Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Under Section 13or 15d**

**of the Securities Exchange Act of 1934**

 

**Forthe quarterly period ended June 30, 2008**

 

**Summer Infant, Inc.**

(Name of Registrantas Specified in Its Charter)

 

Commission file **001-33346**

 
| **Delaware**                              | ** ** | IRS  Employment Number**20-1994619**  |
|-------------------------------------------|------------|---------------------------------------|
| (State  of Incorporation)                 |       |                                  |
|                                      |       |                                  |
| **1275 Park  East Drive**                 | ** ** |                                  |
| **Woonsocket,  RI 02895**                 | ** ** | **(401)  671-6550**                   |
| (Address  of principal executive offices) |       | (Registrant’s  telephone number) |

 

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

** **

**Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.**

 
| **Large accelerated filer****o** | **Accelerated filer****o** | **Non-accelerated filer****o** | **Smaller reporting company****x** |
|----------------------------------|----------------------------|--------------------------------|------------------------------------|

 

**Indicate by check mark whether theregistrant is a shell company as defined in Rule 12b-2 of the ExchangeAct.**

**Yes****o****        No****x**

** **

**As of July 29, 2008, there were 15,055,782 sharesoutstanding of the registrant’s Common Stock, $.0001 par value per share.**

 

 

 

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Tableof Contents

 

**Summer Infant, Inc.**

**Form 10Q**

**Table of Contents**

 
| ** **                                | ** **                                                                                                                   | **Page Number** |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|----------------------|
| **Part 1.**                          | **Financial Information**                                                                                                    |                 |   |
|                                      |                                                                                                                         |                 |   |
| **Item 1.**                               | **Condensed Consolidated Financial Statements  (unaudited)**                                                                 |                 |   |
|                                      |                                                                                                                         |                 |   |
| ** **                                | **Condensed Consolidated Balance Sheets June 30,  2008 (unaudited) and December 31, 2007**                         |                 | **3** |
|                                      |                                                                                                                         |                 |   |
| ** **                                | **Condensed  Consolidated Statements of Income for the three and six months ended  June 30, 2008 and 2007 (unaudited)** |                 | **4** |
|                                      |                                                                                                                         |                 |   |
| ** **                                | **Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2008 and 2007 (unaudited)**       |                 | **5** |
|                                      |                                                                                                                         |                 |   |
| ** **                                | **Notes to Condensed Consolidated Financial Statements**                                                                     |                 | **6** |
|                                      |                                                                                                                         |                 |   |
| **Item 2.**                               | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                              |                 | **11** |
|                                      |                                                                                                                         |                 |   |
| **Item 4T. Controls and  Procedures**     |                                                                                                                         |                 |
|                                      |                                                                                                                         |                 |   |
| **Part II.  Other Information** |                                                                                                                         | **19**               |
|                                      |                                                                                                                         |                 |   |
| **Item 1A. Risk Factors**                 |                                                                                                                         |                 |
| **Item 4.**                               | **Submission of  Matters to a Vote of Security Holders**                                                                     |                 |   |
| **Item 5.**                               | **Other Information**                                                                                                        |                 |   |
| **Item 6.**                               | **Exhibits**                                                                                                                 |                 |   |
|                                      |                                                                                                                         |                 |   |
| **Signatures**                            |                                                                                                                         |                 |

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 

Note that all dollar amounts presented in the tablebelow are in thousands of US dollars except share amounts.

 
| ** **                                                                                             | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **Unaudited**           | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                 |       |                    |       |                        |       |
|                                                                                                   |       |                    |       |                        |       |
| CURRENT  ASSETS                                                                                        |       |                    |       |                        |       |
|                                                                                                   |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                             |       | $                       | 2,876      |                        | $          | 1,771 |   |
| Trade  receivables, net of allowance for doubtful accounts                                             |       | 27,719                  |       | 21,245                      |       |
| Inventory,  primarily finished goods                                                                   |       | 26,868                  |       | 19,327                      |       |
| Prepaids  and other current assets                                                                     |       | 1,065                   |       | 970                         |       |
| Deferred  tax assets                                                                                   |       | 402                     |       | 134                         |       |
|                                                                                                   |       |                    |       |                        |       |
| TOTAL  CURRENT ASSETS                                                                                  |       | 58,930                  |       | 43,447                      |       |
| Property and equipment,  net                                                                           |       | 9,974                   |       | 9,279                       |       |
| Goodwill                                                                                               |       | 44,611                  |       | 30,820                      |       |
| Other assets                                                                                           |       | 264                     |       | 216                         |       |
| Other intangible  assets, net                                                                          |       | 9,333                   |       | 9,463                       |       |
|                                                                                                   |       |                    |       |                        |       |
| TOTAL  ASSETS                                                                                          |       | $                       | 123,112    |                        | $          | 93,225 |   |
|                                                                                                   |       |                    |       |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                             |       |                    |       |                        |       |
| CURRENT  LIABILITIES                                                                                   |       |                    |       |                        |       |
| Line  of credit - bank                                                                                 |       | $                       | —     |                        | $          | 17,591 |   |
| Accounts  payable and accrued expenses                                                                 |       | 21,753                  |       | 17,574                      |       |
| Current  portion of long term liabilities                                                              |       | 1,044                   |       | 265                         |       |
|                                                                                                   |       |                    |       |                        |       |
| TOTAL  CURRENT LIABILITIES                                                                             |       | 22,797                  |       | 35,430                      |       |
| Long term liabilities,  less current portion                                                           |       | 39,442                  |       | 3,977                       |       |
| Deferred tax  liabilities                                                                              |       | 573                     |       | 548                         |       |
|                                                                                                   |       |                    |       |                        |       |
| TOTAL  LIABILITIES                                                                                     |       | 62,812                  |       | 39,955                      |       |
|                                                                                                   |       |                    |       |                        |       |
| COMMITMENTS  AND CONTINGENCIES                                                                         |       |                    |       |                        |       |
|                                                                                                   |       |                    |       |                        |       |
| STOCKHOLDERS’  EQUITY                                                                             |       |                    |       |                        |       |
|                                                                                                   |       |                    |       |                        |       |
| Common  Stock $.0001 par value, issued and outstanding 15,055,782 and 13,907,892  shares, respectively |       | 2                       |       | 1                           |       |
| Additional  paid in capital                                                                            |       | 53,915                  |       | 49,078                      |       |
| Retained  earnings                                                                                     |       | 6,425                   |       | 4,095                       |       |
| Accumulated  other comprehensive income (loss)                                                         |       | (42                     | )          | 96                          |       |
|                                                                                                   |       |                    |       |                        |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                       |       | 60,300                  |       | 53,270                      |       |
|                                                                                                   |       |                    |       |                        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                       |       | $                       | 123,112    |                        | $          | 93,225 |   |

