Note that all amounts presented in the table below are in thousands
of U.S. dollars, except share and par value amounts.
Note that all amounts presented in the table
below are in thousands of U.S. dollars, except share and per share data.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
The
Company designs, markets and distributes branded juvenile health, safety and wellness products that are sold globally to large
national retailers as well as independent retailers, primarily in North America. The Company currently markets its products in
several product categories including safety, nursery, monitoring, and baby gear. Most products are sold under our core brand names
of Summer™, SwaddleMe®, and born freeTM.
When used herein, the terms the “Company,” “we,” “us,” and “our” mean Summer Infant, Inc.
and its consolidated subsidiaries.
Basis of Presentation and Principles of Consolidation
The accompanying interim condensed consolidated
financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results for the interim periods. Accordingly, they do not include
all information and notes required by generally accepted accounting principles in the United States of America (“GAAP”)
for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be
expected for the entire fiscal year or any other period. The balance sheet at December 28, 2019 has been derived from the
audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete
financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company’s
consolidated financial statements and notes for the year ended December 28, 2019 included in its Annual Report on Form 10-K
filed with the SEC on March 18, 2020, as amended on April 24, 2020.
It is the Company’s policy to prepare
its financial statements on the accrual basis of accounting in conformity with GAAP. The interim condensed consolidated financial
statements include the accounts of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in the consolidation.
All dollar amounts included in the Notes
to Condensed Consolidated Financial Statements are in thousands of U.S. dollars, except share and per share amounts.
In March 2020, the Company completed a 1-for-9
reverse stock split of the Company's issued and outstanding shares of common stock in order to regain compliance with Nasdaq's
minimum bid price requirement. Accordingly, all information in the financial statements and accompanying notes included within
this Quarterly Report on Form 10-Q have been adjusted retrospectively to give effect to the reverse stock split as if it occurred
at the beginning of the first period presented.
Reclassification
Previously reported amounts have been revised
in the accompanying condensed consolidated statement of cash flows to properly state certain right to use assets and lease liabilities.
These revisions had no impact on the company’s net cash provided by or used in operating activites.
Revenue Recognition
The Company recognizes revenue to depict
the transfer of promised goods to customers in an amount that reflects what it expects to receive in exchange for the goods.
The Company’s principal activities
from which it generates its revenue is product sales. The Company has one reportable segment of business.
Revenue is measured based on consideration
specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation in a contract
by transferring control over a product to a customer when product delivery occurs. Consideration is typically paid approximately
60 days from the time control is transferred. Taxes assessed by a governmental authority that are both imposed on and concurrent
with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping
and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for
as a fulfillment cost and are included in selling costs.
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 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:
|
|
For the
Six months ended
|
|
|
|
June 27, 2020
|
|
|
June 29, 2019
|
|
Allowance for doubtful accounts, beginning of period
|
|
$
|
542
|
|
|
$
|
304
|
|
Charges to costs and expenses, net
|
|
|
20
|
|
|
|
34
|
|
Account write-offs
|
|
|
—
|
|
|
|
—
|
|
Allowance for doubtful accounts, end of period
|
|
$
|
562
|
|
|
$
|
338
|
|
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.
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 ROU 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 and six months ended June 27, 2020 and for the three and six months ended
June 29, 2019 as it believes the discrete method results in a more accurate representation of the income tax provision for the
periods.
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.
On March 27, 2020, the U.S. CARES Act was
enacted, which provided a substantial tax-and-spending package intended to provide additional economic stimulus to address the
impact of the COVID-19 pandemic. The U.S. CARES Act provides numerous tax provisions and other stimulus measures, including temporary
changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations
on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes,
technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation
of certain refundable employee retention credits. As a result of the U.S. CARES Act tax law changes, we recognized a $262 tax benefit
related to the increase in interest deduction occurring during the fiscal year ended December 28, 2019 which was fully reserved
for. The impact of the CARES Act in prospective periods may differ from our estimate as of June 27, 2020 due to changes in interpretations
and assumptions, guidance that may be issued and actions the Company may take in response to the CARES Act. The CARES Act is highly
detailed, and the Company will continue to assess the impact that various provisions will have on its business.
