SEC Info - Culp Inc. - ‘10-Q’ for 1/29/23

Raw materials

i 9,623

i 12,964

i 13,477

Work-in-process

i 3,164

i 4,679

i 4,237

Finished goods

i 34,840

i 55,490

i 48,843

i 47,627

i 73,133

i 66,557

Substantial and Unusual Losses Resulting from Subsequent Measurement of Inventory

We incurred non-cash inventory charges totaling $ i 6.3 million during the first nine months of fiscal 2023. These charges represent a $ i 2.9 million write-down of inventory to its net realizable value associated with our mattress fabrics segment, $ i 3.3 million related to markdowns of inventory estimated based on our policy for aged inventory in both our mattress and upholstery fabrics segments, and $ i 98,000 for the loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China (see Note 8 to the consolidated financial statements for further details). Of the $ i 6.3 million non-cash inventory charge for the first nine months of fiscal 2023, $ i 3.9 million and $ i 2.4 million pertained to our mattress fabrics and upholstery fabrics segments, respectively.

We incurred a non-cash inventory charge of $ i 1.4 million for the first nine months of fiscal 2022, which represents markdowns of inventory estimated based on our policy for aged inventory in both mattress and upholstery fabrics segments.

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 non-cash inventory charges of $ i 3.8 million 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 fiscal 2023 stemmed from a greater than anticipated decline in consumer discretionary spending, which we believe was due to 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 this evidence, management conducted a thorough review of its mattress fabrics inventory, and as 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.

As of January 29, 2023, we reviewed our mattress fabrics inventory to determine if additional write-downs of inventory that were not recorded based on our policy for aged inventory were necessary. Based on this assessment, no additional write-downs of inventory to their net realizable value were recorded during the third quarter of fiscal 2023.

Based on the current unfavorable macroeconomic conditions, it is possible that the 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

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differences could result in higher than expected inventory provisions, 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 1,411

i 1,711

i 1,636

Non-compete agreement, net

i 395

i 471

i 452

i 2,346

i 2,722

i 2,628

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 January 29, 2023, no indicators of impairment existed, and therefore we did i not record any asset impairment charges associated with our tradename through the third quarter of fiscal 2023.

Customer Relationships

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


	Nine months ended
(dollars in thousands)	January 29, 2023			January 30, 2022
Beginning balance	$	i 1,636		$	i 1,937
Amortization expense		( i 225	)		( i 226	)
Ending balance	$	i 1,411		$	i 1,711

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 January 29, 2023, January 30, 2022, and May 1, 2022, respectively. Accumulated amortization for these customer relationships was $ i 1.7 million, $ i 1.4 million, and $ i 1.5 million as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.

The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2023 - $ i 76,000; FY 2024 - $ i 301,000; FY 2025 - $ i 301,000; FY 2026 - $ i 301,000; FY 2027 - $ i 279,000; and thereafter - $ i 153,000.

The weighted average amortization period for our customer relationships was i 5.0 years as of January 29, 2023.

Non-Compete Agreement

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


	Nine months ended
(dollars in thousands)	January 29, 2023			January 30, 2022
Beginning balance	$	i 452		$	i 527
Amortization expense		( i 57	)		( i 56	)
Ending balance	$	i 395		$	i 471

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 January 29, 2023, January 30, 2022, and May 1, 2022, respectively. Accumulated amortization for our non-compete agreement was $ i 1.6 million, $ i 1.5 million, and $ i 1.6 million as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.

The remaining amortization expense for the next five years and thereafter follows: FY 2023 - $ i 18,000; FY 2024 - $ i 76,000; FY 2025 - $ i 76,000; FY 2026 - $ i 76,000; FY 2027 - $ i 76,000, and thereafter - $ i 73,000.

The weighted average amortization period for the non-compete agreement was i 5.3 years as of January 29, 2023.

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Impairment

As of January 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 "Asset Group"), for impairment, as events and changes in circumstances occurred that indicated the carrying amount of the Asset Group may not be recoverable. During the third quarter of fiscal 2023, the decline in net sales and profitability continued for our mattress fabrics segment. During the first nine months of fiscal 2023, net sales for our mattress fabrics segment declined by i 34.4%, compared with the first nine months of fiscal 2022. This decline in net sales led to a significant decrease in gross margin to ( i 9.1%) during the first nine months of fiscal 2023, compared with gross margin of i 13.2% during the first nine months of fiscal 2022. The significant decline in net sales and profitability during the first nine months of fiscal 2023 stemmed from a greater than anticipated decline in consumer discretionary spending, which we believe was due to 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 Asset Group, which is classified as held and used, by comparing the carrying amount of the 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 fair value (i.e., the sum of undiscounted future cash flows) of the asset. The carrying amount of the Asset Group totaled $ i 37.8 million, which relates to property, plant, and equipment of $ i 34.7 million, right of use assets of $ i 2.5 million, customer relationships of $ i 370,000, and a non-compete agreement of i 309,000. Based on the comparison of the carrying amount of the Asset Group to the sum of its future undiscounted cash flows from its use and eventual disposition, we determined no impairment existed as of January 29, 2023, as the carrying amount of the Asset Group totaling $ i 37.8 million did not exceed the sum of its future undiscounted cash flows.

