VALUE LINE INC - Quarter Report: 2020 January (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended January 31, 2020

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: 0-11306

 

 

VALUE LINE, INC.

(Exact name of registrant as specified in its charter)

 

New York	13-3139843
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
551 Fifth Avenue, New York, New York	10176-0001
(Address of principal executive offices)	(Zip Code)

 

 

(212) 907-1500

(Registrant's telephone number, including area code)

 

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

 

Title of each class	Trading symbol	Name of each Exchange on which registered
Common stock, $0.10 par value per share	VALU	The Nasdaq Capital Market

 

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 ☒ No ☐

 

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

 

Large accelerated filer ☐    Accelerated filer ☐    Non-accelerated filer ☒

Smaller reporting company ☐    Emerging growth company ☐       

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

      Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at March 10, 2020
Common stock, $0.10 par value per share	9,636,471 shares

 

 

 

VALUE LINE, INC.

 

TABLE OF CONTENTS

 

 

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Condensed Financial Statements
	Consolidated Condensed Balance Sheets as of January 31, 2020 and April 30, 2019	3
	Consolidated Condensed Statements of Income for the three and nine months ended  January 31, 2020 and January 31, 2019	4
	Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended January 31, 2020 and January 31, 2019	5
	Consolidated Condensed Statements of Cash Flows for the nine months ended January 31, 2020 and January 31, 2019	6
	Consolidated Condensed Statement of Changes in Shareholders’ Equity for the nine months ended January 31, 2020	7
	Consolidated Condensed Statement of Changes in Shareholders’ Equity for the nine months ended January 31, 2019	8
	Notes to Consolidated Condensed Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	32
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
	Signatures	35

 

 

 

		January 31,				April 30,
		2020				2019
		(unaudited)
Assets
Current Assets:
Cash and cash equivalents (including short term investments of $2,739 and $5,617, respectively)		$	3,555			$	6,493
Securities available-for-sale			25,845				21,828
Accounts receivable, net of allowance for doubtful accounts of $22 and $22, respectively			5,165				1,504
Prepaid and refundable income taxes			96				254
Prepaid expenses and other current assets			1,041				1,335
Total current assets			35,702				31,414
Long term assets:
Investment in EAM Trust			59,612				58,625
Restricted money market investment			469				469
Property and equipment, net			9,798				1,146
Capitalized software and other intangible assets, net			83				134
Total long term assets			69,962				60,374
Total assets		$	105,664			$	91,788
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	1,750			$	2,068
Accrued salaries			1,047				1,211
Dividends payable			1,928				1,933
Accrued taxes on income			-				180
Operating lease obligation			925				-
Unearned revenue			18,216				20,008
Total current liabilities			23,866				25,400
Long term liabilities:
Unearned revenue			5,480				5,475
Operating lease obligation			8,719				-
Deferred charges			-				765
Deferred income taxes			13,253				12,624
Total long term liabilities			27,452				18,864
Total liabilities			51,318				44,264
Shareholders' Equity:
Common stock, $0.10 par value; authorized 30,000,000 shares; issued 10,000,000 shares			1,000				1,000
Additional paid-in capital			991				991
Retained earnings			55,660				48,598
Treasury stock, at cost (360,455 and 336,439 shares, respectively)			(5,315	)			(4,743	)
Accumulated other comprehensive income, net of tax			2,010				1,678
Total shareholders' equity			54,346				47,524
Total liabilities and shareholders' equity		$	105,664			$	91,788

 

		For the Three Months Ended								For the Nine Months Ended
		January 31,								January 31,
		2020				2019				2020				2019
Revenues:
Investment periodicals and related publications		$	7,108			$	7,201			$	21,090			$	21,755
Copyright fees			3,695				1,851				9,410				5,319
Total publishing revenues			10,803				9,052				30,500				27,074
Expenses:
Advertising and promotion			748				893				2,393				2,455
Salaries and employee benefits			4,523				4,417				13,299				13,164
Production and distribution			1,198				1,226				3,608				3,809
Office and administration			1,205				1,103				3,417				3,203
Total expenses			7,674				7,639				22,717				22,631
Income from operations			3,129				1,413				7,783				4,443
Revenues and profits interests in EAM Trust			3,455				2,210				9,384				6,865
Income from securities transactions, net			167				140				451				377
Income before income taxes			6,751				3,763				17,618				11,685
Income tax provision			1,799				1,312				4,765				2,828
Net income		$	4,952			$	2,451			$	12,853			$	8,857
Earnings per share, basic & fully diluted		$	0.51			$	0.25			$	1.33			$	0.91
Weighted average number of common shares			9,640,949				9,687,252				9,652,805				9,688,681

 

		For the Three Months Ended								For the Nine Months Ended
		January 31,								January 31,
		2020				2019				2020				2019
Net income		$	4,952			$	2,451			$	12,853			$	8,857
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities, net of taxes			(30	)			164				332				345
Other comprehensive income (loss)			(30	)			164				332				345
Comprehensive income		$	4,922			$	2,615			$	13,185			$	9,202

