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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ր
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 2, 2023
OR
տ
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-7604
Crown Crafts, Inc.
(Exact name of registrant as specified in its charter)
Delaware
58-0678148
(State of Incorporation)
(I.R.S. Employer Identification No.)
916 S. Burnside Ave.
Gonzales, Louisiana
70737
(Address of principal executive offices)
(Zip Code)
Registrant's Telephone Number, including area code: (225) 647-9100
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, $0.01 par value
CRWS
Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes տ No ր
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.
Yes տ No ր
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 ր No տ
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 ր No տ
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
տ
Accelerated filer
տ
Non-Accelerated filer
ր
Smaller Reporting Company
ր
Emerging Growth Company
տ
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. տ
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. տ
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. տ
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). տ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes տ No ր
The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2022 (the last business day of
the registrant’s most recently completed second fiscal quarter) was $54.2 million.
As of June 15, 2023, 10,154,307 shares of the registrant’s common stock were outstanding.
Documents Incorporated by Reference:
Portions of the registrant’s Proxy Statement for its 2023 Annual Meeting of Stockholders are incorporated into Part III hereof by reference.
2
TABLE OF CONTENTS
Page
PART I
Item 1.
Business. ..................................................................................................................................................................................................
3
Item 1A. Risk Factors. ............................................................................................................................................................................................
6
Item 1B. Unresolved Staff Comments. ...........................................................................................................................................................
10
Item 2.
Properties................................................................................................................................................................................................
11
Item 3.
Legal Proceedings. ..............................................................................................................................................................................
11
Item 4.
Mine Safety Disclosures. ....................................................................................................................................................................
11
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. ................................................................................................................................................................................................
11
Item 6.
Reserved. .................................................................................................................................................................................................
11
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. ....................................
12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..............................................................................................
17
Item 8.
Financial Statements and Supplementary Data. ......................................................................................................................
17
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. ................................
17
Item 9A. Controls and Procedures. ..................................................................................................................................................................
17
Item 9B. Other Information. ...............................................................................................................................................................................
18
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. .............................................................................
18
PART III
Item 10. Directors, Executive Officers and Corporate Governance. ....................................................................................................
18
Item 11. Executive Compensation. .................................................................................................................................................................
18
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. ............
19
Item 13. Certain Relationships and Related Transactions, and Director Independence. .............................................................
19
Item 14. Principal Accountant Fees and Services. .....................................................................................................................................
19
PART IV
Item 15. Exhibits and Financial Statement Schedules. ............................................................................................................................
20
Item 16. Form 10-K Summary. ..........................................................................................................................................................................
25
Cautionary Notice Regarding Forward-Looking Statements
Certain of the statements made in this Annual Report on Form 10-K (this “Annual Report”) under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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”). Forward-looking statements include statements with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance and
involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control and which may
cause the actual results, performance or achievements of Crown Crafts, Inc. (the “Company”) to be materially different from
future results, performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking. Such statements
are based upon management’s current expectations, projections, estimates and assumptions, and may be identified as forward-
looking through the Company’s use of words such as “may,” “will,” “anticipate,” “indicate,” “assume,” “could,” “should,” “would,”
“expect,” “believe” and “intend.” 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 those
described in Part I, Item 1A. “Risk Factors,” and elsewhere in this Annual Report and those described from time to time in our
future reports filed with the Securities and Exchange Commission (the “SEC”) of additional factors that may impact the
Company’s results of operations and financial condition.
All written or oral forward-looking statements that are made by or are attributable to the Company are expressly
qualified in their entirety by this cautionary notice. The Company’s forward-looking statements apply only as of the date of this
Annual Report or the respective date of the document from which they are incorporated herein by reference. The Company has
no obligation and does not undertake to update, revise or correct any of the forward-looking statements after the date of this
Annual Report, or after the respective dates on which such statements are otherwise made, whether as a result of new
information, future events or otherwise.
3
PART I
ITEM 1. Business
Description of Business
The Company was incorporated as a Georgia corporation in 1957 and was reincorporated as a Delaware corporation
in 2003. The Company’s executive offices are located at 916 South Burnside Avenue, Suite 300, Gonzales, Louisiana 70737, its
telephone number is (225) 647-9100 and its internet address is www.crowncrafts.com.
The Company operates indirectly through four of its wholly-owned subsidiaries, NoJo Baby & Kids, Inc. (“NoJo”), Sassy
Baby, Inc. (“Sassy”), Manhattan Group, LLC (“Manhattan”) and Manhattan Toy Europe Limited (“MTE”) 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, soft bath products, disposable products, developmental toys and accessories.
Most sales of the Company’s products are generally made directly to retailers, such as mass merchants, large chain stores, mid-
tier retailers, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, wholesale clubs and internet-
based retailers. The Company's products are marketed under a variety of Company-owned trademarks, under trademarks
licensed from others and as private label goods. Manhattan also sells direct to consumer through its website,
www.manhattantoy.com.
The Company's fiscal year ends on the Sunday nearest to or on March 31. References herein to “fiscal year 2023” or
“2023” represent the 52-week period ended April 2, 2023, and references herein to “fiscal year 2022” or “2022” represent the 53-
week period ended April 3, 2022.
On March 17, 2023 (the “Closing Date”), the Company acquired Manhattan and MTE, Manhattan’s wholly-owned
subsidiary (the “Manhattan Acquisition”), for a purchase price of $17.0 million, subject to adjustments for cash as of 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 Manhattan Acquisition was funded with available cash and borrowings under the Company’s revolving line of
credit with The CIT Group/Commercial Services (“CIT”).
During the first 54 days of fiscal 2022, the Company also operated indirectly through 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 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.
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge
on its website at www.crowncrafts.com as soon as reasonably practicable after such material has been electronically filed with
the SEC. These reports are also available without charge on the SEC’s website at www.sec.gov.
International Sales
Sales to customers in countries other than the U.S. represented 5% and 4% of the Company’s total gross sales during
fiscal years 2023 and 2022, respectively. International sales are based upon the location that predominately represents what
the Company believes to be the final destination of the products delivered to the Company’s customers.
Competition
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.
4
Human Capital Resources
As of June 15, 2023, the Company had 172 employees, all of whom are full-time and none of whom is represented by
a labor union or is otherwise a party to a collective bargaining agreement. The Company attracts and maintains qualified
personnel by paying competitive salaries and benefits and offering opportunities for advancement. The Company considers its
relationship with its employees to be good.
Trademarks, Copyrights and Patents
The Company considers its intellectual property to be of material importance to its business. Sales of products
marketed under the Company’s trademarks, including Sassy®, Manhattan Toy®, NoJo® and Neat Solutions® accounted for 35%
and 30% of the Company’s total gross sales during fiscal years 2023 and 2022, respectively. Protection for these trademarks is
obtained through domestic and foreign registrations. The Company also markets designs that are subject to copyrights and
design patents owned by the Company.
Product Sourcing
Foreign and domestic contract manufacturers produce most of the Company’s products, with the largest
concentration being in China. The Company makes sourcing decisions on the basis of 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 management and quality assurance personnel visit the third-
party facilities regularly to monitor and audit product quality and to ensure compliance with labor requirements and social and
environmental standards. In addition, the Company closely monitors the currency exchange rate. The impact of future
fluctuations in the exchange rate or changes in safeguards cannot be predicted with certainty.
The Company maintains a foreign representative office located in Shanghai, China, which is responsible for the
coordination of production, purchases and shipments, seeking out new vendors and overseeing inspections for social
compliance and quality.
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 the Netherlands, Belgium
and the United Kingdom.
Licensed Products
Certain products are manufactured and sold pursuant to licensing agreements for trademarks. Also, many of the
designs used by the Company are copyrighted by other parties, including trademark licensors, and are available to the
Company through copyright license agreements. The licensing agreements are generally for an initial term of one to three years
and may or may not be subject to renewal or extension. Sales of licensed products represented 40% of the Company’s gross
sales in fiscal year 2023, which included 29% of sales under the Company’s license agreements with affiliated companies of The
Walt Disney Company (“Disney”), which expire as set forth below:
License Agreement
Expiration
Infant Bedding .............................................................
December 31, 2024
Infant Feeding and Bath ...........................................
December 31, 2023
Toddler Bedding ..........................................................
December 31, 2023
STAR WARS Toddler Bedding .................................
December 31, 2023
STAR WARS - Lego Plush ..........................................
December 31, 2023
Customers
The Company’s customers consist principally of mass merchants, large chain stores, mid-tier retailers, juvenile
specialty stores, value channel stores, grocery and drug stores, restaurants, internet accounts and wholesale clubs. The
Company does not enter into long-term or other purchase agreements with its customers. The table below sets forth those
customers that represented at least 10% of the Company’s gross sales in fiscal years 2023 and 2022.
Fiscal Year
2023
2022
Walmart Inc. .................................................................................................................................
51%
52%
Amazon.com, Inc. .......................................................................................................................
20%
21%
5
Products
The Company’s primary focus is on infant, toddler and juvenile products, including the following:
Ɣ
developmental toys
Ɣ
dolls and plush toys
Ɣ
reusable and disposable bibs
Ɣ
infant and toddler bedding
Ɣ
blankets and swaddle blankets
Ɣ
nursery and toddler accessories
Ɣ
room décor
Ɣ
burp cloths
Ɣ
hooded bath towels and washcloths
Ɣ
reusable and disposable placemats and floor mats
Ɣ
disposable toilet seat covers and changing mats
Ɣ
feeding and care goods
Ɣ
other infant, toddler and juvenile soft goods
Seasonality and Inventory Management
Approximately one-third of Manhattan’s annual sales are anticipated to occur during the Company’s third fiscal
quarter (October through December). There are no significant variations in the seasonal demand for the Company’s other
products from year to year. Sales are generally higher in periods when customers take initial shipments of new products, as
these orders typically include enough products for initial sets for each store and additional quantities for the customer’s
distribution centers. The timing of these initial shipments varies by customer and depends on when the customer finalizes store
layouts for the upcoming year and whether the customer has any mid-year introductions of products. Sales may also be higher
or lower, as the case may be, in periods when customers are restricting internal inventory levels. Customer returns of
merchandise shipped are historically less than 1% of gross sales.
Consistent with the expected introduction of specific product offerings, the Company carries necessary levels of
inventory to meet the anticipated delivery requirements of its customers. The Company will also typically increase the
purchases and inventory levels of its products in the months prior to the Lunar New Year, a celebration beginning in late January
to mid-February during which the Company’s contract manufacturers in China cease operations for 2-4 weeks.
Government Regulation and Environmental Control
The Company is subject to various federal, state and local environmental laws and regulations, which regulate, among
other things, product safety and the discharge, storage, handling and disposal of a variety of substances and wastes, and to
laws and regulations relating to employee safety and health, principally the Occupational Safety and Health Administration Act
and regulations thereunder. The Company believes that it currently complies in all material respects with applicable
environmental, health and safety laws and regulations and that future compliance with such existing laws or regulations will
not have a material adverse effect on its capital expenditures, earnings or competitive position. However, there is no assurance
that such requirements will not become more stringent in the future or that the Company will not have to incur significant costs
to comply with such requirements.
Product Design and Styling
The Company believes that its creative team is one of its key strengths. The Company’s product designs are primarily
created internally and are supplemented by numerous additional sources, including independent artists, decorative fabric
manufacturers and apparel designers. Ideas for product design creations are drawn from various sources and are reviewed and
modified by the design staff to ensure consistency within the Company’s existing product offerings and the themes and images
associated with such existing products. In order to respond effectively to changing consumer preferences, the Company’s
designers and stylists attempt to stay abreast of emerging lifestyle trends in color, fashion and design. When designing products
under the Company’s various licensed brands, the Company’s designers coordinate their efforts with the licensors’ design
teams to provide for a more fluid design approval process and to effectively incorporate the image of the licensed brand into
the product. The Company’s designs include traditional, contemporary, textured and whimsical patterns across a broad
spectrum of retail price points.
6
Utilizing state of the art computer technology, the Company continually develops new designs throughout the year
for all of its product groups. This continual development cycle affords the Company design flexibility, multiple opportunities to
present new products to customers and the ability to provide timely responses to customer demands and changing market
trends. The Company also creates designs for exclusive sale by certain of its customers under the Company’s brands, as well as
the customers’ private label brands.
Sales and Marketing
The Company’s products are marketed through a national sales force consisting of salaried sales executives and
employees located in Gonzales, Louisiana; Compton, California; Minneapolis, Minnesota; Grand Rapids, Michigan; Bentonville,
Arkansas; and London, United Kingdom; and by independent commissioned sales representatives located throughout the
United States.
ITEM 1A. Risk Factors
The following risk factors as well as the other information contained in this Annual Report and other filings made by the
Company with the SEC should be considered in evaluating the Company’s business. Additional risks and uncertainties that are not
presently known or that are not currently considered material may also impair the Company’s business operations. If any of the
following risks actually occur, then operating results may be affected in future periods.
Risks Associated with the Company, Business and Industry
The loss of one or more of the Company’s key customers could result in a material loss of revenues.
The Company’s top two customers represented approximately 71% of gross sales in fiscal year 2023. Although the
Company does not enter into contracts with its key customers, it expects its key customers to continue to be a significant
portion of its gross sales in the future. The loss of, or a decline in orders from, one or more of these customers could result in a
material decrease in the Company’s revenue and operating income.
The loss of one or more of the Company’s licenses could result in a material loss of revenues.
Sales of licensed products represented 40% of the Company’s gross sales in fiscal year 2023, which included 29% of
sales associated with the Company’s license agreements with Disney. The Company could experience a material loss of
revenues if it is unable to renew its major license agreements or obtain new licenses. The volume of sales of licensed products
is inherently tied to the success of the characters, films and other licensed programs of the Company’s licensors. A decline in
the popularity of these licensed programs or the inability of the licensors to develop new properties for licensing could also
result in a material loss of revenues to the Company. Additionally, the Company’s license agreements with Disney and others
require a material amount of minimum guaranteed royalty payments. The failure by the Company to achieve the sales
envisioned by the license agreements could result in the payment by the Company of shortfalls in the minimum guaranteed
royalty payments, which would adversely impact the Company’s operating results.
The Company’s inability to anticipate and respond to consumers’ tastes and preferences could adversely affect the
Company’s revenues.
