ITEM 1. FINANCIAL STATEMENTS
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE- AND NINE-MONTH PERIODS ENDED DECEMBER 26, 2021 AND DECEMBER 27, 2020
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 consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of December 26, 2021 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 months ended December 26, 2021 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending April 3, 2022. 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 March 28, 2021.
Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2022” or “2022” represent the 53-week period ending April 3, 2022 and references herein to “fiscal year 2021” or “2021” represent the 52-week period ended March 28, 2021.
Reclassifications: The Company has classified certain prior year information to conform to the amounts presented in the current year. None of the changes impact the Company’s previously reported financial position or results of operations.
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.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, the objective of which is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU amended the FASB ASC in order to improve the consistent application of, and simplify GAAP for, other areas of Topic 740 by clarifying and amending the existing guidance. The amendments contained in the ASU are required to be adopted for public entities in the first interim period of the fiscal year beginning after December 15, 2020. Accordingly, the Company adopted ASU No. 2019-12 effective as of March 29, 2021, which did not 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 December 26, 2021, 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 $105,000 and $283,000 for the three months ended December 26, 2021 and December 27, 2020, respectively, and amounted to $455,000 and $942,000 for the nine months ended December 26, 2021 and December 27, 2020, respectively.
Note 3 – Other Accrued Liabilities
Amounts of $612,000 and $215,000 were recorded as other accrued liabilities at December 26, 2021 and March 28, 2021, respectively. Of these amounts, $26,000 and $85,000 at December 26, 2021 and March 28, 2021, respectively, reflected unearned revenue recorded for payments from customers that were received before the products ordered were received by the customers.
Note 4 – 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 and blankets, bibs, soft bath products, disposable products, developmental and bath toys and accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath, developmental toy, feeding, baby care and disposable products for the three- and nine-month periods ended December 26, 2021 and December 27, 2020 are as follows (in thousands):
|
|
Three-Month Periods Ended
|
|
|
Nine-Month Periods Ended
|
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
Bedding, blankets and accessories
|
|
$
|
11,780
|
|
|
$
|
11,431
|
|
|
$
|
32,838
|
|
|
$
|
34,490
|
|
Bibs, bath, developmental toy, feeding, baby care and disposable products
|
|
|
10,962
|
|
|
|
8,045
|
|
|
|
28,836
|
|
|
|
22,850
|
|
Total net sales
|
|
$
|
22,742
|
|
|
$
|
19,476
|
|
|
$
|
61,674
|
|
|
$
|
57,340
|
|
Note 5 – 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 consolidated statements of income and amounted to $1.5 million and $1.4 million for the three months ended December 26, 2021 and December 27, 2020, respectively, and amounted to $4.2 million for each of the nine months ended December 26, 2021 and December 27, 2020.
Note 6 – 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 audit or other adjustment as of December 26, 2021 were the fiscal years ended March 28, 2021, March 29, 2020, March 31, 2019, April 1, 2018 and April 2, 2017.
After considering all relevant information regarding the calculation of the state portion of its income tax provision, the Company believes that the technical merits of the tax position that the Company has taken with respect to state apportionment percentages would more likely than not be sustained. However, the Company also realizes that the ultimate resolution of such tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position taken. Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities of $22,000 and $25,000 during the three months ended December 26, 2021 and December 27, 2020, respectively, and $67,000 and $58,000 during the nine months ended December 26, 2021 and December 27, 2020, respectively, in the accompanying unaudited condensed consolidated statements of income.
7
The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. The Company accrued interest expense and penalties on the unrecognized tax liabilities for which the relevant statute of limitations remained unexpired of $11,000 and $15,000 during the three-month periods ended December 26, 2021 and December 27, 2020, respectively, and $37,000 and $46,000 during the nine-month periods ended December 26, 2021 and December 27, 2020, respectively, in the accompanying unaudited condensed consolidated statements of income.
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 benefits of $11,000 and $16,000 during the three-month periods ended December 26, 2021 and December 27, 2020, respectively, and $83,000 and $12,000 during the nine-month periods ended December 26, 2021 and December 27, 2020, 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.
Note 7 – Carousel Designs
The accompanying unaudited condensed consolidated statements of income include income, expenses and losses recognized in respect of 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 and cash flow losses, as well as management’s determination that, due to post-COVID-19 competitive pressures in the infant, toddler and juvenile products segment within the consumer products industry, such losses were likely to continue. Accordingly, the operations of Carousel ceased on May 21, 2021.