 

		For the Nine Months Ended
		January 31,
		2020				2019
Cash flows from operating activities:
Net income		$	12,853			$	8,857
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			202				287
Non-voting revenues interest in EAM Trust			(8,389	)			(6,060	)
Non-voting profits interest in EAM Trust			(995	)			(805	)
Distributions received from EAM Trust			8,397				6,785
Deferred income taxes			370				377
Deferred rent			78				(67	)
Other, net			-				(45	)
Changes in operating assets and liabilities:
Unearned revenue			(1,787	)			(1,626	)
Accounts payable & accrued expenses			(318	)			(403	)
Accrued salaries			(164	)			(307	)
Accrued taxes on income			(182	)			1
Prepaid and refundable income taxes			158				231
Prepaid expenses and other current assets			294				95
Accounts receivable			(3,661	)			(1,953	)
Total adjustments			(5,997	)			(3,490	)
Net cash provided by operating activities			6,856				5,367
Cash flows from investing activities:
Purchases of equity securities classified as available-for-sale			(1,716	)			-
Purchases of fixed income securities classified as available-for-sale			(6,931	)			(5,624	)
Proceeds from sales of fixed income securities classified as available-for-sale			5,223				4,638
Acquisition of property and equipment			(2	)			(6	)
Expenditures for capitalized software			-				(98	)
Net cash used in investing activities			(3,426	)			(1,090	)
Cash flows from financing activities:
Purchase of treasury stock at cost			(572	)			(331	)
Dividends paid			(5,796	)			(5,523	)
Net cash used in financing activities			(6,368	)			(5,854	)
Net decrease in cash and cash equivalents			(2,938	)			(1,577	)
Cash, cash equivalents and restricted cash at beginning of period			6,962				6,410
Cash, cash equivalents and restricted cash at end of period		$	4,024			$	4,833

		Common stock								Additional paid-in				Treasury Stock								Retained				Accumulated Other Comprehensive
		Shares				Amount				capital				Shares				Amount				earnings				income				Total
Balance at April 30, 2019			10,000,000			$	1,000			$	991				(336,439	)		$	(4,743	)		$	48,598			$	1,678			$	47,524
Net income																							12,853								12,853
Change in unrealized gains on securities, net of taxes																											332				332
Purchase of treasury stock															(24,016	)			(572	)											(572	)
Dividends declared																							(5,791	)							(5,791	)
Balance at January 31, 2020			10,000,000			$	1,000			$	991				(360,455	)		$	(5,315	)		$	55,660			$	2,010			$	54,346

		Common stock								Additional paid-in				Treasury Stock								Retained				Accumulated Other Comprehensive
		Shares				Amount				capital				Shares				Amount				earnings				income				Total
Balance at April 30, 2018			10,000,000			$	1,000			$	991				(308,380	)		$	(4,135	)		$	44,902			$	783			$	43,541
Net income																							8,857								8,857
Change in unrealized gains on securities, net of taxes																											345				345
Purchase of treasury stock															(15,724	)			(331	)											(331	)
Dividends declared																							(5,521	)							(5,521	)
Balance at January 31, 2019			10,000,000			$	1,000			$	991				(324,104	)		$	(4,466	)		$	48,238			$	1,128			$	46,891

 

Note 1 - Organization and Summary of Significant Accounting Policies:

 

Value Line, Inc. ("Value Line" or "VLI", and collectively with its subsidiaries, the “Company”) is incorporated in the State of New York.  The name "Value Line" as used to describe the Company, its products, and its subsidiaries, is a registered trademark of the Company.  The Company's core business is producing investment periodicals and their underlying research and making available certain Value Line copyrights, Value Line trademarks and Value Line Proprietary Ranking System results and other proprietary information, to third parties under written agreements for use in third-party managed and marketed investment products and for other purposes.  The Company maintains a significant investment in EULAV Asset Management ("EAM")  from which it receives payments in respect of the Company's non-voting revenues interest  and non-voting profits interest.   EAM was established to provide investment management services to the Value Line Mutual Funds ("Value Line Funds" or the "Funds").

 

The Consolidated Condensed Balance Sheets as of January 31, 2020 and April 30, 2019, which have been derived from the unaudited interim Consolidated Condensed Financial Statements and the audited Consolidated Financial Statements, respectively,  were prepared following the interim reporting requirements of the Securities and Exchange Commission (“SEC”).  In the opinion of management, the accompanying Unaudited Interim Consolidated Condensed Financial Statements contain all adjustments (consisting of normal recurring accruals except as noted below) considered necessary for a fair presentation.  This report should be read in conjunction with the audited financial statements and footnotes contained in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2019 filed with the SEC on July 25, 2019    (the “Form 10-K”).   Results of operations covered by this report may not be indicative of the results of operations for the entire year.

 

Use of Estimates:

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates.

