six months ended May 27, 2017.

4. Financial Instruments and Fair Value Measurements

Financial Instruments

Our financial instruments include cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, cost method investments, accounts payable and notes payable/long-term debt. Because of their short maturities, the carrying amounts of cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, and accounts payable approximate fair value. Our cost method investments generally involve entities for which it is not practical to determine fair values.

Investments

Our short-term investments of $23,125 at both May 27, 2017 and November 26, 2016 consisted of certificates of deposit (CDs) with original terms of twelve months, bearing interest at rates ranging from 0.35% to 1.10%. At May 27, 2017, the weighted average remaining time to maturity of the CDs was approximately one month and the weighted average yield of the CDs was approximately 0.65%. Each CD is placed with a Federally insured financial institution and all deposits are within Federal deposit insurance limits. Due to the nature of these investments and their relatively short maturities, the carrying amount of the short-term investments at May 27, 2017 and November 26, 2016 approximates their fair value.

Fair Value Measurement

The Company accounts for items measured at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

We believe that the carrying amounts of our current assets and current liabilities approximate fair value due to the short-term nature of these items. The recurring estimate of the fair value of our notes payable for disclosure purposes (see Note 8) involves Level 3 inputs. Our primary non-recurring fair value estimates typically involve business acquisitions (Note 3) which involve a combination of Level 2 and Level 3 inputs.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

5. Accounts Receivable

Accounts receivable consists of the following:

	May 27, 2017			November 26, 2016
Gross accounts receivable	$	20,217		$	19,157
Allowance for doubtful accounts		(731	)		(799	)
Accounts receivable, net	$	19,486		$	18,358

Activity in the allowance for doubtful accounts for the six months ended May 27, 2017 was as follows:

Balance at November 26, 2016	$	799
Reductions to allowance		(68	)
Balance at May 27, 2017	$	731

We believe that the carrying value of our net accounts receivable approximates fair value. The inputs into these fair value estimates reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 4.

6. Inventories

Inventories are valued at the lower of cost or market. Cost is determined for domestic furniture inventories using the last-in, first-out (LIFO) method. The costs for imported inventories are determined using the first-in, first-out (FIFO) method.

Inventories were comprised of the following:

	May 27, 2017			November 26, 2016
Wholesale finished goods	$	27,076		$	24,392
Work in process		386			369
Raw materials and supplies		12,630			11,343
Retail merchandise		27,070			26,265
Total inventories on first-in, first-out method		67,162			62,369
LIFO adjustment		(7,938	)		(7,804	)
Reserve for excess and obsolete inventory		(1,131	)		(1,350	)
	$	58,093		$	53,215

We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO. The need for these reserves is primarily driven by the normal product life cycle. As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories. Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail. Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:

	Wholesale Segment			Retail Segment			Total
Balance at November 26, 2016	$	1,061		$	289		$	1,350
Additions charged to expense		473			228			701
Write-offs		(674	)		(246	)		(920	)
Balance at May 27, 2017	$	860		$	271		$	1,131

Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in 2017 and do not anticipate that our methodology is likely to change in the future.

7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets consisted of the following:

	May 27, 2017
	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Intangibles subject to amortization
Customer relationships	$	3,038	$	(472	)	$	2,566
Technology - customized applications		834		(278	)		556
Total intangible assets subject to amortization		3,872		(750	)		3,122
Intangibles not subject to amortization:
Trade names		2,490		-			2,490
Goodwill		11,900		-			11,900
Total goodwill and other intangible assets	$	18,262	$	(750	)	$	17,512

	November 26, 2016
	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Intangibles subject to amortization
Customer relationships	$	3,038	$	(371	)	$	2,667
Technology - customized applications		834		(219	)		615
Total intangible assets subject to amortization		3,872		(590	)		3,282
Intangibles not subject to amortization:
Trade names		2,490		-			2,490
Goodwill		11,588		-			11,588
Total goodwill and other intangible assets	$	17,950	$	(590	)	$	17,360

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

Changes in the carrying amounts of goodwill by reportable segment during the six months ended May 27, 2017 were as follows:

	Wholesale		Retail		Logistics		Total
Balance as of November 26, 2016	$	4,839	$	1,820	$	4,929	$	11,588
Goodwill arising from store acquisition (Note 3)		206		106		-		312
Balance as of May 27, 2017	$	5,045	$	1,926	$	4,929	$	11,900

There were no accumulated impairment losses on goodwill as of May 27, 2017 or November 26, 2016.

