CROWN CRAFTS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS CROWN CRAFTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 29, 2024 (UNAUDITED) AND MARCH 31, 2024 (amounts in thousands, except share and per share amounts) December 29, 2024 March 31, 2024 ASSETS Current assets: Cash and cash equivalents $ 1,053 $ 829 Accounts receivable (net of allowances of $ 1,266 at December 29, 2024 and $ 1,486 at March 31, 2024): Due from factor 21,749 18,584 Other 3,753 3,819 Inventories 32,376 29,709 Prepaid expenses 2,908 1,883 Total current assets 61,839 54,824 Operating lease right of use assets 12,987 14,949 Property, plant and equipment - at cost: Leasehold improvements 502 493 Machinery and equipment 5,722 5,062 Furniture and fixtures 477 477 Property, plant and equipment - gross 6,701 6,032 Less accumulated depreciation 4,877 4,376 Property, plant and equipment - net 1,824 1,656 Finite-lived intangible assets - at cost: Customer relationships 8,174 8,174 Other finite-lived intangible assets 10,286 4,766 Finite-lived intangible assets - gross 18,460 12,940 Less accumulated amortization 10,640 10,068 Finite-lived intangible assets - net 7,820 2,872 Goodwill 13,255 7,926 Deferred income taxes 762 277 Other 254 202 Total Assets $ 98,741 $ 82,706 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,643 $ 4,502 Accrued wages and benefits 1,194 813 Accrued royalties 1,272 290 Dividends payable 869 843 Operating lease liabilities, current 3,895 3,587 Other accrued liabilities 536 426 Current maturities of long-term debt 1,990 - Total current liabilities 18,399 10,461 Non-current liabilities: Long-term debt 18,870 8,112 Operating lease liabilities, noncurrent 9,923 12,138 Reserve for unrecognized tax liabilities 473 394 Total non-current liabilities 29,266 20,644 Shareholders' equity: Common stock - $ 0.01 par value per share; Authorized 40,000,000 shares at December 29, 2024 and March 31, 2024; Issued 13,299,402 shares at December 29, 2024 and 13,208,226 shares at March 31, 2024 132 132 Additional paid-in capital 58,459 57,888 Treasury stock - at cost - 2,905,661 shares at December 29, 2024 and 2,897,507 at March 31, 2024 ( 15,860 ) ( 15,821 ) Retained Earnings 8,345 9,402 Total shareholders' equity 51,076 51,601 Total Liabilities and Shareholders' Equity $ 98,741 $ 82,706 See notes to unaudited condensed consolidated financial statements. 1 CROWN CRAFTS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE- AND NINE-MONTH PERIODS ENDED DECEMBER 29, 2024 AND DECEMBER 31, 2023 (amounts in thousands, except per share amounts) Three-Month Periods Ended Nine-Month Periods Ended December 29, 2024 December 31, 2023 December 29, 2024 December 31, 2023 Net sales $ 23,351 $ 23,801 $ 64,023 $ 65,053 Cost of products sold 17,253 17,367 47,002 47,281 Gross profit 6,098 6,434 17,021 17,772 Marketing and administrative expenses 4,397 4,107 14,108 12,189 Income from operations 1,701 2,327 2,913 5,583 Other (expense) income: Interest expense - net of interest income ( 391 ) ( 208 ) ( 840 ) ( 560 ) Gain (loss) on sale or disposition of property, plant and equipment ( 2 ) 58 ( 2 ) 58 Other - net ( 33 ) 17 ( 55 ) ( 9 ) Income before income tax expense 1,275 2,194 2,016 5,072 Income tax expense 382 492 585 1,182 Net income $ 893 $ 1,702 $ 1,431 $ 3,890 Weighted average shares outstanding: Basic 10,394 10,241 10,353 10,198 Effect of dilutive securities - - 1 2 Diluted 10,394 10,241 10,354 10,200 Earnings per share - basic and diluted $ 0.09 $ 0.17 $ 0.14 $ 0.38 See notes to unaudited condensed consolidated financial statements. 2 CROWN CRAFTS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY THREE- AND NINE-MONTH PERIODS ENDED DECEMBER 29, 2024 AND DECEMBER 31, 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) Three-Month Periods Balances - October 1, 2023 13,138,226 $ 131 ( 2,897,507 ) $ ( 15,821 ) $ 57,509 $ 8,334 $ 50,153 Issuance of shares - - - - - - - Stock-based compensation - - - - 190 - 190 Acquisition of treasury stock - - - - - - - Net income - - - - - 1,702 1,702 Dividend declared on common stock - $ 0.08 per share - - - - - ( 820 ) ( 820 ) Balances - December 31, 2023 13,138,226 $ 131 ( 2,897,507 ) $ ( 15,821 ) $ 57,699 $ 9,216 $ 51,225 Balances - September 29, 2024 13,299,402 $ 132 ( 2,905,661 ) $ ( 15,860 ) $ 58,279 $ 8,284 $ 50,835 Issuance of shares - - - - - - - Stock-based compensation - - - - 180 - 180 Acquisition of treasury stock - - - - - - - Net income - - - - - 893 893 Dividend declared on common stock - $ 0.08 per share - - - - - ( 832 ) ( 832 ) Balances - December 29, 2024 13,299,402 $ 132 ( 2,905,661 ) $ ( 15,860 ) $ 58,459 $ 8,345 $ 51,076 Nine-Month Periods Balances - April 2, 2023 13,051,814 $ 131 ( 2,897,507 ) $ ( 15,821 ) $ 57,126 $ 7,778 $ 49,214 Issuance of shares 86,412 - - - - - - Stock-based compensation - - - - 573 - 573 Acquisition of treasury stock - - - - - - - Net income - - - - - 3,890 3,890 Dividend declared on common stock - $ 0.24 per share - - - - - ( 2,452 ) ( 2,452 ) Balances - December 31, 2023 13,138,226 $ 131 ( 2,897,507 ) $ ( 15,821 ) $ 57,699 $ 9,216 $ 51,225 Balances - March 31, 2024 13,208,226 $ 132 ( 2,897,507 ) $ ( 15,821 ) $ 57,888 $ 9,402 $ 51,601 Issuance of shares 91,176 - - - - - - Stock-based compensation - - - - 571 - 571 Acquisition of treasury stock - - ( 8,154 ) ( 39 ) - - ( 39 ) Net income - - - - - 1,431 1,431 Dividends declared on common stock - $ 0.24 per share - - - - - ( 2,488 ) ( 2,488 ) Balances - December 29, 2024 13,299,402 $ 132 ( 2,905,661 ) $ ( 15,860 ) $ 58,459 $ 8,345 $ 51,076 See notes to unaudited condensed consolidated financial statements. 