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 12, 2024, for the fiscal year ended April 28, 2024.

The company's six-months ended October 27, 2024, and October 29, 2023, each represent 26-week periods.

2. Significant Accounting Policies

As of October 27, 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 28, 2024.

Recently Adopted Accounting Pronouncements

There were no recently adopted accounting pronouncements through the second quarter of fiscal 2025.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2023-07 ("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). The company expects that the adoption ASU 2023-07 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.

In December 2023, the FASB issued ASU 2023-09 Improvements to Income Tax Disclosures, which is an update to Topic 740, Income Taxes ("ASU 2023-09"). 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 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 15.

In November 2024, the FASB issued ASU 2024-03 Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures(“ASU 2024-03”) which is an update to Topic 220, Income Statement - Reporting Comprehensive Income. ASU 2024-03 enhances transparency and decision-usefulness of expense disclosures in response to investors' requests for more detailed, disaggregated expense information, enabling a clearer understanding of a public business entity's performance and cost structure. The amendments improve disclosure requirements in financial statement notes for specific expense categories including: (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, (e) certain amounts that are already required to be disclosed under current generally accepted accounting principles in the same disclosure as other disaggregation requirements, (f) qualitative description of amounts remaining in relevant expense captions that are not necessarily disaggregated quantitatively, as well as (g) the total amount of selling expenses, and in annual reporting periods, the entity's definition of selling expense. ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, (i.e., our fiscal 2028 annual report) and interim reporting periods beginning after December 15, 2027 (i.e., first quarter of fiscal 2029 interim report). Early adoption is permitted. The company is currently evaluating ASU 2024-03 to determine the impact it will have on its consolidated financial statements and related disclosures.

3. Allowance for Doubtful Accounts

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

During the six-month periods ended October 27, 2024, and October 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 $518,000 and $541,000 as of October 27, 2024, and October 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, sources, manufactures, and sells fabrics primarily to residential, commercial, and hospitality 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 payments in advance in the form ofcustomer deposits that result in a contract liability which is recorded in the Consolidated Balance Sheets as deferred revenue. If payments in advance are not required, customers may be granted terms which generally range from 15-60 days. Our terms are customary within the industries in which we operate and are not considered financing arrangements. There wereno contract assets recognized as of October 27, 2024, October 29, 2023, or April 28, 2024.

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 October 27, 2024:

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 27, 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 October 29, 2023:

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 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 of $(309,000) for the six months ended October 27, 2024, related to adjustments made to our inventory markdowns reserve estimated based on our policy for aged inventory for both the mattress and upholstery fabrics segments.

We recorded a non-cash inventory credit of $(2.0) million for the six months ended October 29, 2023. The non-cash inventory credit of $(2.0) million represented a $(2.1) million credit related to adjustments made to our inventory markdown reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments, partially offset by a net restructuring related charge of $101,000. This net restructuring related charge represented markdowns of inventory totaling $179,000 during the first quarter of fiscal 2024, partially offset by a gain on disposal of inventory totaling $78,000 during the second quarter of fiscal 2024, both of which related to the discontinuation of production of cut and sewn upholstery kits at our facility in Ouanaminthe, Haiti during the respective periods. Of the $(2.0) million non-cash inventory credit for the first half of fiscal 2024, $(1.5) million and $(453,000) pertained to our mattress fabrics and upholstery fabrics segments, respectively.

Assessment

As of October 27, 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 six months ended October 27, 2024, other than the markdowns of inventory associated with our restructuring activities described in Note 10 of the consolidated financial statements.

Based on the current unfavorable macroeconomic conditions, it is possible that estimates used by management to determine the write down of inventory to its net realizable value could be materially different from the actual amounts or our results. These 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:

Tradename

Our tradename pertains to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of October 27, 2024, no indicators of impairment existed, and therefore we didnot record any asset impairment charges associated with our tradename through the second quarter of fiscal 2025.

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 October 27, 2024, October 29, 2023, and April 28, 2024, respectively. Accumulated amortization for these customer relationships was $2.2 million, $1.9 million, and $2.1 million as of October 27, 2024, October 29, 2023, and April 28, 2024, respectively.

