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CROWN CRAFTS INC - Quarter Report: 2022 October (Form 10-Q)

crws20221002_10q.htm
 

[UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

 

For the quarterly period ended October 2, 2022

 

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

 

 

For the transition period from _____to_____

 

 

Commission File No. 1-7604

 

Crown Crafts, Inc.
(Exact name of registrant as specified in its charter)

 

 

Delaware 58-0678148 
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
   
   
916 South Burnside Avenue, Gonzales, LA  70737 
(Address of principal executive offices) (Zip Code)

 

 

(225) 647-9100
Registrant’s telephone number, including area code

 

 
Former name, former address and former fiscal year, if changed since last report

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CRWS

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 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 ☑

 

The number of shares of common stock, $0.01 par value, of the registrant outstanding as of October 25, 2022 was 10,117,572.

 

 

1

 

  

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 2, 2022 (UNAUDITED) AND APRIL 3, 2022

(amounts in thousands, except share and per share amounts)

 

  

October 2, 2022

  

April 3, 2022

 
         

ASSETS

 

Current assets:

        

Cash and cash equivalents

 $2,342  $1,598 

Accounts receivable (net of allowances of $1,274 at October 2, 2022 and $945 at April 3, 2022):

        

Due from factor

  16,161   21,093 

Other

  1,422   2,133 

Inventories

  27,735   20,653 

Prepaid expenses

  1,143   1,031 

Total current assets

  48,803   46,508 
         

Operating lease right of use assets

  1,729   2,423 
         

Property, plant and equipment - at cost:

        

Vehicles

  182   182 

Leasehold improvements

  425   425 

Machinery and equipment

  3,822   3,581 

Furniture and fixtures

  378   367 

Property, plant and equipment - gross

  4,807   4,555 

Less accumulated depreciation

  3,533   3,198 

Property, plant and equipment - net

  1,274   1,357 
         

Finite-lived intangible assets - at cost:

        

Customer relationships

  7,374   7,374 

Other finite-lived intangible assets

  4,266   4,266 

Finite-lived intangible assets - gross

  11,640   11,640 

Less accumulated amortization

  9,227   8,986 

Finite-lived intangible assets - net

  2,413   2,654 
         

Goodwill

  7,125   7,125 

Other

  88   88 

Total Assets

 $61,432  $60,155 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current liabilities:

        

Accounts payable

 $6,770  $6,375 

Accrued wages and benefits

  985   2,196 

Accrued royalties

  666   462 

Dividends payable

  809   827 

Operating lease liabilities, current

  1,357   1,832 

Other accrued liabilities

  99   94 

Total current liabilities

  10,686   11,786 
         

Non-current liabilities:

        

Deferred income taxes

  1,267   1,020 

Operating lease liabilities, noncurrent

  506   809 

Reserve for unrecognized tax liabilities

  813   739 

Total non-current liabilities

  2,586   2,568 
         

Shareholders' equity:

        

Common stock - $0.01 par value per share; Authorized 40,000,000 shares at October 2, 2022 and April 3, 2022; Issued 13,011,814 shares at October 2, 2022 and 12,944,918 shares at April 3, 2022

  130   129 

Additional paid-in capital

  56,613   55,925 

Treasury stock - at cost - 2,894,242 shares at October 2, 2022 and 2,864,698 shares at April 3, 2022

  (15,803)  (15,614)

Retained Earnings

  7,220   5,361 

Total shareholders' equity

  48,160   45,801 

Total Liabilities and Shareholders' Equity

 $61,432  $60,155 

 

2

 

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE- AND SIX-MONTH PERIODS ENDED OCTOBER 2, 2022 AND SEPTEMBER 26, 2021

(amounts in thousands, except per share amounts)

 

  

Three-Month Periods Ended

  

Six-Month Periods Ended

 
  

October 2, 2022

  

September 26, 2021

  

October 2, 2022

  

September 26, 2021

 
                 

Net sales

 $18,726  $20,220  $34,436  $38,932 

Cost of products sold

  13,280   14,152   23,837   28,208 

Gross profit

  5,446   6,068   10,599   10,724 

Marketing and administrative expenses

  2,736   3,164   6,149   6,530 

Income from operations

  2,710   2,904   4,450   4,194 

Other (expense) income:

                

Interest income - net of interest expense

  4   (3)  1   (16)

Gain on extinguishment of debt

  -   -   -   1,985 

Gain on insurance proceeds received for damage to equipment

  -   -   34   - 

Gain (loss) on sale of property, plant and equipment

  -   (3)  2   (3)

Other - net

  (3)  80   124   92 

Income before income tax expense

  2,711   2,978   4,611   6,252 

Income tax expense

  671   592   1,137   1,201 

Net income

 $2,040  $2,386  $3,474  $5,051 
                 

Weighted average shares outstanding:

                

Basic

  10,094   10,053   10,085   10,028 

Effect of dilutive securities

  22   41   22   43 

Diluted

  10,116   10,094   10,107   10,071 
                 

Earnings per share -- basic and diluted

 $0.20  $0.24  $0.34  $0.50 

 

3

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

THREE- AND SIX-MONTH PERIODS ENDED OCTOBER 2, 2022 AND SEPTEMBER 26, 2021

 

  

Common Shares

  

Treasury Shares

  

Additional

      

Total

 
  

Number of Shares

  

Amount

  

Number of Shares

  

Amount

  

Paid-in Capital

  

Retained Earnings

  

Shareholders' Equity

 
  

(Dollar amounts in thousands)

 
                             
  

Three-Month Periods

 

Balances - June 27, 2021

  12,864,753  $129   (2,834,434) $(15,381) $55,024  $4,054  $43,826 
                             

Issuance of shares

  60,165   -   -   -   103   -   103 

Stock-based compensation

  -   -   -   -   208   -   208 

Acquisition of treasury stock

  -   -   (15,412)  (117)  -   -   (117)

Net income

  -   -   -   -   -   2,386   2,386 

Dividend declared on common stock - $0.08 per share

  -   -   -   -   -   (806)  (806)
                             

Balances - September 26, 2021

  12,924,918  $129   (2,849,846) $(15,498) $55,335  $5,634  $45,600 
                             

Balances - July 3, 2022

  12,959,918  $130   (2,890,165) $(15,776) $56,331  $5,989  $46,674 
                             

Issuance of shares

  51,896   -   -   -   24   -   24 

Stock-based compensation

  -   -   -   -   258   -   258 

Acquisition of treasury stock

  -   -   (4,077)  (27)  -   -   (27)

