CROWN CRAFTS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS CROWN CRAFTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2024 (UNAUDITED) AND MARCH 31, 2024 (amounts in thousands, except share and per share amounts) June 30, 2024 March 31, 2024 ASSETS Current assets: Cash and cash equivalents $ 1,103 $ 829 Accounts receivable (net of allowances of $ 1,631 at June 30, 2024 and $ 1,486 at March 31, 2024): Due from factor 11,224 18,584 Other 4,598 3,819 Inventories 30,610 29,709 Prepaid expenses 1,503 1,883 Total current assets 49,038 54,824 Operating lease right of use assets 14,071 14,949 Property, plant and equipment - at cost: Leasehold improvements 535 493 Machinery and equipment 5,354 5,062 Furniture and fixtures 477 477 Property, plant and equipment - gross 6,366 6,032 Less accumulated depreciation 4,560 4,376 Property, plant and equipment - net 1,806 1,656 Finite-lived intangible assets - at cost: Customer relationships 8,174 8,174 Other finite-lived intangible assets 4,766 4,766 Finite-lived intangible assets - gross 12,940 12,940 Less accumulated amortization 10,216 10,068 Finite-lived intangible assets - net 2,724 2,872 Goodwill 7,926 7,926 Deferred income taxes 581 277 Other 213 202 Total Assets $ 76,359 $ 82,706 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,727 $ 4,502 Accrued wages and benefits 662 813 Accrued royalties 354 290 Dividends payable 858 843 Operating lease liabilities, current 3,663 3,587 Other accrued liabilities 354 426 Total current liabilities 12,618 10,461 Non-current liabilities: Long-term debt 1,466 8,112 Operating lease liabilities, noncurrent 11,217 12,138 Reserve for unrecognized tax liabilities 402 394 Total non-current liabilities 13,085 20,644 Shareholders' equity: Common stock - $ 0.01 par value per share; Authorized 40,000,000 shares at June 30, 2024 and March 31, 2024; Issued 13,208,226 shares at June 30, 2024 and March 31, 2024 132 132 Additional paid-in capital 58,090 57,888 Treasury stock - at cost - 2,897,507 shares at June 30, 2024 and March 31, 2024 ( 15,821 ) ( 15,821 ) Retained Earnings 8,255 9,402 Total shareholders' equity 50,656 51,601 Total Liabilities and Shareholders' Equity $ 76,359 $ 82,706 See notes to unaudited condensed consolidated financial statements. 1 CROWN CRAFTS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 (amounts in thousands, except per share amounts) Three-Month Periods Ended June 30, 2024 July 2, 2023 Net sales $ 16,212 $ 17,123 Cost of products sold 12,246 12,381 Gross profit 3,966 4,742 Marketing and administrative expenses 4,263 4,046 (Loss) income from operations ( 297 ) 696 Other (expense) income: Interest expense - net of interest income ( 101 ) ( 188 ) Other income (expense) - net 12 ( 2 ) (Loss) income before income tax expense ( 386 ) 506 Income tax (benefit) expense ( 64 ) 140 Net (loss) income $ ( 322 ) $ 366 Weighted average shares outstanding: Basic 10,311 10,154 Effect of dilutive securities - 9 Diluted 10,311 10,163 Basic (loss) earnings per share $ ( 0.03 ) $ 0.04 Diluted (loss) earnings per share $ ( 0.03 ) $ 0.04 See notes to unaudited condensed consolidated financial statements. 2 CROWN CRAFTS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 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 - April 2, 2023 13,051,814 $ 131 ( 2,897,507 ) $ ( 15,821 ) $ 57,126 $ 7,778 $ 49,214 Stock-based compensation - - - - 191 - 191 Net income - - - - - 366 366 Dividend declared on common stock - $ 0.08 per share - - - - - ( 812 ) ( 812 ) Balances - July 2, 2023 13,051,814 $ 131 ( 2,897,507 ) $ ( 15,821 ) $ 57,317 $ 7,332 $ 48,959 Balances - March 31, 2024 13,208,226 $ 132 ( 2,897,507 ) $ ( 15,821 ) $ 57,888 $ 9,402 $ 51,601 Stock-based compensation - - - - 202 - 202 Net loss - - - - - ( 322 ) ( 322 ) Dividends declared on common stock - $ 0.08 per share - - - - - ( 825 ) ( 825 ) Balances - June 30, 2024 13,208,226 $ 132 ( 2,897,507 ) $ ( 15,821 ) $ 58,090 $ 8,255 $ 50,656 See notes to unaudited condensed consolidated financial statements. 