 

Principles of Consolidation:

 

The Company follows the guidance in the Financial Accounting Standards Board's ("FASB") Topic 810 “Consolidation” to determine if it should consolidate its investment in a variable interest entity ("VIE"). A VIE is a legal entity in which either (i) equity investors do not have sufficient equity investment at risk to enable the entity to finance its activities independently or (ii) the equity holders at risk lack the obligation to absorb losses, the right to receive residual returns or the right to make decisions about the entity’s activities that most significantly affect the entity's economic performance.  A holder of a variable interest in a VIE is required to consolidate the entity if it is determined that it has a controlling financial interest in the VIE and is therefore the primary beneficiary.  The determination of a controlling financial interest in a VIE is based on a qualitative assessment to identify the variable interest holder, if any, that has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) either the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.  The accounting guidance requires the Company to perform an ongoing assessment of whether the Company is the primary beneficiary of a VIE and the Company has determined it is not the primary beneficiary of a VIE (see Note 3).

 

In accordance with FASB's Topic 810, the assets, liabilities, and results of operations of subsidiaries in which the Company has a controlling interest have been consolidated.  All significant intercompany accounts and transactions have been eliminated in consolidation.  On December 23, 2010, the Company completed the Restructuring Transaction and deconsolidated the related affiliates in accordance with FASB's Topic 810.  As part of the Restructuring Transaction, the Company received a significant non-voting revenues interest (excluding distribution revenues) and a significant non-voting profits interest in the new entity, EULAV Asset Management, a Delaware statutory trust (“EAM” or “EAM Trust”).  The Company relied on the guidance in FASB's ASC Topics 323 and 810 in its determination not to consolidate its investment in EAM and to account for such investment under the equity method of accounting. The Company reports the amount it receives for its non-voting revenues and non-voting profits interests as a separate line item below operating income in the Consolidated Condensed  Statements of Income.

 

Revenue Recognition:

 

Depending upon the product, subscription fulfillment for Value Line periodicals and related publications is available in print or digitally, via internet access.  The length of a subscription varies by product and offer received by the subscriber.  Generally, subscriptions are offered as annual subscriptions with the majority of subscriptions paid in advance.  Subscription revenues, net of discounts, are recognized ratably on a straight line basis when the product is served to the client over the life of the subscription.  Accordingly, the amount of subscription fees to be earned by fulfilling subscriptions after the date of the balance sheets are shown as unearned revenue within current and long-term liabilities.

 

Copyright fees are derived from providing certain Value Line trademarks and the Value Line Proprietary Ranking System results to third parties under written agreements for use in selecting securities for third party marketed products, including unit investment trusts, annuities and exchange traded funds ("ETFs").  The Company earns asset-based copyright fees upon delivery of the product to the customer as specified in the individual agreements.  Revenue is recognized monthly and received either quarterly or in advance over the term of the agreement and, because it is asset-based, will fluctuate as the market value of the underlying portfolio increases or decreases in value.

 

Investment in Unconsolidated Entities:

 

The Company accounts for its investment in its unconsolidated entity, EAM, using the equity method of accounting in accordance with FASB’s ASC 323.  The equity method is an appropriate means of recognizing increases or decreases measured by GAAP in the economic resources underlying the investments.  Under the equity method, an investor recognizes its share of the earnings or losses of an investee in the periods for which they are reported by the investee in its financial statements rather than in the period in which an investee declares a dividend or distribution. An investor adjusts the carrying amount of an investment for its share of the earnings or losses recognized by the investee.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

The Company’s “interests” in EAM, the investment adviser to and the sole member of the distributor of the Value Line Funds, consist of a "non-voting revenues interest" and a "non-voting profits interest" in EAM as defined in the EAM Trust Agreement.  The non-voting revenues interest entitles the Company to receive a range of 41% to 55%, based on the amount of EAM’s adjusted gross revenues, excluding EULAV Securities' distribution revenues (“Revenues Interest”).  The non-voting profits interest entitles the Company to receive 50% of EAM's profits, subject to certain limited adjustments as defined in the EAM Trust Agreement (“Profits Interest”).  The Revenues Interest and at least 90% of the Profits Interest are to be distributed each quarter to all interest holders of EAM, including Value Line.  Subsequent to the Restructuring Date, the Company's Revenues Interest in EAM excludes participation in the service and distribution fees of EAM's subsidiary EULAV Securities.  The Company reflects its non-voting revenues and non-voting profits interests in EAM as non-operating income under the equity method of accounting subsequent to the Restructuring Transaction.  Although the Company does not have control over the operating and financial policies of EAM, pursuant to the EAM Trust Agreement, the Company has a contractual right to receive its share of EAM's revenues and profits.

 

Recent Accounting Pronouncements:

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”.  This ASU requires that, for leases longer than one year, a lessee recognize in the statements of financial position a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the liability to make lease payments. It also requires that for finance leases, a lessee recognize interest expense on the lease liability, separately from the amortization of the right-of-use asset in the statements of earnings, while for operating leases, such amounts should be recognized as a combined expense. The Company adopted this ASU in May 2019 under a modified retrospective approach (see Note 12).

