UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K10-K/A

(Amendment No. 1)

(Mark One)

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2019

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 number 1-3834

Continental Materials Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code312-541-7200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐¨ No  ☒x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐¨ No  ☒x

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  xNo ☐¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  ☒  xNo ☐¨

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

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

The aggregate market value (based on the June 28, 2019 closing price) of voting stock held by non-affiliates of registrant was approximately $8,816,000. As of March 13,April 20, 2020, there were 1,675,484 shares of the registrant’s common stock outstanding.

Incorporation by reference: The information contained in Part III hereof is hereby incorporated by reference from the earlier filed of: (i) an amendment

Continental Materials Corporation

Amendment No. 1 to this Annual Report on Form 10 K or (ii) a definitive proxy statement filed pursuant to Regulation 14A, within 120 days of10-K

For the Fiscal Year Ended December 28, 2019.2019

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTSEXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) amends our Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of Continental Materials Corporation’s (Company) management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Annual Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors including but not limited to: the impact of the novel coronavirus on the workforce, the Company’s supply chain and customer demand, the amount of new construction, weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in the income tax code, income tax rates as well as accounting pronouncements could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. Forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update them.

PART I

Item 1.        BUSINESS

(References to a “Note” are to the Notes to Consolidated Financial Statements contained elsewhere in this report.)

The Company is a Delaware corporation, incorporated in 1954. The Company is a holding company with operations in the Building Products industry group, although it may look to expand outside of that market. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.

HVAC Segment

The HVAC segment is comprised of four operating companies and sells a variety of products including residential and commercial wall furnaces, fan coils, evaporative coolers, boiler room equipment, dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC), Phoenix Manufacturing, Inc. (PMI) Global Flow Products (GFP) and InOvate Dryer Technologies (InOvate).

•WFC manufactures residential gas furnaces and commercial fan coil systems. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Colton, California location. WFC is one of three domestic companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas-fired console heaters, which comprise only a small component of the heating industry, and is one of nine domestic companies producing fan coils.

•PMI manufactures residential and commercial evaporative coolers. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Phoenix, Arizona location. PMI is one of two primary domestic manufacturers of evaporative coolers, although there are other small domestic competitors as well as a number of foreign producers that also distribute evaporative cooling products in the U.S.

•GFP manufactures American Society of Mechanical Engineers (ASME) certified tanks, pressure vessels, valves and other accessories typically found in commercial hydronic systems at its Broken Arrow, Oklahoma locations. GFP is one of many companies manufacturing and distributing valves, accessories and ASME certified tanks to the hydronics market.

•InOvate designs and manufactures a range of air venting and handling products focused on dryer exhaust safety and efficiency. InOvate partners with its supply chain to leverage manufacturing excellence from its location in Jupiter, Florida. InOvate is, we believe, the market leader in manufacturing metal air handling products for the dryer venting marketplace, as the limited competition generally manufactures lower quality products made out of plastic materials, albeit at a lower price point. 

The HVAC segment group markets its products throughout North America through plumbing, heating and air conditioning wholesale distributors as well as directly to major retail home-centers and other retail outlets. Some of the products are also sold to contractors that install HVAC components and equipment manufacturers for commercial applications. The Company contracts with independent manufacturers’ representatives for all of its products while also employing a staff of sales and sales support personnel.

The HVAC segment group maintains several parts departments and help lines to assist its customers in servicing the products. The Company does not currently perform installation services, nor are maintenance or service contracts offered. The HVAC segment group does not derive any revenue from after-sales service and support other than from parts sales. Training and product information sessions for the furnace, fan coil and evaporative cooler product lines are offered at our plants and other sites for distributors, contractors, engineers, utility company employees and other customers.

The heating and cooling industry is dominated by a few manufacturers which are substantially larger than the Company. These manufacturers sell diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. Competition in this industry is primarily on a basis of price, product features and performance, service and timeliness of delivery.

The HVAC segment has few direct competitors but there are multiple competitors for each product line.

Door Segment

The Door segment is comprised of three operating companies and sells and installs hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries, McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity).

The Door segment’s sales are primarily for commercial and institutional buildings such as schools, healthcare facilities and hospitality buildings.  Sales are made to independent installers, general contractors or building owners. Sales include metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems. Certain projects include on site installation services. The Door Segment markets throughout North America primarily through its own staff of industry professionals who specialize in medical, healthcare, hospitality, assisted living and commercial office interior building products.

The acquisition of Fastrac and Serenity in 2019 has increased the range of products and services and expanded its customer base. See Note 18.

The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems throughout the United States. The door industry is highly fragmented and competitive, and includes a number of regional and international competitors. Competition is largely based on the functional and aesthetic quality of products, service quality, distribution capability and price.

Construction Materials Segment

The Construction Materials segment offers a variety of construction related products including limestone, gravel, sand, steel rebar and consumable construction products from facilities in Pueblo and Colorado Springs, Colorado operated by the Company’s wholly-owned subsidiaries, Castle Concrete Company (Aggregates) and Castle Rebar & Supply (Rebar) and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.).

The Construction Materials segment group markets its products primarily through its own direct sales personnel and confines its sales largely in southern Colorado. The Company competes on price, product availability and customer service.

During 2019, no customer accounted for 10% or more of the total sales of the Company.

In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.

The Company sold substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. See Note 19. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 18 for additional discussion of these acquisitions. In conjunction with these transactions, management reviewed its segment reporting structure and determined it was no longer appropriate for the consolidated business going forward. The segment reporting was revised to align with the way the Company’s decision makers evaluate, manage and allocate resources to the operating businesses after the sale of the concrete and sand operation assets and the acquisitions discussed in Note 18. Segment information for prior periods has been reclassified to conform to current segment reporting structure.

EMPLOYEES

The Company employed 460 people as of December 28, 2019. Employment varies throughout the year due to the seasonal nature of its businesses. The number of employees was significantly reduced due to the sale of substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019.  This transaction also caused the Company to re-align its segment reporting to align with the way management will measure and evaluate operations going forward. A breakdown of the current and prior year’s employment at year-end by segment was:

The factory employees at the WFC plant are represented by the Carpenters Local 721 Union under a contract that expires December 31, 2022. The Company considers relations with its employees and with their union to be good. There are no unions at any of the Company’s other operations.

ENVIRONMENTAL MATTERS

Our operations involve the use, release, discharge, disposal and clean-up of substances regulated under federal, state and/or local environmental protection laws and regulations, including those related to reclamation of mined areas. Some laws impose obligations on us with respect to the management of waste products. We strive not only to maintain compliance with all applicable environmental laws and regulations, but to exceed the minimum requirements of those laws and regulations where practicable. However, there can be no assurance that the Company will be in compliance with all applicable environmental laws and regulations in the future.

In 2019, our capital expenditures and remediation expenses for environmental matters, except those expenses related to our mining reclamation efforts, were not material to our financial condition. Because of the complexity and ever-changing nature of environmental laws and regulations, it is difficult to predict total reclamation costs. 

TENDER OFFER

On February 18, 2020 Bee Street Holdings LLC, an entity controlled by James G. Gidwitz, the Chairman of our board of directors and our Chief Executive Officer, ("Bee Street"), commenced an unsolicited tender offer to acquire all of the outstanding shares of common stock for $9.50 per share in cash.

On March 3, 2020 the Company filed Schedule 14D-9 stating that the Board of Directors had unanimously decided to express no opinion and remain neutral with respect to the offer.

On March 17, 2020, the Bee Street tender offer expired. On March 18, 2020 Bee Street extended the tender offer until April 3, 2020 to allow additional time for stockholders to consider the offer in the light of recent market activity and the developing economic situation stemming from the COVID-19 coronavirus pandemic.

AVAILABLE INFORMATION

The Company electronically files various reports and other information with the Securities and Exchange Commission (SEC) including this annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding the Company. Access to this information is available free of charge at the SEC’s website at http://www.sec.gov. In addition to the SEC site, the Company maintains an internet site which contains SEC filings, SEC filings in XBRL format, Governance documents and Annual Reports. Access to this site and the information therein is available free of charge at www.continental-materials.com.  The information on our website is not incorporated by reference into this Annual Report on Form 10-K.

