crws20221002

crws20221002_10q.htm

[UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 2, 2022

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

For the transition period from _____to_____

Commission File No. 1-7604

Crown Crafts, Inc.

(Exact name of registrant as specified in its charter)

Delaware		58-0678148
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)


916 South Burnside Avenue, Gonzales, LA		70737
(Address of principal executive offices)		(Zip Code)

(225) 647-9100

Registrant’s telephone number, including area code

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CRWS	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the

Exchange Act.

Large accelerated filer ☐			Accelerated filer ☐
Non-Accelerated filer ☑			Smaller Reporting Company ☑
			Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

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

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROWN CRAFTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

	October 2, 2022		April 3, 2022

*ASSETS*
Current assets:
Cash and cash equivalents	$	2,342	$	1,598
Accounts receivable (net of allowances of $1,274 at October 2, 2022 and $945 at April 3, 2022):
Due from factor		16,161		21,093
Other		1,422		2,133
Inventories		27,735		20,653
Prepaid expenses		1,143		1,031
Total current assets		48,803		46,508

Operating lease right of use assets		1,729		2,423

Property, plant and equipment - at cost:
Vehicles		182		182
Leasehold improvements		425		425
Machinery and equipment		3,822		3,581
Furniture and fixtures		378		367
Property, plant and equipment - gross		4,807		4,555
Less accumulated depreciation		3,533		3,198
Property, plant and equipment - net		1,274		1,357

Finite-lived intangible assets - at cost:
Customer relationships		7,374		7,374
Other finite-lived intangible assets		4,266		4,266
Finite-lived intangible assets - gross		11,640		11,640
Less accumulated amortization		9,227		8,986
Finite-lived intangible assets - net		2,413		2,654

Goodwill		7,125		7,125
Other		88		88
Total Assets	$	61,432	$	60,155

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	6,770		$	6,375
Accrued wages and benefits		985			2,196
Accrued royalties		666			462
Dividends payable		809			827
Operating lease liabilities, current		1,357			1,832
Other accrued liabilities		99			94
Total current liabilities		10,686			11,786

Non-current liabilities:
Deferred income taxes		1,267			1,020
Operating lease liabilities, noncurrent		506			809
Reserve for unrecognized tax liabilities		813			739
Total non-current liabilities		2,586			2,568

Shareholders' equity:
Common stock - $0.01 par value per share; Authorized 40,000,000 shares at October 2, 2022 and April 3, 2022; Issued 13,011,814 shares at October 2, 2022 and 12,944,918 shares at April 3, 2022		130			129
Additional paid-in capital		56,613			55,925
Treasury stock - at cost - 2,894,242 shares at October 2, 2022 and 2,864,698 shares at April 3, 2022		(15,803	)		(15,614	)
Retained Earnings		7,220			5,361
Total shareholders' equity		48,160			45,801
Total Liabilities and Shareholders' Equity	$	61,432		$	60,155

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(amounts in thousands, except per share amounts)

	Three-Month Periods Ended						Six-Month Periods Ended
	October 2, 2022			September 26, 2021			October 2, 2022		September 26, 2021

Net sales	$	18,726		$	20,220		$	34,436	$	38,932
Cost of products sold		13,280			14,152			23,837		28,208
Gross profit		5,446			6,068			10,599		10,724
Marketing and administrative expenses		2,736			3,164			6,149		6,530
Income from operations		2,710			2,904			4,450		4,194
Other (expense) income:
Interest income - net of interest expense		4			(3	)		1		(16	)
Gain on extinguishment of debt		-			-			-		1,985
Gain on insurance proceeds received for damage to equipment		-			-			34		-
Gain (loss) on sale of property, plant and equipment		-			(3	)		2		(3	)
Other - net		(3	)		80			124		92
Income before income tax expense		2,711			2,978			4,611		6,252
Income tax expense		671			592			1,137		1,201
Net income	$	2,040		$	2,386		$	3,474	$	5,051

Weighted average shares outstanding:
Basic		10,094			10,053			10,085		10,028
Effect of dilutive securities		22			41			22		43
Diluted		10,116			10,094			10,107		10,071

Earnings per share -- basic and diluted	$	0.20		$	0.24		$	0.34	$	0.50

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

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

	Common Shares				Treasury Shares						Additional					Total
	Number of Shares		Amount		Number of Shares			Amount			Paid-in Capital		Retained Earnings			Shareholders' Equity
	(Dollar amounts in thousands)

	Three-Month Periods
Balances - June 27, 2021		12,864,753	$	129		(2,834,434	)	$	(15,381	)	$	55,024	$	4,054		$	43,826

Issuance of shares		60,165		-		-			-			103		-			103
Stock-based compensation		-		-		-			-			208		-			208
Acquisition of treasury stock		-		-		(15,412	)		(117	)		-		-			(117	)
Net income		-		-		-			-			-		2,386			2,386
Dividend declared on common stock - $0.08 per share		-		-		-			-			-		(806	)		(806	)