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230, Statement of Cash Flows.  The Company has adopted ASU 2016-15 in the first quarter of fiscal 2019.

 

The FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In addition, ASU No. 2014-09 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 supersedes most existing U.S. GAAP revenue recognition principles, and it permits the use of either the retrospective or cumulative effect transition method. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods.  The Company has adopted ASU No. 2014-09 in the first quarter of fiscal 2019, which does not have a material impact on the Company's consolidated condensed financial statements and related disclosures.

 

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230):  Restricted Cash (a consensus of the FASB Emerging Issues Task Force)", effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods.  This ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents.     The Company has adopted ASU No. 2016-18 in the first quarter of fiscal 2019, which does not have a material impact on the Company's consolidated condensed financial statements and related disclosures.

 

On June 21, 2018, the United States Supreme Court reversed the 1992 ruling in Quill, which protected firms delivering items by common carrier into a state where it had no physical presence from having to collect sales tax in such state.  The Company has  integrated the effects of the various state laws into its operations and continues to do so.

 

Valuation of Securities:

 

The Company's securities classified as cash equivalents and available-for-sale consist of shares of money market funds that invest primarily in short-term U.S. Government securities and investments in equities including ETFs and are valued in accordance with the requirements of the Fair Value Measurements Topic of the FASB's ASC 820.  The securities classified as available-for-sale reflected in the Consolidated Balance Sheets are valued at market and unrealized gains and losses, net of applicable taxes, are reported as a separate component of shareholders' equity. Realized gains and losses on sales of the securities classified as available-for-sale are recorded in earnings as of the trade date and are determined on the identified cost method.

 

The Company classifies its securities available-for-sale as current assets to properly reflect its liquidity and to recognize the fact that it has liquid assets available-for-sale should the need arise.

 

Market valuations of securities listed on a securities exchange and ETF shares are based on the closing sales prices on the last business day of each month. The market value of the Company's fixed maturity U.S. Government debt securities is determined utilizing publicly quoted market prices.  Cash equivalents consist of investments in money market funds that invest primarily in U.S. Government securities valued in accordance with rule 2a-7 under the 1940 Act.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

The Fair Value Measurements Topic of FASB's ASC defines fair value as the price that the Company would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market for the investment. The  Fair Value Measurements Topic established a three-tier hierarchy to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the information that market participants would use in pricing the asset or liability, including assumptions about risk. Examples of risks include those inherent in a particular valuation technique used to measure fair value such as the risk inherent in the inputs to the valuation technique. Inputs are classified as observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the factors market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

The three-tier hierarchy of inputs is summarized in the three broad levels listed below.

 

Level 1 – quoted prices in active markets for identical investments

Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

 

The following summarizes the levels of fair value measurements of the Company’s investments:

 

 

 

The Company had no other financial instruments such as futures, forwards and swap contracts. For the periods ended January 31, 2020 and April 30, 2019, there were no Level 2 nor Level 3 investments. The Company does not have any liabilities that are subject to fair value measurement.

 

Advertising expenses:

 

The Company expenses advertising costs as incurred.

 

Income Taxes:

 

The Company computes its income tax provision in accordance with the Income Tax Topic of the FASB's ASC.  Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Consolidated Condensed  Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax bases of particular assets and liabilities, using tax rates currently in effect for the years in which the differences are expected to reverse.  The Company adopted the provisions of ASU 2015-17, Income taxes (Topic 740) during the first quarter of fiscal 2018 and now classifies all deferred taxes as long-term liabilities on the Consolidated Condensed Balance Sheets.

 

The Income Tax Topic of the FASB's ASC establishes for all entities, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures.  As of January 31, 2020, management has reviewed the tax positions for the years still subject to tax audit under the statute of limitations, evaluated the implications, and determined that there is no material impact to the Company's financial statements.

 

Earnings per share:

 

Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.  The Company does not have any potentially dilutive common shares from outstanding stock options, warrants, restricted stock, or restricted stock units.

 

Cash and Cash Equivalents:

 

For purposes of the Consolidated Condensed Statements of Cash Flows, the Company considers all cash held at banks and short term liquid investments with an original maturity of less than three months to be cash and cash equivalents. As of January 31, 2020 and April 30, 2019, cash equivalents included $2,739,000 and $5,617,000, respectively, for amounts invested in money market mutual funds that invest in short term U.S. government securities.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

Note 2 - Investments:

 

Securities Available-for-Sale:

 

Investments held by the Company and its subsidiaries are classified as securities available-for-sale in accordance with FASB's ASC 320, Investments - Debt and Equity Securities.  All of the Company's securities classified as available-for-sale were readily marketable or had a maturity of twelve months or less and are classified as current assets on the Consolidated Condensed Balance Sheets.

 

Equity Securities:

 

Equity securities classified as available-for-sale on the Consolidated Condensed Balance Sheets, consist of ETFs held for dividend yield that attempt to replicate the performance of certain equity indexes and ETFs that hold preferred shares primarily of financial institutions.

