SEC Info - Culp Inc. - ‘10-Q’ for 10/29/23

Raw materials

i 8,433

i 9,859

i 7,908

Work-in-process

i 2,196

i 3,724

i 2,602

Finished goods

i 33,836

i 38,641

i 34,570

i 44,465

i 52,224

i 45,080

Measurement of Inventory to Net Realizable Value

We recorded a non-cash inventory (credit) charge of $( i 1.3) million and $ i 5.3 million for the three months ended October 29, 2023 and October 30, 2022, respectively. The non-cash inventory credit of $( i 1.3) million for the three months ended October 29, 2023 represented a $( i 1.2) million credit related to adjustments made to our inventory markdowns reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments, as well as a credit of ($ i 78,000) for the gain on disposal of inventory related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. The non-cash inventory charge of $ i 5.3 million for the three months ended October 30, 2022 represented a $ i 2.9 million write down of inventory to its net realizable value associated with our mattress fabrics segment, $ i 2.3 million related to our inventory markdowns reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments and a $ i 98,000 charge for the loss on disposal and markdowns of inventory related to our exit of our cut and sew upholstery fabrics operation located in Shanghai, China. Of the $( i 1.3) million non-cash inventory credit for the second quarter of fiscal 2024, $( i 801,000) and $( i 482,000) pertained to our mattress fabrics and upholstery fabrics segments, respectively. Of the $ i 5.3 million non-cash inventory charge for the second quarter of 2023, $ i 3.8 million and $ i 1.5 million pertained to our mattress fabrics and upholstery fabrics segments, respectively.

We recorded a non-cash inventory (credit) charge of $( i 2.0) million and $ i 6.4 million for the six months ended October 29, 2023, and October 30, 2022, respectively. The non-cash inventory credit of $( i 2.0) million for the six months ended October 29, 2023, represented a $( i 2.1) million credit related to adjustments made to our inventory markdown reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments, partially offset by a net restructuring related charge of $ i 101,000. This net restructuring related charge represents markdowns of inventory totaling $ i 179,000 during the first quarter of fiscal 2024, partially offset by a gain on disposal of inventory totaling $ i 78,000 during the second quarter of fiscal 2024, both of which related to the discontinuation of production of cut and sewn upholstery kits at our facility in Ouanaminthe, Haiti during the respective periods. The non-cash inventory charge of $ i 6.4 million for the six months ended October 30, 2022, represented a $ i 2.9 million write down of inventory to its net realizable value associated with our mattress fabrics segment, a $ i 3.4 million charge related to markdowns of inventory estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments, and a $ i 98,000 charge related to the loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China. Of the $( i 2.0) million non-cash inventory credit for the first half of fiscal 2024, $( i 1.5) million and $( i 453,000) pertained to our mattress fabrics and upholstery fabrics segments, respectively. Of the $ i 6.4 million non-cash inventory charge for the first half of fiscal 2023, $ i 4.2 million and $ i 2.2 million pertained to our mattress fabrics and upholstery fabrics segments, respectively.

Mattress Fabrics Segment - Net Realizable Value

During the second quarter of fiscal 2023, our mattress fabrics segment experienced a i 35.8% decline in net sales compared with the second quarter of fiscal 2022. This decline in net sales led to a significant decrease in gross margin to ( i 8.7%) (excluding a non-cash inventory charge of $ i 3.8 million disclosed above) during the second quarter of fiscal 2023, as compared with gross margin of i 15.0% during the second quarter of fiscal 2022. The significant decline in net sales and profitability during the second quarter of

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fiscal 2023 stemmed from a greater than anticipated decline in consumer discretionary spending on mattress products, which we believe was driven by the following factors: (i) inflationary effects of commodities such as gas, food, and other necessities; (ii) a significant increase in interest rates; (iii) the pulling forward of demand for home goods products during the early years of the COVID-19 pandemic, which demand then shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to the decline in consumer demand. Based on this evidence, management conducted a thorough review of its mattress fabrics inventory and, as a result, recorded a charge of $ i 2.9 million within cost of sales to write down inventory to its net realizable value. This $ i 2.9 million charge was based on management's best estimates of product sales prices, customer demand trends, and its plans to transition to new products.

Assessment

As of October 29, 2023, we reviewed our mattress fabrics and upholstery fabrics inventories to determine if any additional write-downs, in excess of the amount recorded based on our policy for aged inventory, were necessary. Based on our assessment, no additional write-downs of inventories to their net realizable value were recorded for the three months and six months ended October 29, 2023, other than the markdowns of inventory associated with our upholstery fabrics segment restructuring activity described more fully in Note 9 of the consolidated financial statements.

Based on the current unfavorable macroeconomic conditions, it is possible that estimates used by management to determine the write down of inventory to its net realizable value could be materially different from the actual amounts or its results. These differences could result in higher than expected markdowns of inventory, which could adversely affect the company’s results of operations and financial condition in the near term.

6. Intangible Assets

A summary of intangible assets follows:

(dollars in thousands)

Tradename

i 540

Customer relationships, net

i 1,185

i 1,486

i 1,335

Non-compete agreement, net

i 339

i 414

i 377

i 2,064

i 2,440

i 2,252

Tradename

Our tradename pertains to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of October 29, 2023, no indicators of impairment existed, and therefore we did i not record any asset impairment charges associated with our tradename through the second quarter of fiscal 2024.

Customer Relationships

A summary of the change in the carrying amount of our customer relationships follows:


	Six months ended
(dollars in thousands)	October 29, 2023			October 30, 2022
Beginning balance, net	$	i 1,335		$	i 1,636
Amortization expense		( i 150	)		( i 150	)
Ending balance, net	$	i 1,185		$	i 1,486

Our customer relationships are amortized on a straight-line basis over useful lives ranging from nine to i seventeen years.

The gross carrying amount of our customer relationships was $ i i i 3.1 / / million as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively. Accumulated amortization for these customer relationships was $ i 1.9 million, $ i 1.6 million, and $ i 1.8 million as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

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The remaining amortization expense for the next five fiscal years and thereafter are as follows: FY 2024 - $ i 151,000; FY 2025 - $ i 301,000; FY 2026 - $ i 301,000; FY 2027 - $ i 278,000; FY 2028 - $ i 52,000; and thereafter - $ i 102,000.