Sales are driven by consumer demand for the Company’s products. There can be no assurance that the demand for
the Company’s products will not decline or that the Company will be able to anticipate and respond to changes in demand
related to consumers’ tastes and preferences. The infant and toddler consumer products industry is characterized by the
continual development of cutting-edge new products to meet the high standards of parents. The Company’s failure to adapt
to these changes or to develop new products could lead to lower sales and excess inventory, which could have a material
adverse effect on the Company’s financial condition and operating results.
The Company’s business is impacted by general economic conditions and related uncertainties, including a declining
birthrate, affecting markets in which the Company operates.
The Company’s growth is largely influenced by the birthrate, and in particular, the rate of first births. Economic
conditions, including the real and perceived threat of a recession, could lead individuals to decide to forgo or delay having
children. Even under optimal economic conditions, shifts in demographic trends and preferences could have the consequence
of individuals starting to have children later in life and/or having fewer children.
7
In recent years, the birthrate in the United States has steadily declined. These conditions could result in reduced
demand for some of the Company’s products, increased order cancellations and returns, an increased risk of excess and
obsolete inventories and increased pressure on the prices of the Company’s products. Also, although the Company’s use of a
commercial factor significantly reduces the risk associated with collecting accounts receivable, such factor may at any time
terminate or limit its approval of shipments to a particular customer. The bankruptcy of a customer, the perceived pending
threat of a bankruptcy of a customer, or an adverse change in overall economic conditions are among the events that would
increase the likelihood that the factor would terminate or limit its approval of shipments to customers. Such an action by the
factor could result in the loss of future sales to such affected customers.
Economic conditions could result in an increase in the amounts paid for the Company’s products.
Significant increases in freight costs and the price of raw materials that are components of the Company’s products,
including cotton, oil and labor, could adversely affect the amounts that the Company must pay its suppliers for its finished
goods. If the Company is unable to pass these cost increases along to its customers, its profitability could be adversely affected.
Widespread outbreaks of contagious disease may adversely affect the Company’s business operations, employee
availability, financial condition, liquidity and cash flow.
Significant outbreaks of contagious diseases could have adverse effects on the overall economy and impact the
Company’s supply chain, manufacturing and distribution operations, transportation services, customers and employees, as well
as consumer sentiment in general and traffic within the retail stores that carry the Company’s products. A pandemic could
adversely affect the Company’s revenues, earnings, liquidity and cash flows and 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.
During fiscal years 2022 and 2021, the COVID-19 pandemic led global government authorities to implement numerous
public health measures, including quarantines, business closures, travel bans and lockdowns to confront the pandemic. China’s
efforts to control the spread of the COVID-19 virus by locking down its largest cities placed a strain on already-stressed global
supply chains. Several of the Company’s customers experienced financial difficulties as a result of the COVID-19 pandemic.
A resurgence of the COVID-19 pandemic, or any other outbreak of contagious disease, 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.
The Company’s sourcing and marketing operations in foreign countries are subject to anti-corruption laws.
The Company’s foreign operations are subject to laws prohibiting improper payments and bribery, including the U.S.
Foreign Corrupt Practices Act and similar laws and regulations in foreign jurisdictions, which apply to the Company’s directors,
officers, employees and agents acting on behalf of the Company. Failure to comply with these laws could result in damage to
the Company’s reputation, a diversion of management’s attention from its business, increased legal and investigative costs,
and civil and criminal penalties, any or all of which could adversely affect the Company’s operating results.
The strength of the Company’s competitors may impact the Company’s ability to maintain and grow its sales, which
could decrease the Company’s revenues.
The infant and toddler consumer products industry is highly competitive. The Company competes with a variety of
distributors and manufacturers, both branded and private label. The Company’s ability to compete successfully depends
principally on styling, price, service to the retailer and continued high regard for the Company’s products and trade names.
Several of these competitors are larger than the Company and have greater financial resources than the Company, and some
have experienced financial challenges from time to time, including servicing significant levels of debt. Those facing financial
pressures could choose to make particularly aggressive pricing decisions in an attempt to increase revenue. The effects of
increased competition could result in a material decrease in the Company’s revenues.
The Company’s success is dependent upon retaining key management personnel.
Certain of the Company’s executive management and other key personnel have been integral to the Company’s
operations and the execution of its growth strategy. The departure from the Company of one or more of these individuals,
along with the inability of the Company to attract qualified and suitable individuals to fill the Company’s open positions, could
adversely impact the Company’s growth and operating results.
8
The Company may need to write down or write off inventory.
If product programs end before the inventory is completely sold, then the remaining inventory may have to be sold
at less than carrying value. The market value of certain inventory items could drop to below carrying value after a decline in
sales, at the end of programs, or when management makes the decision to exit a product group. Such inventory would then
need to be written down to the lower of carrying or market value, or possibly completely written off, which would adversely
affect the Company’s operating results.
The Company could experience losses associated with its intellectual property.
The Company relies upon the fair interpretation and enforcement of patent, copyright, trademark and trade secret
laws in the U.S., similar laws in other countries, and agreements with employees, customers, suppliers, licensors and other
parties. Such reliance serves to establish and maintain the intellectual property rights associated with the products that the
Company develops and sells. However, the laws and courts of certain countries at times do not protect intellectual property
rights or respect contractual agreements to the same extent as the laws of the U.S. Therefore, in certain jurisdictions the
Company may not be able to protect its intellectual property rights against counterfeiting or enforce its contractual agreements
with other parties. Specifically, as discussed above, the Company sources its products primarily from foreign contract
manufacturers, with the largest concentration being in China. Article VII of the National Intelligence Law of China requires every
commercial entity in China, by simple order of the Chinese government, to act as an agent of the government by committing
espionage, technology theft, or whatever else the government deems to be in the national interest of China. Finally, a party
could claim that the Company is infringing upon such party’s intellectual property rights, and claims of this type could lead to
a civil complaint. An unfavorable outcome in litigation involving intellectual property could result in any or all of the following:
(i) civil judgments against the Company, which could require the payment of royalties on both past and future sales of certain
products, as well as plaintiff’s attorneys’ fees and other litigation costs; (ii) impairment charges of up to the carrying value of the
Company’s intellectual property rights; (iii) restrictions on the ability of the Company to sell certain of its products; (iv) legal and
other costs associated with investigations and litigation; and (v) adverse effects on the Company’s competitive position.
Recalls or product liability claims could increase costs or reduce sales.
The Company must comply with the Consumer Product Safety Improvement Act, which imposes strict standards to
protect children from potentially harmful products and which requires that the Company’s products be tested to ensure that
they are within acceptable levels for lead and phthalates. The Company must also comply with related regulations developed
by the Consumer Product Safety Commission and similar state regulatory authorities. The Company’s products could be subject
to involuntary recalls and other actions by these authorities, and concerns about product safety may lead the Company to
voluntarily recall, accept returns or discontinue the sale of select products. Product liability claims could exceed or fall outside
the scope of the Company’s insurance coverage. Recalls or product liability claims could result in decreased consumer demand
for the Company’s products, damage to the Company’s reputation, a diversion of management’s attention from its business
and increased customer service and support costs, any or all of which could adversely affect the Company’s operating results.
Changes in international trade regulations and other risks associated with foreign trade could adversely affect the
Company’s sourcing.
The Company sources its products primarily from foreign contract manufacturers, with the largest concentration
being in China. Difficulties encountered by these suppliers, such as fires, accidents, natural disasters, outbreaks of infectious
diseases (including the COVID-19 pandemic) and the instability inherent in operating within an authoritarian political structure,
could halt or disrupt production and shipment of the Company’s products. The Chinese government could make allegations
against the Company of corruption or antitrust violations, or could adopt regulations related to the manufacture of products
within China, including quotas, duties, taxes and other charges or restrictions on the exportation of goods produced in China.
In response to Russia’s invasion of Ukraine, the U.S. government and other allied countries across the world have levied
coordinated and wide-ranging economic sanctions against Russia. If similar sanctions were levied against China, up to and
including a ban on the importation of goods manufactured in China, then the Company could be forced to source its products
from suppliers in other countries.
Any of these actions could result in an increase in the cost of the Company’s products, if the Company was even in a
position to maintain the current sourcing of its products. Also, an arbitrary strengthening of the Chinese currency versus the
U.S. Dollar could increase the prices at which the Company purchases finished goods. In addition, changes in U.S. customs
procedures or delays in the clearance of goods through customs could result in the Company being unable to deliver goods to
customers in a timely manner or the potential loss of sales altogether. The occurrence of any of these events could adversely
affect the Company’s profitability.
9
The Company could experience adjustments to its effective tax rate or its prior tax obligations, either of which could
adversely affect its results of operations.
The Company is subject to income taxes in the many jurisdictions in which it operates, including the U.S., several U.S.
states and China. At any particular point in time, several tax years are subject to general examination or other adjustment by
these various jurisdictions. Although the Company believes that the calculations and positions taken on its filed income tax
returns are reasonable and justifiable, administrative or legal proceedings leading to the outcome of any examination could
result in an adjustment to the position that the Company has taken. Such adjustment could result in further adjustment to one
or more income tax returns for other jurisdictions, or to income tax returns for prior or subsequent tax 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 operating results.
The Company’s provision for income taxes is based on its effective tax rate, which in any given financial statement
period could fluctuate based on changes in tax laws or regulations, changes in the mix and level of earnings by taxing
jurisdiction, changes in the amount of certain expenses within the consolidated statements of income that will never be
deductible on the Company’s income tax returns and certain charges deducted on the Company’s income tax returns that are
not included within the consolidated statements of income. These changes could cause fluctuations in the Company’s effective
tax rate either on an absolute basis, or in relation to varying levels of the Company’s pre-tax income. Such fluctuations in the
Company’s effective tax rate could adversely affect its results of operations.
Customer pricing pressures could result in lower selling prices, which could negatively affect the Company’s operating
results.
The Company’s customers could place pressure on the Company to reduce the prices of its products. The Company
continuously strives to stay ahead of its competition in sourcing, which allows the Company to obtain lower cost products while
maintaining high standards for quality. There can be no assurance that the Company could respond to a decrease in sales prices
by proportionately reducing its costs, which could adversely affect the Company’s operating results.
Disruptions to the Company’s information technology systems could negatively affect the Company’s results of
operations.
The Company’s operations are highly dependent upon computer hardware and software systems, including
customized information technology systems and cloud-based applications. The Company also employs third-party systems and
software that are integral to its operations. These systems are vulnerable to cybersecurity incidents, including disruptions and
security breaches, which can result from unintentional events or deliberate attacks by insiders or third parties, such as
cybercriminals, competitors, nation-states, computer hackers and other cyber terrorists. The Company faces an evolving
landscape of cybersecurity threats in which evildoers use a complex array of means to perpetrate attacks, including the use of
stolen access credentials, malware, ransomware, phishing, structured query language injection attacks and distributed denial-
of-service attacks.
The Company has implemented security measures to securely maintain confidential and proprietary information
stored on the Company’s information systems and continually invests in maintaining and upgrading the systems and
applications to mitigate these risks. There is no assurance that these measures and technology will adequately prevent an
intrusion or that a third party that is relied upon by the Company will not suffer an intrusion, that unauthorized individuals will
not gain access to confidential or proprietary information or that any such incident will be timely detected and effectively
countered. A significant data security breach could result in negative consequences, including a disruption to the Company’s
operations and substantial remediation costs, such as liability for stolen assets or information, repairs of system damage, and
incentives to customers or other business partners in an effort to maintain relationships after an attack. An assault against the
Company’s information technology infrastructure could also lead to other adverse impacts to its results of operations such as
increased future cybersecurity protection costs, which may include the costs of making organizational changes, deploying
additional personnel and protection technologies, and engaging third-party experts and consultants.
A significant disruption to the Company’s distribution network or to the timely receipt of inventory could adversely
impact sales or increase transportation costs, which would decrease the Company’s profits.
Nearly all of the Company’s products are imported from China into the Port of Long Beach in Southern California and
the Port of Prince Rupert in British Columbia. There are many links in the distribution chain, including the availability of ocean
freight, cranes, dockworkers, containers, tractors, chassis and drivers. The timely receipt of the Company’s products is
dependent upon efficient operations at these ports. Any shortages in the availability of any of these links or disruptions in port
operations, including strikes, lockouts or other work stoppages or slowdowns, could cause bottlenecks and other congestion
10
in the distribution network, which could adversely impact the Company’s ability to obtain adequate inventory on a timely basis
and result in lost sales, increased transportation costs and an overall decrease of the Company’s profits.
General Risk Factors
The Company’s ability to successfully identify, consummate and integrate acquisitions, divestitures and other
significant transactions could have an adverse impact on the Company’s financial results, business and prospects.
As part of its business strategy, the Company has made acquisitions of businesses, divestitures of businesses and
assets, and has entered into other transactions to further the interests of the Company’s business and its stockholders. Risks
associated with such activities include the following, any of which could adversely affect the Company’s financial results:
Ɣ
The active management of acquisitions, divestitures and other significant transactions requires varying levels of
Company resources, including the efforts of the Company’s key management personnel, which could divert
attention from the Company’s ongoing business operations.
Ɣ
The Company may not fully realize the anticipated benefits and expected synergies of any particular acquisition
or investment, or may experience a prolonged timeframe for realizing such benefits and synergies.
Ɣ
Increased or unexpected costs, unanticipated delays or failure to meet contractual obligations could make
acquisitions and investments less profitable or unprofitable.
Ɣ
The failure to retain executive management members and other key personnel of the acquired business that may
have been integral to the operations and the execution of the growth strategy of the acquired business.
The Company’s debt covenants may affect its liquidity or limit its ability to pursue acquisitions, incur debt, make
investments, sell assets or complete other significant transactions.
The Company’s credit facility contains usual and customary covenants regarding significant transactions, including
restrictions 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. Unless waived by the Company’s lender, these covenants could limit the Company’s ability to pursue opportunities
to expand its business operations, respond to changes in business and economic conditions and obtain additional financing,
or otherwise engage in transactions that the Company considers beneficial.
The Company’s ability to comply with its credit facility is subject to future performance and other factors.
The Company’s ability to make required payments of principal and interest on its debts, to refinance its maturing
indebtedness, to fund capital expenditures or to comply with its debt covenants will depend upon future performance. The
Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory
and other factors beyond its control. The breach of any of the debt covenants could result in a default under the Company’s
credit facility. Upon the occurrence of an event of default, the Company’s lender could make an immediate demand of the
amount outstanding under the credit facility. If a default was to occur and such a demand was to be made, there can be no
assurance that the Company’s assets would be sufficient to repay the indebtedness in full.
