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CROWN CRAFTS INC - Quarter Report: 2023 October (Form 10-Q)

crws20231001_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 1, 2023

 

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 filerAccelerated filer
Non-Accelerated filerSmaller 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 30, 2023 was 10,240,719.

 

1

 

   

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 1, 2023 (UNAUDITED) AND APRIL 2, 2023

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

 

  

October 1, 2023

  

April 2, 2023

 
         

ASSETS

 

Current assets:

        

Cash and cash equivalents

 $1,851  $1,742 

Accounts receivable (net of allowances of $2,410 at October 1, 2023 and $1,474 at April 2, 2023):

        

Due from factor

  17,091   20,740 

Other

  3,215   2,068 

Inventories

  35,257   34,211 

Prepaid expenses

  1,458   1,614 

Total current assets

  58,872   60,375 
         

Operating lease right of use assets

  15,733   17,305 
         

Property, plant and equipment - at cost:

        

Vehicles

  182   182 

Leasehold improvements

  480   473 

Machinery and equipment

  4,802   4,333 

Furniture and fixtures

  476   408 

Property, plant and equipment - gross

  5,940   5,396 

Less accumulated depreciation

  4,109   3,677 

Property, plant and equipment - net

  1,831   1,719 
         

Finite-lived intangible assets - at cost:

        

Customer relationships

  8,174   8,174 

Other finite-lived intangible assets

  4,766   4,766 

Finite-lived intangible assets - gross

  12,940   12,940 

Less accumulated amortization

  9,766   9,467 

Finite-lived intangible assets - net

  3,174   3,473 
         

Goodwill

  7,875   7,912 

Other

  197   188 

Total Assets

 $87,682  $90,972 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current liabilities:

        

Accounts payable

 $7,490  $7,548 

Accrued wages and benefits

  1,062   1,087 

Accrued royalties

  642   614 

Dividends payable

  822   815 

Operating lease liabilities, current

  3,096   2,427 

Other accrued liabilities

  643   566 

Total current liabilities

  13,755   13,057 
         

Non-current liabilities:

        

Long-term debt

  9,808   12,674 

Deferred income taxes

  297   815 

Operating lease liabilities, noncurrent

  13,306   14,889 

Reserve for unrecognized tax liabilities

  363   323 

Total non-current liabilities

  23,774   28,701 
         

Shareholders' equity:

        

Common stock - $0.01 par value per share; Authorized 40,000,000 shares at October 1, 2023 and April 2, 2023; Issued 13,138,226 shares at October 1, 2023 and 13,051,814 shares at April 2, 2023

  131   131 

Additional paid-in capital

  57,509   57,126 

Treasury stock - at cost - 2,897,507 shares at October 1, 2023 and April 2, 2023

  (15,821)  (15,821)

Retained Earnings

  8,334   7,778 

Total shareholders' equity

  50,153   49,214 

Total Liabilities and Shareholders' Equity

 $87,682  $90,972 

 

See notes to unaudited condensed consolidated financial statements.

 

2

 

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE- AND SIX-MONTH PERIODS ENDED OCTOBER 1, 2023 AND OCTOBER 2, 2022

(amounts in thousands, except per share amounts)

 

   

Three-Month Periods Ended

   

Six-Month Periods Ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 
                                 

Net sales

  $ 24,129     $ 18,726     $ 41,252     $ 34,436  

Cost of products sold

    17,533       13,280       29,914       23,837  

Gross profit

    6,596       5,446       11,338       10,599  

Marketing and administrative expenses

    4,036       2,736       8,082       6,149  

Income from operations

    2,560       2,710       3,256       4,450  

Other (expense) income:

                               

Interest expense - net of interest income

    (164 )     4       (352 )     1  

Gain on insurance proceeds received for damage to equipment

    -       -       -       34  

Gain on sale of property, plant and equipment

    -       -       -       2  

Other - net

    (24 )     (3 )     (26 )     124  

Income before income tax expense

    2,372       2,711       2,878       4,611  

Income tax expense

    550       671       690       1,137  

Net income

  $ 1,822     $ 2,040     $ 2,188     $ 3,474  
                                 

Weighted average shares outstanding:

                               

Basic

    10,199       10,094       10,177       10,085  

Effect of dilutive securities

    2       22       5       22  

Diluted

    10,201       10,116       10,182       10,107  
                                 

Earnings per share - basic and diluted

  $ 0.18     $ 0.20     $ 0.21     $ 0.34  

 

See notes to unaudited condensed consolidated financial statements.