 

See notes to condensed consolidated financialstatements

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Income**

 

Note that all dollar amounts presented in the tablebelow are in thousands of US dollars except share amounts.

 
| ** **                                        | ** ** | **Unaudited**                                      | ** ** | **Unaudited**                                    | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
| ** **                                        | ** ** | **June 30,  2008**                            | ** ** | **June 30,  2007**                          | ** ** | **June 30,  2008** | ** ** | **June 30,  2007** | ** ** |
| ** **                                        | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  revenues                                     |       | $                                                  | 33,982     |                                             | $          | 18,675 |   | $ | 62,407 |   | $ | 23,446 |   |
| Cost  of goods sold                               |       | 21,665                                             |       | 11,415                                           |       | 40,154 |   | 14,340 |   |
| Gross  profit                                     |       | 12,317                                             |       | 7,260                                            |       | 22,253 |   | 9,106 |   |
| Selling,  general and administrative expenses (a) |       | 9,573                                              |       | 5,777                                            |       | 17,461 |   | 7,822 |   |
| Net  operating income                             |       | 2,744                                              |       | 1,483                                            |       | 4,792 |   | 1,284 |   |
| Interest  income (expense), net                   |       | (585                                               | )          | 20                                               |       | (967 | ) | 552 |   |
| Income  before provision for income taxes         |       | 2,159                                              |       | 1,503                                            |       | 3,825 |   | 1,836 |   |
| Income  tax expense                               |       | 833                                                |       | 574                                              |       | 1,495 |   | 707 |   |
| Net  income                                       |       | $                                                  | 1,326      |                                             | $          | 929 |   | $ | 2,330 |   | $ | 1,129 |   |
| Net  income per share- basic                      |       | $                                                  | 0.09       |                                             | $          | 0.07 |   | $ | 0.16 |   | $ | 0.09 |   |
| Weighted  average shares outstanding - basic      |       | 14,917,738                                         |       | 13,907,892                                       |       | 14,415,605 |   | 12,941,000 |   |
| Net  income per share - diluted                   |       | $                                                  | 0.09       |                                             | $          | 0.07 |   | $ | 0.16 |   | $ | 0.08 |   |
| Weighted  average shares outstanding- diluted     |       | 14,917,738                                         |       | 14,268,676                                       |       | 14,415,605 |   | 13,301,572 |   |
|                                                   |            |                                                    |            |                                                  |            |  |  |  |  |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

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(a) Includesnon-cash stock compensation expense of $180 and $191 for the six months ended June 30,2008 and 2007, and expense of $90 and $38 for the three months ended June 30,2008 and 2007.  The total also includesnon-capitalizable deal-related fees of $214 for the three and six months ended June 30,2008.

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

 

Note that all dollar amounts presented in the tablebelow are in thousands of US dollars except share amounts.

 
| ** **                                                                                                                                                                             | ** ** | **Unaudited**                                    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **For the six months ended** | ** ** |
| ** **                                                                                                                                                                             | ** ** | **June 30,  2008**                          | ** ** | **June 30,  2007** | ** ** |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Cash  flows from operating activities:                                                                                                                                                 |       |                                             |       |   |   |
| Net  income                                                                                                                                                                            |       | $                                                | 2,330      |   | $ | 1,129 |   |
| Adjustments  to reconcile net income to net cash used in operating activities                                                                                                          |       |                                             |       |   |   |
| Depreciation  and amortization                                                                                                                                                         |       | 1,125                                            |       | 432 |   |
| Non-cash  stock option expense                                                                                                                                                         |       | 180                                              |       | 191 |   |
| Deferred  taxes                                                                                                                                                                        |       | (243                                             | )          | — |   |
| Changes  in assets and liabilities net of effects of acquisition:                                                                                                                      |       |                                             |       |   |   |
| Increase  in accounts receivable                                                                                                                                                       |       | (2,806                                           | )          | (3,514 | ) |
| Increase  in inventory                                                                                                                                                                 |       | (2,724                                           | )          | (3,430 | ) |
| Increase  in accounts payable and accrued expenses                                                                                                                                     |       | 1,203                                            |       | 3,020 |   |
| Decrease  in prepaids and other current assets                                                                                                                                         |       | 437                                              |       | 286 |   |
| Increase  in other assets                                                                                                                                                              |       | (50                                              | )          | — |   |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Net  cash used in operating activities                                                                                                                                                 |       | (548                                             | )          | (1,886 | ) |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Cash  flows from investing activities:                                                                                                                                                 |       |                                             |       |   |   |
| Acquisitions  of property and equipment                                                                                                                                                |       | (1,339                                           | )          | (1,839 | ) |
| Acquisition  of Basic Comfort, Inc., Kiddopotamus & Company (2008) and  Summer Infant, Inc. (2007) net of cash acquired of $61 and $897,  respectively              |       | (15,374                                          | )          | (23,353 | ) |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Net  cash used in investing activities                                                                                                                                                 |       | (16,713                                          | )          | (25,192 | ) |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Cash  flows from financing activities:                                                                                                                                                 |       |                                             |       |   |   |
| Net  borrowings (repayments) on debt                                                                                                                                                   |       | 18,635                                           |       | (13,987 | ) |
| Principal  payments on capital lease obligations                                                                                                                                       |       | (135                                             | )          | — |   |
| Redemptions  of common stock                                                                                                                                                           |       | —                                           |       | (6,883 | ) |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Net  cash provided by (used in) financing activities                                                                                                                                   |       | 18,500                                           |       | (20,870 | ) |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                                                                                                                          |       | (134                                             | )          | 65 |   |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                                                                                                                  |       | 1,105                                            |       | (47,883 | ) |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Cash  and cash equivalents, beginning of period                                                                                                                                        |       | 1,771                                            |       | 52,094 |   |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Cash  and cash equivalents, end of period                                                                                                                                              |       | $                                                | 2,876      |   | $ | 4,211 |   |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| Non  cash investing and financing activities:                                                                                                                                          |       |                                             |       |   |   |
| Issuance  of common stock in conjunction with the acquisition of Basic  Comfort, Inc., Kiddopotamus & Company (2008), and Summer  Infant, Inc. (2007), respectively |       | $                                                | 4,657      |   | $ | 20,563 |   |
|                                                                                                                                                                                   |       |                                             |       |   |   |
| New Capital  lease obligations incurred                                                                                                                                                |       | $                                                | 148        |   | — |   |