A stockholder could lose all or a portion of his or her investment in the Company.
The Company’s common stock has historically experienced a degree of price variability, and the price could be subject
to rapid and substantial fluctuations. The Company’s common stock has also historically been thinly traded, a circumstance
that exists when there is a relatively small volume of buy and sell orders for the Company’s common stock at any given point in
time. In such situations, a stockholder may be unable to liquidate his or her position in the Company’s common stock at the
desired price. Also, as an equity investment, a stockholder’s investment in the Company is subordinate to the interests of the
Company’s creditors, and a stockholder could lose all or a substantial portion of his or her investment in the Company in the
event of a bankruptcy filing or liquidation.
ITEM 1B. Unresolved Staff Comments
None.
11
ITEM 2. Properties
Each of the Company’s facilities are rented under leases that expire on various dates through fiscal year 2029, including
157,400 square feet at a warehouse and distribution facility located in Compton, California under a lease that expires May 31,
2028, 128,000 square feet at a warehouse and distribution facility located in Eden Valley, Minnesota under leases that expire
every six months, 16,837 square feet at Manhattan’s headquarters facility located in Minneapolis, Minnesota under a lease that
expires March 31, 2027 and 15,598 square feet at the Company’s headquarters facility located in Gonzales, Louisiana under a
lease that expires January 31, 2026. In addition, several employees of the Company perform their respective job functions from
remote locations for which no rent is paid. Management believes that its properties are suitable for the purposes for which they
are used, are in generally good condition and provide adequate capacity for current and anticipated future operations. The
table below sets forth certain information regarding the Company's principal real property as of the close of business on June
15, 2023.
Location
Use
Approximate
Square Feet
Owned/
Leased
Gonzales, Louisiana ............................................... Administrative and sales office ............................
15,598
Leased
Compton, California .............................................. Offices, warehouse and distribution center ....
157,400
Leased
Minneapolis, Minnesota ...................................... Product design and sales office ...........................
16,837
Leased
Eden Valley, Minnesota ........................................ Warehouse and distribution center ...................
128,000
Leased
Grand Rapids, Michigan ....................................... Product design office ..............................................
5,711
Leased
London, United Kingdom ................................... Sales office ..................................................................
1,800
Leased
Shanghai, People’s Republic of China ............ Office .............................................................................
1,912
Leased
ITEM 3. Legal Proceedings
The Company is, from time to time, involved in various legal 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 legal proceeding the outcome of
which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial position, results
of operations or cash flows.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the Nasdaq Capital Market under the symbol “CRWS”. As of June 15, 2023,
there were 151 record holders of the Company’s common stock.
The Company has historically paid cash dividends. The Company’s payment of dividends is and will continue to be
restricted by or subject to, among other limitations, applicable provisions of federal and state laws, the Company’s earnings
and various business considerations, including the Company’s financial condition, results of operations, cash flow, level of
capital expenditures, future business prospects and such other matters as the Board deems relevant. The Company’s credit
facility permits the Company to pay cash dividends on its common stock without limitation, provided there is no default under
the credit facility before or as a result of the payment of such dividends.
For information regarding securities of the Company that have been authorized for issuance under equity
compensation plans, refer to “Securities Authorized for Issuance under Equity Compensation Plans” in Item 12, Part III. of this
Annual Report.
ITEM 6. Reserved
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Objective
The following discussion and analysis is intended to provide material information relevant to an assessment of the
Company’s financial condition and results of operations, as well as an evaluation of the amounts and certainty of cash flows
from operations and from outside sources. This discussion and analysis is further intended to provide details concerning
material events and uncertainties known to management that are reasonably likely to cause reported financial information to
not be necessarily indicative of future operating results or future financial condition. This data includes descriptions and
amounts of matters that have had a material impact on reported operations, as well as matters that management has assessed
to be reasonably likely to have a material impact on future operations. Management expects that this discussion and analysis
will enhance a reader’s understanding of the Company’s financial condition, results of operations, cash flows, liquidity and
capital resources. This discussion and analysis should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Annual Report.
Results of Operations
The following table contains results of operations for fiscal years 2023 and 2022 and the dollar and percentage changes
for those periods (in thousands, except percentages).
Change
2023
2022
$
%
Net sales by category:
Bedding, blankets and accessories ................ $
36,747 $
45,341 $
(8,594)
-19.0%
Bibs, bath, developmental toy, feeding,
baby care and disposable products ..............
38,306
42,019
(3,713)
-8.8%
Total net sales ............................................................
75,053
87,360
(12,307)
-14.1%
Cost of products sold ..............................................
55,225
64,052
(8,827)
-13.8%
Gross profit .................................................................
19,828
23,308
(3,480)
-14.9%
% of net sales ...............................................................
26.4%
26.7%
Marketing and administrative expenses ..........
12,655
13,002
(347)
-2.7%
% of net sales ...............................................................
16.9%
14.9%
Interest (income) expense - net ...........................
(81)
50
(131)
-262.0%
Gain on extinguishment of debt .........................
-
1,985
(1,985)
-100.0%
Other income - net of other expense ................
172
85
87
102.4%
Income tax expense .................................................
1,776
2,408
(632)
-26.2%
Net income .................................................................
5,650
9,918
(4,268)
-43.0%
% of net sales ...............................................................
7.5%
11.4%
Net Sales:
Sales decreased to $75.1 million for 2023, compared with $87.4 million in 2022, a decrease of $12.3 million, or 14.1%.
Sales of bedding, blankets and accessories decreased by $8.6 million, and sales of bibs, toys and disposable products decreased
by $3.7 million. The decreases in sales are primarily due to lower replenishment orders at retailers due to the Company’s
customers reducing their purchases as a result of excessive inventory purchases during the first quarter of calendar 2022, as
well as consumers’ response to macroeconomic conditions, including trading down to lower priced items, buying fewer items,
or foregoing some items altogether due to inflationary concerns. Sales were also negatively impacted in the second half of the
current year by the Company’s decision to stop shipping to a customer experiencing significant credit issues. Additionally, 2022
contained 53 weeks of sales as opposed to 52 weeks for 2023, resulting in an extra week of sales for 2022.
Gross Profit:
Gross profit decreased by $3.5 million and decreased from 26.7% of net sales for 2022 to 26.4% of net sales for 2023.
The decrease in the gross profit amount for the current year is associated with the decline in sales during the periods and is net
of the positive impact of the closure of Carousel, which in the prior year recognized a gross loss of $681,000, 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 was impacted by increases in costs across the entire supply
chain, the Company in the current year has realized some stabilization in most of its input costs. However, beginning in February
13
2023, the Company experienced a rent increase at its warehouse and distribution facility in Compton, California. Finally, the
Company has benefited from recent increases in the selling prices of its products.
Marketing and Administrative Expenses:
Marketing and administrative expenses decreased by $347,000 but increased from 14.9% of net sales for fiscal year
2022 to 16.9% of net sales for fiscal year 2023. Overall compensation costs were $785,000 lower in the current year as compared
with the prior year, and the prior year included $500,000 for charges incurred by Carousel that were not incurred in the current
year. These decreases were offset by the following charges that occurred in the current year but not in the prior year: $371,000
in costs associated with the Manhattan Acquisition, and a $263,000 charge for the amount receivable from a customer that has
declared bankruptcy.
Gain on Extinguishment of Debt:
During fiscal year 2022, the Company recorded a gain on extinguishment of debt in the amount of $1,985,000
associated with the forgiveness of a loan made pursuant to the Paycheck Protection Program (the "PPP Loan"), administered by
the U.S. Small Business Administration under the Coronavirus Aid, Relief and Economic Security Act. The gain on
extinguishment of debt has been presented below income from operations in the accompanying consolidated statements of
income. The Company did not record such a gain during fiscal year 2023.
Income Tax Expense:
The Company’s provision for income taxes is based upon an annual effective tax rate (“ETR”) on continuing operations,
which was 23.2% and 20.1% during the fiscal years ended April 2, 2023 and April 3, 2022, respectively.
Management evaluates items of income, deductions and credits reported on the Company’s various federal and state
income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are
more likely than not to be sustained. The Company applies the provisions of accounting guidelines requiring a minimum
recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income
tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. After considering all relevant
information regarding the calculation of the state portion of its income tax provision, the Company believes that the technical
merits of the tax position that the Company has taken with respect to state apportionment percentages would more likely than
not be sustained. However, the Company also realizes that the ultimate resolution of such tax position could result in a tax
charge that is more than the amount realized based upon the application of the tax position taken. Therefore, the Company’s
measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording
discrete reserves for unrecognized tax liabilities during fiscal years 2023 and 2022 of $73,000 and $59,000, respectively, in the
accompanying consolidated statements of income.
In August 2020, the Company received notification from the Franchise Tax Board of the State of California (the “FTB”)
of its intention to examine the Company’s California consolidated income tax returns that the Company had filed 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 (“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, 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 accompanying consolidated financial statements, the Company recorded the effect
of the Settlement Agreement in the accompanying consolidated balance sheet as of April 2, 2023 and the consolidated
statement of income for fiscal year 2023. The Company’s adjustment to its reserve for unrecognized tax liabilities associated
with the tax returns under examination resulted in a discrete income tax benefit during fiscal year 2023, net of the impact of
federal income tax, of $81,000, and a net decrease to interest expense of $86,000.
In February 2021, the Company was notified by the U.S. Internal Revenue Service (the “IRS”) that it had selected for
examination the Company’s original and amended federal consolidated income tax returns for the fiscal year ended April 2,
2017. On March 15, 2023, the Company agreed to accept the proposal by the IRS to disallow the Company’s claim for refund in
the amount of $81,000 that was associated with the Company’s amended federal consolidated income tax return for the fiscal
year ended April 2, 2017.
During fiscal year 2023, the Company recorded a discrete income tax charge of $6,000 to reflect the effect of the net
tax shortfall arising from the exercise of stock options and the vesting of non-vested stock. During fiscal year 2022, the Company
14
recorded a discrete income tax benefit of $83,000 to reflect the effect during the period of the net excess tax benefit from the
exercise of stock options and the vesting of non-vested stock.
The ETR on continuing operations and the discrete income tax charges and benefits discussed above contributed to
an overall provision for income taxes of 23.9% and 19.5% for fiscal years 2023 and 2022, respectively.
Known Trends and Uncertainties
The Company’s financial results are closely tied to sales to the Company’s top two customers, which represented
approximately 71% of the Company’s gross sales in fiscal year 2023. A significant downturn experienced by either or both of
these customers could lead to decreased sales.
During fiscal year 2023, consumers responded to macroeconomic conditions by trading down to lower priced items,
buying fewer items, or foregoing some items altogether due to inflationary concerns. The Company monitors the impact of
inflation on its operations on an ongoing basis and may need to adjust its prices to mitigate the impact of changes to the rate
of inflation in future periods. Future volatility of prices could affect consumer purchases of our products. Additionally, the
impact of inflation on input and other operational costs could adversely affect the Company's financial results.
During fiscal year 2022, the Company at times faced higher costs associated with the Company’s sourcing activities in
China, including freight and higher duties on some products. Future increases in these costs could adversely affect the
profitability of the Company if it cannot pass the cost increases along to its customers in the form of price increases or if the
timing of price increases does not closely match the cost increases.
Significant outbreaks of contagious diseases could have adverse effects on the overall economy and impact the
Company’s supply chain, manufacturing and distribution operations, transportation services, customers and employees, as well
as consumer sentiment in general and traffic within the retail stores that carry the Company’s products. During fiscal years 2022
and 2021, the COVID-19 pandemic led global government authorities to implement numerous public health measures,
including quarantines, business closures and lockdowns to confront the pandemic. China’s efforts to control the spread of the
COVID-19 virus by locking down its largest cities placed a strain on already-stressed global supply chains. Several of the
Company’s customers experienced financial difficulties as a result of the COVID-19 pandemic.
A resurgence of the COVID-19 pandemic, or any other outbreak of contagious disease, 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.
For an additional discussion of trends, uncertainties and other factors that could impact the Company’s operating
results, refer to “Risk Factors” in Item 1A, Part I. of this Annual Report.
Financial Position, Liquidity and Capital Resources
Net cash provided by operating activities decreased from $8.3 million for the fiscal year ended April 3, 2022 to $7.7
million for the fiscal year ended April 2, 2023. The Company in the current year experienced a decrease in its net income that
was $4.3 million lower than in the prior year; the Company experienced a decrease in the deferred income tax liability that $1.9
million higher than the increase in the prior year; the Company in the current year experienced a decrease in its accounts
payable balances that was $1.6 million higher than the increase in the prior year; the Company experienced a decrease in its
accrued liabilities balances that was $1.2 million higher than the increase in the prior year; and the Company experienced a
decrease in the reserve for unrecognized tax liabilities that was $525,000 higher than the decrease in the prior year. As offsets
to these increases in cash provided by operating activities, the Company in the current year experienced a decrease in its
accounts receivable balances that was $7.4 million higher than the increase in the prior year and the Company recognized a
gain on extinguishment of debt of $1,985,000 that was associated with the forgiveness of the PPP Loan in the prior year that
did not occur in the current year.
Net cash used in investing activities was $490,000 in fiscal year 2022 compared with $16.9 million in fiscal year 2023.
The increase in fiscal year 2023 was primarily due to the $16.1 million payment made in the current year to complete the
Manhattan Acquisition, net of cash acquired of $1.3 million.
Net cash used in financing activities was $6.8 million in fiscal year 2022 compared with $9.3 million in cash provided
by financing activities in fiscal year 2023. The Company incurred net borrowings under its revolving line of credit of $12.7 million
15
in the current year that did not occur in the prior year, such borrowings primarily being required to fund the Manhattan
Acquisition. Also, dividend payments were $3.5 milion lower in the current year than in the prior year.
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 the availability on its revolving line of credit will be adequate to meet its liquidity needs.
The Company’s credit facility at April 2, 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, bearing interest at the rate of prime minus
0.5% or the Secured Overnight Financing Rate (“SOFR”) plus 1.6%, and which is secured by a first lien on all assets of the
Company.
