ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTSSTATEMENT OF COMPREHENSIVE INCOMESTOCKHOLDERS’ EQUITY (UNAUDITED)

All amounts are net of tax

See notes to Consolidated Condensed Financial Statements.

On September 18, 2017,13, 2022, the Company paid a quarterly dividend of $0.115$0.15 per common share to all shareholders of record on September 11, 2017.6, 2022. The total amount of the dividend was approximately $1.7$2.0 million and was charged against retained earnings.

On June 15, 2017,7, 2022, the Company paid a quarterly dividend of $0.115$0.15 per common share to all shareholders of record on June 8, 2017.May 31, 2021. The total amount of the dividend was approximately $1.7$2.0 million and was charged against retained earnings.

On March 20, 2017,21, 2022, the Company paid a quarterly dividend of $0.115$0.15 per common share to all shareholders of record on March 13, 2017.14, 2022 (the amount was funded to the transfer agent by the Company on March 17, 2022). The total amount of the dividend was approximately $1.6$2.0 million and was charged against retained earnings.

Note J -H ‑ Earnings Per Share

The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:

Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 20172022 and 20162021 were 77,600zero and 64,000,11,900, respectively.

Note I – New Accounting Standards and Changes in Accounting Principles

With the exception of that discussed below, thereThere have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine month periodsmonths ended October 7, 2017,1, 2022, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,25, 2021, that are of significance, or potential significance to the Company.

In March 2016,Note J – Revenue from Contracts with Customers

Revenue Recognition – Revenue is recognized when obligations under the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2016-09, Improvementsterms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured as the amount of consideration we expect to Employee Share-Based Payment Accounting, which amends existing guidance relatedreceive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to accounting for employee share-based payments affecting the income tax consequencescustomers are reported within revenue.

Gross-to-net sales adjustments – We recognize revenue net of awards, classification of awardsvarious sales adjustments to arrive at net sales as equity or liabilities, and classificationreported on the statement of cash flows. This guidance is effective for fiscal years,operations. These adjustments are referred to as gross-to-net sales adjustments and interim periods within those years, beginning after December 15, 2016.primarily fall into one of three categories: returns, warranties and customer allowances.

Returns –The new standard requires excess tax benefitsCompany records an accrued liability and tax deficiencies to bereduction in sales for estimated product returns based upon historical experience. An accrued liability and reduction in sales is also recorded for approved return authorizations that have been communicated by the customer.

Warranties – Limited warranties are provided on certain products for varying periods. We record an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as income tax expense or benefitan adjustment to the accrued liability and sales in the income statementcurrent year.

Customer Allowances – Customer allowances are common practice in the industries in which the Company operates. These agreements are typically in the form of advertising subsidies, volume rebates and also requirescatalog allowances and are accounted for as a policy electionreduction to either estimategross sales. The Company reviews such allowances on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.

Disaggregation of Revenue – We generate revenue from the numbersale of awardswidely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products. These products are sold through multiple sales channels that include: mass merchants, specialty dealers, key on-line retailers (“E-commerce”) and international. The following table depicts the disaggregation of revenue according to sales channel:

Note K – Leases

We have operating leases for office, manufacturing and distribution facilities as well as for certain equipment. Our leases have remaining lease terms of 1 year to 10 years. As of October 1, 2022, the Company has not entered into any lease arrangements classified as a finance lease.

We determine if an arrangement is a lease at inception. Operating leases are expected to vest or account for forfeitures when they occur.included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to account for forfeitures when they actually occur. The new guidance also requires cash paid by an employer when directly withholding shares for tax withholding purposes to be classified in the Consolidated Statement of Cash Flows as a financing activity, which is the classification currently used by the Company. Lastly, the guidance requires that excess tax benefits should be classified along with other income tax cash flows as an operating activitynot recognize short-term leases (one year or less) on the statement of cash flows.balance sheet. The Company also elected the package of practical expedients which applies to apply this provision usingleases that commenced before the prospective transition method. Adoptionadoption date. By electing the package of this guidancepractical expedients, the Company did not impactneed to reassess the presentation of cash flows infollowing; whether any existing contracts are or contain leases, the current period.lease classification for any existing leases and initial direct costs for any existing leases.

In November 2015, the FASB issued ASU 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred taxROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Components of lease expense and other information is as noncurrent. The ASU is effective forfollows:

Other information about lease amounts recognized in our consolidated financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard on January 1, 2017 and has elected to apply the requirements prospectively. Comparative financial statements of prior periods have not been retrospectively adjusted. Adoption of this standard did not impact results of operations or cash flows in the current or previous reporting periods.is summarized as follows:

Future minimum lease payments under non-cancellable leases as of October 1, 2022 were as follows:

Note L – Commitments and Contingencies

The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.