Item 1A.    RISK FACTORS

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such, is not required to provide information in response to this item. However, in light of recent events, stockholders should be aware of the following risks associated with an investment in the Company:

If Bee Street fails to complete its tender offer for our common stock, our stock price, business, results of operations and financial condition could be adversely affected.

We cannot assure that Bee Street will complete its tender offer for our common stock. If the tender offer is not completed, we will be subject to several risks. Because the current trading price of our common stock may reflect a market assumption that the tender offer will be completed, failure to complete the tender offer could adversely affect the price of our common stock. Also, we have incurred significant, and may incur additional, costs in connection with the tender offer, including the diversion of management resources, for which we will have received little or no benefit if the

tender offer is not completed. A failed transaction may also result in a negative impression of the Company in the investment community.

The tender offer by Bee Street may increase the volatility of the price of our common stock, which may could result in substantial losses by investors.

The tender offer by Bee Street could affect the trading price of our common stock and increase its volatility, as well as reduce the market liquidity for our common stock. Securities class action litigation is commonly instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us in the future could result in substantial costs and a diversion of management’s attention and resources.

The spread of a new strain of coronavirus (also known as COVID-19) may adversely affect our business operations.

In December 2019, a new strain of coronavirus (also known as, and hereinafter referred to as “COVID-19”) originated in Wuhan, China, and quickly spread to infect many people in the city and surrounding area.  In some cases, COVID-19 causes severe illness and even death.  Since its discovery, COVID-19 has spread throughout China and to several other countries, significantly impacting their economies.  Various measures may be taken by countries, including the United States, both on a macro country-wide level and a local level, to combat the virus and its spread.  These may include quarantines or bans on public events.

The continued spread of COVID-19 may adversely affect our supply chain, results of operations and business generally, depending on the extent of its spread of the virus, the rate of infection, the severity of illness and the probability of lethality, the relative effect on various portions of the population (such as the aged), the measures taken to combat the virus and their effectiveness, the effect on international trade of any measures taken to combat the virus, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, the timing and availability of any vaccine for the virus, and other factors.

The Centers for Disease Control and Prevention has stated a risk exists of a pandemic in the United States, which would mean that the current methods in place to control of the spread of the virus have been ineffective. In such a situation, the effect on the economy and on the public may be severe.  There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a potential pandemic, and, as a result, there is considerable uncertainty of its potential effect on our business and results of operations.

Item 1B.     UNRESOLVED STAFF COMMENTS

None.

Item 2.     PROPERTIES

The HVAC segment operates out of owned facilities in Colton, California and Broken Arrow, Oklahoma. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs. Production capacity exists at the Colton plant such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery.  There is sufficient capacity in Broken Arrow, Oklahoma for the current level of business, however, expansion may be required to support increased business activity levels in future years. Additional facilities include leased facilities in Phoenix, Arizona, Jupiter, Florida and Broken Arrow, Oklahoma. Production capacity exists at the Phoenix facilities such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.

The Door segment operates out of an owned facility in Colorado Springs and leased facilities in Colorado Springs, Colorado and Pueblo, Colorado. Product volumes at all of the facilities of the Company are subject to market fluctuations, but in the opinion of management, the facilities are generally well utilized. The facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.

The Construction Materials segment comprises six aggregates locations including Grisenti Farms, Pikeview, Black Canyon (Synder), Pueblo East, Pueblo West, and Barnhart Pit, which are all located in southern Colorado. The previously leased properties of Pueblo East, Pueblo West and Barnhart Pit were part of the legal dispute with Valco, Inc. that was settled in October 2019 (see Note 2) and are now owned by the Company. Following the decision in 2019 to cease mining operations at Pikeview, none of the remaining properties are active in the production of aggregates and are in various states of reclamation under their respective mining permits.

The corporate office operates out of leased office space in Chicago, Illinois.

Item 3.        LEGAL PROCEEDINGS

As previously disclosed, on January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was approximately $218,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.

On October 9, 2019, the Company and Valco filed a Joint Notice of Settlement, regarding the Company’s previously disclosed litigation, stating that the parties had reached a settlement agreement resolving all claims. As part of the $9,000,000 settlement, paid by the Company, we agreed to purchase the previously leased property from Valco. On October 16, 2019, the Company and Valco filed a Stipulated Motion for Dismissal with Prejudice which stated: the parties “agree that this matter, including all claims and counterclaims, dismissed with prejudice and without costs, each party to bear its own attorneys’ fees.” The Court entered the Order of Dismissal with Prejudice on October 16, 2019.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6.

Item 4.        MINE SAFETY DISCLOSURES

The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Annual Report.

PART II

Item 5.       MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common stock of Continental Materials Corporation is traded on the NYSE American stock exchange under the symbol CUO.

The Company currently has fewer than 300 shareholders.

The Company has never paid, nor does it currently intend to declare, any dividends. The Company’s policy of reinvesting earnings from operations is reviewed periodically by the Board of Directors of the Company (the “Board”).

The following sets forth information regarding the Company’s equity plans as of December 28, 2019:

The Company has an open-ended program to repurchase its common stock under which the Board authorized purchases up to a maximum amount of $1,000,000. Repurchases may be made on the open market or in block trades at the discretion of management. During the 2019 fiscal year, 22,499 shares were repurchased and as of December 28, 2019, $743,467 of the authorized amount remained available for stock repurchases.

On March 16, 2020, the Company entered into a credit agreement with a bank which contains certain restrictions on the Company’s ability to repurchase its stock. See further discussion in the “Financial Condition, Liquidity and Capital Resources” section of Item 7 below.

Item 6.       SELECTED FINANCIAL DATA

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.

Item 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY OVERVIEW

The Company experienced various changes in 2019 including the sale of substantially all the assets of its ready-mix concrete and Daniels Sand operations in the first quarter, the acquisition of four new operating businesses in the second quarter,  the cessation of mining at Pikeview quarry in the third quarter and the settlement of the Valco litigation in the fourth quarter. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward, including revisions to the Company’s reporting segments. Segment information for prior periods has been reclassified to conform to current segment reporting structure.

The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment, dryer boxes, and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona, Global Flow Products /American HVAC (GFP) of Broken Arrow, Oklahoma, and InOvate Dryer Technologies (InOvate) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems, and electronic access/security systems from the Company’s wholly-owned subsidiaries, McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers aggregates and construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries, Castle Aggregates and Castle Rebar & Supply of Colorado Springs, and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado.

In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance, property and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office. This classification also holds one property owned by the Company.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations during 2019 was $2,573,000. The increased cash flow compared to 2018 was primarily due to receipt of $14,782,000 from a legal settlement in the first quarter of 2019 offset by a decrease in operating results. See Note 17 for further discussion. Cash used by discontinued operations in 2019 was $2,138,000. The increased use of cash compared to the prior year was mainly due to reduced operating results.

Cash provided by continuing operations in 2018 was $2,061,000. The decline from prior year cash flow was attributable mainly to less favorable operating results partially offset by changes in working capital items, including receivables and inventory. Cash provided by discontinued operations was $631,000 in 2018.

Investing activities provided $886,000 during 2019 compared to $1,270,000 used during 2018.  In 2019, the Company received $23,679,000 from the sale of its discontinued operations and used $22,521,000 to acquire assets of four operating businesses. See Note 19 for discussion of the sales of assets and Note 18 for discussion of acquisitions. In 2019, capital expenditures by continuing operations of $2,693,000, primarily in the Construction Materials segment, were offset by $2,593,000 received from the sale of property and equipment, mainly in the Construction Materials segment. Capital expenditures by discontinued operations were  $172,000 in 2019. In 2018, capital expenditures by continuing operations were $1,409,000, primarily in the HVAC segment. Capital expenditures by discontinued operations of $1,291,000 were offset by $1,430,000 received for the sale of property and equipment.

During 2019, the Company repaid $1,400,000 on its revolving credit line while $257,000 was used to repurchase stock of the Company. During 2018, the Company repaid $1,300,000 on its revolving credit line while $5,000 was used to repurchase stock of the Company.

