Company Quick10K Filing
Quick10K
Summer Infant
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.48 19 $9
10-Q 2019-06-29 Quarter: 2019-06-29
10-Q 2019-03-30 Quarter: 2019-03-30
10-K 2018-12-29 Annual: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
10-Q 2015-10-03 Quarter: 2015-10-03
10-Q 2015-07-04 Quarter: 2015-07-04
10-Q 2015-04-04 Quarter: 2015-04-04
10-K 2015-01-03 Annual: 2015-01-03
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-02
8-K 2019-08-07 Earnings, Exhibits
8-K 2019-05-10 Shareholder Vote
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-04-04
8-K 2019-02-20 Earnings, Exhibits
8-K 2018-12-05 Officers
8-K 2018-11-25 Officers
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-06-28 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-03 Shareholder Vote
8-K 2018-04-24 Enter Agreement, Earnings, Off-BS Arrangement, Exhibits
8-K 2018-03-01 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-07 Officers, Exhibits
8-K 2018-01-22 Enter Agreement, Exhibits
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HI Hillenbrand 1,718
HNI HNI 1,321
AGS PlayAGS 362
DAKT Daktronics 303
ODC Oil-Dri Corp of America 238
CDXC Chromadex 214
DOGZ Dogness 40
JASN Jason Industries 16
SGLB Sigma Labs 8
SUMR 2019-06-29
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 a19-10367_1ex31d1.htm
EX-31.2 a19-10367_1ex31d2.htm
EX-32.1 a19-10367_1ex32d1.htm
EX-32.2 a19-10367_1ex32d2.htm

Summer Infant Earnings 2019-06-29

SUMR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-10367_110q.htm 10-Q

Table of Contents

 

 

 

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 June 29, 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)

 

Delaware

 

20-1994619

(State or other jurisdiction

 

(IRS Employer Identification No.)

of incorporation or organization)

 

 

 

1275 Park East Drive

 

 

Woonsocket, RI 02895

 

(401) 671-6550

(Address of principal executive offices) (Zip Code)

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001

 

SUMR

 

Nasdaq Capital Market

 

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.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company x

 

 

Emerging growth company o

 

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 August  5, 2019, there were 18,926,704 shares outstanding of the registrant’s Common Stock, $0.0001 par value per share.

 

 

 


Table of Contents

 

Summer Infant, Inc.

Form 10-Q

Table of Contents

 

 

 

Page Number

 

 

 

Part I.

Financial Information

1

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets as of June 29, 2019 (unaudited) and December 29, 2018

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Stockholder’s Equity for the Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

19

 

 

 

Part II.

Other Information

20

 

 

 

Item 1.

Legal Proceedings

20

 

 

 

Item 1A.

Risk Factors

20

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 3.

Defaults Upon Senior Securities

20

 

 

 

Item 4.

Mine Safety Disclosures

20

 

 

 

Item 5.

Other Information

20

 

 

 

Item 6.

Exhibits

20

 

 

 

Exhibit Index

 

21

 

 

 

Signatures

 

22

 


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.                Condensed Consolidated Financial Statements (unaudited)

 

Summer Infant, Inc.

Condensed Consolidated Balance Sheets

 

Note that all amounts presented in the table below are in thousands of U.S. dollars, except share and par value amounts.

 

 

 

(Unaudited)

 

 

 

 

 

June 29,
2019

 

December 29,
2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

580

 

$

721

 

Trade receivables, net of allowance for doubtful accounts

 

35,975

 

31,223

 

Inventory, net

 

32,599

 

36,066

 

Prepaid and other current assets

 

1,223

 

997

 

TOTAL CURRENT ASSETS

 

70,377

 

69,007

 

Property and equipment, net

 

9,621

 

9,685

 

Other intangible assets, net

 

13,044

 

13,300

 

Right to use assets, noncurrent

 

5,396

 

 

Deferred tax assets, net

 

2,138

 

2,127

 

Other assets

 

101

 

97

 

TOTAL ASSETS

 

$

100,677

 

$

94,216

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

24,679

 

$

28,120

 

Accrued expenses

 

7,745

 

8,939

 

Lease liabilities, current

 