The remaining amortization expense for the next five fiscal years and thereafter are as follows: FY 2025- $151,000; FY 2026 - $301,000; FY 2027 - $280,000; FY 2028 - $51,000; FY 2029 - $51,000; and thereafter - $51,000.

The weighted average amortization period for our customer relationships was 3.4 years as of October 27, 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 October 27, 2024, October 29, 2023, and April 28, 2024, respectively. Accumulated amortization for our non-compete agreement was $1.8 million, $1.7 million, and $1.7 million as of October 27, 2024, October 29, 2023, and April 28, 2024, respectively.

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

The weighted average amortization period for the non-compete agreement was 3.5 years as of October 27, 2024.

Impairment of Definite Lived Assets - Mattress Fabrics Segment

As of October 27, 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 definite-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 $32.6 million commencing in the second quarter of fiscal 2023, and continuing through the second quarter of fiscal 2025. We believe this significant cumulative operating loss 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 fair value of the asset group. The carrying amount of the Mattress Asset Group totaled $25.5 million, which represents property, plant, and equipment of $24.7 million, right of use assets of $275,000, customer relationships of $281,000, and a non-compete agreement of $263,000. The total carrying amount of the Mattress Asset Group did not exceed the sum of its future undiscounted cash flows from its use and disposition. As a result, we determined there wasno impairment associated with the Mattress Asset Group as of October 27, 2024.

7. Note Receivables

Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti")

In connection with the restructuring activity of our upholstery fabrics cut and sew operation located in Ouanaminthe, Haiti, effective January 24, 2023, CUF Haiti entered into an agreement to terminate a lease of a facility (“Termination Agreement”). See Note 10 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, and the initial lease term was 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 million in the form of a note receivable over a period commencing on April 1, 2023, and ending on December 31, 2029, based on the terms stated in the Termination Agreement. In connection with Termination Agreement, an affiliate of the Lessee has guaranteed payment in full of all amounts due and payable to CUF Haiti by the Lessee, and CUF Haiti has been fully and unconditionally discharged from all of its remaining obligations under the Original Lease.

As of the end of our third quarter of fiscal 2023, the 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. We used an interest rate of 6% to determine the present value of the future discounted cash flows, 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 12 for further explanation of the fair value hierarchy).

Effective May 1, 2024, CUF Haiti formally assigned the $2.4 million note receivable to Culp, Inc. (its U.S. Parent).

The following table represents the remaining future principal payments as of October 27, 2024:

As of October 27, 2024, this note receivable totaled $1.6 million, of which $272,000 and $1.3 million were classified as short-term note receivable and long-term note receivable, respectively. As of October 29, 2023, this note receivable totaled $1.9 million, of which $256,000 and $1.6 million were classified as short-term note receivable and long-term note receivable, respectively. As of April 28, 2024, this note receivable totaled $1.7 million, of which $264,000 and $1.5 million were classified as short-term note receivable and long-term note receivable, respectively.

We classified amortization of unearned interest income totaling $50,000 and $57,000 within interest income on our consolidated statements of net loss during the six-month periods ending October 27, 2024, and October 29, 2023, respectively.

As of October 27, 2024, we believe there is no expected credit loss related to the collectability of this note receivable, as the Lessee has made all of the 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.

Culp Home Fashions Haiti, Ltd. ("CHF Haiti")

Effective August 2, 2024, CHF Haiti entered into an agreement to terminate a lease of a facility (“CHF Termination Agreement”). Pursuant to the terms of the CHF Termination Agreement, CHF Haiti is entitled to a payment of $250,000 from the lessor for payment made in advance based on the terms of the original lease agreement at the earlier of February 18, 2025 or 15 days after a new lease with a third party lessee is signed. In connection with the CHF Termination Agreement, CHF Haiti has been fully and unconditionally discharged from all of its remaining obligations under this lease.

As of October 27, 2024, we believe there is no expected credit loss related to the collectability of this note receivable. 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. Assets Held for Sale

A summary of assets held for sale follows:

The carrying values of these assets held for sale totaling $3.3 million are presented separately on the October 27, 2024, consolidated balance sheet and are no longer being depreciated.