3 CROWN CRAFTS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 (amounts in thousands) Three-Month Periods Ended June 30, 2024 July 2, 2023 Operating activities: Net (loss) income $ ( 322 ) $ 366 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation of property, plant and equipment 184 217 Amortization of intangibles 148 146 Reduction in the carrying amount of right of use assets 1,136 1,037 Deferred income taxes ( 304 ) ( 324 ) Reserve for unrecognized tax liabilities 8 14 Stock-based compensation 202 191 Changes in assets and liabilities: Accounts receivable 6,581 7,016 Inventories ( 901 ) ( 3,513 ) Prepaid expenses 380 201 Other assets ( 11 ) - Lease liabilities ( 1,103 ) ( 424 ) Accounts payable 2,174 1,632 Accrued liabilities ( 159 ) ( 210 ) Net cash provided by operating activities 8,013 6,349 Investing activities: Capital expenditures for property, plant and equipment ( 284 ) ( 355 ) Net cash used in investing activities ( 284 ) ( 355 ) Financing activities: Repayments under revolving line of credit ( 21,329 ) ( 20,427 ) Borrowings under revolving line of credit 14,683 14,262 Dividends paid ( 809 ) ( 806 ) Net cash used in financing activities ( 7,455 ) ( 6,971 ) Net increase (decrease) in cash and cash equivalents 274 ( 977 ) Cash and cash equivalents at beginning of period 829 1,742 Cash and cash equivalents at end of period $ 1,103 $ 765 Supplemental cash flow information: Income taxes paid $ 11 $ 357 Interest paid 92 268 Noncash activities: Property, plant and equipment purchased but unpaid ( 51 ) ( 8 ) Dividends declared but unpaid ( 858 ) ( 821 ) See notes to unaudited condensed consolidated financial statements. 4 CROWN CRAFTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 Note 1 – Interim Financial Statements Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of Crown Crafts, Inc. (the “Company”) and its subsidiaries and have been prepared pursuant to accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information as promulgated by the Financial Accounting Standards Board (“FASB”). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. References herein to GAAP are to topics within the FASB Accounting Standards Codification (the “FASB ASC”), which the FASB periodically revises through the issuance of an Accounting Standards Update (“ASU”) and which has been established by the FASB as the authoritative source for GAAP recognized by the FASB to be applied by nongovernmental entities. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of June 30, 2024 and the results of its operations and cash flows for the periods presented. Such adjustments include normal, recurring accruals, as well as the elimination of all significant intercompany balances and transactions. Operating results for the three -months ended June 30, 2024 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending March 30, 2025. For further information, refer to the Company’s consolidated financial statements and notes thereto for the fiscal year ended March 31, 2024, included in the Company’s Annual Report on Form 10 -K filed with the United States Securities and Exchange Commission (the “SEC”). Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2025” or “2025” represent the 52 -week period ending March 30, 2025 and references herein to “fiscal year 2024” or “2024” represent the 52 -week period ended March 31, 2024. Recently-Issued Accounting Standards: In November 2023, the FASB issued ASU No. 2023 - 07, Segment Reporting (Topic 280 ) – Improvements to Reportable Segment Disclosures , the objective of which is to improve the disclosures about a public entity’s reportable segments by providing more detailed information about a reportable segment’s expenses. For disclosures associated with annual and interim periods, the amendments in ASU No. 2023 - 07 are required to be adopted for fiscal years beginning after December 15, 2023 and December 15, 2024, respectively, and early adoption is permitted. Upon adoption, a public entity must apply the amendments in ASU No. 2023 - 07 retrospectively to disclosures of all prior periods presented. The Company has adopted ASU No. 2023 - 07 effective as of April 1, 2024 and is evaluating the guidance of the ASU against its existing disclosures related to segment reporting In December 2023, the FASB issued ASU No. 2023 - 09, Income Taxes (Topic 740 ) – Improvements to Income Tax Disclosures , the objective of which is to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU No. 2023 - 09 are required to be adopted for fiscal years beginning after December 15, 2024 and early adoption is permitted. The Company is evaluating the guidance of the ASU No. 2023 - 09 against its existing disclosures related to income tax disclosures. The Company has determined that all other ASUs issued which had become effective as of June 30, 2024, or which will become effective at some future date, are not expected to have a material impact on the Company’s consolidated financial statements. Earnings (Loss) Per Share: Due to the net loss incurred by the Company in the three -month period ended June 30, 2024, diluted shares used in the calculation of the diluted loss per share represented basic shares because the inclusion of the potentially dilutive effect of the exercisable stock options would have resulted in anti-dilution. Note 2 – Advertising Costs Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and amounted to $ 127,000 and $ 192,000 for the three months ended June 30, 2024 and July 2, 2023, respectively. 