2,316

 

 

Current portion of long term debt

 

875

 

875

 

TOTAL CURRENT LIABILITIES

 

35,615

 

37,934

 

Long-term debt, less current portion and unamortized debt issuance costs

 

51,249

 

44,641

 

Lease liabilities, noncurrent

 

3,634

 

 

Other liabilities

 

2,166

 

2,371

 

TOTAL LIABILITIES

 

92,664

 

84,946

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred Stock, $0.0001 par value, 1,000,000 authorized, none issued or outstanding at June 29, 2019 and December 29, 2018, respectively

 

 

 

Common Stock $0.0001 par value, authorized, issued and outstanding of 49,000,000, 19,198,353 and 18,926,704 at June 29, 2019 and 49,000,000, 19,092,251, and 18,820,602 at December 29, 2018, respectively

 

2

 

2

 

Treasury Stock at cost (271,649 shares at June 29, 2019 and December 29, 2018)

 

(1,283

)

(1,283

)

Additional paid-in capital

 

77,548

 

77,396

 

Accumulated deficit

 

(65,507

)

(63,885

)

Accumulated other comprehensive loss

 

(2,747

)

(2,960

)

TOTAL STOCKHOLDERS’ EQUITY

 

8,013

 

9,270

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

100,677

 

$

94,216

 

 

See notes to condensed consolidated financial statements

 

1


Table of Contents

 

Summer Infant, Inc.

Condensed Consolidated Statements of Operations

 

Note that all amounts presented in the table below are in thousands of U.S. dollars, except share and per share amounts.

 

 

 

Unaudited

 

Unaudited

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 29,
2019

 

June 30,
2018

 

June 29,
2019

 

June 30,
2018

 

Net sales

 

$

46,425

 

$

47,678

 

$

88,963

 

$

89,733

 

Cost of goods sold

 

31,583

 

32,284

 

60,671

 

60,747

 

Gross profit

 

14,842

 

15,394

 

28,292

 

28,986

 

General & administrative expenses

 

8,523

 

9,376

 

17,902

 

21,964

 

Selling expenses

 

4,031

 

3,091

 

7,384

 

5,769

 

Depreciation and amortization

 

952

 

1,074

 

1,889

 

2,075

 

Operating income (loss)

 

1,336

 

1,853

 

1,117

 

(822

)

Interest expense, net

 

1,293

 

1,409

 

2,542

 

2,182

 

Income (loss) before provision (benefit) for income taxes

 

43

 

444

 

(1,425

)

(3,004

)

Provision (benefit) for income taxes

 

267

 

146

 

197

 

(595

)

Net (loss) income

 

$

(224

)

$

298

 

$

(1,622

)

$

(2,409

)

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

BASIC

 

$

(0.01

)

$

0.02

 

$

(0.09

)

$

(0.13

)

DILUTED

 

$

(0.01

)

$

0.02

 

$

(0.09

)

$

(0.13

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

BASIC

 

18,899,340

 

18,731,553

 

18,866,100

 

18,690,711

 

DILUTED

 

18,899,340

 

18,735,858

 

18,866,100

 

18,690,711

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

 

Summer Infant, Inc.

Condensed Consolidated Statements of Comprehensive Loss

 

Note that all amounts presented in the table below are in thousands of U.S. dollars.

 

 

 

Unaudited
For the three
months ended

 

Unaudited
For the six
months ended

 

 

 

June 29,
2019

 

June 30,
2018

 

June 29,
2019

 

June 30,
2018

 

Net (loss) income

 

$

(224

)

$

298

 

$

(1,622

)

$

(2,409

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Changes in foreign currency translation adjustments

 

48

 

(348

)

213

 

(400

)

 

 

 

 

 

 

 

 

 

 

Comprehensive net loss

 

$

(176

)

$

(50

)

$

(1,409

)

$

(2,809

)

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

 

Summer Infant, Inc.

Condensed Consolidated Statements of Cash Flows

 

Note that all amounts presented in the table below are in thousands of U.S. dollars.