 

3

 

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

THREE- AND SIX-MONTH PERIODS ENDED OCTOBER 1, 2023 AND OCTOBER 2, 2022

 

  

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 - 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 
                             

Balances - July 2, 2023

  13,051,814  $131   (2,897,507) $(15,821) $57,317  $7,332  $48,959 
                             

Issuance of shares

  86,412   -   -   -   -   -   - 

Stock-based compensation

  -   -   -   -   192   -   192 

Net income

  -   -   -   -   -   1,822   1,822 

Dividend declared on common stock - $0.08 per share

  -   -   -   -   -   (820)  (820)
                             

Balances - October 1, 2023

  13,138,226  $131   (2,897,507) $(15,821) $57,509  $8,334  $50,153 
                             
  

Six-Month Periods

 

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 

Dividend 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 
                             

Balances - April 2, 2023

  13,051,814  $131   (2,897,507) $(15,821) $57,126  $7,778  $49,214 
                             

Issuance of shares

  86,412   -   -   -   -   -   - 

Stock-based compensation

  -   -   -   -   383   -   383 

Net income

  -   -   -   -   -   2,188   2,188 

Dividends declared on common stock - $0.16 per share

  -   -   -   -   -   (1,632)  (1,632)
                             

Balances - October 1, 2023

  13,138,226  $131   (2,897,507) $(15,821) $57,509  $8,334  $50,153 

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

 
CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX-MONTH PERIODS ENDED OCTOBER 1, 2023 AND OCTOBER 2, 2022

(amounts in thousands)

 

   

Six-Month Periods Ended

 
   

October 1, 2023

   

October 2, 2022

 

Operating activities:

               

Net income

  $ 2,188     $ 3,474  

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

               

Depreciation of property, plant and equipment

    432       335  

Amortization of intangibles

    299       241  

Amortization of right of use assets

    2,074       884  

Deferred income taxes

    (518 )     247  

Gain on insurance proceeds received for damage to equipment

    -       (34 )

Gain on sale of property, plant and equipment

    -       (2 )

Reserve for unrecognized tax liabilities

    40       74  

Stock-based compensation

    383       591  

Changes in assets and liabilities:

               

Accounts receivable

    2,502       5,643  

Inventories

    (1,434 )     (7,082 )

Prepaid expenses

    156       (112 )

Other assets

    (9 )     -  

Lease liabilities

    (1,417 )     (969 )

Accounts payable

    (126 )     370  

Accrued liabilities

    80       (1,002 )

Net cash provided by operating activities

    4,650       2,658  

Cash used in investing activities:

               

Capital expenditures for property, plant and equipment

    (539 )     (227 )

Insurance proceeds received for damage to equpment

    -       34  

Proceeds from sale of property, plant and equipment

    -       2  

Aggregate adjustment from the Manhattan and MTE acquisition

    488       -  

Net cash used in investing activities

    (51 )     (191 )

Financing activities:

               

Repayments under revolving line of credit

    (35,947 )     -  

Borrowings under revolving line of credit

    33,081       -  

Purchase of treasury stock from related parties

    -       (189 )

Issuance of common stock

    -       98  

Dividends paid

    (1,624 )     (1,632 )

Net cash used in financing activities

    (4,490 )     (1,723 )

Net increase in cash and cash equivalents

    109       744  

Cash and cash equivalents at beginning of period

    1,742       1,598  

Cash and cash equivalents at end of period

  $ 1,851     $ 2,342  
                 

Supplemental cash flow information:

               

Income taxes paid

  $ 875     $ 23  

Interest paid

    448       5  
                 

Noncash activities:

               

Property, plant and equipment purchased but unpaid

    (5 )     (25 )

Dividends declared but unpaid

    (822 )     (809 )

 

See notes to unaudited condensed consolidated financial statements.

 

5

 

 

CROWN CRAFTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE- AND SIX-MONTH PERIODS ENDED OCTOBER 1, 2023 AND OCTOBER 2, 2022

 

 

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 unaudited condensed consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of October 1, 2023 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 three- and six-month periods ended October 1, 2023 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending March 31, 2024. For further information, refer to the Company’s consolidated financial statements and notes thereto for the fiscal year ended April 2, 2023, included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”).

 

Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2024” or “2024” represent the 52-week period ending March 31, 2024 and references herein to “fiscal year 2023” or “2023” represent the 52-week period ended April 2, 2023.

 

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 adopted ASU No. 2016-13 effective as of April 3, 2023. Because the Company assigns the majority of its trade accounts receivable under factoring agreements with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc., the adoption of the ASU has not had a significant impact on the Company’s financial position, results of operations and related disclosures.

 

In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements Codification Amendments in Response to the SECs Disclosure Update and Simplification Initiative, the objective of which is to clarify or improve disclosure and presentation requirements and to align the requirements in the FASB ASC with the SEC’s regulations. In August 2018, the SEC issued Release No. 33-10532, in which the SEC referred certain of its disclosure requirements that overlap with GAAP to the FASB for potential incorporation into the FASB ASC. The amendments in ASU No. 2023-06 are the result of the FASB’s decision to incorporate into the FASB ASC 14 of the 27 disclosures referred by the SEC. The FASB noted that the disclosure requirements in the SEC’s guidance and the FASB ASC should not be duplicated in both places. Accordingly, although the ASU was required to be adopted upon issuance, each amendment to the FASB ASC included in the ASU will not become effective until the effective date upon which the related SEC disclosure is no longer required. The amendments in this ASU are to be applied prospectively, and early application of the amendments is prohibited. The Company does not anticipate that the adoption of ASU No. 2023-06 will have a significant impact on the Company’s financial position, results of operations and related disclosures.