 

As of January 31, 2020 and April 30, 2019, the aggregate cost of the equity securities classified as available-for-sale, which consist of investments in the SPDR Series Trust S&P Dividend ETF (SDY), First Trust Value Line Dividend Index ETF (FVD), INVESCO Financial Preferred ETF (PGF), Select Utilities Select Sector SPDR ETF (XLU), First Trust Value Line 100 ETF (FVL), ProShares Trust S&P 500 Dividend Aristocrats ETF (NOBL), iShares Select Dividend ETF (DVY) and equity securities portfolio under EAM management held at Charles Schwab was  a combined total of $10,257,000 and $8,541,000, respectively, and the fair value was $12,861,000 and $10,622,000, respectively.

 

There were no sales or proceeds from sales of equity securities during the nine months ended January 31, 2020 or January 31, 2019.  The increase in gross unrealized gains on equity securities classified as available-for-sale of $523,000, net of deferred  taxes of $240,000 was included in Shareholders' Equity on the Consolidated Condensed Balance Sheet at January 31, 2020.  The increase in gross unrealized gains on equity securities classified as available-for-sale of $404,000, net of deferred  taxes of $85,000 was included in Shareholders' Equity on the Consolidated Condensed Balance Sheet at January 31, 2019.

 

The changes in the value of equity securities investments are recorded in Other Comprehensive Income in the Consolidated Condensed Financial Statements.  Realized gains and losses are recorded as of the trade date in the Consolidated Condensed Statements of Income when securities are sold, mature or are redeemed.  As of January 31, 2020 and April 30, 2019, accumulated other comprehensive income included unrealized  gains of $2,604,000 and $2,081,000, net of deferred taxes of $677,000 and $437,000, respectively.

 

The carrying value and fair value of securities available-for-sale at January 31, 2020 were as follows:

 

 

The carrying value and fair value of securities available-for-sale at April 30, 2019 were as follows:

 

 

Government Debt Securities (Fixed Income Securities):

 

Fixed income securities consist of certificates of deposits and securities issued by federal, state and local governments within the United States.  The aggregate cost and fair value at January 31, 2020 of fixed income securities classified as available-for-sale were as follows:

 

 

The aggregate cost and fair value at April 30, 2019 of fixed income securities classified as available-for-sale were as follows:

 

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

Proceeds from maturities and sales of government debt securities classified as available-for-sale during the nine months ended January 31, 2020 and January 31, 2019, were $5,223,000 and $4,638,000, respectively.  The increase in gross unrealized gains of $69,000 on fixed income securities classified as available-for-sale net of deferred income tax of $20,000, was included in Shareholders' Equity on the Consolidated Condensed Balance Sheet as of January 31, 2020.  The increase in gross unrealized  gains of $34,000 on fixed income securities classified as available-for-sale net of deferred income tax of $8,000, was included in Shareholders' Equity on the Consolidated Condensed Balance Sheet as of January 31, 2019.  As of January 31, 2020 and April 30, 2019, accumulated other comprehensive income included unrealized  gains of $112,000 and $43,000, net of deferred taxes of $29,000  and $9,000, respectively.

 

The average yield on the Government debt securities classified as available-for-sale at January 31, 2020 and April 30, 2019 was 2.30% and 2.09%, respectively.

 

Income from Securities Transactions:

 

Income from securities transactions was comprised of the following:

 

 

Investment in Unconsolidated Entities:

Equity Method Investment:

 

As of January 31, 2020 and April 30, 2019, the Company's investment in EAM Trust on the Consolidated Condensed Balance Sheets was $59,612,000 and $58,625,000, respectively.

 

The value of VLI’s investment in EAM at January 31, 2020 and April 30, 2019 reflects the fair value of contributed capital of $55,805,000 at inception which included $5,820,000 of cash and liquid securities in excess of working capital requirements contributed to EAM’s capital account by VLI, plus VLI's share of non-voting revenues and non-voting profits from EAM less distributions, made quarterly to VLI by EAM, during the period subsequent to its initial investment through the dates of the Consolidated Condensed Balance Sheets.

 

It is anticipated that EAM will have sufficient liquidity and earn enough profit to conduct its current and future operations such that EAM will not need additional funding.

 

The Company monitors its Investment in EAM Trust for impairment to determine whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment.  Impairment indicators include, but are not limited to the following: (a) a significant deterioration in the earnings performance, asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse change in the general market condition of the industry in which the investee operates, or (d) factors that raise significant concerns about the investee’s ability to continue as a going concern such as negative cash flows, working capital deficiencies, or noncompliance with statutory capital and regulatory requirements.  EAM did not record any impairment losses for its assets during the fiscal years 2020 or 2019.

 

The components of EAM’s investment management operations, provided to the Company by EAM, were as follows:

 

 

(1) Represents EAM's net income, after giving effect to Value Line’s non-voting revenues interest, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

 

(1) At January 31, 2020 and April 30, 2019, EAM's total liabilities included a payable to VLI for its accrued non-voting revenues interest and non-voting profits interest of $3,413,000 and $2,420,000, respectively.

