ITEM 1. FINANCIAL STATEMENTS
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE- AND NINE-MONTH PERIODS ENDED JANUARY 1, 2023 AND DECEMBER 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 January 1, 2023 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 January 1, 2023 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. 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 January 1, 2023, 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 $105,000 for the three-month periods ended January 1, 2023 and December 26, 2021, respectively, and amounted to $370,000 and $455,000 for the nine-month periods ended January 1, 2023 and December 26, 2021, respectively.
6
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 ended January 1, 2023 and December 26, 2021 are as follows (in thousands):
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
Bedding, blankets and accessories |
|
$ |
9,005 |
|
|
$ |
11,780 |
|
|
$ |
26,006 |
|
|
$ |
32,838 |
|
Bibs, toys and disposables products |
|
|
9,999 |
|
|
|
10,962 |
|
|
|
27,434 |
|
|
|
28,836 |
|
Total net sales |
|
$ |
19,004 |
|
|
$ |
22,742 |
|
|
$ |
53,440 |
|
|
$ |
61,674 |
|
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 $1.5 million for the three months ended January 1, 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, 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, 2023 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 $6,000 during the nine-month period ended January 1, 2023, and the Company recorded discrete income tax benefits of $11,000 and $83,000 during the three- and nine-month periods ended December 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 nine-month periods ended December 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 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.
7
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 $77,000 and $99,000 for the three-month periods ended January 1, 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, respectively.
Credit Facility: The Company’s credit facility as of January 1, 2023 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 matures on July 11, 2025, bears interest at 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 January 1, 2023, 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 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, 2023 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 January 1, 2023.
Credit Concentration: The Company’s accounts receivable as of January 1, 2023 amounted to $18.9 million, net of allowances of $1.5 million. Of this amount, $17.2 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 million 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.
8
Note 8 – Goodwill
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations. For the purpose of presenting and measuring for the impairment of goodwill, the Company has two reporting units: one that produces and markets infant and toddler bedding, blankets and accessories and another that produces and markets infant and toddler bibs, toys and disposable products. The Company’s reporting units have recognized goodwill as of January 1, 2023 and April 3, 2022 of $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.
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 4, 2022, the Company performed a qualitative assessment to determine if it is more likely than not that the fair values of the Company’s reporting units are less than their carrying values by evaluating relevant events and circumstances, including financial performance, market conditions and share price. Based on this assessment, the Company concluded that the goodwill for each of the Company’s reporting units was not considered at risk of impairment.
Note 9 – Other Intangible Assets
Other intangible assets as of January 1, 2023 and April 3, 2022 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 January 1, 2023 and April 3, 2022, the amortization expense for the three- and nine-month periods ended January 1, 2023 and December 26, 2021, 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 |
|
|
|
January 1, |
|
|
April 3, |
|
|
January 1, |
|
|
April 3, |
|
|
January 1, |
|
|
December 26, |
|
|
January 1, |
|
|
December 26, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2021 |
|
|
2023 |
|
|
2021 |
|
Tradename and trademarks |
|
$ |
2,567 |
|
|
$ |
2,567 |
|
|
$ |
1,990 |
|
|
$ |
1,885 |
|
|
$ |
35 |
|
|
$ |
43 |
|
|
$ |
105 |
|
|
$ |
128 |
|
Non-compete covenants |
|
|
98 |
|
|
|
98 |
|
|
|
98 |
|
|
|
98 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
5 |
|
Patents |
|
|
1,601 |
|
|
|
1,601 |
|
|
|
1,042 |
|
|
|
1,003 |
|
|
|
13 |
|
|
|
13 |
|
|
|
39 |
|
|
|
40 |
|
Customer relationships |
|
|
7,374 |
|
|
|
7,374 |
|
|
|
6,217 |
|
|
|
6,000 |
|
|
|
72 |
|
|
|
72 |
|
|
|
217 |
|
|
|
216 |
|
Total other intangible assets |
|
$ |
11,640 |
|
|
$ |
11,640 |
|
|
$ |
9,347 |
|
|
$ |
8,986 |
|
|
$ |
120 |
|
|
$ |
130 |
|
|
$ |
361 |
|
|
$ |
389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification within the accompanying unaudited condensed consolidated statements of income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
5 |
|
Marketing and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
128 |
|
|
|
361 |
|
|
|
384 |
|
Total amortization expense |
|
|
|
|
|
|
|
|
|
|
|
$ |
120 |
|
|
$ |
130 |
|
|
$ |
361 |
|
|
$ |
389 |
|
Note 10 – Inventories
Major classes of inventory were as follows (in thousands):
|
|
January 1, 2023 |
|
|
April 3, 2022 |
|
Raw Materials |
|
$ |
- |
|
|
$ |
28 |
|
Finished Goods |
|
|
25,782 |
|
|
|
20,625 |
|
Total inventory |
|
$ |
25,782 |
|
|
$ |
20,653 |
|
9
Note 11 – Leases
The Company made cash payments related to its recognized operating leases of $492,000 and $460,000 during the three months ended January 1, 2023 and December 26, 2021, respectively, and $1.5 million and $1.4 million during the nine months ended January 1, 2023 and December 26, 2021, 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. At January 1, 2023, the Company’s operating leases had a weighted-average remaining lease term of 1.6 years and a weighted-average discount rate of 3.6%.
