Quarterly Report for Quarter Ending December 28, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

Certain of the statements made in this Quarterly Report on Form 10-Q (this "Quarterly Report") within this Item 2. and elsewhere, including information incorporated herein by reference to other documents, are "forward-looking statements" within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as "expects," "believes," "anticipates," "estimates," "predicts," "forecasts," "plans," "projects," "targets," "should," "potential," "continue," "aims," "intends," "may," "will," "could," "would" and variations of such words and similar expressions may identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, general economic conditions, including changes in interest rates, in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company's products, changing competition, changes in the retail environment, the Company's ability to successfully integrate newly acquired businesses, the level and pricing of future orders from the Company's customers, the Company's dependence upon third-party suppliers, including some located in foreign countries with unstable political situations, the Company's ability to successfully implement new information technologies, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company's business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company's dependence upon licenses from third parties. Reference is also made to the Company's periodic filings with the SEC for additional factors that may impact the Company's results of operations and financial condition. The Company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the Company's expectations, whether as a result of new information, future events or otherwise.

DESCRIPTION OF BUSINESS

The Company was originally formed as a Georgia corporation in 1957 and was reincorporated as a Delaware corporation in 2003. The Company primarily operates indirectly through its wholly-owned subsidiaries, NoJo Baby & Kids, Inc. and Sassy Baby, Inc. in the infant, toddler and juvenile products segment within the consumer products industry. The infant, toddler and juvenile products segment consists of infant and toddler bedding, toys, bibs, diaper bags, disposables and feeding products.

The Company's products are marketed under Company-owned trademarks, under trademarks licensed from others and as private label goods. The Company-owned trademarks include Sassy®, NoJo®, Manhattan Toy®, Baby Boom® and Neat Solutions®. Sales of the Company's products are made directly to retailers, such as mass merchants, large chain stores, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, wholesale clubs, internet-based retailers and direct-to-consumers through the Company's websites.

The infant, toddler and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant, toddler and juvenile product companies and specialty infant, toddler and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging. The Company's ability to compete depends principally on styling, price, service to the retailer and continued high regard for the Company's products and trade names.

Foreign and domestic contract manufacturers produce most of the Company's products, with the largest concentration being in China. The Company makes sourcing decisions based on quality, timeliness of delivery and price, including the impact of ocean freight and duties. Although the Company maintains relationships with a limited number of suppliers, the Company believes that its products may be readily manufactured by several alternative sources in quantities sufficient to meet the Company's requirements.

The Company's products are warehoused and distributed domestically from leased facilities located in Compton, California and Eden Valley, Minnesota and internationally from third-party logistics warehouses in Belgium and England.

A summary of certain factors that management considers important in reviewing the Company's results of operations, financial position, liquidity and capital resources is set forth below, which should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included in the preceding sections of this Quarterly Report.

KNOWN TRENDS AND UNCERTAINTIES

The U.S. government has tariffs on imports from certain countries, including China. During 2025, the U.S. government increased tariffs which have increased the cost of the products the Company sources from China and affected shipments from the Company's Chinese-based suppliers. The Company continues to evaluate the impact of the tariffs on imports from China to the Company's business and financial condition. The impact of the increased tariffs is uncertain because it is subject to a number of factors, including the duration of such tariffs, changes in the rate or amount, scope and nature of the tariffs in the future, any countermeasures that China may take and any mitigation actions that may become available.

For additional discussion of trends, uncertainties and other factors that could impact the Company's operating results, refer to the risk factors disclosed in Item 1A. of Part 1 of the Company's Annual Report on Form 10-K for the year ended March 30, 2025.

RESULTS OF OPERATIONS

The following table contains the results of operations for the three- and nine-month periods ended December 28, 2025 and December 29, 2024 and the dollar and percentage changes for those periods (in thousands, except percentages):

Net Sales: Sales were $20.7 million for the three months ended December 28, 2025, compared with $23.4 million for the three months ended December 29, 2024, a decrease of $2.6 million or 11.3%. Sales of bedding and diaper bags decreased by $3.3 million, while the sales of bibs, toys and disposable products increased by $0.7 million. Sales were $59.9 million for the nine months ended December 28, 2025 compared with $64.0 million for the nine months ended December 29, 2024, a decrease of $4.1 million or 6.5%. Sales of bedding and diaper bags decreased by $4.4 million and sales of bibs, toys and disposable products increased by $0.3 million. The decrease in bedding and diaper bags was primarily due to the decrease in the number of items included in programs at a major retailer. Sales were also negatively affected by inventory shortages resulting from the Company's strategy to minimize the impact of increased tariffs in effect primarily during the first quarter of the current fiscal year.