 

 

 

 

(Unaudited)

 

 

 

For the six months ended

 

 

 

June 29,
2019

 

June 30,
2018

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(1,622

)

$

(2,409

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,855

 

2,068

 

Stock-based compensation expense

 

152

 

314

 

Write off of unamortized deferred financing costs

 

 

518

 

Provision for allowance for doubtful accounts

 

34

 

2,269

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in trade receivables

 

(4,553

)

(1,972

)

Decrease in inventory

 

3,725

 

6,953

 

Increase in right of use assets

 

(5,381

)

 

Increase in lease liability

 

5,935

 

 

Increase in prepaids and other assets

 

(220

)

(317

)

Decrease in accounts payable and accrued expenses

 

(5,042

)

(273

)

Net cash (used in) provided by operating activities

 

(5,117

)

7,151

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(1,416

)

(1,751

)

Acquisitions of other intangible assets

 

(114

)

 

Net cash (used in) investing activities

 

(1,530

)

(1,751

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

19

 

Repayment of Prior Term Loan Facility

 

 

(5,000

)

Repayment of Prior FILO

 

 

(1,250

)

Payment of financing fees and expenses

 

 

(1,958

)

Proceeds from New Term Loan Facility

 

 

17,500

 

Repayment of Term Loan Facility

 

(438

)

 

Net borrowings (repayment) on revolving facilities

 

7,046

 

(14,529

)

Net cash provided by (used in) financing activities

 

6,608

 

(5,218

)

Effect of exchange rate changes on cash and cash equivalents

 

(102

)

66

 

Net (decrease) increase in cash and cash equivalents

 

(141

)

248

 

Cash and cash equivalents, beginning of period

 

721

 

681

 

Cash and cash equivalents, end of period

 

$

580

 

$

929

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

2,034

 

$

1,411

 

Cash paid for income taxes

 

$

5

 

$

4

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

 

Summer Infant, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

 

Note that all amounts presented in the table below are in thousands of U.S. dollars, except share and per share data.

 

 

 

Common Stock

 

Additional
Paid in

 

Treasury

 

Retained

 

Accumulated
Comprehensive

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Earnings

 

Loss

 

Equity

 

Balance at December 30, 2017

 

18,629,737

 

$

2

 

$

76,848

 

$

(1,283

)

$

(59,634

)

$

(2,291

)

$

13,642

 

Issuance of common stock upon vesting of restricted shares

 

55,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

99

 

 

 

 

 

 

 

99

 

Net loss for the period

 

 

 

 

 

 

 

 

 

(2,707

)

 

 

(2,707

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(52

)

(52

)

Balance at March 31, 2018

 

18,685,237

 

$

2

 

$

76,947

 

$

(1,283

)

$

(62,341

)

$

(2,343

)

$

10,982

 

Issuance of common stock upon vesting of restricted shares

 

67,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock options

 

16,050

 

 

 

20

 

 

 

 

 

 

 

20

 

Stock-based compensation

 

 

 

 

 

215

 

 

 

 

 

 

 

215

 

Net loss for the period

 

 

 

 

 

 

 

 

 

298

 

 

 

298

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(348

)

(348

)

Balance at June 30, 2018

 

18,769,015

 

$

2

 

$

77,182

 

$

(1,283

)

$

(62,043

)

$

(2,691

)

$

11,167

 

 

 

 

Common Stock

 

Additional
Paid in

 

Treasury

 

Retained

 

Accumulated
Comprehensive

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Earnings

 

Loss

 

Equity

 

Balance at December 29, 2018

 

18,820,602

 

$

2

 

$

77,396

 

$

(1,283

)

$

(63,885

)

$

(2,960

)

$

9,270

 

Issuance of common stock upon vesting of restricted shares

 

33,125

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

48

 

 

 

 

 

 

 

48

 

Net loss for the period

 

 

 

 

 

 

 

 

 

(1,398

)

 

 

(1,398

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

165

 

165

 

Balance at March 30, 2019

 

18,853,727

 

$

2

 

$

77,444

 

$

(1,283

)

$

(65,283

)

$

(2,795

)

$

8,085

 

Issuance of common stock upon vesting of restricted shares

 

72,977

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

104

 

 

 

 

 

 

 

104

 

Net loss for the period

 

 

 

 

 

 

 

 

 

(224

)

 

 

(224

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

48

 

48

 

Balance at June 29, 2019

 

18,926,704

 

$

2

 

$

77,548

 

$

(1,283

)

$

(65,507

)

$

(2,747

)

$

8,013

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

 

SUMMER INFANT, INC.  AND SUBSIDIARIES

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 29, 2018 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 29, 2018 included in its Annual Report on Form 10-K filed with the SEC on February 20, 2019, as amended on March 22, 2019.

