SUMR Summer Infant Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 30, 2019

o          Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to               

Commission file number: 001-33346

Summer Infant, Inc.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  x

As of May 3, 2019, there were 18,853,727 shares outstanding of the registrant’s Common Stock, $0.0001 par value per share.

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Summer Infant, Inc.

Form 10-Q

Table of Co ntents

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See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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SUMMER INFANT, INC.  AND SUBSIDIARIES

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A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for the Company is transfer of juvenile products to its customers. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.

A transaction price is the amount of consideration the Company expects to receive under the arrangement. The Company is required to estimate variable consideration (if any) and to factor that estimation into the determination of the transaction price. The Company conducts its business with customers through valid purchase or sales orders each of which is considered a separate contract because individual orders are not interdependent on one another. Product transaction prices on a purchase or sale order are discrete and stand-alone. Purchase or sales orders may be issued under either a customer master service agreement or a reseller allowance agreement. Purchase or sales orders, master service agreements, and reseller allowance agreements which are specific and unique to each customer, may include product price discounts, markdown allowances, return allowances, and/or volume rebates which reduce the consideration due from customers. Variable consideration is estimated using the most likely amount method, which is based on our historical experience as well as current information such as sales forecasts.

Contracts may also include cooperative advertising arrangements where the Company allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. These allowances are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit and fair value and are accounted for as direct selling expenses.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of revenues, expenses, assets, liabilities and related disclosures. These estimates are based on management’s best knowledge as of the date the financial statements are published of current events and actions the Company may undertake in the future.  Accordingly, actual results could differ from those estimates.

Trade Receivables

Trade receivables are carried at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible. Amounts are considered to be uncollectable based upon historical experience and management’s evaluation of outstanding accounts receivable.

Changes in the allowance for doubtful accounts are as follows:

Inventory Valuation

Inventory is comprised mostly of finished goods and some component parts and is stated at the lower of cost using the first-in, first-out (“FIFO”) method, or net realizable value. The Company regularly reviews slow-moving and excess inventories, and writes down inventories to net realizable value if the expected net proceeds from the disposals of excess inventory are less than the carrying cost of the merchandise.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the Company’s condensed consolidated balance sheets.

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ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company’s uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The lease component results in a right-of-use asset being recorded on the balance sheet. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Income Taxes

Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred income tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carry-forwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, that it is more likely than not that such benefits will be realized. The net deferred tax assets and liabilities are presented as noncurrent.

The Company utilized the discrete method of accounting for income taxes in the U.S. for the three months ended March 30, 2019 as it believes the discrete method results in a more accurate representation of the income tax benefit for the quarter.

The Company follows the appropriate guidance relative to uncertain tax positions. This standard provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet a recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the financial statements.

Net Loss Per Share

Basic loss per share for the Company is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share includes the dilutive impact of outstanding stock options and unvested restricted shares.

Translation of Foreign Currencies

All assets and liabilities of the Company’s foreign subsidiaries, each of whose functional currency is in its local currency, are translated into U.S. dollars at the exchange rate in effect at the end of the quarter and the income and expense accounts of these affiliates have been translated at average rates prevailing during each respective quarter. Resulting translation adjustments are made to a separate component of stockholders’ equity within accumulated other comprehensive loss. Foreign exchange transaction gains and losses are included in the accompanying interim, condensed consolidated statement of operations.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases are classified as either operating or finance, and classification is based on criteria similar to past lease accounting, but without explicit bright lines. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) — Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance became effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.

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The Company adopted the standard on the effective date of December 31, 2018 by applying the new lease requirements at the effective date. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. The impact of the adoption of ASC 842 on the condensed consolidated balance sheet was an increase approximately $6,411 million in assets and an increase of $7,037 million of liabilities for the recognition of right-of-use assets and lease liabilities. The adoption of ASU 2016-02 was immaterial to the condensed consolidated results of operations and cash flows.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

2.                                       REVENUE

Disaggregation of Revenue

The Company’s revenue is primarily from distinct fixed-price product sales in the juvenile product market, to similar customers and channels utilizing similar types of contracts that are short term in nature (less than one year). The Company does not sell service agreements or goods over a period of time and does not sell or utilize customer financing arrangements or time-and-material contracts.

The following is a table that presents net sales by geographical area:

All Other consists of Canada, Europe, South America, Mexico, Asia, and the Middle East.