Net income

  -   -   -   -   -   2,040   2,040 

Dividend declared on common stock - $0.08 per share

  -   -   -   -   -   (809)  (809)
                             

Balances - October 2, 2022

  13,011,814  $130   (2,894,242) $(15,803) $56,613  $7,220  $48,160 
                             
  

Six-Month Periods

 

Balances - March 28, 2021

  12,809,753  $128   (2,811,446) $(15,202) $54,748  $2,191  $41,865 
                             

Issuance of shares

  115,165   1   -   -   247   -   248 

Stock-based compensation

  -   -   -   -   340   -   340 

Acquisition of treasury stock

  -   -   (38,400)  (296)  -   -   (296)

Net income

  -   -   -   -   -   5,051   5,051 

Dividends declared on common stock - $0.16 per share

  -   -   -   -   -   (1,608)  (1,608)
                             

Balances - September 26, 2021

  12,924,918  $129   (2,849,846) $(15,498) $55,335  $5,634  $45,600 
                             

Balances - April 3, 2022

  12,944,918  $129   (2,864,698) $(15,614) $55,925  $5,361  $45,801 
                             

Issuance of shares

  66,896   1   -   -   97   -   98 

Stock-based compensation

  -   -   -   -   591   -   591 

Acquisition of treasury stock

  -   -   (29,544)  (189)  -   -   (189)

Net income

  -   -   -   -   -   3,474   3,474 

Dividends declared on common stock - $0.16 per share

  -   -   -   -   -   (1,615)  (1,615)
                             

Balances - October 2, 2022

  13,011,814  $130   (2,894,242) $(15,803) $56,613  $7,220  $48,160 

 

 

 

 

4

 
 

  

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX-MONTH PERIODS ENDED OCTOBER 2, 2022 AND SEPTEMBER 26, 2021

(amounts in thousands)

 

   

Six-Month Periods Ended

 
   

October 2, 2022

   

September 26, 2021

 

Operating activities:

               

Net income

  $ 3,474     $ 5,051  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation of property, plant and equipment

    335       311  

Amortization of intangibles

    241       259  

Amortization of right of use assets

    884       893  

Deferred income taxes

    247       277  

Gain on extinguishment of debt

    -       (1,985 )

Gain on insurance proceeds received for damage to equipment

    (34 )     -  

(Gain) loss on sale of property, plant and equipment

    (2 )     3  

Reserve for unrecognized tax liabilities

    74       71  

Stock-based compensation

    591       340  

Changes in assets and liabilities:

               

Accounts receivable

    5,643       853  

Inventories

    (7,082 )     (3,899 )

Prepaid expenses

    (112 )     468  

Other assets

    -       3  

Lease liabilities

    (969 )     (984 )

Accounts payable

    370       1,916  

Accrued liabilities

    (1,002 )     (383 )

Net cash provided by operating activities

    2,658       3,194  

Cash used in investing activities:

               

Capital expenditures for property, plant and equipment

    (227 )     (273 )

Insurance proceeds received for damage to equipment

    34       -  

Proceeds from sale of property, plant and equipment

    2       20  

Net cash used in investing activities

    (191 )     (253 )

Financing activities:

               

Repayments under revolving line of credit

    -       (5,809 )

Borrowings under revolving line of credit

    -       5,809  

Purchase of treasury stock from related parties

    (189 )     (296 )

Issuance of common stock

    98       248  

Dividends paid

    (1,632 )     (1,602 )

Net cash used in financing activities

    (1,723 )     (1,650 )

Net increase in cash and cash equivalents

    744       1,291  

Cash and cash equivalents at beginning of period

    1,598       613  

Cash and cash equivalents at end of period

  $ 2,342     $ 1,904  
                 

Supplemental cash flow information:

               

Income taxes paid

  $ 23     $ 932  

Interest paid

    5       6  
                 

Noncash activities:

               

Property, plant and equipment purchased but unpaid

    (25 )     (44 )

Dividends declared but unpaid

    (809 )     (806 )

 

5

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE- AND SIX-MONTH PERIODS ENDED OCTOBER 2, 2022 AND SEPTEMBER 26, 2021

 

 

Note 1 Interim Financial Statements

 

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of Crown Crafts, Inc. (the “Company”) and its subsidiaries and have been prepared pursuant to accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information as promulgated by the Financial Accounting Standards Board (“FASB”). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. References herein to GAAP are to topics within the FASB Accounting Standards Codification (the “FASB ASC”), which the FASB periodically revises through the issuance of an Accounting Standards Update (“ASU”) and which has been established by the FASB as the authoritative source for GAAP recognized by the FASB to be applied by nongovernmental entities.

 

In the opinion of the Company’s management, the interim unaudited condensed consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of October 2, 2022 and the results of its operations and cash flows for the periods presented. Such adjustments include normal, recurring accruals, as well as the elimination of all significant intercompany balances and transactions. Operating results for the quarter ended October 2, 2022 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending April 2, 2023. For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 3, 2022.

 

Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2023” or “2023” represent the 52-week period ending April 2, 2023 and references herein to “fiscal year 2022” or “2022” represent the 53-week period ended April 3, 2022.

 

Recently-Issued Accounting Standards: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the objective of which is to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by an entity. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred. Because this methodology restricted the recognition of credit losses that are expected, but did not yet meet the “probable” threshold, ASU No. 2016-13 was issued to require the consideration of a broader range of reasonable and supportable information when determining estimates of credit losses. The ASU is to be applied using a modified retrospective approach, and the ASU could have been early-adopted in the fiscal year that began after December 15, 2018. When issued, ASU No. 2016-13 was required to be adopted no later than the fiscal year beginning after December 15, 2019, but on November 15, 2019, the FASB issued ASU No. 2019-10, Financial Instruments Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which provided for the deferral of the effective date of ASU No. 2016-13 for a registrant that is a smaller reporting company to the first interim period of the fiscal year beginning after December 15, 2022. Accordingly, the Company intends to adopt ASU No. 2016-13 effective as of April 3, 2023. Although the Company has not determined the full impact of the adoption of ASU No. 2016-13, because the Company assigns substantially all of its trade accounts receivable under factoring agreements with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc., the Company does not believe that the adoption of the ASU will have a significant impact on the Company’s financial position, results of operations and related disclosures.