7. Accrued Expenses

A summary of accrued expenses follows:

(dollars in thousands)

Compensation, commissions and related benefits

i 3,571

i 3,426

i 4,248

Other accrued expenses

i 3,130

i 5,020

i 3,584

i 6,701

i 8,446

i 7,832

8. Upholstery Fabrics Segment Restructuring Activities

Second Quarter of Fiscal 2023

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 our response to adjust our operating costs to better align with the declining consumer demand for cut and sewn products. As a result of this strategic action, we recorded restructuring expense and restructuring related charges during the second quarter of fiscal 2023 totaling $ i 713,000. Restructuring expense and restructuring related charges totaling $ i 713,000 represent employee termination benefits of $ i 468,000, loss from the disposal and markdowns of inventory of $ i 98,000, impairment loss associated with equipment of $ i 80,000, lease termination costs of $ i 47,000, and other associated costs of $ i 20,000. Of the total $ i 713,000, $ i 615,000 and $ i 98,000, were recorded to restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net loss for the three-month period ending October 30, 2022 and the nine-month period ending January 29, 2023.

Third Quarter of Fiscal 2023

Effective January 24, 2023, Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti") entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti ("Haiti"), that was used solely for the production of cut and sewn kits associated with our upholstery fabrics segment. As a result, CUF Haiti's production of cut and sewn kits will be moved to an existing facility leased by Culp Home Fashions Haiti, Ltd. ("CHF Haiti"). Both CUF Haiti and CHF Haiti are indirect wholly-owned subsidiaries of Culp, Inc. CHF Haiti's facility, which is also located in Haiti, will now produce not only cut and sewn kits associated with our upholstery fabrics segment, but will also continue to produce cut and sewn mattress covers associated with our

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mattress fabrics segment. We believe this restructuring action will reduce the costs of our operations located in Haiti to better align with the declining consumer demand for cut and sewn products by consolidating existing facilities and reducing headcount.

This restructuring action will be completed during the fourth quarter of fiscal 2023.

As mentioned above, CUF Haiti entered into an agreement to terminate the lease ("the Termination Agreement") of a facility ("right of use asset"). Pursuant to the terms of the original lease agreement (the "Original Lease"), CUF Haiti was required to pay in advance $ i i 2.8 / million for the full amount of rent due prior to the commencement of the Original Lease, and the initial lease term was set to expire on i December 31, 2029. Pursuant to the terms of the Termination Agreement, the Original Lease would not be formally terminated until CUF Haiti vacated and returned possession of their right of use asset associated with the Original Lease to the lessor, which was required prior to February 28, 2023, and did occur in the fourth quarter of fiscal 2023. After CUF Haiti vacated and returned possession of their right of use asset to the lessor, a third party (the "Lessee"") has taken possession of CUF Haiti's right of use asset and the Lessee will pay CUF Haiti $ i 2.4 million over a period commencing on April 1, 2023 through December 31, 2029, based on monthly installments as stated in the Termination Agreement. In connection with the 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 will be fully and unconditionally released and discharged from all of its obligations under the Termination Agreement and Original Lease.

In connection with the Termination Agreement, CUF Haiti's right of use asset was classified as held for sale and is presented separately as assets held for sale on the Consolidated Balance Sheet as of January 29, 2023. As a result, CUF Haiti's right of use asset was recorded at its fair value of $ i 2.0 million, which was lower than its carrying value as of January 29, 2023 (see Note 10 to the consolidated financial statements for further details regarding fair value measurement). Consequently, since the fair value of CUF Haiti's right of use asset was lower than its carrying amount, we recorded a restructuring charge of $ i 434,000 during the third quarter of fiscal 2023 to reduce the carrying amount of CUF Haiti's right of use asset to its reported fair value. During the fourth quarter of fiscal 2023, CUF Haiti recognized the sale of their right of use asset, as they have vacated and returned possession of their right of use asset to the Lessor, and the Lessee has taken possession of CUF Haiti's right of use asset. As a result, CUF Haiti's right of use asset classified as held for sale was derecognized and a short-term and long-term note receivable was recognized based on the payments and timing of such payments due from the Lessee as stated in the Termination Agreement.

As a result of this strategic action, we recorded restructuring expense of $ i 711,000 during the third quarter of fiscal 2023, which represents lease termination costs of $ i 434,000 and an impairment loss regarding leasehold improvements totaling $ i 277,000.