 

6

 

The Company has determined that all other ASUs issued which had become effective as of October 1, 2023, 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 $172,000 and $123,000 for the three-month periods ended October 1, 2023 and October 2, 2022, respectively, and amounted to $364,000 and $247,000 for the six-month periods ended October 1, 2023 and October 2, 2022, respectively.

 

 

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 1, 2023 and October 2, 2022 are as follows (in thousands):

 

   

Three-Month Periods Ended

   

Six-Month Periods Ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Bedding, blankets and accessories

  $ 9,776     $ 9,503     $ 15,349     $ 17,001  

Bibs, toys and disposable products

    14,353       9,223       25,903       17,435  

Total net sales

  $ 24,129     $ 18,726     $ 41,252     $ 34,436  

 

 

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 $1.5 million and $1.2 million for the three months ended October 1, 2023 and October 2, 2022, respectively, and amounted to $2.5 million and $2.3 million for the six months ended October 1, 2023 and October 2, 2022, 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 1, 2023 were the fiscal years ended April 2, 2023, April 3, 2022, March 28, 2021, March 29, 2020 and March 31, 2019.

 

In August 2020, the Company was notified by the Franchise Tax Board of the State of California (the “FTB”) of its intention to examine the Company’s California income tax returns for the fiscal years ended April 2, 2017, April 1, 2018 and March 31, 2019. On May 30, 2023, the Company and the FTB entered into an agreement to settle (the “Settlement Agreement”) the FTB’s proposed assessment of additional income tax in respect of these consolidated income tax returns under examination for the amount of $442,000, which included interest expense of $86,000, payment of which was made by the Company to the FTB on May 31, 2023. Because the examination was ongoing as of April 2, 2023, and because the Settlement Agreement was entered into prior to the issuance of the consolidated financial statements as of and for the fiscal year ended April 2, 2023, the Company recorded the effect of the Settlement Agreement in the consolidated balance sheet as of April 2, 2023 and the consolidated statement of income for the fiscal year ended April 2, 2023.

 

Although management believes that the calculations and positions taken on its filed income tax returns are reasonable and justifiable, the outcome of an examination could result in an adjustment to the position that the Company took on such income tax returns. Such adjustment could also lead to adjustments to one or more other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the Company’s reserve for unrecognized tax liabilities is not adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent that the calculations and positions taken by the Company on the filed income tax returns under examination are sustained, the reversal of all or a portion of the Company’s reserve for unrecognized tax liabilities could result in a favorable impact on its future results of operations.

 

7

 
 

Note 6 Inventories

 

As of October 1, 2023 and April 2, 2023, the Company’s balances of inventory were $35.3 million and $34.2 million, respectively, nearly all of which were finished goods.

  

 

Note 7 Acquisition

 

On March 17, 2023 (the “Closing Date”), the Company acquired Manhattan Group, LLC (“Manhattan”) and Manhattan Toy Europe Limited (“MTE”), Manhattan’s wholly-owned subsidiary, from H Enterprises International, LLC (“HEI”) (the “Manhattan Acquisition”), for a purchase price of $17.0 million, subject to adjustments for cash at the Closing Date and to the extent that actual net working capital as of the Closing Date differs from target net working capital of $13.75 million (the “Aggregate Adjustment”). The Manhattan Acquisition was funded with cash available on the Closing Date and borrowings under the Company’s revolving line of credit with CIT. On September 29, 2023, the Company and HEI agreed to a settlement of the Aggregate Adjustment, pursuant to which HEI paid $509,000 to the Company, which included interest income of $21,000.

 

The Manhattan Acquisition has been accounted for in accordance with FASB ASC Topic 805, Business Combinations. The Company is currently determining the allocation of the acquisition cost with the assistance of an independent third party. The identifiable assets acquired were recorded at their estimated fair value, which has been preliminarily determined based on available information and the use of multiple valuation approaches. The estimated useful lives of the identifiable intangible assets acquired were determined based upon the remaining time that these assets are expected to directly or indirectly contribute to the future cash flow of the Company. Certain data necessary to complete the acquisition cost allocation is not yet available, including the final appraisals and valuations of the assets acquired and liabilities assumed.

 

The acquisition cost paid on the Closing Date amounted to $17.4 million, which included an estimate for cash as of the Closing Date and an estimate for the net working capital acquired. The settlement of the Aggregate Adjustment decreased the acquisition cost to $16.9 million. The following table represents the Company’s preliminary allocation of this acquisition cost (in thousands) to the identifiable assets acquired and the liabilities assumed based on their respective estimated fair values as of the Closing Date. The excess of the acquisition cost over the estimated fair value of the identifiable net assets acquired is reflected as goodwill.

