CULP INC

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Culp, Inc. and its majority-owned subsidiaries (the “company”) include all adjustments that are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements that are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 14, 2023, for the fiscal year ended April 30, 2023.

The company’s nine-months ended January 28, 2024, and January 29, 2023, each represent 39-week periods.

2. Significant Accounting Policies

As of January 28, 2024, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended April 30, 2023.

Recently Adopted Accounting Pronouncements

There were no recently adopted accounting pronouncements during the first nine months of fiscal 2024.

Recently Issued Accounting Pronouncements

Effective November 27, 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 Improvements to Reportable Segment Disclosures which enhances disclosure requirements to segment reporting including (i) significant segment expenses that are regularly provided to the Chief Operating Decision Maker (CODM) that are included within each measure of segment profit or loss, (ii) other segment items by reportable segment as defined by ASU 2023-07, and (iii) the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of each segment's profit or loss in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for public entities starting in annual periods beginning after December 15, 2023 (i.e., our fiscal 2025 annual report) and interim periods beginning after December 15, 2024 (i.e., first quarter of fiscal 2026 interim report). Management is currently evaluating the effects ASU 2023-07 will have on the notes to the consolidated financial statements.

Effective December 14, 2023, the FASB issued ASU 2023-09 Improvements to Income Tax Disclosures, which is an update to Topic 740, Income Taxes. The amendments in this update relate to improvements regarding the transparency of income tax disclosures by requiring consistent categories and greater disaggregation by jurisdiction of information included in the effective income tax rate rate reconciliation and for income taxes paid. Also, the amendments allow investors to better assess an entity's (i) capital allocation decisions, (ii) worldwide operations, and (iii) related tax risks, tax planning, and operational opportunities that affect the effective income tax rate and prospects for future cash flows. The other amendments in this update improve the effectiveness and comparability of disclosures relating to pretax income (or loss) and income tax expense (or benefit) and remove disclosures that are no longer considered cost beneficial or relevant. ASU 2023-09 is effective for public entities starting in annual periods beginning after December 15, 2024 (i.e., our fiscal 2026 annual report). Early adoption is permitted. The company expects that the adoption ASU 2023-09 will not have an impact on our results of operations and financial condition, but will have a material impact on the disclosures required in the notes to the consolidated financial statements, which are disclosed in Note 14.

3. Allowance for Doubtful Accounts

A summary of the activity in the allowance for doubtful accounts follows:

During the nine-month periods ended January 28, 2024, and January 29, 2023, we assessed the credit risk of our customers within our accounts receivable portfolio. Our risk assessment includes the respective customers’ (i) financial position; (ii) past payment history; (iii) management’s general ability; and (iv) historical loss experience; as well as (v) any other ongoing economic conditions. After our risk assessment was completed, we assigned credit grades to our customers, which in turn, were used to determine our allowance for doubtful accounts totaling $661,000 and $253,000 as of January 28, 2024, and January 29, 2023, respectively.

4. Revenue from Contracts with Customers

Nature of Performance Obligations

Our operations are classified intotwo 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, the upholstery fabrics segment includes Read Window Products LLC (“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.

Our primary performance obligations include the sale of mattress fabrics and upholstery fabrics, as well as the performance of customized fabrication and installation services for Read’s products associated with window treatments.

Contract Assets & Liabilities

Certain contracts, primarily those for customized fabrication and installation services associated with Read, require upfront customer deposits that result in a contract liability which is recorded in the Consolidated Balance Sheets as deferred revenue. Our terms are customary within the industries in which we operate and are not considered financing arrangements. There wereno contract assets recognized as of January 28, 2024, January 29, 2023, or April 30, 2023.

A summary of the activity associated with deferred revenue follows:

Disaggregation of Revenue

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending January 28, 2024:

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending January 29, 2023:

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the nine-month period ending January 28, 2024:

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the nine-month period ending January 29, 2023:

5. Inventories

Inventories are carried at the lower of cost or net realizable value. Cost is determined using the FIFO (first-in, first-out) method.