The following summarizes our restructuring expense and restructuring related charges from both our restructuring activities noted above for the nine months ending January 29, 2023:


	Nine Months Ended
(dollars in thousands)	January 29, 2023
Lease termination costs	$	i 481
Employee termination benefits		i 468
Impairment loss - leasehold improvements and equipment		i 357
Loss on disposal and markdowns of inventory		i 98
Other associated costs		i 20
Restructuring expense and restructuring related charges (1)	$	i 1,424

(1) Of the total $ i 1.4 million, $ i 1.3 million and $ i 98,000 were recorded to restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 29, 2023.

The following summarizes the activity in accrued restructuring for the nine-month period ending January 29, 2023:

Employee

Lease

Other

Termination

Associated

(dollars in thousands)

Benefits

Costs

Total

Beginning balance

—

Accrual established in fiscal 2023

i 468

i 47

—

i 515

Expenses incurred

—

i 20

Payments

( i 468

)

( i 47

)

( i 20

)

( i 535

)

Ending balance

—

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9. Lines of Credit

Revolving Credit Agreement – United States

Existing Credit Agreement

As of May 1, 2022, we had a Credit Agreement (the “Existing Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided a revolving loan commitment of $ i 30 million, was set to expire on i August 15, 2022, and allowed us to issue letters of credit not to exceed $ i 1 million.

Amended Agreement

Effective June 24, 2022, we entered into an Amended and Restated Credit Agreement (“the Amended Agreement”) with Wells Fargo. The Amended Agreement amended, restated, superseded, and served as a replacement for the Existing Credit Agreement. The Amended Agreement provided a revolving credit facility of up to $ i 40 million, was secured by a lien on the company’s assets, and was set to expire in i June 2025.

The company’s available borrowings under the Amended Agreement were based on a borrowing base calculation using certain accounts receivable and inventory of the company, subject to certain sub-limits as defined in the Amended Agreement, to be calculated on a monthly basis. Similar to the Existing Credit Agreement, the Amended Agreement contained a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $ i 1 million.

Borrowings under the Amended Agreement incurred interest at a rate calculated using a margin (the “Applicable Margin”) over the Federal Reserve Bank of New York’s secured overnight funding rate (SOFR). The Applicable Margin was set initially at i 1.35% and varied under the terms of the Amended Agreement from i 1.35% to i 2.50%, depending on the ratio of the company’s consolidated debt to consolidated EBITDA, as defined in the Amended Agreement, determined on a quarterly basis. The Amended Agreement contained customary affirmative and negative covenants and required compliance by the company with certain financial covenants, including minimum tangible net worth of $ i 100 million plus i 50% of annual net income, and a minimum ratio of consolidated EBITDA to consolidated net interest expense of i 3.0 to 1.0 as defined in the Amended Agreement. The EBITDA to interest expense covenant did not apply under the Amended Agreement during the first three quarters of the company’s fiscal 2023, but during that period, the company was required to maintain “access to liquidity” of $ i 15 million, which is defined as unencumbered liquid assets plus available and unused credit under the revolving credit facility as calculated using the borrowing base, as defined in the Amended Agreement.

First Amendment

On August 19, 2022, we entered into a First Amendment to the Amended Agreement (“the First Amendment”) with Wells Fargo. The terms of the First Amendment amended the time period in which the financial covenant for the minimum ratio of consolidated EBITDA to consolidated net interest expense applied, such that this EBITDA to interest expense covenant does not apply during any of the four quarters of the Company’s fiscal 2023. During that time period, we were still required to maintain minimum “access to liquidity” of $ i 15 million as mentioned in the above Amended Agreement section.

Second Amended and Restated Agreement

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 lender (the “Lender”), to establish an asset-based revolving credit facility (the “ABL Facility”), the proceeds of which may be used to pay fees and expenses related to the ABL Facility and to 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 Agreement, dated as of June 24, 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. Like the Amended Agreement, 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:

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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 currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender.

$ 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 point (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 prepayment 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

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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;

•

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 Agreement at a rate (applicable interest rate of i 5.81% as of January 29, 2023) calculated using the Applicable Margin over i SOFR based on the the Company’s excess availability under the ABL Facility, as defined in the ABL Agreement. Under the Existing Credit Agreement, interest was charged at a rate (applicable interest rate of i 1.71% and i 2.40% as of January 30, 2022, and May 1, 2022, respectively) as a variable spread over i i LIBOR / based on a ratio of debt to EBITDA, as defined in the Existing Credit Agreement.

There were $ i i i 275,000 / / of outstanding letters of credit provided by the ABL Agreement and the Existing Agreement as applicable, as of January 29, 2023, January 30, 2022, and May 1, 2022. As of January 29, 2023, we had $ i 725,000 remaining for the issuance of additional letters of credit under the ABL Agreement.

There were i i i no / / borrowings outstanding under either the ABL Agreement or the Existing Credit Agreement, as applicable, as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.