Amortization expense associated with intangible assets during the three and six months ended May 27 and May 28, 2016 was as follows:

	Quarter Ended				Six Months Ended
	May 27, 2017		May 28, 2016		May 27, 2017		May 28, 2016
Intangible asset amortization expense	$	80	$	80	$	161	$	161

8. Notes Payable and Bank Credit Facility

Our notes payable consist of the following:

	May 27, 2017
	Principal Balance			Unamortized Discount			Net Carrying Amount
Zenith acquisition note payable	$	3,000		$	(52	)	$	2,948
Real estate notes payable		1,029			-			1,029
Total Debt		4,029			(52	)		3,977
Less current portion		(3,398	)		52			(3,346	)
Total long-term debt	$	631		$	-		$	631

	November 26, 2016
	Principal Balance			Unamortized Discount			Net Carrying Amount
Zenith acquisition note payable	$	6,000		$	(108	)	$	5,892
Real estate notes payable		1,219			-			1,219
Total Debt		7,219			(108	)		7,111
Less current portion		(3,385	)		95			(3,290	)
Total long-term debt	$	3,834		$	(13	)	$	3,821

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

The future maturities of our notes payable are as follows:

Remainder of fiscal 2017	$	196
Fiscal 2018		3,412
Fiscal 2019		421
Fiscal 2020		-
Fiscal 2021		-
Fiscal 2022		-
Thereafter		-
	$	4,029

Zenith Acquisition Note Payable

As part of the consideration given for our acquisition of Zenith on February 2, 2015, we issued an unsecured note payable to the former owner in the amount of $9,000, payable in three annual installments of $3,000 due on each anniversary of the note. Interest is payable annually at the one year LIBOR rate. The note was recorded at its fair value in connection with the acquisition resulting in a debt discount that is amortized to the principal amount through the recognition of non-cash interest expense over the term of the note. Interest expense resulting from the amortization of the discount was $19 and $57 for the three and six months ended May 27, 2017, respectively, and $46 and $112 for the three and six months ended May 28, 2016, respectively. The current portion of the note due within one year, including unamortized discount, was $2,948 and $2,904 at May 27, 2017 and November 26, 2016, respectively.

Real Estate Notes Payable

Certain of our retail real estate properties have been financed through commercial mortgages with outstanding principal totaling $1,029 and $1,219 at May 27, 2017 and November 26, 2016, respectively. The mortgages bear interest at fixed rates of 6.73%. They are collateralized by the respective properties with net book values totaling approximately $5,791 and $5,858 at May 27, 2017 and November 26, 2016, respectively. The current portion of these mortgages due within one year was $398 and $385 as of May 27, 2017 and November 26, 2016, respectively.

Fair Value

We believe that the carrying amount of our notes payable approximates fair value at both May 27, 2017 and November 26, 2016. In estimating the fair value, we utilize current market interest rates for similar instruments. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 3.

Bank Credit Facility

Our credit facility with our bank provides for a line of credit of up to $15,000. This credit facility, which matures in December of 2018, is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future.

At May 27, 2017, we had $1,972 outstanding under standby letters of credit against our line, leaving availability under our credit line of $13,028. In addition, we have outstanding standby letters of credit with another bank totaling $511.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

9. Post Employment Benefit Obligations

Management Savings Plan

On May 1, 2017, our Board of Directors, upon the recommendation of the Organization, Compensation and Nominating Committee (the “Committee”), adopted the Bassett Furniture Industries, Incorporated Management Savings Plan (the “Plan”).The Plan is an unfunded, nonqualified deferred compensation plan maintained for the benefit of certain highly compensated or management level employees.

