Summer Infant (SUMR) 10-Q2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 27, 2020

For the transition period from                 to

Commission file number: 001-33346

Summer Infant, Inc.

(Exact name of registrant as specified in its charter)

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

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 ¨

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 ¨

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

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

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

As of August 10, 2020, there were 2,114,103 shares outstanding of the registrant’s Common Stock, $0.0001 par value per share.

Summer Infant, Inc.

Form 10-Q

Table of Contents

PART I.  FINANCIAL INFORMATION

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.

See notes to condensed consolidated financial statements

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.

See notes to condensed consolidated financial statements.

Summer Infant, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

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

See notes to condensed consolidated financial statements.

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.

See notes to condensed consolidated financial statements.

Summer Infant, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

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

SUMMER INFANT, INC.  AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 free^TM. 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:

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:

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:

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:

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:

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.

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:

The components of the Company’s lease expense for the six months ended June 27, 2020 and June 29, 2019 were as follows:

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:

The future fixed sublease receipts under non-cancelable operating lease agreements as of June 27, 2020 are as follows:

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.

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.

As of June 27, 2020, there were 67,557 shares available to grant under the 2012 Plan.

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.

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 the COVID-19 pandemic on our financial condition and results of operations in the near and long term; anticipated savings from our ongoing restructuring efforts; the impact of tariffs on the cost of certain of our imported products and the expected effect of our mitigation efforts; and our expected cash flow and liquidity for the next 12 months. These statements are based on current expectations that involve numerous risks and uncertainties.  These risks and uncertainties include the impact of the COVID-19 outbreak on our business operations, and the U.S. and global economies; changes in international trade policy and the imposition of tariffs or other fees by the United States or other countries on our products; the concentration of our business with retail customers; potential liquidity problems or bankruptcy of our customers and their ability to pay us in a timely manner; our ability to comply with financial and other covenants in our debt agreements; our ability to work with our lenders to amend our existing debt agreements, if required; our ability to raise additional funds or engage in a strategic transaction, if necessary; whether we will be able to obtain forgiveness for all or part of our PPP loan; 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 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; potential increases in the cost of raw materials used to manufacture our products; compliance with safety and testing regulations for our products; potential product liability claims arising from use of our products; unanticipated tax liabilities; a potential impairment of other intangible assets; and other risks as detailed in our Annual Report on Form 10-K for the year ended December 28, 2019, as amended, our Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, this Quarterly Report on Form 10-Q 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 28, 2019 included in our Annual Report on Form 10-K for the year ended December 28, 2019, as amended (“2019 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.

We operate in one principal industry segment across geographically diverse marketplaces, selling our products primarily in North America 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. 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 2020, sales declined 17.7% as compared to the prior year period, principally as a result of the restructuring of our international business in the second quarter and the negative effect of the COVID-19 pandemic on our supply chain and reduced demand from our customers and consumers with many brick-and-mortar stores being closed. While gross profit decreased due to lower sales, gross margin improved due primarily to a favorable mix of higher product margin categories and tariff exclusions on our products that resulted in $1,786 of the tariff refunds as a benefit to cost of goods sold in the second quarter of 2020. General and administrative expenses declined 21% as compared to the prior period as the Company began to benefit from the restructuring actions taken in the first and second quarters of 2020. Net income per diluted share for the quarter was $0.61 as compared to a net loss per diluted share of $0.11 in the comparable prior period.

In early 2020 and prior to the COVID-19 outbreak in the U.S., we announced restructuring initiatives to further streamline operations and improve our financial outlook. We anticipate that these actions will result in annualized cost savings of approximately $7,500. As of the end of July 2020, we had taken many of these actions, including headcount reductions, reductions in facility space, and other cost reductions, and believe we are on track to realize the expected $7,500 in annualized cost savings. At the end of March 2020, we vacated our distribution center located in the U.K. To further reduce expenses, in April 2020, we entered into a sublease to lease a portion of our California distribution center and signed an amendment to our lease of our headquarters located in Rhode Island that reduced the size of premises occupied by us and correspondingly will reduce our base rent going forward. During the second quarter of 2020, we also worked with our lenders to amend our credit facility and term loan agreement to provide additional liquidity to address the potential short-term impact of the COVID-19 pandemic.