As of January 29, 2023, our available borrowings calculated under the provisions of the ABL Agreement totaled $ i 23.0 million.

Revolving Credit Agreements – 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 40 million RMB ($ i 5.9 million USD as of January 29, 2023). i Interest charged under this agreement is based on an interest rate determined by the Chinese government at the time of borrowing. The agreement was set to expire on i November 15, 2022.

On November 24, 2022, we renewed this agreement, which renewal maintains our borrowing capacity of i 40 million RMB and extends the expiration date to i November 24, 2023.

There were i i i no / / borrowings outstanding under this agreement as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.

Denominated in United States Dollar (“USD”)

We had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit of up to $ i 2 million USD, which expired on i August 30, 2022. Currently, the company does not plan to renew or replace this agreement.

Overall

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

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Interest paid during the first nine months of fiscal 2023 totaled $ i 8,000. i No interest payments were made during the first nine months of fiscal 2022.

10. Fair Value

ASC Topic 820 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.

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 January 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 9,364

N/A

i 9,364

Growth Allocation Mutual Funds

i 508

N/A

i 508

Moderate Allocation Mutual Fund

i 85

N/A

i 85

Other

i 188

N/A

i 188

Fair value measurements as of January 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 8,531

N/A

i 8,531

Growth Allocation Mutual Funds

i 444

N/A

i 444

Bond Mutual Funds

i 267

N/A

i 267

Moderate Allocation Mutual Fund

i 86

N/A

i 86

Large Cap Equity Mutual Funds

i 74

N/A

i 74

Other

i 259

N/A

i 259

Fair value measurements as of May 1, 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 8,683

N/A

i 8,683

Growth Allocation Mutual Funds

i 435

N/A

i 435

Moderate Allocation Mutual Fund

i 81

N/A

i 81

Other

i 158

N/A

i 158

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Short-Term Investments – Available for Sale

During the fourth quarter of fiscal 2022, we sold all of our remaining short-term investments classified as available-for-sale, and therefore we did not report short-term investments classified as available-for-sale in the accompanying Consolidated Balance Sheets as of January 29, 2023, and May 1, 2022. As of January 30, 2022, our short-term investments classified as available-for-sale (i) consisted of various types of bond and equity mutual funds, (ii) were recorded at their fair value totaling $ i 438,000, (iii) had an accumulated unrealized loss of $ i 2,000, (iv) approximated their cost basis, and (v) resided with our U.S. operations.

Short-Term and Long-Term Investments - Held-To-Maturity

During the fourth quarter of fiscal 2022, we sold all of our remaining investments classified as held-to-maturity, and therefore we did not report short-term or long-term investments classified as held-to-maturity in the accompanying Consolidated Balance Sheets as of January 29, 2023, and May 1, 2022. As of January 30, 2022, our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds. These investments were classified as held-to-maturity as we had the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent in our Consolidated Balance Sheets, based on the maturity date in relation to the respective reporting period and were recorded at amortized cost.

As of January 30, 2022, our held-to-maturity investments (i) were recorded at amortized cost totaling $ i 10.0 million, (ii) had a fair value totaling $ i 9.8 million, and (iii) resided with our U.S. operations.

Our held-to-maturity investments were classified as level 2 within the fair value hierarchy as they were traded over the counter within a broker network and not on an active market. The fair value of our held-to-maturity investments was determined based on a published source that provided an average bid price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective bond investment.

Investments - Rabbi Trust

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

As of January 29, 2023, our investments associated with our rabbi trust totaled $ i 10.1 million, of which $ i 2.4 million and $ i 7.7 million were classified as short-term and long-term, respectively. As of January 30, 2022, our investments associated with our rabbi trust totaled $ i i 9.2 / million, all of which were classified as long-term. As of May 1, 2022, our investments associated with our rabbi trust totaled $ i i 9.4 / million, all of which were classified as long-term. The investments associated with our rabbi trust had an accumulated unrealized gain of $ i 21,000, $ i 90,000, and $ i 32,000 as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.

The fair value of our long-term investments associated with our rabbi 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.

Non-Recurring Basis

In connection with the restructuring activity associated with our upholstery fabrics cut and sew operation located in Haiti (which is described more fully in Note 8 of the consolidated financial statements), we classified a right of use asset associated with a leased facility as held for sale in the accompanying Consolidated Balance Sheet as of January 29, 2023. This right of use asset classified as held for sale was recorded at its fair value of $ i 2.0 million, which represents the present value of future discounted cash flows based on the payments and timing of such payments due from the Lessee as stated in the related Termination Agreement. The interest rate used to determine the present value of discounted cash flows 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 are denominated in USD, and (iv) the fact that the right of use asset is located in and the Lessee and guarantor conduct business in Haiti, a foreign country. As a result, since management used significant unobservable inputs and

I-18

assumptions to determine the fair value of this right of use asset, this right of use asset is classified as level 3 within the fair value hierarchy defined above.