 

The Company has determined that all other ASUs issued which had become effective as of October 2, 2022, or which will become effective at some future date, are not expected to have a material impact on the Company’s consolidated financial statements.

  

 

Note 2 Advertising Costs

 

The Company’s advertising costs are primarily associated with cooperative advertising arrangements with certain of the Company’s customers and are recognized using the straight-line method based upon aggregate annual estimated amounts for these customers, with periodic adjustments to the actual amounts of authorized agreements. Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income and amounted to $123,000 and $129,000 for the three-month periods ended October 2, 2022 and September 26, 2021, respectively, and amounted to $247,000 and $350,000 for the six-month periods ended October 2, 2022 and September 26, 2021, respectively.

 

6

 
  
 

Note 3 Segment and Related Information

 

The Company operates primarily in one principal segment, infant, toddler and juvenile products. These products consist of infant and toddler bedding, blankets, accessories, bibs, toys and disposable products. Net sales of bedding, blankets and accessories and net sales of bibs, toys and disposable products for the three- and six-month periods ended October 2, 2022 and September 26, 2021 are as follows (in thousands):

 

  

Three-Month Periods Ended

  

Six-Month Periods Ended

 
  

October 2, 2022

  

September 26, 2021

  

October 2, 2022

  

September 26, 2021

 

Bedding, blankets and accessories

 $9,503  $11,101  $17,001  $21,058 

Bibs, toys and disposables products

  9,223   9,119   17,435   17,874 

Total net sales

 $18,726  $20,220  $34,436  $38,932 

  

 

Note 4 Licensing Agreements

 

The Company has entered into licensing agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalty amounts are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold in the accompanying unaudited condensed consolidated statements of income and amounted to $1.2 million and $1.4 million for the three months ended October 2, 2022 and September 26, 2021, respectively, and amounted to $2.3 million and $2.7 million for the six months ended October 2, 2022 and September 26, 2021, respectively.

  

 

Note 5 Income Taxes

 

The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to examination or other adjustment as of October 2, 2022 were the fiscal years ended April 3, 2022, March 28, 2021, March 29, 2020, March 31, 2019, April 1, 2018 and April 2, 2017.

 

In August 2020, the Company was notified by the Franchise Tax Board of the State of California of its intention to examine the Company’s California income tax returns for the fiscal years ended March 31, 2019, April 1, 2018 and April 2, 2017. Further, in February 2021, the Company was notified by the U.S. Internal Revenue Service of its intention to examine the Company’s amended federal income tax return for the fiscal year ended April 2, 2017. The ultimate resolution of these examinations could include administrative or legal proceedings. Although management believes that the calculations and positions taken on these income tax returns and all other filed income tax returns are reasonable and justifiable, the outcome of these or any other examination could result in an adjustment to the position that the Company took on such income tax returns.

 

The Company recorded discrete income tax charges of $5,000 and $6,000 during the three- and six-month periods ended October 2, 2022, respectively, and the Company recorded discrete income tax benefits of $28,000 and $72,000 during the three- and six-month periods ended September 26, 2021, respectively, to reflect the net effects of the excess tax benefits and tax shortfalls arising from the exercise of stock options and the vesting of non-vested stock during the periods.

  

 

Note 6 Carousel Designs

 

The accompanying unaudited condensed consolidated statements of income for the three- and six-month periods ended September 26, 2021 include income, expenses and losses associated with the operating activities of Carousel Designs, LLC (“Carousel”), a wholly-owned subsidiary that manufactured and marketed infant and toddler bedding directly to consumers online from a facility in Douglasville, Georgia. On May 5, 2021, the Company’s Board of Directors (the “Board”) approved the closure of Carousel due to its high costs, declining sales and operating losses, as well as management’s determination that, due to post-COVID-19 competitive pressures in the infant, toddler and juvenile products segment within the consumer products industry, such losses were likely to continue. Accordingly, the operations of Carousel ceased on May 21, 2021.

 

During the three- and six-month periods ended September 26, 2021, Carousel experienced a gross loss of $41,000 and $688,000, respectively. The gross loss was the result of the sale of inventory below cost and, for the three-month period ended June 27, 2021 and the six-month period ended September 26, 2021, the recognition of charges of $334,000 related to the settlement with a supplier of a commitment to purchase fabric and $265,000 associated with the liquidation of Carousel’s remaining inventory upon the closure of the business.

 

7

 
  
 

Note 7 Financing Arrangements

 

Factoring Agreements: To reduce its exposure to credit losses, the Company assigns substantially all of its trade accounts receivable to CIT pursuant to factoring agreements, which have expiration dates that are coterminous with that of the financing agreement described below. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. As such, the Company does not take advances on the factoring agreements.

 

CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation occurs, then the Company either assumes (and may seek to mitigate) the credit risk for shipments to the customer after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, amounted to $79,000 and $85,000 for the three-month periods ended October 2, 2022 and September 26, 2021, respectively, and amounted to $147,000 and $149,000 for the six-month periods ended October 2, 2022 and September 26, 2021, respectively.

 

Credit Facility: The Company’s credit facility as of October 2, 2022 consisted of a revolving line of credit under a financing agreement with CIT of up to $26.0 million, which includes a $1.5 million sub-limit for letters of credit. The financing agreement will mature on July 11, 2025, bears interest at the rate of prime minus 1.0% or the Secured Overnight Financing Rate (“SOFR”) plus 1.6%, and is secured by a first lien on all assets of the Company. At October 2, 2022, the Company had elected to pay interest on balances owed under the revolving line of credit, if any, under the SOFR option. The financing agreement also provides for the payment by CIT to the Company of interest at the rate of prime as of the beginning of the calendar month minus 2.0%, which was 4.25% as of October 2, 2022, on daily negative balances, if any, held at CIT.

 

As of October 2, 2022 and April 3, 2022, there was no balance owed on the revolving line of credit, there was no letter of credit outstanding and $26.0 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances. The financing agreement contains usual and customary covenants for agreements of that type, including limitations on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or consolidation transactions, transactions with affiliates, and changes in or amendments to the organizational documents for the Company and its subsidiaries. The Company believes it was in compliance with these covenants as of October 2, 2022.