Contract Balances

The Company does not have any contract assets such as work-in-process or contract liabilities such as customer advances. All trade receivables on the Company’s condensed consolidated balance sheet are from contracts with customers.

Contract Costs

Costs incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract that are short term in nature are expensed as incurred. All contract costs incurred in the three months ended March 30, 2019 and three months ended March 31, 2018 fall under the provisions of the practical expedient and have therefore been expensed.

3.                                       DEBT

Credit Facilities

Bank of America Credit Facility.   On June 28, 2018, the Company and Summer Infant (USA), Inc., as borrowers, entered into a Second Amended and Restated Loan and Security Agreement with Bank of America, N.A., as agent, the financial institutions party to the agreement from time to time as lenders, and certain subsidiaries of the Company as guarantors (as amended, the “Restated BofA Agreement”). The Restated BofA Agreement replaced the Company’s prior credit facility with Bank of America, and provides for a $60,000, asset-based revolving credit facility, with a $5,000 letter of credit sub-line facility. The total borrowing capacity is based on a borrowing base, which is defined as 85% of eligible receivables plus the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less applicable reserves. The scheduled maturity date of loans under the Restated BofA Agreement is June 28, 2023 (subject to customary early termination provisions).  On March 25, 2019, the Company and Summer Infant (USA), Inc., as borrowers, entered into Amendment No. 1 to the Second Amended and Restated Loan and Security Agreement that modified the definitions of Capital Lease, EBITDA, Eligible Account and Revolver Borrowing Base in the Restated BofA Agreement in order to account for FASB mandated changes to lease accounting standards and provide additional financing flexibility to the Company.

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All obligations under the Restated BofA Agreement are secured by substantially all the assets of the Company, including a first priority lien on accounts receivable and inventory and a junior lien on certain assets subject to the term loan lender’s first priority lien described below. Summer Infant Canada Limited and Summer Infant Europe Limited, subsidiaries of the Company, are guarantors under the Restated BofA Agreement. Proceeds from the loans were used to satisfy existing debt, pay fees and transaction expenses associated with the closing of the Restated BofA Agreement and may be used to pay obligations under the Restated BofA Agreement, and for lawful corporate purposes, including working capital.

Loans under the Restated BofA Agreement bear interest, at the Company’s option, at a base rate or at LIBOR, plus applicable margins based on average quarterly availability under the Restated BofA Agreement. Interest payments are due monthly, payable in arrears. The Company is also required to pay an annual non-use fee on unused amounts, as well as other customary fees as are set forth in the Restated BofA Agreement. The Restated BofA Agreement contains customary affirmative and negative covenants. Among other restrictions, the Company is restricted in its ability to incur additional debt, make acquisitions or investments, dispose of assets, or make distributions unless in each case certain conditions are satisfied. In addition, if availability falls below a specified amount, a springing covenant would be in effect requiring the Company to maintain a fixed charge coverage ratio at the end of each fiscal month of at least 1.0 to 1.0 for the twelve-month period then ended.

The Restated BofA Agreement also contains customary events of default, including a cross default with the Term Loan Agreement or the occurrence of a change of control. In the event of a default, all of the obligations of the Company and its subsidiaries under the Restated BofA Agreement may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.

As of March 30, 2019, under the Restated BofA Agreement, the rate on base-rate loans was 6.50% and the rate on LIBOR-rate loans was 4.625%. The amount outstanding on the Restated BofA Agreement at March 30, 2019 was $39,544. Total borrowing capacity at March 30, 2019 was $46,032 and borrowing availability was $6,488.

Prior to entering into the Restated BofA Agreement, the Company and Summer Infant (USA), Inc. were parties to an amended and restated loan and security agreement with Bank of America, N.A., as agent, which provided for an asset-based credit facility (the “Prior Credit Facility”). The Prior Credit Facility consisted of a $60,000 asset-based revolving credit facility, with a $10,000 letter of credit sub-line facility (the “Revolving Facility”), a $5,000 “first in last out” revolving credit facility (the “FILO Facility”) and a $10,000 term loan facility (the “Term Loan Facility”). The total borrowing capacity under the Revolving Facility was based on a borrowing base, generally defined as 85% of the value of eligible accounts plus the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less reserves. The total borrowing capacity under the FILO Facility was based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts that steps down over time, plus a specified percentage of the value of eligible inventory that stepped down over time. As noted above, all obligations under the Revolving Facility and Term Loan Facility were repaid in connection with the Restated BofA Agreement and Term Loan Agreement described below. Loans under the FILO Facility were repaid April 21, 2018.