 

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**SUMMERINFANT, INC.  AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                      ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The accompanying interimcondensed consolidated financial statements of Summer Infant, Inc. (“Summer”or “the Company”) are unaudited, but in the opinion of management, reflect alladjustments, consisting of normal recurring accruals, necessary for a fairpresentation of the results for the interim periods. Accordingly, they do notinclude all information and notes required by generally accepted accountingprinciples for complete financial statements. The results of operations forinterim periods are not necessarily indicative of results to be expected forthe entire fiscal year or any other period. The balance sheet at December 31,2007 has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements. These interim consolidated financial statements should beread in conjunction with the Company’s consolidated financial statements andnotes for the year ended December 31, 2007 filed on Form 10-K on March 27,2008.

 

*Acquisition of Summer Infant, Inc. by KBL Healthcare AcquisitionCorp. II*

 

On March 6, 2007,under an Agreement and Plans of Reorganization, dated as of September 1,2006 (“Acquisition Agreement”), KBL Healthcare Acquisition Corp. II (“KBL”),and its wholly owned subsidiary, SII Acquisition Corp. (“Acquisition Sub”),consummated a transaction by which (i) Summer Infant, Inc. (“SII”)was merged with and into Acquisition Sub and (ii) all of the outstandingcapital stock of each of Summer Infant Europe, Limited (“SIE”) and SummerInfant Asia, Ltd. (“SIA” and, collectively, with SII and SIE, the “Targets”)was acquired directly by KBL. As used in this report, the term “Summer”includes each of the Targets. As used in this report, the term “Company” meansthe registrant on a post-acquisition basis. On March 7, 2007, the securities of the Company commenced listingon the Nasdaq Capital Market under the symbols SUMR (common stock), SUMRW(warrants) and SUMRU (units).

 

*Nature of Operations and Basis of Presentation*

 

TheStatement of Income for the six months ended June 30, 2007 consists of theperiod from March 6, 2007 through June 30, 2007 for Summer plus thefull six months of results of KBL.  Theacquisition of Summer by KBL occurred on March 6, 2007, and therefore theresults of Summer are included from that date forward. The interim financialinformation as of June 30, 2008, and for the three and six months thenended, is unaudited and has been prepared on the same basis as the auditedfinancial statements as of December 31, 2007. The 2008 results include the results of Basic Comfort, Inc. andKiddopotamus & Company from the dates of acquisition, which were March31, 2008 and April 18, 2008, respectively. In the opinion of management, such unaudited financial informationincludes all adjustments (consisting only of normal recurring adjustments)necessary for a fair presentation of the interim information. Operating resultsfor the three and six months ended June 30, 2008 are not necessarilyindicative of the results that may be expected for the year ended December 31,2008.

 

Allsignificant intercompany accounts and transactions have been eliminated in thecondensed consolidated financial statements.

 

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*Basic Comfort Acquisition*

 

On March 31, 2008, through Summer (USA), theCompany acquired substantially all of the assets of Basic Comfort, Inc.  (“Basic”), a leading manufacturer and supplier ofinfant comfort and safety products, including infant sleep positioners, infanthead supports and portable changing pads.  The acquisition price was approximately$4,700,000 in cash and 450,000 shares of unregistered Summer common stock(which were valued at $1,777,500 using the March 31, 2008 closing price of$3.95). The cash portion of the purchase price was funded through borrowingsunder the Company’s prior credit facility. A portion of the common stock issued at closing was depositedinto escrow to secure the post-closing indemnification obligations of the Basicstockholders.   The owners of Basic can receive additional payments based on theachievement of certain EBITDA targets for the twelve months ended March 31,2009.

 

The following table summarizes the estimatedpreliminary fair values of the assets acquired and liabilities assumed at thedate of acquisition of Basic by Summer (amounts in thousands of US dollars):

 
| Trade  receivables         |   | $     | 1,384  |   |
|----------------------------|--------|-------|--------|--------|
| Inventory                  |   | 1,559 |   |
| Other  Current Assets      |   | 121   |   |
| Property  and equipment    |   | 152   |   |
| Goodwill                   |   | 5,373 |   |
| Total  assets acquired     |   | 8,589 |   |
| Total  liabilities assumed |   | 1,854 |   |
| Net  assets acquired       |   | $     | 6,735  |   |

 

Thepro forma effect on net revenues, earnings, and earnings per share amounts,assuming the transaction closed on January 1, 2008, are not consideredmaterial, and therefore are not presented here.