 

Credit Concentration: The Company’s accounts receivable as of October 2, 2022 amounted to $17.6 million, net of allowances of $1.3 million. Of this amount, $16.2 million was due from CIT under the factoring agreements; an additional amount of $2.3 million was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $18.5 million represented the maximum loss that the Company could have incurred as of October 2, 2022 if CIT had failed completely to perform its obligations under the factoring agreements and the revolving line of credit. The Company’s accounts receivable at April 3, 2022 amounted to $23.2 million, net of allowances of $945,000. Of this amount, $21.1 million was due from CIT under the factoring agreements; an additional amount of $1.5 million was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $22.6 million represented the maximum loss that the Company could have incurred as of April 3, 2022 if CIT had failed completely to perform its obligations under the factoring agreements and the revolving line of credit.

 

Paycheck Protection Program Loan: On April 19, 2020, the Company executed a Note (the “Note”) in connection with a loan made pursuant to the Paycheck Protection Program (the “PPP Loan”), which is administered by the U.S. Small Business Administration (the “SBA”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act of 2020. The Note was entered into with CIT Bank, N.A. (the “Lender”) for the principal amount of $1,963,800 and accrued interest at 1.0% per year.

 

As authorized by the provisions of the CARES Act, the Company applied to the Lender for forgiveness of all or a portion of the PPP Loan. The Note would have matured on April 20, 2022, but on May 20, 2021, the PPP Loan was forgiven in full and the SBA remitted to the Lender on that date the principal amount of the Note of $1,963,800 and interest of $21,000 that had accrued from the funding date of April 20, 2020 through the forgiveness date of May 20, 2021. During the three months ended June 27, 2021, the Company recorded a gain on extinguishment of debt in the amount of $1,985,000 associated with the forgiveness of the PPP Loan, which has been presented below income from operations in the accompanying unaudited condensed consolidated statements of income.

 

8

 
  
 

Note 8 Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations. For the purpose of presenting and measuring for the impairment of goodwill, the Company has two reporting units: one that produces and markets infant and toddler bedding, blankets and accessories and another that produces and markets infant and toddler bibs, toys and disposable products. The Company’s reporting units have recognized goodwill as of October 2, 2022 and April 3, 2022 of $30.0 million, which is reflected in the accompanying condensed consolidated balance sheets net of accumulated impairment charges of $22.9 million, for a net reported balance of $7.1 million.

 

The Company measures for impairment the goodwill within its reporting units annually as of the first day of the Company’s fiscal year. An additional interim measurement for impairment is performed during the year whenever an event or change in circumstances occurs that suggests that the fair value of either of the reporting units of the Company has more likely than not (defined as having a likelihood of greater than 50%) fallen below its carrying value. The annual or interim measurement for impairment is performed by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such qualitative factors so indicate, then the measurement for impairment is continued by calculating an estimate of the fair value of each reporting unit and comparing the estimated fair value to the carrying value of the reporting unit. If the carrying value exceeds the estimated fair value of the reporting unit, then an impairment charge is calculated as the difference between the carrying value of the reporting unit and its estimated fair value, not to exceed the goodwill of the reporting unit.

 

On April 4, 2022, the Company performed a qualitative assessment to determine if it is more likely than not that the fair values of the Company’s reporting units are less than their carrying values by evaluating relevant events and circumstances, including financial performance, market conditions and share price. Based on this assessment, the Company concluded that the goodwill for each of the Company’s reporting units was not considered at risk of impairment.

  

 

Note 9 Other Intangible Assets

 

Other intangible assets as of October 2, 2022 and April 3, 2022 consisted primarily of the fair value of identifiable assets acquired in business combinations other than tangible assets and goodwill. The gross amount and accumulated amortization of the Company’s other intangible assets as of October 2, 2022 and April 3, 2022, the amortization expense for the three- and six-month periods ended October 2, 2022 and September 26, 2021, and the classification of such amortization expense within the accompanying unaudited condensed consolidated statements of income are as follows (in thousands):

 

 

                                   

Amortization Expense

 
   

Gross Amount

   

Accumulated Amortization

   

Three-Month Periods Ended

   

Six-Month Periods Ended

 
   

October 2,

   

April 3,

   

October 2,

   

April 3,

   

October 2,

   

September 26,

   

October 2,

   

September 26,

 
   

2022

   

2022

   

2022

   

2022

   

2022

   

2021

   

2022

   

2021

 

Tradename and trademarks

  $ 2,567     $ 2,567     $ 1,955     $ 1,885     $ 35     $ 42     $ 70     $ 85  

Non-compete covenants

    98       98       98       98       -       2       -       3  

Patents

    1,601       1,601       1,029       1,003       13       14       26       27  

Customer relationships

    7,374       7,374       6,145       6,000       73       72       145       144  

Total other intangible assets

  $ 11,640     $ 11,640     $ 9,227     $ 8,986     $ 121     $ 130     $ 241     $ 259  
                                                                 
Classification within the accompanying unaudited condensed consolidated statements of income:                                                                

Cost of products sold

                                  $ -     $ 2     $ -     $ 3  

Marketing and administrative expenses

                              121       128       241       256  

Total amortization expense

                                  $ 121     $ 130     $ 241     $ 259  

 

  

 

Note 10 Inventories

 

Major classes of inventory were as follows (in thousands):

 

   

October 2, 2022

   

April 3, 2022

 

Raw Materials

  $ -     $ 28  

Finished Goods

    27,735       20,625  

Total inventory

  $ 27,735     $ 20,653  

 

9

 
  
 

Note 11 Leases

 

The Company made cash payments related to its recognized operating leases of $488,000 and $487,000 during the three months ended October 2, 2022 and September 26, 2021, respectively, and $968,000 and $984,000 during the six months ended October 2, 2022 and September 26, 2021, respectively. Such payments reduced the operating lease liabilities and were included in the cash flows provided by operating activities in the accompanying unaudited condensed consolidated statements of cash flows. At October 2, 2022, the Company’s operating leases had a weighted-average remaining lease term of 1.6 years and a weighted-average discount rate of 3.6%.