Term Loan Agreement.   On June 28, 2018, the Company and Summer Infant (USA), Inc., as borrowers, entered into a Term Loan and Security Agreement (as amended, the “Term Loan Agreement”) with Pathlight Capital LLC, as agent, each lender from time to time a party to the Term Loan Agreement, and certain subsidiaries of the Company as guarantors, providing for a $17,500 term loan (the “Term Loan”). Proceeds from the Term Loan were used to satisfy existing debt, pay fees and transaction expenses associated with the closing of the Term Loan and may be used to pay obligations under the Term Loan Agreement, and for lawful corporate purposes, including working capital. The Term Loan is secured by a lien on certain assets of the Company, including a first priority lien on intellectual property, machinery and equipment, and a pledge of (i) 100% of the ownership interests of domestic subsidiaries and (ii) 65% of the ownership interests in certain foreign subsidiaries of the Company, and a junior lien on certain assets subject to the liens under the Restated BofA Agreement described above. The Term Loan matures on June 28, 2023. Summer Infant Canada Limited and Summer Infant Europe Limited, subsidiaries of the Company, are guarantors under the Term Loan Agreement.  On March 25, 2019, the Company and Summer Infant (USA), Inc., as borrowers, entered into Amendment No. 1 to the Term Loan and Security Agreement that modified definitions consistent with the amendment of the Restated BofA Agreement and also modified the IP Advance Rate Reduction Amount definition in order to provide additional financing flexibility to the Company.

The principal of the Term Loan will be repaid, on a quarterly basis, in installments of $219, with the first installment paid on December 1, 2018, until paid in full on termination. The Term Loan bears interest at an annual rate equal to LIBOR, plus 9.0%. Interest payments are due monthly, in arrears. Obligations under the Term Loan Agreement are also subject to restrictions on prepayment and a prepayment penalty if the Term Loan is repaid prior to the third anniversary of the closing of the Term Loan.

The Term Loan Agreement contains customary affirmative and negative covenants that are substantially the same as the Restated BofA Agreement. In addition, if availability falls below a specified amount, then the Company must maintain a fixed charge coverage ratio at the end of each fiscal month of at least 1.0 to 1.0 for the twelve-month period then ended. The Term Loan Agreement

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also contains events of default, including a cross default with the Restated BofA Agreement or the occurrence of a change of control. In the event of a default, all of the obligations of the Company and its subsidiaries under the Term Loan Agreement may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.

As of March 30, 2019, the interest rate on the Term Loan was 11.63%. The amount outstanding on the Term Loan at March 30, 2019 was $17,062.

Aggregate maturities of bank debt related to the Restated BofA Agreement and the Term Loan Agreement:

Unamortized debt issuance costs were $2,418 at March 30, 2019 and $2,395 at December 29, 2018, and are presented as a direct deduction of long-term debt on the consolidated balance sheets.

The amortization period for the majority of the intangible assets ranges from 5 to 20 years for those assets that have an estimated life; certain of the assets have indefinite lives (brand names). Total of intangibles not subject to amortization amounted to $8,400 as of March 30, 2019 and December 29, 2018.

5.                                       COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space and distribution centers primarily related to its Riverside California, Canada, United Kingdom, and Hong Kong operations.  In connection with these leases, there were no cash incentives from the landlord to be used for the construction of leasehold improvements within the facility. Our headquarters in Woonsocket, Rhode Island continues to be accounted for as a sale-leaseback lease.

The Company identified and assessed the following significant assumptions in recognizing the right-of-use asset and corresponding liabilities:

·                   Expected lease term — The expected lease term includes both contractual lease periods and, when applicable, cancelable option periods when it is reasonably certain that the Company would exercise such options. These  leases have remaining lease terms between 7 months and 4 years. The Riverside lease has two 5-year extension options that have not been included in the lease term. The Canada lease has one 5-year extension option  that has also not been included in the lease term.

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·                   Incremental borrowing rate — The Company’s lease agreements do not provide an implicit rate. As the Company does not have any external borrowings for comparable terms of its leases, the Company estimated the incremental borrowing rate based on secured borrowings available to the Company for the next 5 years. This is the rate the Company would have to pay if borrowing on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.