Net Loss/Income Per Share
Basic income or loss per share for the
Company is computed by dividing net income or loss by the weighted-average number of shares of common stock outstanding
during the period. Diluted income or loss per share includes the dilutive impact of outstanding stock options and unvested
restricted shares.
Translation of Foreign Currencies
Assets and liabilities of the Company’s
foreign subsidiaries whose functional currency is 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. Assets and liabilities of the Company’s foreign subsidiaries whose functional
currency is the U.S. dollar are remeasured into U.S. dollars at the their historical rates or the exchange rate in effect at the
end of the quarter and the income and expense accounts of these affiliates have been remeasured at average rates prevailing during
each respective quarter. Resulting remeasurement adjustments are made to the condensed consolidated statement of operations. Foreign
exchange transaction gains and losses are included in the accompanying interim condensed consolidated statement of operations.
2020 Plan and COVID-19 Pandemic
In March 2020, the COVID-19 outbreak was
declared a global pandemic and became widespread in the U.S. While our products are considered “essential” and our
distribution center located in California continues to operate, some of our customers have been impacted and, to the extent they
operated retail stores, have been required to close their stores and curtail operations. We began to see an impact on orders at
the end of March and may continue to see lower demand in the near term as governmental restrictions on businesses remain in place.
Due to the uncertainty with respect to when governmental restrictions may be lifted and the widespread nature of the pandemic,
we cannot currently predict how it will impact our business in the long term. The Company is not currently aware of any events
or circumstances arising from the COVID-19 pandemic that would require us to update any estimates, judgments or materially revise
the carrying value of our assets or liabilities. The Company’s estimates may change, however, as events evolve and additional
information is obtained, and any such changes will be recognized in the condensed consolidated financial statements.
Beginning in the first quarter of 2020,
the Company implemented various restructuring initiatives to streamline operations and support its liquidity needs, including headcount
reductions, reductions in facility space, and other cost reductions, as well as working with its lenders to amend its credit facility
and term loan agreement to undertake these restructuring initiatives and to provide availability. In addition, the Company
has begun taking actions to mitigate the impact of the expiration in August 2020 of tariff exclusions previously granted with respect
to certain of its products, including seeking price increases from its customers and alternative manufacturing sources. In
light of the ongoing uncertainty surrounding the COVID-19 pandemic in the U.S. and other countries and unpredictable economic consequences
in the coming months, the Company applied for and in August 2020, received a loan through the Paycheck Protection Program of the
U.S. CARES Act in the amount of $1,955, which may be used to fund certain qualified expenses, including payroll costs, rent
and utility costs. The Company believes that its existing plan will generate sufficient cash which, along with its existing cash
and availability under its facilities, will enable it to fund operations through at least the next 12 months. To the extent the
Company experiences unexpected impacts from the COVID-19 pandemic or is unable to meet its current financial forecast, the Company
would take further action to reduce costs, mitigate risks to its supply chain and, if necessary, seek to raise additional funds
through debt or equity financings, restructure our existing debt, engage in strategic collaborations, and/or a strategic transaction.
2. REVENUE
RECOGNITION
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:
|
|
For the three
months ended
June 27, 2020
|
|
|
For the three
months ended
June 29, 2019
|
|
United States
|
|
$
|
35,800
|
|
|
$
|
39,064
|
|
All Other
|
|
|
2,414
|
|
|
|
7,361
|
|
Net Sales
|
|
$
|
38,214
|
|
|
$
|
46,425
|
|
|
|
For the six
months ended
June 27, 2020
|
|
|
For the nine
months ended
June 29, 2019
|
|
United States
|
|
$
|
71,578
|
|
|
$
|
75,300
|
|
All Other
|
|
|
6,974
|
|
|
|
13,663
|
|
Net Sales
|
|
$
|
78,552
|
|
|
$
|
88,963
|
|
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 and six months ended June 27, 2020 and three and six months ended
June 29, 2019 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 through August 2020 (as amended, the “Restated BofA Agreement”). The Restated BofA Agreement
replaced the Company’s prior credit facility with Bank of America, and provides for an asset-based revolving credit
facility with a letter of credit sub-line facility. As of June 27, 2020, total revolver commitments under the credit facility
were $48,000. 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). As a result of the amendments made to the Restated
BofA Agreement in the first and second quarters of 2020, (i) the definition of Financial Covenant Trigger Amount was
modified, (ii) the lenders' aggregate revolver commitments were reduced to $48,000, (iii) the definition of EBITDA was
amended to exclude certain fees and expenses, (iv) the Company is required to meet certain minimum net sales amounts for each
period of three consecutive fiscal months through the three-month period ending December 31, 2020, (v) the Company is
required to meet a certain minimum EBITDA (as defined in the Restated BofA Agreement) as of the end of each fiscal month,
calculated on a trailing 12-month basis, (vi) the applicable margin and applicable unused line fee rate were increased, (vii)
a LIBOR floor of 0.75% was added, and (viii) certain reporting requirements were modified.