Gross Profit: Gross profit decreased by $1.2 million from the prior year reflecting a margin of 23.5% for the three-month period ended December 28, 2025 compared to 26.1% of net sales for the three-month period ended December 29, 2024. Gross profit decreased by $2.1 million from the prior year reflecting a margin of 25.0% for the nine-month period ended December 28, 2025 compared to 26.6% of net sales for the nine-month period ended December 29, 2024. The primary cause of this decrease in gross profit relates to increased tariff costs associated with products imported from China.

Marketing and Administrative Expenses: Marketing and administrative expenses increased by $0.6 million and changed to 24.0% of net sales for the three-month period ended December 28, 2025 from 18.8% of net sales for the three-month period ended December 29, 2024. The increase was due to severance expenses incurred in connection with operational consolidation efforts. Marketing and administrative expenses increased by $0.3 million and changed to 24.0% of net sales for the nine-month period ended December 28, 2025 from 22.0% of net sales for the nine-month period ended December 29, 2024. The increase in the current year period is due to an increase in advertising costs and severance expense which were partially offset by acquisition costs in the prior period.

Other Income (Expense): Other income increased $2.5 million from the three-month period ended December 29, 2024 to the three-month period ended December 28, 2025, and increased $2.7 million from the nine-month period ended December 29, 2024 to the nine-month period ended December 29, 2025. The increase is primarily due to the $2.5 million in Insurance Proceeds received during the quarter related to certain claims filed by the Company under a representation and warranties insurance policy purchased in connection with the Acquisition. The financial impact of the Insurance Proceeds, excluding certain legal and license related expenses, resulted in a net impact of $2.1 million to income before income tax expense for the three months ended December 28, 2025.

Income Tax Expense: Income tax expense increased $0.2 million from the three-month period ended December 29, 2024 to the three-month period ended December 28, 2025, and increased $0.2 million from the nine-month period ended December 29, 2024 to the nine-month period ended December 29, 2025. The Company's estimated annual ETR was 24.7% and 22.3% for the three-month periods ended December 28, 2025 and December 29, 2024, respectively, and was 24.7% and 22.4% for the nine-month periods ended December 28, 2025 and December 29, 2024, respectively.

Although the Company does not anticipate a material change to the ETR for the remainder of fiscal year 2026, several factors could impact the ETR, including variations from the Company's estimates of the amount and source of its pre-tax income, and the actual ETR for the year could differ materially from the Company's estimates.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities increased from $7.0 million for the nine-month period ended December 29, 2024 to $7.1 million for the nine-month period ended December 28, 2025. The increase in the current year was partially the result of a decrease of $6.6 million in accounts receivable that was $6.0 million higher than the decrease in the prior year. The increase in the current year was partially offset by an increase in inventories in the current year that was $2.7 million higher than the increase in the prior year, a decrease of $2.9 million in accrued liabilities from the prior year to the current year and an increase in accounts payable in the current year that was $1.6 million lower than the increase in the prior year.

Net cash used in investing activities decreased from $17.0 million in the prior year to $616 thousand in the current year which were primarily associated with capital expenditures for property, plant and equipment. Prior year capital expenditures included $16.4 million for the Acquisition.

Net cash used in financing activities, which were primarily associated with net repayments under the revolving line of credit and payments of the term loan, was $4.6 million compared to net cash provided by financing activities in the prior year of $10.2 million. This decrease was due to the issuance of an $8.0 million term loan in the prior year as well as the Company paying down debt in the current year.

As of December 28, 2025, the balance on the revolving line of credit with CIT was $11.3 million, there was no letter of credit outstanding and $10.6 million was available under the revolving line of credit with CIT based on the Company's eligible accounts receivable and inventory balances.

To reduce its exposure to credit losses and to enhance the predictability of its cash flow, the Company assigns the majority of its trade accounts receivable to CIT under factoring agreements. 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 $74 thousand and $115 thousand for the three-month periods ended December 28, 2025, and December 29, 2024, respectively, and amounted to $254 thousand and $283 thousand for the nine-month periods ended December 28, 2025 and December 29, 2024, respectively.

On June 23, 2025, the Company and CIT amended the Company's financing agreement with CIT to: (i) provide that, until the Company's term loan is paid in full, the Company shall maintain at all times Excess Availability (as defined in the financing agreement) equal to or the greater of (a) the sum of the balance outstanding under the Company's term loan plus $1.0 million or (b) $4.0 million (the "Availability Covenant"); and (ii) reinstate the fixed charge coverage ratio; provided however, that the fixed charge coverage ratio shall not be tested at any fiscal quarter end in which, during the immediately preceding fiscal quarter, the Company at all times has been in compliance with the Availability Covenant. As of December 28, 2025, the Company has complied with the Excess Availability requirements.

The Company's future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash flow from operations and funds available under the revolving line of credit will be adequate to meet its liquidity needs.