Note M – Acquisition

During the nine months ended October 7, 2017,On January 21, 2022, the Company acquiredcompleted its acquisition of the assets constituting the Brunswick Billiards business of Life Fitness, LLC. The purchase price of the acquisition is $35.8 million. The acquisition was funded by cash and the Company’s revolving credit facility. The Company has not yet finalized its final evaluation of the fair value of certain items. The current estimates of fair value for the more significant assets acquired and liabilities through two acquisitions. These acquisitions, individuallyassumed were receivables ($1.3 million), inventory ($13.6 million), fixed assets, including building and land ($4.1 million), accounts payable ($3.2 million), other accrued liabilities ($2.5 million), goodwill and other intangible assets ($22.5 million).

Note N – Debt

On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in aggregate, were not and would notthe Restated Credit Agreement (collectively, the “Lender”). Under the terms of the Restated Credit Agreement, Old National Bank has been added as a Lender. The Lenders have been materialnow made available to the Company’s net sales, resultsCompany a senior revolving credit facility with increased maximum availability of operations$65.0 million (the “Revolving Facility”), up from $50.0 million, plus an accordion feature that would allow borrowings up to $90.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility was extended to January 21, 2027. The Company may prepay the Revolving Facility, in whole or total assets duringin part, and reborrow prior to the three and nine month periods ended October 7, 2017. Accordingly, our consolidated results from operations do not differ materially from historical performance as a result of these acquisitions, and therefore, pro-forma results are not presented.revolving loan maturity date. The Restated Credit Agreement further extended the maturity date for the term loan facility to January 21, 2027.

Total consideration paid for

On July 18, 2022, the acquisitions was $1.5 million, of which $1.4 million was paid in cash and a note payable was recorded forCompany entered into the remaining $0.1 million. The consideration paid by the company for these acquisitions was allocatedFirst Amendment to the assets acquired, netRestated Credit Agreement. Under the terms of the liabilities assumed, based upon their estimated fair valuesFirst Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $65.0 million to $75.0 million pursuant to the accordion feature in the Restated Credit Agreement. The First Amendment also adjusted the funded debt to EBITDA ratio financial covenant to 3:00 to 1:00 as of the dateend of the acquisition.Company’s third and fourth fiscal quarters of 2022.

ASC 805 requires that when fair valueAs of October 1, 2022, the outstanding principal amount of the net assets acquired exceedsterm loan was $41.7 million and total amount drawn under the purchase price, resulting in a bargain purchase,Revolving Facility was $65.0 million.

Note O – Subsequent Events

On October 26, 2022, the acquirer must reassessCompany entered into the reasonablenessSecond Amendment ("Second Amendment”) to the Restated Credit Agreement. Under the terms of the values assignedSecond Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $75.0 million to all$90.0 million pursuant to the accordion feature in the Restated Credit Agreement. The Second Amendment adjusted the funded debt to EBITDA ratio financial covenant to 3:25 to 1:00 as of the net assets acquired, liabilities assumed and consideration transferred. The Company has performed such assessment and has concluded that the values assigned appear to be reasonable. The following table summarizes the allocationend of the purchase priceCompany’s third and fourth fiscal quarters of 2022 and 3:00 to 1:00 as of the end of the Company’s first fiscal quarter of 2023. The Second Amendment also modified the EBITDA definition to permit add-backs of a) up to $2.0 million for disposition related expenses; and b) up to $2.0 million for unusual or non-recurring expenses which are incurred prior to the acquisition that resulted in a bargain purchase:end of fiscal year 2023 and which are subject to the approval of the Administrative Agent.