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. The Company is also required to meet certain financial covenants through the end of fiscal 2020,
specifically (a) a minimum net sales amount for each period of three consecutive fiscal months, measured at the end of each month,
and (b) a trailing, 12-month minimum adjusted EBITDA amount (as defined in the Restated BofA Agreement), measured at the end of
each fiscal month. In addition, if availability falls below agreed minimum amounts, 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, the lenders may declare all of the obligations of the Company and its subsidiaries under the Restated BofA
Agreement immediately due and payable. For events of default relating to insolvency and receivership, all outstanding obligations
automatically become due and payable without any action on the part of the lenders.
As of June 27, 2020, under the Restated
BofA Agreement, the rate on base-rate loans was 5.75% and the rate on LIBOR-rate loans was 4.25%. The amount outstanding on the
Restated BofA Agreement at June 27, 2020, was $18,752 and borrowing availability was $7,493.
The amendments executed in the six
months ended June 27, 2020 were evaluated to determine the proper accounting treatment for the transactions. Accordingly,
debt extinguishment accounting was used to account for the reduction in the total revolver commitments under the credit
facility, resulting in the write off of $266 in remaining unamortized deferred financing costs during the three months ended
March 28, 2020.
On July 14, 2020, the Company entered
into a letter agreement with Bank of America, N.A. as agent and lender and Pathlight Capital LLC, as agent for the Term Loan
Lender that increased the maximum percentage of accounts owing from the Amazon Companies that may be included as eligible
accounts under the Restated BofA Agreement for 120 days. In addition, on August 10, 2020, the Company entered into Amendment
No. 6 to the Restated BofA Agreement with respect to the PPP Loan. See Note 9 for information regarding the letter
agreement and Amendment No. 6.
Term
Loan Agreement. On June 28, 2018, the Company and Summer Infant (USA), Inc., as borrowers, entered into
a Term Loan and Security Agreement with Pathlight Capital LLC, as agent, each lender from time to time a party thereto,
and certain subsidiaries of the Company as guarantors, as amended through August 2020 (as amended, the “Term Loan
Agreement”) 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. As a result of
the amendments made to the Term Loan Agreement in the first and second quarters of 2020, (i) the definition of
IP Advance Rate Reduction was modified, (ii) the definition of Term Loan
Borrowing Base was modified to deduct a specified equipment reserve amount from the calculation of the borrowing base, (iii) the
definitions of Financial Covenant Trigger Amount and EBITDA were amended consistent with the Restated BofA Agreement, (iv)
consistent with the Restated BofA Agreement, the Company is required to meet certain minimum net sales amounts for each
period of three consecutive fiscal months through the three-month period ending December 31, 2020 and certain minimum EBITDA
as of the end of each fiscal month, calculated on a trailing 12-month period, (v) principal payments on the term loan were
suspended for 2020, such payments to resume in March 2021, (vi) a LIBOR floor of 0.75% was added, and (vii) certain reporting
requirements were modified. In addition, as described below, beginning March 10, 2020, the Term Loan began to bear additional
interest, to be paid in kind ("PIK interest") at an annual rate of 4.0%.
