CRWS

FORWARD-LOOKING INFORMATION Certain of the statements made in this Quarterly Report on Form 10-Q (this “Quarterly Report”) within this Item 2. and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s current expectations, projections, estimates and assumptions. Words such as “expects,” “believes,” “anticipates,” “estimates,” “predicts,” “forecasts,” “plans,” “projects,” “targets,” “should,” “potential,” “continue,” “aims,” “intends,” “may,” “will,” “could,” “would” and variations of such words and similar expressions may identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, general economic conditions, including the impact of increased U.S. tariffs and any retaliatory measures by impacted exporting countries, the Company’s ability to mitigate the impact of such tariffs, changes in interest rates, changes in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company’s products, changing competition, changes in the retail environment, the Company’s ability to successfully integrate newly acquired businesses, the level and pricing of future orders from the Company’s customers, the Company’s dependence upon third-party suppliers, including some located in foreign countries with unstable political situations, the Company’s ability to successfully implement new information technologies, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company’s business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company’s dependence upon licenses from third parties. Reference is also made to the Company’s periodic filings with the SEC for additional factors that may impact the Company’s results of operations and financial condition. The Company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the Company’s expectations, whether as a result of new information, future events or otherwise. DESCRIPTION OF BUSINESS The Company was originally formed as a Georgia corporation in 1957 and was reincorporated as a Delaware corporation in 2003. The Company primarily operates through its wholly-owned subsidiaries, NoJo Baby & Kids, Inc. and Sassy Baby, Inc. in the infant, toddler and juvenile products segment within the consumer products industry. The infant, toddler and juvenile products segment consists of infant and toddler bedding, bibs, toys, plush, dolls, diaper bags, disposables and feeding products. The Company’s products are marketed under a variety of Company-owned trademarks, under trademarks licensed from others and as private label goods. The Company-owned trademarks include Sassy®, NoJo®, Manhattan Toy®, Baby Boom® and Neat Solutions®. Sales of the Company’s products are made directly to retailers, such as mass merchants, large chain stores, mid-tier retailers, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, wholesale clubs and internet-based retailers and direct-to-consumers through the Company’s websites. The infant, toddler and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant, toddler and juvenile product companies and specialty infant, toddler and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging. The Company’s ability to compete depends principally on styling, price, service to the retailer and continued high regard for the Company’s products and trade names. Foreign and domestic contract manufacturers produce most of the Company’s products, with the largest concentration being in China. The Company makes sourcing decisions on the basis of quality, timeliness of delivery and price, including the impact of ocean freight and duties. Although the Company maintains relationships with a limited number of suppliers, the Company believes that its products may be readily manufactured by several alternative sources in quantities sufficient to meet the Company’s requirements. The Company’s management and quality assurance personnel visit the third-party facilities regularly to monitor and audit product quality and to ensure compliance with labor requirements and social and environmental standards. In addition, the Company closely monitors the currency exchange rate. The impact of future fluctuations in the exchange rate or changes in safeguards cannot be predicted with certainty. The Company’s products are warehoused and distributed domestically from leased facilities located in Compton, California and Eden Valley, Minnesota and internationally from third-party logistics warehouses in Belgium, Shanghai and the United Kingdom. 11 The U.S. government has tariffs on imports from certain countries, including China. During 2025, the U.S. government increased tariffs which increased the cost of the products the Company sources from China and affected shipments from the Company’s Chinese-based suppliers. Some of these tariffs, the IEEPA tariffs, were recently deemed illegal by the U.S. Supreme Court ruling issued on February 20, 2026. The Company incurred approximately $5.3 million and $267 thousand of IEEPA tariffs during fiscal year 2026 and 2025, respectively. In April 2026, the U.S. Customs and Border Protection launched CAPE, a platform for importers of record to submit IEEPA tariff refund requests. The Company has evaluated its eligibility to submit IEEPA tariff refund requests, is complying with all applicable refund procedures and has submitted its eligible entries. As of June 28, 2026, $4.7 million of the refunds submitted were accepted by the CAPE system. These accepted claims for the recovery of IEEPA tariffs were deemed probable under the loss recovery model as of June 28, 2026. Of this amount, $0.2 million was received during the quarter and the remaining $4.5 million has been recorded as a receivable included within other current assets on the Condensed Consolidated Balance Sheets. The Company recognized a reduction in cost of sales of $3.7 million within the Condensed Consolidated Statements of Operations. Additionally, $0.9 million was recorded as a reduction to inventory for tariff costs that remain capitalized within inventory. As of August 5, 2026, the Company has received $4.6 million in IEEPA refunds. The Company continues to evaluate the impact of the tariffs and its potential refunds on the additional $0.9 million of refund requests. While significant refunds have been received, some uncertainty remains regarding the ultimate availability, timing, and amount of a full recovery of this amount. The Company will continue to monitor developments and will recognize any additional recovery when realization becomes probable. A summary of certain factors that management considers important in reviewing the Company’s results of operations, financial position, liquidity and capital resources is set forth below, which should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included in the preceding sections of this Quarterly Report. KNOWN TRENDS AND UNCERTAINTIES The Company primarily sources products from foreign contract manufacturers, with the largest concentration being in China. The U.S. government has tariffs on imports from certain countries, including China. During 2025 and 2026, the U.S. government has increased and decreased tariffs which increases volatility in the cost of