The Plan is an account-based plan under which (i) participants may defer voluntarily the payment of current compensation to future years (“participant deferrals”) and (ii) the Company may make annual awards to participants payable in future years (“Company contributions”). The Plan permits each participant to defer up to 75% of base salary and up to 100% of any incentive compensation or other bonus, which amounts would be credited to a deferral account established for the participant. Such deferrals will be fully vested at the time of the deferral. Participant deferrals will be indexed to one or more deemed investment alternatives chosen by the participant from a range of alternatives made available under the Plan. Each participant’s account will be adjusted to reflect gains and losses based on the performance of the selected investment alternatives. A participant may receive distributions from the Plan: (1) upon separation from service, in either a lump sum or annual installment payments over up to a 15 year period, as elected by the participant, (2) upon death or disability, in a lump sum, or (3) on a date or dates specified by the participant (“scheduled distributions”) with such scheduled payments made in either a lump sum or substantially equal annual installments over a period of up to five years, as elected by the participant. Participant contributions will commence during the third quarter of fiscal 2017. Company contributions will vest in full (1) on the third anniversary of the date such amounts are credited to the participant’s account, (2) the date that the participant reaches age 63 or (3) upon death or disability. Company contributions are subject to the same rules described above regarding the crediting of gains or losses from deemed investments and the timing of distributions. The Company plans to make a contribution to the Plan effective February 1, 2018. Expense associated with the planned Company contribution was $28 for the three and six months ended May 27, 2017.

On May 2, 2017, we made Long Term Cash Awards (“LTC Awards”) totaling $2,000 under the Plan to certain management employees in the amount of $400 each. The LTC Awards vest in full on the first anniversary of the date of the award if the participant has reached age 63 by that time, or, if later, on the date the participant reaches age 63, provided in either instance that the participant is still employed by the Company at that time. If not previously vested, the awards will also vest immediately upon the death or disability of the participant prior to the participant’s separation from service. The awards will be payable in 10 equal annual installments following the participant’s death, disability or separation from service. We are accounting for the LTC Awards as a defined benefit pension plan. Accordingly, during the second quarter of fiscal 2017 we recorded an initial projected benefit obligation of $932 representing prior service cost. Our projected benefit obligation for the LTC Awards at May 27, 2017 is $950, which is included in post employment benefit obligations in our condensed consolidated balance sheet. At May 27, 2017, accumulated other comprehensive loss includes unamortized prior service cost of $558 with respect to the LTC Awards, net of the related deferred income tax benefit of $350.

Supplemental Retirement Income Plan

We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives. The liability for the Supplemental Plan was $11,879 and $11,863 as of May 27, 2017 and November 26, 2016, respectively.

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MAY 27, 2017

(Dollars in thousands except share and per share data)

Aggregate Pension Liability and Aggregate Net Periodic Pension Costs

The combined pension liability for the Supplemental Plan and LTC Awards is recorded as follows in the condensed consolidated balance sheets:

	May 27, 2017		November 26, 2016
Accrued compensation and benefits	$	776	$	776
Post employment benefit obligations		12,053		11,087
Total pension liability	$	12,829	$	11,863

Components of net periodic pension costs are as follows:

	Quarter Ended				Six Months Ended
	May 27, 2017		May 28, 2016		May 27, 2017		May 28, 2016
Service cost	$	49	$	36	$	87	$	73
Interest cost		114		106		222		211
Amortization of prior service costs		24		-		24		-
Amortization of transition obligation		11		11		21		21
Amortization of loss		83		81		166		162
Net periodic pension cost	$	281	$	234	$	520	$	467

The components of net periodic pension cost other than the service cost component are included in other loss, net in our condensed consolidated statements of income.

Deferred Compensation Plan

We have an unfunded Deferred Compensation Plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. Our liability under this plan was $1,929 and $1,969 as of May 27, 2017 and November 26, 2016, respectively.

Our combined liability for all deferred compensation arrangements, including Company contributions under the Management Savings Plan, is recorded as follows in the condensed consolidated balance sheets:

	May 27, 2017		November 26, 2016
Accrued compensation and benefits	$	296	$	296
Post employment benefit obligations		1,661		1,673
Total deferred compensation liability	$	1,957	$	1,969

We recognized expense under our deferred compensation arrangements during the three and six months ended May 27, 2017 and May 28, 2016 as follows:

	Quarter Ended				Six Months Ended
	May 27, 2017		May 28, 2016		May 27, 2017		May 28, 2016
Deferred compensation expense	$	82	$	57	$	136	$	114

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(Dollars in thousands except share and per share data)

10. Other Gains and Losses

Gain on Sale of Investment

In 1985, we acquired a minority interest in a privately-held, start-up provider of property and casualty insurance for $325. We have accounted for this investment on the cost method and included it in other long-term assets in our condensed consolidated balance sheet. In April of 2017 we sold our interest for $3,592 in cash, resulting in a gain of $3,267 recognized for the three and six months ended May 27, 2017.