Impact of the COVID-19 Pandemic. As discussed in our 2019 Form 10-K, we experienced some delays in manufacturing and shipment of our products to the U.S., as the majority of our products are sourced from China. Sales in the first quarter were consistent with our forecast until March, when the COVID-19 pandemic spread to the U.S. Because our products are considered “essential” and our distribution center is located in California, we have continued to ship products without interruption.

In March 2020, we began to see customers that have retail stores reduce orders as they experienced or anticipated closures of those stores. While we did see an uptick in sales to those customers with significant e-commerce capabilities, it did not offset the reduced orders from our mid-size and smaller customers which continued through the second quarter of 2020.

We have seen manufacturing and shipments from China return to more normal levels, however, the potential exists that we might not be able to meet demand for certain products that are manufactured by suppliers that may be subject to closure due to the resurgence of COVID-19 outbreaks.

Sales in the second quarter of 2020 were impacted by the COVID-19 pandemic as some retail stores remained closed. We believe that customers with e-commerce capabilities will continue to have high demand and that, as stores begin to reopen across the U.S., we will see a corresponding increase in orders from customers with retail stores. However, given the unpredictability of the COVID-19 pandemic, it is possible that some stores will remain closed, or that outbreaks may continue to occur throught the remainder of the year. With our mid-size and smaller customers, we have seen some of these customers ask for extensions in payment terms. We expect these customers may experience financial difficulties, and we have taken steps to limit risk of non-payment from these customers.

The Company continues to assess the impact of the COVID-19 pandemic on its supply chain, consumer demand and overall business operations through the remainder of 2020 and have been working with our lenders to provide flexibility under our existing credit facilities during this uncertain time. Additionally, we believe the recent COVID-19 resurgence in the United States and in other countries has added greater uncertainty and unpredictable economic consequences in the coming months. After careful consideration and because of the lingering potential negative economic impact and increased uncertainty of the COVID-19 pandemic, in late July 2020 we applied for for a PPP loan under the CARES Act. Our application was approved on July 27, 2020, and we received approximately $1,955 in loan proceeds in August. We will use the loan proceeds to fund certain qualified expenses, including payroll costs, rent and utility costs. The term of the loan is for five-year period and bears interest at an annual rate of 1.00%, with no principal or interest payments due during the first six months. Under the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or part of the loan subject to limitations based on the use of the proceeds for eligible purposes. There can be no assurance that our application to the SBA will be approved, or if the loan is approved, that we will be able to obtain forgiveness of the loan in whole or in part.

Recent Developments. Tariff exclusions on certain of our imported products that were issued by the Office of the U.S. Trade Representative expired on August 7, 2020 and have not been renewed. As a result, we will again be required to pay tariffs on certain imported products effective August 2020 unless and until the tariff exclusion is extended, a new tariff exclusion is granted or the tariffs are terminated. While we are initiating actions to mitigate the impact of these tariffs, the tariffs will materially impact our cost of goods sold, and therefore our gross profit and gross margins, for the remainder of fiscal 2020 and beyond. To the extent our mitigation efforts are not successful, the impact 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 27, 2020 from our critical accounting policies and estimates disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K.

Results of Operations

Three Months ended June 27, 2020 compared with Three Months ended June 29, 2019

Net sales decreased 17.7% from $46,425 for the three months ended June 29, 2019 to $38,214 for the three months ended June 27, 2020 primarily as a result of the strategic restructuring of our international business that resulted in a decline of international sales and the negative effect of the COVID-19 pandemic on our supply chain and demand from our customers and consumers with many brick-and-mortar stores being closed. Sales to our top customers, especially through their ecommerce channels, remained strong and we increased sales in our specialty blanket and playard categories.

Cost of goods sold includes cost of the finished product from suppliers, tariffs/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 27, 2020 as compared to the quarter ended June 29, 2019.

Gross profit decreased 5.4% from $14,842 for the three months ended June 29, 2019 to $14,039 for the three months ended June 27, 2020. Gross profit as a percent of net sales increased from 32.0% for the three months ended June 29, 2019 to 36.7% for the three months ended June 27, 2020. Gross profit declined primarily due to lower sales. Gross profit as a percent of net sales increased primarily due to tariff exclusions on certain gate, bath, and bedrail products issued by the Office of the U.S. Trade Representative that became effective immediately and retroactive to September 2018 resulting in $1,819 of tariff refunds due to the Company. We recorded $1,786 of the tariff refunds as a benefit to cost of goods sold in the second quarter of 2020.