 

*Kiddopotamus Acquisition*

 

On April 18, 2008, the Company, through Summer USA, enteredinto an Agreement and Plan of Merger (the “Merger Agreement”), among SummerUSA, Kiddo Acquisition Co., Inc., a wholly-owned subsidiary of Summer USA(“Merger Sub”), Kiddopotamus & Company (“Kiddopotamus”), J. ChrisSnedeker, Kristen Peterson Snedeker and Thomas K. Manning, under which theCompany acquired Kiddopotamus, a leading manufacturer and supplier of infantnursery, travel and feeding accessories.  Pursuant to the terms of theMerger Agreement, on April 18, 2008, Merger Sub merged with and intoKiddopotamus, with Kiddopotamus continuing as the surviving entity (the “Merger”). As a result of the Merger, Kiddopotamus became an indirect, wholly-ownedsubsidiary of the Company.

 

Under the merger agreement, the total purchase price paid by theCompany to the holders of Kiddopotamus common and preferred stock, plus thepayment of various closing expenses, was $12,500,000.  Of the total purchase price, approximately$9,600,000 was paid in cash, and approximately $2,900,000 was paid by theissuance of 697,890 unregistered shares of the Company’s common stock at $4.126per share, which represented the ten day trading average ending on the tradingday two business days prior to the closing of the merger.  Each holder of Kiddopotamus common andpreferred stock (other than J. Chris Snedeker and Kristen Peterson Snedeker the“Principal Stockholders”) elected to receive their allocation of the total netpurchase price in cash.  As required bythe Merger Agreement, the Principal Stockholders received one half of theirallocation of the total net purchase price in Shares and one half in cash.

 

The Company funded the cash portion of the total net purchase pricewith borrowings under its two new secured credit facilities.  Approximately 10% of the total net purchaseprice was deposited in escrow to secure the post-closing indemnificationobligations of the former Kiddopotamus stockholders, including the PrincipalStockholders, under the terms of the agreement.

 

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The following table summarizes the estimatedpreliminary fair values of the assets acquired and liabilities assumed at thedate of acquisition of Kiddopotamus by Summer (amounts in thousands of USdollars):

 
| Trade  receivables         |   | $      | 2,284  |   |
|----------------------------|--------|--------|--------|--------|
| Inventory                  |   | 3,258  |   |
| Other  Assets              |   | 740    |   |
| Property  and equipment    |   | 48     |   |
| Goodwill                   |   | 8,300  |   |
| Total  assets acquired     |   | 14,630 |   |
| Total  liabilities assumed |   | 1,524  |   |
| Net  assets acquired       |   | 13,106 |   |

 

Thepro forma effect on net revenues, earnings, and earnings per share amounts forthe six months ended June 30, 2008, assuming the Kiddopotamus transactionhad closed on January 1, 2008, are as follows:

 

Netrevenues:  $66,196,000

Net income: $2,818,000

Earnings per share: $0.19 per share

 

*Income taxes.*    The provision for income taxes is based on theCompany’s estimated annualized effective tax rate for the year.

 

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109.” FIN 48 provides detailed guidance for the financialstatement recognition, measurement and disclosure of uncertain tax positionsrecognized in the financial statements in accordance with SFAS No. 109.Tax positions must meet a “more-likely-than-not” recognition threshold at theeffective date to be recognized upon the adoption of FIN 48 and in subsequentperiods. Upon the adoption of FIN 48, the Company had no unrecognized taxbenefits. During the first six months of 2008, the Company recognized noadjustments for uncertain tax benefits.

 

Income taxes are computed using the asset and liability method ofaccounting. Under the asset and liability method, a deferred tax asset orliability is recognized for estimated future tax effects attributable totemporary differences and carryforwards. The measurement of deferred income taxassets is adjusted by a valuation allowance, if necessary, to recognize futuretax benefits only to the extent, based on available evidence, it is more likelythan not such benefits will be realized. The Company recognizes interest and penalties, if any, related touncertain tax positions in selling, general and administrative expenses. No interest and penalties related to uncertain tax positions were accrued at June 30,2008. The tax years 2004 through 2007 remain open to examination by the majortaxing jurisdictions in which the Company operates. The Company expects nomaterial changes to unrecognized tax positions within the next twelve months.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect certain reported amounts and disclosures.Accordingly, actual results could differ from those estimates.

 

*Net Income Per Share*

 

Basicearnings per share for the Company is computed by dividing net income by theweighted-average number of shares of common stock outstanding during theperiod. Diluted earnings per share has not been presented in the accompanyingcondensed consolidated statement of income since the Company has no dilutiveoptions, warrants and other potential common stock outstanding during theperiods based on the stock price as of the end of the quarter.  Options to purchase

 

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1,040,000and 500,000 shares of the Company’s common stock, and 3,633,953 and 18,400,000warrants to purchase shares of common stock, were not included in thecalculation, due to the fact that these options and warrants were anti-dilutivefor the three and six months ended June 30, 2008 and 2007, respectively.

 

2**.****                       ****DEBT**

 

*New Credit Facilities*

 

On April 10, 2008, the Company entered into twonew three-year secured credit facilities (the “Loan Agreement”) with Bank ofAmerica, N.A., as Administrative Agent, and each of the financial institutionsa signatory to the Loan Agreement.  TheLoan Agreement provides for a $36,000,000 working capital revolving creditfacility and a $10,000,000 non-restoring acquisition credit facility.  The new credit facilities mature on April 10,2011.  The acquisition credit facilityhas been utilized in its entirety as of June 30, 2008.

 

The Company and its subsidiaries, Summer Infant(USA), Inc. Summer Infant Europe Limited, Summer Infant Asia Limited andSummer Infant Canada, Limited are the borrowers under this Loan Agreement.  These new credit facilities are secured byall assets of the Company and its subsidiaries. These new credit facilities replace the Company’s prior line of creditand are being used principally to fund growth opportunities and for workingcapital purposes.