5 Note 3 – Segment and Related Information The Company operates primarily in one principal segment, infant, toddler and juvenile products. These products consist of infant and toddler bedding, blankets, accessories, bibs, toys and disposable products. Net sales of bedding, blankets and accessories and net sales of bibs, toys and disposable products for the three months ended June 30, 2024 and July 2, 2023 are as follows (in thousands): Three-Month Periods Ended June 30, 2024 July 2, 2023 Bedding, blankets and accessories $ 6,251 $ 5,573 Bibs, toys and disposable products 9,961 11,550 Total net sales $ 16,212 $ 17,123 Note 4 – Licensing Agreements The Company has entered into licensing agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalty amounts are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold in the accompanying unaudited condensed consolidated statements of operations and amounted to $ 1.1 million and $ 977,000 for the three months ended June 30, 2024 and July 2, 2023, respectively. Note 5 – Income Taxes The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to examination or other adjustment as of June 30, 2024 were the fiscal years ended March 31, 2024, April 2, 2023, April 3, 2022, March 28, 2021, and March 29, 2020. Although management believes that the calculations and positions taken on its filed income tax returns are reasonable and justifiable, the outcome of an examination could result in an adjustment to the position that the Company took on such income tax returns. Such adjustment could also lead to adjustments to one or more other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the Company’s reserve for unrecognized tax liabilities is not adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent that the calculations and positions taken by the Company on the filed income tax returns under examination are sustained, the reversal of all or a portion of the Company’s reserve for unrecognized tax liabilities could result in a favorable impact on its future results of operations. Note 6 – Inventories As of June 30, 2024 and March 31, 2024, the Company’s balances of inventory were $ 30.6 million and $ 29.7 million, respectively, nearly all of which were finished goods. Note 7 – Financing Arrangements Factoring Agreements: To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to The CIT Group/Commercial Services, Inc. ("CIT"), a subsidiary of First Citizens Bank, pursuant to factoring agreements, which have expiration dates that are coterminous with that of the financing agreement described below. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. As such, the Company does not take advances on the factoring agreements. CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation occurs, then the Company either assumes (and may seek to mitigate) the credit risk for shipments to the customer after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of operations, amounted to $ 74,000 and $ 67,000 for the three -month period ended June 30, 2024 and July 2, 2023, respectively. 6 Credit Facility: The Company’s credit facility as of June 30, 2024 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 prime minus 0.5 % or the Secured Overnight Financing Rate (“SOFR”) plus 1.6 %, and is secured by a first lien on all assets of the Company. At June 30, 2024, the Company had elected to pay interest on balances owed under the revolving line of credit under the SOFR option, which was 6.9 %. The financing agreement also provides for the payment by CIT to the Company of interest at prime as of the beginning of the calendar month minus 2.0 % on daily negative balances, if any, held at CIT. The financing agreement was scheduled to mature on July 11, 2028, but was amended on July 19, 2024 to extend the maturity date to July 19, 2029 and to increase the borrowing capacity on revolving line of credit to $ 40.0 million. At June 30, 2024 and March 31, 2024, the balances on the revolving line of credit were $ 1.5 million and $ 8.1 million, respectively, there was no letter of credit outstanding and $ 17.6 million and $ 19.2 million, respectively, was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances. The financing agreement contains usual and customary covenants for agreements of that type, including limitations on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or consolidation