 

Note 3 - Variable Interest Entity

 

The Company retained a  non-voting revenues interest and a 50% non-voting profits interest in EAM, which was formed, as a result of the Restructuring Transaction on December 23, 2010, to carry on the asset management and mutual fund distribution businesses formerly conducted by the Company.  EAM is considered to be a VIE in relation to the Company.  The Company makes its determination for consolidation of EAM as a VIE based on a qualitative assessment of the purpose and design of EAM, the terms and characteristics of the variable interests in EAM, and the risks EAM is designed to originate and pass through to holders of variable interests.  Other than EAM, the Company does not have an interest in any other VIEs.

 

The Company has determined that it does not have a controlling financial interest in EAM because it does not have the power to direct the activities of EAM that most significantly impact its economic performance.  Value Line does not hold any voting stock of EAM and it does not have any involvement in the day-to-day activities or operations of EAM.  Although the EAM Trust Agreement provides Value Line with certain consent rights and contains certain restrictive covenants related to the activities of EAM, these are considered to be protective rights and therefore Value Line does not maintain control over EAM.

 

In addition, although EAM is expected to be profitable, there is a risk that it could operate at a loss.   While all of the profit interest shareholders in EAM are subject to variability based on EAM’s operations risk, Value Line’s non-voting revenues interest in EAM is a preferred interest in the revenues of EAM, rather than a profits interest in EAM, and Value Line accordingly believes it is subject to proportionately less risk than other holders of the profits interests.

 

The Company has not provided any explicit or implicit financial or other support to EAM other than what was contractually agreed to in the EAM Trust Agreement.  Value Line has no obligation to fund EAM in the future and, as a result, has no exposure to loss beyond its initial investment and any undistributed revenues and profits interests retained in EAM.  The following table presents the total assets of EAM, the maximum exposure to loss due to involvement with EAM, as well as the value of the assets and liabilities the Company has recorded on its Consolidated Condensed Balance Sheets for its interest in EAM.

 

 

(1)  Reported within Long-Term Assets on the Consolidated Condensed Balance Sheets.

 

Note 4 - Supplementary Cash Flows Information:

 

Reconciliation of Cash, Cash Equivalents, and Restricted Cash:

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Condensed Statement of Cash Flows that sum to the total of the same such amounts shown in the Consolidated Condensed Statement of Cash Flows.

 

 

Income Tax Payments:

 

The Company made income tax payments as follows:

 

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

Note 5 - Employees' Profit Sharing and Savings Plan:

 

Substantially all employees of the Company and its subsidiaries are members of the Value Line, Inc. Profit Sharing and Savings Plan (the "Plan").  In general, this is a qualified, contributory plan which provides for a discretionary annual Company contribution which is determined by a formula based on the salaries of eligible employees and the amount of consolidated net operating income as defined in the Plan. For the nine months ended January 31, 2020 and January 31, 2019, the estimated profit sharing plan contributions, which are included as expenses in salaries and employee benefits in the Consolidated Condensed Statements of Income, were $423,000 and $398,000, respectively.

 

Note 6 - Comprehensive Income:

 

The FASB's ASC Comprehensive Income topic requires the reporting of comprehensive income in addition to net income from operations.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that otherwise would not be recognized in the calculation of net income.

 

As of January 31, 2020 and January 31, 2019, the Company held equity securities consisting primarily of ETFs with high relative dividend yields that are classified as securities available-for-sale on the Consolidated Condensed Balance Sheets.  As of January 31, 2020 and January 31, 2019, the Company also had fixed income securities consisting of certificates of deposits and securities issued by federal, state and local governments within the United States that are classified as securities available-for-sale on the Consolidated Condensed Balance Sheets.  The change in valuation of these securities, net of deferred income taxes, has been recorded in accumulated other comprehensive income in the Company's Consolidated Condensed Balance Sheets.

 

The components of comprehensive income included in the Consolidated  Condensed Statements of Income and Changes in Shareholders' Equity for the nine months ended January 31, 2020 are as follows:

 

 

The components of comprehensive income included in the Consolidated  Condensed Statements of Income and Changes in Shareholders' Equity for the nine months ended January 31, 2019 are as follows:

 

 

Note 7 - Related Party Transactions:

 

Investment Management (overview):

 

The Company has substantial non-voting revenues and non-voting profits interests in EAM, the asset manager to the Value Line Mutual Funds.  Accordingly, the Company no longer reports this operation as a separate business segment, although it still maintains a significant interest in the cash flows generated by this business and will receive non-voting revenues and non-voting profits interests, as discussed below. 

 

Total assets in the Value Line Funds managed and/or distributed by EAM at January 31, 2020, were $3.75 billion, 40% above total assets of $2.68 billion in the Value Line Funds managed and/or distributed  by EAM at January 31, 2019.