During the second quarter of fiscal 2025, we determined that the carrying value of the assets classified as held for sale were less than or equal to their fair value. The fair value used in the determination was based on quoted market prices and from third party buyer sales offers which are either directly or indirectly observable, and therefore we believe are classified as Level 2 within the fair value hierarchy (see Note 12 for further explanation of the fair value hierarchy). Consequently, we did not have to record an impairment loss on these assets.

9. Accrued Expenses

A summary of accrued expenses follows:

10. Restructuring Activities

Mattress Fabrics Segment, Upholstery Fabrics Segment, and Unallocated Corporate

Fiscal 2025 Restructuring Plan

On April 29, 2024 (first quarter of fiscal 2025), our board of directors made a decision to (1) consolidate the company's North American mattress fabrics operations, including a gradual discontinuation of operations and sale of the company's manufacturing facility located in Quebec, Canada; (2) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, NC; (3) transition the mattress fabrics segment's weaving operation to a strategic sourcing model through the company's long standing supply partners; (4) consolidate the company's two leased facilities related to the sewn mattress cover operation located in Ouanaminthe, Haiti, and reduce other operating expenses at this location; as well as (5) reduce unallocated corporate expenses and shared service expenses.

We expect the gradual discontinuance of operations and the closure of the facility located in Quebec, Canada will be completed by the end of the third quarter of fiscal 2025. The consolidation activity associated with the sewn mattress cover operation located in Haiti was completed during the first quarter of fiscal 2025. During fiscal 2025, these actions are expected to result in restructuring and restructuring related charges of approximately $7.3 million, of which approximately $4.4 million is expected to be cash expenditures. The $7.3 million of estimated restructuring and restructuring related charges represents approximately $7.2 million and $147,000 associated with the mattress fabrics and upholstery fabrics segments, respectively.

The $7.2 million of estimated restructuring and restructuring related charges associated with our mattress fabrics segment represents (i) other associated costs of $2.7 million mostly related to relocating equipment from our facility in Quebec, Canada to our facility in Stokesdale, NC, (ii) additional depreciation expense related to the shortening of useful lives of equipment associated with the gradual discontinuance of our operations located in Canada noted above totaling $1.3 million, (iii) employee termination benefits of $1.3 million, (iv) $1.1 million related to losses on disposal and valuation of inventory, and (v) lease termination costs of $860,000, (vi) partially offset by net gains on the disposal of equipment totaling $110,000. These restructuring and restructuring related charges exclude any expected gain on the sale of real estate associated with the closure of the Canadian facility, the amount of which is currently undetermined but which will ultimately reduce the amount of the restructuring charges incurred. Based on management's internal analysis we expect cash proceeds from the sale of real estate (net of all taxes and commissions) to exceed the amount of cash restructuring charges incurred.

Based on changes in business and current industry economic conditions, it is possible that the above estimates provided by management to determine restructuring and restructuring related charges incurred during fiscal 2025, and proceeds generated from the sale of the manufacturing facility located in Quebec, Canada, could be materially different from our actual results, and therefore could adversely affect the success of this restructuring plan.

The following summarizes accrued restructuring costs for the six-month period ending October 27, 2024:

The following summarizes restructuring and restructuring related charges for the three-month and six-month periods ending October 27, 2024:

(1)Of the total $2.8 million restructuring and restructuring related charges, $2.0 million and $769,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending October 27, 2024. Of the total $2.8 million, $2.8 million and $29,000 relate to the mattress fabrics and upholstery fabrics segments, respectively.

(2)Of the total $5.5 million restructuring and restructuring related charges, $4.6 million and $885,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the six-month period ending October 27, 2024. Of the total $5.5 million, $5.4 million and $147,000 relate to the mattress fabrics and upholstery fabrics segments, respectively.