 

Tangible assets:

       

Cash and cash equivalents

  $ 1,270  

Accounts receivable

    3,112  

Inventories

    12,578  

Prepaid expenses

    350  

Other assets

    91  

Operating lease right of use assets

    1,009  

Property, plant and equipment

    194  

Total tangible assets

    18,604  

Amortizable intangible assets:

       

Tradename

    300  

Licensing relationships

    200  

Customer relationships

    800  

Total amortizable intangible assets

    1,300  

Goodwill

    750  

Total acquired assets

    20,654  
         

Liabilities assumed:

       

Accounts payable

    2,048  

Accrued wages and benefits

    370  

Operating lease liabilities, current

    226  

Other accrued liabilities

    308  

Operating lease liabilities, noncurrent

    783  

Total liabilities assumed

    3,735  

Net acquisition cost

  $ 16,919  

 

8

 

The Company expects to complete the acquisition cost allocation during the 12-month period following the Closing Date, during which time the values of the assets acquired and liabilities assumed, including the goodwill, may need to be revised as appropriate. Based upon the preliminary allocation of the acquisition cost, the Company recognized $787,000 of goodwill as of the Closing Date, the entirety of which was assigned to the reporting unit of the Company that produces and markets infant and toddler bibs, developmental toys, feeding, bath care and disposable products, and the entirety of which is expected to be deductible for income tax purposes. The following table represents the adjustments made to the amount of goodwill during the six-month period ended October 1, 2023.

 

Amount of goodwill recognized based upon the preliminary allocation of the acquisition cost

 $787,000 

Adjustments made during the six-month period ended October 1, 2023:

    

Settlement of the Aggregate Adjustment

  (488,000)

Revaluation of inventory as of the Closing Date

  387,000 

Resolution of pre-acquisition accounts payable

  64,000 

Net adjustments made during the six-month period ended October 1, 2023

  (37,000)
     

Amount of goodwill recognized as of October 1, 2023

 $750,000 

 

The Manhattan Acquisition resulted in net sales of $4.8 million and $8.5 million of developmental toy, feeding and baby care products for the three- and six-month periods ended October 1, 2023, respectively. Manhattan recorded amortization expense associated with the acquired amortizable intangible assets of $33,000 and $58,000 during the three and six months ended October 1, 2023, respectively, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income. Amortization is computed using the straight-line method over the estimated useful lives of the assets, which are 15 years for the tradename, 10 years for the customer and licensing relationships and 11 years on a weighted-average basis for the grouping taken together.

 

The Company has determined, on a pro forma basis, that the combined net sales and the combined net income of the Company and Manhattan, giving effect to the Manhattan Acquisition as if it had been completed on April 4, 2022, would have been $25.8 million and $1.3 million, respectively, for the three-month period ended October 2, 2022, and would have been $48.5 million and $2.1 million, respectively, for the six-month period ended October 2, 2022. The combined net income includes adjustments related to the amortization of the amortizable intangible assets acquired and estimates of the interest expense and income tax expense or benefit that would have been incurred, but otherwise do not reflect the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any revenue, tax or other synergies that may result from the Manhattan Acquisition.

  

 

Note 8 Financing Arrangements

 

Factoring Agreements:  To reduce its exposure to credit losses, the Company assigns the majority 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 $92,000 and $79,000 for the three months ended October 1, 2023 and October 2, 2022, respectively, and amounted to $159,000 and $147,000 for the six months ended October 1, 2023 and October 2, 2022, respectively.

 

Credit Facility:  The Company’s credit facility as of October 1, 2023 consisted of a revolving line of credit under a financing agreement with CIT of up to $35.0 million, which includes a $1.5 million sub-limit for letters of credit. The financing agreement matures on July 11, 2028, bears interest at prime minus 0.5% 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 1, 2023, the Company had elected to pay interest on balances owed under the revolving line of credit under the SOFR option, which was 6.9%. The financing agreement also provides for the payment by CIT to the Company of interest at prime as of the beginning of the calendar month minus 2.0% on daily negative balances, if any, held at CIT.

 

9

 

As of October 1, 2023 and April 2, 2023, the balances on the revolving line of credit were $9.8 million and $12.7 million, respectively, there was no letter of credit outstanding and $20.2 million and $20.0 million, respectively, 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 1, 2023.

 

Credit Concentration:  The Company’s accounts receivable as of October 1, 2023 amounted to $20.3 million, net of allowances of $2.4 million. Of this amount, $17.1 million was due from CIT under the factoring agreements, which represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements. The Company’s accounts receivable as of April 2, 2023 amounted to $22.8 million, net of allowances of $1.5 million. Of this amount, $20.7 million was due from CIT under the factoring agreements, which represented the maximum loss that the Company could have incurred if CIT had failed completely to perform its obligations under the factoring agreements.