Certain products within the Company’s portfolio are seasonal, primarily furnaces and evaporative coolers in the HVAC segment which are sensitive to weather conditions particularly during their respective peak selling seasons. Other products within the HVAC segment, specifically fan-coils and dryer boxes, and Door segment sales are, to a significant extent, dependent on construction activity. Historically, the Company has experienced operating losses during the first quarter and typically improved in the second and third quarters reflecting more favorable weather conditions for legacy products. Fourth quarter results have typically varied based on weather conditions affecting the Company’s discontinued operations as well as in the principal markets for the Company’s heating equipment. The sale of the Company’s ready-mix and Daniels Sand operations along with the acquisitions completed in the current year are expected to reduce the seasonality of the Company’s operations.

Historically, the Company would typically experience operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the HVAC segment and payment of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tended to peak during the second quarter and then decline over the remainder of the year. In the current year, a legal settlement and the sale of TMC assets in the first quarter provided sufficient cash reserves such that borrowings against the revolving credit facility were significantly less than historical experience. The cash reserves allowed the Company to complete the acquisitions of four operating businesses without taking on additional debt. The divestiture and acquisition activity is expected to smooth cash flow over the course of the fiscal year and result in more consistent levels of borrowings throughout future years.

Revolving Credit and Term Loan Agreement

The Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) effective March 16, 2020. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.

The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.

The Credit Agreement as amended provides for the following:

Definitions under the Credit Agreement as amended are as follows:

Outstanding funded revolving debt was $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019 and 2018 was $3,700,000 and $9,800,000, respectively. Average outstanding funded debt was $313,000 and $6,058,000 for 2019 and 2018, respectively. At December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future. The Company was not in compliance with the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.

The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for

the next twelve months. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.

Insurance Policies

The Company maintains insurance policies with the following per incident deductibles and policy limits:

Should any or all policy limits be exceeded, the Company maintains umbrella policies which cover the next $25,000,000 of claims.

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet arrangements that are likely to have a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources other than the effect, during the first quarter of 2019, from the implementation of ASU No. 2016-02, Leases (Topic 842). The implementation of the ASU resulted in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000 as of the adoption date. See Note 9.

Cybersecurity Risks and Incidents

The Company is dependent upon the capacity, reliability and security of our information technology (IT) systems for our manufacturing, sales, financial and administrative functions. We also face the challenge of supporting our IT systems and implementing upgrades when necessary, including the prompt detection and remediation of any cybersecurity breaches.

Our IT systems’ security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disaster, unauthorized access, cyber-attack and other similar disruptions. However, our IT systems remain vulnerable to intrusion and damage despite our implementation of security measures that we feel protect our IT systems. To date, we are not aware of any cybersecurity breaches that have negatively impacted our manufacturing operations, sales or financial and administrative functions or that resulted in the compromise of personal information of our employees, customers or suppliers. Should we learn of such a breach, the Company would promptly notify the SEC by filing a Form 8-K and notify all insiders that the purchase or sale of the Company’s stock is forbidden until such information has been given adequate time to become available to the trading public.

RESULTS OF OPERATIONS

In the ensuing discussions of the results of operations, we define the term gross profit as the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.

DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS

2019 vs. 2018

Consolidated sales in 2019 were $113,276,000, an increase of 12,389,000 or 12.3%, compared to 2018 after adjusting for discontinued operations. The increase was directly attributable to the higher sales in the HVAC and Doors segment reflecting the impact of acquisitions in the second quarter of 2019. The HVAC segment reported sales increases of $8,671,000 (11.8%) primarily due to the acquisitions of GFP and InOvate. The Door segment reported a sales increase of

$4,211,000 (20.9%) primarily due to the acquisitions of Fastrac and Serenity. The Construction Materials segment reported a small decrease in sales of $399,000 (5.6%) not including approximately $7,156,000 of 2018 former intercompany sales to the ready-mix business that was sold in the first quarter of 2019.

The consolidated gross profit ratio in 2019 was 21.7% compared to 22.7% for 2018. The Door Segment and HVAC segments reported increases in gross profit while the Construction Material segment reported a decrease in gross profit primarily due to the charges associated with the decision to cease mining operations at the Pikeview quarry.

Selling and administrative expenses were $9,483,000 higher in 2019 compared to 2018. The increases were reported primarily in the HVAC segment (up 27.6%) due to the impact of acquisitions and in the Unallocated Corporate expenses (up 33.5%) primarily due to professional services related to acquisition activity. As a  percentage of consolidated sales, selling and administrative expenses increased to 28.1% in 2019 compared to 22.5% in 2018.

Depreciation and amortization charges were $1,962,000 in 2019 compared to $1,472,000 in 2018. The increase between years is attributed to the acquisition of the assets of four operating business during the second quarter of 2019.

2019 included an aggregated charge of $22,492,000 to impair mining assets related to the final asset retirement obligations recorded in the Construction Materials segment. 2018 included charges of $6,840,000 and $627,000 to write off deferred development costs and an overpayment of prepaid royalties, also in the Construction Materials segment.

The Company recognized a net $14,781,000 gain from a legal settlement and a $6,800,000 loss on legal settlement for the year ended December 28, 2019. See Note 2 and Note 17 for additional discussion.  

2019 included $1,237,000 of gains from the sale of equipment in the Construction Materials segment discussed below. There were no gains or losses from the sale of equipment of continuing operations in 2018. There were $919,000 of gains from the sales of equipment of discontinued operations in 2018.

The Company reported an operating loss in 2019 of $22,845,000 compared to operating loss of $8,764,000 in 2018.  Increased selling and administrative costs and impairment costs are driving the overall decrease in operating results.

Interest income in 2019 was $362,000 compared to $76,000 in 2018. The increase was due to interest earned on cash reserves in the first half of 2019. Interest expense in 2019 and 2018 was $371,000 and $539,000, respectively. The decrease was due to lower average borrowings in 2019 compared to 2018. Average outstanding funded debt in 2019 was $313,000 compared to $6,058,000 in 2018.

The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The effective income tax rate related to the net loss for 2019 and 2018 was a benefit of 23.7% and 27.2%, respectively.

The Company operates businesses within the Building Products industry group. The businesses are grouped into three reportable segments. The following addresses various aspects of operating performance focusing on the reportable segments.

DISCUSSION OF CONSOLIDATED RESULTS OF DISCONTINUED OPERATIONS

The results of discontinued operations reflect the operations of the ready-mix and Daniels Sand businesses of the Company’s former subsidiary, TMC. The Company sold the assets of these business units on February 1, 2019. The 2019 income realized from discontinued operations included a pre-tax loss from operations of $724,000 and a pre-tax gain on the sale of assets of $5,283,000. The pre-tax income from discontinued operations for the year ended December  28, 2018 was $1,161,000.

HVAC Segment Group

The table below presents a summary of operating information for the HVAC segment group for the fiscal years 2019 and 2018 (amounts in thousands).

2019 vs. 2018

Sales in the HVAC segment increased  $8,671,000 (11.8%) between 2019 and 2018 reflecting the impact of the acquisitions of GFP and InOvate.  The two acquisitions, combined, contributed 14.8% of current year revenue. Sales of furnaces and fan-coils were consistent between years while sales of cooling related equipment declined in the current year from the prior year.

The HVAC segment’s gross profit ratio increased to 24.0% in 2019 from 20.2% in 2018. The increase was primarily due to impact of the acquisitions noted above.

Selling and administrative expenses in 2019 were $4,494,000 higher than the prior year. The acquisition activity noted above was the primary driver behind the increased expense between the two years. Additional investment spending on personnel and processes to stimulate future growth in previously owned lines of business also contributed to the increase between years. As a percentage of sales, such expenses were 21.3% in 2019 compared to 17.7% in 2018.  

Certain businesses in the HVAC group are sensitive to changes in the prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.

Door Segment Group

The table below presents a summary of operating information for the Door Segment group for the fiscal years 2019 and 2018 (amounts in thousands).

2019 vs. 2018

The Door segment sells hollow metal doors, door frames and related hardware, wood doors, sliding door systems, lavatory fixtures and electronic access and security systems. Nearly all of the Door segments sales are for commercial and institutional buildings such as schools, hotels, and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting, but instead tracks gross profit by job. Management relies on the trend in sales and the gross profit rate by job and in the aggregate in managing the business.

Door sales in 2019 were $4,211,000, or 20.9% higher than in 2018. The increase is primarily due to the acquisition of Fastrac and Serenity in the second quarter of the current year. The gross profit ratio in 2019 was 29.0% compared to 28.1% in 2018.