3 CROWN CRAFTS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE-MONTH PERIODS ENDED DECEMBER 29, 2024 AND DECEMBER 31, 2023 (amounts in thousands) Nine-Month Periods Ended December 29, 2024 December 31, 2023 Operating activities: Net income $ 1,431 $ 3,890 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 501 647 Amortization of intangibles 574 451 Reduction in the carrying amount of right of use assets 3,458 3,208 Deferred income taxes ( 485 ) ( 1,106 ) (Gain) loss on sale or disposition of property, plant and equipment 2 ( 58 ) Reserve for unrecognized tax liabilities 79 56 Stock-based compensation 571 573 Changes in assets and liabilities: Accounts receivable 665 765 Inventories ( 678 ) ( 1,112 ) Prepaid expenses ( 671 ) ( 1,130 ) Other assets ( 52 ) ( 14 ) Lease liabilities ( 3,330 ) ( 2,497 ) Accounts payable 3,528 ( 113 ) Accrued liabilities 1,401 542 Net cash provided by operating activities 6,994 4,102 Cash used in investing activities: Capital expenditures for property, plant and equipment ( 659 ) ( 662 ) Proceeds from sale of property, plant and equipment - 105 Payment to acquire Baby Boom ( 16,355 ) - Aggregate adjustment from the Manhattan and MTE acquisition - 488 Net cash used in investing activities ( 17,014 ) ( 69 ) Financing activities: Repayments under revolving line of credit ( 59,774 ) ( 55,099 ) Borrowings under revolving line of credit 65,387 52,440 Payments on term loan ( 833 ) - Proceeds from term loan, net of issuance cost 7,964 - Shares withheld to pay taxes on stock compensation ( 39 ) - Dividends paid ( 2,461 ) ( 2,433 ) Net cash provided by (used in) financing activities 10,244 ( 5,092 ) Net increase (decrease) in cash and cash equivalents 224 ( 1,059 ) Cash and cash equivalents at beginning of period 829 1,742 Cash and cash equivalents at end of period $ 1,053 $ 683 Supplemental cash flow information: Income taxes paid $ 629 $ 1,628 Interest paid 693 650 Noncash activities: Property, plant and equipment purchased but unpaid ( 12 ) ( 9 ) Dividends declared but unpaid ( 869 ) ( 833 ) See notes to unaudited condensed consolidated financial statements. 4 CROWN CRAFTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE- AND NINE-MONTH PERIODS ENDED DECEMBER 29, 2024 AND DECEMBER 31, 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 December 29, 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 - and nine -month periods ended December 29, 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 is evaluating the guidance of ASU No. 2023 - 07 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. In November 2024, the FASB issued ASU No. 2024 - 03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220 - 40 ) - Disaggregation of Income Statement Expenses, the objective of which is to enhance the transparency and usefulness of financial statements by requiring public business entities to provide more detailed disclosures about their expenses. The amendments in ASU No. 2024 - 03 are required to be adopted for annual reporting periods beginning after December 15, 2026, and for interim periods within annual reporting periods beginning after December 15, 2027, and early adoption is permitted. The Company is evaluating the guidance of the ASU No. 2024 - 03 against its existing disclosures related to income statement expenses. The Company has determined that all other ASUs issued which had become effective as of December 29, 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. Note 2 – Advertising Costs Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income and amounted to $ 151,000 and $ 267,000 for the three months ended December 29, 2024 and December 31, 2023, respectively, and amounted to $ 411,000 and $ 631,000 for the nine months ended December 29, 2024 and December 31, 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, diaper bags, bibs, toys and disposable products. Net sales of bedding and diaper bags and net sales of bibs, toys and disposable products for the three - and nine - month periods ended December 29, 2024 and December 31, 2023 are as follows (in thousands): Three-Month Periods Ended Nine-Month Periods Ended December 29, 2024 December 31, 2023 December 29, 2024 December 31, 2023 Bedding and diaper bags $ 11,184 $ 8,996 $ 29,431 $ 24,345 Bibs, toys and disposable products 12,167 14,805 34,592 40,708 Total net sales $ 23,351 $ 23,801 $ 64,023 $ 65,053 Note 4 – Licensing Agreements The Company has entered into licensing agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalty amounts are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold in the accompanying unaudited condensed consolidated statements of income and amounted to $ 1.7 million and $ 1.3 million for the three months ended December 29, 2024 and December 31, 