Upholstery Fabrics Segment

Shanghai, China

Upholstery Fabrics Finishing Operation

During the fourth quarter of fiscal 2024, we closed our upholstery fabrics finishing operation to align with current demand trends and will continue to leverage our strategic supply relationships to meet customer finishing needs in China. This restructuring activity was completed during the first quarter of fiscal 2025 and resulted in cumulative restructuring and restructuring related charges totaling $218,000.

The following summarizes the activity in accrued restructuring costs for the six-month period ending October 27, 2024:

(1)Accrued restructuring expense of $3,000 was reported within accrued expenses in the Consolidated Balance Sheet for the period ending April 28, 2024.

(2)Expenses incurred represent other associated costs and were recognized in our Consolidated Statement of Net Loss for the six month period ending October 27, 2024.

Ouanaminthe, Haiti

Cut and Sew Upholstery Fabrics Operation

During the third quarter of fiscal 2023, Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti") entered into an agreement to terminate a lease associated with a facility, 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 indirectly 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.

The following summarizes our restructuring expense and restructuring related charges (credits) for the three months and six months ending October 29, 2023:

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

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

This restructuring activity was completed during the third quarter of fiscal 2024 and resulted in cumulative restructuring and restructuring related charges of $1.3 million.

11. Lines of Credit

Revolving Credit Agreement – United States

Culp, Inc., as borrower (the “borrower”), and Read, as guarantor (the “Guarantor”), are parties to an agreement (the "ABL Credit Agreement") by and among the borrower, 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 provide funding for ongoing working capital and general corporate purposes.

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 $1.0 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 borrower’s obligations under the ABL Facility (and certain related obligations) are guaranteed by the Guarantor. In addition, the ABL Credit Agreement requires that the borrower's future domestic subsidiaries guarantee the ABL Facility on a senior secured basis (such future domestic subsidiaries, together with the Guarantor and the borrower, the "Loan Parties"). The borrower's obligations under the ABL Facility are secured by first priority liens and other security interests on all assets of the Loan Parties, subject to certain exceptions and permitted liens.

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. 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;

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sell certain assets;

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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

Interest is charged at a rate (applicable interest rate of 6.33%, and 6.80% and 6.81% as of October 27, 2024, October 29, 2023, and April 28, 2024, respectively) calculated using the Applicable Margin over SOFR based on the borrower's excess availability under the ABL Facility, as defined in the ABL Credit Agreement.

There were $535,000 of outstanding letters of credit provided by the ABL Credit Agreement as of October 27, 2024, October 29, 2023, and April 28, 2024. As of October 27, 2024, the borrower 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 October 27, 2024, October 29, 2023, and April 28, 2024, respectively. In addition, on November 25, 2024, we borrowed $2.5 million under the ABL Credit Agreement.

As of October 27, 2024, our available borrowings calculated under the provisions of the ABL Credit Agreement totaled $22.6 million.

Denominated in Chinese Yuan Renminbi (“RMB”)

Agricultural Bank of China - 29.0 Million RMB Unsecured Credit Agreement

Effective on March 20, 2024, we entered into an unsecured credit agreement denominated in RMB, that provides for a line of credit up to 29.0 million RMB ($4.1 million USD as of October 27, 2024). The 29.0 million RMB line of credit expires on March 18,

2025. Interest charged under this agreement is based on the Loan Prime Rate ("LPR") in China minus 50 basis points (2.60% as of October 27, 2024).

As of October 27, 2024, the amount outstanding was 29.0 million RMB ($4.1 million USD). There wereno borrowings outstanding under this agreement as of April 28, 2024.