Selling and administrative expenses increased by $1,353,000 (41.6%) in 2019 compared to 2018. The increase was primarily due to acquisition activity noted previously. As a percentage of sales, these expenses were 18.9% and 16.1% in 2019 and 2018, respectively.

Construction Materials Segment Group

The table below presents a summary of operating information for the Construction Materials segment group for the fiscal years 2019 and 2018 (amounts in thousands).

The ready-mix concrete and Daniels Sand operational assets of TMC were sold on February 1, 2019. The operations of the ready-mix and Daniels Sand businesses were classified as discontinued operations and assets held for sale for all periods presented. The discontinued operations, together with the continuing operations formerly known as the Concrete, Aggregate and Construction Supply (CACS) segment, were reclassified to the Construction Materials segment for current reporting. The product offerings of continuing operations of the former CACS segment consisted of aggregates and construction supplies. Aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades, particularly concrete sub-contractors.

Management made a strategic decision to cease mining operations at the Pikeview quarry at the end of the third quarter of 2019 when it was determined that continued mining was not in the best economic interests of the consolidated portfolio. The third quarter 2019 included a $20,217,000 impairment charge related to the cessation of mining. In the fourth quarter of 2019 the Company, by way of a legal settlement, purchased land it previously leased in Pueblo, Colorado. See Note 2. The Company does not plan to resume mining of the Pueblo property and has recorded an impairment charge of $2,230,000 related to reclamation liabilities associated with the property for the fiscal year ended December 28, 2019. See Note 20. The quarries may continue to report some revenue from dumping fees or for remaining inventory sales, but otherwise will turn to full reclamation status.

Prior to the decision to cease mining operations, the CACS segment produced and sold sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs, Colorado. Sales volume of aggregates

decreased in 2019 compared to 2018 primarily attributable to the Grisenti pit being fully mined and the ensuing work to complete reclamation with minimal sales. Sales at the Pikeview quarry were nominal in 2019 as the Company prioritized completing the reclamation at Grisenti. In 2018, the aggregate operations supplied the ready-mix business with $7,156,000 of product. These sales reduced with the sale of the ready-mix operations. The reduced sales volumes and additional reclamation related costs, in part, led management to its decision to cease mining operations at the remaining quarries in the current year.

Selling and administrative expenses were $232,000 higher in 2019 compared to 2018. The increase is primarily due to litigation related costs. Legal expenses, including those related to the Pueblo aggregate lease litigation, were $1,757,000 in 2019 compared to $1,603,000 in 2018. As a percentage of sales, selling and administrative expenses were 38.0% in 2019 compared to 32.6% in 2018.

The fiscal year ended December 28, 2019 included a $14,781,000 net gain on legal settlement and a $6,800,000 legal settlement expense related to previously disclosed litigation. See Note 2 and Note 17. The fiscal year ended December 29, 2018 included charges of $6,840,000 and $627,000 related to the write-off of deferred development and prepaid royalties, respectively. See Note 16.

Gains on disposition of assets were $1,231,000 in 2019  due to the disposition of equipment no longer considered useful upon the cessation of mining operations. There were no gains or losses on disposition of assets in 2018.

In connection with the movement to full reclamation status at all mining properties in 2019, management completed an assessment to determine if certain assets should be considered held for sale. Based on this assessment, $896,000 of property previously included in Machinery and equipment on the Consolidated Balance Sheet was classified as Assets held for sale as of December 28, 2019.

OUTLOOK

The Company’s HVAC segment anticipates growth in 2020 sales due to the impact of a full year of the operations acquired in 2019. Fan coil sales are expected to increase due to continued construction spending in the lodging industry and investments made in sales and marketing during 2019. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels. Sales of ASME tanks, hydronics accessories and dryer related products are dependent on construction levels, which are expected to grow in 2020.

Sales in the Door segment are expected to increase in 2020 due to full year impact of the operations acquired in 2019. Sales are somewhat dependent on the level of commercial construction activity, which is also expected to grow in 2020.

Sales in the Construction Materials segment are expected to remain consistent with 2019. Sales are dependent upon the level of commercial construction activity in the Colorado Springs, Colorado area. As the Company has ceased mining operations it intends to sell off its excess assets, over a period of the next few years, as reclamation is completed. The proceeds from these sales are expected to be available to reduce borrowings by the Company.

CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commission requires all registrants, including the Company, to include a discussion of “critical” accounting policies or methods used in the preparation of financial statements. We believe the following are our critical accounting policies and methods.

Goodwill and Other Intangible Assets

The Company annually assesses goodwill for potential impairment as of the last day of its fiscal year. In addition, to the extent that events occur, either involving the relevant reporting unit or in their industries, the Company revisits its assessment of the recorded goodwill to determine if impairment has occurred and should be recognized. As of December

28, 2019, the Company had recorded $5,932,000 of goodwill consisting of $3,198,000 related to the Door segment and $2,734,000 related to the HVAC segment.

In connection with acquisition activity in 2019, the Company recorded $12,809,000 of amortizable intangible assets related to customers, trade names and intellectual property. Recorded amounts were based on valuations performed by an independent business advisory firm. These intangible assets are amortized over their estimated useful lives on a straight-line basis. See Note 4 and Note 18.

The Company follows ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplified the test for goodwill impairment by eliminating the calculation of implied goodwill fair value. Instead, companies compare 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. 

Management prepared a discounted cash flow (DCF) valuation to estimate the fair value of each reporting unit. The DCF valuation was calculated using an appropriate discount rate. The calculated fair values were compared to the reporting unit’s carrying value including goodwill. In each case the fair value exceeded carrying costs resulting in no impairment. See additional discussion in Note 1.

Long-lived Assets (other than Goodwill and Intangible Assets)

The Company reviews long-lived assets by asset group for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the amount and useful life over which cash flows will occur and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available given the Company’s historical experience and internal business plans. In 2019, the Company recognized $22,492,000 of impairment charges related to mining assets in the Construction Materials segment that were simultaneously recorded and impaired as the future undiscounted cash outflows were expected to exceed the current carrying value. See Note 20. In the first two quarters of 2018, the Company wrote off a net $6,840,000 of deferred development costs, previously reported in Property, plant and equipment in the Consolidated Balance Sheet, related to an aggregates property after the necessary mining permits were denied by the State of Colorado for the second time. See Note 16 for further discussion. During the fourth quarter of 2018 the Company wrote-off $627,000 of royalty overpayments related to the aggregate property in that was under litigation at the time.

Liabilities

The Company purchases insurance coverage for workers’ compensation, general product and automobile liability, retaining certain levels of risk (self-insured portion). See the above section titled “Insurance Policies” for information related to per incident deductibles and policy limits. Provision for workers’ compensation claims is estimated by management based on information provided by the independent third party administrator and periodic review of all outstanding claims. The Company’s independent claims administrator tracks all claims and assigns a liability to each individual claim based upon facts known at the time of estimation. In addition, management periodically reviews each individual claim with both the third party claims administrator and legal counsel and the third party administrator revises the estimated liability accordingly. The Company also retains an independent expert who applies actuarial methodology to the claims data provided by the Company’s independent claims administrator to estimate the ultimate aggregate settlement amount of the claims using specific loss development factors based on the Company’s prior experience. The Company then establishes its reserve for workers’ compensation claims based upon the actuarial evaluation and management’s knowledge of the outstanding claims. Management tracks changes to the incurred and paid amounts of individual workers compensation claims up to the date of final closure. In recent years, the net amounts that the claims have ultimately settled for have indicated that the reserve recorded by the Company has been sufficient.

With regard to product liability, provisions for both claims and un-asserted claims that would be covered under the self-insured portion of the policies are reviewed as circumstances dictate, at least annually, and are recorded in accordance

with accounting guidance on contingent liabilities provided in the FASB Accounting Standards Codification (Codification). Management also incorporates information from discussions with legal counsel handling the individual claims when revising its estimates. Provision for automobile claims is estimated based upon information provided by the Company’s independent claims administrator and the Company’s own experience. The number of automobile claims and the amounts involved are generally not material. Historically, there have not been many instances of significant variances between actual final settlements and our estimates regarding automobile and product liability claims.