The principal of the Term Loan is being
repaid, on a quarterly basis, in installments of $219, with the first installment having been paid on December 1, 2018, until
paid in full on termination. In connection with the March 2020 amendment, principal payments on the Term Loan were suspended for
2020, to resume in March 2021. The Term Loan bears interest at an annual rate equal to LIBOR, plus 9.0%. Cash interest payments
are due monthly, in arrears. In addition, the Term Loan began to accrue PIK (payment in kind) interest at an annual rate of 4.0%
in March 2020, which interest will become payable upon the earlier to occur of (i) the repayment of the Term Loan in full, (ii)
a sale or merger of the Company, (iii) the occurrence of default or event of default under the Term Loan Agreement, or (iv) the
Company achieving adjusted EBITDA of $12 million (calculated on a trailing, 12-month basis). If, and only if, the PIK interest
becomes due and payable as a result of the Company achieving the adjusted EBITDA event noted in clause (iv), then the Company will
pay all PIK interest then due and thereafter, PIK interest will continue to accrue and be paid on each subsequent anniversary of
such event. Obligations under the Term Loan Agreement are also subject to 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. Consistent with the Restated
BofA Agreement, the Company is also required to meet certain financial covenants through the end of fiscal 2020, specifically (a)
a minimum net sales amount for each period of three consecutive fiscal months, measured at the end of each month, and (b) a trailing,
12-month minimum adjusted EBITDA amount (as defined in the Restated BofA Agreement), measured at the end of each fiscal month.
In addition, consistent with the Restated BofA Agreement, if availability falls below a specified amount as described above, 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, the lenders may declare all of the obligations of the Company
and its subsidiaries under the Term Loan Agreement immediately due and payable. For events of default relating to insolvency and
receivership, all outstanding obligations automatically become due and payable without any action on the part of the lenders.
As of June 27, 2020, the interest rate on
the Term Loan was 9.75% of cash interest and 4.0% of PIK interest. The amount outstanding on the Term Loan at June 27, 2020 was
$16,406 and $201 of accrued PIK interest.
On August 10, 2020, the Company entered
into Amendment No. 5 to the Term Loan Agreement with respect to the PPP Loan. See Note 9 for information regarding Amendment No.
5.
Aggregate maturities of bank debt related
to the Restated BofA Agreement and the Term Loan Agreement:
Fiscal Year ending:
|
|
|
|
2020
|
|
|
—
|
|
2021
|
|
|
875
|
|
2022
|
|
|
875
|
|
2023 and thereafter
|
|
$
|
33,408
|
|
Total
|
|
$
|
35,158
|
|
Unamortized debt issuance costs were $2,340 at June 27, 2020
and $2,398 at December 28, 2019, and are presented as a direct deduction of long-term debt on the condensed consolidated balance
sheets.
4. PROPERTY AND
EQUIPMENT
Property and equipment, at cost, consisted
of the following:
|
|
For the
|
|
|
|
|
|
|
fiscal year ended
|
|
|
Depreciation/
|
|
|
|
June 27, 2020
|
|
|
December 28, 2019
|
|
|
Amortization Period
|
|
Computer-related
|
|
|
4,531
|
|
|
$
|
4,511
|
|
|
|
5 years
|
|
Tools, dies, prototypes,
and molds
|
|
|
28,093
|
|
|
|
27,457
|
|
|
|
1 - 5 years
|
|
Building
|
|
|
0
|
|
|
|
4,156
|
|
|
|
30 years
|
|
Other
|
|
|
7,636
|
|
|
|
7,474
|
|
|
|
1 - 15 years
|
|
|
|
|
40,260
|
|
|
|
43,598
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
34,576
|
|
|
|
34,810
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,684
|
|
|
$
|
8,788
|
|
|
|
|
|
Property and equipment included amounts
acquired under capital leases of approximately $589 and $589 at June 27, 2020 and June 29, 2019, respectively, with related accumulated
depreciation of approximately $164 and $73, respectively. Total depreciation expense was $1,536 and $1,520 for the six months ended
June 27, 2020 and June 29, 2019, respectively.
See Note 6 on the derecognition of the
building asset in May 2020.