Impairment of Investment in Real Estate

We own a building in Chesterfield County, Virginia that was formerly leased to a licensee for the operation of a BHF store. The building is subject to a ground lease that expires in 2020, but which has additional renewal options. Since 2012, we have leased the building to another party who is, as of recently, paying less than the full amount of the lease obligation, resulting in rental income insufficient to cover our ground lease obligation. Efforts to sell our interest in the building have been unsuccessful so far. We have also concluded that absent a significant cash investment in the building the likelihood of locating another tenant for the building at a rent that would provide positive cash flow in excess of the ground lease expense is remote. In addition, we obtained an appraisal during the quarter ended May 27, 2017 which indicated that the value of the building had significantly decreased and was now minimal. Given these circumstances, we concluded in the current quarter that we are unlikely to renew the ground lease in 2020 and would therefore likely vacate the property at that time. Consequently, we recorded a non-cash impairment charge of $1,084 for the three and six months ended May 27, 2017 to write off the value of the building. The carrying value of the building at November 26, 2016 of $1,108 was included in other long-term assets in our condensed consolidated balance sheet.

11. Commitments and Contingencies

We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, we believe that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services segment. Our real estate lease terms range from one to 15 years and generally have renewal options of between five and 15 years. Some store leases contain contingent rental provisions based upon sales volume. Our transportation equipment leases have terms ranging from two to seven years with fixed monthly rental payments plus variable charges based upon mileage. The following schedule shows future minimum lease payments under non-cancellable operating leases with terms in excess of one year as of May 27, 2017:

	Retail Stores		Distribution Centers		Transportation Equipment		Total
Remainder of fiscal 2017	$	10,663	$	2,377	$	1,685	$	14,725
Fiscal 2018		21,148		3,379		2,325		26,852
Fiscal 2019		19,600		2,375		1,958		23,933
Fiscal 2020		18,280		1,601		1,781		21,662
Fiscal 2021		15,986		1,349		1,169		18,504
Fiscal 2022		13,343		1,743		963		16,049
Thereafter		37,558		1,320		254		39,132
Total future minimum lease payments	$	136,578	$	14,144	$	10,135	$	160,857

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(Dollars in thousands except share and per share data)

We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $1,379 and $1,868 at May 27, 2017 and November 26, 2016, respectively.

In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory), and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease guarantees (an estimate of the cost to the Company to perform on these guarantees) at May 27, 2017 and November 26, 2016 was not material.

12. Earnings Per Share

The following reconciles basic and diluted earnings per share:

	Net Income		Weighted Average Shares		Net Income Per Share
For the quarter ended May 27, 2017:
Basic earnings per share	$	5,842		10,648,033	$	0.55
Add effect of dilutive securities:
Options and restricted shares		-		74,293		(0.01	)
Diluted earnings per share	$	5,842		10,722,326	$	0.54
For the quarter ended May 28, 2016:
Basic earnings per share	$	3,385		10,767,082	$	0.31
Add effect of dilutive securities:
Options and restricted shares		-		145,609		-
Diluted earnings per share	$	3,385		10,912,691	$	0.31
For the six months ended May 27, 2017:
Basic earnings per share	$	8,703		10,630,836	$	0.82
Add effect of dilutive securities:
Options and restricted shares		-		88,009		(0.01	)
Diluted earnings per share	$	8,703		10,718,845	$	0.81
For the six months ended May 28, 2016:
Basic earnings per share	$	6,619		10,773,656	$	0.61
Add effect of dilutive securities:
Options and restricted shares		-		142,584		-
Diluted earnings per share	$	6,619		10,916,240	$	0.61

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MAY 27, 2017

(Dollars in thousands except share and per share data)

For the three and six months ended May 27, 2017 and May 28, 2016, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

Anti-dilutive shares:

	Quarter Ended				Six Months Ended
	May 27, 2017		May 28, 2016		May 27, 2017		May 28, 2016
Unvested shares		-		5,814		6,538		7,814

13. Segment Information

We have strategically aligned our business into three reportable segments as defined in ASC 280, Segment Reporting, and as described below:

● Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. Our wholesale segment also includes our holdings of short-term investments and retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of income.

● Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities and capital expenditures directly related to these stores.

● Logistical services. Our logistical services operating segment reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s total operating costs, including those associated with providing logistical services to the Company as well as to third-party customers, are included in selling, general and administrative expenses and were $23,828 and $46,388 for the three and six months ended May 27, 2017, and $23,149 and $47,084 for the three and six months ended May 28, 2016, respectively.

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores and the elimination of Zenith logistics revenue from our wholesale and retail segments. Inter-company income elimination includes the embedded wholesale profit in the Company-owned store inventory that has not been realized. These profits will be recorded when merchandise is delivered to the retail consumer. The inter-company income elimination also includes rent paid by our retail stores occupying Company-owned real estate, and the elimination of shipping and handling charges from Zenith for services provided to our wholesale and retail operations.

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MAY 27, 2017

(Dollars in thousands except share and per share data)

The following table presents our segment information:

	Quarter Ended						Six Months Ended
	May 27, 2017			May 28, 2016			May 27, 2017			May 28, 2016
Sales Revenue
Wholesale	$	62,293		$	59,906		$	124,268		$	119,482
Retail - Company-owned stores		67,144			61,943			128,737			123,538
Logistical services		24,626			23,810			46,960			48,489
Inter-company eliminations:
Furniture and accessories		(29,143	)		(28,859	)		(59,013	)		(57,628	)
Logistical services		(10,795	)		(10,133	)		(20,935	)		(20,341	)
Consolidated	$	114,125		$	106,667		$	220,017		$	213,540
Income from Operations
Wholesale	$	4,783		$	4,334		$	10,676		$	8,732
Retail - Company-owned stores		1,367			381			24			697
Logistical services		798			661			572			1,405
Inter-company elimination		652			477			992			810
Consolidated	$	7,600		$	5,853		$	12,264		$	11,644
Depreciation and Amortization
Wholesale	$	664		$	459		$	1,308		$	915
Retail - Company-owned stores		1,496			1,529			2,968			3,060
Logistical services		1,195			806			2,430			1,636
Consolidated	$	3,355		$	2,794		$	6,706		$	5,611
Capital Expenditures
Wholesale	$	2,218		$	1,454		$	3,845		$	2,991
Retail - Company-owned stores		1,211			959			4,914			2,980
Logistical services		133			3,135			413			8,145
Consolidated	$	3,562		$	5,548		$	9,172		$	14,116

	As of		As of
Identifiable Assets	May 27, 2017		November 26, 2016
Wholesale	$	135,098	$	139,477
Retail - Company-owned stores		91,238		88,855
Logistical services		50,760		49,935
Consolidated	$	277,096	$	278,267

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14. Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates ASC Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Companies are allowed to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures. In addition, during 2016 the FASB has issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, all of which clarify certain implementation guidance within ASU 2014-09, and ASU 2016-11, which rescinds certain SEC guidance within the ASC effective upon an entity’s adoption of ASU 2014-09. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is not permitted. Therefore the amendments in ASU 2014-09 will become effective for us as of the beginning of our 2019 fiscal year. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements and have not made any decision on the method of adoption.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory within the scope of this Update be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. For all entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. Therefore the amendments in ASU 2015-11 will become effective for us as of the beginning of our 2018 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. The amendments in ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. The amendments in ASU 2016-01 will become effective for us as of the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. As with previous guidance, there continues to be a differentiation between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Lease assets and liabilities arising from both finance and operating leases will be recognized in the statement of financial position. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The transitional guidance for adopting the requirements of ASU 2016-02 calls for a modified retrospective approach that includes a number of optional practical expedients that entities may elect to apply. The guidance in ASU 2016-02 will become effective for us as of the beginning of our 2020 fiscal year. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements, which we expect will have a material effect on our statement of financial position, and have not made any decision on the method of adoption with respect to the optional practical expedients.