During the 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 result of the sale of inventory below cost and, for the three-month period ended June 27, 2021 and the nine-month period ended December 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 8 – 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 $99,000 and $79,000 during the three-month periods ended December 26, 2021 and December 27, 2020, respectively, and $248,000 and $209,000 during the nine-month periods ended December 26, 2021 and December 27, 2020, respectively.
Credit Facility: The Company’s credit facility as of December 26, 2021 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, bearing interest at the rate of prime minus 1.0% or LIBOR plus 1.5%, and which is secured by a first lien on all assets of the Company. On May 13, 2021, the Company and CIT entered into an agreement whereby CIT’s lien on Carousel’s assets would be automatically released upon the sale of such assets.
The financing agreement was scheduled to mature on July 11, 2022, but on May 31, 2021 the financing agreement was amended to extend the maturity date to July 11, 2025 and to change the interest rates as reflected in the preceding paragraph. The financing agreement was also amended to provide for a transition from the LIBOR reference rate to its replacement at the appropriate time. At December 26, 2021, the Company had elected to pay interest on balances owed under the revolving line of credit, if any, under the LIBOR option, which was 1.59% as of December 26, 2021. 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 1.25% as of December 26, 2021, on daily negative balances, if any, held at CIT.
At December 26, 2021 and March 28, 2021, 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 December 26, 2021.
Credit Concentration: The Company’s accounts receivable as of December 26, 2021 amounted to $21.0 million, net of allowances of $1.5 million. Of this amount, $19.8 million was due from CIT under the factoring agreements; an additional amount of $2.0 million was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $21.8 million represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements and the revolving line of credit. The Company’s accounts receivable at March 28, 2021 amounted to $19.3 million, net of allowances of $723,000. Of this amount, $18.6 million was due from CIT under the factoring agreements; an additional amount of $602,000 was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $19.2 million represented the maximum loss that the Company could have incurred 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 and the nine months ended December 26, 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.
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, blankets and accessories and another that produces and markets infant and toddler bibs, developmental toys, bath care and disposable products. The goodwill of the reporting units of the Company as of December 26, 2021 and March 28, 2021 amounted to $30.0 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 $7.1 million.
9
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 March 29, 2021, the Company performed the annual measurement for impairment of the goodwill of its reporting units and concluded that the estimated fair value of each of the Company’s reporting units exceeded their carrying values, and thus the goodwill of the Company’s reporting units was not impaired as of that date.
Note 10 – Other Intangible Assets
Other intangible assets as of December 26, 2021 and March 28, 2021 consisted primarily of the fair value of identifiable assets acquired in business combinations other than tangible assets and goodwill. The gross amount and accumulated amortization of the Company’s other intangible assets as of December 26, 2021 and March 28, 2021, the amortization expense for the three- and nine-month periods ended December 26, 2021 and December 27, 2020, and the classification of such amortization expense within the accompanying unaudited condensed consolidated statements of income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense
|
|
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Three-Month Periods Ended
|
|
|
Nine-Month Periods Ended
|
|
|
|
December 26,
|
|
|
March 28,
|
|
|
December 26,
|
|
|
March 28,
|
|
|
December 26,
|
|
|
December 27,
|
|
|
December 26,
|
|
|
December 27,
|
|