The weighted average amortization period for our customer relationships was i 4.3 years as of October 29, 2023.

Non-Compete Agreement

A summary of the change in the carrying amount of our non-compete agreement follows:


	Six months ended
(dollars in thousands)	October 29, 2023			October 30, 2022
Beginning balance, net	$	i 377		$	i 452
Amortization expense		( i 38	)		( i 38	)
Ending balance, net	$	i 339		$	i 414

Our non-compete agreement is associated with a prior acquisition by our mattress fabrics segment and is amortized on a straight-line basis over the i fifteen-year life of the agreement.

The gross carrying amount of our non-compete agreement was $ i i i 2.0 / / million as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively. Accumulated amortization for our non-compete agreement was $ i 1.7 million, $ i 1.6 million, and $ i 1.6 million as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

The remaining amortization expense for the next five years and thereafter follows: FY 2024 - $ i 38,000; FY 2025 - $ i 76,000; FY 2026 - $ i 76,000; FY 2027 - $ i 76,000; FY 2028 - $ i 73,000.

The weighted average amortization period for the non-compete agreement was i 4.5 years as of October 29, 2023.

Impairment

As of October 29, 2023, management reviewed the long-lived assets associated with our mattress fabrics segment, which consisted of property, plant, and equipment, right of use assets, and finite-lived intangible assets (collectively known as the "Mattress Asset Group"), for impairment, as events and changes in circumstances occurred that indicated the carrying amount of the Mattress Asset Group may not be recoverable. The mattress fabrics segment experienced a significant cumulative operating loss totaling $ i 18.1 million commencing in the second quarter of fiscal 2023, and continuing through the second quarter of fiscal 2024. We believe the significant decline in profitability for the mattress fabrics segment stemmed from a decline in consumer discretionary spending on mattress products, which we believe was driven by the following factors: (i) inflationary effects of commodities such as gas, food, and other necessities; (ii) a significant increase in interest rates; (iii) the pulling forward of demand for home goods products during the early years of the COVID-19 pandemic, which demand has now shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to the decline in consumer demand.

Based on the above evidence, we were required to determine the recoverability of the Mattress Asset Group, which is classified as held and used, by comparing the carrying amount of the Mattress Asset Group to the sum of the future undiscounted cash flows expected to result from its use and eventual disposition. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the sum of the undiscounted future cash flows of the asset group. The carrying amount of the Mattress Asset Group totaled $ i 35.5 million, which relates to property, plant, and equipment of $ i 32.8 million, right of use assets of $ i 2.0 million, customer relationships of $ i 332,000, and a non-compete agreement of $ i 339,000. The total carrying amount of the Mattress Asset Group did not exceed the sum of its future undiscounted cash flows from its use and disposition. As a result, we determined i no impairment associated with the Mattress Asset Group existed as of October 29, 2023.

7. Note Receivable

In connection with the restructuring activity of our upholstery fabrics cut and sew operation located in Ouanaminthe, Haiti, effective January 24, 2023, Culp Upholstery Fabrics Haiti, Ltd. (“CUF Haiti”) entered into an agreement to terminate a lease of a facility (“Termination Agreement”). See Note 9 of the consolidated financial statements for further details regarding this restructuring activity.

Pursuant to the terms of the original lease agreement (the “Original Lease”), CUF Haiti was required to pay in advance $ i 2.8 million for the full amount of rent due prior to the commencement of the Original Lease, with the initial lease term set to expire on i December 31, 2029. Pursuant to the terms of the Termination Agreement, the Original Lease was formally terminated when CUF

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Haiti vacated and returned possession of the leased facility to the lessor. After CUF Haiti vacated and returned possession of the leased facility, a third party (the “Lessee”) took possession of this facility, and the Lessee agreed to pay CUF Haiti $ i 2.4 million in the form of a note receivable over a period commencing on April 1, 2023, and ending on December 31, 2029, based on the terms stated in the Termination Agreement. In connection with Termination Agreement, an affiliate of the Lessee has guaranteed payment in full of all amounts due and payable to CUF Haiti by the Lessee, and CUF Haiti has been fully and unconditionally discharged from all of its remaining obligations under the Original Lease.

As of the end of our third quarter of fiscal 2023, the gross carrying amount of the note receivable totaling $ i 2.4 million was recorded at its fair value of $ i 2.0 million, which represented the present value of future discounted cash flows based on the payment amounts and timing of such payments due from the Lessee as stated in the Termination Agreement. Consequently, since the fair value of the note receivable was less than its carrying amount, we recorded a restructuring charge of $ i 434,000 during the third quarter of fiscal 2023 to reduce the note receivable’s carrying amount to its reported fair value.

We used an interest rate of i 6.0% to determine the present value of the future discounted cash flows, which was based on significant unobservable inputs and assumptions determined by management such as (i) the credit characteristics of the Lessee and guarantor of the Termination Agreement; (ii) the length of the payment terms as defined in the Termination Agreement; (iii) the payment terms as defined in the Termination Agreement being denominated in USD; and (iv) the fact that the facility is located in, and the Lessee and guarantor conduct business in, Haiti, a foreign country. Since management used significant unobservable inputs and assumptions to determine the fair value of this note receivable, this note receivable was classified as Level 3 within the fair value hierarchy (see Note 11 for further explanation of the fair value hierarchy).

The following table represents the remaining future principal payments as of October 29, 2023:


(dollars in thousands)
2024	$	i 180
2025		i 360
2026		i 360
2027		i 360
2028		i 360
Thereafter		i 600
Undiscounted value of note receivable	$	i 2,220
Less: unearned interest income		( i 368	)
Present value of note receivable	$	i 1,852

As of October 29, 2023, we believe there is no expected credit loss related to the collectibility of our note receivable, as the Lessee has made all required principal payments stated in the Termination Agreement. We will continue to evaluate the facts and circumstances at the end of each reporting period to determine if an expected credit loss is deemed necessary.