The financing agreement was scheduled to mature on July 11, 2025, but on March 17, 2023 the financing agreement
was amended to extend the maturity date to July 11, 2028. As of April 2, 2023, the Company had elected to pay interest on
balances owed under the revolving line of credit, if any, under the SOFR option, which was 6.4%. The financing agreement also
provides for the payment by CIT to the Company of interest on daily negative balances, if any, held by CIT at the rate of prime
as of the beginning of the calendar month minus 2.0%, which was 6.0% as of April 2, 2023.
As of April 2, 2023, there was a balance of $12.7 million owed on the revolving line of credit, there was no letter of
credit outstanding and $20.0 million was available under the revolving line of credit based on the Company’s eligible accounts
receivable and inventory balances. As of 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 April 2, 2023.
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 above. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such
payments are received by CIT. Credit losses are borne by CIT 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 consolidated statements of income, were $287,000 and
$344,000 during fiscal years 2023 and 2022, respectively.
Critical Accounting Policies and Estimates
The Company prepares its financial statements to conform with accounting principles generally accepted in the U.S.
(“GAAP”) as promulgated by the Financial Accounting Standards Board (“FASB”). 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.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the
reporting period. The listing below, while not inclusive of all of the Company's accounting policies, sets forth those accounting
policies which the Company's management believes embody the most significant judgments due to the uncertainties affecting
their application and the likelihood that materially different amounts would be reported under different conditions or using
different assumptions.
Revenue Recognition: Revenue is recognized upon the satisfaction of all contractual performance obligations and the
transfer of control of the products sold to the customer. The majority of the Company’s sales consists of single performance
obligation arrangements for which the transaction price for a given product sold is equivalent to the price quoted for the
product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the
16
customer to deliver a product as directed by the customer. Shipping and handling costs that are charged to customers are
included in net sales, and the Company’s costs associated with shipping and handling activities are included in cost of products
sold. A provision for anticipated returns, which are based upon historical returns and claims, is provided through a reduction of
net sales and cost of products sold in the reporting period within which the related sales are recorded. Actual returns and claims
experienced in a future period may differ from historical experience, and thus, the Company’s provision for anticipated returns
at any given point in time may be over-funded or under-funded.
Revenue from sales made directly to consumers is recorded when the shipped products have been received by
customers, and excludes sales taxes collected on behalf of governmental entities. Revenue from sales made to retailers is
recorded when legal title has been passed to the customer based upon the terms of the customer’s purchase order, the
Company’s sales invoice, or other associated relevant documents. Such terms usually stipulate that legal title will pass when
the shipped products are no longer under the control of the Company, such as when the products are picked up at the
Company’s facility by the customer or by a common carrier. Payment terms can vary from prepayment for sales made directly
to consumers to payment due in arrears (generally, 60 days of being invoiced) for sales made to retailers.
Allowances Against Accounts Receivable: Revenue from sales made to retailers is reported net of allowances for
anticipated returns and other allowances, including cooperative advertising allowances, warehouse allowances, placement
fees, volume rebates, coupons and discounts. Such allowances are recorded commensurate with sales activity or using the
straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the results of
operations. The provision for the majority of the Company’s allowances occurs on a per-invoice basis. When a customer requests
to have an agreed-upon deduction applied against the customer’s outstanding balance due to the Company, the allowances
are correspondingly reduced to reflect such payments or credits issued against the customer’s account balance. The Company
analyzes the components of the allowances for customer deductions monthly and adjusts the allowances to the appropriate
levels. Although the timing of funding requests for advertising support can cause the net balance in the allowance account to
fluctuate from period to period, such timing has no impact on the consolidated statements of income since such costs are
accrued commensurate with sales activity or using the straight-line method, as appropriate.
Valuation of Long-Lived Assets and Identifiable Intangible Assets: In addition to the systematic annual depreciation and
amortization of the Company’s fixed assets and identifiable intangible assets, the Company reviews for impairment long-lived
assets and identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of any
asset may not be recoverable. An impairment loss must be recognized if the carrying amount of a long-lived asset group is not
recoverable and exceeds its fair value. Assets to be disposed of, if any, are recorded at the lower of net book value or fair market
value, less estimated costs to sell at the date management commits to a plan of disposal, and are classified as assets held for
sale on the consolidated balance sheets. Actual results could differ materially from those estimates.
Inventory Valuation: On a periodic basis, management reviews its inventory quantities on hand for obsolescence,
physical deterioration, changes in price levels and the existence of quantities on hand which may not reasonably be expected
to be sold within the Company’s normal operating cycle. To the extent that any of these conditions is believed to exist or the
market value of the inventory expected to be realized in the ordinary course of business is otherwise no longer as great as its
carrying value, an allowance against the inventory value is established. To the extent that this allowance is established or
increased during an accounting period, an expense is recorded in cost of products sold in the Company's consolidated
statements of income. Only when inventory for which an allowance has been established is later sold or is otherwise disposed
is the allowance reduced accordingly. Significant management judgment is required in determining the amount and adequacy
of this allowance. In the event that actual results differ from management's estimates or these estimates and judgments are
revised in future periods, the Company may not fully realize the carrying value of its inventory or may need to establish
additional allowances, either of which could materially impact the Company's financial position and results of operations.
Business Combinations: The Company accounts for acquisitions using the acquisition method of accounting in
accordance with FASB ASC Topic 805, Business Combinations. An acquisition is accounted for as a purchase and the appropriate
account balances and operating activities are recorded in the Company's consolidated financial statements as of the acquisition
date and thereafter. Assets acquired, liabilities assumed and noncontrolling interests, if any, are measured at fair value as of the
acquisition date using the appropriate valuation method. The Company may engage an independent third party to assist with
these measurements. Goodwill resulting from an acquisition is recognized for the excess of the purchase price over the fair
value of the tangible and identifiable intangible assets, less the liabilities assumed. In determining the fair value of the
identifiable intangible assets and any noncontrolling interests, the Company uses various valuation techniques, including the
income approach, the cost approach and the market approach. These valuation methods require significant management
judgement to make estimates and assumptions surrounding projected revenues and costs, growth rates and discount rates. In
the event that actual results differ from management's estimates, the Company may need to recognize an impairment to all or
a portion of the carrying value of these assets in a future period, which could materially impact the Company's financial position
and results of operations.
17
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For a detailed discussion of market risk and other factors that could impact the Company’s operating results, refer to
“Risk Factors” in Item 1A. of Part I. of this Annual Report on Form 10-K.
Interest Rate Risk
As of April 2, 2023, the Company had $12.7 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 $97,000 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 8. Financial Statements and Supplementary Data
See pages 22 and F-1 through F-21 of this Annual Report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time period specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. As of the end of the period covered by this Annual Report, the Company carried out
an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining for the Company adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act (“ICFR”). With
the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the
effectiveness of ICFR based on the framework and the criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
18
In management’s evaluation of ICFR during fiscal year 2023, the Company has excluded an evaluation of the ICFR
related to the operations of Manhattan and MTE, which were acquired by the Company on March 17, 2023. During fiscal year
2023, the combined net sales of Manhattan and MTE were $773,000, which was 1.0% of the Company’s total net sales. As of
April 2, 2023, the combined total assets of Manhattan and MTE amounted to $21.4 million (including $787,000 in goodwill),
which was 23.5% of the Company’s total assets. Based on management’s evaluation of ICFR, taking into account the exclusion
of an evaluation of the ICFR related to the operations of Manhattan and MTE, management has concluded that ICFR was
effective as of April 2, 2023.
The Company’s internal control system has been designed to provide reasonable assurance to the Company’s
management and the Board regarding the reliability of financial reporting and the preparation and fair presentation of financial
statements in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only a reasonable, rather than absolute, assurance that
the Company’s financial statements are free of any material misstatement, whether caused by error or fraud.
Changes in Internal Control over Financial Reporting
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the Company’s ICFR as required by Rule 13a-15(d) under the Exchange Act and, in
connection with such evaluation and taking into account the exclusion of the evaluation of the ICFR related to the operations
of Manhattan and MTE referred to above, determined that no changes occurred during the Company’s fiscal quarter ended
April 2, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
ITEM 9B. Other Information
Not applicable.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information with respect to the Company’s directors and executive officers will be set forth in the Company’s
Proxy Statement for the Annual Meeting of Stockholders to be held in 2023 (the “Proxy Statement”) under the captions
“Proposal 1 – Election of Directors” and “Executive Compensation – Executive Officers” and is incorporated herein by reference.
The information with respect to Item 406 of Regulation S-K will be set forth in the Proxy Statement under the caption “Corporate
Governance – Code of Business Conduct and Ethics; Code of Conduct for Directors” and is incorporated herein by reference.
The information with respect to Item 407 of Regulation S-K will be set forth in the Proxy Statement under the captions
“Corporate Governance – Board Committees” and “Report of the Audit Committee” and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information set forth under the captions “Executive Compensation” and “Corporate Governance – Compensation
Committee Interlocks and Insider Participation” in the Proxy Statement is incorporated herein by reference.
19
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in
the Proxy Statement is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The table below sets forth information regarding shares of the Company’s common stock that may be issued upon
the exercise of options, warrants and other rights granted to employees, consultants or directors under all of the Company’s
existing equity compensation plans as of April 2, 2023.
Plan Category
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
Equity compensation plans approved by security
holders:
2006 Omnibus Incentive Plan ...........................................................
62,500
$7.62
0
2014 Omnibus Equity Compensation Plan ..................................
553,000
$7.46
0
2021 Incentive Plan ..............................................................................
120,000
$6.54
765,439
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions “Corporate Governance – Director Independence” and “Certain
Relationships and Related Transactions” in the Proxy Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The information set forth under the caption “Proposal 2 – Ratification of Appointment of Independent Registered
Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.
20
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1). Financial Statements
The following consolidated financial statements of the Company are included in Part II, Item 8. of this Annual Report:
- Report of Independent Registered Public Accounting Firm
- Consolidated Balance Sheets as of April 2, 2023 and April 3, 2022
- Consolidated Statements of Income for the Fiscal Years Ended April 2, 2023 and April 3, 2022
- Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Years Ended April 2, 2023 and April 3, 2022
- Consolidated Statements of Cash Flows for the Fiscal Years Ended April 2, 2023 and April 3, 2022
- Notes to Consolidated Financial Statements
(a)(2). Financial Statement Schedule
The following financial statement schedule of the Company is included with this Annual Report:
Schedule II — Valuation and Qualifying Accounts ........................................................................................................................... Page 22
All other schedules not listed above have been omitted because they are not applicable or the required information
is included in the financial statements or notes thereto.
21
SCHEDULE II
CROWN CRAFTS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Valuation and Qualifying Accounts
Column A
Column B Column C Column D Column E
Balance at
Beginning Charged to
Balance at
End of
of Period Expenses Deductions
Period
(in thousands)
Accounts Receivable Valuation Accounts:
Year Ended April 3, 2022
Allowance for customer deductions .......................................................... $
723 $
6,052 $
5,830 $
945
Year Ended April 2, 2023
Allowance for customer deductions .......................................................... $
945 $
5,746 $
5,217 $
1,474
22
(a)(3). Exhibits
Exhibits required to be filed by Item 601 of SEC Regulation S-K are included as Exhibits to this Annual Report and listed
below.
In reviewing the agreements included as exhibits to this Annual Report, investors are reminded that the agreements
are included to provide information regarding their terms and are not intended to provide any other factual or disclosure
information about the Company or the other parties to the agreements. Some of the agreements contain representations and
warranties made by each of the parties to the applicable agreement. These representations and warranties have been made
solely for the benefit of the other parties to the applicable agreement and:
Ɣ
Should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk
to one of the parties if those statements prove to be inaccurate;
Ɣ
Have been qualified by the disclosures that were made to the other party in connection with the negotiation of
the applicable agreement, which disclosures are not necessarily reflected in the agreement;
Ɣ
May apply standards of materiality in a way that is different from what may be viewed as material to you or other
investors; and
Ɣ
Were made only as of the date of the applicable agreement or such other date or dates may be specified in the
agreement and are subject to more recent developments.
Accordingly, the representations and warranties may not describe the actual state of affairs as of the date they were
made or at any other time. Additional information about the Company may be found elsewhere in this Annual Report and the
Company’s other public filings with the SEC.