  

 

Note 9 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 1, 2023 and April 2, 2023 of $30.8 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 $7.9 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 3, 2023, 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 10 Other Intangible Assets

 

Other intangible assets as of October 1, 2023 and April 2, 2023 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 1, 2023 and April 2, 2023 and the amortization expense for the three and six months ended October 1, 2023 and October 2, 2022, the entirety of which has been included in marketing and administrative expenses in 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 1,

   

April 2,

   

October 1,

   

April 2,

   

October 1,

   

October 2,

   

October 1,

   

October 2,

 
   

2023

   

2023

   

2023

   

2023

   

2023

   

2022

   

2023

   

2022

 

Tradename and trademarks

  $ 2,867     $ 2,867     $ 2,103     $ 2,025     $ 43     $ 35     $ 78     $ 70  

Non-compete covenants

    98       98       98       98       -       -       -       -  

Patents

    1,601       1,601       1,081       1,055       13       13       26       26  

Customer relationships

    8,174       8,174       6,474       6,289       92       73       185       145  

Licensing relationships

    200       200       10       -       5       -       10       -  

Total other intangible assets

  $ 12,940     $ 12,940     $ 9,766     $ 9,467     $ 153     $ 121     $ 299     $ 241  

 

10

 
  
 

Note 11 Leases

 

The Company made cash payments related to its recognized operating leases of $993,000 and $488,000 during the three months ended October 1, 2023 and October 2, 2022, respectively, and $1.4 million and $969,000 for the six months ended October 1, 2023 and October 2, 2022, 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. The Company recognized noncash reductions to its operating right of use assets resulting from reductions to its lease liabilities in the amount of $249,000 and $20,000 during the three-month periods ended October 1, 2023 and October 2, 2022, respectively, and $503,000 and $43,000 during the six-month periods ended October 1, 2023 and October 2, 2022, respectively. As of October 1, 2023 and April 2, 2023, the Company’s operating leases had weighted-average remaining lease terms of 4.5 years and 5.0 years, respectively, and weighted-average discount rates of 5.9%.

 

During the three- and six-month periods ended October 1, 2023 and October 2, 2022, 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 1, 2023

  

October 2, 2022

  

October 1, 2023

  

October 2, 2022

 

Cost of products sold

 $940  $401  $1,880  $802 

Marketing and administrative expenses

  97   41   194   82 

Total operating lease costs

 $1,037  $442  $2,074  $884 

 

The maturities of the Company’s operating lease liabilities as of October 1, 2023 are as follows (in thousands):

 

Fiscal Year

    

2024

 $1,980 

2025

  4,027 

2026

  4,108 

2027

  4,086 

2028

  3,952 

2029

  663 

Total undiscounted operating lease payments

  18,816 

Less imputed interest

  2,414 

Operating lease liabilities - net

 $16,402 

  

 

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”), although grants may no longer be issued under either the 2006 Plan or the 2014 Plan. As of October 1, 2023, 559,000 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 $192,000 and $258,000 during the three-month periods ended October 1, 2023 and October 2, 2022, respectively, and $383,000 and $591,000 during the six-month periods ended October 1, 2023 and October 2, 2022, 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 1, 2023.

 

11

 
 

Stock Options:  The following table represents stock option activity for the six-month periods ended October 1, 2023 and October 2, 2022:

 

  

Six-Month Periods Ended

 
  

October 1, 2023

  

October 2, 2022

 
  

Weighted-

      

Weighted-

     
  

Average

  

Number of

  

Average

  

Number of

 
  

Exercise

  

Options

  

Exercise

  

Options

 
  

Price

  

Outstanding

  

Price

  

Outstanding

 

Outstanding at Beginning of Period

 $7.32   735,500  $7.39   635,500 

Granted

  5.26   120,000   6.54   120,000 

Exercised

  -   -   4.92   (20,000)

Expired

  6.14   (10,000)  -   - 

Outstanding at End of Period

  7.04   845,500   7.32   735,500 

Exercisable at End of Period

  7.41   665,500   7.42   499,000 

 

As of October 1, 2023, the outstanding and exercisable stock options had no intrinsic value. There were no stock options exercised during the six-month period ended October 1, 2023. 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. The Company did not receive any cash from the exercise of stock options during the three- and six-month periods ended October 2, 2022. 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 $10,000 during the three and six months ended October 2, 2022, 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 1, 2023 and October 2, 2022, which stock options vest over a two-year period, assuming continued service.

 

  

Six-Month Periods Ended

 
  

October 1, 2023

  

October 2, 2022

 

Number of options issued

  120,000   120,000 

Grant date

 

June 21, 2023

  

June 7, 2022

 

Dividend yield

  6.08%  4.89%

Expected volatility

  25.00%  30.00%

Risk free interest rate

  4.29%  2.95%

Contractual term (years)

  10.00   10.00 

Expected term (years)

  3.00   4.00 

Forfeiture rate

  5.00%  5.00%

Exercise price (grant-date closing price) per option

 $5.26  $6.54 

Fair value per option

 $0.46  $0.90 

 

12

 

During the three-month periods ended October 1, 2023 and October 2, 2022, 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 1, 2023

  

Three-Month Period Ended October 2, 2022

 
  

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 

2022

  -   -   -   10   16   26 

2023

  5   8   13   4   8   12 

2024

  3   3   6   -   -   - 
                         

Total stock option compensation

 $8  $11  $19  $14  $39  $53 

 

During the six-month periods ended October 1, 2023 and October 2, 2022, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):