During the three- and nine-month periods ended January 1, 2023 and December 26, 2021, 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 | |
| | January 1, 2023 | | | December 26, 2021 | | | January 1, 2023 | | | December 26, 2021 | |
Cost of products sold | | $ | 403 | | | $ | 395 | | | $ | 1,205 | | | $ | 1,197 | |
Marketing and administrative expenses | | | 43 | | | | 32 | | | | 125 | | | | 123 | |
Total operating lease costs | | $ | 446 | | | $ | 427 | | | $ | 1,330 | | | $ | 1,320 | |
The maturities of the Company’s operating lease liabilities as of January 1, 2023 are as follows (in thousands):
Fiscal Year | | | |
2023 | | $ | 493 |
2024 | | | 563 |
2025 | | | 223 |
2026 | | | 171 |
Total undiscounted operating lease payments | | | 1,450 |
Less imputed interest | | | 44 |
Operating lease liabilities - net | | $ | 1,406 |
On February 3, 2023, the Company entered into a new operating lease agreement for approximately 157,400 square feet for its existing office, warehouse and distribution center located in Compton, California. The existing lease for the Compton facility will expire on May 31, 2023; the term of the new lease is sixty (60) months, commencing on June 1, 2023. The Company will be required to remit minimum non-variable rental payments under the new lease of $2.8 million, $3.5 million, $3.7 million, $3.8 million, $4.0 million and $663,000 in fiscal years 2024, 2025, 2026, 2027, 2028 and 2029, respectively. As of February 3, 2023, the Company had not yet calculated the amount associated with the lease that will be capitalized as an operating lease right-of-use asset or the corresponding operating lease liability.
Note 12 – 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”), although grants may no longer be issued under either the 2006 Plan or the 2014 Plan. As of January 1, 2023, 805,439 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 $253,000 and $224,000 during the three-month periods ended January 1, 2023 and December 26, 2021, respectively, and recorded $844,000 and $564,000 during the nine-month periods ended January 1, 2023 and December 26, 2021, 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 January 1, 2023.
Stock Options: The following table represents stock option activity for the nine-month periods ended January 1, 2023 and December 26, 2021:
| | Nine-Month Periods Ended | |
| | January 1, 2023 | | | December 26, 2021 | |
| | Weighted- | | | | | | | Weighted- | | | | | |
| | Average | | | Number of | | | Average | | | Number of | |
| | Exercise | | | Options | | | Exercise | | | Options | |
| | Price | | | Outstanding | | | Price | | | Outstanding | |
Outstanding at Beginning of Period | | $ | 7.39 | | | | 635,500 | | | $ | 6.84 | | | | 567,500 | |
Granted | | | 6.54 | | | | 120,000 | | | | 7.98 | | | | 158,000 | |
Exercised | | | 4.92 | | | | (20,000 | ) | | | 7.72 | | | | (70,000 | ) |
Forfeited | | | - | | | | - | | | | 4.84 | | | | (20,000 | ) |
Outstanding at End of Period | | | 7.32 | | | | 735,500 | | | | 7.39 | | | | 635,500 | |
Exercisable at End of Period | | | 7.42 | | | | 499,000 | | | | 7.54 | | | | 352,500 | |
As of January 1, 2023, the intrinsic value of the outstanding and exercisable stock options was $47,000. There were no options exercised during the three-month period ended January 1, 2023. The intrinsic value of the stock options exercised during the nine-month period ended January 1, 2023 was $28,000. The Company did not receive any cash from the exercise of stock options during either of the nine-month periods ended January 1, 2023 or December 26, 2021. 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 during the three-month period ended December 26, 2021, and $10,000 and $67,000 during the nine-month periods ended January 1, 2023 and December 26, 2021, respectively.
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-month periods ended January 1, 2023 and December 26, 2021, which options vest over a two-year period, assuming continued service.