 

The Company’s ability to borrow under the LoanAgreement is subject to its ongoing compliance with a number of financial andother covenants, including the following: (i) that the Company and itssubsidiaries maintain a net worth of $50,000,000 plus the sum of 50% of netincome earned in each fiscal year, (ii) that the Company and itssubsidiaries maintain a ratio of total funded debt to EBITDA of not greaterthan 3.50:1.00, and (iii) that the Company and its subsidiaries maintain aratio of operating cash flow to debt service of not less than 1.25:1,00.  In addition, if the Company’s ratio of totalfunded debt to EBITDA is greater than 3.25:1.00 as of December 31, 2008,the total commitment amount under the working capital revolving credit facilitywill reduce by $4,000,000 on March 31, 2009.  Furthermore, if the Company’s ratio of totalfunded debt to EBITDA is greater than 3.25:1.00 for any fiscal year, theaggregate amount that may be borrowed under the Loan Agreement will bedetermined by reference to a borrowing base.

 

These new credit facilities bear interest at afloating rate based on a spread over LIBOR ranging from 150 basis points to 200basis points, depending upon the ratio of the Company’s total funded debt toEBITDA.  As of June 30, 2008, therate on these credit facilities was approximately 4.48%.  In addition, these new credit facilities havean unused line fee based on the unused amount of the credit facilities equal to25 basis points.

 

The Loan Agreement also contains customary events ofdefault, including a cross default provision and a change of controlprovision.  In the event of a default,all of the obligations of the Company and its subsidiaries under the loanAgreement may be declared immediately due and payable.   For certain events of default relating toinsolvency and receivership, all outstanding obligations become due andpayable.

 

As of June 30, 2008, the Company was in compliance with all convenants.

 

*Amendment to Construction Loan.*

 

In connection with the Company’s construction of itsprincipal offices in Woonsocket, Rhode Island, the Company previously assumedall obligations of Faith Realty under a Construction Loan between Faith Realtyand Bank of America, N.A.  (the “RealEstate Loan”).  Under the terms of theReal Estate Loan, the Company borrowed $3,145,000 to pay off existing mortgageliens on the Company’s property in Woonsocket, Rhode Island and to fund theconstruction of the Company’s principal offices.  In connection with the new credit facilitiesdescribed above, the Company and Bank of America, N.A. amended the Real EstateLoan to include a cross default provision with these new credit facilities.

 

**3****.****                      ****COMMITMENTS ANDCONTINGENCIES**

 

*Litigation*

 

TheCompany is involved in various claims and legal actions arising in the ordinarycourse of business. Management is of the opinion that the ultimate outcome ofthese matters would not have a material adverse impact on the financialposition of the Company or the results of its operations.

 

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**4. STOCK OPTIONS**

 

Summerhas granted stock options under its 2006 Performance Equity Plan (“2006 Plan”).  Under the 2006 Plan, awards may be granted toparticipants in the form of Non-Qualified Stock Options, Incentive StockOptions, Restricted Stock, Deferred Stock, Stock Reload Options and otherstock-based awards.  Subject to the provisionsof the plan, awards may be granted to employees, officers, directors, advisorsand consultants who are deemed to have rendered or are able to rendersignificant services to us or our subsidiaries and who are deemed to havecontributed or to have the potential to contribute to our success.  Incentive stock options may only be awardedto individuals who are our employees at the time of grant.

 

EffectiveJanuary 1, 2006, the Company adopted the fair value recognition provisionsof SFAS 123(R), using the modified prospective transition method.  The adoption of SFAS 123(R) resulted inshare-based compensation expense for the six months ended June 30, 2008and 2007 of approximately $180,000 and $191,000, respectively, and expense forthe three months ended June 30, 2008 and 2007 was approximately $90,000and $38,000, respectively.  There were nogrants of stock options for the three or six months ended June 30,2008.  As of June 30, 2008, therewere 1,040,000 stock options outstanding.

 

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option valuation model.

 

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**ITEM 2.  SUMMER’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*Thestatements contained in this Report on Form 10-Q, that are not purelyhistorical, are forward-looking information and statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These include statements regarding ourexpectations, intentions, or strategies regarding future matters. Allforward-looking statements included in this document are based on informationavailable to us on the date hereof. It is important to note that our actualresults could differ materially from those projected in such forward-lookingstatements contained in this Form 10-Q. The forward-looking statementscontained herein are based on current expectations that involve numerous risksand uncertainties.  These risks includethe concentration of the Company’s business with retail customers; the abilityof the Company to compete in the industry; the Company’s dependence on keypersonnel; the Company’s reliance on foreign suppliers; and other risks asdetailed in the Company’s Annual Report on Form 10-K for the fiscal yearended December 31, 2007, and subsequent filings with the Securities andExchange Commission. All these matters are difficult or impossible to predictaccurately, many of which may be beyond our control. Although we believe thatthe assumptions underlying our forward-looking statements are reasonable, anyof the assumptions could be inaccurate and, therefore, there can be noassurance that the forward-looking statements included in this Form 10-Qwill prove to be accurate.*

 

The following discussion isintended to assist in the assessment of significant changes and trends relatedto the results of operations and financial condition of Summer Infant, Inc.This discussion and analysis should be read in conjunction with Summer’sconsolidated financial statements and notes thereto included herein. Summer’sbusiness has grown organically in all of its markets. Summer derives itsrevenues from the sale of health, safety and wellness products for infants andtoddlers.  Summer’s revenue is driven byits ability to design and market desirable products, identify businessopportunities and secure new and renew existing distribution channels. Summer’sincome from operations is derived from its ability to generate revenue andcollect cash in excess of labor and other costs of providing its products andselling, general and administrative costs.

 

*Summary of critical accounting policies and estimates*

 

The Company’s criticalaccounting policies are disclosed in the Company’s Annual Report on Form 10-K.  There have been no material changes to thesepolicies during the first six months of 2008. This summary of criticalaccounting policies of Summer is presented to assist in understanding Summer’sconsolidated financial statements. The consolidated financial statements andnotes are representations of Summer’s management, which is responsible fortheir integrity and objectivity. These accounting policies conform toaccounting principles generally accepted in the United States of America andhave been consistently applied in the preparation of the consolidated financialstatements.