 

The Company’s non-voting revenues and non-voting profits interests in EAM entitle it to receive quarterly distributions in a range of 41% to 55% of EAM’s revenues (excluding distribution revenues) from EAM’s mutual fund and separate account business and 50% of the residual profits of EAM (subject to temporary increase in certain limited circumstances).  The Voting Profits Interest Holders will receive the other 50% of residual profits of EAM.  Distribution is not less than 90% of EAM’s profits payable each fiscal quarter under the provisions of the EAM Trust Agreement.   Value Line’s percent share of EAM’s revenues is calculated each fiscal quarter.  The applicable recent non-voting revenues interest percentage for the third quarter of fiscal 2020 was 51.03%.

 

EAM Trust - VLI's non-voting revenues and non-voting profits interests:

 

The Company holds non-voting revenues and non-voting profits interests in EAM which entitle the Company to receive from EAM an amount ranging from 41% to 55% of EAM's investment management fee revenues from its mutual fund and separate accounts business.  EAM currently has no separately managed account fees.  The Company recorded income from its non-voting revenues interest and its non-voting profits interests in EAM as follows:

 

 

At January 31, 2020, the Company's investment in EAM includes a receivable of $3,413,000 representing the quarterly distribution of the non-voting revenues share and non-voting profits share.  That sum was subsequently paid.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

Transactions with Parent:

 

During the nine months ended January 31, 2020 and January 31, 2019, the Company was reimbursed $259,000 and $256,000,  respectively, for payments it made on behalf of and for services the Company provided to the Parent Company, Arnold Bernhard and Co., Inc. ("Parent").  There were no receivables from the Parent on the Consolidated Condensed Balance Sheets at January 31, 2020 and April 30, 2019.

 

The Company is a party to a tax-sharing arrangement with the Parent which allocates the tax liabilities of the two Companies between them.  The Company made federal tax payments of $3,325,000 and  $2,050,000 to the Parent during the nine months ended January 31, 2020 and January 31, 2019, respectively.

 

As of January 31, 2020, the Parent owned 89.57% of the outstanding shares of common stock of the Company.

 

Note 8 - Federal, State and Local Income Taxes:

 

In accordance with the requirements of the Income Tax Topic of the FASB's ASC, the Company's provision for income taxes includes the following:

 

 

On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted.  The Tax Act lowered the U.S. federal income tax rate ("Federal Tax Rate") from 35% to 21% effective January 1, 2018.  Accordingly, the Company computes Federal income tax expense using the Federal Tax Rate of 21% in fiscal year 2020 and each year thereafter.

 

The overall effective income tax rates, as a percentage of pre-tax ordinary income for the nine months ended January 31, 2020 and January 31, 2019 were 27.05% and 24.20%, respectively.  The increase in the effective tax rate during the quarter ended January 31, 2020 is primarily a result of an increase in the state and local income taxes as a result of changes in state and local tax legislation and the effect of the lowering of the NYC tax allocation factor on deferred taxes in fiscal 2019.  The Company's annualized overall effective tax rate fluctuates due to a number of factors, in addition to changes in tax law, including but not limited to an increase or decrease in the ratio of items that do not have tax consequences to pre-tax income, the Company's geographic profit mix between tax jurisdictions, taxation method adopted by each locality, new interpretations of existing tax laws and rulings and settlements with tax authorities.

 

Deferred income taxes, a liability, are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.  The tax effect of temporary differences giving rise to the Company's long-term deferred tax liability are as follows:

 

 

At the end of each interim reporting period, the Company estimates the effective income tax rate to apply for the full fiscal year. The Company uses the effective income tax rate determined to provide for income taxes on a year-to-date basis and reflects the tax effect of any tax law changes and certain other discrete events in the period in which they occur.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rate to pretax income as a result of the following:

 

 

The Company believes that, as of January 31, 2020, there were no material uncertain tax positions that would require disclosure under GAAP.

 

The Company is included in the consolidated federal income tax return of the Parent.  The Company has a tax sharing agreement which requires it to make tax payments to the Parent equal to the Company's liability/(benefit) as if it filed a separate return.  Beginning with the fiscal year ended April 30, 2017, the Company files combined income tax returns with the Parent on a unitary basis in certain states as a result of changes in state tax regulations.  The Company does not anticipate any significant tax implications from the change to unitary state tax filing.

 

The Company’s federal income tax returns (included in the Parent’s consolidated returns) and state and city tax returns for fiscal years ended 2016 through 2018, are subject to examination by the tax authorities, generally for three years after they are filed with the tax authorities. The Company is presently engaged in a federal tax audit for the fiscal year ended April 30, 2015 and does not expect it to have a material effect on the financial statements.