·                   Lease and non - lease components — In certain cases the Company is required to pay for certain additional charges for operating costs, including insurance, maintenance, taxes, and other costs incurred, which are billed based on both usage and as a percentage of the Company’s share of total squared footage. The Company determined that these costs are non-lease components and they are not included in the calculation of the lease liabilities because they are variable. Payments for these variable, non-lease components are considered variable lease costs and are recognized in the period in which the costs are incurred.

The components of the Company’s lease expense for the three months ended March 30, 2019 were as follows:

Cash paid for amounts included in the measurement of the Company’s lease liabilities were $648 for the three months ended March 30, 2019.

As of March 30, 2019, the present value of maturities of the Company’s operating lease liabilities were as follows:

Prior to the adoption of ASU 2016-02 and for the three months ended March 31, 2018, the Company recognized rent expense on a straight-line basis over the lease period and recorded deferred rent expense for rent expense incurred but not yet paid. The Company also recorded deferred rent attributable to cash incentives received under its lease agreements which are amortized to rent expense over the lease term. During the three months ended March 31, 2018, the Company recognized total rent expense of $615.

Disclosures related to periods prior to adoption of the new lease standard:

Under ASC 840, approximate future minimum rental payments due under these leases as of December 29, 2018 were as follows:

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(a)          Amounts exclude payments for sales-leaseback transaction of the Woonsocket headquarters.

Litigation

The Company is a party to various routine claims, litigation and administrative complaints incidental to its business, including claims involving product liability, employee matters and other general liability claims, most of which are covered by insurance. We are not aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, results of operations or financial condition.

6.                                       SHARE BASED COMPENSATION

The Company is currently authorized to issue up to 1,700,000 shares for equity awards under the Company’s 2012 Incentive Compensation Plan (as amended, “2012 Plan”). Periodically, the Company may also grant equity awards outside of its 2012 Plan as inducement grants for new hires.

Under the 2012 Plan, awards may be granted to participants in the form of non-qualified stock options, incentive stock options, restricted stock, deferred stock, restricted stock units and other stock-based awards. Subject to the provisions of the plans, awards may be granted to employees, officers, directors, advisors and consultants who are deemed to have rendered or are able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the Company’s success. The Company accounts for options under the fair value recognition standard. Share-based compensation expense for the three months ended March 30, 2019 and March 31, 2018 was $48 and $99, respectively. Share based compensation expense is included in general and administrative expenses.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the table below. The Company uses the simplified method to estimate the expected term of the options, but used an estimate for grants of “plain vanilla” stock options based on a formula prescribed by the Securities and Exchange Commission. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense recognized in the consolidated financial statements is based on awards that are ultimately expected to vest.

As of March 30, 2019, there were 1,036,610 stock options outstanding and 205,700 unvested restricted shares outstanding.

During the three months ended March 30, 2019, the Company granted 9,000 stock options and 3,000 shares of restricted stock, respectively. The following table summarizes the weighted average assumptions used for stock options granted during the three  months ended March 30, 2019 and March 31, 2018.

As of March 30, 2019, there were 891,663 shares available to grant under the 2012 Plan.

7.                                       WEIGHTED AVERAGE COMMON SHARES

Basic and diluted earnings or loss per share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted weighted average number of common shares outstanding also included common stock equivalents such as stock options and restricted shares. The Company does not include the anti-dilutive effect of common stock equivalents in the calculation of dilutive common shares outstanding. The computation of diluted common shares for the three months ended March 30, 2019 excluded 1,036,610 stock options and 205,700 shares of restricted stock outstanding. The computation of diluted common shares for the three months ended March 31, 2018 excluded 1,151,830 stock options and 272,891 shares of restricted stock outstanding.

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8.                                       SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and determined that no subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.

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product portfolio. We believe this “family of brands” approach better reflects our strategic vision and evolving consumer expectations, and we intend to leverage our brands, Summer™, SwaddleMe® and born free™, to cover multiple consumer demographics, retailers and channels.

In the first quarter of 2019, we also amended our existing credit facility with Bank of America and term loan with Pathlight Capital to modify certain definitions in these agreements and provide additional financing flexibility to the Company, as further described in Part II, Item 5.