transactions, transactions with affiliates, and changes in or amendments to the organizational documents for the Company and its subsidiaries. The Company believes it was in compliance with these covenants as of June 30, 2024. Credit Concentration: The Company’s accounts receivable at June 30, 2024 amounted to $ 15.8 million, net of allowances of $ 1.6 million. Of this amount, $ 11.2 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 March 31, 2024 amounted to $ 22.4 million, net of allowances of $ 1.5 million. Of this amount, $ 18.6 million was due from CIT under the factoring agreements, which represented the maximum loss that the Company could have incurred if CIT had failed completely to perform its obligations under the factoring agreements. Note 8 – Goodwill Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations. For the purpose of presenting and measuring for the impairment of goodwill, the Company has two reporting units: one that produces and markets infant and toddler bedding, blankets and accessories and another that produces and markets infant and toddler bibs, toys and disposable products. The Company’s reporting units have recognized goodwill as of June 30, 2024 and March 31, 2024 of $ 30.8 million, which is reflected in the accompanying condensed consolidated balance sheets net of accumulated impairment charges of $ 22.9 million, for a net reported balance of $ 7.9 million. The Company measures for impairment the goodwill within its reporting units annually as of the first day of the Company’s fiscal year. An additional interim measurement for impairment is performed during the year whenever an event or change in circumstances occurs that suggests that the fair value of either of the reporting units of the Company has more likely than not (defined as having a likelihood of greater than 50% ) fallen below its carrying value. The annual or interim measurement for impairment is performed by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such qualitative factors so indicate, then the measurement for impairment is continued by calculating an estimate of the fair value of each reporting unit and comparing the estimated fair value to the carrying value of the reporting unit. If the carrying value exceeds the estimated fair value of the reporting unit, then an impairment charge is calculated as the difference between the carrying value of the reporting unit and its estimated fair value, not to exceed the goodwill of the reporting unit. On April 1, 2024, the Company performed a qualitative assessment to determine if it is more likely than not that the fair values of the Company’s reporting units are less than their carrying values by evaluating relevant events and circumstances, including financial performance, market conditions and share price. Based on this assessment, the Company concluded that the goodwill for each of the Company’s reporting units was not considered at risk of impairment. Note 9 – Subsequent Events On July 19, 2024 ( the “Closing Date”), NoJo Baby & Kids, Inc. ("NoJo"), a wholly-owned subsidiary of the Company, acquired substantially all of the assets, and assumed certain specified liabilities, of Baby Boom Consumer Products, Inc. (the “Baby Boom Acquisition”), for a purchase price of $ 18.0 million, subject to adjustments to the extent that actual net working capital as of the Closing Date differs from target net working capital of $ 6.5 million. The purchase price was funded by the Company using proceeds of an $ 8.0 million term loan from CIT and additional borrowings under the Company’s revolving line of credit. The Company and CIT also on July 19, 2024 amended the financing agreement to (i) provide for the $ 8.0 million term loan mentioned above, which is payable by the Company in 48 equal monthly installments and which bears interest at SOFR plus 2.25%; (ii) extend the maturity date from July 11, 2028 to July 19, 2029; and (iii) increase the borrowing capacity on the revolving line of credit from $ 35.0 million to $ 40.0 million. The Company is in the process of obtaining all relevant information relating to the Baby Boom Acquisition. As a result, the Company is not able to provide certain disclosures required by FASB ASC Topic 805. The initial accounting for the acquisition was incomplete at the time of the financial statements. The Company has evaluated all other events which have occurred between June 30, 2024 and the date that the accompanying unaudited condensed consolidated financial statements were issued, and has determined that there are no other material subsequent events that require disclosure. 7