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

Forward-Looking Statements

This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to,to: specific and overall impacts of the COVID-19 global pandemic on Escalade’s financial condition and results of operations; the impact of competitive products and pricing,pricing; product demand and market acceptance,acceptance; new product development,development; Escalade’s ability to achieve its business objectives, especially with respect to its Sporting Goods business on which it has chosen to focus,focus; Escalade’s ability to successfully achieve the anticipated results of strategic transactions, including the integration of the operations of acquired assets and businesses and of divestitures or discontinuances of certain operations, assets, brands, and products,products; the continuation and development of key customer, supplier, licensing and other business relationships, therelationships; Escalade’s ability to develop and implement our own direct to consumer e-commerce distribution channel; Escalade’s ability to successfully negotiate the shifting retail environment and changes in consumer buying habits,habits; the financial health of our customers; disruptions or delays in our business operations, including without limitation disruptions or delays in our supply chain, arising from political unrest, war, labor strikes, natural disasters, public health crises such as the coronavirus pandemic, and other events and circumstances beyond our control; Escalade’s ability to control costs; Escalade’s ability to successfully implement actions to lessen the potential impacts of tariffs and other trade restrictions applicable to our products and raw materials, including impacts on the costs of producing our goods, importing products and materials into our markets for sale, and on the pricing of our products; general economic conditions,conditions; fluctuation in operating results,results; changes in foreign currency exchange rates,rates; changes in the securities markets; continued listing of the Company’s common stock on the NASDAQ Global Market; the Company’s inclusion or exclusion from certain market indices; Escalade’s ability to obtain financing and to maintain compliance with the terms of such financingfinancing; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology; risks related to data security of privacy breaches; the potential impact of actual or perceived defects in, or safety of, our products, including any impact of product recalls or legal or regulatory claims, proceedings or investigations involving our products; and other risks detailed from time to time in Escalade’s filings with the Securities and Exchange Commission. Escalade’s future financial performance could differ materially from the expectations of management contained herein. Escalade undertakes no obligation to release revisions to these forward-looking statements after the date of this report.

Overview

Escalade, Incorporated (Escalade, the Company, we, us or our) is focused on growing its Sporting Goods business through organic growth of existing categories, strategic acquisitions, and new product development. The Sporting Goods business competes in a variety of categories including basketball goals, archery, billiards, indoor and outdoor game recreation and fitness products. Strong brands and on-going investment in product development provide a solid foundation for building customer loyalty and continued growth.

Within the sporting goods industry, the Company has successfully built a robust market presence in several niche markets. This strategy is heavily dependent on expanding our customer base, barriers to entry, strong brands, excellent customer service and a commitment to innovation. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to market in a cost effective manner while maintaining a diversified portfolio of products to meet the demands of consumers. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a low cost supplier.

To enhance growth opportunities, the Company has focused on promoting new product innovation and development and brand marketing. In addition, the Company has embarked on a strategy of acquiring companies or product lines that complement or expand the Company's existing product lines or provide expansion into new or emerging categories in sporting goods. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing Company structure. In January 2022, the Company completed its acquisition of the assets of the Brunswick Billiards® business, complementing its existing portfolio of billiards brands and other offerings in the Company’s indoor recreation market. The Company also sometimes divests or discontinues certain operations, assets, brands, and products that do not perform to the Company's expectations or no longer fit with the Company's strategic objectives.

Management believes that key indicators in measuring the success of these strategies are revenue growth, earnings growth, new product introductions, and the expansion of channels of distribution.

As the impact of the COVID-19 pandemic evolves, the Company continues to respond to the challenges and opportunities arising from the COVID-19 pandemic. Even though the pandemic may not have had a material adverse direct effect on the Company, the pandemic’s effects on the global supply chain, higher freight and materials costs, supplier product delays, workforce availability and labor costs have caused operational challenges for the Company. The ultimate extent of the effects of the COVID-19 pandemic on the Company is workinghighly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends. Consumer demand for the Company’s products may be slowing due to overcome the industry-wide downturnadditional factors such as general economic conditions, inflation, recessionary fears, rising interest rates, changes in the archery category, a reductionhousing market and declining consumer confidence. Management cannot predict the full impact of these factors on the Company. Due to the above circumstances and as described generally in contribution from our joint venture, Stiga Sports, AB, and bankruptcies that have plaguedthis Form 10-Q, the retail industry. We believe these conditions have masked improvements in our other existing and acquired businesses. The Company’s balance sheet remains strong, as inventory levels and receivables are downresults of operations for the third quarterperiod ended October 1, 2022 are not necessarily indicative of 2017, and long-term debt has decreased by 31.3% from the third quarter of 2016. results to be expected for fiscal year 2022.

Results of Operations

The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:

Revenue and Gross Margin

Sales increaseddecreased by 8.0%7.9% for the third quarter of 2017,2022, compared with the same period in the prior year drivenyear. Sales declined due to softening consumer demand and excess inventories in the retail channel. During the third quarter of 2022, increases in billiards and pickleball sales, together with the contribution from the Brunswick Billiards® acquisition completed January 21, 2022, were more than offset by our corelower sales in outdoor categories – Basketball, Table Tennisincluding archery, games, water sports, and Archery.playground. For the first nine months ended October 7, 2017,of 2022, sales were up by 2.7%0.6% compared to the same period prior year.