11. Net (Loss) Income Per Share

Basic net (loss) income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) income 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) income per share are as follows:


	Three months ended
(amounts in thousands)	January 29, 2023		January 30, 2022
Weighted average common shares outstanding, basic		i 12,299		i 12,212
Dilutive effect of stock-based compensation		—		—
Weighted average common shares outstanding, diluted		i 12,299		i 12,212

During the third quarter of fiscal 2023, i 22,053 shares of unvested common stock were not included in the computation of diluted net loss per share as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during the third quarter of fiscal 2023, i 87,433 shares of unvested common stock were not included in the computation of diluted net loss per share as we incurred a net loss during the reporting period.

During the third quarter of fiscal 2022, i 44,616 shares of unvested common stock were not included in the computation of diluted net loss per share, as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during the third quarter of fiscal 2022, i 79,507 shares of unvested common stock were not included in the computation as we incurred a net loss during the reporting period.


	Nine months ended
(amounts in thousands)	January 29, 2023		January 30, 2022
Weighted average common shares outstanding, basic		i 12,272		i 12,249
Dilutive effect of stock-based compensation		—		i 92
Weighted average common shares outstanding, diluted		i 12,272		i 12,341

During the nine-month period ending January 29, 2023, i 31,176 shares of unvested common stock were not included in the computation of diluted net loss per share as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during the nine-month period ending January 29, 2023, i 68,380 shares of unvested common stock were not included in the computation of diluted net loss per share as we incurred a net loss during the reporting period.

During the nine-month period ending January 30, 2022, i 11,711 shares of unvested common stock were not included in the computation of diluted net income per share, as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards.

12. 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.

I-19

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. Also, total assets related to our upholstery fabrics segment include a right of use asset classified as held for sale as of January 29, 2023. 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.

Statements of operations for our operating segments are as follows:


	Three months ended
	January 29, 2023			January 30, 2022
net sales by segment:
mattress fabrics	$	i 24,697		$	i 38,439
upholstery fabrics		i 27,826			i 41,852
net sales	$	i 52,523		$	i 80,291
gross (loss) profit:
mattress fabrics	$	( i 1,237	)	$	i 3,164
upholstery fabrics		i 3,330			i 5,946
gross profit	$	i 2,093		$	i 9,110
selling, general, and administrative expenses by segment:
mattress fabrics	$	i 2,992		$	i 2,800
upholstery fabrics		i 3,750			i 3,500
unallocated corporate expenses		i 2,423			i 1,707
selling, general, and administrative expenses	$	i 9,165		$	i 8,007
(loss) income from operations by segment:
mattress fabrics	$	( i 4,229	)	$	i 364
upholstery fabrics		( i 420	)		i 2,446
unallocated corporate expenses		( i 2,423	)		( i 1,707	)
total segment (loss) income from operations	$	( i 7,072	)	$	i 1,103
restructuring expense (1)		( i 711	)		—
(loss) income from operations	$	( i 7,783	)	$	i 1,103
interest income		i 196			i 214
other expense		( i 1,095	)		( i 322	)
(loss) income before income taxes	$	( i 8,682	)	$	i 995

I-20

(1) Restructuring expense of $ i 711,000 for the three months ending January 29, 2023, represents lease termination costs of $ i 434,000 and an impairment loss regarding leasehold improvements totaling $ i 277,000 that related to the consolidation of certain leased facilities located in Ouanaminthe, Haiti.


	Nine months ended
	January 29, 2023			January 30, 2022
net sales by segment:
mattress fabrics	$	i 80,299		$	i 122,380
upholstery fabrics		i 93,209			i 115,519
net sales	$	i 173,508		$	i 237,899
gross (loss) profit:
mattress fabrics	$	( i 7,330	)	$	i 16,106
upholstery fabrics		i 11,436			i 16,230
total segment gross profit	$	i 4,106		$	i 32,336
restructuring related charge (1)		( i 98	)		—
gross profit	$	i 4,008		$	i 32,336
selling, general, and administrative expenses by segment:
mattress fabrics	$	i 8,821		$	i 8,991
upholstery fabrics		i 11,053			i 10,491
unallocated corporate expenses		i 7,259			i 6,793
selling, general, and administrative expenses	$	i 27,133		$	i 26,275
(loss) income from operations by segment:
mattress fabrics	$	( i 16,151	)	$	i 7,115
upholstery fabrics		i 383			i 5,739
unallocated corporate expenses		( i 7,259	)		( i 6,793	)
total segment (loss) income from operations	$	( i 23,027	)	$	i 6,061
restructuring expense (2)		( i 1,326	)		—
restructuring related charge (1)		( i 98	)		—
(loss) income from operations	$	( i 24,451	)	$	i 6,061
interest income		i 292			i 347
other expense		( i 348	)		( i 963	)
(loss) income before income taxes	$	( i 24,507	)	$	i 5,445

I-21

(1) Restructuring related charge of $ i 98,000 for the nine months ended January 29, 2023, represents a loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China, which occurred during the second quarter of fiscal 2023. This $ i 98,000 restructuring related charge was recorded in cost of sales in the Consolidated Statements of Net Loss for the nine months ending January 29, 2023.