Balances - September 26, 2021		12,924,918	$	129		(2,849,846	)	$	(15,498	)	$	55,335	$	5,634		$	45,600

Balances - July 3, 2022		12,959,918	$	130		(2,890,165	)	$	(15,776	)	$	56,331	$	5,989		$	46,674

Issuance of shares		51,896		-		-			-			24		-			24
Stock-based compensation		-		-		-			-			258		-			258
Acquisition of treasury stock		-		-		(4,077	)		(27	)		-		-			(27	)
Net income		-		-		-			-			-		2,040			2,040
Dividend declared on common stock - $0.08 per share		-		-		-			-			-		(809	)		(809	)

Balances - October 2, 2022		13,011,814	$	130		(2,894,242	)	$	(15,803	)	$	56,613	$	7,220		$	48,160

	Six-Month Periods
Balances - March 28, 2021		12,809,753	$	128		(2,811,446	)	$	(15,202	)	$	54,748	$	2,191		$	41,865

Issuance of shares		115,165		1		-			-			247		-			248
Stock-based compensation		-		-		-			-			340		-			340
Acquisition of treasury stock		-		-		(38,400	)		(296	)		-		-			(296	)
Net income		-		-		-			-			-		5,051			5,051
Dividends declared on common stock - $0.16 per share		-		-		-			-			-		(1,608	)		(1,608	)

Balances - September 26, 2021		12,924,918	$	129		(2,849,846	)	$	(15,498	)	$	55,335	$	5,634		$	45,600

Balances - April 3, 2022		12,944,918	$	129		(2,864,698	)	$	(15,614	)	$	55,925	$	5,361		$	45,801

Issuance of shares		66,896		1		-			-			97		-			98
Stock-based compensation		-		-		-			-			591		-			591
Acquisition of treasury stock		-		-		(29,544	)		(189	)		-		-			(189	)
Net income		-		-		-			-			-		3,474			3,474
Dividends declared on common stock - $0.16 per share		-		-		-			-			-		(1,615	)		(1,615	)

Balances - October 2, 2022		13,011,814	$	130		(2,894,242	)	$	(15,803	)	$	56,613	$	7,220		$	48,160

CROWN CRAFTS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(amounts in thousands)

	Six-Month Periods Ended
	October 2, 2022			September 26, 2021
Operating activities:
Net income	$	3,474		$	5,051
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment		335			311
Amortization of intangibles		241			259
Amortization of right of use assets		884			893
Deferred income taxes		247			277
Gain on extinguishment of debt		-			(1,985	)
Gain on insurance proceeds received for damage to equipment		(34	)		-
(Gain) loss on sale of property, plant and equipment		(2	)		3
Reserve for unrecognized tax liabilities		74			71
Stock-based compensation		591			340
Changes in assets and liabilities:
Accounts receivable		5,643			853
Inventories		(7,082	)		(3,899	)
Prepaid expenses		(112	)		468
Other assets		-			3
Lease liabilities		(969	)		(984	)
Accounts payable		370			1,916
Accrued liabilities		(1,002	)		(383	)
Net cash provided by operating activities		2,658			3,194
Cash used in investing activities:
Capital expenditures for property, plant and equipment		(227	)		(273	)
Insurance proceeds received for damage to equipment		34			-
Proceeds from sale of property, plant and equipment		2			20
Net cash used in investing activities		(191	)		(253	)
Financing activities:
Repayments under revolving line of credit		-			(5,809	)
Borrowings under revolving line of credit		-			5,809
Purchase of treasury stock from related parties		(189	)		(296	)
Issuance of common stock		98			248
Dividends paid		(1,632	)		(1,602	)
Net cash used in financing activities		(1,723	)		(1,650	)
Net increase in cash and cash equivalents		744			1,291
Cash and cash equivalents at beginning of period		1,598			613
Cash and cash equivalents at end of period	$	2,342		$	1,904

Supplemental cash flow information:
Income taxes paid	$	23		$	932
Interest paid		5			6

Noncash activities:
Property, plant and equipment purchased but unpaid		(25	)		(44	)
Dividends declared but unpaid		(809	)		(806	)

CROWN CRAFTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1 – Interim Financial Statements

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

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

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

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

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

Note 2 – Advertising Costs

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

Note 3 – Segment and Related Information

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

	Three-Month Periods Ended				Six-Month Periods Ended
	October 2, 2022		September 26, 2021		October 2, 2022		September 26, 2021
Bedding, blankets and accessories	$	9,503	$	11,101	$	17,001	$	21,058
Bibs, toys and disposables products		9,223		9,119		17,435		17,874
Total net sales	$	18,726	$	20,220	$	34,436	$	38,932

Note 4 – Licensing Agreements

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

Note 5 – Income Taxes

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

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

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

Note 6 – Carousel Designs

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

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

Note 7 – Financing Arrangements

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

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

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

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

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

Paycheck Protection Program Loan: On April 19, 2020, the Company executed a Note (the “Note”) in connection with a loan made pursuant to the Paycheck Protection Program (the “PPP Loa

SEC Form 10-Q filed by Crown Crafts Inc