While we are encouraged by our growth in the first quarter and look forward to our seasonally better quarters to come, we expect our results in 2019 and potentially thereafter to be impacted by the 10% tariff enacted in September 2018 on goods imported into the United States from China. The duration of these tariffs, and whether the tariffs may increase, is uncertain as the United States continues to engage in trade negotiations with China. We have initiated actions to mitigate the impact of the existing tariffs, including price increases and exploring alternative sources of supply outside of China. However, the increase in the cost of certain of our products as a result of the tariffs that is not offset by our mitigation efforts could have an adverse effect on our business, financial position, results of operations and cash flows.

Summary of Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 30, 2019 from our critical accounting policies and estimates disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Form 10-K except for the adoption of the new lease accounting rules in the first quarter of fiscal 2019 as noted in Note 1 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Three Months ended March 30, 2019 compared with Three Months ended March 31, 2018

Net sales increased 1.1% from $42,055 for the three months ended March 31, 2018 to $42,538 for the three months ended March 30, 2019. The increase was primarily a result of increased business across all of our major customers and certain product categories, including gates, potty, bath, and positioners, as former TRU business continued its migration to other channels. Sales to TRU totaled $2,954 for the three months ended March 31, 2018, the last quarter the company did business with TRU.

Cost of goods sold includes cost of the finished product from suppliers, duties on certain imported items, freight-in from suppliers, and miscellaneous charges. The components of cost of goods sold remained substantially the same for the quarter ended March 30, 2019 as compared to the quarter ended March 31, 2018.

Gross profit decreased 1.0% from $13,592 for the three months ended March 31, 2018 to $13,450 for the three months ended March 30 2019. Gross margin as a percent of net sales declined from 32.3% for the three months ended March 31, 2018 to 31.6% for the three months ended March 30, 2019. Gross margin dollars and percent declined primarily due to sales mix. Gate sales increased in the quarter in dollars and as a percent of sales which typically sell at lower margins than other product categories. In addition, tariffs and demurrage costs continued to negatively effect gross margins.

General and administrative expenses decreased 25.5% from $12,588 for the three months ended March 31, 2018 to $9,379 for the three months ended March 30, 2019.  General and administrative expenses decreased from 29.9% of net sales for the three months ended March 31, 2018 to 22.0% of net sales for the three months ended March 30, 2019.  The decline in dollars and as a percent of

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sales was attributable in great part to a $2,348 adjustment to increase allowance for bad debt due to the TRU bankruptcy in the three months ending March 31, 2018 that did not recur in the three months ending March 30, 2019. The decline was also attribuble to $1,004 of lower labor and other costs as a result of cost reduction actions taken in the three months ending March 30, 2019 and over the past fiscal year partially offset by $563 in severance costs in the first quarter of fiscal 2019 in comparison to $421 in the first quarter of fiscal 2018.

Selling expenses increased 25.2% from $2,678 for the three months ended March 31, 2018 to $3,353 for the three months ended March 30, 2019. Selling expenses also increased as a percent of net sales from 6.4% for the three months ended March 31, 2018 to 7.9% for the three months ended March 30, 2019. The increase in selling expense dollars and as a percent of sales was primarily attributable to increased cooperative advertisements and freight out costs this year as compared to the three months ended March 31, 2018 which included a larger component of direct import sales which do not incur cooperative advertisement and freight costs.

Depreciation and amortization decreased 6.4% from $1,001 for the three months ended March 31, 2018 to $937 for the three months ended March 30, 2019. The decrease in depreciation and amortization was primarily attributable to a reduction in capital investment over the past several years.

Interest expense increased 61.6% from $773 for the three months ended March 31, 2018 to $1,249 for the three months ended March 30, 2019.  Interest expense increased primarily as a result of higher debt levels, higher average interest rates under our new credit facilities, and the impact of Federal interest rate hikes over the past year.

For the three months ended March 31, 2018, we recorded a $741 tax benefit on $3,448 of pretax loss, reflecting an estimated 21.5% tax rate for the quarter. For the three months ended March 30, 2019, we recorded a $70 tax benefit for income taxes on $1,468 of pretax loss, reflecting an estimated 4.8% tax rate for the quarter. The tax rate for the three months ended March 30, 2019 included  a $313 discrete valuation allowance charge for nondeductible interest expense.

Liquidity and Capital Resources

We fund our operations and working capital needs through cash generated from operations and borrowings under our credit facilities.