A summary of inventories follows:

Measurement of Inventory to Net Realizable Value

We recorded a non-cash inventory (credit) charge of $(2.0) million and $6.3 million for the nine months ended January 28, 2024, and January 29, 2023, respectively. The non-cash inventory credit of $(2.0) million for the nine months ended January 28, 2024, represents a credit of $(2.0) million 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 charge of $40,000 which represents markdowns of inventory related to the discontinuance of production of cut and sewn upholstery kits at our facility in Ouanaminthe, Haiti. The non-cash inventory charge of $6.3 millionfor the nine months ended January 29, 2023, represented a $2.9 million charge for the write down of inventory to its net realizable value associated with our mattress fabrics segment, a $3.3 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 $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 $(2.0) million non-cash inventory credit for the first nine months of fiscal 2024, $(1.9) million and $(163,000) pertained to our mattress fabrics and upholstery fabrics segments, respectively. Of the $6.3 million non-cash inventory charge for the first nine months of fiscal 2023, $3.9 million and $2.4 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 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 (8.7%) (excluding a non-cash inventory charge of $3.8 million recorded during the second quarter of fiscal 2023), as compared with gross margin of 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 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 $2.9 million within cost of sales to write down inventory to its net realizable value. This $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 January 28, 2024, 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 nine months ended January 28, 2024, 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 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 the actual amounts or 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:

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 28, 2024, no indicators of impairment existed, and therefore we didnot record any asset impairment charges associated with our tradename through the third quarter of fiscal 2024.

Customer Relationships

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

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

The gross carrying amount of our customer relationships was $3.1 million as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively. Accumulated amortization for these customer relationships was $2.0 million, $1.7 million, and $1.8 million as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively.

The remaining amortization expense for the next five fiscal years and thereafter are as follows: FY 2024- $76,000; FY 2025 - $301,000; FY 2026 - $301,000; FY 2027 - $278,000; FY 2028 - $52,000; and thereafter - $102,000.

The weighted average amortization period for our customer relationships was 4.1 years as of January 28, 2024.

Non-Compete Agreement

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

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

The gross carrying amount of our non-compete agreement was $2.0 million as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively. Accumulated amortization for our non-compete agreement was $1.7 million, $1.6 million, and $1.6 million as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively.

The remaining amortization expense for the next five years and thereafter follows: FY 2024 - $19,000; FY 2025 - $76,000; FY 2026 - $76,000; FY 2027 - $76,000; FY 2028 - $73,000.

The weighted average amortization period for the non-compete agreement was 4.3 years as of January 28, 2024.

Impairment

As of January 28, 2024, 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 $19.7 million commencing in the second quarter of fiscal 2023, and continuing through the third 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 $34.7 million, which relates to property, plant, and equipment of $32.3 million, right of use assets of $1.8 million, customer relationships of $319,000, and a non-compete agreement of $320,000. 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 determinedno impairment associated with the Mattress Asset Group existed as of January 28, 2024.

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 $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 December 31, 2029. Pursuant to the terms of the Termination Agreement, the Original Lease was formally terminated when CUF 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 $2.4 millionin 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 infull 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 $2.4 million was recorded at its fair value of $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 $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 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 January 28, 2024:

As of January 28, 2024, 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:

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

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 both our restructuring activities noted above for the nine months ending January 28, 2024, and January 29, 2023:

(1)Of the total $472,000, $432,000 and $40,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 28, 2024.

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

The restructuring activity related to the discontinuation of production of upholstery cut and sewn kits located in Haiti was mostly completed as of January 28, 2024. As a result of our strategic decision to discontinue this production, we incurred a cumulative charge of $1.3 million in restructuring expense and restructuring related charges from this start of the restructuring activity during the third quarter of fiscal 2023 through January 28, 2024.