 

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.

 

Revenue Recognition

 

The Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services.

 

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

 

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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:

 

 

 

For the
Six months ended

 

 

 

June 29, 2019

 

June 30, 2018

 

Allowance for doubtful accounts, beginning of period

 

$

304

 

$

1,622

 

Charges to costs and expenses, net

 

34

 

2,269

 

Account write-offs

 

 

 

Allowance for doubtful accounts, end of period

 

$

338

 

$

3,891

 

 

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

 

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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 and the three months ended June 29, 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/Income 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 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.

 

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 of $6,411 in assets and an increase of $7,037 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.

 

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

 

 

 

For the three
months ended
June 29, 2019

 

For the six months
ended
June 29, 2019

 

United States

 

$

39,064

 

$

75,300

 

All Other

 

7,361

 

13,663

 

Net Sales

 

$

46,425

 

$

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 six months ended June 29, 2019 and six months ended June 30, 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.

 

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

 

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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 June 29, 2019, under the Restated BofA Agreement, the rate on base-rate loans was 6.50% and the rate on LIBOR-rate loans was 4.50%. The amount outstanding on the Restated BofA Agreement at June 29, 2019 was $37,712. Total borrowing capacity at June 29, 2019 was $45,854 and borrowing availability was $8,142.

 

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 having been 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 June 29, 2019, the interest rate on the Term Loan was 11.52%. The amount outstanding on the Term Loan at June 29, 2019 was $16,844.

 

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

 

Fiscal Year ending:

 

 

 

2019

 

438

 

2020

 

875

 

2021

 

875

 

2022

 

875

 

2023 and thereafter

 

$

51,493

 

Total

 

$

54,556

 

 

Unamortized debt issuance costs were $2,432 at June 29, 2019 and $2,395 at December 29, 2018, and are presented as a direct deduction of long-term debt on the consolidated balance sheets.

 

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4.                                      INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

 

 

June 29,

 

December 29,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Brand names

 

$

11,819

 

$

11,819

 

Patents and licenses

 

3,880

 

3,766

 

Customer relationships

 

6,946

 

6,946

 

Other intangibles

 

1,882

 

1,882

 

 

 

24,527

 

24,413

 

Less: Accumulated amortization

 

(11,483

)

(11,113

)

Intangible assets, net

 

$

13,044

 

$

13,300

 

 

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 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 Canada lease has one 5-year extension option that has also 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 three and six months ended June 29, 2019 were as follows:

 

 

 

Three Months Ended
June 29, 2019

 

Six Months Ended
June 29, 2019

 

Operating lease cost

 

$

624

 

$

1,247

 

Variable lease cost

 

270

 

644

 

Total lease cost

 

$

894

 

$

1,891

 

 

Weighted-average remaining lease term

 

2.57 years

 

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Weighted Average discount rate:

 

5.00%

 

Cash paid for amounts included in the measurement of the Company’s lease liabilities were $1,298 for the six months ended June 29, 2019.

 

As of June 29, 2019, the present value of maturities of the Company’s operating lease liabilities were as follows:

 

Fiscal Year Ending:

 

 

 

2019

 

$

1,294

 

2020

 

2,550

 

2021

 

2,041

 

2022

 

319

 

2023

 

153

 

Less imputed interest

 

(407

)

Total

 

$

5,950

 

 

Prior to the adoption of ASU 2016-02 and for the six months ended June 29, 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 and six months ended June 29, 2018, the Company recognized rent expense of $613 and $1,225 respectively.