 

Summer makes certainestimates and assumptions that affect the reported amounts of assets andliabilities and the reported amounts of revenues and expenses. The accountingpolicies described below are those Summer considers critical in preparing itsfinancial statements. Some of these policies include significant estimates madeby management using information available at the time the estimates were made.However, these estimates could change materially if different information orassumptions were used.

 

*Nature of operations*

 

Summer is engaged in thedesign, marketing and distribution of juvenile products.  The majority of its revenues are derived fromretail customers in North America, with approximately 10% of the business beinggenerated in the UK.  The Company alsomaintains a research and development staff in Asia (no revenues are generateddirectly out of Asia).

 

*Incometaxes*

 

The provision for incometaxes is based on our estimated annualized effective tax rate for the year. EffectiveJanuary 1, 2007, we adopted the provisions of FASB Interpretation No. 48(“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation ofFASB Statement No. 109.” FIN 48 provides detailed guidance for the financialstatement recognition, measurement and disclosure of uncertain tax positionsrecognized in the financial statements in accordance with SFAS No. 109.Tax positions must meet a “more-likely-than-not” recognition threshold at theeffective date to be recognized upon the adoption of FIN 48 and in subsequentperiods. Upon the adoption of FIN 48, we had no unrecognized tax benefits.During the second quarter of 2008, we recognized no adjustments for uncertaintax benefits.

 

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Incometaxes are computed using the asset and liability method of accounting. Underthe asset and liability method, a deferred tax asset or liability is recognizedfor estimated future tax effects attributable to temporary differences andcarryforwards. The measurement of deferred income tax assets is adjusted by avaluation allowance, if necessary, to recognize future tax benefits only to theextent, based on available evidence; it is more likely than not such benefitswill be realized.  We recognize interestand penalties, if any, related to uncertain tax positions in selling, generaland administrative expenses.  No interest and penalties related touncertain tax positions were accrued at June 30, 2008. The tax years 2004through 2007 remain open to examination by the major taxing jurisdictions inwhich we operate. We expect no material changes to unrecognized tax positionswithin the next twelve months.

 

**CompanyOverview**

 

Summer is a designer,marketer, and distributor of branded juvenile health, safety and wellnessproducts which are sold principally to large North American and UKretailers.  Summer currently has morethan 70 proprietary products in various product categories including nurseryaudio/video monitors, safety gates, durable bath products, bed rails, infantthermometers and related health and safety products, booster and potty seatsand bouncers.

 

Summer’s strategy is to growits sales through a variety of methods, including:

 

·                  increasedproduct penetration (more products at each store);

·                  increasedstore penetration (more stores within each retail customer);

·                  newproducts (at existing and new customers);

·                  newmass merchant retail customers;

·                  newdistribution channels (food and drug chains, price clubs, home centers, andweb-based retailers);

·                  newgeographies (international expansion); and

·                  newproduct categories

·                  acquisitions

 

Summer has been able to growits annual revenues by approximately $80,000,000 over the past six yearsthrough a combination of all of the above factors. Each year it has been ableto expand the number of products into its main distribution channel, massmerchant retailers, and has also added new customers each year. Therefore, evenwithout new product introductions, Summer could grow its business by simplyselling more of its existing product line to existing customers.

 

For 2008 and beyond, thegrowth strategy of Summer will be to continue to develop and sell new productsto its existing customer base, sell new and existing products to new customers(or expand relationships with existing customers), and to expand in the UK andin other geographic regions (including Japan, Mexico and Australia, among others).

 

On March 31, 2008,Summer acquired substantially all ofthe assets of Basic Comfort, Inc., a leading manufacturer andsupplier of infant comfort and safety products, including infant sleeppositioners, infant head supports and portable changing pads.

 

On April 18, 2008,Summer acquired Kiddopotamus & Company, a leading manufacturer andsupplier of infant nursery, travel and feeding accessories.

 

Summer may pursue additionalpotential acquisition candidates to obtain new innovative products, new productcategories, new retail customers or new sales territories.  There are approximately 400 active juvenileproduct companies, of which approximately 300 have less than $10,000,000 insales. In addition, there are various product categories that Summer does notcurrently compete in, including car seats, strollers, walkers, nursery care,and other categories. Summer may look to develop its own products in thesecategories or attempt to gain entrance into these categories throughacquisitions.

 

As Summer continues to growthrough internal initiatives and any additional future acquisitions, it willincur additional expenses.  Two of thekey areas in which such increased expenses will likely occur are sales andproduct development. In order to grow sales, Summer will likely hire additionalsales personnel to service new geographic territories, focus existing resourceson specific parts of the United States market and retain product linespecialists to drive sales of new and existing products in specific areas inwhich Summer believes it can readily increase sales.  

 

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Product development expenseswill increase as Summer develops new products in existing and new categories.As a result of its acquisition strategy, Summer will face various challengessuch as the integration of the acquired companies’ product lines, employees,marketing requirements and information systems. Ongoing infrastructureinvestment also may be required to support realized growth, includingexpenditures with respect to upgraded and expanded information systems andenhancing the Company’s management team.

 

*Sales*

 

Summer’s sales are primarilyderived from the sale of juvenile health, safety and wellness products and arerecognized upon transfer of title of product to Summer’s customers. Summer’sproducts are marketed through several distribution channels including chainretailers, specialty retailers and direct to consumers.

 

Approximately 90% of salesare currently made to customers in North America, with the remaining 10% madeto customers in the UK. Sales are made utilizing standard credit terms of 30 to90 days. Summer generally accepts returns only for defective merchandise.