The restructuring activity related to the closure of our cut and sew upholstery fabrics operation located in China was completed during the third quarter of fiscal 2023, and this restructuring activity incurred a cumulative charge of $713,000 in restructuring expense and restructuring related charges.

The following summarizes the activity in accrued restructuring costs for both our restructuring activities for the nine-month period ending January 28, 2024:

The following summarizes the activity in accrued restructuring costs for both our restructuring activities for the nine-month period ending January 29, 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 $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 $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:

•

85% of eligible accounts receivable, plus

•

the least of:

o

the sum of:

▪

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

▪

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

▪

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

o

$22.5 million; and

o

An amount equal to 200% of eligible accounts receivable,

minus

•

applicable reserves.

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 150 basis points (if the average monthly excess availability under the ABL Facility is greater than 50%) or 175 basis points (if the average monthly excess availability under the ABL Facility is less than or equal to 50%) or 50 basis points above base rate (if the average monthly excess availability under the ABL Facility is greater than 50%) or 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 37.5 basis points and an annual servicing fee of $12,000.

The ABL Facility matures on 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 $35.0 million and the borrowing base) (the “Excess Availability”) falls below $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 $7.0 million for a period of 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 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 $5.25 million at such time. Such compliance period shall end when Excess Availability shall be equal to or greater than $5.25 million for a period of 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 Credit Agreement at a rate (applicable interest rate of 6.81%,5.81%, and 6.30% as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively) calculated using the Applicable Margin over SOFR based on the company’s excess availability under the ABL Facility, as defined in the ABL

There were $535,000, $275,000, and $275,000 of outstanding letters of credit provided by the ABL Credit Agreement as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively. As of January 28, 2024, we had $465,000 remaining for the issuance of additional letters of credit under the ABL Credit Agreement.

There wereno borrowings outstanding under the ABL Credit Agreement as of January 28, 2024, January 29, 2023, or April 30, 2023, respectively.

As of January 28, 2024, our available borrowings calculated under the provisions of the ABL Credit Agreement totaled $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 35 million RMB ($4.9 million USD as of January 28, 2024). 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 October 24, 2024. Our borrowing capacity of 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; and therefore, we cannot borrow under this agreement.

There wereno borrowings outstanding under this agreement as of January 28, 2024, January 29, 2023, or April 30, 2023, respectively.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of January 28, 2024, we complied with our financial covenants.

No interest payments were made during the first nine months of fiscal 2024. Interest paid during the first nine months of fiscal 2023 totaled $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.

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:

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 January 28, 2024, our investments associated with the Trust totaled $8.0 million, of which $937,000 and $7.1 million were classified as short-term and long-term, respectively. As of January 29, 2023, our investments associated with the Trust totaled $10.1 million, of which $2.4 million and $7.7 million were classified as short-term and long-term, respectively. As of April 30, 2023, our investments associated with the Trust totaled $8.5 million, of which $1.4 million and $7.1 million were classified as short-term and long-term, respectively. Theinvestments associated with the Trust had an accumulated unrealized gain of $88,000, $21,000, and $19,000 as of January 28, 2024, January 29, 2023, 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.

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 12,470,000 and 12,299,000 for the three months ending January 28, 2024, and January 29, 2023, respectively.

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

Weighted average shares used in the computation of basic and diluted net loss per share were 12,419,000 and 12,272,000 for the nine months ending January 28, 2024, and January 29, 2023, respectively.

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

13. Segment Information

Overall

Our operations are classified intotwo 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, inventory, 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. 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:

(1)Gross profit and loss from operations for the three months ending January 28, 2024, includes a restructuring related credit of $61,000 for the gain on disposal of inventory related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti.

(2)The restructuring credit of $50,000 for the three months ended January 28, 2024, represents a gain on disposal of equipment related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Restructuring expense of $711,000 for the three months ended January 29, 2023, represents lease termination costs of $434,000 and an impairment loss regarding leasehold improvements totaling $277,000 that related to the consolidation of certain leased facilities located in Ouanaminthe, Haiti.