| | Nine-Month Periods Ended | |
| | January 1, 2023 | | | December 26, 2021 | |
Number of options issued | | | 120,000 | | | | 158,000 | |
Grant date | | June 7, 2022 | | | June 9, 2021 | |
Dividend yield | | | 4.89 | % | | | 4.00 | % |
Expected volatility | | | 30.00 | % | | | 35.00 | % |
Risk free interest rate | | | 2.95 | % | | | 0.53 | % |
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 | | $ | 6.54 | | | $ | 7.98 | |
Fair value per option | | $ | 0.90 | | | $ | 1.61 | |
During the three-month periods ended January 1, 2023 and December 26, 2021, 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 January 1, 2023 | | | Three-Month Period Ended December 26, 2021 | |
| | Cost of | | | Marketing & | | | | | | | Cost of | | | Marketing & | | | | | |
| | Products | | | Administrative | | | Total | | | Products | | | Administrative | | | Total | |
Options Granted in Fiscal Year | | Sold | | | Expenses | | | Expense | | | Sold | | | Expenses | | | Expense | |
2021 | | $ | - | | | $ | 11 | | | $ | 11 | | | $ | 4 | | | $ | 14 | | | $ | 18 | |
2022 | | | 9 | | | | 20 | | | | 29 | | | | 9 | | | | 20 | | | | 29 | |
2023 | | | 6 | | | | 7 | | | | 13 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total stock option compensation | | $ | 15 | | | $ | 38 | | | $ | 53 | | | $ | 13 | | | $ | 34 | | | $ | 47 | |
During the nine-month periods ended January 1, 2023 and December 26, 2021, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):
| | Nine-Month Period Ended January 1, 2023 | | | Nine-Month Period Ended December 26, 2021 | |
| | 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 | | | $ | 4 | | | $ | 7 | |
2021 | | | 3 | | | | 37 | | | | 40 | | | | 11 | | | | 37 | | | | 48 | |
2022 | | | 31 | | | | 66 | | | | 97 | | | | 20 | | | | 52 | | | | 72 | |
2023 | | | 12 | | | | 17 | | | | 29 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total stock option compensation | | $ | 46 | | | $ | 120 | | | $ | 166 | | | $ | 34 | | | $ | 93 | | | $ | 127 | |
As of January 1, 2023, total unrecognized stock option compensation expense amounted to $143,000, which will be recognized as the underlying stock options vest over a weighted-average period of 7.4 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.
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) |
46,896 | | | $ | 6.65 | | August 16, 2022 | One |
40,165 | | | | 7.47 | | August 11, 2021 | One |
41,452 | | | | 5.79 | | August 12, 2020 | Two |
46,512 | | | | 5.16 | | August 14, 2019 | Two |
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. The non-vested stock granted on August 11, 2021 included 8,033 shares granted to E. Randall Chestnut, formerly the Company’s Chairman, President and Chief Executive Officer. On May 1, 2022, upon the resignation of Mr. Chestnut from the Board and his retirement from all positions that he held within the Company, the vesting of these 8,033 shares was accelerated, with such shares having an aggregate value on such date of $50,000. The remaining shares set forth above will vest over the periods indicated, assuming continued service. In August 2022 and August 2021, 52,856 shares and 43,984 shares, respectively, that had been granted to the Company’s directors vested, having an aggregate value of $331,000 and $327,000, 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 |
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 |
These shares vest on the dates indicated, assuming continued service. In June 2022, 45,000 shares that had been granted to certain of the Company’s employees vested, having an aggregate value on their respective vesting dates of $293,000.
Performance Award Shares: On March 1, 2022, performance awards were granted to certain of the Company’s executive officers, consisting of 187,500 shares, of which: (a) 75,000 shares shall be earned if the closing price per share of the Company’s common stock equals or exceeds $8.00 on ten trading days within any period of twenty consecutive trading days prior to March 1, 2027; and (b) 112,500 shares shall be earned if the closing price per share of the Company’s common stock equals or exceeds $9.00 on ten trading days within any period of twenty consecutive trading days prior to March 1, 2027. Upon the achievement of each applicable stock hurdle described above: (i) one-third of the shares that are earned shall vest on the later of the date on which the shares are earned and March 1, 2023; (ii) one-third of the shares that are earned shall vest on the first anniversary of the date on which the shares are earned; and (iii) one-third shall vest on the second anniversary of the date on which the shares are earned. All shares that are non-earned or non-vested will be forfeited upon the termination of service. The Company, with the assistance of an independent third party, determined that the grant date fair value of the awards amounted to $732,000.
During the three- and nine-month periods ended January 1, 2023 and December 26, 2021, 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 | | January 1, 2023 | | | December 26, 2021 | | | January 1, 2023 | | | December 26, 2021 | |
2020 | | $ | - | | | $ | - | | | $ | - | | | $ | 40 | |
2021 | | | 9 | | | | 52 | | | | 76 | | | | 156 | |
2022 | | | 113 | | | | 125 | | | | 472 | | | | 241 | |
2023 | | | 78 | | | | - | | | | 130 | | | | - | |
| | | | | | | | | | | | | | | | |
Total stock grant compensation | | $ | 200 | | | $ | 177 | | | $ | 678 | | | $ | 437 | |
As of January 1, 2023, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $542,000, 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 11.7 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 13 – Subsequent Events
On February 3, 2023, the Company entered into a new operating lease agreement for approximately 157,400 square feet for its existing office, warehouse and distribution center located in Compton, California. The Company has evaluated all other events which have occurred between January 1, 2023 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.