8. Accrued Expenses

A summary of accrued expenses follows:

(dollars in thousands)

Compensation, commissions and related benefits

i 4,540

i 4,489

i 5,800

Other accrued expenses

i 3,566

i 3,105

i 2,733

i 8,106

i 7,594

i 8,533

9. Upholstery Fabrics Segment Restructuring

Ouanaminthe, Haiti

During the third quarter of fiscal 2023, CUF Haiti entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti and, in turn, moved the production of upholstery cut and sewn kits to an existing facility leased by Culp Home Fashions Haiti, Ltd. (“CHF Haiti”) during the fourth quarter of fiscal 2023. Both CUF Haiti and CHF Haiti are indirect wholly-owned subsidiaries of the company. During the first quarter of fiscal 2024, demand for upholstery cut and sewn kits

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declined more than previously anticipated, resulting in the strategic action to discontinue the production of upholstery cut and sew kits in Haiti.

The following summarizes our restructuring expense and restructuring related (credits) charges from the restructuring activities associated with our upholstery fabrics operations located in Haiti for the three months and six months ending October 29, 2023:


	Three Months Ended			Six Months Ended
(dollars in thousands)	October 29, 2023			October 29, 2023
Employee termination benefits	$	i 2		$	i 103
Impairment loss - equipment		i 142			i 379
(Gain) loss on disposal and markdowns of inventory		( i 78	)		i 101
Restructuring expense and restructuring related (credits) charges (1) (2)	$	i 66		$	i 583

(1) Of the total $ i 66,000, $ i 144,000 and ($ i 78,000) were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending October 29, 2023.

(2) Of the total $ i 583,000, $ i 482,000 and $ i 101,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the six-month period ending October 29, 2023.

The restructuring activity related to the discontinuation of production of upholstery cut and sew kits in Haiti was completed as of October 29, 2023. As a result of our strategic decision to discontinue this production, we incurred a cumulative amount of $ i 1.4 million in restructuring expense and restructuring related charges.

The following summarizes the activity in accrued restructuring costs for the six-month period ending October 29, 2023:


	Employee
	Termination
(dollars in thousands)	Benefits			Total
Beginning balance	$	—		$	—
Expenses incurred		i 103			i 103
Payments		( i 103	)		( i 103	)
Ending balance	$	—		$	—

Shanghai, China

During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation located in Shanghai, China, which included the termination of an agreement to lease a building. This strategic action, along with the further use of our Asian supply chain, was taken in order to adjust our operating costs to better align with the declining customer demand for cut and sewn products.

The following summarizes our restructuring expense and restructuring related charges from the restructuring activities associated with our upholstery fabrics operations located in China for the three months and six months ending October 29, 2022:


	Three and Six Months Ended
(dollars in thousands)	October 30, 2022
Employee termination benefits	$	i i 468 /
Loss on disposal and markdowns of inventory		i i 98 /
Loss on disposal of equipment		i i 80 /
Lease termination costs		i i 47 /
Other associated costs		i i 20 /
Restructuring expense and restructuring related charges (3)	$	i i 713 /

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(3) Of the total $ i i 713,000 / , $ i i 615,000 / and $ i i 98,000 / were recorded to restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month and six-month periods ending October 30, 2022.

The following summarizes the activity in accrued restructuring costs for the three-month and six-month periods ending October 30, 2022:

Employee

Lease

Other

Termination

Associated

(dollars in thousands)

Benefits

Costs

Total

Beginning balance

—

Accrual established in fiscal 2023

i i 468 /

i i 47 /

—

i i 515 /

Expenses incurred

—

i i 20 /

Payments

( i i 468 /

)

( i i 16 /

)

( i i 18 /

)

( i i 502 /

)

Ending balance

—

i 31

i 2

i 33

The restructuring activity related to the discontinuation of operations of the upholstery cut and sew kits in China was completed in the third quarter of fiscal 2023.

10. Lines of Credit

Revolving Credit Agreement – United States

On January 19, 2023, Culp, Inc., as borrower (the “company”), and Read, as guarantor (the “Guarantor”), entered into a Second Amended and Restated Credit Agreement (the “ABL Credit Agreement”), by and among the company, the Guarantor and Wells Fargo Bank, National Association, as the lender (the “Lender”), to establish an asset-based revolving credit facility (the “ABL Facility”). The proceeds from the ABL Facility may be used to pay fees and expenses related to the ABL Facility and will provide funding for ongoing working capital and general corporate purposes. The ABL Credit Agreement amends, restates and supersedes, and serves as a replacement for, the Amended and Restated Credit Agreement (the “Amended Agreement”), dated as of June 24, 2022, and the First Amendment to the Amended Agreement dated as of August 19, 2022, as amended, by and between the company and the Lender.

The ABL Facility may be used for revolving credit loans and letters of credit from time to time up to a maximum principal amount of $ i 35.0 million, subject to the limitations described below. The ABL Facility contains a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $ i 1 million. The amount available under the ABL Facility is limited by a borrowing base consisting of certain eligible accounts receivable and inventory, reduced by specified reserves, as follows:

•

i 85% of eligible accounts receivable, plus

•

the least of:

the sum of:

▪

lesser of (i) i 65% of eligible inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) i 85% of the net-orderly-liquidation value percentage of eligible inventory, plus

▪

the least of (i) i 65% of eligible in-transit inventory valued at cost based on a first-in first-out basis (net of intercompany profits), (ii) i 85% of the net-orderly-liquidation value percentage of eligible in-transit inventory, and (iii) $ i 5.0 million, plus

▪

the lesser of (i) i 65% of eligible raw material inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) i 85% of the net-orderly-liquidation value percentage of eligible raw material inventory

In each case, the net-orderly-liquidation value is calculated based on the lower of (i) a first-in first-out basis and (ii) market value, and is (A) net of intercompany profits, (B) net of write-ups and write-downs in value with respect to foreign currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender.