 

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 June 29, 2019 were as follows:

 

Fiscal Year Ending:

 

 

 

2019

 

$

2,627

 

2020

 

2,556

 

2021

 

2,048

 

2022

 

323

 

2023 and beyond

 

154

 

Total (a)

 

$

7,708

 

 


(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 six months ended June 29, 2019 and June 30, 2018 was $152 and $314, respectively. Share based compensation expense is included in general and administrative expenses.

 

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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 June 29, 2019, there were 1,213,660 stock options outstanding and 292,275 unvested restricted shares outstanding.

 

During the six months ended June 29, 2019, the Company granted 237,000 stock options and 169,500 shares of restricted stock, respectively. The following table summarizes the weighted average assumptions used for stock options granted during the six months ended June 29, 2019 and June 30, 2018.

 

 

 

For the Six
Months Ended
June 29, 2019

 

For the Six
Months Ended
June 30, 2018

 

Expected life (in years)

 

4.8

 

4.9

 

Risk-free interest rate

 

2.34

%

2.68

%

Volatility

 

64.2

%

64.0

%

Dividend yield

 

0

%

0

%

Forfeiture rate

 

24.2

%

23.1

%

 

As of June 29, 2019, there were 516,218 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 and six months ended June 29, 2019 excluded 1,213,660 stock options and 292,275 shares of restricted stock outstanding. The computation of diluted common shares for the three and six months ended June 30, 2018 excluded 1,188,010 stock options and 321,000 shares of restricted stock outstanding and 1,188,010 stock options and 356,766 shares of restricted stock outstanding, respectively.

 

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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ITEM 2.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking information and statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All forward-looking statements included in this document are based on information available to us on the date hereof. It is important to note that our actual results could differ materially from those projected in such forward-looking statements contained in this Quarterly Report on Form 10-Q. These forward-looking statements include statements concerning our expectations regarding the impact of existing tariffs or new tariffs on the cost of our imported products and pricing of our products; the impact of our re-branding and marketing strategy; our business strategy and future growth and profitability; our ability to deliver high quality, innovative products to the marketplace; our ability to maintain and build upon our existing customer and supplier relationships; our expected cash flow and liquidity for the next 12 months; and our ability to build awareness of our core brands. These statements are based on current expectations that involve numerous risks and uncertainties.  These risks and uncertainties include the concentration of our business with retail customers; our ability to comply with financial and other covenants in our debt agreements; our ability to introduce new products or improve existing products that satisfy consumer preferences; our ability to develop new or improved products in a timely and cost-efficient manner; our ability to meet the continued listing requirements for the listing of our common stock on the Nasdaq Capital Market; liquidity problems or bankruptcy of our customers and their ability to pay us in a timely manner; our ability to compete with larger and more financially stable companies in our markets; our dependence on key personnel; our reliance on foreign suppliers and potential disruption in foreign markets in which we operate; increases in the cost of raw materials used to manufacture our products; compliance with safety and testing regulations for our products; product liability claims arising from use of our products; unanticipated tax liabilities; an impairment of other intangible assets; and other risks as detailed in our Annual Report on Form 10-K for the year ended December 29, 2018, as amended, and subsequent filings with the Securities and Exchange Commission. All these matters are difficult or impossible to predict accurately, many of which may be beyond our control. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate.

 

The following discussion is intended to assist in the assessment of significant changes and trends related to the results of operations and financial condition of our Company and our consolidated subsidiaries.  This Management’s Discussion and Analysis should be read together with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this filing and with our consolidated financial statements for the year ended December 29, 2018 included in our Annual Report on Form 10-K for the year ended December 29, 2018, as amended (“2018 Form 10-K”).

 

Note that all dollar amounts in this section are in thousands of U.S. dollars, except share and per share data.

 

Overview

 

We are an infant and juvenile products company originally founded in 1985 and have publicly traded on the Nasdaq Stock Market since 2007 under the symbol “SUMR.” We are a recognized authority in the juvenile industry, providing parents and caregivers a full range of innovative, high-quality, and high-value products to care for babies and toddlers. We seek to improve the quality of life of parents, caregivers, and babies through our product offerings, while at the same time maximizing shareholder value over the long term.