 

  

Six-Month Period Ended October 1, 2023

  

Six-Month Period Ended October 2, 2022

 
  

Cost of

  

Marketing &

      

Cost of

  

Marketing &

     
  

Products

  

Administrative

  

Total

  

Products

  

Administrative

  

Total

 

Options Granted in Fiscal Year

 

Sold

  

Expenses

  

Expense

  

Sold

  

Expenses

  

Expense

 

2021

 $-  $-  $-  $3  $26  $29 

2022

  10   21   31   22   46   68 

2023

  12   17   29   6   10   16 

2024

  3   4   7   -   -   - 
                         

Total stock option compensation

 $25  $42  $67  $31  $82  $113 

 

As of October 1, 2023, total unrecognized stock option compensation expense amounted to $86,000, which will be recognized as the underlying stock options vest over a weighted-average period of 12.5 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.

 

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)

60,412

 $4.85

August 15, 2023

One

46,896

   6.65

August 16, 2022

One

40,165

   7.47

August 11, 2021

One

41,452

   5.79

August 12, 2020

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 of Directors of the Company (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 non-vested stock granted on August 16, 2022 included 11,724 shares granted to Sidney Kirschner, a director of the Company since 2001. Upon the death of Mr. Kirschner on February 21, 2023, the vesting of these 11,724 shares was accelerated, with such shares having an aggregate value on such date of $67,000.

 

In August 2023 and August 2022, 35,172 shares and 52,856 shares, respectively, that had been granted to the Company’s directors vested, having an aggregate value of $168,000 and $331,000, respectively. The remaining shares set forth above will vest over the periods indicated, assuming continued service.

 

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

26,000

 $4.77

August 14, 2023

August 14, 2024

40,000

   5.85

March 21, 2023

March 21, 2025

25,000

   7.98

June 9, 2021

June 9, 2022

10,000

   7.60

February 22, 2021

February 22, 2023

20,000

   4.92

June 10, 2020

June 10, 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.

 

13

 
 

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 date on which the shares are earned; (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 1, 2023 and October 2, 2022, 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 1, 2023

  

October 2, 2022

  

October 1, 2023

  

October 2, 2022

 

2021

 $-  $-  $-  $67 

2022

  55   19   110   359 

2023

  49   134   137   52 

2024

  69   52   69   - 
                 

Total stock grant compensation

 $173  $205  $316  $478 

 

As of October 1, 2023, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $662,000, 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 9.0 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.

   

 

Note 13 Subsequent Events

 

The Company has evaluated all other events which have occurred between October 1, 2023 and the date that the accompanying unaudited condensed consolidated financial statements were issued, and has determined that there are no other material subsequent events that require disclosure.

 

14

 
   
 

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,” “estimates,” “predicts,” “forecasts,” “plans,” “projects,” “targets,” “should,” “potential,” “continue,” “aims,” “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, 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 SEC 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 its four wholly-owned subsidiaries, NoJo Baby & Kids, Inc., Sassy Baby, Inc., Manhattan Group, LLC and Manhattan Toy Europe Limited 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 infant, toddler and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant, toddler and juvenile product companies and specialty infant, toddler and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging. The Company’s ability to compete depends principally on styling, price, service to the retailer and continued high regard for the Company’s products and trade names.

 

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.

 

The Company’s products are warehoused and distributed domestically from leased facilities located in Compton, California and Eden Valley, Minnesota and internationally from third-party logistics warehouses in Belgium and England.

 

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.

 

15

 

 

RESULTS OF OPERATIONS

 

The following table contains the results of operations for the three- and six-month periods ended October 1, 2023 and October 2, 2022 and the dollar and percentage changes for those periods (in thousands, except percentages):

 

   

Three-Month Periods Ended

   

Change

   

Six-Month Periods Ended

   

Change

 
   

October 1, 2023

   

October 2, 2022

   

$

   

%

   

October 1, 2023

   

October 2, 2022

   

$

   

%

 

Net sales by category:

                                                               

Bedding, blankets and accessories

  $ 9,776     $ 9,503     $ 273       2.9 %   $ 15,349     $ 17,001     $ (1,652 )     -9.7 %

Bibs, toys and disposable products

    14,353       9,223       5,130       55.6 %     25,903       17,435       8,468       48.6 %

Total net sales

    24,129       18,726       5,403       28.9 %     41,252       34,436       6,816       19.8 %

Cost of products sold

    17,533       13,280       4,253       32.0 %     29,914       23,837       6,077       25.5 %

Gross profit

    6,596       5,446       1,150       21.1 %     11,338       10,599       739       7.0 %

% of net sales

    27.3 %     29.1 %                     27.5 %     30.8 %                

Marketing and administrative expenses

    4,036       2,736       1,300       47.5 %     8,082       6,149       1,933       31.4 %

% of net sales

    16.7 %     14.6 %                     19.6 %     17.9 %                

Interest (expense) income - net

    (164 )     4       (168 )     -4200.0 %     (352 )     1       (353 )     -35300.0 %