Bank of China -35.0 Million RMB Credit Agreement

On November 5, 2024 (third quarter fiscal 2025), we entered into a credit agreement (“Agreement”) denominated in RMB that provides borrowing capacity up to 35.0 million RMB ($4.9 million USD as of November 5, 2024), of which 25.0 million RMB ($3.5 million USD as of November 5, 2024) relates to a line of credit secured by trade accounts receivable associated with the company’s operations located in China and 10.0 million RMB ($1.4 million USD as of November 5, 2024) related to a working capital loan. The line of credit and working capital loan expire on July 31, 2025, and November 5, 2025, respectively. Interest is charged under the Agreement based on the LPR in China minus 50 basis points (2.60% as of November 5, 2024). The borrowing capacity regarding the 25.0 million line of credit is restricted to certain Culp, Inc. consolidated net sales and consolidated profitability requirements as defined in the Agreement. Currently, Culp, Inc. does not meet the consolidated net sales and consolidated profitability conditions required for borrowing under the 25.0 million line of credit. During the third quarter of fiscal 2025, we borrowed the entire 10.0 million ($1.4 million USD as of November 6, 2024) working capital loan to fund certain working capital expenditures incurred in China. There are no consolidated net sales and profitability requirements related to the 10.0 million working capital loan.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of October 27, 2024, we were in compliance with our financial covenants.

No interest payments were made during the three-month or six-month periods ending October 27, 2024, and October 29, 2023, respectively.

12. 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:

Investments - Rabbi Trust

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

As of October 27, 2024, our investments associated with the Trust totaled $8.0 million, of which $919,000 and $7.1 million were classified as short-term and long-term, respectively. As of October 29, 2023, our investments associated with the Trust totaled $7.9 million, of which $937,000 and $7.0 million were classified as short-term and long-term, respectively. As of April 28, 2024, our investments associated with the Trust totaled $8.0 million, of which $903,000 and $7.1 million were classified as short-term and long-term, respectively. Theinvestments associated with the Trust had an accumulated unrealized gain (loss) of $221,000, $(6,000), and $118,000 as of October 27, 2024, October 29, 2023, and April 28, 2024, respectively.

The fair value of our long-term 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.

13. 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 12,513,000 and 12,456,000 for the three months ending October 27, 2024, and October 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 12,491,000 and 12,394,000 for the six months ending October 27, 2024, and October 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:

14. Segment Information

Overall

Our operations are classified intotwo business segments: mattress fabrics and upholstery fabrics.

Mattress Fabrics

The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers.

Upholstery Fabrics

The upholstery fabrics segment develops, manufactures, sources, and sells fabrics to customers in the residential, commercial, and hospitality industries. 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

Weevaluate 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 compensationand 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. The mattress fabrics segment also includes assets held for sale associated with a right of use asset and equipment related to the fiscal 2025 restructuring plan announced on April 29, 2024 (see Note 10 to the consolidated financial statements for further details regarding this restructuring plan). 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)During the three months ending October 27, 2024, gross profit from operations includes restructuring related charges totaling $769,000 for losses on the disposal and valuation of inventory related to the gradual discontinuation of operations at our manufacturing facility located in Quebec, Canada.

(2)During the three months ending October 29, 2023, gross profit from operations includes restructuring related credits of $78,000 for the gain on disposal of inventory related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti.

(3) During the three months ending October 27, 2024, restructuring expense of $2.0 million represents $2.0 million and $29,000, related to the mattress fabrics and upholstery fabrics segments, respectively. The $2.0 million of restructuring expense represents (i) $1.4 million related to the gradual discontinuation of operations and the process of selling the manufacturing facility located in Quebec, Canada, which includes employee termination benefits of $505,000, additional depreciation related to the shortening of useful lives of equipment of $465,000, other associated costs of $373,000, and lease termination costs of $179,000, partially offset by gains on the disposal of equipment totaling $133,000; (ii) $600,000 related to relocating certain equipment and consolidating production from the mattress fabric manufacturing facility located in Quebec, Canada to the U.S facility located in Stokesdale, North Carolina, which includes other associated costs of $527,000, employee termination benefits of $58,000, and losses on the disposal of equipment totaling $15,000; (iii) $29,000 ofother associated costs related to moving certain equipment from our upholstery fabrics operation located in Knoxville, Tennessee to our upholstery fabrics distribution center located in Burlington, N.C.; and (iv) $13,000 for losses on the disposal of equipment related to the consolidation of two leased facilities at our mattress cover operation located in Ouanaminthe, Haiti.

(4)During the three months ending October 29, 2023, restructuring expense of $144,000 represents $142,000 of impairment charges related to equipment and $2,000 of employee termination benefits related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti.