 

We operate in one principal industry segment across geographically diverse marketplaces, selling our products globally to large, national retailers as well as independent retailers, and on our partner’s websites, and our own direct to consumer websites. In North America, our customers include Amazon.com, Wal-Mart, Target, Buy Buy Baby, Home Depot, and Lowe’s. Our largest European-based customers are Argos and Amazon. We also sell through international distributors, representatives, and to select international retail customers in geographic locations where we do not have a direct sales presence.

 

In the second quarter of 2019, sales declined 2.6% as compared to the prior year period. In the second quarter of 2019, we experienced growth across our major customers and certain product categories but experienced declines with our mid-tier and international customers.  Selling expenses increased 30.4% in the second quarter compared to prior year period as a result of higher cooperative advertisement and consumer advertisement costs for new product launches and on-line marketing initiatives. General and administrative expenses declined 9.1% as compared to the prior period largely due to lower labor and other costs as a result of cost reduction actions take in the prior fiscal quarter and over the past year. Net loss per diluted share for the quarter was $0.01 per share as compared to a net income of $0.02 per share for the comparable prior period.

 

We continue to progress on a key part of our business strategy to develop a portfolio of brands positioned to appeal to multiple consumer demographics and offer channel differentiation.  In early 2019, we began doing business under the name SUMR Brands and expanded our family of brands with the born freeTM relaunch in March of 2019. The repositioned born freeTM brand utilizes a

 

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‘digital-first’ approach and offers a product line with more sophisticated styling and higher price points than the SummerTM branded range of products.

 

We expect our results in 2019 and potentially thereafter will continue to be impacted by the 10% tariff enacted in September 2018 and the 15% tariff enacted in May 2019 on certain products, as well as the new 10% tariff expected for September 2019 on all remaining goods that are 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 six months ended June 29, 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.

 

Results of Operations

 

 

 

For the three months ended

 

For the six months ended

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

June 29, 2019

 

June 30, 2018

 

June 29, 2019

 

June 30, 2018

 

Net sales

 

$

46,425

 

$

47,678

 

$

88,963

 

$

89,733

 

Cost of goods sold

 

31,583

 

32,284

 

60,671

 

60,747

 

Gross profit

 

14,842

 

15,394

 

28,292

 

28,986

 

General & administrative expenses

 

8,523

 

9,376

 

17,902

 

21,964

 

Selling expenses

 

4,031

 

3,091

 

7,384

 

5,769

 

Depreciation and amortization

 

952

 

1,074

 

1,889

 

2,075

 

Operating income (loss)

 

1,336

 

1,853

 

1,117

 

(822

)

Interest expense, net

 

1,293

 

1,409

 

2,542

 

2,182

 

Income (loss) before provision (benefit) for income taxes

 

43

 

444

 

(1,425

)

(3,004

)

Provision (benefit) for income taxes

 

267

 

146

 

197

 

(595

)

Net income (loss)

 

$

(224

)

$

298

 

$

(1,622

)

$

(2,409

)

 

Three Months ended June 29, 2019 compared with Three Months ended June 30, 2018

 

Net sales decreased 2.6% from $47,678 for the three months ended June 30, 2018 to $46,425 for the three months ended June 29, 2019. Sales to our top three customers increased by 7.7% and we had increases in sales across most of our product categories, including gates, potty, strollers, monitors, bathers, and entertainers for the three months ended June 29, 2019 as compared to the three months ended June 30, 2018. However, these increases were offset by a decline in our international and mid-tier customer sales as well as a decline in value of foreign currency sales and the negative impact on sales of the 25% tariff on goods imported into the United States from China.

 

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 June 29, 2019 as compared to the quarter ended June 30, 2018.

 

Gross profit decreased 3.6% from $15,394 for the three months ended June 30, 2018 to $14,842 for the three months ended June 29, 2019. Gross margin as a percent of net sales declined slightly from 32.3% for the three months ended June 30, 2018 to 32.0% for the three months ended June 29, 2019. Gross margin dollars and percent declined primarily due to increased tariffs, shift in sales mix, and the decline in value of foreign currency sales.