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$ i 22.5 million; and

An amount equal to i 200% of eligible accounts receivable,

minus

•

applicable reserves.

i The ABL Facility permits both base rate borrowings and borrowings based upon daily simple SOFR (the secured overnight financing rate administered by the Federal Reserve Bank of New York (or its successor)). Borrowings under the ABL Facility bear interest at an annual rate equal to daily simple SOFR plus i 150 basis points (if the average monthly excess availability under the ABL Facility is greater than 50%) or i 175 basis points (if the average monthly excess availability under the ABL Facility is less than or equal to 50%) or i 50 basis points above base rate (if the average monthly excess availability under the ABL Facility is greater than 50%) or i 75 basis points above base rate (if the average monthly excess availability under the ABL Facility is less than or equal to 50%), as applicable, with a fee on unutilized commitments at an annual rate of i 37.5 basis points and an annual servicing fee of $ i 12,000. /

The ABL Facility matures on i January 19, 2026. The ABL Facility may be prepaid from time to time, in whole or in part, without a prepayment penalty or premium. In addition, customary mandatory prepayments of the loans under the ABL Facility are required upon the occurrence of certain events including, without limitation, outstanding borrowing exposures exceeding the borrowing base and certain dispositions of assets outside of the ordinary course of business. Accrued interest is payable monthly in arrears.

The company’s obligations under the ABL Facility (and certain related obligations) are (a) guaranteed by the Guarantor and each of the company’s future domestic subsidiaries is required to guarantee the ABL Facility on a senior secured basis (such guarantors and the company, the “Loan Parties”) and (b) secured by all assets of the Loan Parties, subject to certain exceptions. The liens and other security interests granted by the Loan Parties on the collateral for the benefit of the Lender under the ABL Facility are, subject to certain permitted liens, first-priority.

Cash Dominion. Under the terms of the ABL Facility, if (i) an event of default has occurred or (ii) excess borrowing availability under the ABL Facility (based on the lesser of $ i 35.0 million and the borrowing base) (the “Excess Availability”) falls below $ i 7.0 million at such time, the Loan Parties will become subject to cash dominion, which will require prepayment of loans under the ABL Facility with the cash deposited in certain deposit accounts of the Loan Parties, including a concentration account, and will restrict the Loan Parties’ ability to transfer cash from their concentration account. Such cash dominion period (a “Dominion Period”) shall end when Excess Availability shall be equal to or greater than $ i 7.0 million for a period of i 60 consecutive days and no event of default is continuing.

Financial Covenants. The ABL Facility contains a springing covenant requiring that the company’s fixed charge coverage ratio be no less than i 1.10 to 1.00 during any period that (i) an event of default has occurred or (ii) Excess Availability under the ABL Facility falls below $ i 5.25 million at such time. Such compliance period shall end when Excess Availability shall be equal to or greater than $ i 5.25 million for a period of i 60 consecutive days and no event of default is continuing.

Affirmative and Restrictive Covenants. The ABL Credit Agreement governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and qualifications), and events of defaults, including covenants that limit the company’s ability to, among other things:

•

incur additional indebtedness;

•

make investments;

•

pay dividends and make other restricted payments;

•

sell certain assets;

•

create liens;

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•

consolidate, merge, sell or otherwise dispose of all or substantially all of the company’s assets; and

•

enter into transactions with affiliates.

Overall

Effective January 19, 2023, interest was charged under the ABL Credit Agreement at a rate (applicable interest rate of i 6.80% and i 6.30% as of October 29, 2023 and April 30, 2023, respectively) calculated using the Applicable Margin over i SOFR based on the company’s excess availability under the ABL Facility, as defined in the ABL Credit Agreement. Under the Amended Agreement, interest was charged at a rate ( i 4.38% as of October 30, 2022) calculated using the Applicable Margin over SOFR based on the ratio of company’s consolidated debt to consolidated EBITDA, as defined in the Amended Agreement.

There were $ i 535,000, $ i 275,000, and $ i 275,000 of outstanding letters of credit provided by the ABL Credit Agreement and the Amended Agreement, as applicable, as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively. As of October 29, 2023, we had $ i 465,000 remaining for the issuance of additional letters of credit under the ABL Credit Agreement.

There were i i i no / / borrowings outstanding under either the ABL Credit Agreement or the Amended Credit Agreement, as applicable, as of October 29, 2023, October 30, 2022, or April 30, 2023, respectively.

As of October 29, 2023, our available borrowings calculated under the provisions of the ABL Credit Agreement totaled $ i 26.2 million.

Revolving Credit Agreement – China Operations

Denominated in Chinese Yuan Renminbi (“RMB”)

We have an unsecured credit agreement denominated in RMB with a bank located in China that provides for a line of credit of up to i 35 million RMB ($ i 4.8 million USD as of October 29, 2023). i Interest charged under this agreement is based on an interest rate determined by the Chinese government at the time of borrowing. This agreement is set to expire on i October 24, 2024. Our borrowing capacity of i 35 million RMB is restricted to certain consolidated net sales and consolidated profitability requirements as defined in the agreement. These requirements relate to our total consolidated Culp Inc. entity as a whole. Currently, Culp Inc. does not meet the consolidated net sales and consolidated profitability requirements set forth in the agreement, therefore, we cannot borrow under this agreement.

There were i i i no / / borrowings outstanding under this agreement as of October 29, 2023, October 30, 2022, or April 30, 2023, respectively.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of October 29, 2023, we complied with our financial covenants.

i No interest payments were made during the first half of fiscal 2024. Interest paid during the first half of fiscal 2023 totaled $ i 8,000.

11. Fair Value

Accounting Standard Codification ("ASC") Topic 820, Fair Value Measurement establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.

The hierarchy consists of three broad levels as follows:

Level 1 – Quoted market prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable; and

Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.

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The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors, and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.

Recurring Basis

The following tables present information about assets measured at fair value on a recurring basis:

Fair value measurements as of October 29, 2023, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

i 7,060

N/A

i 7,060

Growth Allocation Mutual Funds

i 560

N/A

i 560

Moderate Allocation Mutual Fund

i 46

N/A

i 46

Other

i 266

N/A

i 266

Fair value measurements as of October 30, 2022, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

i 9,089

N/A

i 9,089

Growth Allocation Mutual Funds

i 438

N/A

i 438

Moderate Allocation Mutual Fund

i 77

N/A

i 77

Other

i 159

N/A

i 159

Fair value measurements as of April 30, 2023, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

i 7,649

N/A

i 7,649

Growth Allocation Mutual Funds

i 528

N/A

i 528

Moderate Allocation Mutual Fund

i 86

N/A

i 86

Other

i 208

N/A

i 208

Investments - Rabbi Trust

We have a rabbi trust (the “Trust”) for the participants of our deferred compensation plan (the “Plan”), that enables participants to direct their contributions to various investment options under the Plan. The investments associated with the Trust consist of a money market fund and various mutual funds that are classified as available-for-sale.