|
|
2021
|
|
|
2021
|
|
|
2021
|
|
|
2021
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Tradename and trademarks
|
|
$
|
2,567
|
|
|
$
|
2,567
|
|
|
$
|
1,850
|
|
|
$
|
1,722
|
|
|
$
|
43
|
|
|
$
|
61
|
|
|
$
|
128
|
|
|
$
|
183
|
|
Developed technology
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
83
|
|
Non-compete covenants
|
|
|
98
|
|
|
|
98
|
|
|
|
98
|
|
|
|
93
|
|
|
|
2
|
|
|
|
19
|
|
|
|
5
|
|
|
|
59
|
|
Patents
|
|
|
1,601
|
|
|
|
1,601
|
|
|
|
990
|
|
|
|
950
|
|
|
|
13
|
|
|
|
13
|
|
|
|
40
|
|
|
|
48
|
|
Customer relationships
|
|
|
7,374
|
|
|
|
7,374
|
|
|
|
5,928
|
|
|
|
5,712
|
|
|
|
72
|
|
|
|
72
|
|
|
|
216
|
|
|
|
223
|
|
Total other intangible assets
|
|
$
|
11,640
|
|
|
$
|
11,640
|
|
|
$
|
8,866
|
|
|
$
|
8,477
|
|
|
$
|
130
|
|
|
$
|
193
|
|
|
$
|
389
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification within the accompanying unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Marketing and administrative expenses
|
|
|
|
128
|
|
|
|
191
|
|
|
|
384
|
|
|
|
591
|
|
Total amortization expense
|
|
|
$
|
130
|
|
|
$
|
193
|
|
|
$
|
389
|
|
|
$
|
596
|
|
Note 11 – Inventories
Major classes of inventory were as follows (in thousands):
|
|
December 26, 2021
|
|
|
March 28, 2021
|
|
Raw Materials
|
|
$
|
27
|
|
|
$
|
453
|
|
Work in Process
|
|
|
-
|
|
|
|
19
|
|
Finished Goods
|
|
|
24,440
|
|
|
|
19,863
|
|
Total inventory
|
|
$
|
24,467
|
|
|
$
|
20,335
|
|
Note 12 – Leases
The Company made cash payments related to its recognized operating leases of $460,000 and $493,000 during the three months ended December 26, 2021 and December 27, 2020, respectively, and $1.4 million and $1.3 million during the nine months ended December 26, 2021 and December 27, 2020, respectively. Such payments reduced the operating lease liabilities and were included in the cash flows provided by operating activities in the accompanying unaudited condensed consolidated statements of cash flows. As of December 26, 2021, the Company’s operating leases have a weighted-average remaining lease term of 2.0 years and the weighted-average discount rate is 3.6%.
10
During the three- and nine-month periods ended December 26, 2021 and December 27, 2020, the Company classified its operating lease costs within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):
|
|
Three-Month Periods Ended
|
|
|
Nine-Month Periods Ended
|
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
Cost of products sold
|
|
$
|
395
|
|
|
$
|
422
|
|
|
$
|
1,197
|
|
|
$
|
1,269
|
|
Marketing and administrative expenses
|
|
|
32
|
|
|
|
50
|
|
|
|
123
|
|
|
|
152
|
|
Total operating lease costs
|
|
$
|
427
|
|
|
$
|
472
|
|
|
$
|
1,320
|
|
|
$
|
1,421
|
|
The maturities of the Company’s operating lease liabilities as of December 26, 2021 are as follows (in thousands):
Fiscal Year
|
|
|
|
|
2022
|
|
$
|
475
|
|
2023
|
|
|
1,896
|
|
2024
|
|
|
491
|
|
2025
|
|
|
187
|
|
2026
|
|
|
158
|
|
Total undiscounted operating lease payments
|
|
|
3,207
|
|
Less imputed interest
|
|
|
117
|
|
Operating lease liabilities - net
|
|
$
|
3,090
|
|
Note 13 – Stock-based Compensation
The Company has three incentive stock plans, the 2006 Omnibus Incentive Plan (the “2006 Plan”), the 2014 Omnibus Equity Compensation Plan (the “2014 Plan”) and the 2021 Incentive Plan (the “2021 Plan”). As a result of the approval of the 2014 Plan by the Company’s stockholders at the Company’s 2014 annual meeting and the 2021 Plan by the Company’s stockholders at the Company’s 2021 annual meeting, grants may no longer be issued under either the 2006 Plan or the 2014 Plan. At December 26, 2021, 1,159,835 shares of the Company’s common stock were available for future issuance under the 2021 Plan, which may be issued from authorized and unissued shares of the Company’s common stock or treasury shares. The Company recorded stock-based compensation expense of $224,000 and $103,000 during the three-month periods ended December 26, 2021 and December 27, 2020, respectively, and $564,000 and $289,000 during the nine-month periods ended December 26, 2021 and December 27, 2020, respectively. The Company records the compensation expense associated with stock-based awards granted to individuals in the same expense classifications as the cash compensation paid to those same individuals. No stock-based compensation costs were capitalized as part of the cost of an asset as of December 26, 2021.