The overall grossGross margin percentage increaseddeclined to 27.1%18.2% for the third quarter of 2017,2022 compared to 26.5%22.5% for 2016. the same period in 2021 due to lower sales, unfavorable product mix, global supply chain constraints, and nonrecurring product recall expenses.

Gross margin percentage decreased to 26.2%23.8% for the first nine months of 2017,2022, compared to 27.9% for the same period in the prior year. Gross margin, for the quarter, was favorably impacted by product mix of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $6.9 million for the third quarter of 2017 compared to $4.6 million for the same period in the prior year, an increase of $2.3 million or 49.8%. SG&A as a percent of sales is 16.4% for the third quarter of 2017 compared with 11.8% for the same period in the prior year. In the third quarter of 2016, SG&A was favorably impacted by the recognition of a gain of approximately $1.9 million on the sale of our Wabash, IN land and building. One-time expenses of $0.4 million unfavorably impacted SG&A during the third quarter of 2016. The net gain of these one-time events recorded during the third quarter of 2016 was $1.5 million. For the first nine months of 2017, SG&A were $22.1 million compared to $21.3 million for the same period in 2016, an increase of $0.8 million or 3.7%. As a percent of sales, SG&A is 17.6% for the first nine months of 2017 compared with 17.4%25.3% for the same period in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $8.8 million for the third quarter of 2022 compared to $10.2 million for the same period in the prior year, a decrease of $1.4 million or 14.0%. SG&A as a percent of sales is 11.7% for the third quarter of 2022 compared with 12.6% for the same period in the prior year. For the first nine months of 2022, SG&A were $34.0 million compared to $33.9 million for the same period in 2021, an increase of $0.1 million or 0.3%. As a percent of sales, SG&A is 14.0% for the first nine months of 2022 compared with 14.1% for the same period in the prior year.

Provision for Income Taxes

The effective tax rate for the first nine months of 20172022 was 31.9%19.6% compared to 27.6%20.5% for the same period last year. The effective tax rate for prior year is lower than 2017 primarily due to benefits from the captive insurance.

Financial Condition and Liquidity

Total debt at the end of the first nine months of 20172022 was $26.0$106.7 million, an increase of $0.6$49.2 million from December 31, 2016.25, 2021. The increase in debt was largely driven by the funding of the Brunswick Billiards acquisition completed in January of 2022. The following schedule summarizes the Company’s total debt:

As a percentage of stockholders’ equity, total debt was 24.5%67.8%, 25.0%39.2% and 37.2%40.8% at October 7, 2017,1, 2022, December 31, 2016,25, 2021, and October 2, 2021, respectively.

On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lender”). Under the terms of the Restated Credit Agreement, Old National Bank has been added as a Lender. The Lenders have now made available to the Company a senior revolving credit facility with increased maximum availability of $65.0 million (the “Revolving Facility”), up from $50.0 million, plus an accordion feature that would allow borrowings up to $90.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility was extended to January 21, 2027. The Company may prepay the Revolving Facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Restated Credit Agreement further extended the maturity date for the term loan facility to January 21, 2027.

Each loan bears interest at the Adjusted LIBO Rate for the interest period in effect plus the Applicable Rate. Applicable Rate means the applicable rate per annum set forth below, based upon Escalade’s Funded Debt to Adjusted Ratio as of the most recent determination date:

The Applicable Rate is determined as of the end of each quarter based upon the Company’s annual or quarterly consolidated financial statements and shall be effective during the period commencing the date of delivery to the agent.

In addition to the increased revolving borrowing amount and extended maturity dates, other significant changes reflected in the Restated Credit Agreement included: specifying that Indian’s acquisition of the assets of the Brunswick Billiards business is a permitted acquisition; providing a $7.5 million swingline commitment by Chase; replacing LIBOR with the replacement benchmark secured overnight financing rate as previously contemplated; and adjustments to certain financial covenants relating to the fixed charge coverage ratio. Escalade’s indebtedness under the Restated Credit Agreement continues to be collateralized by liens on all of the present and future equity of each of Escalade’s domestic subsidiaries and substantially all of the assets of the Company (excluding real estate). Each direct and indirect domestic subsidiary of Escalade and Indian has secured its guaranty of indebtedness incurred under the Revolving Facility with a first priority security interest and lien on all of such subsidiary’s assets. Escalade, Indian and all of the domestic subsidiaries entered into an Amended and Restated Pledge and Security Agreement dated January 21, 2022 in favor of the Lender to continue the existing liens, previously existing under the original pledge and security agreements entered into on April 30, 2009, as amended, and thereafter for subsidiaries created or acquired after that date. The obligations, guarantees, liens and other interests granted by Escalade, Indian, and their domestic subsidiaries continue in full force and effect.