 

General and administrative expenses decreased 9.1% from $9,376 for the three months ended June 30, 2018 to $8,523 for the three months ended June 29, 2019.  General and administrative expenses decreased from 19.7% of net sales for the three months ended June 30, 2018 to 18.4% of net sales for the three months ended June 29, 2019.  The decline in dollars and as a percent of sales

 

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was primarily attributable to the impact of lower labor and other costs as a result of cost reduction actions taken earlier in the fiscal year.

 

Selling expenses increased 30.4% from $3,091 for the three months ended June 30, 2018 to $4,031 for the three months ended June 29, 2019. Selling expenses also increased as a percent of net sales from 6.5% for the three months ended June 30, 2018 to 8.7% for the three months ended June 29, 2019. The increase in selling expense dollars and as a percent of sales was primarily attributable to increased cooperative advertisements and consumer advertisement costs this year due mainly to new product launches and on-line marketing initiatives as compared to the three months ended June 30, 2018, which also included a larger component of direct import sale.

 

Depreciation and amortization decreased 11.4% from $1,074 for the three months ended June 30, 2018 to $952 for the three months ended June 29, 2019. The decrease in depreciation and amortization was attributable to the timing of capital investment over the past year.

 

Interest expense decreased 8.2% from $1,409 for the three months ended June 30, 2018 to $1,293 for the three months ended June 29, 2019.  Interest expense for the three months ended June 30, 2018 included a write off of $518 of previously unamortized prepaid finance fees associated with the repayment of existing debt from the proceeds of our June 2018 refinancing. This was partially offset by interest on higher debt levels, increased market interest rates and higher interest margins under our new credit facilities.

 

For the three months ended June 30, 2018, we recorded a $146 provison for income taxes on $444 of pretax income, reflecting an estimated 32.9% tax rate for the quarter. For the three months ended June 29, 2019, we recorded a $267 provision for income taxes on $43 of pretax income. The tax provision for the three months ended June 29, 2019 included a $181 discrete valuation allowance charge for nondeductible interest expense.

 

Six Months ended June 29, 2019 compared with Six Months ended June 30, 2018

 

Net sales decreased 0.9% from $89,733 for the six months ended June 30, 2018 to $88,963 for the six months ended June 29, 2019. The six months ended June 30, 2018 included $2,954 of sales to Babies R Us, a subsidiary of Toys R Us (“TRU”), that did not recur in the six months ended June 29, 2019 as a result of the liquidation of TRU in 2018. Excluding the 2018 TRU sales of $2,954, net sales for the six months ended June 29, 2019 increased by 2.5% compared to the same period last year. For the six month ended June 29, 2019, our top four customer sales increased by 11.5% and we experienced increases in sales across many of our product categories such as in gates, potty, strollers, bathers, and entertainer categories. However, these increases were offset by a decline in our international and mid-tier customer sales as well as a decline in value of foreign currency sales and the negative impact of the 25% tariff on goods imported into the United Stated from China.

 

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 six months ended  June 29, 2019 as compared to the six months ended June 30, 2018.

 

Gross profit decreased 2.4% from $28,986 for the six months ended June 30, 2018 to $28,292 for the six months ended June 29, 2019. Gross margin as a percent of net sales decreased from 32.3% for the six months ended June 30, 2018 to 31.8% for the six months ended June 29, 2019. Gross profit decreased primarily due to lower sales. Gross margin decreased primarily due tariffs, sales mix, and the decline in value of foreign currency sales.

 

General and administrative expenses decreased 18.5% from $21,964 for the six months ended June 30, 2018 to $17,902 for the six months ended June 29, 2019.  General and administrative expenses decreased from 24.5% of net sales for the six months ended June 30, 2018 to 20.1% of net sales for the six months ended June 29, 2019.  The decrease in dollars and as a percent of sales was primarily attributable to a $2,348 increase in our allowance for bad debts due to the liquidation of TRU’s U.S. assets in the three months ended March 30, 2018 that did not repeat as well as lower labor and other costs as a result of cost reduction actions taken in the three months ended March 30, 2019.