Stock Options: The following table represents stock option activity for the nine-month periods ended December 26, 2021 and December 27, 2020:
|
|
Nine-Month Periods Ended
|
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
Options
|
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding
|
|
Outstanding at Beginning of Period
|
|
$
|
6.84
|
|
|
|
567,500
|
|
|
$
|
6.86
|
|
|
|
517,500
|
|
Granted
|
|
|
7.98
|
|
|
|
158,000
|
|
|
|
4.92
|
|
|
|
110,000
|
|
Exercised
|
|
|
7.72
|
|
|
|
(70,000
|
)
|
|
|
5.49
|
|
|
|
(95,000
|
)
|
Forfeited
|
|
|
4.84
|
|
|
|
(20,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at End of Period
|
|
|
7.39
|
|
|
|
635,500
|
|
|
|
6.71
|
|
|
|
532,500
|
|
Exercisable at End of Period
|
|
|
7.54
|
|
|
|
352,500
|
|
|
|
7.59
|
|
|
|
360,000
|
|
As of December 26, 2021, the intrinsic value of the outstanding and exercisable stock options was $283,000 and $177,000, respectively. The intrinsic value of the stock options exercised during the three and nine months ended December 26, 2021 was $58,000 and $196,000, respectively.
11
The Company did not receive any cash from the exercise of stock options during any of the three- or nine-month periods ended December 26, 2021 and December 27, 2020. Upon the exercise of stock options, participants may choose to surrender to the Company those shares from the option exercise necessary to satisfy the exercise amount and their income tax withholding obligations that arise from the option exercise. The effect on the cash flow of the Company from these “cashless” option exercises is that the Company remits cash on behalf of the participant to satisfy his or her income tax withholding obligations. The Company used cash to remit the required income tax withholding amounts from “cashless” option exercises of $19,000 and $67,000 during the three- and nine-month periods ended December 26, 2021, respectively, and $43,000 during each of the three- and nine-month periods ended December 27, 2020.
Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation – Stock Compensation, which requires stock-based compensation to be accounted for using a fair-value-based measurement. To determine the estimated fair value of stock options granted, the Company uses the Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to estimate fair value. The following table sets forth the assumptions used to determine the fair value of the non-qualified stock options that were awarded to certain employees during the nine months ended December 26, 2021 and December 27, 2020, which options vest over a two-year period, assuming continued service.
|
|
Nine-Month Periods Ended
|
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
Number of options issued
|
|
|
158,000
|
|
|
|
110,000
|
|
Grant date
|
|
June 9, 2021
|
|
|
June 10, 2020
|
|
Dividend yield
|
|
|
4.00
|
%
|
|
|
6.50
|
%
|
Expected volatility
|
|
|
35.00
|
%
|
|
|
30.00
|
%
|
Risk free interest rate
|
|
|
0.530
|
%
|
|
|
0.275
|
%
|
Contractual term (years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Expected term (years)
|
|
|
4.00
|
|
|
|
4.00
|
|
Forfeiture rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Exercise price (grant-date closing price) per option
|
|
$
|
7.98
|
|
|
$
|
4.92
|
|
Fair value per option
|
|
$
|
1.61
|
|
|
$
|
0.56
|
|
During the three- and nine-month periods ended December 26, 2021 and December 27, 2020, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):
|
|
Three-Month Period Ended December 26, 2021
|
|
|
Three-Month Period Ended December 27, 2020
|
|
|
|
Cost of
|
|
|
Marketing &
|
|
|
|
|
|
|
Cost of
|
|
|
Marketing &
|
|
|
|
|
|
|
|
Products
|
|
|
Administrative
|
|
|
Total
|
|
|
Products
|
|
|
Administrative
|
|
|
Total
|
|
Options Granted in Fiscal Year
|
|
Sold
|
|
|
Expenses
|
|
|
Expense
|
|
|
Sold
|
|
|
Expenses
|
|
|
Expense
|
|
2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
6
|
|
2021
|
|
|
4
|
|
|
|
14
|
|
|
|
18
|
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
2022
|
|
|
9
|
|
|
|
20
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option compensation
|
|
$
|
13
|
|
|
$
|
34
|
|
|
$
|
47
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
12
|
|
|
|
Nine-Month Period Ended December 26, 2021
|
|
|
Nine-Month Period Ended December 27, 2020
|
|
|
|
Cost of
|
|
|
Marketing &
|
|
|
|
|
|
|
Cost of
|
|
|
Marketing &
|
|
|
|
|
|
|
|
Products
|
|
|
Administrative
|
|
|
Total
|
|
|
Products
|
|
|
Administrative
|
|
|
Total
|
|
Options Granted in Fiscal Year
|
|
Sold
|
|
|
Expenses
|
|
|
Expense
|
|
|
Sold
|
|
|
Expenses
|
|
|
Expense
|
|
2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
6
|
|
2020
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
8
|
|
|
|
11
|
|
|
|
19
|
|
2021
|
|
|
11
|
|
|
|
37
|
|
|
|
48
|
|
|
|
7
|
|
|
|
8
|
|
|
|
15
|
|
2022
|
|
|
20
|
|
|
|
52
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option compensation
|
|
$
|
34
|
|
|
$
|
93
|
|
|
$
|
127
|
|
|
$
|
18
|
|
|
$
|
22
|
|
|
$
|
40
|
|
As of December 26, 2021, total unrecognized stock option compensation expense amounted to $256,000, which will be recognized as the underlying stock options vest over a weighted-average period of 9.0 months. The amount of future stock option compensation expense could be affected by any future stock option grants and by the separation from the Company of any individual who has received stock options that are unvested as of such individual’s separation date.
