CSS Industries, Inc. (collectively with its subsidiaries, “CSS” or the “Company”) has prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The Company is currently in compliance with its debt covenants under its ABL Credit Facility discussed in Note 7; however, it is probable, based on our forecasts, that the Company will not be in compliance with these covenants at certain future measurement dates in the following twelve-month period. In connection with the transactions contemplated by the Merger Agreement discussed in Note 13, the Company expects that its obligations to the lenders under the ABL Credit Facility described in Note 7 will be discharged at the time the merger contemplated by the Merger Agreement is consummated. However, there can be no assurance that the transactions contemplated by the Merger Agreement will be consummated on the contemplated timeline or at all. If a debt covenant violation under the ABL Credit Facility were to occur prior to the consummation of the transactions contemplated by the Merger Agreement and if the Company was unable to agree to amended financial covenant measures with its lenders before such time or obtain a waiver in the event of subsequent non-compliance, the Company would not be able to repay the entirety of the outstanding debt in the event the lenders were to call the debt, thus leading to substantial doubt about the Company’s ability to continue as a going concern until such amendments or waivers are in place.

Gift The gift category includes products designed to celebrate certain life events or special occasions, such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, and other items that commemorate life's celebrations. Products in this category are primarily sold into mass, specialty, and online retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year.

CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their craft, gift and seasonal product requirements. A substantial portion of CSS’ products are manufactured and packaged in the United States and warehoused and distributed from facilities in the United States, the United Kingdom and Australia, with the remainder sourced from foreign suppliers, primarily in Asia. The Company also has a manufacturing facility in India that produces certain craft products, including trims, braids and tassels, and also has a distribution facility in India. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains purchasing offices in Hong Kong and China to administer Asian sourcing opportunities.

The Company's foreign subsidiaries generally use the local currency as the functional currency. The Company translates all assets and liabilities at period end exchange rates and all income and expense accounts at average rates during the period. Translation adjustments are recorded in accumulated other comprehensive income (loss) in stockholders’ equity. Gains and losses on foreign currency transactions (denominated in currencies other than the local currency) are not material and are included in other expense (income), net in the consolidated statements of operations and comprehensive income (loss).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Judgments and assessments of uncertainties are required in applying the Company’s accounting policies in many areas. Such estimates pertain to revenue recognition, the valuation of inventory and accounts receivable, the assessment of the recoverability of other intangible and long-lived assets and resolution of litigation and other proceedings. Actual results could differ from these estimates.

The Company records inventory when title is transferred, which occurs upon receipt or prior to receipt dependent on supplier shipping terms. The Company adjusts unsaleable and slow-moving inventory to its estimated net realizable value. Substantially all of the Company’s inventories are stated at the lower of first-in, first-out (FIFO) cost or net realizable value. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or net realizable value. Inventories consisted of the following (in thousands):

In connection with the acquisitions of substantially all of the net assets and business of The McCall Pattern Company on December 13, 2016, Simplicity Creative Group ("Simplicity") on November 3, 2017 and Fitlosophy, Inc. ("Fitlosophy") on June 1, 2018, the Company recorded a step-up to fair value of the inventory acquired of $21,773,000, $10,214,000, and $312,000, respectively, at the date of each such acquisition. This was a result of the acquired inventory being marked up to an estimated net selling price in purchase accounting and is recognized through cost of sales as the inventory is sold. The amount of step-up to fair value of the acquired inventory remaining as of December 31, 2019, March 31, 2019 and December 31, 2018 was $0, $284,000 and $1,135,000, respectively.

The Company has no asset held for sale as of December 31, 2019. Asset held for sale of $131,000 as of March 31, 2019 represented a distribution facility in Danville, Pennsylvania, which the Company sold on October 29, 2019 for $750,000. On the closing date, the Company received cash proceeds of $708,000 after closing costs. The Company also incurred additional legal costs of approximately $24,000 to sell the facility. Asset held for sale of $2,514,000 as of December 31, 2018, which represented a distribution facility in Havant, England, was sold in the fourth quarter of fiscal 2019.

The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use (“ROU”) assets are included in operating lease right-of-use assets on the consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of operating lease liabilities and operating lease liabilities, respectively, on the consolidated balance sheets. Finance leases are not material to the Company’s consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the adoption date for existing leases and as of the commencement date for new leases in determining the present value of future payments. The operating lease ROU assets are subsequently measured throughout the lease term at the carrying amount of the lease liability, adjusted for any prepaid or accrued rent payments, lease incentives and initial direct costs incurred. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company elected the package of transition practical expedients related to lease identification, lease classification, and initial direct costs. In addition, the Company made the following accounting policy elections for all asset classes: (1) the Company will not separate lease and non-lease components by class of underlying asset, (2) the Company will apply the short-term lease exemption by class of underlying asset, and, (3) the Company will apply the portfolio approach to the development of its discount rates for the leases to be recorded in accordance with ASC 842. The Company has chosen not to elect the hindsight practical expedient for its transition to ASC 842. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.