 

*Cost of goods sold and other expenses*

 

Summer’s products aremanufactured by third parties, with approximately 80-85% of the dollar value ofproducts being manufactured in China and the majority of the balance beingmanufactured in Massachusetts. Cost of goods sold primarily representspurchases of finished products from these third party manufacturers. Theremainder of Summer’s cost of goods sold includes tooling depreciation,freight-in from suppliers and miscellaneous charges from contractmanufacturers. Substantially all of Summer’s purchases are made in US dollars,therefore most of this activity is not subject to currency fluctuations. IfSummer’s suppliers experience increased raw materials, labor or other costs andpass along such cost increases through higher prices for finished goods, Summer’scosts of sales would increase, and to the extent it is unable to pass suchprice increases along to Summer’s customers, Summer’s gross margins woulddecrease.

 

Selling, general and administrativeexpenses primarily consist of payroll, insurance, professional fees, royalties,freight out to customers, product development costs, advertising and marketingexpenses (including co-op advertising allowances as negotiated with certaincustomers) and sales commissions. Several of these items fluctuate with sales,some based on sales to particular customers and others based on sales ofparticular products.

 

There are not significantvariations in seasonal demand for Summer’s products. Sales to its retailcustomers are generally higher in the time frame when retailers take initialshipments of new products; these orders usually incorporate enough product tofill each store plus additional amounts to be kept at the distribution centersof the customer. The timing of these initial shipments varies by customerdepending on when they finalize store layouts for the upcoming year, andwhether there are any mid-year product introductions.

 

**Results ofOperations**

 

**Summer Infant Inc. and Subsidiaries (formerly KBL HealthcareAcquisition Corp.)Consolidated Statements of IncomeFor the Three and Six Months Ending June 30, 2008 and 2007(In thousands)**

 
| ** **                             | ** ** | **Three Months Ended  June 30, 2008** | ** ** | **Three Months Ended  June 30, 2007** | ** ** | **Six Months Ended  June 30, 2008** | ** ** | **Six Months Ended  June 30, 2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **(Unaudited)**                                           | ** ** | **(Unaudited)**                                           | ** ** | **(Unaudited)**                                         | ** ** | **(Unaudited)**                                         | ** ** |
| ** **                             | ** ** | ** **                                                | ** ** | ** **                                                | ** ** | ** **                                              | ** ** | ** **                                              | ** ** |
| Net revenues                           |       | $                                                         | 33,982     |                                                      | $          | 18,675                                                  |       | $                                                       | 62,407     |   | $ | 23,446 |   |
| Cost of goods  sold                    |       | 21,665                                                    |       | 11,415                                                    |       | 40,154                                                  |       | 14,340                                                  |       |
| Gross profit                           |       | 12,317                                                    |       | 7,260                                                     |       | 22,253                                                  |       | 9,106                                                   |       |
|                                   |       |                                                      |       |                                                      |       |                                                    |       |                                                    |       |
| Operating  expenses including interest |       | 10,158                                                    |       | 5,757                                                     |       | 18,428                                                  |       | 7,270                                                   |       |
| Income tax  expense                    |       | 833                                                       |       | 574                                                       |       | 1,495                                                   |       | 707                                                     |       |
|                                   |       |                                                      |       |                                                      |       |                                                    |       |                                                    |       |
| Net income                             |       | $                                                         | 1,326      |                                                      | $          | 929                                                     |       | $                                                       | 2,330      |   | $ | 1,129 |   |

 

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Theresults of operations for the six months ended June 30, 2007 representsthe combined activity of KBL Healthcare from January 1, 2007 through March 6,2007 (which represents general and administrative expenses of KBL Healthcare,net of interest income generated by the $52,000,000 cash balance prior to theacquisition of Summer Infant on March 6, 2007) and the activity of SummerInfant from March 6, 2007 through June 30, 2007.

 

**To give the reader some additionalinformation on the performance of the underlying Summer Infant operations, thefollowing table represents the unaudited results of Summer for the three andsix months ended June 30, 2008 and the unaudited results of the SummerInfant operating company for the three and six months ended June 30,2007.  This table is being presented togive the reader more information about the underlying performance of theongoing operating company.**

 

**Summer Infant and Subsidiaries**

**ConsolidatedStatements of Income**

**For theThree and Six Months Ending June 30, 2008 and 2007**

**(Inthousands)**

 
| ** **                                        | ** ** | **Three Months  Ended June 30,  2008** | ** ** | **Three Months  Ended June 30,  2007** | ** ** | **Six Months Ended  June 30,** **2008** | ** ** | **Six Months Ended  June 30, 2007** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**                                       | ** ** | **(unaudited)**                                       | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                    | ** ** |
| Net Sales .                                       |       | $                                                     | 33,982     |                                                  | 100.0      | %                                                      | $          | 18,675                                             |       | 100.0 | % | $ | 62,407 |   | 100.0 | % | $ | 35,845 |   | 100.0 | % |
| Cost of Goods  Sold.                              |       | 21,665                                                |       | 63.8                                                  | %          | 11,415                                                 |       | 61.1                                               | %          | 40,154 |   | 64.3 | % | 22,022 |   | 61.4 | % |
| Gross Profit                                      |       | 12,317                                                |       | 36.2                                                  | %          | 7,260                                                  |       | 38.9                                               | %          | 22,253 |   | 35.7 | % | 13,823 |   | 38.6 | % |
| Operating Expenses                                |       |                                                  |       |                                                  |       |                                                   |       |                                               |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses(A). |       | 8,615                                                 |       | 25.3                                                  | %          | 5,414                                                  |       | 29.0                                               | %          | 15,942 |   | 25.6 | % | 10,321 |   | 28.8 | % |
|                                              |       |                                                  |       |                                                  |       |                                                   |       |                                               |       |   |   |   |   |   |   |   |   |
| EBITDA(B).                                        |       | $                                                     | 3,702      |                                                  | 10.9       | %                                                      | $          | 1,846                                              |       | 9.9 | % | $ | 6,311 |   | 10.1 | % | $ | 3,502 |   | 9.8 | % |

 

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(A)      (excludingdepreciation and amortization, non-capitalizable deal fees and non-cash stockoption expense)

 

(B)        See non-GAAP discussion below regarding the computation of EBITDA.

