Note 4 – Acquisition

On the March 17, 2023 (the “Closing Date”), the Company acquired Manhattan and MTE, Manhattan’s wholly-owned subsidiary, from H Enterprises International, LLC (“HEI”) (“the Manhattan Acquisition”), for a purchase price of $17.0 million, subject to adjustments for cash as of the Closing Date and to the extent that actual net working capital as of the Closing Date differed from target net working capital of $13.75 million (the “Aggregate Adjustment”). The Manhattan Acquisition was funded with cash available on the Closing Date and borrowings under the Company’s revolving line of credit with CIT. On September 29, 2023, the Company and HEI agreed to a settlement of the Aggregate Adjustment, pursuant to which HEI paid $509,000 to the Company, which included interest income of $21,000.

The Manhattan Acquisition was accounted for in accordance with FASB ASC Topic 805, Business Combinations. The Company determined the allocation of the acquisition cost with the assistance of an independent third party. The identifiable assets acquired were recorded at their estimated fair value, which was determined based on available information and the use of multiple valuation approaches. The estimated useful lives of the identifiable intangible assets acquired were determined based upon the remaining time that these assets are expected to directly or indirectly contribute to the future cash flow of the Company.

The acquisition cost paid on the Closing Date amounted to $17.4 million, which included an estimate for cash as of the Closing Date and an estimate for the net working capital acquired. The settlement of the Aggregate Adjustment resulted in a decrease of the acquisition cost to $16.9 million. The following table represents the Company’s allocation of this acquisition cost (in thousands) to the identifiable assets acquired and the liabilities assumed based on their respective estimated fair values as of the acquisition date. The excess of the acquisition cost over the estimated fair value of the identifiable net assets acquired is reflected as goodwill.

Based upon the allocation of the acquisition cost, the Company recognized $787,000 of goodwill as of the Closing Date, the entirety of which was assigned to the reporting unit of the Company that produces and markets infant and toddler bibs, developmental toys, feeding, bath care and disposable products, and the entirety of which is expected to be deductible for income tax purposes. In accordance with FASB ASC Topic 805, The financial statements as of and for the fiscal year ended April 2, 2023 were not retrospectively adjusted for any measurement-period adjustments that occurred during the fiscal year ended March 31, 2024. Rather, the adjustments to provisional amounts that were identified during the measurement period were recorded during the fiscal year ended March 31, 2024, which is the reporting period in which the adjustments were determined. The Company considers the measurement period to have ended as of March 31, 2024 and further considers all measurement period adjustments to be final. The following table represents the adjustments made to the amount of goodwill during the fiscal year ended March 31, 2024.

The Manhattan Acquisition resulted in net sales of $18.5 million and $773,000 of developmental toy, feeding and baby care products during the fiscal years ended March 31, 2024 and April 2, 2023, respectively. Manhattan recorded amortization expense associated with the acquired amortizable intangible assets of $120,000 during the fiscal year ended March 31, 2024, which is included in marketing and administrative expenses in the consolidated statements of income. Amortization is computed using the straight-line method over the estimated useful lives of the assets, which are 15 years for the tradename, 10 years for the customer and licensing relationships and 11 years on a weighted-average basis for the grouping taken together.

The Company determined, on a pro forma basis, that the combined net sales of the Company and Manhattan, giving effect to the Manhattan Acquisition as if it had been completed on March 29, 2021, is $100.8 million for the fiscal year ended April 2, 2023, and the combined net income for the fiscal year ended April 2, 2023 is $2.8 million. These amounts combine the net sales and net income (or loss, as applicable) from the Company’s consolidated statements of income for the fiscal year ended April 2, 2023 with the respective amounts from Manhattan’s consolidated statements of operations for its fiscal year ended December 31, 2022. The combined amounts of net income or loss include adjustments related to the amortization of the amortizable intangible assets acquired and estimates of the interest expense and income tax expense or benefit that would have been incurred, but otherwise do not reflect the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any revenue, tax or other synergies that may result from the Manhattan Acquisition.