 

During the three- and six-month periods ended October 2, 2022 and September 26, 2021, the Company classified its operating lease costs within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):

 

   

Three-Month Periods Ended

   

Six-Month Periods Ended

 
   

October 2, 2022

   

September 26, 2021

   

October 2, 2022

   

September 26, 2021

 

Cost of products sold

  $ 401     $ 402     $ 802     $ 802  

Marketing and administrative expenses

    41       44       82       91  

Total operating lease costs

  $ 442     $ 446     $ 884     $ 893  

 

The maturities of the Company’s operating lease liabilities as of October 2, 2022 are as follows (in thousands):

 

 

Fiscal Year

       

2023

  $ 977  

2024

    550  

2025

    223  

2026

    171  

Total undiscounted operating lease payments

    1,921  

Less imputed interest

    58  

Operating lease liabilities - net

  $ 1,863  

  

 

 

Note 12 Stock-based Compensation

 

The Company has three incentive stock plans, the 2006 Omnibus Incentive Plan (the “2006 Plan”), the 2014 Omnibus Equity Compensation Plan (the “2014 Plan”) and the 2021 Incentive Plan (the “2021 Plan”). As a result of the approval of the 2014 Plan by the Company’s stockholders at the Company’s 2014 annual meeting and the 2021 Plan by the Company’s stockholders at the Company’s 2021 annual meeting, grants may no longer be issued under either the 2006 Plan or the 2014 Plan. As of October 2, 2022, 805,439 shares of the Company’s common stock were available for future issuance under the 2021 Plan, which may be issued from authorized and unissued shares of the Company’s common stock or treasury shares. The Company recorded stock-based compensation expense of $258,000 and $208,000 during the three-month periods ended October 2, 2022 and September 26, 2021, respectively, and recorded $591,000 and $340,000 during the six-month periods ended October 2, 2022 and September 26, 2021, respectively. The Company records the compensation expense associated with stock-based awards granted to individuals in the same expense classifications as the cash compensation paid to those same individuals. No stock-based compensation costs were capitalized as part of the cost of an asset as of October 2, 2022.

 

Stock Options: The following table represents stock option activity for the six-month periods ended October 2, 2022 and September 26, 2021:

 

  

Six-Month Periods Ended

 
  

October 2, 2022

  

September 26, 2021

 
  

Weighted-

      

Weighted-

     
  

Average

  

Number of

  

Average

  

Number of

 
  

Exercise

  

Options

  

Exercise

  

Options

 
  

Price

  

Outstanding

  

Price

  

Outstanding

 

Outstanding at Beginning of Period

 $7.39   635,500  $6.84   567,500 

Granted

  6.54   120,000   7.98   158,000 

Exercised

  4.92   (20,000)  4.96   (50,000)

Forfeited

  -   -   4.92   (5,000)

Outstanding at End of Period

  7.32   735,500   7.26   670,500 

Exercisable at End of Period

  7.42   499,000   7.30   387,500 

 

10

 

As of October 2, 2022, the intrinsic value of the outstanding and exercisable stock options was $89,000. The intrinsic value of the stock options exercised during the three- and six-month periods ended October 2, 2022 was $8,000 and $28,000, respectively. Upon the exercise of stock options, participants may choose to surrender to the Company those shares from the option exercise necessary to satisfy the exercise amount and their income tax withholding obligations that arise from the option exercise. The effect on the cash flow of the Company from these “cashless” option exercises is that the Company remits cash on behalf of the participant to satisfy his or her income tax withholding obligations. The Company used cash to remit the required income tax withholding amounts from “cashless” option exercises of $2,000 and $14,000 during the three-month periods ended October 2, 2022 and September 26, 2021, respectively, and $10,000 and $48,000 during the six-month periods ended October 2, 2022 and September 26, 2021, respectively.

 

Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation Stock Compensation, which requires stock-based compensation to be accounted for using a fair-value-based measurement. To determine the estimated fair value of stock options granted, the Company uses the Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to estimate fair value. The following table sets forth the assumptions used to determine the fair value of the non-qualified stock options that were awarded to certain employees during the six-month periods ended October 2, 2022 and September 26, 2021, which options vest over a two-year period, assuming continued service.

 

  

Six-Month Periods Ended

 
  

October 2, 2022

  

September 26, 2021

 

Number of options issued

  120,000   158,000 

Grant date

 

June 7, 2022

  

June 9, 2021

 

Dividend yield

  4.89%  4.00%

Expected volatility

  30.00%  35.00%

Risk free interest rate

  2.95%  0.53%

Contractual term (years)

  10.00   10.00 

Expected term (years)

  4.00   4.00 

Forfeiture rate

  5.00%  5.00%

Exercise price (grant-date closing price) per option

 $6.54  $7.98 

Fair value per option

 $0.90  $1.61 

 

During the three- and six-month periods ended October 2, 2022 and September 26, 2021, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):

 

  

Three-Month Period Ended October 2, 2022

  

Three-Month Period Ended September 26, 2021

 
  

Cost of

  

Marketing &

      

Cost of

  

Marketing &

     
  

Products

  

Administrative

  

Total

  

Products

  

Administrative

  

Total

 

Options Granted in Fiscal Year

 

Sold

  

Expenses

  

Expense

  

Sold

  

Expenses

  

Expense

 

2021

 $-  $15  $15  $3  $7  $10 

2022

  10   16   26   9   28   37 

2023

  4   8   12   -   -   - 
                         

Total stock option compensation

 $14  $39  $53  $12  $35  $47 

 

 

  

Six-Month Period Ended October 2, 2022

  

Six-Month Period Ended September 26, 2021

 
  

Cost of

  

Marketing &

      

Cost of

  

Marketing &

     
  

Products

  

Administrative

  

Total

  

Products

  

Administrative

  

Total

 

Options Granted in Fiscal Year

 

Sold

  

Expenses

  

Expense

  

Sold

  

Expenses

  

Expense

 

2020

 $-  $-  $-  $3  $4  $7 

2021

  3   26   29   7   23   30 

2022

  22   46   68   11   32   43 

2023

  6   10   16   -   -   - 
                         

Total stock option compensation

 $31  $82  $113  $21  $59  $80 

 

As of October 2, 2022, total unrecognized stock option compensation expense amounted to $196,000, which will be recognized as the underlying stock options vest over a weighted-average period of 10.4 months. The amount of future stock option compensation expense could be affected by any future stock option grants and by the separation from the Company of any individual who has received stock options that are unvested as of such individual’s separation date.