(1)Gross profit and loss from operations for the nine months ending January 28, 2024, includes a restructuring related charge of $40,000, representing markdowns of inventory 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 nine months ending January 29, 2023, includes a restructuring related charge of $98,000 that 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.

(2)Restructuring expense of $432,000 for the nine months ending January 28, 2024, represents a $329,000 impairment charge associated with equipment and $103,000 for employee termination benefits related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Restructuring expense of $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 $481,000, employee termination benefits of $468,000, impairment losses totaling $357,000 that relate to leasehold improvements and equipment, and $20,000 for other associated costs.

Balance sheet information for our operating segments follows:

(1)

The $32.3 million as of January 28, 2024, represents property, plant, and equipment of $21.9 million, $9.8 million, and $600,000 located in the U.S., Canada, and Haiti, respectively. The $34.7 million as of January 29, 2023, represents property, plant, and equipment of $23.1 million, $10.9 million, and $651,000 located in the U.S., Canada, and Haiti, respectively. The $33.7 million as of April 30, 2023, represents property, plant, and equipment of $22.7 million, $10.4 million, and $608,000 located in the U.S., Canada, and Haiti, respectively.

(2)

The $1.8 million as of January 28, 2024, represents right of use assets of $1.2 million and $604,000 located in Haiti and Canada, respectively. The $2.5 million as of January 29, 2023, represents right of use assets of $1.6 million and $833,000 located in Haiti and Canada, respectively. The $2.3 million as of April 30, 2023, represents right of use assets of $1.5 million and $776,000 located in Haiti and Canada, respectively.

(3)

The $1.2 million as of January 28, 2024, represents property, plant, and equipment of $1.1 million and $134,000 located in the U.S. and China, respectively. The $1.8 million as of January 29, 2023, represents property, plant, and equipment of $1.0 million, $630,000, and $121,000 located in the U.S., Haiti, and China, respectively. The $1.7 million as of April 30, 2023, represents property, plant, and equipment of $974,000, $592,000, and $105,000 located in the U.S., Haiti, and China, respectively.

(4)

The $2.3 million as of January 28, 2024, represents right of use assets of $944,000 and $1.4 million located in China and the U.S., respectively. The $3.0 million as of January 29, 2023, represents right of use assets of $1.7 million and $1.3 million located in China and the U.S., respectively. The $2.6 million as of April 30, 2023, represents right of use assets of$1.5 million and $1.1 million located in China and the U.S., respectively.

(5)

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

(6)

The $603,000, $737,000, and $691,000 as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively, represent property, plant, and equipment associated with the 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.

(7)

The $2.8 million, $3.4 million, and $3.3 million as of January 28, 2024, January 29, 2023, 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:

(1)

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

14. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $2.2 million, or (33.4%) of loss before income taxes, for the nine-month period ending January 28, 2024, compared with income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023.

Our effective income tax rates for the nine-month periods ended January 28, 2024, and January 29, 2023, 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 28, 2024, and January 29, 2023, 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 nine-month periods ending January 28, 2024, and January 29, 2023:

Our consolidated effective income tax rates during the first nine months of fiscal 2024 and the first nine months 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 during fiscal 2024 and both our operations located in China and Canada during fiscal 2023, which have higher income tax rates than the U.S. In addition, during the first nine months of fiscal 2024 and the first nine months 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. 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 nine months of fiscal 2024 compared with the first nine months of fiscal 2023, as our $(11.3)million U.S. pre-tax loss incurred during thefirst nine months of fiscal 2024 was significantly lower than the $(28.8) million U.S. pre-tax loss incurred during the first nine months of fiscal 2023.

During the first nine months of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(6.7) million, compared with $(24.5) million during the first nine months 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 nine months of fiscal 2024, as 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 28, 2024, 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. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years from 2021 through 2023, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2024. 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.

