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 nine-month periods months ended January 1,July 2, 2023 and December 26, 2021July 3, 2022 are as follows (in thousands):

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$977,000 and $1.5$1.1 million for the three months-month periods ended January 1,July 2, 2023 and December 26, 2021, respectively, and amounted to $3.5 million and $4.2 million for the nine months ended January 1, 2023 and December 26, 2021,July 3, 2022, respectively.

Note 5 – Income Taxes

The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to examination or other adjustment as of January 1,July 2, 2023 were the fiscal years ended April 2, 2023, April 3, 2022, March 28, 2021, March 29, 2020 and March 31, 2019, April 1, 2018 and April 2, 2017.2019.

In August 2020, the Company was notified by the Franchise Tax Board of the State of California (the “FTB”) of its intention to examine the Company’s California income tax returns for the fiscal years ended March 31, 2019,April 2, 2017, April 1, 2018 and April 2, 2017.March 31, 2019. Further, inOn February 2021,May 30, 2023, the Company and the FTB entered into an agreement to settle (the “Settlement Agreement”) the FTB’s proposed assessment of additional income tax in respect of these consolidated income tax returns under examination for the amount of $442,000, which included interest expense of $86,000, payment of which was notifiedmade by the U.S. Internal Revenue ServiceCompany to the FTB on May 31, 2023. Because the examination was ongoing as of its intentionApril 2, 2023, and because the Settlement Agreement was entered into prior to examine the Company’s amended federal income tax returnissuance of the consolidated financial statements as of and for the fiscal year ended April 2, 2017.2023, The ultimate resolutionthe Company recorded the effect of these examinations could include administrative or legal proceedings. the Settlement Agreement in the consolidated balance sheet as of April 2, 2023 and the consolidated statement of income for the fiscal year ended April 2, 2023.

Although management believes that the calculations and positions taken on these income tax returns and all otherits filed income tax returns are reasonable and justifiable, the outcome of these or any otheran examination could result in an adjustment to the position that the Company took on such income tax returns.

The Company recorded discrete Such adjustment could also lead to adjustments to one or more other state income tax chargesreturns, 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 $6,000 during the nine-month period ended January 1, 2023, andsuch adjustments, the Company recorded discretecould 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 benefitsreturns under examination are sustained, the reversal of $11,000 and $83,000 during the three- and nine-month periods ended December 26, 2021, respectively, to reflect the net effectsall or a portion of the excessCompany’s reserve for unrecognized tax benefits and tax shortfalls arising from the exerciseliabilities could result in a favorable impact on its future results of stock options and the vesting of non-vested stock during the periods.operations.

Note 6 – Carousel DesignsInventories

Major classes of inventory were as follows (in thousands):

Note 7– Acquisition

On March 17, 2023 (the “Closing Date”), the Company acquired Manhattan Group, LLC (“Manhattan”) and Manhattan Toy Europe Limited (“MTE”), Manhattan’s wholly-owned subsidiary (the “Manhattan Acquisition”), for a purchase price of $17.0 million, subject to adjustments for cash at the Closing Date and to the extent that actual net working capital as of the Closing Date differs from target net working capital of $13.75 million. The 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 this acquisition cost (in thousands) to the identifiable assets acquired and the liabilities assumed based on their respective estimated fair values as of the Closing Date. The excess of the acquisition cost over the estimated fair value of the identifiable net assets acquired is reflected as goodwill.

The Company expects to complete the acquisition cost allocation during the 12-month period following the Closing Date, during which time the values of the assets acquired and liabilities assumed, including the goodwill, may need to be revised as appropriate. Based upon the preliminary allocation of the acquisition cost, the Company recognized $787,000 of goodwill as of the Closing Date, the entirety of which was assigned to the reporting unit of the Company that produces and markets infant and toddler bibs, developmental toys, feeding, bath care and disposable products, and the entirety of which is expected to be deductible for income tax purposes. During the three-month period ended July 2, 2023, the Company increased the amount of goodwill recognized to $794,000 for the resolution of pre-acquisition accounts payable.

The Manhattan Acquisition resulted in net sales of $3.7 million of developmental toy, feeding and baby care products during the three-month period ended July 2, 2023. Manhattan recorded amortization expense associated with the acquired amortizable intangible assets of $25,000 during the three-month period ended July 2, 2023, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of incomeincome. Amortization is computed using the straight-line method over the estimated useful lives of the assets, which are 15 years for the three-tradename, 10 years for the customer and nine-month periods ended December 26, 2021 include income, expenseslicensing relationships and losses associated with11 years on a weighted-average basis for the operating activities of Carousel Designs, LLC (“Carousel”),grouping taken together.

The Company has determined, on a wholly-owned subsidiarypro forma basis, 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, decliningcombined net 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 nine-month periods ended December 26, 2021, Carousel experienced a gross loss of $1,000 and $689,000, respectively. The gross loss was the resultcombined net income of the sale of inventory below costCompany and Manhattan, giving effect to the Manhattan Acquisition as if it had been completed on April 4, 2022, would have been $22.7 million and $732,000, respectively, for the three-month period ended June 27, 2021July 3, 2022. and the nine-month period ended December 26, 2021, the recognition of charges of $334,000The combined net income includes adjustments 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 closureamortization of the business.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 78 – Financing Arrangements

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

CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation occurs, then the Company either assumes (and may seek to mitigate) the credit risk for shipments to the customer after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, amounted to $77,000$67,000 and $99,000$68,000 for the three-month periods ended January 1,July 2, 2023 and December 26, 2021, respectively, and amounted to $224,000 and $248,000 for the nine-month periods ended January 1, 2023 and December 26, 2021,July 3, 2022, respectively.

Credit Facility:   The Company’s credit facility as of January 1,July 2, 2023 consisted of a revolving line of credit under a financing agreement with CIT of up to $26.0$35.0 million, which includes a $1.5 million sub-limit for letters of credit. The financing agreement matures on July 11, 2025,2028, bears interest at prime minus 1.0%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 January 1,July 2, 2023, the Company had elected to pay interest on balances owed under the revolving line of credit if any, under the SOFR option.option, which was 6.7%. 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%, which was 5.5% as of January 1, 2023, on daily negative balances, if any, held at CIT.

As of January 1,July 2, 2023 and April 3, 2022,2, 2023, there was no balancethe balances owed on the revolving line of credit were $6.5 million and $12.7 million, respectively, there was no letter of credit outstanding and $26.0$20.7 million and $20.0 million, respectively, was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances. The financing agreement contains usual and customary covenants for agreements of that type, including limitations on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or consolidation transactions, transactions with affiliates, and changes in or amendments to the organizational documents for the Company and its subsidiaries. The Company believes it was in compliance with these covenants as of January 1,July 2, 2023.

Credit Concentration: The Company’s accounts receivable as of January 1,July 2, 2023 amounted to $18.9$15.8 million, net of allowances of $2.1 million. Of this amount, $11.5 million was due from CIT under the factoring agreements, which represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements. The Company’s accounts receivable as of April 2, 2023 amounted to $22.8 million, net of allowances of $1.5 million. Of this amount, $17.2$20.7 million was due from CIT under the factoring agreements; an additional amount of $1.7 million was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $18.9 millionagreements, which represented the maximum loss that the Company could have incurred as of January 1, 2023 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 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 accrued interest at 1.0% per year.

As authorized by the provisions of the CARES Act, the Company applied to the Lender for forgiveness of all or a portion 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 the three months ended June 27, 2021, 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 unaudited condensed consolidated statements of income.agreements.