As of October 29, 2023, our investments associated with the Trust totaled $ i 7.9 million, of which $ i 937,000 and $ i 7.0 million were classified as short-term and long-term, respectively. As of October 30, 2022, our investments associated with the Trust totaled $ i 9.8 million, of which $ i 2.2 million and $ i 7.6 million were classified as short-term and long-term, respectively. As of April 30, 2023, our investments associated with the Trust totaled $ i 8.5 million, of which $ i 1.4 million and $ i 7.1 million were classified as short-term and long-term, respectively. The investments associated with the Trust had an accumulated unrealized loss of $ i 6,000, an accumulated unrealized loss of $ i 21,000, and an accumulated unrealized gain of $ i 19,000 as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

The fair value of our investments associated with the Trust approximates their cost basis.

Other

The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximated their fair value because of the short maturity of these financial instruments.

I-18

12. Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of shares outstanding during the period. Diluted net loss per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.

Weighted average shares used in the computation of basic and diluted net loss per share were i i 12,456,000 / and i i 12,280,000 / for the three months ending October 29, 2023, and October 30, 2022, respectively.

Shares of unvested common stock that were not included in the computation of diluted net loss per share consist of the following:


	Three months ended
(in thousands)	October 29, 2023		October 30, 2022
antidilutive effect from decrease in the price per share of our common stock		i 11		i 42
antidilutive effect from net loss incurred during the fiscal year		i 136		i 35
total unvested shares of common stock not included in computation of diluted net loss per share		i 147		i 77

Weighted average shares used in the computation of basic and diluted net loss per share were i i 12,394,000 / and i i 12,259,000 / for the six months ending October 29, 2023, and October 30, 2022, respectively.

Shares of unvested common stock that were not included in the computation of diluted net loss per share consist of the following:


	Six months ended
(in thousands)	October 29, 2023		October 30, 2022
antidilutive effect from decrease in the price per share of our common stock		i 20		i 38
antidilutive effect from net loss incurred during the fiscal year		i 105		i 47
total unvested shares of common stock not included in computation of diluted net loss per share		i 125		i 85

13. Segment Information

Overall

Our operations are classified into i two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. In addition, this segment includes Read, which provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services for Read’s products, to customers in the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

Financial Information

We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executives and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. i Intangible assets are not included in segment assets as these assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating performance, allocate resources to individual segments, or determine executive compensation.

I-19

Statements of operations for our operating segments are as follows:


	Three months ended
	October 29, 2023			October 30, 2022
net sales by segment:
mattress fabrics	$	i 31,377		$	i 26,230
upholstery fabrics		i 27,348			i 32,151
net sales	$	i 58,725		$	i 58,381
gross profit (loss):
mattress fabrics	$	i 2,483		$	( i 6,057	)
upholstery fabrics		i 5,389			i 3,942
segment gross profit (loss):		i 7,872			( i 2,115	)
restructuring related credit (charge) (1)		i 78			( i 98	)
gross profit (loss)	$	i 7,950		$	( i 2,213	)
selling, general, and administrative expenses by segment:
mattress fabrics	$	i 3,419		$	i 2,945
upholstery fabrics		i 3,998			i 3,680
unallocated corporate expenses		i 2,628			i 2,478
selling, general, and administrative expenses	$	i 10,045		$	i 9,103
(loss) income from operations by segment:
mattress fabrics	$	( i 936	)	$	( i 9,002	)
upholstery fabrics		i 1,391			i 262
unallocated corporate expenses		( i 2,628	)		( i 2,478	)
total segment loss from operations	$	( i 2,173	)	$	( i 11,218	)
restructuring related credit (charge) (1)		i 78			( i 98	)
restructuring expense (2)		( i 144	)		( i 615	)
loss from operations	$	( i 2,239	)	$	( i 11,931	)
interest income		i 282			i 79
other income		i 49			i 829
loss before income taxes	$	( i 1,908	)	$	( i 11,023	)

I-20

(1) Gross profit and loss from operations for the three months ending October 29, 2023, includes restructuring related credits of $ i 78,000 for the gain on disposal of inventory related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Gross loss and loss from operations for the three months ending October 30, 2022, includes restructuring related charges totaling $ i 98,000 for loss on disposal and markdowns of inventory associated with the exit of our cut and sewn upholstery fabrics operation located in Shanghai, China.

(2) Restructuring expense of $ i 144,000 for the three months ended October 29, 2023, represents a $ i 142,000 impairment charge related to equipment and $ i 2,000 of employee termination benefits related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Restructuring expense of $ i 615,000 for the three-months ended October 30, 2022, represents $ i 468,000 for employee termination benefits, $ i 80,000 related to a loss on disposal of equipment, $ i 47,000 for lease termination costs, and $ i 20,000 of other associated costs related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China.


	Six months ended
	October 29, 2023			October 30, 2022
net sales by segment:
mattress fabrics	$	i 60,599		$	i 55,602
upholstery fabrics		i 54,788			i 65,383
net sales	$	i 115,387		$	i 120,985
gross profit (loss):
mattress fabrics	$	i 4,477		$	( i 6,093	)
upholstery fabrics		i 10,659			i 8,105
total segment gross profit	$	i 15,136		$	i 2,012
restructuring related charge (1)		( i 101	)		( i 98	)
gross profit	$	i 15,035		$	i 1,914
selling, general, and administrative expenses by segment:
mattress fabrics	$	i 6,811		$	i 5,829
upholstery fabrics		i 7,939			i 7,302
unallocated corporate expenses		i 5,124			i 4,837
selling, general, and administrative expenses	$	i 19,874		$	i 17,968
(loss) income from operations by segment:
mattress fabrics	$	( i 2,334	)	$	( i 11,922	)
upholstery fabrics		i 2,720			i 803
unallocated corporate expenses		( i 5,124	)		( i 4,837	)
total segment loss from operations	$	( i 4,738	)	$	( i 15,956	)
restructuring related charge (1)		( i 101	)		( i 98	)
restructuring expense (2)		( i 482	)		( i 615	)
loss from operations	$	( i 5,321	)	$	( i 16,669	)
interest income		i 627			i 96
other income		i 145			i 747
loss before income taxes	$	( i 4,549	)	$	( i 15,826	)

I-21

(1) Gross profit and loss from operations for the six months ending October 29, 2023, includes a net restructuring related charge of $ i 101,000, which represents a markdown of inventory totaling $ i 179,000 during the first quarter of fiscal 2024, partially offset by a gain on disposal of inventory totaling $ i 78,000 during the second quarter of fiscal 2024, both of which related to the discontinuation of production of cut and sewn upholstery kits at our facility located in Ouanaminthe, Haiti. Gross profit and loss from operations for the six months ending October 30, 2022 includes restructuring related charges totaling $ i 98,000 for loss on disposal and markdowns of inventory associated with the exit of our cut and sewn upholstery fabrics operation located in Shanghai, China.