5. INTANGIBLE
ASSETS
Intangible assets consisted of the following:
|
|
June 27, 2020
|
|
|
December 28, 2019
|
|
Brand names
|
|
$
|
11,819
|
|
|
$
|
11,819
|
|
Patents and licenses
|
|
|
4,163
|
|
|
|
4,101
|
|
Customer relationships
|
|
|
6,946
|
|
|
|
6,946
|
|
Other intangibles
|
|
|
1,882
|
|
|
|
1,882
|
|
|
|
|
24,810
|
|
|
|
24,748
|
|
Less: Accumulated amortization
|
|
|
(12,096
|
)
|
|
|
(11,852
|
)
|
Intangible assets, net
|
|
$
|
12,714
|
|
|
$
|
12,896
|
|
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 June 29, 2019 and June
27, 2020.
6.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
The Company leases office space and distribution
centers primarily related to its United States, 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.
In May 2020, the Company entered into a
lease agreement amendment related to our headquarters in Woonsocket, Rhode Island. The agreement decreased the leased premises
square footage and extended the current term, which was set to end in March 2021 prior to the amendment to June 2025. It additionally
granted two 5-year term extension options. The Company was accounting for the lease in Woonsocket as a sale-leaseback with the
building on the balance sheet as property and equipment, net and a corresponding financing obligation in long-term liabilities.
Upon the execution of the lease amendment, the Company re-assessed the classification of the lease and determined it to be an operating
lease, as the criteria for a sale had been met. As part of this re-classification, the Company derecognized the financing obligation
of $2,390 from long-term liabilities and the amount related to the property and equipment, net of $2,357 from the balance sheet
and recorded a ROU asset and lease liability of $1,457 respectively. The Company did not include either of the term extension options
in the calculation of the ROU asset and lease liability.
In April 2020, the company entered into
a twelve month sublease agreement for a portion of the distribution warehouse located in Riverside, California. Fixed sublease
payments received are recognized on a straight-line basis over the sublease term in general and administrative expenses.
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 1.25 and 5.00 years. The Woonsocket lease has two 5-year extension options and the Canada lease has one 5-year extension
option that have not been included in the lease term.
|
|
·
|
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 square 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
six months ended June 27, 2020 and June 29, 2019 were as follows:
|
|
Six Months Ended
June 27, 2020
|
|
|
Six Months Ended
June 29, 2019
|
|
Operating lease cost
|
|
$
|
1,297
|
|
|
$
|
1,247
|
|
Variable lease cost
|
|
$
|
523
|
|
|
$
|
644
|
|
Less: sublease income
|
|
|
(250
|
)
|
|
|
—
|
|
Total lease expense
|
|
$
|
1,570
|
|
|
$
|
1,891
|
|
Weighted-average remaining lease term
|
|
2.5 years
|
Weighted-average discount rate:
|
|
5.00%
|
Cash paid for amounts included in the measurement
of the Company’s lease liabilities were $1,405 and $1,298 for the six months ended June 27, 2020 and June 29, 2019 respectively.
As of June 27, 2020, the present value of
maturities of the Company’s operating lease liabilities were as follows:
Fiscal Year Ending:
|
|
|
|
2020
|
|
|
1,497
|
|
2021
|
|
|
2,448
|
|
2022
|
|
|
618
|
|
2023
|
|
|
465
|
|
2024
|
|
|
325
|
|
Thereafter
|
|
|
164
|
|
Less imputed interest
|
|
|
(352
|
)
|
Total
|
|
$
|
5,165
|
|
The future fixed sublease receipts under non-cancelable operating
lease agreements as of June 27, 2020 are as follows:
Fiscal Year Ending:
|
|
|
|
2020
|
|
|
500
|
|
2021
|
|
|
250
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
750
|
|
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.
7.
|
SHARE BASED COMPENSATION
|
The Company is currently authorized to
issue up to 188,889 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 six months
ended June 27, 2020 and June 29, 2019 was $31 and $152, 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 condensed consolidated financial statements is based on awards that are ultimately expected
to vest.
As of June 27, 2020, there were 71,562 stock
options outstanding and 20,543 unvested restricted shares outstanding.