 

11

 
 

Non-vested Stock Granted to Directors: The following shares of non-vested stock were granted to the Company’s directors:

 

Number of Shares

  

Fair Value per Share

 

Grant Date

Vesting Period (Years)

46,896  $6.65 

August 16, 2022

One

40,165   7.47 

August 11, 2021

One

41,452   5.79 

August 12, 2020

Two

46,512   5.16 

August 14, 2019

Two

 

The fair value of the non-vested stock granted to the Company’s directors was based on the closing price of the Company’s common stock on the date of each grant. The non-vested stock granted on August 11, 2021 included 8,033 shares granted to E. Randall Chestnut, formerly the Company’s Chairman, President and Chief Executive Officer. On May 1, 2022, upon the resignation of Mr. Chestnut from the Board and his retirement from all positions that he held within the Company, the vesting of these 8,033 shares was accelerated, with such shares having an aggregate value on such date of $50,000. The remaining shares set forth above will vest over the periods indicated, assuming continued service. In August 2022 and August 2021, 52,856 shares and 43,984 shares, respectively, that had been granted to the Company’s directors vested, having an aggregate value of $331,000 and $327,000, respectively.

 

Non-vested Stock Granted to Employees: The following shares of non-vested stock were granted to certain of the Company’s employees:

 

Number of Shares

  

Fair Value per Share

 

Grant Date

Vesting Date

20,000  $4.92 

June 10, 2020

June 10, 2022

10,000   7.60 

February 22, 2021

February 22, 2023

25,000   7.98 

June 9, 2021

June 9, 2022

 

These shares vest on the dates indicated, assuming continued service. In June 2022, 45,000 shares that had been granted to certain of the Company’s employees vested, having an aggregate value on their respective vesting dates of $293,000.

 

Performance Award Shares: On  March 1, 2022, performance awards were granted to certain of the Company’s executive officers, consisting of 187,500 shares, of which: (a) 75,000 shares shall be earned if the closing price per share of the Company’s common stock equals or exceeds $8.00 on ten trading days within any period of twenty consecutive trading days prior to  March 1, 2027; and (b) 112,500 shares shall be earned if the closing price per share of the Company’s common stock equals or exceeds $9.00 on ten trading days within any period of twenty consecutive trading days prior to  March 1, 2027.  Upon the achievement of each applicable stock hurdle described above: (i) one-third of the shares that are earned shall vest on the later of the date on which the shares are earned and  March 1, 2023; (ii) one-third of the shares that are earned shall vest on the first anniversary of the date on which the shares are earned; and (iii) one-third shall vest on the second anniversary of the date on which the shares are earned. All shares that are non-earned or non-vested will be forfeited upon the termination of service. The Company, with the assistance of an independent third party, determined that the grant date fair value of the awards amounted to $732,000.

 

During the three- and six-month periods ended October 2, 2022 and September 26, 2021, the Company recorded compensation expense associated with stock grants, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, as follows (in thousands):

 

  

Three-Month Periods Ended

  

Six-Month Periods Ended

 

Stock Granted in Fiscal Year

 

October 2, 2022

  

September 26, 2021

  

October 2, 2022

  

September 26, 2021

 

2020

 $-  $10  $-  $40 

2021

  19   52   67   104 

2022

  134   99   359   116 

2023

  52   -   52   - 
                 

Total stock grant compensation

 $205  $161  $478  $260 

 

As of October 2, 2022, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $743,000, which will be recognized over the respective vesting terms associated with each block of non-vested stock indicated above, such grants having an aggregate weighted-average vesting term of 14.7 months. The amount of future compensation expense related to the Company’s non-vested stock grants could be affected by any future non-vested stock grants and by the separation from the Company of any individual who has non-vested stock grants as of such individual’s separation date.

 

12

  
 

Note 13 Subsequent Events

 

The Company has evaluated all events which have occurred between October 2, 2022 and the date that the accompanying unaudited condensed consolidated financial statements were issued, and has determined that there are no material subsequent events that require disclosure.  

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING INFORMATION

 

Certain of the statements made in this Quarterly Report on Form 10-Q (this “Quarterly Report”) within this Item 2. and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s current expectations, projections, estimates and assumptions. Words such as “expects,” “believes,” “anticipates,” “intends,” “may,” “will,” “could,” “would” and variations of such words and similar expressions may identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, the impact of the COVID-19 pandemic on the Company’s business operations, general economic conditions, including changes in interest rates, in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company’s products, changing competition, changes in the retail environment, the Company’s ability to successfully integrate newly acquired businesses, the level and pricing of future orders from the Company’s customers, the Company’s dependence upon third-party suppliers, including some located in foreign countries with unstable political situations, the Company’s ability to successfully implement new information technologies, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company’s business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company’s dependence upon licenses from third parties. Reference is also made to the Company’s periodic filings with the Securities and Exchange Commission for additional factors that may impact the Company’s results of operations and financial condition. The Company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the Company’s expectations, whether as a result of new information, future events or otherwise.

 

DESCRIPTION OF BUSINESS

 

The Company was originally formed as a Georgia corporation in 1957 and was reincorporated as a Delaware corporation in 2003. The Company operates indirectly through two of its wholly-owned subsidiaries, NoJo Baby & Kids, Inc. and Sassy Baby, Inc., in the infant, toddler and juvenile products segment within the consumer products industry. The infant, toddler and juvenile products segment consists of infant and toddler bedding and blankets, bibs, disposables, toys and feeding products. The Company’s products are marketed under Company-owned trademarks, under trademarks licensed from others and as private label goods. Sales of the Company’s products are made directly to retailers, such as mass merchants, large chain stores, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, wholesale clubs and internet-based retailers.

 

The accompanying unaudited condensed consolidated statements of income for the three- and six-month periods ended September 26, 2021 include income, expenses and losses associated with the operating activities of Carousel, a wholly-owned subsidiary that manufactured and marketed infant and toddler bedding directly to consumers online from a facility in Douglasville, Georgia. On May 5, 2021, the Board approved the closure of Carousel due to a history of high costs, declining sales and operating and cash flow losses, as well as management’s determination that such losses were likely to continue. Accordingly, the operations of Carousel ceased at the close of business on May 21, 2021.

 

Foreign and domestic contract manufacturers produce most of the Company’s products, with the largest concentration being in China. The Company makes sourcing decisions based on quality, timeliness of delivery and price, including the impact of ocean freight and duties. Although the Company maintains relationships with a limited number of suppliers, the Company believes that its products may be readily manufactured by several alternative sources in quantities sufficient to meet the Company's requirements.

 

A summary of certain factors that management considers important in reviewing the Company’s results of operations, financial position, liquidity and capital resources is set forth below, which should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included in the preceding sections of this Quarterly Report.