(2) Restructuring expense of $ i 482,000 for the six months ended October 29, 2023, represents a $ i 379,000 impairment charge associated with equipment and $ i 103,000 for employee termination benefits related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Restructuring expense of $ i 615,000 for the six-months ended October 30, 2022, represents $ i 468,000 for employee termination benefits, $ i 80,000 related to a loss on disposal of equipment, $ i 47,000 for lease termination costs, and $ i 20,000 of other associated costs related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China.

Balance sheet information for our operating segments follows:

(dollars in thousands)

October 29, 2023

October 30, 2022

April 30, 2023

Segment assets:

Mattress Fabrics:

Accounts receivable, net

i 11,303

i 8,700

i 12,396

Inventory

i 27,195

i 30,300

i 25,674

Property, plant and equipment (1)

i 32,862

i 35,853

i 33,749

Right of use assets (2)

i 1,969

i 2,087

i 2,308

Total mattress fabrics assets

i 73,329

i 76,940

i 74,127

Upholstery Fabrics:

Accounts receivable, net

i 11,733

i 13,743

i 12,382

Inventory

i 17,270

i 21,924

i 19,406

Property, plant and equipment (3)

i 1,175

i 2,150

i 1,671

Right of use assets (4)

i 1,992

i 5,898

i 2,618

Total upholstery fabrics assets

i 32,170

i 43,715

i 36,077

Total segment assets

i 105,499

i 120,655

i 110,204

Non-segment assets:

Cash and cash equivalents

i 15,214

i 19,137

i 20,964

Short-term investments - rabbi trust

i 937

i 2,237

i 1,404

Short-term note receivable

i 256

—

i 219

Current income taxes receivable

i 340

i 510

—

Other current assets

i 4,346

i 3,462

i 3,071

Long-term note receivable

i 1,596

—

i 1,726

Deferred income taxes

i 472

i 493

i 480

Property, plant and equipment (5)

i 627

i 829

i 691

Right of use assets (6)

i 2,913

i 3,624

i 3,265

Intangible assets

i 2,064

i 2,440

i 2,252

Long-term investments - rabbi trust

i 6,995

i 7,526

i 7,067

Other assets

i 901

i 717

i 840

Total assets

i 142,160

i 161,630

i 152,183

(1)

The $ i 32.9 million as of October 29, 2023, represents property, plant, and equipment of $ i 22.2 million, $ i 10.0 million, and $ i 661,000 located in the U.S., Canada, and Haiti, respectively. The $ i 35.9 million as of October 30, 2022, represents property, plant, and equipment of $ i 23.8 million, $ i 11.4 million, and $ i 679,000 located in the U.S., Canada, and Haiti, respectively. The $ i 33.7 million as of April 30, 2023, represents property, plant, and equipment of $ i 22.7 million, $ i 10.4 million, and $ i 608,000 located in the U.S., Canada, and Haiti, respectively.

(2)

The $ i 2.0 million as of October 29, 2023, represents right of use assets of $ i 1.3 million and $ i 663,000 located in Haiti and Canada, respectively. The $ i 2.1 million as of October 30, 2022, represents right of use assets of $ i 1.8 million, $ i 167,000, and $ i 164,000 located in Haiti, Canada, and the U.S., respectively. The $ i 2.3 million as of April 30, 2023, represents right of use assets of $ i 1.5 million and $ i 776,000 located in Haiti and Canada, respectively.

I-22

(3)

The $ i 1.2 million as of October 29, 2023, represents property, plant, and equipment of $ i 1.0 million and $ i 140,000 located in the U.S. and China, respectively. The $ i 2.2 million as of October 30, 2022, represents property, plant, and equipment of $ i 1.0 million, $ i 1.0 million, and $ i 137,000 located in the U.S., Haiti, and China, respectively. The $ i 1.7 million as of April 30, 2023, represents property, plant, and equipment of $ i 974,000, $ i 592,000, and $ i 105,000 located in the U.S., Haiti, and China, respectively.

(4)

The $ i 2.0 million as of October 29, 2023, represents right of use assets of $ i 1.2 million and $ i 818,000 located in China and the U.S., respectively. The $ i 5.9 million as of October 30, 2022, represents right of use assets of $ i 2.5 million, $ i 2.0 million, and $ i 1.4 million located in Haiti, China, and the U.S., respectively. The $ i 2.6 million as of April 30, 2023, represents right of use assets of $ i 1.5 million and $ i 1.1 million located in China and the U.S., respectively.

(5)

The $ i 627,000, $ i 829,000, and $ i 691,000 as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively, represent property, plant, and equipment associated with unallocated corporate department and corporate departments shared by our mattress fabrics and upholstery fabrics segments. Property, plant, and equipment associated with our corporate departments reside in the U.S.

(6)

The $ i 2.9 million, $ i 3.6 million, and $ i 3.3 million as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively, represent right of use assets located in the U.S.

Information about capital expenditures and depreciation expense for our operating segments follows:


	Six months ended
(dollars in thousands)	October 29, 2023		October 30, 2022
Capital expenditures (1):
Mattress Fabrics	$	i 1,948	$	i 267
Upholstery Fabrics		i 185		i 447
Unallocated Corporate		i 80		i 60
Total capital expenditures	$	i 2,213	$	i 774
Depreciation expense:
Mattress Fabrics	$	i 2,922	$	i 3,088
Upholstery Fabrics		i 329		i 401
Total depreciation expense	$	i 3,251	$	i 3,489

(1)

Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.