During the six months ended June 27, 2020,
the Company granted 21,433 stock options and 9,550 shares of restricted stock, respectively. The following table summarizes the
weighted average assumptions used for stock options granted during the six months ended June 27, 2020 and June 29, 2019.
|
|
For the Six
Months Ended
June 27, 2020
|
|
|
For the Six
Months Ended
June 29, 2019
|
|
Expected life (in years)
|
|
|
5.1
|
|
|
|
4.8
|
|
Risk-free interest rate
|
|
|
1.74
|
%
|
|
|
2.34
|
%
|
Volatility
|
|
|
67.3
|
%
|
|
|
64.2
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Forfeiture rate
|
|
|
14.2
|
%
|
|
|
24.2
|
%
|
As of June 27, 2020, there were 67,557 shares available
to grant under the 2012 Plan.
8.
|
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 and six months ended June 27, 2020 excluded 71,562 stock options
and excluded 20,433 and 20,465 shares of restricted stock outstanding, respectively. The computation of diluted common shares for
the three and six months ended June 29, 2019 excluded 134,852 stock options and 32,475 shares of restricted stock outstanding.
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 condensed consolidated financial statements or disclosure in the notes thereto except as follows.
On July 14, 2020, the Company and Summer
Infant (USA), Inc., as borrowers, and certain subsidiaries of the Company as guarantors, entered into a letter agreement with Bank
of America, N.A. as agent (“Agent”) and lender, and Pathlight Capital LLC, as agent for the Term Loan Lender, with
respect to the Restated BofA Agreement. Pursuant to the letter agreement, the maximum percentage of accounts owing from the Amazon
Companies that may be included as “eligible accounts” under the Restated BofA Agreement shall be increased, provided
that (i) such percentage shall be automatically reduced to the original percentage on November 16, 2020, and (ii) if at any time
the corporate credit rating of Amazon.com, Inc. falls below a certain rating, as defined, the Agent shall have the right, in its
sole discretion, to decrease the maximum percentage of such accounts owing from the Amazon Companies to an amount specified by
the Agent.
Paycheck
Protection Program.
On August 3, 2020, we received loan proceeds of $1,955 (the “PPP Loan”) pursuant to
the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration under the CARES Act.
The PPP Loan, which was in the form of a promissory note (the “PPP Note”), between the Company and Bank of America,
N.A., as the lender, matures on July 27, 2025 and bears interest at a fixed rate of 1% per annum, payable monthly commencing six
months from the date of the PPP Loan. The Company may voluntarily prepay the borrowings in full with no associated penalty or premium.
Under the terms of the PPP, the principal may be forgiven if the PPP Loan proceeds are used for qualifying expenses, including
payroll costs, rent and utility costs. No assurance can be provided that the Company will obtain forgiveness of the PPP Loan in
whole or in part. In addition, details of the PPP continue to evolve regarding which companies are qualified to receive loans pursuant
to the PPP and on what terms, and the Company may be required to repay some or all of the Loan due to these changes or different
interpretations of the PPP requirements.
The PPP Note contains customary representations,
warranties, and covenants for this type of transaction, including customary events of default relating to, among other things,
payment defaults and breaches of representations and warranties or other provisions of the PPP Note. The occurrence of an event
of default may result in, among other things, the Company becoming obligated to repay all amounts outstanding under the PPP Note.
On August 10, 2020, the Company and
Summer Infant (USA), Inc., as borrowers entered into (i) Amendment No. 6 to Second Amended and Restated Loan and Security
Agreement among the Company and Summer Infant (USA) Inc., as borrowers, the guarantors from time to time party thereto, the
financial institutions from time to time party thereto as lenders, and Bank of America, N.A., as agent for the lenders (the
“BofA Amendment”), and (ii) Amendment No. 5 to Term Loan and Security Agreement among the Company and Summer
Infant (USA) Inc., as borrowers, the guarantors from time to time party thereto, the financial institutions from time to time
party thereto as lenders, and Pathlight Capital LLC, as agent for the lenders (the “Term Loan Amendment”). The
BofA Amendment amended the terms of the Restated BofA Agreement with respect to the PPP Loan, including to add the PPP Loan
as “Permitted Debt,” and to exclude the interest expense or principal payments on the PPP Loan from “Fixed
Charges” (unless such PPP Loan amount is not subsequently forgiven). Similarly, the Term Loan Amendment amended the
terms of the Term Loan Agreement to modify certain provisions to take into account the PPP Loan in substantially
the same form as the BofA Amendment.