 

13

 

 

RESULTS OF OPERATIONS

 

The following table contains the results of operations for the three- and six-month periods ended October 2, 2022 and September 26, 2021 and the dollar and percentage changes for those periods (in thousands, except percentages):

 

   

Three-Month Periods Ended

   

Change

   

Six-Month Periods Ended

   

Change

 
   

October 2, 2022

   

September 26, 2021

         

%

   

October 2, 2022

   

September 26, 2021

      $    

%

 

Net sales by category:

                                                               

Bedding, blankets and accessories

  $ 9,503     $ 11,101     $ (1,598 )     -14.4 %   $ 17,001     $ 21,058     $ (4,057 )     -19.3 %

Bibs, toys and disposable products

    9,223       9,119       104       1.1 %     17,435       17,874       (439 )     -2.5 %

Total net sales

    18,726       20,220       (1,494 )     -7.4 %     34,436       38,932       (4,496 )     -11.5 %

Cost of products sold

    13,280       14,152       (872 )     -6.2 %     23,837       28,208       (4,371 )     -15.5 %

Gross profit

    5,446       6,068       (622 )     -10.3 %     10,599       10,724       (125 )     -1.2 %

% of net sales

    29.1 %     30.0 %                     30.8 %     27.5 %                

Marketing and administrative expenses

    2,736       3,164       (428 )     -13.5 %     6,149       6,530       (381 )     -5.8 %

% of net sales

    14.6 %     15.6 %                     17.9 %     16.8 %                

Interest income - net of interest expense

    4       (3 )     7       -233.3 %     1       (16 )     17       -106.3 %

Gain on extinguishment of debt

    -       -       -               -       1,985       (1,985 )        

Other income (expense) - net

    (3 )     77       (80 )     -103.9 %     160       89       71       79.8 %

Income tax expense

    671       592       79       13.3 %     1,137       1,201       (64 )     -5.3 %

Net income

    2,040       2,386       (346 )     -14.5 %     3,474       5,051       (1,577 )     -31.2 %

% of net sales

    10.9 %     11.8 %                     10.1 %     13.0 %                

 

Net Sales: Sales decreased to $18.7 million for the three months ended October 2, 2022, compared with $20.2 million for the three months ended September 26, 2021, a decrease of $1.5 million, or 7.4%. Sales of bedding, blankets and accessories decreased by $1.6 million, which was offset by an increase in sales of bibs, toys and disposable products of $104,000. Sales decreased to $34.4 million for the six months ended October 2, 2022, compared with $38.9 million for the six months ended September 26, 2021, a decrease of $4.5 million, or 11.5%. Sales of bedding, blankets and accessories decreased by $4.1 million, and sales of bibs, toys and disposable products decreased by $439,000. The decreases in sales are primarily due to lower replenishment orders at retailers. Also, during the current-year periods, the Company’s customers began to reduce their purchases as their inventories increased, which the Company believes resulted from customers’ excessive inventory purchases during the first quarter of calendar 2022 and consumers’ response to macroeconomic conditions.

 

Gross Profit: Gross profit decreased by $622,000 and decreased from 30.0% of net sales for the three-month period ended September 26, 2021 to 29.1% of net sales for the three-month period ended October 2, 2022. Gross profit decreased by $125,000 but increased from 27.5% of net sales for the six-month period ended September 26, 2021 to 30.8% of net sales for the six-month period ended October 2, 2022. The decrease in the gross profit amount is net of the positive impact of the closure of Carousel, which in the prior-year period recognized a gross loss of $688,000, including losses from the sale of inventory below cost and the recognition of charges of $334,000 associated with the settlement with a supplier of a commitment to purchase fabric and $265,000 associated with the liquidation of Carousel’s remaining inventory upon the closure of the business. Although the gross profit in the prior-year period was impacted by increases in costs across the entire supply chain, the Company in the current-year has realized some stabilization in its input costs. Finally, the Company also expects to benefit in future periods from recent increases in the selling prices of its products.

 

Marketing and Administrative Expenses: Marketing and administrative expenses decreased by $428,000, and decreased from 15.6% of net sales for the three-month period ended September 26, 2021 to 14.6% of net sales for the three-month period ended October 2, 2022. The prior-year period included $85,000 for charges incurred by Carousel. Marketing and administrative expenses decreased by $381,000 but increased from 16.8% of net sales for the six-month period ended September 26, 2021 to 17.9% of net sales for the six-month period ended October 2, 2022. The prior-year period included $495,000 for charges incurred by Carousel.

 

Gain on extinguishment of debt: On May 20, 2021, the PPP Loan was forgiven in full, which resulted in a gain on extinguishment of debt in the amount of $1,985,000 during the three months ended June 27, 2021 and the six months ended September 26, 2021.

 

Income Tax Expense: The Company’s provision for income taxes is based upon an estimated annual effective tax rate (“ETR”) from continuing operations of 23.5% for the six-month period ended October 2, 2022, as compared with an estimated annual ETR from continuing operations of 19.6% for the six-month period ended September 26, 2021. The gain on extinguishment of debt associated with the forgiveness of the PPP Loan was permitted to be excluded from taxable income, the effect of which lowered the ETR for the prior-year period by approximately four percentage points.

 

14

 

As a result of the consideration of the relevant information regarding the state portion of its income tax provision, the Company recorded discrete reserves for unrecognized tax liabilities of $27,000 and $22,000 during the three-month periods ended October 2, 2022 and September 26, 2021, respectively, and $46,000 and $45,000 during the six-month periods ended October 2, 2022 and September 26, 2021, respectively, in the accompanying unaudited condensed consolidated statements of income. The Company also recorded discrete income tax charges of $5,000 and $6,000 during the three- and six-month periods ended October 2, 2022, respectively, and the Company recorded discrete income tax benefits of $28,000 and $72,000 during the three- and six-month periods ended September 26, 2021, respectively, to reflect the net effects of the excess tax benefits and tax shortfalls arising from the exercise of stock options and the vesting of non-vested stock during the periods.

 

The ETR on continuing operations and the discrete income tax charges and benefits set forth above resulted in an overall provision for income taxes of 24.7% and 19.2% for the six-month periods ended October 2, 2022 and September 26, 2021, respectively.

 

Although the Company does not anticipate a material change to the ETR from continuing operations for the remainder of fiscal year 2023, several factors could impact the ETR, including variations from the Company’s estimates of the amount and source of its pre-tax income, and the actual ETR for the year could differ materially from the Company’s estimates.