(2) Restructuring expense of $ i 1.3 million for the nine months ending January 29, 2023, relates to both our restructuring activities for our cut and sew upholstery fabrics operations located in Shanghai, China, which occurred during the second quarter of fiscal 2023, and located in Ouanaminthe, Haiti, which occurred during the third quarter of fiscal 2023. Restructuring expense consists of lease termination costs of $ i 481,000, employee termination benefits of $ i 468,000, impairment losses totaling $ i 357,000 that relate to leasehold improvements and equipment, and $ i 20,000 for other associated costs.

Balance sheet information for our operating segments follows:

(dollars in thousands)

January 29, 2023

January 30, 2022

May 1, 2022

Segment assets:

Mattress Fabrics:

Accounts receivable

i 8,314

i 17,617

i 9,865

Inventory

i 28,757

i 39,544

i 39,028

Property, plant and equipment (1)

i 34,661

i 39,913

i 38,731

Right of use assets (2)

i 2,476

i 3,706

i 3,469

Total mattress fabrics assets

i 74,208

i 100,780

i 91,093

Upholstery Fabrics:

Accounts receivable

i 12,927

i 21,381

i 12,361

Inventory

i 18,870

i 33,589

i 27,529

Property, plant and equipment (3)

i 1,794

i 2,018

i 2,030

Right of use assets (4)

i 2,995

i 8,727

i 8,124

Assets held for sale (5)

i 1,950

—

Total upholstery fabrics assets

i 38,536

i 65,715

i 50,044

Total segment assets

i 112,744

i 166,495

i 141,137

Non-segment assets:

Cash and cash equivalents

i 16,725

i 11,780

i 14,550

Short-term investments - available for sale

—

i 438

—

Short-term investments - held-to-maturity

—

i 1,315

—

Short-term investments - rabbi trust

i 2,420

—

Current income taxes receivable

i 238

i 367

i 857

Other current assets

i 2,839

i 4,419

i 2,986

Deferred income taxes

i 463

i 500

i 528

Property, plant and equipment (6)

i 737

i 847

i 941

Right of use assets (7)

i 3,442

i 4,162

i 3,984

Intangible assets

i 2,346

i 2,722

i 2,628

Long-term investments - rabbi trust

i 7,725

i 9,223

i 9,357

Long-term investments - held-to-maturity

—

i 8,677

—

Other assets

i 919

i 622

i 595

Total assets

i 150,598

i 211,567

i 177,563


	Nine months ended
(dollars in thousands)	January 29, 2023		January 30, 2022
Capital expenditures (8):
Mattress Fabrics	$	i 612	$	i 2,828
Upholstery Fabrics		i 465		i 815
Unallocated Corporate		i 75		i 1,330
Total capital expenditures	$	i 1,152	$	i 4,973
Depreciation expense:
Mattress Fabrics	$	i 4,624	$	i 4,613
Upholstery Fabrics		i 604		i 590
Total depreciation expense	$	i 5,228	$	i 5,203

(1)

The $ i 34.7 million as of January 29, 2023, represents property, plant, and equipment of $ i 23.1 million, $ i 10.9 million, and $ i 651,000 located in the U.S., Canada, and Haiti, respectively. The $ i 39.9 million as of January 30, 2022, represents property, plant, and equipment of $ i 26.6 million, $ i 12.5 million, and $ i 796,000 located in the U.S., Canada, and Haiti, respectively. The $ i 38.7 million as of May 1, 2022, represents property, plant, and equipment of $ i 25.6 million, $ i 12.4 million, and $ i 757,000 located in the U.S., Canada, and Haiti, respectively.

(2)

The $ i 2.5 million as of January 29, 2023, represents right of use assets of $ i 1.6 million and $ i 833,000 located in Haiti and Canada, respectively. The $ i 3.7 million as of January 30, 2022, represents right of use assets of $ i 2.1 million, $ i 1.3 million, and $ i 352,000 located in Haiti, the U.S., and Canada, respectively. The $ i 3.5 million as of May 1, 2022, represents right of use assets of $ i 2.0 million, $ i 1.2 million, and $ i 291,000 located in Haiti, the U.S., and Canada, respectively.