Other (expense) income - net

    (24 )     (3 )     (21 )     700.0 %     (26 )     160       (186 )     -116.3 %

Income tax expense

    550       671       (121 )     -18.0 %     690       1,137       (447 )     -39.3 %

Net income

    1,822       2,040       (218 )     -10.7 %     2,188       3,474       (1,286 )     -37.0 %

% of net sales

    7.6 %     10.9 %                     5.3 %     10.1 %                

 

Net Sales: Sales increased to $24.1 million for the three months ended October 1, 2023, compared with $18.7 million for the three months ended October 2, 2022, an increase of $5.4 million, or 28.9%. Sales of bedding, blankets and accessories increased by $273,000, and sales of bibs, toys and disposable products increased by $5.1 million. Sales increased due to the Manhattan Acquisition, which generated net sales of $4.8 million of developmental toy, feeding and baby care products during the three-month period ended October 1, 2023.

 

Sales increased to $41.3 million for the six months ended October 1, 2023, compared with $34.4 million for the six months ended October 2, 2022, an increase of $6.8 million, or 19.8%. Sales of bibs, toys and disposable products increased by $8.5 million due to the Manhattan Acquisition. These increases were offset by lower sales of bedding, blankets and accessories, which decreased by $1.7 million, due to the continued impact of retailers that have been managing inventory levels, consumers that have lowered their spending due to inflationary pressures and continued overall softness in the infant and toddler bedding and blankets market. Also, sales declined in the current year due to the recent bankruptcy of a retail customer.

 

Gross Profit: Gross profit increased in amount by $1.2 million due to the Manhattan Acquisition, but decreased from 29.1% of net sales for the three-month period ended October 2, 2022 to 27.3% of net sales for the three-month period ended October 1, 2023.

 

Gross profit increased in amount by $739,000, but decreased from 30.8% of net sales for the six-month period ended October 2, 2022 to 27.5% of net sales for the six-month period ended October 1, 2023. The Manhattan Acquisition contributed $2.3 million to the increase, which was partially offset by an increase in operating lease costs in the current year period, including $311,000 in operating lease costs of Manhattan. These increased operating lease costs also led to the decline in the gross profit percentage.

 

Marketing and Administrative Expenses: Marketing and administrative expenses increased by $1.3 million, and increased from 14.6% of net sales for the three-month period ended October 2, 2022 to 16.7% of net sales for the three-month period ended October 1, 2023. The increases in the current-year period consisted primarily of $896,000 for charges incurred by Manhattan and MTE.

 

Marketing and administrative expenses increased by $1.9 million, and increased from 17.9% of net sales for the six months ended October 2, 2022 to 19.6% of net sales for the six months ended October 1, 2023. The increases in the current-year period were the result of $2.0 million for charges incurred by Manhattan and MTE.

 

Income Tax Expense: The Company’s provision for income taxes is based upon an estimated annual effective tax rate (“ETR”) from continuing operations of 21.6% for the six-month period ended October 1, 2023, as compared with an estimated annual ETR from continuing operations of 23.5% for the six-month period ended October 2, 2022.

 

16

 

  

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 $20,000 and $27,000 during the three months ended October 1, 2023 and October 2, 2022, respectively, and $25,000 and $46,000 during the six months ended October 1, 2023 and October 2, 2022, respectively, in the unaudited condensed consolidated statements of income. The Company also recorded discrete income tax charges of $16,000 and $5,000 for the three-month periods ended October 1, 2023 and October 2, 2022, respectively, and $43,000 and $6,000 during the six-month periods ended October 1, 2023 and October 2, 2022, respectively, to reflect the net effects of the excess tax benefits and tax shortfalls arising from the exercise and expiration of stock options and the vesting of non-vested stock.

 

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 24.0% and 24.7% for the six-month periods ended October 1, 2023 and October 2, 2022, respectively.

 

Although the Company does not anticipate a material change to the ETR from continuing operations for the remainder of fiscal year 2024, 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 increased from $2.7 million for the six-month period ended October 2, 2022 to $4.7 million for the six-month period ended October 1, 2023. The increase in the current year was partially the result of an increase in inventory in the current year that was $5.6 million lower than the increase in the prior year. This increase was partially offset by a decrease in accounts receivable in the current year that was $3.1 million lower than the decrease in the prior year.

 

Net cash used in investing activities decreased from $191,000 in the prior year to $51,000 in the current year. In the current year period, the Company received $488,000 from the settlement of the Aggregate Adjustment from the Manhattan Acquisition, which was offset by an increase in the current year of $312,000 in capital expenditures for property, plant and equipment.

 

Net cash used in financing activities, which were primarily associated with net repayments under the revolving line of credit, increased by $2.8 million from the prior year to the current year.

 

As of October 1, 2023, the balance on the revolving line of credit was $9.8 million, there was no letter of credit outstanding and $20.2 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 the majority 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 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 $92,000 and $79,000 for the three-month periods ended October 1, 2023 and October 2, 2022, respectively, and amounted to $159,000 and $147,000 for the six-month periods ended October 1, 2023 and October 2, 2022, respectively.