The Company has recorded an estimate of liability for final reclamation of its mining properties in the Colorado Springs, Colorado area per ASC 410-20 guidance on accounting for Asset Retirement Obligations (AROs). An ARO is defined in ASC 410-20-20 as an “obligation associated with the retirement of a tangible long-lived asset”. An ARO should be measured at fair value and should be recognized at the time the obligation is incurred if a reasonable estimate of fair value can be made. ASC 410-20 also says that upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. Prior to the third quarter of 2019, the Company had performed reclamation concurrently with mining operations and recognized the related costs in operations. The decision to cease mining operations at Pikeview in the third quarter of 2019 and the acquisition of Valco property in the fourth quarter of 2019 allowed the Company to reasonably estimate the cost of final reclamation at these mining properties. To estimate the fair value of the liabilities, the Company used an expected present value technique. The Company compared its estimates to those prepared by an independent expert to ensure the estimates were reasonable. The related ARO mining assets were considered fully impaired as expected undiscounted future cash outflows exceeded carrying value. Going forward, changes in the ARO due to passage of time will be recognized as an increase in the carrying amount of the liability and as an expense classified as accretion expense. The assessment of adequacy of the ARO is based on management’s assumptions with the assistance of the independent professional. The analysis requires the use of significant assumptions and estimates about timing, third party costs to perform work and method of reclamation to be used.

Management believes that the assumptions and estimates used to determine the reserve are reasonable; however, changes in the aforementioned assumptions and estimates, as well as the effects of unknown future events or circumstances, including legislative requirements, could materially affect estimated costs.

Sales

The Company recognizes revenue as performance obligations to customers are met. Sales are recorded net of estimates of applicable provisions for discounts, volume incentives, returns and allowances based upon current program terms and historical experience. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. Additionally, certain HVAC companies offer discounts for early payment of amounts due under dating and other extended payment programs. The Company records reserves for these items based upon historical experience.

Guidance provided by the Codification mandates that cash consideration (including sales incentives) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services unless both of the following conditions are met: a) the vendor receives an identifiable benefit in exchange for the consideration and b) the vendor can reasonably estimate the fair value of the benefit. Under this guidance, volume incentives and customer discounts provided to our customers are presumed to be a reduction in the selling price of our products and accordingly we record these as a reduction of gross sales. We require that our customers submit proof of both the advertisement and the cost of the advertising expenditure before we allow a deduction for cooperative advertising. Since the Company receives an identifiable and quantifiable benefit, these costs are recorded as selling and administrative expenses. These programs did not have a material effect on operations in 2019 or 2018.

Recently Issued Accounting Standards

The “Recently Issued Accounting Pronouncements” section of Note 1 discusses new accounting policies adopted by the Company since 2018 and the expected impact of accounting pronouncements recently issued but not yet required to be

adopted. To the extent the adoption of new accounting standards has an effect on our financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the Consolidated Financial Statements.

Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.

Item 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Continental Materials Corporation

Consolidated Statements of Operations

For Fiscal Years 2019 and 2018

(Amounts in thousands, except per share data)

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

Continental Materials Corporation

Consolidated Statements of Cash Flows

For Fiscal Years 2019 and 2018

(Amounts in thousands)

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

Continental Materials Corporation

Consolidated Balance Sheets As of December 28, 2019 and December 29, 2018

(Amounts in thousands except share data)

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

Continental Materials Corporation

Consolidated Statements of Shareholders’ Equity

For Fiscal Years 2019 and 2018

(Amounts in thousands except share data)

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

Notes to Consolidated Financial Statements

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company experienced various changes in 2019 with the sale of substantially all assets of its ready-mix concrete and Daniels Sand operations in the first quarter of 2019, the acquisition of four new operating businesses in the second quarter of 2019 and the cessation of mining at Pikeview quarry in the third quarter of 2019. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward including revisions to the Company’s reporting segments. Segment information for prior periods has been reclassified to conform to current segment reporting structure. The Company operates primarily in the Building Products industry group. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.

The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment and dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona, Global Flow Products /American HVAC (GFP) of Broken Arrow, Oklahoma, and InOvate Dryer Technologies (InOvate) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries: McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries, Castle Aggregates and Castle Rebar & Supply of Colorado Springs, and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado (the three companies collectively are referred to as the Castle Companies).

In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office. 

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include Continental Materials Corporation and all of its subsidiaries. Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which removed the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss should not exceed the total amount of goodwill allocated to that reporting unit. The pronouncement was adopted by the Company in the fourth quarter of 2017 in connection with annual impairment testing. No impairment charges resulted from our impairment testing.

Effective December 31, 2017 (the beginning of fiscal 2018), the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which created a single source of

revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard was adopted by the Company in the first quarter of 2018 and did not have a material impact to the consolidated statement of cash flows.

Effective December 30, 2018 (the beginning of fiscal 2019) the Company adopted ASU No. 2016-02, Leases (Topic 842), which superseded Topic 840, “Leases”. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for asset categories, except office space, and to exclude short-term leases from its Consolidated Balance Sheet. For the office space lease category the election was made to report lease and non-lease components separately as the non-lease components are billed and paid separately and are not a fixed amount over the lease term. The implicit discount rate of leases is used to calculate present values when available. When an implicit discount rate is not readily available an incremental borrowing rate is used to calculate present values.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 28, 2019 and December 29, 2018 and the reported amounts of revenues and expenses during both of the two fiscal years in the period ended December 28, 2019. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1  Quoted prices in active markets for identical assets or liabilities.

Level 2  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3  Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.

The following methods were used to estimate the fair value of the financial instruments recognized in the accompanying balance sheet:

Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.

Revolving Bank Loan Payable: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Revolving Bank Loan Payable represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.

Lease liabilities: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Lease liabilities represents a reasonable estimate of the corresponding fair value and was valued as Level 2.

Phantom equity and phantom equity appreciation liability awards: Fair value is estimated based on the use of a Black-Scholes option pricing model based on publicly available inputs. The carrying amount of the liability represents a reasonable estimate of the vested portion of the corresponding fair value of the awards granted and was valued as Level 3.

Contingent consideration: Fair value is estimated based on the use of a Monte Carlo Simulation model based on significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.

ARO liability: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.

ARO for asset impairment: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.

There were no transfers between fair value measurement levels of any financial instruments in the current year.

INVENTORIES

Inventories are valued at the lower of cost or net realizable value and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for certain inventory at WFC and PMI is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 71% of total inventories at December 28, 2019 and 65% at December 29, 2018. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper and steel have experienced significant fluctuations in recent years which is principally relevant to the four HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. Due to the nature of our products, obsolescence is not typically a significant exposure, however certain HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. At December 28, 2019 and December 29, 2018, inventory reserves were approximately 6.8% of the total FIFO inventory value.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:

The cost of property sold or retired and the related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives.

OTHER ASSETS

The Company annually assesses goodwill for potential impairment at the end of each year. In accordance with ASU 2017-04, the fair value of each reporting unit is compared to its carrying value. Impairment expense would be recognized, limited to the value of the reporting unit’s goodwill, should carrying value exceed fair value. In addition to annual assessment, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.

The Company had previously paid $2,500,000 related to an aggregate property near Colorado Springs. During fiscal year 2019, the Company decided to cease negotiations with the State of Colorado to obtain mining permits for the property. The amount, less $325,000 that was not expected to be recovered, was included in other current assets as of December 28, 2019.

Intangible assets with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value.

RETIREMENT PLANS

The Company and its subsidiaries have a contributory profit sharing retirement plan for specific employees. The plan allows qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation was in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code are eligible to participate in an unfunded Deferred Compensation Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his/her account under the 401(k) plan had there been no limitations and the amount the person would receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 28, 2019 and December 29, 2018, the unfunded liabilities related to the Deferred Compensation Plan were $1,250,000 and $1,001,000 respectively.

RESERVE FOR SELF-INSURED AND INSURED LOSSES

The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with GAAP requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably

estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.

GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 28, 2019 and December 29, 2018 was $911,000 and $874,000, respectively.