Exhibit
Number
Description of Exhibits
2.1
—Equity Purchase Agreement, dated as of March 17, 2023, between the Company and H Enterprises International,
LLC. (33)
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. (10)
3.3
—Bylaws of the Company, as amended and restated through November 15, 2016. (19)
4.1*
—Crown Crafts, Inc. 2006 Omnibus Incentive Plan (As Amended August 14, 2012). (12)
4.2*
—Form of Non-Qualified Stock Option Agreement (Employees). (4)
4.3*
—Crown Crafts, Inc. 2014 Omnibus Equity Compensation Plan. (14)
4.4*
—Form of Non-Qualified Stock Option Grant Agreement. (15)
4.5*
—Form of Restricted Stock Grant Agreement. (15)
4.6*
—Crown Crafts, Inc. 2021 Incentive Plan. (28)
4.7*
—Form of Incentive Stock Option Grant Agreement. (29)
4.8*
—Form of Nonstatutory Stock Option Grant Agreement. (29)
4.9*
—Form of Restricted Stock Grant Agreement. (29)
4.10*
—Form of Performance Share Grant Agreement (effective February 23, 2022). (30)
4.11
—Description of Capital Stock (35)
10.1
—Financing Agreement dated as of July 11, 2006 by and among the Company, Churchill Weavers, Inc., Hamco, Inc.,
Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (3)
10.2
—Stock Pledge Agreement dated as of July 11, 2006 by and among the Company, Churchill Weavers, Inc., Hamco,
Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (3)
10.3
—First Amendment to Financing Agreement dated as of November 5, 2007 by and among the Company, Churchill
Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (5)
10.4*
—Employment Agreement dated November 6, 2008 by and between the Company and Olivia W. Elliott (6)
10.5
—Third Amendment to Financing Agreement dated as of July 2, 2009 by and among the Company, Churchill
Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (7)
23
10.6
—Sixth Amendment to Financing Agreement dated as of March 5, 2010 by and among the Company, Churchill
Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (8)
10.7
—Seventh Amendment to Financing Agreement dated as of May 27, 2010 by and among the Company, Churchill
Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (9)
10.8
—Eighth Amendment to Financing Agreement dated as of March 26, 2012 by and among the Company, Churchill
Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (11)
10.9
—Ninth Amendment to Financing Agreement dated May 21, 2013 by and among the Company, Hamco, Inc., Crown
Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (13)
10.10
—Tenth Amendment to Financing Agreement dated as of December 28, 2015 by and among the Company, Hamco,
Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (16)
10.11
—Eleventh Amendment to Financing Agreement dated as of March 31, 2016 by and among the Company, Hamco,
Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (17)
10.12* —Amendment No. 1 to the Crown Crafts, Inc. 2014 Omnibus Equity Compensation Plan. (18)
10.13* —Form of Incentive Stock Option Grant Agreement (effective November 2016). (18)
10.14* —Form of Nonqualified Stock Option Grant Agreement (effective November 2016). (18)
10.15* —Form of Restricted Stock Grant Agreement (effective November 2016). (18)
10.16
—Joinder Agreement dated as of August 4, 2017 by and among the Company, Hamco, Inc., Crown Crafts Infant
Products, Inc., Carousel Acquisition, LLC and The CIT Group/Commercial Services, Inc. (20)
10.17
—Twelfth Amendment to Financing Agreement dated as of December 15, 2017 by and among the Company, Hamco,
Inc., Carousel Designs, LLC, Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (21)
10.18
—Thirteenth Amendment to Financing Agreement dated as of August 7, 2018 by and among the Company, Hamco,
Inc., Carousel Designs, LLC, Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (22)
10.19* —Employment Agreement dated January 18, 2019 by and between NoJo Baby & Kids, Inc. and Donna Sheridan. (23)
10.20
—Note dated as of April 19, 2020 made by the Company in favor of CIT Bank, N.A. (24)
10.21
—Conditional Consent to Paycheck Protection Program Loan dated as of April 19, 2020 by and between the Company,
Sassy Baby, Inc., Carousel Designs, LLC, NoJo Baby & Kids, Inc. and The CIT Group/Commercial. (24)
10.22* —Amendment to Amended and Restated Employment and Severance Protection Agreement dated as of April 14,
2022 by and between the Company and E. Randall Chestnut. (31)
10.23* —Employment Agreement dated February 22, 2021 by and between the Company and Craig Demarest. (25)
10.24* —Letter Agreement regarding Employment Agreement dated February 22, 2021 by and between the Company and
Craig Demarest. (27)
10.25
—Liquidation Agreement dated as of May 13, 2021 by and among the Company, NoJo Baby & Kids, Inc., Sassy Baby,
Inc., Carousel Designs, LLC and The CIT Group/Commercial Services, Inc. (27)
10.26
—Fourteenth Amendment to Financing Agreement dated as of May 31, 2021, by and among the Company, NoJo
Baby & Kids, Inc., Sassy Baby, Inc., Carousel Designs, LLC and The CIT Group/Commercial Services, Inc. (26)
10.27* —Performance Share Award Certificate, dated March 1, 2022, between the Company and Olivia W. Elliott. (30)
10.28* —Performance Share Award Certificate, dated March 1, 2022, between the Company and Donna E. Sheridan. (30)
10.29* —Amendment to Employment Agreement dated June 7, 2022 by and between the Company and Olivia W. Elliott.
(32)
24
10.30
—Fifteenth Amendment to Financing Agreement dated as of June 2, 2022, by and among the Company, NoJo Baby
& Kids, Inc., Sassy Baby, Inc., Carousel Designs, LLC and The CIT Group/Commercial Services, Inc. (32)
10.31
—Sixteenth Amendment to Financing Agreement, dated as of March 17, 2023, by and among the Company, NoJo
Baby & Kids, Inc., Sassy Baby, Inc., Manhattan Group, LLC, Manhattan Toy Europe Limited and the CIT
Group/Commercial Services, Inc. (33)
10.32* —Amended and Restated Employment Agreement dated June 13, 2023 by and between the Company and Olivia
W. Elliott. (34)
14.1
—Code of Ethics. (2)
21.1
—Subsidiaries of the Company. (35)
23.1
—Consent of KPMG LLP. (35)
31.1
—Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer. (35)
31.2
—Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer. (35)
32.1
—Section 1350 Certification by the Company’s Chief Executive Officer. (36)
32.2
—Section 1350 Certification by the Company’s Chief Financial Officer. (36)
101
—The following information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended April 2,
2023, formatted as interactive data files in iXBRL (Inline eXtensible Business Reporting Language):
(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Changes in Shareholders’ Equity;
(iv) Consolidated Statements of Cash Flows; and
(v) Notes to Consolidated Financial Statements.
104
Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
* Management contract or a compensatory plan or arrangement.
(1) Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 28,
2003.
(2) Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended March 28,
2004.
(3) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated July 17, 2006.
(4) Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 dated August 24, 2006.
(5) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated November 9, 2007.
(6) Incorporated herein by reference to Registrant’s Current Report on Form 8-K/A dated November 7, 2008.
(7) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated July 6, 2009.
(8) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated March 8, 2010.
(9) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated May 27, 2010.
(10) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated August 9, 2011.
(11) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated March 27, 2012.
(12) Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 dated August 14, 2012.
(13) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated May 21, 2013.
(14) Incorporated herein by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed on June 27, 2014.
(15) Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 dated November 10, 2014.
(16) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated December 28, 2015.
(17) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated April 4, 2016.
(18) Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2,
2016.
(19) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated November 16, 2016.
(20) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated August 7, 2017.
(21) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated December 18, 2017.
(22) Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2018.
(23) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated January 22, 2019.
(24) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated April 23, 2020.
(25) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated February 22, 2021.
(26) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated June 3, 2021.
(27) Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended March 28, 2021.
(28) Incorporated herein by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed on June 28, 2021.
25
(29) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated August 11, 2021.
(30) Incorporated herein by reference to Registrant’s Current Report on Form 8-K/A dated March 1, 2022.
(31) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated April 15, 2022.
(32) Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended April 3, 2022.
(33) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated March 20, 2023.
(34) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated June 15, 2023.
(35) Filed herewith.
(36) Furnished herewith.
ITEM 16. Form 10-K Summary
Not applicable.
26
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm (KPMG LLP, Baton Rouge, LA, Auditor Firm ID: 185) .............. F-1
Consolidated Balance Sheets as of April 2, 2023 and April 3, 2022 ....................................................................................................... F-3
Consolidated Statements of Income for the Fiscal Years Ended April 2, 2023 and April 3, 2022 ............................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Years Ended April 2, 2023 and
April 3, 2022.......................................................................................................................................................................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended April 2, 2023 and April 3, 2022 ........................................ F-6
Notes to Consolidated Financial Statements ................................................................................................................................................ F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Crown Crafts, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Crown Crafts, Inc. and subsidiaries (the Company) as of
April 2, 2023 and April 3, 2022, the related consolidated statements of income, changes in shareholders’ equity, and cash flows
for each of the years in the two-year period ended April 2, 2023, and the related notes and financial statement schedule II
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of April 2, 2023 and April 3, 2022, and the results of its operations
and its cash flows for each of the years in the two-year period ended April 2, 2023, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts
or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserve for unrecognized tax liabilities
As discussed in Notes 2 and 11 to the consolidated financial statements, the Company has recorded a reserve for
unrecognized tax liabilities relating to California state income taxes, excluding associated interest and penalties, of $280
thousand. The Company recognizes tax positions when it is more likely than not that the tax position will be sustained on
examination based on the technical merits of the position. Recognized income tax positions are measured at the largest
amount that has a greater than 50 percent likelihood of being realized.
We identified the evaluation of the Company’s reserve for unrecognized tax liabilities relating to California state income
taxes as a critical audit matter. Subjective auditor judgment was required to evaluate the Company’s interpretations of the
tax law and regulations, court rulings and settlements used by the Company to identify and determine the uncertain tax
positions. Additionally, specialized skills and knowledge were required in evaluating the Company’s estimate of the
ultimate resolution of the tax positions.
F-2
The following are the primary procedures we performed to address the critical audit matter. We involved tax professionals
with specialized skills and knowledge, who assisted in:
Ɣ
evaluating the Company’s estimate of the ultimate resolution of the tax position taken by the Company
Ɣ
inspecting correspondence and settlements from taxing authorities and analyzing the expiration of statutes of
limitation
Ɣ
evaluating the Company’s assessment of tax positions based on tax law, regulations, and other authoritative guidance
with respect to expiration of statute of limitations and reserve additions.
/s/ KPMG LLP
We have served as the Company’s auditor since 2009.
Baton Rouge, Louisiana
June 23, 2023
F-3
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 2, 2023 AND APRIL 3, 2022
(amounts in thousands, except share and per share amounts)
April 2, 2023
April 3, 2022
ASSETS
Current assets:
Cash and cash equivalents .......................................................................................................................................................... $
1,742 $
1,598
Accounts receivable (net of allowances of $1,474 at April 2, 2023 and $945 at
April 3, 2022):
Due from factor ....................................................................................................................................................................
20,740
21,093
Other ........................................................................................................................................................................................
2,068
2,133
Inventories ........................................................................................................................................................................................
34,211
20,653
Prepaid expenses ...........................................................................................................................................................................
1,614
1,031
Total current assets .....................................................................................................................................................
60,375
46,508
Operating lease right of use assets ......................................................................................................................................
17,305
2,423
Property, plant and equipment - at cost:
Vehicles ..............................................................................................................................................................................................
182
182
Leasehold improvements ............................................................................................................................................................
473
425
Machinery and equipment ..........................................................................................................................................................
4,333
3,581
Furniture and fixtures ...................................................................................................................................................................
408
367
Property, plant and equipment - gross ..............................................................................................................................
5,396
4,555
Less accumulated depreciation .................................................................................................................................................
3,677
3,198
Property, plant and equipment - net ..................................................................................................................
1,719
1,357
Finite-lived intangible assets - at cost:
Customer relationships ................................................................................................................................................................
8,174
7,374
Other finite-lived intangible assets ..........................................................................................................................................
4,766
4,266
Finite-lived intangible assets - gross ..................................................................................................................................
12,940
11,640
Less accumulated amortization .................................................................................................................................................
9,467
8,986
Finite-lived intangible assets - net .......................................................................................................................
3,473
2,654
Goodwill ............................................................................................................................................................................................
7,912
7,125
Other ...................................................................................................................................................................................................
188
88
Total Assets .......................................................................................................................................................................... $
90,972 $
60,155
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................................................................................................................... $
7,548 $
6,375
Accrued wages and benefits ......................................................................................................................................................
1,087
2,196
Accrued royalties ............................................................................................................................................................................
614
462
Dividends payable .........................................................................................................................................................................
815
827
Operating lease liabilities, current ............................................................................................................................................
2,427
1,832
Other accrued liabilities ...............................................................................................................................................................
566
94
Total current liabilities ..............................................................................................................................................
13,057
11,786
Non-current liabilities:
Long-term debt ...............................................................................................................................................................................
12,674
-
Deferred income taxes .................................................................................................................................................................
815
1,020
Operating lease liabilities, noncurrent ....................................................................................................................................
14,889
809
Reserve for unrecognized tax liabilities ..................................................................................................................................
323
739
Total non-current liabilities ....................................................................................................................................
28,701
2,568
Shareholders' equity:
Common stock - $0.01 par value per share; Authorized 40,000,000 shares at April 2, 2023 and April 3,
2022; Issued 13,051,814 shares at April 2, 2023 and 12,944,918 shares at April 3, 2022 ..................................
131
129
Additional paid-in capital ............................................................................................................................................................
57,126
55,925
Treasury stock - at cost - 2,897,507 shares at April 2, 2023 and 2,864,698 shares at April 3, 2022 ......................
(15,821)
(15,614)
Retained Earnings ..........................................................................................................................................................................
7,778
5,361
Total shareholders' equity .......................................................................................................................................
49,214
45,801
Total Liabilities and Shareholders' Equity ............................................................................................................. $
90,972 $
60,155
See notes to consolidated financial statements.
F-4
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED APRIL 2, 2023 AND APRIL 3, 2022
(amounts in thousands, except per share amounts)
2023
2022
Net sales ............................................................................................................................................................. $
75,053 $
87,360
Cost of products sold ....................................................................................................................................
55,225
64,052
Gross profit .......................................................................................................................................................
19,828
23,308
Marketing and administrative expenses ................................................................................................
12,655
13,002
Income from operations ..............................................................................................................................
7,173
10,306
Other (expense) income:
Interest income - net of interest expense .........................................................................................
81
(50)
Gain on extinguishment of debt ..........................................................................................................
-
1,985
Gain on insurance proceeds received for damage to equipment ............................................
34
-
Gain on sale of property, plant and equipment ..............................................................................
2
18
Other - net ....................................................................................................................................................
136
67
Income before income tax expense ........................................................................................................
7,426
12,326
Income tax expense .......................................................................................................................................
1,776
2,408
Net income ....................................................................................................................................................... $
5,650 $
9,918
Weighted average shares outstanding:
Basic ................................................................................................................................................................
10,102
10,055
Effect of dilutive securities ......................................................................................................................
18
29
Diluted ...........................................................................................................................................................
10,120
10,084
Earnings per share:
Basic ................................................................................................................................................................ $
0.56 $
0.99
Diluted ........................................................................................................................................................... $
0.56 $
0.98
See notes to consolidated financial statements.
F-5
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED APRIL 2, 2023 AND APRIL 3, 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)
Balances - March 28, 2021........................... 12,809,753 $
128 (2,811,446) $(15,202) $
54,748 $
2,191 $
41,865
Issuance of shares .............................................
135,165
1
-
-
343
-
344
Stock-based compensation ...........................
-
-
-
-
834
-
834
Acquisition of treasury stock .........................
-
-
(53,252)
(412)
-
-
(412)
Net income ..........................................................
-
-
-
-
-
9,918
9,918
Dividends declared on common stock -
$0.67 per share ..............................................
-
-
-
-
-
(6,748)
(6,748)
Balances - April 3, 2022 ................................ 12,944,918 $
129 (2,864,698) $(15,614) $
55,925 $
5,361 $
45,801
Issuance of shares .............................................
106,896
2
-
-
96
-
98
Stock-based compensation ...........................
-
-
-
-
1,105
-
1,105
Acquisition of treasury stock .........................
-
-
(32,809)
(207)
-
-
(207)
Net income ..........................................................