the products the Company sources from China and affects shipments from the Company’s Chinese-based suppliers. Should the U.S. government introduce new or additional tariffs, the Company may not be able to timely pass along to its customers any or all increases in tariffs and freight charges. Further alterations the Company may make to its business strategy or operations to adapt to the changing tariff environment could be time-consuming and expensive. The full impact of additional tariffs may have a material adverse effect on the Company’s business, cash flow, results of operations and financial condition. For additional discussion of trends, uncertainties and other factors that could impact the Company’s operating results, refer to the risk factors disclosed in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the year ended March 29, 2026. RESULTS OF OPERATIONS The following table contains the results of operations for the three-month periods ended June 28, 2026 and June 29, 2025 and the dollar and percentage changes for those periods (in thousands, except percentages): Three-Month Periods Ended Change June 28, 2026 June 29, 2025 $ % Net sales by category: Bedding and diaper bags $ 6,033 $ 6,791 $ (758 ) -11.2 % Bibs, toys and disposable products 10,733 8,687 2,046 23.6 % Total net sales 16,766 15,478 1,288 8.3 % Cost of products sold 8,735 11,960 (3,225 ) -27.0 % Gross profit 8,031 3,518 4,513 128.3 % % of net sales 47.9 % 22.7 % Marketing and administrative expenses 5,232 4,717 515 10.9 % % of net sales 31.2 % 30.5 % Interest expense - net (190 ) (283 ) 93 -32.9 % Other income (expense) - net 165 99 66 -66.7 % Income tax expense 714 (279 ) 993 -355.9 % Net income 2,060 (1,104 ) 3,164 -286.6 % % of net sales 12.3 % -7.1 % Net Sales: Sales were $16.8 million for the three-month period ended June 28, 2026, compared with $15.5 million for the three-month period ended June 29, 2025, an increase of $1.3 million or 8.3%. Sales of bibs, toys and disposable products increased by $2.0 million while the sales of bedding and diaper bags decreased by $758 thousand. The overall increase in sales was primarily due to improved inventory availability, as the inventory shortages experienced in the prior year as a result of the Company's tariff mitigation strategy were no longer a significant factor. Additionally, the increase in bibs, toys and disposable products increased due to international sales. 12 Gross Profit: Gross profit increased by $4.5 million from the prior year reflecting a margin of 47.9% for the three-month period ended June 28, 2026 compared to 22.7% of net sales for the three-month period ended June 29, 2025. The significant fluctuation in gross profit and gross margin is driven by the tariff refund recorded to cost of products sold of $3.7 million. Gross margin without the tariff refund would have been 25.6%, an increase from the three-month period a year ago. Marketing and Administrative Expenses: Marketing and administrative expenses increased by $515 thousand and changed to 31.2% of net sales for the three-month period ended June 28, 2026 from 30.5% of net sales for the three-month period ended June 29, 2025. This increase was due to an increase in accrued incentive compensation, including $529 thousand associated with tariff refunds, compared to the prior year. Income Tax Expense (Benefit): Income tax expense increased $993 thousand from an income tax benefit for the three-month period ended June 29, 2025 to the three-month period ended June 28, 2026. The Company’s estimated annual ETR was 24.1% and 22.3% for the three-month periods ended June 28, 2026 and June 29, 2025, respectively. Although the Company does not anticipate a material change to the ETR for the remainder of fiscal year 2027, several factors could impact the ETR, including variations from the Company’s estimates of the amount and source of its pre-tax income, and the actual ETR for the year could differ materially from the Company’s estimates. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities increased from $5.2 million for the three-month period ended June 29, 2025 to $5.5 million for the three-month period ended June 28, 2026. The increase in the current year was partially the result of a decrease of $1.6 million in inventories that was $5.3 million lower than the increase in the prior year and an increase of $625 thousand in accrued liabilities that was $1.6 million higher than the decrease in the prior year. These increases were partially offset by a decrease of $5.2 million in accounts receivable that was $2.2 million lower than the increase in the prior year, an increase of $4.5 million in other current assets in the current year that was $4.5 million lower in the prior year, and a decrease of $237 thousand in accounts payable in the current year that was $2.9 million lower than the increase in the prior year. Net cash used in investing activities increased from $86 thousand in the prior year to $156 thousand in the current year which were primarily associated with capital expenditures for property, plant and equipment. Net cash used in financing activities, which were primarily associated with net repayments under the revolving line of credit and payments of the term loan, was $5.4 million compared to $5.5 million in the prior year, a decrease of $96 thousand. As of June 28, 2026, the balance on the revolving line of credit with CIT was $5.4 million, there was no letter of credit outstanding and $11.9 million was available under the revolving line of credit with CIT based on the Company’s eligible accounts receivable and inventory balances. To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to CIT pursuant to factoring agreements, which have expiration dates that are coterminous with that of the financing agreement described below. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation occurs, then the Company either assumes (and may seek to mitigate) the credit risk for shipments to the customer after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of operations, amounted to $77 thousand and $70 thousand for the three-month periods ended June 28, 2026, and June 29, 2025. On June 23, 2025, the Company and CIT further amended the Company’s financing agreement with CIT to: (i) provide that, until the Company’s term loan is paid in full, the Company shall maintain at all times Excess Availability equal to or the greater of (a) the sum of the balance outstanding under the Company’s term loan plus $1.0 million or (b) $4.0 million (the “Availability Covenant”); and (ii) reinstate the fixed charge coverage ratio; provided however, that the fixed charge coverage ratio shall not be tested at any fiscal quarter end in which, during the immediately preceding fiscal quarter, the Company at all times has been in compliance with the Availability Covenant. As of June 28, 2026, the Company has complied with the Excess Availability requirements. 13 The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash flow from operations and funds available under the revolving line of credit will be adequate to meet its liquidity needs.