RECLAMATION

In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company had recorded asset retirement obligations (ARO) and offsetting assets for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the properties. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs. The Company has engaged an independent specialist to assist in evaluating the estimates of the cost of reclamation. Prior to the current fiscal year, the reclamation of mining properties was performed concurrently with mining or soon after each section of the deposit was mined. In the current year, in connection with the decision to cease mining operations at its Pikeview quarry and purchase of formerly leased mining property in Pueblo, the Company was able to reasonably estimate the cost of final reclamation of these properties and has recorded ARO liabilities of $27,913,000 at December 28, 2019. Reclamation liabilities were estimated at $6,269,000 as of December 29, 2018. The Company classifies a portion of the reserve as a current liability, specifically $4,200,000 at December 28, 2019 and $1,017,000 at December 29, 2018 based upon anticipated reclamation timeframe. See Note 2 for discussion of acquisition of Pueblo property and Note 20 for additional discussion of AROs.

TREASURY STOCK

Treasury stock is valued at the aggregated average cost that the Company paid for each transaction.

REVENUE RECOGNITION

Effective December 31, 2017, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which creates a single source of revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.

The Company is applying Topic 606 to the customer contracts in each industry segment to provide assurance of compliance.  Using the five-step model the customer contracts in each segment were evaluated on critical aspects of how revenue is reported and recognized in the financial statements i.e. 1) Identify the contract(s) with the customer; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue as each performance obligation is satisfied.  In applying the model to each reporting segment level, the Company is using a portfolio approach which is acceptable because the contracts within each segment are similar with respect to contract attributes, performance obligations, and revenue recognition.

Sales are recognized when control of the promised goods or services transfers to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The

Company’s payment terms generally range between 30 to 90 days after invoice is billed to the customer. Sales are reported net of sales tax. Shipping and other transportation costs paid by the Company and rebilled to the buyer are recorded gross (as both sales and cost of sales). The Company generally recognizes revenue from the sale of products at the time the products are shipped.

While the return of products is generally not allowed, some large customers have been granted the right to return a certain amount at the end of the normal selling season for seasonal products. Sales returns and allowances are estimated based on current program terms and historical experience. Provisions for estimated returns, discounts, volume rebates and other price adjustments are provided for in the same period the related revenues are recognized and are netted against revenues.

The Company is responsible for warranties related to the manufacture of its HVAC products and estimates the future warranty claims based upon historical experience and management estimates. The Company reviews warranty and related claims activities and records provisions, as necessary. Changes in the aggregated product warranty liability for the fiscal years 2019 and 2018 were as follows (amounts in thousands):

The majority of sales within the Door division do not include extended installation components. Most of the sales of MDHI that contain installation are completed within 30 days and contain two specific components, the product and the installation service. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone price. Revenue is recognized at a point in time as each performance obligation is completed. The Company does not offer maintenance or service contracts. The acquisition of Fastrac and Serenity in mid-2019 expanded the type of contracts that require analysis under Topic 606 guidelines as these operations may include extended installation services within the contracts. The company negotiates the terms of the contract and prepares a detailed project quote that might include number and type of doors, number and style of hardware, locks, electronic items and estimated installation cost. Contract price for each item of the quote is negotiated and stated in the contract. Modifications are treated as adjustments to an existing contract and are part of the changes in billing invoices. Revenue is recognized as performance obligations, per the contract agreement, are completed. Revenue for product is recognized as shipped. Revenue for installation services is recognized on a percentage of completion method with costs in excess of billings and/or billings in excess of costs being recorded as an asset or liability until recognized. Costs in excess of billings, of approximately $420,000, are included in Prepaid expenses and retainage on contracts of approximately $345,000 is included in Receivables on the Consolidated Balance Sheet as of December 28, 2019.

SHARE-BASED COMPENSATION

Share-based compensation expense is recognized using the fair value method of accounting. Share-based awards are recognized ratably over the requisite service period.

INCOME TAXES

Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.

The 2017 Tax Cuts and Jobs Act (Tax Act) repealed the corporate alternative minimum tax (AMT) and allows for all existing credit carryforwards to be used to offset regular tax liability for tax years beginning after December 31, 2017.

Additionally, for tax years 2018, 2019 and 2020, to the extent that the AMT credit carryover exceeds the regular tax liability, 50% of the excess AMT credit is refundable. Any remaining credits will be fully refundable in 2021. For state tax purposes, net operating losses can be carried forward for various periods for the states that the Company is required to file in. California Enterprise Zone credits can be used through 2023 while Colorado credits can be carried forward for 7 years. The Company has established a valuation reserve related to a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration.

The Company’s income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns. The Company did not identify any such uncertain tax positions as of December 28, 2019 or December 29, 2018.

CONCENTRATIONS

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company did not have any temporary cash investments in either fiscal 2019 or 2018.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In some Door segment and HVAC segment (as it relates to the fan coil product line) transactions, the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.

All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal 2019 or 2018. One customer in the HVAC segment accounted for 15.9% and 16.1% of consolidated accounts receivable at December 28, 2019 and at December 29, 2018, respectively.

Substantially all of the HVAC Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2022. The Company considers relations with its employees and with their union to be good.

IMPAIRMENT OF LONG-LIVED ASSETS

In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value is required. In the fiscal quarters ended March 31, 2018 and June 30, 2018 the Company wrote off a total of  $6,840,000 of deferred development related to a granite mining property south of Colorado Springs. See Note 16 for additional discussion.

In the third quarter of 2019 the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company recorded an ARO liability and offsetting asset of $20,715,000 which represented the estimated fair value of the total reclamation costs. The related ARO asset was considered fully impaired as the total future estimated cash flows exceeded the carrying value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset. In the fourth quarter of 2019, the Pikeview ARO was increased by a $45,000 change in estimate. The related ARO asset was considered fully impaired due to the same reason noted in the third quarter of 2019. Additionally in the fourth quarter, the Company purchased formerly leased mining property in Pueblo, Colorado as part of a legal settlement. See Note 2. With no intention to resume mining of this property, the Company was able to reasonably estimate the cost of final reclamation and recorded an ARO liability and offsetting asset of $6,660,000 related to this property. The related mining asset was considered fully impaired as total estimated cash flows exceeded the

carrying value. Therefore, the Company recorded a net impairment charge, related to the Pueblo property, of $2,230,000 for the year ended December 28, 2019. See Note 20.

FISCAL YEAR END

The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal 2019 and fiscal 2018 each consisted of 52 weeks.

2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE

Subsequent to the end of the third quarter, on October 9, 2019, the Company and Valco filed a Joint Notice of Settlement regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The Settlement stated that the parties had reached a settlement agreement resolving all claims. Trial had previously been scheduled for October 21, 2019. On October 16, 2019, the Company and Valco filed a Stipulated Motion for Dismissal with Prejudice which stated: the parties “agree that this matter, including all claims and counterclaims, dismissed with prejudice and without costs, each party to bear its own attorneys’ fees.” The Court entered the Order of Dismissal with Prejudice on October 16, 2019.  

As part of the Settlement, the Company agreed to pay Valco $9,000,000, which included purchase of previously leased land. There is no intention to resume mining of the property that ceased several years prior when litigation began. As the litigation claim was a known event prior to the third quarter balance sheet date, the Company recognized the portion of the agreement related to the legal settlement in its financial statements for the period ended September 28, 2019. Since the asset purchase agreement was not a known event prior to the balance sheet date it was not recorded in the financial statements for the period ended September 28, 2019. The Company used its best estimate, based on currently available information, to record an estimated loss on litigation settlement of $6,400,000 for the third quarter of 2019. During the fourth quarter of 2019, a third-party appraisal of the property was obtained which valued the land at $2,200,000. Using this valuation, the Company recorded the property purchase in the fourth quarter and revised the loss on litigation settlement to $6,800,000 for the year-ended December 28, 2019. See Note 20 for discussion of asset retirement obligation and related asset impairment related to the purchased property.

3. INVENTORIES

Inventories consisted of the following (amounts in thousands):

If inventories valued on the LIFO basis were valued at current costs, inventories would be higher by $6,618,000  and $7,176,000 at December 28, 2019 and December 29, 2018, respectively. Reductions in inventories during 2018 resulted in liquidations of LIFO quantities by charging cost of goods sold with LIFO costs significantly below current costs. By matching these older costs with current revenues, 2018 net loss decreased by approximately $968,000, net of tax. There was not a similar significant reduction in inventory levels in 2019.