 

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.

 

17

 

 

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 2, 2023.

 

INTEREST RATE RISK

 

As of October 1, 2023, the Company had $9.8 million of indebtedness that bears interest at a variable rate, comprised of borrowings under the revolving line of credit. Based upon this level of outstanding debt, the Company’s annual net income would decrease by approximately $77,000 for each increase of one percentage point in the interest rate applicable to the debt.

 

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 71% of the Company’s gross sales in fiscal year 2023. In addition, 40% of the Company’s gross sales in fiscal year 2023 consisted of licensed products, which included 29% 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 1, 2023, 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.

 

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 2, 2023.

 

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

 

None.

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

On November 14, 2023, the Board amended and restated the Company’s Bylaws (as so amended and restated, the “Bylaws”), effective as of such date. The Board approved the Bylaws as part of a periodic review by the Board of the Company’s corporate governance documents.  Among other matters, the amendments included in the Bylaws:

 

 

(i)

make certain updates in connection with the SEC’s rules relating to universal proxy cards (the “Universal Proxy Rules”), including: (a) requiring stockholders who intend to engage in a solicitation (as defined in Item 4 of Schedule 14A under the Exchange Act) with respect to a director nomination to represent that they intend to solicit the requisite holders required by the Universal Proxy Rules; (b) requiring stockholders who have delivered to the Company a notice with respect to a director nomination to provide reasonable evidence that they have complied with the Universal Proxy Rules no later than five business days prior to the date of the applicable meeting of the Company’s stockholders; and (c) reserving white proxy cards for the exclusive use of the Board;

 

 

(ii)

modify the advance notice provisions that are applicable to director nominations and to other business proposed to be brought before a stockholder meeting by a stockholder, which are set forth in Section 2.13 of the Bylaws, to require that the proposing stockholder’s notice to the Company Secretary include, among other things: (a) information regarding the proposing stockholder’s entry into any derivative or hedging arrangements, instruments or agreements with respect to shares of the Company’s capital stock; (b) an undertaking to deliver a director questionnaire and other information reasonably requested by the Company with respect to any director nominee proposed by the stockholder; and (c) if the proposing stockholder intends to engage in a solicitation, a statement disclosing the name of each participant in such solicitation; and

 

 

(iii)

update provisions regarding the manner in which a meeting of stockholders may be adjourned and eliminating the requirement that the list of stockholders entitled to vote at a stockholder meeting be available for review during such meeting, in each case to reflect amendments to the Delaware General Corporation Law.

 

In addition, Section 2.13 of the Bylaws provides that a stockholder’s notice with respect to nominations of persons for election to the Board and the proposal of other business to be considered by stockholders must be received at the principal executive office of the Corporation not later than the close of business on the 120th calendar day, nor earlier than the close of business on the 150th calendar day, prior to the first anniversary of the date that the Company’s proxy statement was mailed or given to stockholders in connection with the Company’s previous year’s annual meeting of stockholders; provided, however, that if no annual meeting was held in the previous year, if the date of the forthcoming annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year’s proxy statement or if the forthcoming meeting is not an annual meeting, then such stockholder’s notice must be received not later than the close of business on the 10th day following the earlier of: (i) the day on which notice of the date of the forthcoming meeting was mailed or given to stockholders; and (ii) the day on which public announcement of the date of the forthcoming meeting was made by the Company.

 

The amendments also include certain other ministerial, clarifying and conforming revisions.

 

The foregoing summary is qualified in its entirety by reference to the Amended and Restated Bylaws of the Company, effective November 14, 2023, a copy of which is attached hereto as Exhibit 3.3 and is incorporated by reference in this Item 5. A copy of the Amended and Restated Bylaws of the Company, effective November 14, 2023, marked to show the changes to the Bylaws of the Company that were in effect immediately prior to November 14, 2023, is attached hereto as Exhibit 3.4.

 

19

 

 

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

     

  2.1

 

Letter Agreement dated as of July 28, 2023 between the Company and H Enterprises International, LLC (“HEI”). (3)

     

  2.2

 

Letter Agreement dated as of September 15, 2023 between the Company and HEI. (3)

     

  2.3

 

Letter Agreement dated September 29, 2023 between the Company and HEI. * (3)

     

   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

 

Amended and Restated Bylaws of the Company, effective as of November 14, 2023. (3)

     

  3.4

 

Amended and Restated Bylaws of the Company, effective as of November 14, 2023 (marked to show changes to the Bylaws of the Company that were in effect immediately prior to November 14, 2023). (3)

     

31.1

 

Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer. (3)

     

31.2

 

Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer. (3)

     

32.1

 

Section 1350 Certification by the Company’s Chief Executive Officer. (3)

     

32.2

 

Section 1350 Certification by the Company’s Chief Financial Officer. (3)

     

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 1, 2023, 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.

 

 

*

Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted schedules upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

 

(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)

Filed herewith.

 

20

 

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 15, 2023 /s/ Craig J. Demarest
 

CRAIG J. DEMAREST

Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

21