-
-
-
-
-
5,650
5,650
Dividends declared on common stock -
$0.32 per share ..............................................
-
-
-
-
-
(3,233)
(3,233)
Balances - April 2, 2023 ................................ 13,051,814 $
131 (2,897,507) $(15,821) $
57,126 $
7,778 $
49,214
See notes to consolidated financial statements.
F-6
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED APRIL 2, 2023 AND APRIL 3, 2022
(amounts in thousands)
2023
2022
Operating activities:
Net income ....................................................................................................................................................... $
5,650 $
9,918
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment .......................................................................
688
652
Amortization of intangibles ...............................................................................................................
481
509
Amortization of right of use assets .................................................................................................
2,121
1,762
Deferred income taxes ........................................................................................................................
(205)
1,726
Gain on extinguishment of debt ......................................................................................................
-
(1,985)
Gain on insurance proceeds received for damage to equipment .......................................
(34)
-
Gain on sale of property, plant and equipment .........................................................................
(2)
(18)
Reserve for unrecognized tax liabilities .........................................................................................
(416)
109
Stock-based compensation ...............................................................................................................
1,105
834
Changes in assets and liabilities:
Accounts receivable .........................................................................................................................
3,530
(3,888)
Inventories ..........................................................................................................................................
(593)
(318)
Prepaid expenses ..............................................................................................................................
(233)
153
Other assets ........................................................................................................................................
(9)
4
Lease liabilities ...................................................................................................................................
(2,265)
(1,919)
Accounts payable .............................................................................................................................
(854)
793
Accrued liabilities..............................................................................................................................
(1,226)
(68)
Net cash provided by operating activities .......................................................................................
7,738
8,264
Cash used in investing activities:
Capital expenditures for property, plant and equipment ................................................................
(813)
(531)
Insurance proceeds received for damage to equpment ..................................................................
34
-
Proceeds from sale of property, plant and equipment .....................................................................
2
41
Payment to acquire Manhattan and MTE, net of cash acquired ....................................................
(16,136)
-
Net cash used in investing activities ...................................................................................................
(16,913)
(490)
Financing activities:
Repayments under revolving line of credit ...........................................................................................
(1,746)
(25,158)
Borrowings under revolving line of credit .............................................................................................
14,420
25,158
Purchase of treasury stock from related parties ..................................................................................
(207)
(412)
Issuance of common stock ..........................................................................................................................
98
344
Dividends paid ................................................................................................................................................
(3,246)
(6,721)
Net cash provided by (used in) financing activities .....................................................................
9,319
(6,789)
Net increase in cash and cash equivalents .......................................................................................
144
985
Cash and cash equivalents at beginning of period ............................................................................
1,598
613
Cash and cash equivalents at end of period ................................................................................... $
1,742 $
1,598
Supplemental cash flow information:
Income taxes paid .......................................................................................................................................... $
1,142 $
1,948
Interest paid .....................................................................................................................................................
45
18
Noncash activities:
Property, plant and equipment purchased but unpaid ...................................................................
(43)
(43)
Dividends declared but unpaid .................................................................................................................
(815)
(827)
See notes to consolidated financial statements.
F-7
Crown Crafts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Description of Business
Crown Crafts, Inc. (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 four of its wholly-owned subsidiaries, NoJo Baby &
Kids, Inc. (“NoJo”), Sassy Baby, Inc. (“Sassy”), Manhattan Group, LLC (“Manhattan”) and Manhattan Toy Europe Limited (“MTE”)
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, soft bath products, disposable products,
developmental toys and accessories. Most sales of the Company’s products are generally made directly to retailers, such as
mass merchants, large chain stores, mid-tier retailers, juvenile specialty stores, value channel stores, grocery and drug stores,
restaurants, wholesale clubs and internet-based retailers. Manhattan also sells direct to consumer through its website,
www.manhattantoy.com. The Company’s products are marketed under a variety of Company-owned trademarks, under
trademarks licensed from others and as private label goods.
The Company's fiscal year ends on the Sunday nearest to or on March 31. References herein to “fiscal year 2023” or
“2023” represent the 52-week period ended April 2, 2023, and references herein to “fiscal year 2022” or “2022” represent the 53-
week period ended April 3, 2022.
On March 17, 2023 (the “Closing Date”), the Company acquired Manhattan and MTE, Manhattan’s wholly-owned
subsidiary (the “Manhattan Acquisition”), for a purchase price of $17.0 million, subject to adjustments for cash as of 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 Manhattan Acquisition was funded with cash available on the Closing Date and borrowings under the Company’s
revolving line of credit with The CIT Group/Commercial Services (“CIT”).
During the first 54 days of fiscal 2022, the Company also operated indirectly through 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 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.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and
have been prepared pursuant to accounting principles generally accepted in the U.S. (“GAAP”) as promulgated by the Financial
Accounting Standards Board (“FASB”). 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.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the
periods presented on the consolidated statements of income and cash flows. Significant estimates are made with respect to:
Ɣ
Allowances related to accounts receivable for customer deductions for returns, allowances and disputes,
Ɣ
Inventory reserves for discontinued finished goods, and
Ɣ
A reserve for unrecognized tax liabilities in respect of the tax impact of state apportionment percentages.
Actual results could differ materially from these estimates.
Cash and Cash Equivalents: The Company’s credit facility consists of a revolving line of credit under a financing
agreement with CIT. The Company classifies a negative balance outstanding under this revolving line of credit as cash and cash
equivalents, as these amounts are legally owed to the Company and are immediately available to be drawn upon by the
Company. There are no compensating balance requirements or other restrictions on the transfer of amounts associated with
the Company’s depository accounts.
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Financial Instruments: For short-term instruments such as cash and cash equivalents, accounts receivable and accounts
payable, the Company uses carrying value as a reasonable estimate of fair value. Additionally, the Company’s long-term debt
is a revolving credit facility whereby the Company uses carrying value as a reasonable estimate of fair value.
Segments and Related Information: The Company operates primarily in one principal segment, infant and toddler
products. These products consist of infant and toddler bedding and blankets, bibs, soft bath products, disposable products,
developmental and bath toys and accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath and
disposable products for the fiscal years ended April 2, 2023 and April 3, 2022 are as follows (in thousands):
2023
2022
Bedding, blankets and accessories ....................................................................................................... $
36,747 $
45,341
Bibs, bath, developmental toy, feeding, baby care and disposable products ......................
38,306
42,019
Total net sales ................................................................................................................................. $
75,053 $
87,360
Revenue Recognition: Revenue is recognized upon the satisfaction of all contractual performance obligations and the
transfer of control of the products sold to the customer. The majority of the Company’s sales consists of single performance
obligation arrangements for which the transaction price for a given product sold is equivalent to the price quoted for the
product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the
customer to deliver a product as directed by the customer. Shipping and handling costs that are charged to customers are
included in net sales, and the Company’s costs associated with shipping and handling activities are included in cost of products
sold.
A provision for anticipated returns, which are based upon historical returns and claims, is provided through a reduction
of net sales and cost of products sold in the reporting period within which the related sales are recorded. Actual returns and
claims experienced in a future period may differ from historical experience, and thus, the Company’s provision for anticipated
returns at any given point in time may be over-funded or under-funded.
Revenue from sales made directly to consumers is recorded when the shipped products have been received by
customers, and excludes sales taxes collected on behalf of governmental entities. Revenue from sales made to retailers is
recorded when legal title has been passed to the customer based upon the terms of the customer’s purchase order, the
Company’s sales invoice, or other associated relevant documents. Such terms usually stipulate that legal title will pass when
the shipped products are no longer under the control of the Company, such as when the products are picked up at the
Company’s facility by the customer or by a common carrier. Payment terms can vary from prepayment for sales made directly
to consumers to payment due in arrears (generally, 60 days of being invoiced) for sales made to retailers.
Allowances Against Accounts Receivable: Revenue from sales made to retailers is reported net of allowances for
anticipated returns and other allowances, including cooperative advertising allowances, warehouse allowances, placement
fees, volume rebates, coupons and discounts. Such allowances are recorded commensurate with sales activity or using the
straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the results of
operations. The provision for the majority of the Company’s allowances occurs on a per-invoice basis. When a customer requests
to have an agreed-upon deduction applied against the customer’s outstanding balance due to the Company, the allowances
are correspondingly reduced to reflect such payments or credits issued against the customer’s account balance. The Company
analyzes the components of the allowances for customer deductions monthly and adjusts the allowances to the appropriate
levels. Although the timing of funding requests for advertising support can cause the net balance in the allowance account to
fluctuate from period to period, such timing has no impact on the consolidated statements of income since such costs are
accrued commensurate with sales activity or using the straight-line method, as appropriate.
Uncollectible Accounts: To reduce the exposure to credit losses and to enhance the predictability of its cash flows, the
Company assigns substantially all of its receivables under factoring agreements with CIT. In the event a factored receivable
becomes uncollectible due to creditworthiness, CIT bears the risk of loss. The Company recognizes revenue net of the amount
that is expected to be uncollectible on accounts receivable, if any, that are not assigned under the factoring agreements with
CIT. The Company’s management makes estimates of the uncollectiblity of its non-factored accounts receivable by specifically
analyzing the accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic
trends and changes in its customers’ payment terms.
Credit Concentration: The Company’s accounts receivable at 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 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 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
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balance outstanding under the revolving line of credit. The combined amount of $22.6 million represents the maximum loss
that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements and the
revolving line of credit.
Inventory Valuation: The preparation of the Company's financial statements requires careful determination of the
appropriate value of the Company's inventory balances. Such amounts are presented as a current asset in the accompanying
consolidated balance sheets and are a direct determinant of cost of products sold in the accompanying consolidated
statements of income and, therefore, have a significant impact on the amount of net income reported in the accounting
periods. The basis of accounting for inventories is cost, which includes the direct supplier acquisition cost, duties, taxes and
freight, and the indirect costs to design, develop, source and store the product until it is sold. Once cost has been determined,
the Company’s inventory is then stated at the lower of cost or net realizable value, with cost determined using the first-in, first-
out (“FIFO”) method, which assumes that inventory quantities are sold in the order in which they are acquired.
The determination of the indirect charges and their allocation to the Company’s finished goods inventories is complex
and requires significant management judgment and estimates. If management made different judgments or utilized different
estimates, then differences would result in the valuation of the Company’s inventories and in the amount and timing of the
Company’s cost of products sold and the resulting net income for the reporting period.
On a periodic basis, management reviews its inventory quantities on hand for obsolescence, physical deterioration,
changes in price levels and the existence of quantities on hand which may not reasonably be expected to be sold within the
Company’s normal operating cycle. To the extent that any of these conditions is believed to exist or the market value of the
inventory expected to be realized in the ordinary course of business is otherwise no longer as great as its carrying value, an
allowance against the inventory value is established. To the extent that this allowance is established or increased during an
accounting period, an expense is recorded in cost of products sold in the Company’s consolidated statements of income. Only
when inventory for which an allowance has been established is later sold or is otherwise disposed is the allowance reduced
accordingly. Significant management judgment is required in determining the amount and adequacy of this allowance. In the
event that actual results differ from management’s estimates or these estimates and judgments are revised in future periods,
the Company may not fully realize the carrying value of its inventory or may need to establish additional allowances, either of
which could materially impact the Company’s financial position and results of operations.
Leases: The Company capitalizes most of its operating lease obligations as right-of-use assets and recognizes
corresponding lease liabilities. The Company elects to use the practical expedient that permits the Company to exclude short-
term agreements of less than 12 months from capitalization. The Company is a party to various operating leases for offices,
warehousing facilities and certain office equipment. The leases expire at various dates, have varying options to renew and
cancel, and may contain escalation provisions. The Company recognizes as expense non-variable lease payments ratably over
the lease term. The key estimates for the Company’s leases include the discount rate used to discount the unpaid lease payment
to present value and the lease term. The Company’s leases generally do not include a readily determinable implicit rate;
therefore, management determined the incremental borrowing rate to discount the lease payment based on the information
available at lease commencement. For purposes of such estimates, a lease term includes the noncancellable period under the
applicable lease.
Depreciation and Amortization: The accompanying consolidated balance sheets reflect property, plant and equipment,
and certain intangible assets at cost less accumulated depreciation or amortization. The Company capitalizes additions and
improvements and expenses maintenance and repairs as incurred. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, which are three to eight years for property, plant and
equipment, and five to twenty years for intangible assets other than goodwill. The Company amortizes improvements to its
leased facilities over the term of the lease or the estimated useful life of the asset, whichever is shorter.
Patent Costs: The Company incurs certain legal and related costs in connection with patent applications. The Company
capitalizes such costs to be amortized over the expected life of the patent to the extent that an economic benefit is anticipated
from the resulting patent or an alternative future use is available to the Company. The Company also capitalizes legal and other
costs incurred in the protection or defense of the Company’s patents when it is believed that the future economic benefit of
the patent will be maintained or increased and a successful defense is probable. Capitalized patent defense costs are amortized
over the remaining expected life of the related patent. The Company’s evaluation of future economic benefit of its patents
involves considerable management judgment, and a different conclusion could result in a material impairment charge up to
the carrying value of these assets.
Valuation of Long-Lived Assets and Identifiable Intangible Assets: In addition to the depreciation and amortization
procedures set forth above, the Company reviews for impairment long-lived asset groups and certain identifiable intangible
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asset groups whenever events or changes in circumstances indicate that the carrying amount of any asset group may not be
recoverable. In the event of an impairment, the asset is written down to its fair value.
Royalty Payments: The Company has entered into 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
consolidated statements of income and amounted to $5.2 million and $6.0 million for fiscal years 2023 and 2022, respectively.
Provision for Income Taxes: The Company’s provision for income taxes includes all currently payable federal, state, local
and foreign taxes and is based upon the Company’s effective tax rate, which is based on the Company’s pre-tax income, as
adjusted for certain expenses within the consolidated statements of income that will never be deductible on the Company’s
tax returns and certain charges expected to be deducted on the Company’s tax returns that will never be deducted on the
consolidated statements of income, multiplied by the statutory tax rates for the various jurisdictions in which the Company
operates and reduced by certain anticipated tax credits. 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; taxable years open to examination as of April 3, 2022 were the fiscal years ended April 2, 2023, April 3, 2022, March
28, 2021, March 29, 2020, March 31, 2019 and April 1, 2018.