I-22

(3)

The $ i 1.8 million as of January 29, 2023, represents property, plant, and equipment of $ i 1.0 million, $ i 630,000, and $ i 121,000 located in the U.S., Haiti, and China, respectively. The $ i 2.0 million as of January 30, 2022, represents property, plant, and equipment of $ i 1.1 million, $ i 585,000, and $ i 344,000 located in the U.S., Haiti, and China, respectively. The $ i 2.0 million as of May 1, 2022, represents property, plant, and equipment of $ i 1.0 million, $ i 756,000, and $ i 255,000 located in the U.S., Haiti, and China, respectively.

(4)

The $ i 3.0 million as of January 29, 2023, represents right of use assets of $ i 1.7 million and $ i 1.3 million located in China and the U.S., respectively. The $ i 8.7 million as of January 30, 2022, represents right of use assets of $ i 4.1 million, $ i 2.7 million, and $ i 1.9 million located in China, Haiti, and the U.S., respectively. The $ i 8.1 million as of May 1, 2022, represents right of use assets of $ i 3.7 million, $ i 2.6 million, and $ i 1.8 million located in China, Haiti, and the U.S., respectively.

(5)

The $ i 2.0 million as of January 29, 2023, represents a right of use asset classified as held for sale located in Haiti.

(6)

The $ i 737,000, $ i 847,000, and $ i 941,000 as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively, represent property, plant, and equipment associated with unallocated corporate departments 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.

(7)

The $ i 3.4 million, $ i 4.2 million, and $ i 4.0 million as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively, represent right of use assets located in the U.S.

(8)

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

13. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $ i 2.3 million, or ( i 9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023, compared with income tax expense of $ i 2.6 million, or i 48.4% of income before income taxes, for the nine-month period ending January 30, 2022.

Our effective income tax rates for the nine-month periods ended January 29, 2023, and January 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 nine-month periods ended January 29, 2023, and January 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 versus 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 nine-month periods ending January 29, 2023, and January 30, 2022:


	January 29,			January 30,
	2023			2022
U.S. federal income tax rate		i 21.0	%		i 21.0	%
U.S. valuation allowance		( i 29.3	)		( i 26.9	)
Withholding taxes associated with foreign jurisdictions		( i 2.0	)		i 9.8
Capital expenditure deduction - Quebec, Canada		( i 1.6	)		—
Foreign income tax rate differential		i 1.4			i 7.9
Tax effects of local currency foreign exchange gains (losses)		i 1.3			( i 1.0	)
Global Intangible Low Taxed Income Tax ("GILTI")		—			i 37.4
Other		( i 0.3	)		i 0.2
	( i 9.5)%				i 48.4	%

Our consolidated effective income tax rate during the first nine months of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, as compared to the first nine months of fiscal 2022. During the first nine months of fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $( i 28.8) million, compared with $( i 2.3) million during the first nine months of fiscal 2022. As a result, a significantly higher income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets during the first nine months of fiscal 2023, as compared with the first nine months of fiscal 2022. In addition, almost all of our taxable income in the first nine months of fiscal 2023 and fiscal 2022 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

During the first nine months of fiscal 2023, we incurred a significantly higher consolidated pre-tax loss totaling $( i 24.5) million, compared with a much lower pre-tax income totaling $ i 5.4 million, during the first nine months of fiscal 2022. 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 nine months of fiscal 2022, compared with the first nine months 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.

As of January 29, 2023, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years from 2020 through 2022, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2023. As a result of the significant weight of this 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.

I-24

Based on our assessments as of January 29, 2023, January 30, 2022, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)

January 29, 2023

January 30, 2022

May 1, 2022

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

i 15,741

i 7,802

i 9,527

U.S. capital loss carryforward

i 2,330

i 18,071

i 10,132

i 11,857

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 January 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 January 29, 2023, January 30, 2022, and May 1, 2022, we recorded a deferred income tax liability of $ i 4.1 million, $ i 3.6 million, and $ i 3.5 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, or 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 January 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 May 1, 2022, we had a $ i 1.1 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 January 30, 2022, we had a $ i 1.4 million total gross unrecognized income tax benefit, of which $ i 1.1 million and $ i 380,000 were recorded to income taxes payable – long-term and noncurrent deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. These unrecognized income tax benefits would favorably affect the income tax rate in future periods by $ i 1.2 million, $ i 1.1 million, and $ i 1.1 million, as of January 29, 2023, May 1, 2022, and January 30, 2022, respectively.

Our gross unrecognized income tax benefit of $ i 1.2 million as of January 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:


	Nine Months			Nine Months
	Ended			Ended
	January 29,			January 30,
(dollars in thousands)	2023			2022
United States Transition Tax Payment	$	i 265		$	i 266
China Income Taxes, Net of Refunds		i 1,680			i 2,036
China - Withholding Taxes Associated With Earnings and Profits Distributed to the U.S.		—			i 487
Canada - Income Taxes, Net of Refunds		( i 9	)		i 256
	$	i 1,936		$	i 3,045

14. 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

I-25

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.