I-23

14. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $ i 1.2 million, or ( i 26.8%) of loss before income taxes, for the six-month period ending October 29, 2023, compared with income tax expense of $ i 2.0 million, or ( i 12.9%) of loss before income taxes, for the six-month period ending October 30, 2022.

Our effective income tax rates for the six-month periods ended October 29, 2023, and October 30, 2022, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rates for the six-month periods ended October 29, 2023, and October 30, 2022, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, and Haiti as compared to annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the six-month periods ending October 29, 2023, and October 30, 2022:


	October 29,			October 30,
	2023			2022
U.S. federal income tax rate		i 21.0	%		i 21.0	%
U.S. valuation allowance		( i 32.8	)		( i 36.7	)
Withholding taxes associated with foreign jurisdictions		( i 9.9	)		( i 3.3	)
Foreign income tax rate differential		( i 5.7	)		i 3.2
Stock-based compensation		( i 4.2	)		( i 0.6	)
Tax effects of local currency foreign exchange gains		i 5.1			i 4.7
Other		( i 0.3	)		( i 1.2	)
	( i 26.8%)			( i 12.9)%

Our consolidated effective income tax rates during the first half of fiscal 2024 and the first half of fiscal 2023 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S. In addition, during the first half of fiscal 2024 and the first half of fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets. However, the income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was lower during the first half of fiscal 2024 compared with the first half of fiscal 2023, as our $( i 11.8) million U.S. pre-tax loss incurred during the first half of fiscal 2024 was significantly lower than the $( i 20.7) million U.S. pre-tax loss incurred during the first half of fiscal 2023.

During the first half of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $( i 4.5) million, compared with $( i 15.8) million during the first half of fiscal 2023. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first half of fiscal 2024, as compared with the first half of fiscal 2023.

U.S. Valuation Allowance

We evaluate the realizability of our U.S. net deferred income tax assets to determine if a valuation allowance is required. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

I-24

negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

Based on our assessments as of October 29, 2023, October 30, 2022, and April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)

October 29, 2023

October 30, 2022

April 30, 2023

U.S. federal and state net deferred income tax assets

i 17,839

i 13,958

i 16,345

U.S. capital loss carryforward

i 2,330

i 20,169

i 16,288

i 18,675

Undistributed Earnings

We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company and whether we are required to record a deferred income tax liability for those undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of October 29, 2023, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would eventually be distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior reporting periods.

As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a i 100% dividend received deduction for earnings and profits received from a i 10% owned foreign corporation. Therefore, a deferred income tax liability will be required only for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company. As a result, as of October 29, 2023, October 30, 2022, and April 30, 2023, we recorded a deferred income tax liability of $ i 4.6 million, $ i 4.0 million, and $ i 4.2 million, respectively.

Uncertain Income Tax Positions

An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

As of October 29, 2023, we had a $ i 1.2 million total gross unrecognized income tax benefit, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of October 30, 2022, we had a $ i 1.1 million total gross unrecognized income tax benefit, of which the entire amount was recorded to income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of April 30, 2023, we had a $ i 1.2 million total gross unrecognized income tax benefit, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. These unrecognized income tax benefits would favorably affect income tax expense in future periods by $ i 1.2 million, $ i 1.1 million, and $ i 1.2 million, as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

Our gross unrecognized income tax benefit of $ i 1.2 million as of October 29, 2023, relates to income tax positions for which significant change is currently not expected within the next year.

Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:


	Six Months Ended		Six Months Ended
	October 29,		October 30,
(dollars in thousands)	2023		2022
United States Transition Tax Payment	$	i 499	$	i 265
China Income Taxes, Net of Refunds		i 1,278		i 1,286
Canada Income Taxes, Net of Refunds		i 336		i 161
	$	i 2,113	$	i 1,712

I-25

15. Stock-Based Compensation

Equity Incentive Plan Description

On September 16, 2015, our shareholders approved an equity incentive plan titled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based units, and other equity and cash related awards as determined by the Compensation Committee of our board of directors. An aggregate of i 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. Effective September 27, 2023, our shareholders approved an amendment and restatement of the 2015 Plan (the "Amended and Restated Plan"). The Amended and Restated Plan authorizes the issuance of an additional i 960,000 shares of common stock in addition to the shares of common stock still available for issuance under the 2015 Plan. The Amended and Restated Plan also removed certain sub-limits that previously applied with respect to specific type of awards that may be issued under the plan.

As of October 29, 2023, there were i 765,399 shares available for future equity-based grants under the Amended and Restated Plan.

Performance-Based Restricted Stock Units

Senior Executives

We grant performance-based restricted stock units to senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit award agreements. The number of shares of common stock that are earned based on performance targets that have been achieved may be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit award agreements.

Our performance-based restricted stock units granted to senior executives were measured based on their fair market value on the date of grant. The fair market value per share was determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock for the performance-based component.

The following table provides assumptions used to determine the fair market value of the market-based total shareholder return component using the Monte Carlo simulation model on our outstanding performance-based restricted stock units granted to senior executives on September 28, 2023, August 10, 2022 and July 22, 2021:


	September 28,	August 10,	July 22,
	2023	2022	2021
Closing price of our common stock	$ i 5.59	$ i 5.06	$ i 14.75
Expected volatility of our common stock	i 37.3%	i 48.2%	i 54.2%
Expected volatility of peer companies	i 35.7%- i 91.5%	i 41.6%- i 105.1%	i 45.7%- i 101.5%
Risk-free interest rate	i 4.90%	i 3.13%	i 0.33%
Dividend yield	i 0.00%	i 0.00%	i 3.00%
Correlation coefficient of peer companies	i 0.01- i 0.21	i 0.05- i 0.23	i 0.03- i 0.35

Key Employees

We grant performance-based restricted stock units to key employees which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit award agreements. Our performance-based restricted stock units granted to key employees were measured based on the fair market value (the closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in these awards.