Inventory valuation reserves at December 28, 2019 and December 29, 2018 were $1,023,000 and $1,747,000,  respectively. The decrease between years is due to progress made in streamlining products sold reducing the risk of excess and obsolete inventory.

4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

As of December 29, 2018 the Company had recorded $1,000,000 of goodwill, not including discontinued operations goodwill of $6,229,000 that was eliminated with the sale of the ready-mix and Daniels Sand operations, related to the Door segment. During the second quarter of 2019, the Company recorded approximately $4,932,000 of goodwill related to the acquisitions of four operating businesses. See Note 18. As of December 28, 2019, the Company has recorded $5,932,000 of goodwill comprised of $3,198,000 or 54% related to the Door segment and $2,734,000 or 46% related to the HVAC segment. The Company assesses goodwill for potential impairment at the end of each year. The Company prepared a discounted cash flow analysis, based on a third party valuation of the Company’s operating units, to estimate the fair value of each reporting unit. The fair value was compared to the carrying value for each reporting unit. There was no goodwill impairment recorded, for any of the periods reported, as fair value exceeded carrying cost for each unit. If events occur or circumstances change in the relevant reporting segments or in their industries, the Company will reassess the recorded goodwill to determine if impairment has occurred. The valuation of goodwill and other intangibles is considered a significant estimate. Future economic conditions could negatively impact the value of the business which could trigger an impairment that would materially impact earnings.

Intangible assets with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives.  Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. There were no amortizable intangible assets as of December 29, 2018. See Note 18 for additional discussion of intangible assets acquired during the current fiscal year.  Amortizable intangible assets on the Consolidated Balance Sheet as of December 28, 2019 were as follows (amounts in thousands):

Amortization Expense for the fiscal year ended December 28, 2019, which was $371,000. The estimated amortization expense for eachoriginally filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2020 (the “Original Filing”). In accordance with paragraph (3) of General Instruction G to Form 10-K, we are filing this Amendment No. 1 to include the next five yearsinformation that is $664,000.  required by Part III of Form 10-K and which was not included in the Original Filing.

5. REVOLVING BANK LOAN

The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective March 16 2020. BorrowingsIn addition, as required by Rule 12b-15 under the Credit Agreement are securedSecurities Exchange Act of 1934, as amended, new certifications by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certainprincipal executive officer and principal financial officer are filed as Exhibits 31.3 and 31.4 to this Amendment No. 1 as required by Section 302 of the Sarbanes-Oxley Act of 2002. Because no financial statements have been included in this Amendment No. 1 and this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4, and 5 of the certifications have been omitted.

No attempt has been made to update the Original Filing other than the furnishing of additional Exhibits 31.3 and 31.4 in Item 15 herein. Except as expressly noted in this Amendment No. 1, this Amendment No. 1 does not reflect events that may have occurred subsequent to the Original Filing date, including, without limitation, the financial statements included in the Original Filing. Accordingly, this Amendment No. 1 should be read together with the Original Filing and with the Company’s other filings with the SEC.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board Composition and Qualifications

Steve Gidwitz has served on the Board since 2018. Steve began his career in 1980 after graduating from Tulane University in New Orleans with a B.A. in Business Management. He worked for Consolidated Packaging for several years in various positions before becoming an administrative manager at Riverwood International, a global leader in developing innovative packaging solutions. In 1991, Steve worked for Corson Manufacturing as vice president of operations, then as president, before becoming vice president of NCAComp in 2002, Chief Operating Officer in 2011 and President in 2014. Over the course of his career, his job responsibilities have included: human resources, purchasing, inside sales, sales management, quality control, accident prevention, plant management, and full company management. In addition, Steve has served as a board member and vice president of the Group Self-Insurance Association of New York (“GSIANY”) and served on a WCB/GSIANY committee to assist in rewriting the rules and regulations of self-insurance groups in the state of New York. Mr. Gidwitz is also a member of the board of managers of Bee Street Holdings LLC (“Bee Street”), the Company’s majority stockholder.

James G. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1978. He has served as the Chairman of the Board and its Chief Executive Officer since 1983. Mr. Gidwitz also serves on the Boards of several non-profit institutions involved in such diverse activities as medical research and political analysis. Mr. Gidwitz served as Chairman of the Endowment Committee of The Hotchkiss School where he continues to serve on the Committee. Mr. Gidwitz also formerly served on the Board of the Hoover Institution, an organization associated with Stanford University. The Board has concluded that Mr. Gidwitz possesses strong leadership experience and knowledge of the Company and its business obtained through his long tenure with the Company. Mr. Gidwitz is also a member of the board of managers of Bee Street.

Scott Gidwitzhas served on the Board since 2018. Scott is a Senior Vice President of the investments group at The John Buck Company and serves as a member of the Investment Committee. His primary responsibilities include the evaluation, underwriting, and due diligence of new residential and commercial acquisition and development opportunities. Currently, Mr. Gidwitz serves as asset manager for 3Eleven, a 245-unit residential development opening in Chicago’s River North neighborhood, and 333 S. Wabash Ave., a 1.2 million square foot office tower in Chicago’s East Loop. Prior to joining The John Buck Company, Mr. Gidwitz was an Analyst at Siebert Branford Shank, L.L.C., a boutique investment bank specializing in municipal finance. While at Siebert, Mr. Gidwitz provided quantitative and analytical support to senior bankers, as well as technical support on over $210 million in senior managed financings, and over $3 billion of co-senior and co-managed transactions. Mr. Gidwitz earned his J.D. from Northwestern University School of Law, M.B.A. from Northwestern University’s Kellogg School of Management, and B.A. from University of Pennsylvania.Mr. Gidwitz is also a member of the board of managers of Bee Street.

Ralph W. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1984. Mr. Gidwitz is retired having previously started Capital Results LLC, a financial consulting company, for which he also served as the Managing Partner and Chief Executive Officer until 2009. Mr. Gidwitz has also served as the President and Chief Executive Officer of a private company engaged in manufacturing. Mr. Gidwitz served on the Board of Trustees for a local college as well as serving as its Treasurer and Chairman of its Finance and Investment Committees from 2006 to 2013. He currently serves on the Executive Committee of the Board of Governors of the City of Hope, a large research driven hospital and health care organization, and as 1^st Vice President of a Los Angeles based cultural group. He also served as a Director for three community associations and as Chairman and a Governor for a Chicago cultural group. The Board has concluded that Mr. Gidwitz adds invaluable and extensive business and financial experience as well as possessing experience in mergers and acquisitions. Mr. Gidwitz is also a member of the board of managers of Bee Street.

Theodore R. Tetzlaff has served on the Board since 1981. Mr. Tetzlaff is an attorney at law and principal of Tetzlaff Law Offices, LLC. He was previously of counsel to the law firm of Ungaretti & Harris LLP from 2005 to 2012. He has also been a partner at other law firms where he served as the Managing Partner of one firm’s Chicago office and as a member of another firm’s Executive Committee. He served as General Counsel of Tenneco, Inc., a large publicly traded oil and gas company from 1992 to 1999 and General Counsel for Peoples Energy Corporation, a large publicly traded diversified energy company from 2003 to 2006. Mr. Tetzlaff has also served as Chairman of the Board of a large Chicago civic organization. The Board has concluded that Mr. Tetzlaff’s experience adds invaluable and extensive business experience as well as an in-depth understanding of legal issues that have affected or may affect the Company.

Until his resignation effective April 18, 2020, Peter E. Thieriot had served on the Board since 2001. He is currently the Managing Member of Elk Mountain Holdings, a Delaware LLC and a privately owned land and livestock company. He has served in that capacity since 2006 and from 1993 to 2006 for its predecessor company, Elk Mountain Ranch Company, LLC. Mr. Thieriot possesses extensive and diverse experience having served in numerous capacities for The Chronicle Publishing Company (“The Chronicle”), a closely held, family, national media company. His roles have included President, Vice President, Publisher and Station Manager for newspapers and television stations owned by The Chronicle. Over the years, Mr. Thieriot has served as a director or trustee for numerous cultural, civic and other types of non-profit organizations as well as serving as a director of The Chronicle from 1977 to 1993. Prior to his resignation, the Board had concluded that Mr. Thieriot’s diverse experience in various industries, including The Chronicle, adds a unique perspective to many of the issues and tasks that are the responsibility of the Company’s Board.