(1)During the six months ending October 27, 2024, gross profit from operations includes restructuring related charges totaling $885,000 for losses on the disposal and valuation of inventory related to the gradual discontinuation of operations at our manufacturing facility located in Quebec, Canada.

(2)During the six months ending October 29, 2023, gross profit from operations includes a net restructuring related charge of $101,000, which represents a markdown of inventory totaling $179,000 during the first quarter of fiscal 2024, partially offset by a gain on disposal of inventory totaling $78,000 during the second quarter of fiscal 2024, both of which related to the discontinuation of production of cut and sewn upholstery kits at our facility located in Ouanaminthe, Haiti.

(3)During the six months ending October 27, 2024, restructuring expense of $4.7 million represents $4.5 million and $161,000, related to the mattress fabrics and upholstery fabrics segments, respectively. The $4.7 million of restructuring expense represents (i) $3.3 million related to the gradual discontinuation of operations and the process of selling the manufacturing facility located in Quebec, Canada, which includes $1.3 million of additional depreciation related to the shortening of useful lives of equipment, employee termination benefits of $1.0 million, other associated costs of $463,000, and lease termination costs of $443,000, partially offset by net gains on the disposal of equipment of $38,000; (ii) $767,000 related to relocating certain equipment and consolidating production from the mattress fabric manufacturing facility located in Quebec, Canada to the U.S facility located in Stokesdale, North Carolina, which includes other associated costs of $694,000, employee termination benefits of $58,000, and losses on the disposal of equipment totaling $15,000; (iii) $483,000 related to the consolidation of two leased facilities at our mattress cover operation located in Ouanaminthe, Haiti, which includes lease termination costs of $406,000, employee termination benefits of $48,000, other associated costs of $16,000, and losses of the disposal of equipment of$13,000; and (iv)$161,000 related to our upholstery fabrics segment, which includes employee termination benefits of $102,000 and other associated costs of $59,000 for moving equipment from our upholstery fabrics operation located in Knoxville, Tennessee to our upholstery fabrics distribution center located in Burlington, N.C.

(4)During the six months ending October 29, 2023, restructuring expense of $482,000 represents $379,000 for 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.

Balance sheet information for our operating segments follows:

(1)

The $24.7 million as of October 27, 2024, represents property, plant, and equipment of $22.2 million, $1.6 million, and $889,000 located in the U.S., Canada, and Haiti, respectively. The $32.9 million as of October 29, 2023, represents property, plant, and equipment of $22.2 million, $10.0 million, and $661,000 located in the U.S., Canada, and Haiti, respectively. The $31.5 million as of April 28, 2024, represents property, plant, and equipment of $21.5 million, $9.4 million, and $555,000 located in the U.S., Canada, and Haiti, respectively.

(2)

The $275,000 as of October 27, 2024, represents a right of use asset in Haiti. The $2.0 million as of October 29, 2023, represents right of use assets of $1.3 million and $663,000 located in Haiti, and Canada, respectively. The $1.6 million as of April 28, 2024, represents right of use assets of $1.1 million and $545,000 located in Haiti and Canada, respectively.

(3)

The $3.3 million as of October 27, 2024, represents assets held for sale of $2.9 million and $358,000 located in Canada and the U.S., respectively.

(4)

The $1.2 million as of October 27, 2024, represents property, plant, and equipment of $1.1 million and $95,000 located in the U.S., and China, respectively. The $1.2 million as of October 29, 2023, represents property, plant, and equipment of $1.0 million, and $140,000 located in the U.S. and China, respectively. The $1.1 million as of April 28, 2024, represents property, plant, and equipment of $1.0 million and $120,000 located in the U.S., and China, respectively.

(5)

The $1.1 million as of October 27, 2024, represents right of use assets of $925,000 and $195,000 located in the U.S., and China, respectively. The $2.0 million as of October 29, 2023, represents right of use assets of $1.2 million and $818,000 locatedin China and the U.S. respectively. The $2.0 million as of April 28, 2024, represents right of use assets of $1.3 million and $709,000 located in the U.S. and China, respectively.