Based on our assessments as of January 28, 2024, January 29, 2023, and April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:

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 28, 2024, 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 100% dividend received deduction for earnings and profits received from a 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 28, 2024, January 29, 2023, and April 30, 2023, we recorded a deferred income tax liability of $4.7 million, $4.1 million, and $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 January 28, 2024, January 29, 2023, and April 30, 2023, we had a $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 $1.2 million, as of January 28, 2024, January 29, 2023, and April 30, 2023.

Our gross unrecognized income tax benefit of $1.2 million as of January 28, 2024, 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 income taxes paid by jurisdiction:

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 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 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 January 28, 2024, there were 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 January 8, 2024, September 28, 2023, August 10, 2022 and July 22, 2021:

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 28, 2024:

(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 January 28, 2024.

(5)

Price per share represents the fair market value per share ($1.11 per $1, or an increase of $0.62 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 ($5.61) for the performance-based component of the performance-based restricted stock units granted to senior executives on January 8, 2024.

(6)

Price per share represents the fair market value per share ($1.15 per $1, or an increase of $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 ($5.59) for the performance-based component of the performance-based restricted stock units granted to senior executives on September 28, 2023.

(7)

Price per share represents the fair market value per share ($1.14 per $1, or an increase of $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 ($5.06) for the performance-based component of the performance-based restricted stock units granted to senior executives on August 10, 2022.

(8)

Price per share represents the fair market value per share ($1.08 per $1, or an increase of $1.18 tothe 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 ($14.75) for the performance-based component of the performance-based restricted stock units granted to senior executives on July 22, 2021.

(9)

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

There wereno performance-based restricted stock units that vested during the nine-month period ended January 28, 2024. The following table summarizes information related to our performance-based restricted stock units that vested during the nine-month period ended January 29, 2023:

(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 compensation expense of $67,000 and $2,000 within selling, general, and administrative expenses associated with our performance-based restrictive stock units for the nine-month periods ended January 28, 2024, and January 29, 2023, 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 January 28, 2024, the remaining unrecognized compensation expense related to our performance-based restricted stock units was $558,000, which is expected to be recognized over a weighted average vesting period of 2.5 years. As of January 28, 2024, the performance-based restricted stock units that are expected to vest had a fair value totaling $498,000.

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 January 28, 2024:

(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 nine-month periods ending January 28, 2024, and January 29, 2023, respectively:

(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 $597,000 and $634,000 within selling, general, and administrative expenses associated with our time-based restricted stock unit awards for the nine-month periods ended January 28, 2024, and January 29, 2023, respectively.

As of January 28, 2024, the remaining unrecognized compensation expense related to our time-based restricted stock units was $1.1 million, which is expected to be recognized over a weighted average vesting period of 1.8 years. As of January 28, 2024, the time-based restricted stock units that are expected to vest had a fair value totaling $1.6 million.

Immediately Vested Common Stock Awards

We granted a total of 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 $5.04 per share on July 3, 2023, respectively, which represents the closing price of our common stock on the date of grant.

We granted a total of 17,819,18,326, and 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 the grant. The fair value of these awards was $4.70, $4.57, and $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 recorded $84,000 and $251,000 ofcompensation expense within selling, general, and administrative expenses for common stock awards to our outside directors for the nine-month periods ended January 28, 2024, and January 29, 2023, 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 ofone toeight years, with 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 28, 2024, January 29, 2023, and April 30, 2023, are as follows:

Supplemental Cash Flow Information

Operating lease expense for the three-month periods ended January 28, 2024, and January 29, 2023, was $789,000 and $921,000, respectively. Operating lease expense for the nine-month periods ended January 28, 2024, and January 29, 2023, was $2.3 million and$2.9 million, respectively. Short-term lease and variable lease expenses were immaterial for the three-month and nine-month periods ended January 28, 2024, and January 29, 2023.