General and administrative expenses decreased 21.0% from $8,523 for the three months ended June 29, 2019 to $6,729 for the three months ended June 27, 2020. General and administrative expenses decreased from 18.4% of net sales for the three months ended June 29, 2019 to 17.6% of net sales for the three months ended June 27, 2020. The decline in dollars and as a percent of sales was primarily due to the Company’s restructuring activities begun in the first quarter of 2020 that included a reduction in work force and other cost reductions.

Selling expenses decreased 7.3% from $4,031 for the three months ended June 29, 2019 to $3,738 for the three months ended June 27, 2020. Selling expenses increased as a percent of net sales from 8.7% for the three months ended June 29, 2019 to 9.8% for the three months ended June 27, 2020. The decrease in selling expense dollars is primarily attributable to lower sales. The increase in selling expenses as a percent of net sales was primarily attributable to increased cooperative advertisement, freight out, and royalty costs this year as compared to the three months ended June 29, 2019.

Depreciation and amortization decreased 14.6% from $952 for the three months ended June 29, 2019 to $813 for the three months ended June 27, 2020. The decrease in depreciation and amortization was attributable to lower capital investment over the past year.

Interest expense decreased 13.3% from $1,293 for the three months ended June 29, 2019 to $1,121 for the three months ended June 27, 2020. Interest expense decreased due to lower debt levels.

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. For the three months ended June 27, 2020, we recorded a $351 provision for income taxes on $1,638 of pretax income. The provision for income tax for the three months ended June 27, 2020 included a $120 discrete valuation allowance charge for nondeductible interest expense.

Six Months ended June 27, 2020 compared with Six Months ended June 29, 2019

Net sales decreased 11.7% from $88,963 for the six months ended June 29, 2019 to $78,552 for the six months ended June 27, 2020 primarily as a result of the strategic restructuring of our international business that resulted in a decline of international sales and the negative effect of the COVID-19 pandemic on our supply chain and demand from our customers and consumers with many brick-and-mortar stores being closed. Sales to our top customers, especially through their ecommerce channels, remained strong and we increased sales in our specialty blanket and playard categories.

Cost of goods sold includes cost of the finished product from suppliers, tariffs/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 27, 2020 as compared to the six months ended June 29, 2019.

Gross profit decreased 6.2% from $28,292 for the six months ended June 29, 2019 to $26,542 for the six months ended June 27, 2020. Gross profit as a percent of net sales increased from 31.8% for the six months ended June 29, 2019 to 33.8% for the six months ended June 27, 2020. Gross profit dollars decreased primarily due to lower sales. Gross profit as a percent of net sales improved primarily due to tariff exclusions on certain gate, bath, and bedrail products issued by the Office of the U.S. Trade Representative that became effective immediately and retroactive to September 2018 resulting in $2,020 of tariff refunds due to the Company in the six month period ending June 27, 2020. We also received tariff exclusions on metal gates in December 2019 of $1,848. As a result, we recorded $2,289 of the tariff refunds as a benefit to cost of sales in the six months ending June 27, 2020.

General and administrative expenses decreased 16.9% from $17,902 for the six months ended June 29, 2019 to $14,876 for the six months ended June 27, 2020. General and administrative expenses decreased from 20.1% of net sales for the six months ended June 29, 2019 to 18.9% of net sales for the six months ended June 27, 2020. The decline in dollars and as a percent of sales was primarily due to the Company’s restructuring activities begun in the first quarter of 2020 that included a reduction in work force and other cost reductions partially offset by severance and restructuring costs.

Selling expenses decreased 2.7% from $7,384 for the six months ended June 29, 2019 to $7,182 for the six months ended June 27, 2020. Selling expenses increased as a percent of net sales from 8.3% for the six months ended June 29, 2019 to 9.1% for the six months ended June 27, 2020. The decrease in selling expense dollars is primarily attributable to lower sales. The increase in selling expenses as a percent of net sales was primarily attributable to increased consumer advertising, freight out, and royalty costs this year as compared to the six months ended June 29, 2019.