(6)

The $620,000, $627,000, and $585,000 as of October 27, 2024, October 29, 2023, and April 28, 2024, respectively, represents 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 $2.8 million, $2.9 million, and $2.6 million as of October 27, 2024, October 29, 2023, and April 28, 2024, 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 an accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.

(2)

During the six-month period ending October 27, 2024, depreciation expense for the mattress fabrics segment included additional depreciation expense related to the shortening of useful lives of equipment associated with the gradual discontinuation of operations at our manufacturing facility located in Quebec, Canada. The amount of additional depreciation expense was $1.3 million and was classified as restructuring expense.

15. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $190,000, or (1.5%) of loss before income taxes, for the six-month period ending October 27, 2024, compared with income tax expense of $1.2 million, or (26.8%) of loss before income taxes, for the six-month period ending October 29, 2023.

Our effective income tax rates for the six-month periods ended October 27, 2024, and October 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 six-month periods ended October 27, 2024, and October 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, Haiti, and Vietnam 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 six-month periods ending October 27, 2024, and October 29, 2023:

Our consolidated effective income tax rates for the first half of fiscal 2025 and the first half of fiscal 2024 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems mostly from our operations located in China, which has a higher income tax rate than the U.S. In addition, during the first half of fiscal 2025 and the first half of 2024, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to a 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 higher during the first half of fiscal 2025 compared with the first half of fiscal 2024, as our $(12.4) million U.S. pre-tax loss incurred during the first half of fiscal 2025 was significantly greater than the $(5.8) million U.S. pre-tax loss incurred during the first half of fiscal 2024.

During the first half of fiscal 2025, we incurred a greater consolidated pre-tax loss totaling $(12.7) million, compared with $(4.5) million during the first half of fiscal 2024. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first half of fiscal 2024, as compared with the first half of fiscal 2025.

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 October 27, 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 2022 through 2024, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2025. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

Based on our assessments as of October 27, 2024, October 29, 2023, and April 28, 2024, 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 October 27, 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 October 27, 2024, October 29, 2023, and April 28, 2024, we recorded a deferred income tax liabi lity of $5.0 million, $4.6 million, and $4.8 million, respectively.

Uncertain Income Tax Positions

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

As of October 27, 2024, October 29, 2023, and April 28, 2024 we had a $1.4 million, $1.2 million, and $1.3 million total of gross unrecognized income tax benefits, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of October 27, 2024, the unrecognized tax benefit would favorably affect income tax expense in future periods by $1.4 million.

Our gross unrecognized income tax benefit of $1.4 million as of October 27, 2024, relates to income tax positions for which significant change could occur within the next year if the statute of limitations for relevant taxing authorities to examine and challenge the tax position expires.

Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:

16. 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 the issuance of the 2015 Plan. The Amended and Restated Plan also removed certain sub-limits that previously applied with respect to specific types of awards that may be issued under the plan.

As of October 27, 2024, there were 460,543 shares available for future equity-based grants under the Amended and Restated Plan.

Performance-Based Restricted Stock Units

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 8, 2024, January 8, 2024, September 28, 2023, and August 10, 2022:

The following table summarizes information related to our grants of performance-based restricted stock units associated with senior executives that were unvested as of October 27, 2024:

(1)

Performance-based restricted stock units awarded to senior executives.

(2)

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.

(3)

Compensation cost is based on an assessment each reporting period to determine the probability of whether or not certain performance goals will be met and how many shares are expected to be earned as of the end of the vesting period. These amounts represent the number of shares that were expected to vest as of October 27, 2024.

(4)

Price per share represents the fair market value per share ($1.15 per $1, or an increase of $0.70 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 ($4.65) for the performance-based component of the performance-based restricted stock units granted to senior executives on August 8, 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 a senior executive 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 modelfor 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.

There wereno performance-based restricted stock units that vested during the six-month periods ended October 27, 2024 and October 29, 2023, respectively.

We recorded compensation expense of $33,000 and $23,000 within selling, general, and administrative expenses associated with our performance-based restricted stock unit awards for the six-month periods ended October 27, 2024, and October 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 October 27, 2024, the remaining unrecognized compensation expense related to our performance-based restricted stock units was $283,000, which is expected to be recognized over a weighted average vesting period of 2.6 years. As of October 27, 2024, performance-based restricted stock units that are expected to vest had a fair value of $333,000.