I-26

Overall

The following table summarizes information related to our grants of performance-based restricted stock units associated with senior executives and key employees that were unvested as of October 29, 2023:

(3)

(4)

Performance-Based

Restricted Stock

Units Expected

Date of Grant

Units Awarded

to Vest

Price Per Share

Vesting Period

September 28, 2023 (1)

i 227,497

i 121,740

i 6.43

(5)

i 34 months

August 10, 2022 (1)

i 178,714

—

i 5.77

(6)

i 3 years

July 22, 2021 (1)

i 122,476

—

i 15.93

(7)

i 3 years

July 22, 2021 (2)

i 20,500

—

i 14.75

(8)

i 3 years

(1)

Performance-based restricted stock units awarded to senior executives.

(2)

Performance-based restricted stock units awarded to key employees.

(3)

Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements.

(4)

Compensation cost is based on an assessment each reporting period to determine the probability of whether or not certain performance goals will be met and how many shares are expected to be earned as of the end of the vesting period. These amounts represent the number of shares that were expected to vest as of October 29, 2023.

(5)

Price per share represents the fair market value per share ($ i 1.15 per $1, or an increase of $ i 0.84 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($ i 5.59) for the performance-based component of the performance-based restricted stock units granted to senior executives on September 28, 2023.

(6)

Price per share represents the fair market value per share ($ i 1.14 per $1, or an increase of $ i 0.71 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($ i 5.06) for the performance-based component of the performance-based restricted stock units granted to senior executives on August 10, 2022.

(7)

Price per share represents the fair market value per share ($ i 1.08 per $1, or an increase of $ i 1.18 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($ i 14.75) for the performance-based component of the performance-based restricted stock units granted to senior executives on July 22, 2021.

(8)

Price per share represents the closing price of our common stock on the date of grant.

There were i no performance-based restricted stock units that vested during the six-month period ended October 29, 2023. i The following table summarizes information related to our performance-based restricted stock units that vested during the six-month period ended October 30, 2022:

Performance-Based

(4)

Restricted Stock

(3)

Price

Fiscal Year

Units Vested

Fair Value

Per Share

Fiscal 2023 (1)

i 545

i 3

i 5.10

Fiscal 2023 (2)

i 437

i 2

i 5.10

(1)

Performance-based restricted stock units vested by senior executives.

(2)

Performance-based restricted stock units vested by key employees.

(3)

Dollar amounts are in thousands.

(4)

Price per share is derived from the closing price of our common stock on the date the respective performance-based restricted stock units vested.

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We recorded compensation expense of $ i 23,000 and $ i 2,000 within selling, general, and administrative expenses associated with our performance-based restrictive stock units for the six-month periods ended October 29, 2023, and October 30, 2022, respectively. Compensation expense is recorded based on an assessment each reporting period to determine the probability of whether or not certain performance targets will be met and how many shares are expected to be earned as of the end of the vesting period. If certain performance goals are not expected to be achieved, compensation expense would not be recorded, and any previously recognized compensation expense would be reversed.

As of October 29, 2023, the remaining unrecognized compensation expense related to our performance-based restricted stock units was $ i 759,000, which is expected to be recognized over a weighted average vesting period of i 2.7 years. As of October 29, 2023, the performance-based restricted stock units that are expected to vest had a fair value totaling $ i 674,000.

Time-Based Restricted Stock Units

The following table summarizes information related to our grants of time-based restricted stock unit awards associated with senior executives, key employees, and outside directors that were unvested as of October 29, 2023:


	Time-Based
	Restricted Stock		(1)
Date of Grant	Units Awarded		Price Per Share		Vesting Period
September 28, 2023 (2)		i 100,068	$	i 5.59	i 34 months
September 28, 2023 (3)		i 59,928	$	i 5.59	i 1 year
September 6, 2022 (2)		i 25,114	$	i 4.58	i 2 to i 3 years
August 10, 2022 (2)		i 78,225	$	i 5.06	i 3 years
July 22, 2021 (2)		i 30,835	$	i 14.75	i 3 years

(1)

Price per share represents closing price of common stock on the date the respective award was granted.

(2)

Time-based restricted stock units awarded to senior executives and key employees.

(3)

Time-based restricted stock units awarded to outside directors.

The following table summarizes information related to our time-based restricted stock units that vested during the six-month periods ending October 29, 2023, and October, 30, 2022, respectively:

Time-Based

(2)

Restricted Stock

(1)

Price

Fiscal Year

Units Vested

Fair Value

Per Share

Fiscal 2024

i 151,653

i 857

i 5.65

Fiscal 2023

i 32,799

i 167

i 5.10

(1)

Dollar amounts are in thousands.

(2)

Price per share is derived from the closing price of our common stock on the date the respective time-based restricted stock units vested.

We recorded compensation expense of $ i 378,000 and $ i 396,000 within selling, general, and administrative expenses associated with our time-based restricted stock unit awards for the six-month periods ended October 29, 2023, and October 30, 2022, respectively.

As of October 29, 2023, the remaining unrecognized compensation expense related to our time-based restricted stock units was $ i 1.3 million, which is expected to be recognized over a weighted average vesting period of i 1.9 years. As of October 29, 2023, the time-based restricted stock units that are expected to vest had a fair value totaling $ i 1.6 million.

Immediately Vested Common Stock Awards

We granted a total of i 16,616 shares of common stock to our outside directors on July 3, 2023. These shares of common stock vested immediately and were measured at their fair value on the date of the grant. The fair value of these awards was $ i 5.04 per share on July 3, 2023, which represents the closing price of our common stock on the date of grant.

We granted a total of i 18,326 and i 19,753 shares of common stock to our outside directors on October 3, 2022, and July 1, 2022, respectively. These shares of common stock vested immediately and were measured at their fair value on the date of the grant. The

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fair value of these awards was $ i 4.57 and $ i 4.24 per share on October 3,2022, and July 1, 2022, respectively, which represents the closing price of our common stock on the date of grant.

We recorded $ i 84,000 and $ i 167,000 of compensation expense within selling, general, and administrative expenses for common stock awards to our outside directors for the six-month periods ended October 29, 2023, and October 30, 2022, respectively.

16. Leases

Overview

We lease manufacturing facilities, showroom and office space, distribution centers, and equipment under operating lease arrangements. Our operating leases have remaining lease terms of one to i eight years, with i renewal options for additional periods ranging up to twelve years.

Balance Sheet

The right of use assets and lease liabilities associated with our operating leases as of October 29, 2023, October 30, 2022, and April 30, 2023, are as follows:

(dollars in thousands)