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MAY 27, 2017

(Dollars in thousands except share and per share data)

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costs related to debt prepayments or extinguishments, payments representing accreted interest on discounted debt, payments of contingent consideration after a business combination, proceeds from insurance claims and company-owned life insurance, and distributions from equity method investees, among others. The amendments in ASU 2016-15 are to be adopted retrospectively and will become effective for as at the beginning of our 2019 fiscal year. Early adoption, including adoption in an interim period, is permitted. The adoption of this guidance is not expected to have a material impact upon our presentation of cash flows.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments in ASU 2017-01 shall apply prospectively and will become effective for as at the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in ASU 2017-04 will become effective for us as of the beginning of our 2021 fiscal year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

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In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under existing GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. The amendments in ASU 2017-07 require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in ASU 2017-07 shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. Early adoption is permitted, and we have elected to adopt the amendments in ASU 2017-07 effective as of the beginning of our 2017 fiscal year. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The amendments in ASU 2017-09 will become effective for us as of the beginning of our 2019 fiscal year. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 115-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.

With 91 BHF stores at May 27, 2017, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.  Our store program is designed to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service.  In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 25 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.  

The BHF stores feature custom order furniture ready for delivery in less than 30 days, free in-home design visits (“home makeovers”), and coordinated decorating accessories.  Our philosophy is based on building strong long-term relationships with each customer.  Sales people are referred to as “Design Consultants” and are each trained to evaluate customer needs and provide comprehensive solutions for their home decor.  Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home design services for our customers.

We have factories in Newton, North Carolina and Grand Prairie, Texas that manufacture upholstered furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our “Bench Made” line of furniture. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its process, with custom pieces often manufactured within two weeks of taking the order in our stores. Our logistics team then promptly ships the product to one of our home delivery hubs or to a location specified by our licensees in a timeframe to meet the 30 day promise.  In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture and certain upholstery offerings from several foreign plants, primarily in Vietnam and China. Over 70% of the products we currently sell are manufactured or assembled and finished in the United States.

We also own Zenith Freight Lines, LLC (“Zenith”) which provides logistical services to both the wholesale and retail operations at Bassett along with other furniture manufacturers and retailers. Zenith delivers best-of-class shipping and logistical support services that are uniquely tailored to the needs of Bassett and the furniture industry, as well as the ability to provide the expedited delivery service which is increasingly demanded by our industry. Zenith operates seven regional freight hubs and 12 home delivery centers in 13 states. Approximately 55% of Zenith’s revenue is generated from services provided to non-Bassett customers.

At May 27, 2017, our BHF store network included 62 Company-owned stores and 29 licensee-owned stores. During the first half of fiscal 2017, we opened new stores in Garden City, New York; Culver City, California and King of Prussia, Pennsylvania, and completed the repositioning of our store in Scottsdale, Arizona. In addition, we acquired a store in Columbus, Ohio from a former licensee. We also closed an underperforming store in Danbury, Connecticut and a licensee closed a store in Toronto, Canada.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

We continue to execute our strategy of growing the Company through opening new stores, repositioning stores to improved locations within a market and closing underperforming stores. The following table shows planned store activity where leases have been executed:

		Size		Planned
Location	Type	Sq. Ft.		Opening
New Stores:
Kansas City, KS	Licensed		13,000	Q3 2017
Pittsburgh, PA	Corporate		12,600	Q4 2017
Chandler, AZ	Corporate		8,800	Q4 2017
Wichita, KS	Corporate		10,000	Q4 2017/Q1 2018
El Paso, TX	Corporate		8,400	Q1 2018
Oklahoma City, OK	Corporate		9,700	Q1 2018
Frisco, TX	Corporate		15,000	Q4 2018
Repositioning:
Las Vegas to Summerlin, NV	Corporate		15,500	Q4 2017/Q1 2018

In addition, lease negotiations are underway for both Company-owned and Licensee-owned new store locations that would result in additional openings during 2018. With a track record of six consecutive years of positive same store sales growth and our focus on store productivity, we believe that we can take our concept to new markets and consistently grow overall store count in the years to come. We also plan to close three other stores by the end of the first quarter of 2018 after the lease term expires. We are in active negotiations to obtain improved real estate in one of those markets.