Depreciation and amortization decreased 5.8% from $1,889 for the six months ended June 29, 2019 to $1,780 for the six months ended June 27, 2020. The decrease in depreciation was attributable to the decline in capital investment primarily over the past year.

Interest expense decreased 0.4% from $2,542 for the six months ended June 29, 2019 to $2,531 for the six months ended June 27, 2020. The decrease in interest expense was primarily attributable to lower debt levels. The decrease was partially offset by the write off of $266 of previously unamortized prepaid finance fees associated with the reduction in the total revolver commitments under the Company’s Bank of America credit facility in March 2020.

For the six months ended June 29, 2019, we recorded a $197 provision for income taxes on $1,425 of pretax loss. The provision for income taxes for the six months ended June 29, 2019, included a $494 discrete valuation allowance charge for nondeductible interest expense. For the six months ended June 27, 2020, we recorded a $96 provision for income taxes on $173 of pretax income. The provision for income taxes for the six months ended June 27, 2020, included a $171 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 China. 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 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 27, 2020, net cash provided by operating activities totaled $14,546 primarily due to increased profitability and improved working capital efficiency. Net cash used in operating activities for the six months ended June 29, 2019 was $5,117 primarily due to the paydown of accounts payable from higher inventory purchases at the end of the previous fiscal year in advance of a potential further increase in tariffs.

For the six months ended June 27, 2020, net cash used in investing activities was approximately $921. For the six months ended June 29, 2019, net cash used in investing activities was $1,530.

Net cash used in financing activities was approximately $13,270 for the six months ended June 27, 2020. Cash provided by operating activities were primarily used to reduce our bank borrowings on our credit facilities. 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 to reduce supplier payables and fund accounts receivable.

Primarily as a result of the above factors, net cash increased for the six months ended June 27, 2020 by $453, resulting in a cash balance of approximately $848 at June 27, 2020.

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. As noted above, we received a PPP loan in August 2020, the proceeds of which we will use to pay for certain qualifying expenses, including payroll costs, rent and utility costs.

As discussed above, we have worked with our lenders to address the potential impact of the COVID-19 pandemic on our cash flow and access to funding under our credit facility. However, if we are unable to meet our current financial forecast, experience a more severe impact from the COVID-19 pandemic on our business than expected, do not adequately control expenses, are unable to mitigate the impact of tariffs, or adjust our operations accordingly, we may experience constraints on our liquidity and may not meet the financial and other covenants under our revolving credit facility and term loan agreements which could impact our borrowing availability. 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 or agree to amend the terms of our agreements with them if there are covenant violations. In such case, we may be required to seek to raise additional funds through debt or equity financings, restructure our existing debt, engage in strategic collaborations, and/or a strategic transaction that is in the best interest of our stockholders. Any such financing or strategic transaction could result in significant dilution to our existing stockholders, depending on the terms of the transaction. If we are unable to identify a strategic transaction, raise additional funds, and/or restructure our existing debt, our operations could be limited and we may not be able to meet all of our obligations under our credit facility and term loan agreement.

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

Credit Facilities

Restated BofA Agreement. We and our wholly owned subsidiary, Summer Infant (USA), Inc., as borrowers, and certain of our subsidiaries as guarantors, are parties to a Second Amended and Restated Loan and Security Agreement with Bank of America, N.A., as agent, that provides for a $48,000 asset-based revolving credit facility (as it may be amended from time to time, the "Restated BofA Agreement"). Total borrowing capacity under the Restated BofA Agreement 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. Loans under the Restated BofA Agreement are scheduled to mature on June 28, 2023 (subject to customary early termination provisions). 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, and certain of our subsidiaries are guarantors.

Loans under the Restated BofA Agreement bear interest, at the Company's option, at a base rate or at LIBOR with a LIBOR floor of 0.75%, plus applicable margins based on average quarterly availability under the Restated BofA Agreement. Interest payments are due monthly, payable in arrears. We are 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 and certain financial 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. Through the end of fiscal 2020, the Company is required to achieve (i) a minimum net sales amount for each three consecutive months, measured at the end of each month, and (ii) a trailing 12-month minimum adjusted EBITDA amount, measured at the end of each month. 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.