2023, respectively, and amounted to $ 4.5 and $ 3.8 million for the nine months ended December 29, 2024 and December 31, 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 December 29, 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 December 29, 2024 and March 31, 2024, the Company’s balances of inventory were $ 32.4 million and $ 29.7 million, respectively, nearly all of which were finished goods. Note 7 – Acquisition 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. (“Baby Boom”) (the "Acquisition”), for a purchase price of $ 18.0 million in cash, subject to a dollar-for-dollar adjustment to the extent that the working capital at closing was greater or less than the target working capital of approximately $ 6.5 million. The Acquisition was funded by the Company using the proceeds of an $ 8.0 million term loan from The CIT Group/Commercial Services, Inc. (“CIT”) and additional borrowings under the Company’s revolving line of credit with CIT. The Acquisition has been accounted for in accordance with FASB ASC Topic 805, Business Combinations . The Company is currently determining the allocation of the acquisition cost with the assistance of an independent third party. The identifiable assets acquired were recorded at their estimated fair value, which has been preliminarily determined based on available information and the use of multiple valuation approaches. The estimated useful lives of the identifiable intangible assets acquired were determined based upon the remaining time that these assets are expected to directly or indirectly contribute to the future cash flow of the Company. Certain data necessary to complete the acquisition cost allocation is not yet available, including the final appraisals and valuations of the assets acquired and liabilities assumed. 6 The acquisition cost paid on the Closing Date amounted to $ 16.4 million, which included an estimate for the net working capital adjustment. 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 Closing Date. The excess of the acquisition cost over the estimated fair value of the identifiable net assets acquired is reflected as goodwill. Tangible assets: Accounts receivable 3,764 Inventories 1,989 Prepaid expenses and other current assets 354 Total tangible assets 6,107 Amortizable intangible assets: Tradename 420 Licensing relationships 5,100 Total amortizable intangible assets 5,520 Goodwill 5,329 Total acquired assets 16,956 Liabilities assumed: Accounts payable 601 Total liabilities assumed 601 Net acquisition cost $ 16,355 The Company expects to complete the acquisition cost allocation during the 12 -month period following the Closing Date, during which time the values of the assets acquired and liabilities assumed, including the goodwill, may need to be revised as appropriate. Based upon the preliminary allocation of the acquisition cost, the Company recognized $ 5.3 million of goodwill as of the Closing Date, the entirety of which was assigned to the reporting unit of the Company that produces and markets infant and toddler bedding and diaper bags, and the entirety of which is expected to be deductible for income tax purposes. The goodwill recognized primarily consists of synergies expected from combining operations of Baby Boom and the Company and intangible assets acquired that do not qualify for separate recognition. During the three -month period ended December 29, 2024, the Company increased the amount of goodwill recognized by $ 10,000 for the resolution of pre-acquisition accounts payable. The assets acquired in the Acquisition generated net sales of $ 3.8 million of bedding and diaper bag products for the three -month period ended December 29, 2024, and net sales of $ 7.2 million of bedding and diaper bag products for the period from the Closing Date to December 29, 2024. Amortization expense associated with the acquired amortizable intangible assets was $ 99,000 and $ 164,000 during the three and nine months ended December 29, 2024, respectively, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income. Amortization is computed using the straight-line method over the estimated useful lives of the assets, which are 15 years for the tradename, 14 years for the customer and licensing relationships and 14 years on a weighted-average basis for the grouping taken together. The Company has determined, on a pro forma basis, that the combined net sales and the combined net income of the Company and Baby Boom, giving effect to the Acquisition as if it had been completed on April 3, 2023, would have been $ 69.1 million and $ 2.0 million, respectively, for the nine -month period ended December 29, 2024. The combined net sales and the combined net income would have been $ 29.3 million and $ 1.7 million, respectively, for the three -month period ended December 31, 2023, and would have been $ 81.7 million and $ 3.9 million, respectively, for the nine -month period ended December 31, 2023. The combined net income includes adjustments related to the amortization of the amortizable intangible assets acquired and estimates of the interest expense and income tax expense or benefit that would have been incurred, but otherwise do not reflect the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any revenue, tax or other synergies that may result from the Acquisition. 