12
Non-vested Stock Granted to Directors: The following shares of non-vested stock were granted to the Company’s directors:
Number of Shares
|
|
|
Fair Value per Share
|
|
Grant Date
|
Vesting Period (Years)
|
40,165
|
|
|
$
|
7.47
|
|
August 11, 2021
|
One
|
41,452
|
|
|
|
5.79
|
|
August 12, 2020
|
Two
|
46,512
|
|
|
|
5.16
|
|
August 14, 2019
|
Two
|
28,000
|
|
|
|
5.43
|
|
August 8, 2018
|
Two
|
These shares vest over the periods indicated, assuming continued service. The fair value of the non-vested stock granted to the Company’s directors was based on the closing price of the Company’s common stock on the date of each grant. In August 2021 and August 2020, 43,984 and 37,256 shares, respectively, that had been granted to the Company’s directors vested, having an aggregate value of $327,000 and $179,000, respectively.
Non-vested Stock Granted to Employees: The following shares of non-vested stock were granted to certain of the Company’s employees:
Number of Shares
|
|
|
Fair Value per Share
|
|
Grant Date
|
Vesting Date
|
25,000
|
|
|
$
|
5.86
|
|
January 18, 2019
|
January 18, 2021
|
20,000
|
|
|
|
4.92
|
|
June 10, 2020
|
June 10, 2022
|
10,000
|
|
|
|
7.60
|
|
February 22, 2021
|
February 22, 2023
|
25,000
|
|
|
|
7.98
|
|
June 9, 2021
|
June 9, 2022
|
During the three- and nine-month periods ended December 26, 2021 and December 27, 2020, the Company recorded compensation expense associated with stock grants, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, as follows (in thousands):
|
|
Three-Month Periods Ended
|
|
|
Nine-Month Periods Ended
|
|
Stock Granted in Fiscal Year
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
|
December 26, 2021
|
|
|
December 27, 2020
|
|
2019
|
|
$
|
-
|
|
|
$
|
18
|
|
|
$
|
-
|
|
|
$
|
80
|
|
2020
|
|
|
-
|
|
|
|
30
|
|
|
|
40
|
|
|
|
90
|
|
2021
|
|
|
52
|
|
|
|
43
|
|
|
|
156
|
|
|
|
79
|
|
2022
|
|
|
125
|
|
|
|
-
|
|
|
|
241
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock grant compensation
|
|
$
|
177
|
|
|
$
|
91
|
|
|
$
|
437
|
|
|
$
|
249
|
|
As of December 26, 2021, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $393,000, which will be recognized over the respective vesting terms associated with each block of non-vested stock indicated above, such grants having an aggregate weighted-average vesting term of 7.3 months. The amount of future compensation expense related to the Company’s non-vested stock grants could be affected by any future non-vested stock grants and by the separation from the Company of any individual who has non-vested stock grants as of such individual’s separation date.
Note 14 – Related Party Transaction
On December 16, 2020, the Company purchased 250,000 shares of its common stock from E. Randall Chestnut, the Company’s Chief Executive Officer. The shares were purchased at a purchase price of $7.5435 per share, which represented the trailing 10-trading day volume weighted average closing price of the Company’s common stock ending, and including December 16, 2020.
Note 15 – Subsequent Events
The Company has evaluated all events which have occurred between December 26, 2021 and the date that the accompanying unaudited condensed consolidated financial statements were issued, and has determined that there are no material subsequent events that require disclosure.
13