As with any retail operation, prior to opening a new store we incur such expenses as rent, training costs and other payroll related costs. These costs generally range between $200 to $400 per store depending on the overall rent costs for the location and the period between the time when we take physical possession of the store space and the time of the store opening. Generally, rent payments during a buildout period between delivery of possession and opening of a new store are deferred and therefore straight line rent expense recognized during that time does not require cash. Inherent in our retail business model, we also incur losses in the two to three months of operation following a new store opening. Like other furniture retailers, we do not recognize a sale until the furniture is delivered to our customer. Because our retail business model does not involve maintaining a stock of retail inventory that would result in quick delivery and because of the custom nature of many of our furniture offerings, delivery to our customers usually occurs about 30 days after an order is placed. We generally require a deposit at the time of order and collect the remaining balance when the furniture is delivered, at which time the sale is recognized. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $400 to $600 per store. While our retail expansion is initially costly, we believe our site selection and new store presentation will generally result in locations that operate at or above a retail break-even level within a reasonable period of time following store opening. Factors affecting the length of time required to achieve this goal on a store-by-store basis may include the level of brand recognition, the degree of local competition and the depth of penetration in a particular market. Even as new stores ramp up to break-even, we do realize additional wholesale sales volume that leverages the fixed costs in our wholesale business. Because of the increased store openings in 2017, we expect to incur approximately $2,000 of additional new store pre-opening costs and post-opening losses in 2017 as compared to 2016.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

Results of Operations – Periods ended May 27, 2017 compared with periods ended May 28, 2016:

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the three and six months ended May 27, 2017 and May 28, 2016:

	Quarter Ended								Six Months Ended
	May 27, 2017				May 28, 2016				May 27, 2017				May 28, 2016
Sales revenue:
Furniture and accessories	$	100,294	87.9	%	$	92,990	87.2	%	$	193,992	88.2	%	$	185,392	86.8	%
Logistics revenue		13,831	12.1	%		13,677	12.8	%		26,025	11.8	%		28,148	13.2	%
Total sales revenue		114,125	100.0	%		106,667	100.0	%		220,017	100.0	%		213,540	100.0	%
Cost of furniture and accessories sold		44,981	39.4	%		42,419	39.8	%		86,879	39.5	%		84,405	39.5	%
SG&A expenses		61,075	53.5	%		58,088	54.5	%		119,599	54.4	%		117,045	54.8	%
New store pre-opening costs		469	0.4	%		307	0.3	%		1,275	0.5	%		446	0.2	%
Income from operations	$	7,600	6.7	%	$	5,853	5.5	%	$	12,264	5.7	%	$	11,644	5.5	%

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three and six months ended May 27, 2017 as compared with the prior year periods.

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(Dollars in thousands except share and per share data)

Segment Information

We have strategically aligned our business into three reportable segments as described below:

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of income.

Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.

Logistical services. Our logistical services operating segment reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s operating costs are included in selling, general and administrative expenses.

The following tables illustrate the effects of various intercompany eliminations on income from operations in the consolidation of our segment results:

	Quarter Ended May 27, 2017
	Wholesale		Retail		Logistics		Eliminations				Consolidated
Sales revenue:
Furniture & accessories	$	62,293	$	67,144	$	-	$	(29,143	)	(1)	$	100,294
Logistics		-		-		24,626		(10,795	)	(2)		13,831
Total sales revenue		62,293		67,144		24,626		(39,938	)			114,125
Cost of furniture and accessories sold		41,222		33,072		-		(29,313	)	(3)		44,981
SG&A expense		16,288		32,236		23,828		(11,277	)	(4)		61,075
New store pre-opening costs		-		469		-		-				469
Income from operations	$	4,783	$	1,367	$	798	$	652			$	7,600

	Quarter Ended May 28, 2016
	Wholesale		Retail		Logistics		Eliminations				Consolidated
Sales revenue:
Furniture & accessories	$	59,906	$	61,943	$	-	$	(28,859	)	(1)	$	92,990
Logistics		-		-		23,810		(10,133	)	(2)		13,677
Total sales revenue		59,906		61,943		23,810		(38,992	)			106,667
Cost of furniture and accessories sold		39,636		31,641		-		(28,858	)	(3)		42,419
SG&A expense		15,936		29,614		23,149		(10,611	)	(4)		58,088
New store pre-opening costs		-		307		-		-				307
Income from operations	$	4,334	$	381	$	661	$	477			$	5,853

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

Six Months Ended May 27, 2017
Wholesale	Retail	Logistics