7 Note 8 – Financing Arrangements Factoring Agreements: To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to CIT, 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 income, amounted to $ 115,000 and $ 106,000 for the three -month periods ended December 29, 2024 and December 31, 2023, respectively, and amounted to $ 283,000 and $ 265,000 for the nine -month periods ended December 29, 2024 and December 31, 2023, respectively. Credit Facility: The Company’s credit facility includes a revolving line of credit and a term loan of $ 8.0 million under a financing agreement with CIT. The Company may borrow up to $ 40 million under the revolving line of credit, 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 December 29, 2024, the Company had elected to pay interest on balances owed under the revolving line of credit under the SOFR option, which was 6.1 %. 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. At December 29, 2024 and March 31, 2024, the balances on the revolving line of credit were $ 13.7 million and $ 8.1 million, respectively, there was no letter of credit outstanding and $ 15.3 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’s credit facility as of December 29, 2024 includes an $ 8.0 million term loan, issued July 19, 2024, which is payable by the Company in 48 equal monthly installments and bears interest at SOFR plus 2.25 % ( 6.7 % at December 29, 2024). The balances on the term loan as of December 29, 2024 was $ 7.2 million, including $ 2.0 million classified as current. On January 2, 2025, the Company and its subsidiaries entered into a letter agreement with CIT with respect to the financing agreement, pursuant to which CIT waived the Company's non-compliance with the fixed charge coverage ratio required under the financing agreement with respect to the Company's fiscal quarters ended September 29, 2024 and December 29, 2024. In addition, the letter agreement modified the financing agreement by changing the Excess Availability (as defined in the Financing Agreement) required to be maintained by the Company with respect to its revolving credit line under the financing agreement to $ 7,000,000 (from 50% of the outstanding balance of the Company's term loan under the financing agreement). Upon notice to the Company, CIT may reverse such modification. Credit Concentration: The Company’s accounts receivable at December 29, 2024 amounted to $ 25.5 million, net of allowances of $ 1.3 million. Of this amount, $ 21.7 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 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. 8 Note 9 – Goodwill Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations. For the purpose of presenting and measuring for the impairment of goodwill, the Company has two reporting units: one that produces and markets infant and toddler bedding and diaper bags and another that produces and markets infant and toddler bibs, toys 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 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 10 – Concentrations 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 foreign representative offices located in Shanghai and Shenzhen, China, which are responsible for the coordination of production, purchases and shipments, seeking out new vendors and overseeing inspections for social compliance and quality. No supplier represented at least 10% of the Company’s total suppliers. 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 2024, which included 24 % of sales under the Company’s license agreements with affiliated companies of The Walt Disney Company, which expire as set forth below: License Agreement Expiration Infant Bedding March 31, 2025 Infant Feeding and Bath December 31, 2025 Toddler Bedding March 31, 2025 Marvel March 31, 2025 STAR WARS Toddler Bedding March 31, 2025 STAR WARS - Lego Plush December 31, 2025 The Company is currently negotiating with Disney with respect to the licenses set to terminate on March 31, 2025, and anticipates that they will be extended. 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 for the nine months ended December 29, 2024. 2025 Walmart Inc. 44 % Amazon.com, Inc. 18 % 9 Note 11 – Subsequent Events On February 10, 2025, the Company and CIT amended the Company's financing agreement with CIT to: (i) waive, with respect to the fiscal year ending March 30, 2025, and through the fiscal year ending March 29, 2026, the Company's obligation to comply with the fixed charge coverage ratio; and (ii) increase the Excess Availability (as defined in the financing agreement) required to be maintained by the Company with respect to its revolving line of credit under the financing agreement from $ 7,000,000 to $ 7,500,000 , until further notice to the Company by CIT. After such notice, the Excess Availability shall be 50% of the outstanding balance of the Company's term loan under the financing agreement. The Company has evaluated all other events which have occurred between December 29, 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.