 

Selling expenses increased 28.0% from $5,769 for the six months ended June 30, 2018 to $7,384 for the six months ended June 29, 2019. Selling expenses also increased as a percent of net sales from 6.4% for the six months ended June 30, 2018 to 8.3% for the six months ended June 29, 2019. The increase in selling expense dollars and as a percent of sales was primarily attributable to increased cooperative advertisements and consumer advertisement costs this year due mainly to new product launches and on-line marketing initiatives as compared to the six months ended June 30, 2018, which also included a larger component of direct import sales.

 

Depreciation and amortization decreased 9.0% from $2,075 for the six months ended June 30, 2018 to $1,889 for the six months ended June 29, 2019. The decrease in depreciation was attributable to the timing of capital investment primarily over the past year.

 

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Interest expense increased 16.5% from $2,182 for the six months ended June 30, 2018 to $2,542 for the six months ended June 29, 2019.  The increase in interest expense was primarily attributable to higher debt levels, increased market interest rates and higher interest margins under our new credit facilities. Interest expense for the three months ended June 30, 2018, included a write off of $518 of previously unamortized prepaid finance fees associated with the repayment of existing debt from the proceeds of our June 2018 refinancing.

 

For the six months ended June 30, 2018, we recorded a $595 benefit for income taxes on $3,004 of pretax loss, reflecting an estimated 19.8% tax rate. For the six months ended June 29, 2019, we recorded a $197 provision for income taxes on $1,425 of pretax loss. The tax provision for the six months ended June 29, 2019, included a $494 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 six months ended June 29, 2019, net cash used in operating activities totaled $5,117 primarily due to the paydown of accounts payable from higher inventory purchased at the end of the previous fiscal year 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 six months ended June 30, 2018 was $7,151 primarily due to reductions in inventory.

 

For the six months ended June 29, 2019, net cash used in investing activities was approximately $1,530. For the six months ended June 30, 2018, net cash used in investing activities was $1,751.

 

Net cash provided by financing activities was approximately $6,608 for the six months ended June 29, 2019 and reflected borrowings on our credit facilities primarily to reduce supplier payables and fund accounts receivable. We expect inventory to return to normal levels in the third fiscal quarter of 2019, resulting in lower borrowings and thus repayments on our credit facilities. Net cash used by financing activities was approximately $5,218 for the six months ended June 30, 2018, reflecting repayments on our credit facilities with funds generated from operating activities.

 

Based primarily on the above factors, net cash decreased for the six months ended June 29, 2019 by $141, resulting in a cash balance of approximately $580 at June 29, 2019.

 

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.

 

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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.

 

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 June 29, 2019, under the Restated BofA Agreement, the rate on base-rate loans was 6.50% and the rate on LIBOR-rate loans was 4.50%. The amount outstanding on the Restated BofA Agreement at June 29, 2019 was $37,712. Total borrowing capacity at June 29, 2019 was $45,854 and borrowing availability was $8,142.

 

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.

 

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The principal of the Term Loan will be 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. 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 June 29, 2019, the interest rate on the Term Loan was 11.52%. The amount outstanding on the Term Loan at June 29, 2019 was $16,844.

 

ITEM 3.                        Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

ITEM 4.                        Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as of June 29, 2019. Our Chief Executive Officer and Chief Financial Officer have concluded, based on this evaluation, that our controls and procedures were effective as of June 29, 2019.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1.                        Legal Proceedings

 

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.

 

ITEM 1A.               Risk Factors

 

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2018 Form 10-K and Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarter ended March 30, 2019.

 

ITEM 2.                        Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

ITEM 3.                        Defaults Upon Senior Securities

 

None.

 

ITEM 4.                        Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.                        Other Information.

 

None

 

ITEM 6.                        Exhibits

 

The exhibits listed in the Exhibit Index immediately preceding the signature page hereto are filed as part of this Quarterly Report on Form 10-Q.

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer

 

 

 

31.2

 

Certification of Chief Financial Officer

 

 

 

32.1

 

Section 1350 Certification of Chief Executive Officer

 

 

 

32.2

 

Section 1350 Certification of Chief Financial Officer

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Summer Infant, Inc.

 

 

 

 

 

 

 

 

Date: August 7, 2019

 

By:

/s/ Mark Messner

 

 

 

Mark Messner

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

Date: August 7, 2019

 

By:

/s/ Paul Francese

 

 

 

Paul Francese

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

22