 

Note 9 - Property and Equipment:

 

Property and equipment are carried at cost.  Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, or in the case of leasehold improvements, over the remaining terms of the leases.  For income tax purposes, depreciation of furniture and equipment is computed using accelerated methods and buildings and leasehold improvements are depreciated over prescribed extended tax lives. Property and equipment, net, on the Consolidated Condensed Balance Sheets was comprised of the following:

 

 

Note 10 - Accounting for the Costs of Computer Software Developed for Internal Use:

 

The Company has adopted the provisions of the Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed for Internal Use".  SOP 98-1 requires companies to capitalize as long-lived assets many of the costs associated with developing or purchasing software for internal use and amortize those costs over the software's estimated useful life in a systematic and rational manner.  Such costs, when incurred, are capitalized and amortized over the expected useful life of the asset, normally 3 to 5 years.  During  the nine months ended January 31, 2019 the Company capitalized $98,000 of third party programmers' costs related to the development of software for internal use.  Total amortization expenses during the nine months ended January 31, 2020 and January 31, 2019, were $52,000 and $107,000, respectively.

 

The Company  did not incur and did not capitalize expenditures related to third party programmers' costs or to the development of software for internal use during the nine months ended January 31, 2020.

 

Note 11 - Treasury Stock and Repurchase Program:

 

On October 19, 2018, the Company's Board of Directors approved a share repurchase program authorizing the repurchase of shares of the Company’s common stock up to an aggregate purchase price of $2,000,000.  The repurchases may be made from time to time on the open market at prevailing market prices, in negotiated transactions off the market, in block purchases or otherwise. The repurchase program may be suspended or discontinued at any time at the Company’s discretion and has no set expiration date.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

Treasury stock, at cost, consists of the following:

 

 

(1) Includes 85,219 shares that were acquired during the former repurchase program which was authorized in January 2011 and expired in January 2012;  18,400 shares were acquired prior to January 2011.

 

(2) Includes 207,047 shares that were acquired during the $3 million repurchase program which was authorized in September 2012 and expired in October 2018.

 

(3) Includes 49,789 shares that were acquired during the $2 million repurchase program which was authorized in  October 2018.

 

Note 12 - Leases:

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”.  This ASU requires that, for leases longer than one year, a lessee recognizes in the statements of financial position a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the liability to make lease payments. It also requires that for finance leases, a lessee recognizes interest expense on the lease liability, separately from the amortization of the right-of-use asset in the statements of earnings, while for operating leases, such amounts should be recognized as a combined expense. The firm adopted this ASU in May 2019 under a modified retrospective approach.

 

The Company adopted ASU 2016-02 using a modified retrospective transition approach as of the Effective Date as permitted by the amendments in ASU 2018-11, which provides an alternative modified retrospective transition method. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. May 1, 2019). The Company has elected to employ the transitionary relief offered by the FASB and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized.

 

The Company leases office space in New York, NY and a warehouse and appurtenant office space in Lyndhurst, NJ. The Company has evaluated these leases and determined that they are operating leases under the definitions of the guidance of ASU 2016-02.

 

The right-of-use asset is initially measured at cost, which comprises the initial amount of the net present value of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the net present value of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received.

 

On May 1, 2019, the Company recorded a right-of-use asset in the amount of $9,575,000, which represents the lease liability of $10,340,000 adjusted for previously recorded unamortized lease incentives in the amount of $765,000. The right-of-use asset will be amortized over the remaining lease term in the amount equal to the difference between the calculated straight-line expense of the total lease payments less the monthly interest calculated on the remaining lease liability. As of January 31, 2020, the Company had a long-term lease asset of $8,799,000 recorded in property and equipment in its consolidated condensed balance sheets.

 

The Company will recognize lease expense, calculated as the remaining cost of the lease allocated over the remaining lease term on a straight-line basis. Lease expense will be presented as part of continuing operations in the consolidated condensed statements of income. For the nine months ended January 31, 2020, the Company recognized $1,125,000 in lease expense.

 

For the nine months ended January 31, 2020, the Company paid $1,047,000 in rent relating to the leases. As a payment arising from an operating lease, the $1,047,000 will be classified within operating activities in the consolidated condensed statements of cash flows.

 

 

Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

January 31, 2020

(Unaudited)

 

The Company’s leases generally do not provide an implicit interest rate, and therefore the Company estimated an incremental borrowing rate, or IBR, as of the commencement date, to determine the present value of its operating lease liabilities. The IBR is defined under ASC 842 as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. The following table reconciles the undiscounted future minimum lease payments to the total operating lease liabilities recognized on the condensed consolidated balance sheet as of January 31, 2020:

 

 

* Excludes the nine months ended January 31, 2020

 

Note 13 - Restricted Cash and Deposits:

 

Restricted Money Market Investment in the noncurrent assets on the Consolidated Condensed Balance Sheet at January 31, 2020, includes $469,000, which represents cash invested in a bank money market fund securing a letter of credit ("LOC") in the amount of $469,000 issued to the sublandlord as a security deposit for the Company's New York City leased corporate office facility.

 

Note 14 - Concentration:

 

During the  nine months ended January 31, 2020, 30.85% of total publishing revenues of $30,500,000 were derived from a single customer.

 

Note 15 - Concentration of Credit Risk:

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of January 31, 2020 and January 31, 2019, the Company had $1,782,000 and $2,650,000, respectively, in excess of the FDIC insured limit.  Management has concluded the excess does not represent a material risk, based on the creditworthiness  of the counter parties.