In our typical operational cash flow cycle, inventory is purchased in U.S. dollars to meet expected demand plus a safety stock. Because the majority of our suppliers are based in Asia, inventory takes from three to four weeks to arrive from Asia to the various distribution points we maintain in the United States, Canada and the United Kingdom. Payment terms for these vendors are approximately 60-75 days from the date the product ships from Asia and therefore we are generally paying for the product a short time after it is physically received in the United States.  In turn, sales to customers generally have payment terms of 60-75 days, resulting in an accounts receivable and increasing the amount of cash required to fund working capital.  To bridge the gap between paying our suppliers and receiving payment from our customers for goods sold, we rely on our credit facilities.

The majority of our capital expenditures are for tools and molds related primarily to new product introductions. We receive indications from retailers near the middle of each year as to what products they will be taking into their product lines for the upcoming year. Based on these indications, we will then acquire the tools and molds required to build and produce the products. In most cases, the payments for the tools are spread out over a three to four month period.

For the three months ended March 30, 2019, net cash used in operating activities totaled $7,519 primarily due to the paydown of accounts payable from higher inventory purchased in the previous fiscal quarter in advance of a potential further increase in tariffs. We expect inventory to return to normal levels in the third fiscal quarter of 2019. Net cash provided by operating activities for the three months ended March 31, 2018 was $3,664 primarily due to reductions in accounts receivable and inventory.

For the three months ended March 30, 2019, net cash used in investing activities was approximately $812. For the three months ended March 31, 2018, net cash used in investing activities was $767.

Net cash provided by financing activities was approximately $8,672 for the three months ended March 30, 2019 and reflected borrowings on our credit facilities to fund inventory purchases and accounts receivable. We expect inventory to return to normal levels in the third fiscal quarter of 2019, resulting in lower borrowings and repayments on our credit facilities. Net cash used by financing activities was approximately $3,071 for the three months ended March 31, 2018, reflecting repayments on our credit facilities with funds generated from operating activities.

Based primarily on the above factors, net cash increased for the three months ended March 30, 2019 by $195, resulting in a cash balance of approximately $916 at March 30, 2019.

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Capital Resources

In addition to operating cash flow, we also rely on our asset-based revolving credit facility with Bank of America, N.A. and our term loan agreement with Pathlight Capital to meet our financing requirements, which are subject to changes in our inventory and account receivable levels. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure.

If we are unable to meet our current financial forecast, do not adequately control expenses, or adjust our operations accordingly, we may not have access to all of our available lines of credit due to insufficient asset availability.  If our availability drops below specified levels, we will be required to meet certain financial covenants under our revolving credit facility and term loan agreement. There is no assurance that we will meet all of our financial or other covenants in the future, or that our lenders will grant waivers if there are covenant violations. In addition, should we seek to raise additional funds through debt or equity financings, any sale of debt or equity securities may cause dilution to existing stockholders. If sufficient funds are not available or are not available on acceptable terms, our ability to address any unexpected changes in our operations could be limited.

Based on past performance and current expectations, we believe that our anticipated cash flow from operations and availability under our existing credit facility are sufficient to fund our working capital, capital expenditures and debt service requirements for at least the next 12 months.

Credit Facilities

On June 28, 2018, the Company and Summer Infant (USA), Inc., as borrowers, entered into a Second Amended and Restated Loan and Security Agreement with Bank of America, N.A., as agent, the financial institutions party to the agreement from time to time as lenders, and certain subsidiaries of the Company as guarantors (as amended, the “Restated BofA Agreement”). The Restated BofA Agreement replaced the Company’s prior credit facility with Bank of America, and provides for a $60,000, asset-based revolving credit facility, with a $5,000 letter of credit sub-line facility. The total borrowing capacity is based on a borrowing base, which is defined as 85% of eligible receivables plus the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less applicable reserves. The scheduled maturity date of loans under the Restated BofA Agreement is June 28, 2023 (subject to customary early termination provisions). On March 25, 2019, the Company and Summer Infant (USA), Inc., as borrowers, entered into Amendment No. 1 to the Second Amended and Restated Loan and Security Agreement that modified the definitions of Capital Lease, EBITDA, Eligible Account and Revolver Borrowing Base in the Restated BofA Agreement in order to account for FASB mandated changes to lease accounting standards and provide additional financing flexibility to the Company.  Please see Part II, Item 5 “Other Information,” for more information about the amendment.