Management evaluates items of income, deductions and credits reported on the Company’s various federal and state
income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are
more likely than not to be sustained. The Company applies the provisions of accounting guidelines that require a minimum
recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income
tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs.
After considering all relevant information regarding the calculation of the state portion of its income tax provision, the
Company believes that the technical merits of the tax position that the Company has taken with respect to state apportionment
percentages would more likely than not be sustained. However, the Company also realizes that the ultimate resolution of such
tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position
taken. Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages
resulted in the Company recording discrete reserves for unrecognized tax liabilities during fiscal years 2023 and 2022 of $73,000
and $59,000, respectively, in the accompanying consolidated statements of income.
The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized tax
liabilities as a charge to interest expense in the Company’s consolidated statements of income. During fiscal years 2023 and
2022, the Company accrued $45,000 and $50,000, respectively, for interest expense and penalties on the portion of the
unrecognized tax liabilities for which the relevant statute of limitations remained unexpired.
In August 2020, the Company received notification from the Franchise Tax Board of the State of California (the “FTB”)
of its intention to examine the Company’s California consolidated income tax returns that the Company had filed 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 (“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, 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 accompanying consolidated financial statements, the Company recorded the effect
of the Settlement Agreement in the accompanying consolidated balance sheet as of April 2, 2023 and the consolidated
statement of income for fiscal year 2023. The Company’s adjustment to its reserve for unrecognized tax liabilities associated
with the tax returns under examination resulted in a discrete income tax benefit during fiscal year 2023, net of the impact of
federal income tax, of $81,000, and a net decrease to interest expense of $86,000.
In February 2021, the Company was notified by the U.S. Internal Revenue Service (the “IRS”) that it had selected for
examination the Company’s original and amended federal consolidated income tax returns that the Company had filed for its
fiscal year ended April 2, 2017. On March 15, 2023, the Company agreed to accept the proposal by the IRS to disallow the
Company’s claim for refund in the amount of $81,000 that was associated with the Company’s amended federal consolidated
income tax return for the fiscal year ended April 2, 2017, which amount was recorded as a discrete income tax charge during
fiscal year 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
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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.
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 consolidated statements of income and
amounted to $422,000 and $408,000 for fiscal years 2023 and 2022, respectively.
Business Combinations: The Company accounts for acquisitions using the acquisition method of accounting in
accordance with FASB ASC Topic 805, Business Combinations. An acquisition is accounted for as a purchase and the appropriate
account balances and operating activities are recorded in the Company's consolidated financial statements as of the acquisition
date and thereafter. Assets acquired, liabilities assumed and noncontrolling interests, if any, are measured at fair value as of the
acquisition date using the appropriate valuation method. The Company may engage an independent third party to assist with
these measurements. Goodwill resulting from an acquisition is recognized for the excess of the purchase price over the fair
value of the tangible and identifiable intangible assets, less the liabilities assumed.
Earnings Per Share: The Company calculates basic earnings per share by using a weighted average of the number of
shares outstanding during the reporting periods. Diluted shares outstanding are calculated in accordance with the treasury
stock method, which assumes that the proceeds from the exercise of all exercisable options would be used to repurchase shares
at market value. The net number of shares issued after the exercise proceeds are exhausted represents the potentially dilutive
effect of the exercisable options, which are added to basic shares to arrive at diluted shares.
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. Because the
Company assigns substantially all of its trade accounts receivable under factoring agreements with CIT, 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 ASU’s issued which had become effective as of June 15, 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 3 – Inventories
Major classes of inventory were as follows (in thousands):
April 2, 2023
April 3, 2022
Raw Materials ............................................................................................................................... $
1 $
28
Finished Goods ...........................................................................................................................
34,210
20,625
Total inventory ....................................................................................................................... $
34,211 $
20,653
Note 4 – Acquisition
On the Closing Date, the Company completed the Manhattan Acquisition for a purchase price of $17.0 million, subject
to adjustments for cash as of the Closing Date and to the extent that actual net working capital as of the Closing Date differs
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from target net working capital of $13.75 million. The Manhattan Acquisition was funded with cash available on the Closing
Date and borrowings under the Company’s revolving line of credit with CIT.
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 settlement of the working capital acquired and 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 following table represents the Company’s
preliminary allocation of the acquisition cost (in thousands) to the identifiable assets acquired and the liabilities assumed based
on their respective estimated fair values as of the acquisition 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 ...........................................................................................................................................................................
12,965
Prepaid expenses ..............................................................................................................................................................
350
Other assets .........................................................................................................................................................................
91
Operating lease right of use assets .............................................................................................................................
1,009
Property, plant and equipment ...................................................................................................................................
194
Total tangible assets .................................................................................................................................................................
18,991
Amortizable intangible assets:
Tradename ..........................................................................................................................................................................
300
Licensing relationships ...................................................................................................................................................
200
Customer relationships ...................................................................................................................................................
800
Total amortizable intangible assets .....................................................................................................................................
1,300
Goodwill ........................................................................................................................................................................................
787
Total acquired assets ................................................................................................................................................................
21,078
Liabilities assumed:
Accounts payable..............................................................................................................................................................
1,984
Accrued wages and benefits .........................................................................................................................................
370
Operating lease liabilities, current ..............................................................................................................................
226
Other accrued liabilities ..................................................................................................................................................
308
Operating lease liabilities, noncurrent ......................................................................................................................
783
Total liabilities assumed...........................................................................................................................................................
3,671
Net acquisition cost .......................................................................................................................................................... $
17,407
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 has recognized $787,000 of goodwill, the
entirety of which has been assigned to the reporting unit of the Company that produces and markets infant and toddler bibs,
developmental toys, bath care and disposable products, and the entirety of which is expected to be deductible for income tax
purposes.
The Manhattan Acquisition resulted in net sales of $773,000 of developmental toy, feeding and baby care products
during fiscal year 2023. Amortization is computed for the acquired amortizable intangible assets 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.
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The Company has determined, on a pro forma basis, that the combined net sales of the Company and Manhattan,
giving effect to the Manhattan Acquisition as if it had been completed on March 29, 2021, is $100.8 million and $115.8 million
for fiscal years 2023 and 2022, respectively, and the combined net income for fiscal years 2023 and 2022 is $2.8 million and $9.1
million, respectively. These amounts combine the net sales and net income (or loss, as applicable) from the Company’s
consolidated statements of income for fiscal years 2023 and 2022 with the respective amounts from Manhattan’s consolidated
statements of operations for its fiscal years ended December 31, 2022 and December 31, 2021, respectively. The combined
amounts of net income or loss include 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 5 – Carousel Designs
During the first 54 days of fiscal year 2022, Carousel 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 approved the closure of
Carousel due to its high costs, declining sales and operating and cash flow 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 fiscal year ended April 3, 2022, Carousel experienced a gross loss of $689,000, which was the result of the
sale of inventory below cost and 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.
Note 6 - 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.
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, 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 consolidated statements of income, were $287,000 and $344,000 during fiscal
years 2023 and 2022, respectively. There were no advances on the factoring agreements at April 2, 2023 or April 3, 2022.
Credit Facility: The Company’s credit facility at April 2, 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, bearing interest at the rate
of prime minus 0.5% or the Secured Overnight Financing Rate (“SOFR”) plus 1.6%, and which is secured by a first lien on all
assets of the Company.
The financing agreement was scheduled to mature on July 11, 2025, but on March 17, 2023 the financing agreement
was amended to extend the maturity date to July 11, 2028. As of April 2, 2023, the Company had elected to pay interest on
balances owed under the revolving line of credit, if any, under the SOFR option, which was 6.4%. The financing agreement also
provides for the payment by CIT to the Company of interest on daily negative balances, if any, held by CIT at the rate of prime
as of the beginning of the calendar month minus 2.0%, which was 6.0% as of April 2, 2023.
As of April 2, 2023, there was a balance of $12.7 million owed on the revolving line of credit, there was no letter of
credit outstanding and $20.0 million was available under the revolving line of credit based on the Company’s eligible accounts
receivable and inventory balances. As of 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 April 2, 2023.
F-14
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 bore a 1.0% interest rate.
As authorized by the provisions of the CARES Act, the Company applied to the Lender for forgiveness 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 2022, 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 consolidated statements of income.
Note 7 – Retirement Plan
The Company sponsors a defined contribution retirement savings plan with a cash or deferred arrangement (the
“401(k) Plan”), as provided by Section 401(k) of the Internal Revenue Code (the “Code”). The 401(k) Plan covers substantially all
employees, who may elect to contribute a portion of their compensation to the 401(k) Plan, subject to maximum amounts and
percentages as prescribed in the Code. Each calendar year, the Board determines the portion, if any, of employee contributions
that will be matched by the Company.
For calendar years 2023, 2022 and 2021, the Board established the employer matching contributions at 100% of the
first 2% of employee contributions and 50% of the next 3% of employee contributions to the 401(k) Plan. If an employee
separates from the Company prior to the full vesting of the funds in their account, then the unvested portion of the matching
employer amount in their account is forfeited when the employee receives a distribution from their account. The Company
utilizes such forfeitures as an offset to the aggregate matching contributions. The Company's matching contributions to the
401(k) Plan, net of the utilization of forfeitures, were $293,000 and $289,000 for fiscal years 2023 and 2022, respectively.
Note 8 – Goodwill, Customer Relationships and Other Intangible Assets
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, developmental toys, bath care and disposable products. The goodwill of the reporting
units of the Company as of April 2, 2023 and April 3, 2022 amounted to $30.8 million and $30.0 million, respectively, which is
reflected in the accompanying consolidated balance sheets net of accumulated impairment charges of $22.9 million, for a net
reported balance of $7.9 million and $7.1 million as of April 2, 2023 and April 3, 2022, respectively.
The amount of goodwill reported by the Company increased by $787,000 during fiscal year 2023, which amount
represents the excess of the purchase price over the preliminary determination of the fair value of net identifiable assets
acquired in the Manhattan Acquisition. The goodwill recognized from the Manhattan Acquisition has been assigned to the
reporting unit of the Company that produces and markets infant and toddler bibs, developmental toys, bath care and
disposable products.
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 the annual measurement for impairment of the goodwill of its reporting
units and concluded that the estimated fair value of each of the Company’s reporting units exceeded their carrying values, and
thus the goodwill of the Company’s reporting units was not impaired as of that date.
F-15
Other Intangible Assets: Other intangible assets as of April 2, 2023 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 April 2, 2023 and April 3, 2022, the amortization
expense for fiscal years ended April 2, 2023 and April 3, 2022 and the classification of such amortization expense within the
accompanying consolidated statements of income are as follows (in thousands):
Gross Amount
Accumulated
Amortization
Amortization Expense
Fiscal Year Ended
April 2,
April 3,
April 2,
April 3,
April 2,
April 3,
2023
2022
2023
2022
2023
2022
Tradename and trademarks ........ $
2,867 $
2,567 $
2,025 $
1,885 $
140 $
163
Non-compete covenants ..............
98
98
98
98
-
5
Patents ................................................
1,601
1,601
1,055
1,003
52
52
Customer relationships .................
8,174
7,374
6,289
6,000
289
289
Licensing relationships ..................
200
-
-
-
-
-
Total other intangible
assets ...................................... $
12,940 $
11,640 $
9,467 $
8,986 $
481 $
509
Classification within the accompanying consolidated statements of income:
Cost of products sold ............
$
- $
5
Marketing and
administrative expenses .
481
505
Total amortization
expense ........................
$
481 $
509
The Company estimates that its amortization expense will be $591,000, $527,000, $412,000, $385,000 and $385,000 in
fiscal years 2024, 2025, 2026, 2027 and 2028, respectively.
Note 9 – Leases
During fiscal year 2023, the Company capitalized operating lease obligations as right of use assets and recognized
corresponding lease liabilities in the amount of $17.3 million, and entered into no such transactions during fiscal year 2022. The
Company made cash payments related to its recognized operating leases of $2.3 million and $1.9 million during the fiscal years
ended April 2, 2023 and April 3, 2022, respectively. Such payments reduced the operating lease liabilities and were included in
the cash flows provided by operating activities in the accompanying 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 $224,000 and $131,000 during the fiscal years ended April 2, 2023 and April 2, 2022, respectively. As of April 2, 2023 and April
3, 2022, the Company’s operating leases have weighted-average discount rates of 5.9% and 3.6%, respectively, and weighted-
average remaining lease terms of 5.0 years and 1.8 years, respective.
During the fiscal years ended April 2, 2023 and April 3, 2022, the Company classified its operating lease costs within
the accompanying consolidated statements of income as follows (in thousands):
2023
2022
Cost of products sold ..................................................................................................................... $
1,938 $
1,598
Marketing and administrative expenses .................................................................................
183
164
Total operating lease costs ............................................................................................ $
2,121 $
1,762
The maturities of the Company’s operating lease liabilities as of April 2, 2023 are as follows (in thousands):
Fiscal Year
April 2, 2023
2024 ................................................................................................................................................................................................ $
3,396
2025 ................................................................................................................................................................................................
4,027
2026 ................................................................................................................................................................................................
4,108
2027 ................................................................................................................................................................................................
4,086
2028 ................................................................................................................................................................................................
3,952
2029 ................................................................................................................................................................................................
663
Total undiscounted operating lease payments...............................................................................................................
20,232
Less imputed interest ...............................................................................................................................................................
2,916
Operating lease liabilities - net ......................................................................................................................................... $
17,316
F-16
Note 10 – 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.
The Company believes that awards of long-term, equity-based incentive compensation will attract and retain
directors, officers and employees of the Company and will encourage these individuals to contribute to the successful
performance of the Company, which will lead to the achievement of the Company’s overall goal of increasing stockholder value.
Awards granted under the 2021 Plan may be in the form of incentive stock options, non-qualified stock options, shares of
restricted or unrestricted stock, stock units, stock appreciation rights, or other stock-based awards. Awards may be granted
subject to the achievement of performance goals or other conditions, and certain awards may be payable in stock or cash, or a
combination of the two. The 2021 Plan is administered by the Compensation Committee of the Board, which selects eligible
employees, non-employee directors and other individuals to participate in the 2021 Plan and determines the type, amount,
duration (such duration not to exceed a term of ten (10) years for grants of stock options) and other terms of individual awards.
At April 2, 2023, 765,000 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.
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. During fiscal years 2023 and
2022, the Company recorded $1.1 million and $834,000 of stock-based compensation, 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 April 2, 2023.