Time-Based Restricted Stock Units

The following table summarizes information related to our grants of time-based restricted stock unit awards associated with senior executives, key employees, and outside directors that were unvested as of October 27, 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 outside directors.

(3)

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

During the six-month period ending October 27, 2024, time-based restricted stock units totaling 103,320, vested at a fair value of $581,000, or $5.63 per share. During the six-month period ending October 29, 2023, time-based restricted stock units totaling 151,652, vested at a fair value of $857,000, or $5.65 per share.

We recorded compensation expense of $332,000 and $378,000 within selling, general, and administrative expenses associated with our time-based restricted stock unit awards for the six-month periods ended October 27, 2024, and October 29, 2023, respectively.

As of October 27, 2024, the remaining unrecognized compensation expense related to our time-based restricted stock units was $813,000, which is expected to be recognized over a weighted average vesting period of 1.5 years. As of October 27, 2024, the time-based restricted stock units that are expected to vest had a fair value totaling $1.4 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, which represents the closing price of our common stock on the date of grant.

We recorded $84,000 of compensation expense within selling, general, and administrative expenses for common stock awards that immediately vested to our outside directors during the six-month period ended October 29, 2023.

17. 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 toseven 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 October 27, 2024, October 29, 2023, and April 28, 2024, are as follows:

Supplemental Cash Flow Information

Operating lease expense for the three-month periods ended October 27, 2024, and October 29, 2023, was $643,000 and$781,000, respectively. Operating lease expense for the six-month periods ended October 27, 2024, and October 29, 2023, was $1.4 million and $1.6 million, respectively. Short-term lease and variable lease expenses were immaterial for the three-month and six-month periods ended October 27, 2024, and October 29, 2023.

Other Information

Maturity of our operating lease liabilities for the remainder of fiscal 2025, the subsequent next four fiscal years, and thereafter follows:

As of October 27, 2024, the weighted average remaining lease term and discount rate for our operating leases follows:

Subsequent Lease Activity

The lease for our corporate offices and shared service departments located in High Point, North Carolina expires on November 30, 2024 (third quarter fiscal 2025). We entered a new lease at the same location with a commencement date of December 1, 2024. Under the new lease agreement, we expect to generate annualized savings of approximately $360,000. The reduction in lease expense is part of the Fiscal 2025 Restructuring Plan described in Note 10. The lease liability and right of use asset associated with the new lease are expected to be $774,000 on the commencement date.

18. Commitments and Contingencies

Litigation

The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the consolidated financial position, consolidated results of operations, or consolidated cash flows of the company.

Accounts Payable – Capital Expenditures

As of October 27, 2024, October 29, 2023, and April 28, 2024, we had amounts due regarding capital expenditures totaling$602,000, $298,000, and $343,000, respectively, which pertained to outstanding vendor invoices, none of which were financed.

Purchase Commitments – Capital Expenditures

As of October 27, 2024, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $571,000.

19. Statutory Reserves

Our subsidiary located in China was required to transfer 10% of its net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reached 50% of the company’s registered capital. As of October 27, 2024, the statutory surplus reserve fund represents the 50% registered capital requirement, and therefore, our subsidiary located in China is no longer required to transfer 10% of its net income in accordance with PRC accounting rules and regulations.

The transfer to this reserve must be made before distributions of any dividend to shareholders. As of October 27, 2024, the company’s statutory surplus reserve was $4.1 million. The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any. The statutory surplus reserve fund may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

The company’s subsidiary located in China can transfer funds to the parent company, except for the statutory surplus reserve of $4.1 million, to assist with debt repayment, capital expenditures, and other expenses of the company’s business.

20. Common Stock Repurchase Program

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

We didnot repurchase any shares of common stock during the six-month periods ending October 27, 2024, and October 29, 2023, respectively.

As of October 27, 2024, $3.2 million is available for additional repurchases of our common stock.