All obligations under the Restated BofA Agreement are secured by substantially all the assets of the Company, including a first priority lien on accounts receivable and inventory and a junior lien on certain assets subject to the term loan lender’s first priority lien described below. Summer Infant Canada Limited and Summer Infant Europe Limited, subsidiaries of the Company, are guarantors under the Restated BofA Agreement. Proceeds from the loans were used to satisfy existing debt, pay fees and transaction expenses associated with the closing of the Restated BofA Agreement and may be used to pay obligations under the Restated BofA Agreement, and for lawful corporate purposes, including working capital.

Loans under the Restated BofA Agreement bear interest, at the Company’s option, at a base rate or at LIBOR, plus applicable margins based on average quarterly availability under the Restated BofA Agreement. Interest payments are due monthly, payable in arrears. The Company is also required to pay an annual non-use fee on unused amounts, as well as other customary fees as are set forth in the Restated BofA Agreement. The Restated BofA Agreement contains customary affirmative and negative covenants. Among other restrictions, the Company is restricted in its ability to incur additional debt, make acquisitions or investments, dispose of assets, or make distributions unless in each case certain conditions are satisfied. In addition, if availability falls below a specified amount, a springing covenant would be in effect requiring the Company to maintain a fixed charge coverage ratio at the end of each fiscal month of at least 1.0 to 1.0 for the twelve-month period then ended.

The Restated BofA Agreement also contains customary events of default, including a cross default with the Term Loan Agreement or the occurrence of a change of control. In the event of a default, all of the obligations of the Company and its subsidiaries under the Restated BofA Agreement may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.

As of March 30, 2019, under the Restated BofA Agreement, the rate on base-rate loans was 6.50% and the rate on LIBOR-rate loans was 4.625%. The amount outstanding on the Restated BofA Agreement at March 30, 2019 was $39,544. Total borrowing capacity at March 30, 2019 was $46,032 and borrowing availability was $6,488.

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Term Loan Agreement.   On June 28, 2018, the Company and Summer Infant (USA), Inc., as borrowers, entered into a Term Loan and Security Agreement (the “Term Loan Agreement”) with Pathlight Capital LLC, as agent, each lender from time to time a party to the Term Loan Agreement, and certain subsidiaries of the Company as guarantors, providing for a $17,500 term loan (the “Term Loan”). Proceeds from the Term Loan were used to satisfy existing debt, pay fees and transaction expenses associated with the closing of the Term Loan and may be used to pay obligations under the Term Loan Agreement, and for lawful corporate purposes, including working capital. The Term Loan is secured by a lien on certain assets of the Company, including a first priority lien on intellectual property, machinery and equipment, and a pledge of (i) 100% of the ownership interests of domestic subsidiaries and (ii) 65% of the ownership interests in certain foreign subsidiaries of the Company, and a junior lien on certain assets subject to the liens under the Restated BofA Agreement described above. The Term Loan matures on June 28, 2023. Summer Infant Canada Limited and Summer Infant Europe Limited, subsidiaries of the Company, are guarantors under the Term Loan Agreement.  On March 25, 2019, the Company and Summer Infant (USA), Inc., as borrowers, entered into Amendment No. 1 to the Term Loan and Security Agreement that modified definitions consistent with the amendment of the Restated BofA Agreement, and also modified the IP Advance Rate Reduction Amount definition in order to provide additional financing flexibility to the Company.  Please see Part II, Item 5 “Other Information,” for more information about the amendment.

The principal of the Term Loan will be repaid, on a quarterly basis, in installments of $219, with the first installment paid on December 1, 2018, until paid in full on termination. The Term Loan bears interest at an annual rate equal to LIBOR, plus 9.0%. Interest payments are due monthly, in arrears. Obligations under the Term Loan Agreement are also subject to restrictions on prepayment and a prepayment penalty if the Term Loan is repaid prior to the third anniversary of the closing of the Term Loan.

The Term Loan Agreement contains customary affirmative and negative covenants that are substantially the same as the Restated BofA Agreement. In addition, if availability falls below a specified amount, then the Company must maintain a fixed charge coverage ratio at the end of each fiscal month of at least 1.0 to 1.0 for the twelve-month period then ended. The Term Loan Agreement also contains events of default, including a cross default with the Restated BofA Agreement or the occurrence of a change of control. In the event of a default, all of the obligations of the Company and its subsidiaries under the Term Loan Agreement may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.

As of March 30, 2019, the interest rate on the Term Loan was 11.63%. The amount outstanding on the Term Loan at March 30, 2019 was $17,062.

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