Stock Options: The following table represents stock option activity for fiscal years 2023 and 2022:
2023
2022
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)
7.72
(70,000)
Forfeited ..............................................................................................................
-
-
4.84
(20,000)
Outstanding at End of Period .......................................................................
7.32
735,500
7.39
635,500
Exercisable at End of Period .........................................................................
7.40
536,500
7.50
390,000
As of April 2, 2023, the intrinsic value of both the outstanding and exercisable stock options was $87,000. The intrinsic
value of the stock options exercised during the fiscal years ended April 2, 2023 and April 3, 2022 was $127,000 and $541,000,
respectively. The Company did not receive any cash from the exercise of stock options during fiscal years 2023 or 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 $10,000 and $67,000 during fiscal years 2023 and 2022, respectively.
As of April 3, 2022, the intrinsic value of the outstanding and exercisable stock options was $205,000 and $126,000, respectively.
F-17
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 awarded to certain employees during fiscal
years 2023 and 2022, which options vest over a two-year period, assuming continued service.
Fiscal Year Ended
April 2, 2023
April 3, 2022
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..........................................................................................................................
2.950%
0.530%
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
For the fiscal years ended April 2, 2023 and April 3, 2022, the Company recognized compensation expense associated
with stock options as follows (in thousands):
Fiscal Year Ended April 2, 2023
Cost of
Marketing &
Products
Administrative
Total
Options Granted in Fiscal Year
Sold
Expenses
Expense
2021 ............................................................................................. $
4 $
41 $
45
2022 .............................................................................................
40
86
126
2023 .............................................................................................
17
24
41
Total stock option compensation........................................................ $
61 $
151 $
212
Fiscal Year Ended April 3, 2022
Cost of
Marketing &
Products
Administrative
Total
Options Granted in Fiscal Year
Sold
Expenses
Expense
2020 ............................................................................................. $
3 $
4 $
7
2021 .............................................................................................
14
64
78
2022 .............................................................................................
30
66
96
Total stock option compensation........................................................ $
47 $
134 $
181
A summary of stock options outstanding and exercisable as of April 2, 2023 is as follows:
Weighted-
Weighted-
Weighted-
Avg. Exercise
Avg. Exercise
Number
Avg. Remaining
Price of
Number
Price of
Exercise
of Options
Contractual
Options
of Options
Options
Price
Outstanding
Life in Years
Outstanding
Exercisable
Exercisable
$4.00 - 4.99
95,000
6.72
$4.84
95,000
$4.84
$5.00 - 5.99
20,000
5.20
$5.90
20,000
$5.90
$6.00 - 6.99
130,000
8.49
$6.51
10,000
$6.14
$7.00 - 7.99
365,500
6.25
$7.74
286,500
$7.67
$8.00 - 8.99
55,000
2.20
$8.38
55,000
$8.38
$9.00 - 9.99
70,000
3.18
$9.60
70,000
$9.60
735,500
5.63
$6.39
536,500
$5.45
F-18
As of April 2, 2023, total unrecognized stock-option compensation costs amounted to $98,000, which will be
recognized as the underlying stock options vest over a weighted-average period of 5.8 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 employee or director who has 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)
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.
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.
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 Mr. Kirschner’s death 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.
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
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 and February 2023, 45,000 shares
and 10,000 shares, respectively, that had been granted to certain of the Company’s employees vested, having an aggregate
value of $293,000 and $57,000, respectively.
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.
F-19
For the fiscal years ended April 2, 2023 and April 3, 2022, the Company recognized compensation expense associated
with non-vested stock grants, which is included in marketing and administrative expenses in the accompanying consolidated
statements of income, as follows (in thousands):
Stock Granted in Fiscal Year
2023
2022
2020 .............................................................................................................................. $
- $
40
2021 ..............................................................................................................................
48
207
2022 ..............................................................................................................................
576
406
2023 ..............................................................................................................................
269
-
Total stock grant compensation ........................................................................................... $
893 $
653
As of April 2, 2023, total unrecognized compensation expense related to the Company’s non-vested stock grants was
$561,000, which will be recognized over the remaining portion of the respective vesting periods associated with each block of
grants, such grants having a weighted average vesting term of 11.3 months. The amount of future compensation expense
related to 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 unearned or unvested grants as of such individual’s separation date.
Note 11 – Income Taxes
The Company’s income tax provision for the fiscal years ended April 2, 2023 and April 3, 2022 is summarized below (in
thousands):
Fiscal year ended April 2, 2023
Current
Deferred
Total
Income tax expense (benefit) on current year income:
Federal ...................................................................................................... $
1,540 $
(169) $
1,371
State...........................................................................................................
381
(36)
345
Foreign .....................................................................................................
10
-
10
Total income tax expense (benefit) on current year income .....
1,931
(205)
1,726
Income tax expense (benefit) - discrete items:
Reserve for unrecognized tax benefits .........................................
(7)
-
(7)
Adjustment to prior year provision ................................................
51
-
51
Net tax shortfall related to stock-based compensation ..........
6
-
6
Income tax expense - discrete items ..................................................
50
-
50
Total income tax expense (benefit) .................................................... $
1,981 $
(205) $
1,776
Fiscal year ended April 3, 2022
Current
Deferred
Total
Income tax expense on current year income:
Federal ...................................................................................................... $
542 $
1,398 $
1,940
State...........................................................................................................
194
328
522
Foreign .....................................................................................................
11
-
11
Total income tax expense on current year income .......................
747
1,726
2,473
Income tax expense (benefit) - discrete items:
Reserve for unrecognized tax benefits .........................................
59
-
59
Adjustment to prior year provision ................................................
(41)
-
(41)
Net excess tax benefit related to stock-based
compensation ....................................................................................
(83)
-
(83)
Income tax benefit - discrete items ....................................................
(65)
-
(65)
Total income tax expense ...................................................................... $
682 $
1,726 $
2,408
F-20
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities as of April 2, 2023 and April 3, 2022 are as follows (in thousands):
April 2, 2023
April 3, 2022
Deferred tax assets:
Employee wage and benefit accruals .................................................................................. $
186 $
495
Accounts receivable and inventory reserves ....................................................................
557
414
Operating lease liabilities ........................................................................................................
4,286
654
Intangible assets .........................................................................................................................
224
322
State net operating loss carryforwards ...............................................................................
706
755
Accrued interest and penalty on unrecognized tax liabilities ....................................
54
43
Stock-based compensation ....................................................................................................
378
289
Total gross deferred tax assets ..........................................................................................
6,391
2,972
Less valuation allowance .....................................................................................................
(706)
(755)
Deferred tax assets after valuation allowance .............................................................
5,685
2,217
Deferred tax liabilities:
Prepaid expenses ........................................................................................................................
(610)
(607)
Operating lease right of use assets ......................................................................................
(4,283)
(600)
Intangible assets .........................................................................................................................
(1,390)
(1,725)
Property, plant and equipment .............................................................................................
(217)
(305)
Total deferred tax liabilities ................................................................................................
(6,500)
(3,237)
Net deferred income tax liabilities ................................................................................... $
(815) $
(1,020)
In assessing the probability that the Company’s deferred tax assets will be realized, management of the Company has
considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of taxable income during the future periods in which the
temporary differences giving rise to the deferred tax assets will become deductible. The Company has also considered the
scheduled inclusion into taxable income in future periods of the temporary differences giving rise to the Company’s deferred
tax liabilities. The valuation allowance as of April 2, 2023 and April 3, 2022 was related to state net operating loss carryforwards
that the Company does not expect to be realized. Based upon the Company’s expectations of the generation of sufficient
taxable income during future periods, the Company believes that it is more likely than not that the Company will realize its
deferred tax assets, net of the valuation allowance and the deferred tax liabilities.
The following table sets forth the reconciliation of the beginning and ending amounts of unrecognized tax liabilities
for fiscal years 2023 and 2022 (in thousands):
2023
2022
Balance at beginning of period .................................................................................................. $
739 $
630
Additions related to current year positions ...........................................................................
73
59
Additions related to prior year positions ................................................................................
45
50
Revaluations due to change in enacted tax rates ................................................................
-
-
Reductions for tax positions of prior years .............................................................................
-
-
Reductions due to lapses of the statute of limitations ......................................................
-
-
Reductions pursuant to judgements and settlements ......................................................
(534)
-
Balance at end of period ............................................................................................................... $
323 $
739
In August 2020, the Company was notified by the FTB of its intention to examine the Company’s California
consolidated 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 the Settlement Agreement to resolve 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, 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 accompanying consolidated financial statements, the
Company recorded the effect of the Settlement Agreement in the accompanying consolidated balance sheet as of April 2, 2023
and the consolidated statement of income for fiscal year 2023. The Company’s adjustment to its reserve for unrecognized tax
liabilities associated with the tax returns under examination resulted in a discrete income tax benefit during fiscal year 2023,
net of the impact of federal income tax, of $81,000, and a net decrease to interest expense of $86,000.
F-21
In February 2021, the Company was notified by the IRS that it had selected for examination the Company’s original
and amended federal consolidated income tax returns that the Company had filed for its fiscal year ended April 2, 2017. On
March 15, 2023, the Company agreed to accept the proposal by the IRS to disallow the Company’s claim for refund in the
amount of $81,000 that was associated with the Company’s amended federal consolidated income tax return for the fiscal year
ended April 2, 2017, which amount was recorded as a discrete income tax charge during fiscal year 2023.
During the fiscal year ended April 2, 2023, the Company recorded a discrete income tax charge of $6,000 to reflect the
effect of the excess tax shortfall arising from the exercise of stock options and the vesting of non-vested stock during the period.
During the fiscal year ended April 3, 2022, the Company recorded a discrete income tax benefit of $83,000 to reflect the effect
during the period of the excess tax benefit from the exercise of stock options and the vesting of non-vested stock.
The Company’s provision for income taxes is based upon effective tax rates of 23.9% and 19.5% in fiscal years 2023
and 2022, respectively. These effective tax rates are the sum of the top U.S. statutory federal income tax rate and a composite
rate for state income taxes, net of federal tax benefit, in the various states in which the Company operates, plus the net effect
of various discrete items.
The following table reconciles income tax expense on income from continuing operations at the U.S. federal income
tax statutory rate to the net income tax provision reported for fiscal years 2023 and 2022 (in thousands):
2023
2022
Federal statutory rate ....................................................................................................................
21% $
21%
Tax expense at federal statutory rate ....................................................................................... $
1,560
2,588
State income taxes, net of Federal income tax benefit......................................................
272
413
Tax credits ..........................................................................................................................................
(135)
(136)
Discrete items ...................................................................................................................................
50
(65)
Tax effect of book income not includible for tax purposes ..............................................
-
(486)
Other - net, including foreign .....................................................................................................
29
94
Income tax expense ....................................................................................................................... $
1,776 $
2,408
Note 12 – Shareholders’ Equity
Dividends: The holders of shares of the Company’s common stock are entitled to receive dividends when and as
declared by the Board. Aggregate cash dividends of $0.32 and $0.67 per share, amounting to $3.2 million and $6.7 million, were
declared during fiscal years 2023 and 2022, respectively. Cash dividends declared during fiscal year 2022 included a special cash
dividend of $0.35 per share. There were no special dividends declared during fiscal year 2023. The Company’s financing
agreement with CIT permits the payment by the Company of cash dividends on its common stock without limitation, provided
there is no default before or as a result of the payment of such dividends.
Stock Repurchases: The Company acquired treasury shares by way of the surrender to the Company from several
employees shares of common stock to satisfy the exercise price and income tax withholding obligations relating to the exercise
of stock options and the vesting of stock. In this manner, the Company acquired 33,000 treasury shares during the fiscal year
ended April 2, 2023 at a weighted-average market value of $6.31 per share and acquired 53,000 treasury shares during the fiscal
year ended April 3, 2022 at a weighted-average market value of $7.72 per share.
Note 13 – Major Customers
The table below sets forth those customers that represented more than 10% of the Company’s gross sales during fiscal
years ended April 2, 2023 and April 3, 2022.
Fiscal Year
2023
2022
Walmart Inc. .................................................................................................................................
51%
52%
Amazon.com, Inc. .......................................................................................................................
20%
21%
Note 14 – Commitments and Contingencies
Total royalty expense amounted to $5.2 million and $6.0 million for fiscal years 2023 and 2022, respectively. The
Company’s commitment for minimum guaranteed royalty payments under its license agreements as of April 2, 2023 is $3.7
F-22
million, consisting of $2.7 million, $811,000, $121,000, $48,000 and $48,000 due in fiscal years 2024, 2025, 2026, 2027 and 2028,
respectively.
The Company is, from time to time, involved in various legal 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 legal proceeding the outcome of
which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial position, results
of operations or cash flows.
Note 15 – Subsequent Events
On May 30, 2023, the Company and the FTB entered into the Settlement Agreement to resolve the FTB’s proposed
assessment of additional income tax to the Company’s consolidated income tax returns for the fiscal years ended April 2, 2017,
April 1, 2018 and March 31, 2019. Because the examination was ongoing as of April 2, 2023, and because the Settlement
Agreement was entered into prior to the issuance of the accompanying consolidated financial statements, the Company
recorded the effect of the Settlement Agreement in the accompanying consolidated balance sheet as of April 2, 2023 and the
consolidated statement of income for fiscal year 2023.
The Company has evaluated events that have occurred between April 2, 2023 and the date that the accompanying
financial statements were issued, and has determined that there are no other material subsequent events that require
disclosure.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: June 23, 2023
By: /s/ Olivia W. Elliott
Olivia W. Elliott
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures
Title
Date
/s/ Olivia W. Elliott
President, Chief Executive Officer and Director
June 23, 2023
Olivia W. Elliott
(Principal Executive Officer)
/s/ Craig J. Demarest
Vice President and Chief Financial Officer
(Principal Financial Officer and
June 23, 2023
Craig J. Demarest
Principal Accounting Officer)
/s/ Zenon S. Nie
Chairman of the Board of Directors
June 23, 2023
Zenon S. Nie
/s/ Michael Benstock
Director
June 23, 2023
Michael Benstock
/s/ Donald Ratajczak
Director
June 23, 2023
Donald Ratajczak
/s/ Patricia Stensrud
Director
June 23, 2023
Patricia Stensrud
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CORPORATE INFORMATION
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