 

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities decreased from $3.2 million for the six-month period ended September 26, 2021 to $2.7 million for the six-month period ended October 2, 2022. The decrease in the current year was the result of an increase in inventory in the current year that was $3.2 million higher than the increase in the prior year and a $1.6 million decrease in net income from the prior year to the current year. There was also an increase in accounts payable in the current year that was $1.6 million lower than the increase in the prior year. There was a decrease in accrued liabilities in the current year that was $619,000 lower than the decrease in the prior year. These decreases were offset by a decrease in accounts receivable in the current year that was $4.8 million higher than the decrease in the prior year and the gain on extinguishment of debt of $1,985,000 in the prior year that was associated with the forgiveness of the PPP Loan.

 

Net cash used in investing activities, which were primarily associated with capital expenditures for property, plant and equipment, decreased from $253,000 in the prior year to $191,000 in the current year.

 

Net cash used in financing activities, which were primarily associated with the payment of dividends, increased by $73,000 from the prior year to the current year.

 

As of October 2, 2022, there was no balance owed on the Company’s revolving line of credit with CIT, there was no letter of credit outstanding and $26.0 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances.

 

To reduce its exposure to credit losses and to enhance the predictability of its cash flow, the Company assigns substantially all of its trade accounts receivable to CIT under factoring agreements. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. As such, the Company does not take advances on the factoring agreements.

 

CIT bears credit losses with respect to assigned accounts receivable from approved customers that are within approved credit limits, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation were to occur, then the Company must choose to either assume the credit risk for shipments after the date of such termination or limitation or discontinue shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, amounted to $79,000 and $85,000 for the three-month periods ended October 2, 2022 and September 26, 2021, respectively, and amounted to $147,000 and $149,000 for the six-month periods ended October 2, 2022 and September 26, 2021, respectively.

 

The Company continues to monitor the impact of the COVID-19 pandemic on its supply chain, manufacturing and distribution operations, customers and employees, as well as the U.S. economy in general. However, due to the uncertainty as to the duration and widespread nature of the COVID-19 pandemic, the success rates of vaccines for COVID-19 and the variants thereof, and the extent to which the vaccines are accepted and effectively administered, the Company cannot currently predict the long-term impact of the COVID-19 pandemic on its operations and financial results.

 

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The uncertainties associated with the COVID-19 pandemic include potential adverse effects on the overall economy, the Company’s supply chain, transportation services, employees and customers, consumer sentiment in general, and traffic within the retail stores that carry the Company’s products. The COVID-19 pandemic could adversely affect the Company’s revenues, earnings, liquidity and cash flows and may require significant actions in response, including employee furloughs, closings of Company facilities, expense reductions or discounts of the pricing of the Company’s products, all in an effort to mitigate such effects.

 

Conditions surrounding COVID-19 change rapidly, and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, the Company believes that its anticipated cash flow from operations and the availability under its revolving line of credit are sufficient to fund the Company’s requirements for working capital and capital expenditures for at least the next 12 months.

 

The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash flow from operations and funds available under the revolving line of credit will be adequate to meet its liquidity needs.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a discussion of market risks that could affect the Company, refer to the risk factors disclosed in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the year ended April 3, 2022.

 

INTEREST RATE RISK

 

Although the Company could have an exposure to interest rate risk related to its floating rate debt, there was no balance outstanding on its floating rate debt as of October 2, 2022.

 

COMMODITY RATE RISK

 

The Company sources its products primarily from foreign contract manufacturers, with the largest concentration being in China. The Company’s exposure to commodity price risk primarily relates to changes in the prices in China of cotton, oil and labor, which are the principal inputs used in a substantial number of the Company’s products. In addition, although the Company pays its Chinese suppliers in U.S. dollars, a strengthening of the rate of the Chinese currency versus the U.S. dollar could result in an increase in the cost of the Company’s finished goods. There is no assurance that the Company could timely respond to such increases by proportionately increasing the prices at which its products are sold to the Company’s customers.

 

MARKET CONCENTRATION RISK

 

The Company’s financial results are closely tied to sales to its top two customers, which represented approximately 73% of the Company’s gross sales in fiscal year 2022. In addition, 40% of the Company’s gross sales in fiscal year 2022 consisted of licensed products, which included 33% of sales associated with the Company’s license agreements with affiliated companies of the Walt Disney Company. The Company’s results could be materially impacted by the loss of one or more of these licenses.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act.  Based on such evaluation, such officers have concluded that, as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures are effective.

 

During the three-month period ended October 2, 2022, there were no changes in the Company’s internal control over financial reporting (“ICFR”) identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is, from time to time, involved in various legal and regulatory proceedings relating to claims arising in the ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such proceeding the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flow.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors disclosed in Item 1A of Part 1 of the Company’s Annual Report on Form 10-K for the year ended April 3, 2022.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibits required to be filed by Item 601 of Regulation S-K are included as Exhibits to this Quarterly Report as follows:

 

Exhibit Number

 

 Description of Exhibit

 
       

   3.1

 

Amended and Restated Certificate of Incorporation of the Company (1)

 
       

   3.2

 

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2)

 
       

  3.3

 

Bylaws of the Company, as amended and restated through November 15, 2016 (3)

 
       

31.1

 

Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer (4)

 
       

31.2

 

Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer (4)

 
       

32.1

 

Section 1350 Certification by the Company’s Chief Executive Officer (4)

 
       

32.2

 

Section 1350 Certification by the Company’s Chief Financial Officer (4)

 
       

101

 

Interactive data files pursuant to Rule 405 of SEC Regulation S-T in connection with registrant’s Form 10-Q for the quarterly period ended October 2, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language):

 
    (i)         Unaudited Condensed Consolidated Balance Sheets;  
    (ii)        Unaudited Condensed Consolidated Statements of Income;  
    (iii)       Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity;  
    (iv)       Unaudited Condensed Consolidated Statements of Cash Flows; and  
    (v)        Notes to Unaudited Condensed Consolidated Financial Statements.  
       

104

 

Cover page Interactive Data File pursuant to Rule 406 of SEC Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101.

 

 

 

(1)

Incorporated herein by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended December 28, 2003.

 

(2)

Incorporated herein by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated August 9, 2011.

 

(3)

Incorporated herein by reference to Exhibit 3.3 to the registrant’s Current Report on Form 8-K dated November 16, 2016.

  (4)  Filed herewith.

   

 

 

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CROWN CRAFTS, INC.
   
Date: November 16, 2022 /s/ Craig J. Demarest
  CRAIG J. DEMAREST
  Vice President and Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)
   

 

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