Other indefinite lived intangible assets consist of tradenames which are required to be tested annually for impairment. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark and then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable

transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. The Company believes the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename to determine if impairment exists.

Long-lived assets (including property, plant and equipment), except for indefinite lived intangible assets, are reviewed for impairment when events or circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.

There were no triggering events identified during the nine months ended December 31, 2019 that required interim impairment testing for long-lived assets. The Company recorded an impairment of property, plant and equipment of $1,398,000 in the nine months ended December 31, 2018 related to a restructuring plan to combine its operations in the United Kingdom. See Note 3 for further discussion of this restructuring and Note 6 for further information on other intangible assets.

Revenue from the sale of the Company's products is recognized when control of the promised goods is transferred to customers, in the amount that reflects the consideration the Company expects to be entitled to receive from its customers in exchange for those goods. The Company's revenue is recognized using the five-step model identified in ASC 606, "Revenue from Contracts with Customers." These steps are: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as the performance obligations are satisfied.

The Company's contracts with customers generally include one performance obligation under the revenue recognition standard. For most product sales, the performance obligation is the delivery of a specified product, and is satisfied at the point in time when control of the product has transferred to the customer, which takes place when title and risk of loss transfer in accordance with the applicable shipping terms, typically either at shipping point or at delivery to a specified destination. The Company has certain limited products, primarily sewing patterns, that are sold on consignment at mass market retailers. The Company recognizes revenue on these products as they are sold to end consumers as recorded at point-of-sale terminals, which is the point in time when control of the product is transferred to the customer.

Revenue is recognized based on the consideration specified in a contract with the customer, and is measured as the amount of consideration to which the Company expects to be entitled to receive in exchange for transferring the goods. When applicable, the transaction price includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Variable consideration consists of revenues that are subject to reductions to the transaction price for customer programs, which may include special pricing arrangements for specific customers, volume incentives and other promotions. The Company has significant historical experience with customer programs and estimates the expected consideration considering historical trends. The related reserves are included in accrued customer programs in the consolidated balance sheets. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. In limited cases, the Company may provide the right to return product to certain customers. The Company also records estimated reductions to revenue, based primarily on known claims, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales. The related reserves are included in accrued customer programs in the December 31, 2019 consolidated balance sheet and in accounts receivable, net of allowances in the March 31, 2019 and December31, 2018 consolidated balance sheets. If the amount of actual customer returns and chargebacks were to increase or decrease from the estimated amount, revisions to the estimated reserve would be recorded.

Sales commissions are earned and recognized as expense as the related revenue is recognized at a point in time. These costs are recorded in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). Taxes collected from customers are excluded from revenue and credited directly to obligations to the appropriate governmental agencies.

Due to the Company's net losses for the nine months ended December 31, 2019 and the three- and nine months ended December 31, 2018, potentially dilutive securities of 576,000 shares, 513,000 shares and 503,000 shares, respectively, consisting of outstanding stock options and unearned time-based restricted stock units, were excluded from the diluted net loss per common share calculation due to their antidilutive effect. The Company excluded 259,000 shares, consisting of outstanding stock options, from the diluted net income per common share calculation for the three months ended December 31, 2019 due to their antidilutive effect. Market-based and performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted-average shares until the market or performance conditions are met even when the Company is profitable for the respective period.


	Three Months Ended December 31,						Nine Months Ended December 31,
	2019		2018		2019		2018
Accumulated effect of currency translation adjustment:
Balance at beginning of period	$	(507)	$	22	$	12	$	988
Currency translation adjustment during period	449		(183)		(70)		(1,149)
Balance at end of period	$	(58)	$	(161)	$	(58)	$	(161)

Accumulated effect of pension and postretirement benefits:
Balance at beginning of period	$	453	$	259	$	453	$	259
Pension and postretirement benefits during period	28		—		28		—
Balance at end of period	$	481	$	259	$	481	$	259



Accumulated effect of interest rate swap agreement:
Balance at beginning of period	$	—	$	392	$	—	$	(84)


Fair value adjustment	—		(585)		—		(109)
Balance at end of period	$	—	$	(193)	$	—	$	(193)