As of June 27, 2020, the interest rate for base-rate loans and LIBOR-rate loans under the Restated BofA Agreement were 5.75% and 4.25%, respectively. The amount outstanding on the Restated BofA Agreement at June 27, 2020 was $18,752, total borrowing capacity was $26,245, and borrowing availability was $7,493.

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 Agrement with respect to the PPP Loan. See Part II, Item. 5, “Other Information” below for information regarding the letter agreement and Amendment No. 6.

Term Loan Agreement. We and our wholly owned subsidiary, Summer Infant (USA), Inc., as borrowers, and certain of our subsidiaries as guarantors, are parties to a Term Loan and Security Agreement with Pathlight Capital LLC, as agent, pursuant to which we received a $17,500 term loan (as it may be amended from time to time, the "Term Loan Agreement"). In connection with the March 2020 amendment to the Term Loan Agreement, principal payments on the term loan were suspended for 2020, to resume in March 2021. 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 repayment of the term loan or earlier upon the occurrence of certain events. The term loan matures on June 28, 2023. 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 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 asset-based revolving credit facility, and certain of our subsidiaries are guarantors.

The Term Loan Agreement contains customary affirmative and negative covenants and certain financial covenants that are substantially the same as the Restated BofA Agreement described above.

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 Agrement with respect to the PPP Loan. See Part II, Item. 5, “Other Information” below for information regarding Amendment No. 5.

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.

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 27, 2020. Our Chief Executive Officer and Chief Financial Officer have concluded, based on this evaluation, that our controls and procedures were effective as of June 27, 2020.

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.

PART II.  OTHER INFORMATION

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.

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2019 Form 10-K and Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, other than the following:

We may not be entitled to forgiveness of our recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan could in the future be determined to have been impermissible.

On August 3, 2020, we received loan proceeds of approximately $1,955 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). We intend to use the PPP Loan to retain current employees, maintain payroll and make lease and utility payments. Under the CARES Act, as amended in June 2020, loan forgiveness is generally available if proceeds were used for qualifying expenses in accordance with the CARES Act. The amount of the PPP Loan eligible to be forgiven may be reduced in certain circumstances, including as a result of certain headcount or salary reductions. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA.

In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any applicable laws or regulations that may apply to us in connection with the PPP Loan or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties, which could also result in adverse publicity and damage to our reputation. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

The suspension, revocation, expiration, non-renewal or other loss of temporary exemptions from certain tariffs could adversely affect our business, financial condition and results of operations.

As previously disclosed, the United States and other countries have levied tariffs and taxes on certain goods, including products imported into the United States from China. The majority of our products are manufactured outside the United States, mainly in China, and imported for sale in the United States. Tariffs enacted in 2018 and 2019 impacted our 2018 and 2019 results, and caused market disruption amongst our major customers.

In December 2019, a tariff exclusion for metal safety gates was granted by the Office of the U.S. Trade Representative (“USTR”), retroactive to the date of implementation (September 2018) through August 2020, and we have been receiving refunds for the amounts we paid in respect of such tariffs. Subsequently, tariff exclusions for certain other juvenile products were granted by the USTR for which we have also been receiving refunds. While we applied for a 12-month extension of the tariff exclusions, the applications have not been approved and the exclusions expired on August 7, 2020. As a result, we will again be required to pay tariffs on certain imported products effective August 2020 and until the tariff exclusions are extended, new tariff exclusions are granted, or the tariffs are terminated. There is no assurance that any actions we take to mitigate tariffs will be successful, and any increase in pricing to allow us to maintain reasonable margins could adversely affect the demand for those affected products and may result in decreased profitability and lower sales, thereby having an adverse effect on our business, results of operations and financial condition.

None.

None.

Not applicable.

Change in Control Plan

In May 2020, the Company’s Board of Directors approved an amendment to the Company’s existing Change in Control Plan to extend the term of the plan until February 7, 2022.

Letter Agreement with Bank of America

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. A copy of the letter agreement is filed herewith as Exhibit 10.4 and incorporated herein by reference.

Paycheck Protection Program and Related Bank Amendments.

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.

The foregoing summary of the BofA Amendment and the Term Loan Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of such amendments, copies of which are filed herewith as Exhibit 10.5 and Exhibit 10.6, respectively, and incorporated herein by reference.

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.

EXHIBIT INDEX

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.