As of January 29, 2023, there were i 224,369 shares available for future equity-based grants under the 2015 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 August 10, 2022 and July 22, 2021:


	August 10,			July 22,
	2022			2021
Closing price of our common stock	$	i 5.06		$ i 14.75
Expected volatility of our common stock		i 48.2	%		i 54.2	%
Expected volatility of peer companies (1)	i 41.6% - i 105.1%			i 45.7% - i 101.5%
Risk-free interest rate		i 3.13	%		i 0.33	%
Dividend yield		i 0.00	%		i 3.00	%
Correlation coefficient of peer companies (1)	i 0.05 - i 0.23			i 0.03 - i 0.35

(1)

The expected volatility and correlation coefficient of our peer companies for the August 10, 2022 and July 22, 2021, grant dates were based on peer companies that were approved by the Compensation Committee of our board of directors as an aggregate benchmark for determining the market-based total shareholder return component. Therefore, we disclosed ranges of the expected volatility and correlation coefficient for the companies that represented this peer group.

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.

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 January 29, 2023:

(3)

(4)

Performance-Based

Restricted Stock

Units Expected

Date of Grant

Units Awarded

to Vest

Price Per Share

Vesting Period

August 10, 2022 (1)

i 178,714

—

i 5.77

(5)

i 3 years

July 22, 2021 (1)

i 122,476

—

i 15.93

(6)

i 3 years

July 22, 2021 (2)

i 20,500

—

i 14.75

(7)

i 3 years

(1)

Performance-based restricted stock units awarded to senior executives.

(2)

Performance-based restricted stock units awarded to key employees.

I-26

(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 January 29, 2023.

(5)

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.

(6)

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.

(7)

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

The following table summarizes information related to our performance-based restricted stock units that vested during the nine-month periods ending January 29, 2023, and January 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

Fiscal 2022 (1)

i 5,051

i 87

i 17.14

Fiscal 2022 (2)

i 5,812

i 100

i 17.14

(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.

We recorded a charge of $ i 2,000 and a credit of $ i 40,000 to compensation expense within selling, general, and administrative expenses for the nine-month periods ending January 29, 2023, and January 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.

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 and key members of management that were unvested as of January 29, 2023:


	Time-Based
	Restricted Stock		(1)
Date of Grant	Units Awarded		Price Per Share		Vesting Period
September 6, 2022		i 37,671	$	i 4.58	i 1 to i 3 years
August 10, 2022		i 82,016	$	i 5.06	i 3 years
July 22, 2021		i 37,591	$	i 14.75	i 3 years
August 6, 2020		i 129,095	$	i 11.01	i 3 years
August 2, 2018		i 10,000	$	i 24.35	i 5 years

(1)

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

The following table summarizes information related to our time-based restricted stock units that vested during the nine-month period ending January 29, 2023:

I-27

Time-Based

(4)

Restricted Stock

(3)

Price

Fiscal Year

Units Vested

Fair Value

Per Share

Fiscal 2023 (1)

i 19,786

i 101

i 5.10

Fiscal 2023 (2)

i 13,013

i 66

i 5.10

(1)

Time-based restricted stock units vested by senior executives.

(2)

Time-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 time-based restricted stock units vested.

We recorded compensation expense of $ i 634,000 and $ i 682,000 within selling, general, and administrative expenses associated with our time-based restricted stock unit awards for the nine-month periods ending January 29, 2023, and January 30, 2022, respectively.

As of January 29, 2023, the remaining unrecognized compensation expense related to our time-based restricted stock units was $ i 1.0 million, which is expected to be recognized over a weighted average vesting period of i 1.7 years. As of January 29, 2023, the time-based restricted stock units that are expected to vest had a fair value totaling $ i 1.6 million.

Common Stock Awards

We granted a total of i 17,819, i 18,326, and i 19,753 shares of common stock to our outside directors on January 3, 2023, 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 grant. The fair value of these awards was $ i 4.70, $ i 4.57, and $ i 4.24 per share on January 3, 2023, October 3, 2022, and July 1, 2022, respectively, which represents the closing price of our common stock on the date of grant.

We granted a total of i 8,357, i 6,426, and i 4,312 shares of common stock to our outside directors on January 3, 2022, October 1, 2021, and July 1, 2021, respectively. These shares of common stock vested immediately and were measured at their fair value on the date of grant. The fair value of these awards was $ i 10.02, $ i 13.03, and $ i 16.24 per share on January 3, 2022, October 1, 2021, and July 1, 2021, respectively, which represents the closing price of our common stock on the date of grant.

We recorded $ i 251,000 and $ i 238,000 of compensation expense within selling, general, and administrative expenses for common stock awards to our outside directors for the nine-month periods ending January 29, 2023, and January 30, 2022, respectively.

15. 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 nine 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 January 29, 2023, January 30, 2022, and May 1, 2022, are as follows:

(dollars in thousands)