Until his resignation effective April 18, 2020, Darrell M. Trent had served on the Board since 1997. Mr. Trent has served as Chairman of the Board of Directors and Chief Executive Officer of Acton Development Company, Inc., a privately held real estate development and property management company since 1988. Mr. Trent was also Chairman of the common stockBoard and Chief Executive Officer of Clean Earth Technologies, Inc., an environmental management venture from 1992 to 1994. Mr. Trent took a leave of absence for part of 2003 to serve as a volunteer with the Coalition Provisional Authority in Iraq. Mr. Trent, a former U.S. Undersecretary of Transportation, was in Iraq to oversee the re-creation of Iraq’s Ministry of Transportation. Prior to his resignation, the Board had concluded that Mr. Trent brings invaluable and extensive business experience in real estate development, a segment of the economy that directly impacts the Company’s Construction Materials segment business as well as affecting other products offered by the Company. He also provides a unique insider’s experience with the federal government.

Until his resignation effective November 18, 2019, Thomas H. Carmody had served on the Board since 1994. Mr. Carmody is the Chief Executive Officer of Summit International, LLC, a sports marketing and distribution company he founded in 1999. He has also served as the Chairman of the Board of Ameridream, a charitable organization providing housing down payment assistance for qualifying individuals, since 2003. Mr. Carmody has also served as Vice President of U.S. Operations and Vice President of the Sports Division of Reebok International, Ltd., a publicly traded footwear, apparel and fitness company. Prior to his resignation, the Board had concluded that Mr. Carmody adds invaluable and extensive marketing and business experience, as well as adding an entrepreneurial approach to situations that the Company has faced or may face in the future.

Family Relationships

James G. Gidwitz and Ralph W. Gidwitz are cousins. Steve Gidwitz and Scott Gidwitz are both nephews of James G. Gidwitz. James G. Gidwitz, together with his siblings and all descendants, and Ralph W. Gidwitz, together with all descendants, including those of their deceased sibling, are herein referred to as the “Gidwitz Family.”

Code of Ethics

In furtherance of its corporate governance responsibilities, during April 2004, the Board adopted a formal Code of Ethics for the Chief Executive Officer and Senior Financial Officers and a formal General Code of Business Conduct and Ethics which is intended to provide guidelines regarding the actions of all of the Company’s subsidiaries. Borrowings underdirectors, officers and employees. A copy of the Credit Agreement bear interest basedCode of Ethics for the Chief Executive Officer and Senior Financial Officers, as well as the Code of Business Conduct and Ethics, are available free of charge at the Company’s website atwww.continental-materials.com in the Investors section. Should an amendment to or a waiver from the provisions of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers that apply to its executive officers occur, the Company intends to satisfy the disclosure requirements by posting such information on a London Interbank Offered Rate (LIBOR) or prime rate based option.its website atwww.continental-materials.com.

Audit Committee

The Credit Agreement either limits or requires prior approvalBoard has established an Audit Committee in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thomas H. Carmody was, until his resignation effective November 18, 2019, and Peter E. Thieriot and Darrell M. Trent were, until their resignations effective April 18, 2020, the only members of the Audit Committee. After Messrs. Thieriot’s and Trent’s resignations, the Board elected Scott Gidwitz, effective April 20, 2020, as the sole member of the Audit Committee pursuant to an exemption from the NYSE American requirement that the Audit Committee include only directors whom have been affirmatively determined to be independent as defined by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury sharesNYSE American corporate governance rules. The Board had determined that, until his resignation effective April 18, 2020, Mr. Thieriot qualified as an "audit committee financial expert" as defined by the Securities and payment of cash dividends. Payment of accrued interest is due monthly or atExchange Commission. Since Mr. Thieriot’s resignation, the endBoard has determined it does not have such an “audit committee financial expert” serving on the Audit Committee because the Nominating Committee has had insufficient time since Mr. Thieriot’s resignation on April 18, 2020, to identify and interview potential director candidates who would be qualified to serve in that role.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the applicable LIBOR period.Exchange Act generally requires the Company’s directors, executive officers and owners of more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission (the “Commission”) reports of beneficial ownership and changes in ownership, on Forms 3, 4 and 5, generally within two business days of the date of a purchase or sale transaction. Such officers, directors and 10% owners are required by Commission regulations to furnish to the Company copies of all Section 16(a) reports that they file. To the Company’s knowledge, based solely on review of copies of such reports furnished to the Company and representations that no other reports were required to be filed during the fiscal year ended December 28, 2019, all executive officers, directors and 10% owners of the Company complied with the Section 16(a) filing requirements during fiscal year 2019.

Executive Officers and Qualifications

Please see above, under ‘Board Composition and Qualifications’, for Mr. Gidwitz’s background and qualifications.

Ryan M. Sullivan has served as the President and Chief Operating Officer of the Company since 2018. Mr. Sullivan has over twenty years of professional engineering experience in manufacturing operations and other industries. From 2017 until joining the Company, Mr. Sullivan served as the North American President and Managing Director of Kingspan Insulation LLC, a manufacturer of energy efficiency and moisture management products. Prior to Kingspan Insulation LLC, from 2004 until 2016, Mr. Sullivan was with James Hardie Building Products, Inc., a manufacturer of fiber-cement building materials for new home construction projects and home remodeling. At James Hardie Building Products, Inc., Mr. Sullivan held various management positions including serving as the President of the North America division from 2015 until 2016, the Executive General Manager, Southern Division from 2013 until 2015 and the General Manager, ColorPlus Business Unit from 2011 until 2013. Mr. Sullivan graduated from Carnegie Mellon in 1995 earning a Bachelor’s of Science in Mechanical Engineering. He also earned a Master of Science in Electrical Engineering in 1999 and a Master of Business Administration in 2004 from the University of Pittsburgh.

Paul A. Ainsworth has served as Vice President, Chief Financial Officer and Secretary of the Company since 2018. Mr. Ainsworth has over twenty years of professional finance and accounting experience in manufacturing operations and other industries. From 2014 until he joined the Company, Mr. Ainsworth served as the Chief Financial Officer of Precision Holding LLC, an engineering group providing precision machining services to the oil and gas, rail, armaments, and heavy-duty engine sectors. Prior to his role at Precision Holding LLC, Mr. Ainsworth was the Chief Financial Officer and President of MD SolarSciences Corp., a manufacturer of luxury skincare products. Mr. Ainsworth has also served as Vice President of Corporate Development at HomeServe PLC, a public marketer of consumer warranty products, and as an Investment Director at Barclays Bank PLC. Mr. Ainsworth spent nearly 10 years as a Senior Manager and Director of Arthur Andersen LLP. Ainsworth earned his B.S. in Molecular Biology and Biochemistry from Durham University in Durham, United Kingdom in 1992 and became a Chartered Accountant, the British equivalent of a CPA, in 1996. In 1998 he earned his Securities and Investments Diploma from the Securities Institute, the British equivalent of a CFA, in 1999 he earned his Advanced Corporate Finance Diploma from INSEAD, and was awarded the Business and Finance Professional qualification in 2019. He has been a member of the AICPA since 2013.

Item 11. EXECUTIVE COMPENSATION

EXECUTIVE SUMMARY COMPENSATION TABLE

The Credit Agreement as amended provides forfollowing table summarizes the following:

Definitions under the Credit Agreement as amended are as follows:

Outstanding funded revolving debt was $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019Company’s principal executive officer and 2018 was $3,700,000 and $9,800,000 respectively. Average outstanding funded debt was $313,000 and $6,058,000its other named executive officers for 2019 and 2018, respectively. At

December 28, 2019,  the Company had outstanding letters of credit (LOC) totaling $5,620,000. At2018. The amounts shown include all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs ofcompensation for services to the Company and this situation is expectedits subsidiaries in all capacities.

NARRATIVE DISCLOSURE OF EXECUTIVE COMPENSATION

Compensation Committee Governance and Compensation Philosophy

The Compensation Committee makes recommendations to continuethe Board concerning compensation for the foreseeable future.named executive officers and determines compensation for other officers. The Company was notCompensation Committee also oversees benefit plans in compliance withwhich the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.named executive officers participate.