 

*Threemonths ended June 30, 2008 compared with three months ended June 30,2007*

 

Net sales increased fromapproximately $18,675,000 in the three months ended June 30, 2007 toapproximately $33,982,000 for the three months ended June 30, 2008, anincrease of approximately 82%. This sales increase was primarily attributableto increased distribution of Summer’s products throughout Summer’s customerbase, plus new product introductions. Significant increases were noted in large accounts such as Babies R Us,in addition to several other new accounts which have been added over the pastyear, including Lowe’s and Wal-Mart.  Theacquisitions of Basic Comfort and Kiddopotamus contributed approximately$5,700,000 to sales for the three months ended June 30, 2008.

 

Gross profit increased fromapproximately $7,260,000 for the three months ended June 30, 2007 toapproximately $12,317,000 for the three months ended June 30, 2008.  The gross profit as a percentage of salesdecreased to 36.2% from 38.9% in the prior year.  The decrease as a percentage of sales is dueto increased costs of finished goods from the Company’s vendors in Asia and theUS.  The increase in these costs is dueto increased raw material and labor costs, in addition to the devaluation ofthe US dollar relative to the Chinese RMB.

 

Selling, general andadministrative expenses increased from approximately $5,414,000 for the threemonths ended June 30, 2007 to approximately $8,615,000 for the threemonths ended June 30, 2008. This increase was primarily attributable toincreases in headcount, higher variable selling expenses due to the increase insales, and costs associated with the opening of new distribution centers tosupport the increase in sales.  Selling,general and administrative expenses decreased to 25.3% of net sales in thethree months ended June 30, 2008 from 29.0% of net sales in the threemonths ended June 30, 2007.  Thisdecrease as a percentage of sales was primarily due to the leveraging of theCompany’s fixed cost structure over a larger sales base.

 

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EBITDA (as defined below)increased from approximately $1,846,000 for the three months ended June 30,2007 to approximately $3,702,000 for the three months ended June 30, 2008,an increase of approximately 100%. This increase was primarily attributable tothe increased sales and gross profit dollars as described above.

 

*Six monthsended June 30, 2008 compared with six months ended June 30, 2007*

 

Net sales increased fromapproximately $35,845,000 in the six months ended June 30, 2007 toapproximately $62,407,000 for the six months ended June 30, 2008, a 74%increase. This sales increase was primarily attributable to increaseddistribution of Summer’s products throughout Summer’s customer base, plus newproduct introductions.  Significantincreases were noted in large accounts such as Babies R Us, in addition toseveral other new accounts which have been added over the past year, includingLowe’s and Wal-Mart.  The acquisitions ofBasic Comfort and Kiddopotamus contributed approximately $5,700,000 to salesfor the six months ended June 30, 2008.

 

Gross profit increased fromapproximately $13,823,000 for the six months ended June 30, 2007 toapproximately $22,253,000 for the six months ended June 30, 2008.  The gross profit as a percentage of salesdecreased to 35.7% from 38.6% in the prior year.  The decrease as a percentage of sales wasprimarily due to increased costs of finished goods from the Company’s vendorsin Asia and the US.  The increase inthese costs is due to increased raw material and labor costs, in addition tothe devaluation of the US dollar relative to the Chinese RMB.

 

Selling, general andadministrative expenses increased from approximately $10,321,000 for the sixmonths ended June 30, 2007 to approximately $15,942,000 for the six monthsended June 30, 2008. This increase was primarily attributable to increasesin headcount, higher variable selling expenses due to the increase in sales,and costs associated with the opening of new distribution centers to supportthe increase in sales.  Selling, generaland administrative expenses decreased to 25.6% of net sales in the six monthsended June 30, 2008 from 28.8% of net sales in the six months ended June 30,2007.  This decrease as a percentage ofsales was primarily due to the leveraging of the Company’s fixed cost structureover a larger sales base.

 

EBITDA increased fromapproximately $3,502,000 for the six months ended June 30, 2007 toapproximately $6,311,000 for the six months ended June 30, 2008, anincrease of 80%. This increase was primarily attributable to the increasedsales and gross profit dollars as described above.

 

**Liquidityand Capital Resources**

 

Summer generally funds itsoperations and working capital needs through cash generated from operations andborrowings under its credit facilities.

 

Summer’s sales haveincreased significantly over the past several years. For the year ended December 31,2003, net sales were $17,600,000. For the year ended December 31, 2007,net sales exceeded $80,000,000. This sales growth has led to a substantialincrease in working capital requirements, specifically accounts receivable andinventory. The typical cash flow cycle is as follows:

 

·                  Inventoryis purchased to meet expected demand plus a safety stock. Since the majority ofSummer’s vendors are based in Asia, inventory takes from four to six weeks toarrive from Asia to the various distribution points Summer maintains in the USand the UK. Payment terms for these vendors average 60 days from the date theproduct ships from Asia, therefore Summer is generally paying for the product ashort time after it is physically received in the US. The increased salesSummer has experienced result in increased levels of inventory, and thereforean increase in the amount of cash required to fund its inventory level.

 

·                  Salesto customers generally have payment terms of 30 to 60 days. The increased saleshave resulted in an increase in the level of accounts receivable, and thereforehave increased the amount of cash required to fund working capital.

 

Summer had traditionallybeen able to fund its increased working capital through asset-based lines ofcredit with banks. The lenders generally follow a borrowing base formula thatallows advances based on the levels of accounts receivable and inventory.

 

The majority of capitalexpenditures for Summer are for tools related to new product introductions.Summer receives indications from retailers generally around the middle of eachyear as to what products the retailer will be taking into its product line forthe upcoming year. Based on these indications, Summer will then acquire thetools required to build the products. The majority of these expenditures aretherefore made in the third and fourth quarters of each year so that initial 

 

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shipments of products can bemade in December and January (the typical time frame for new productshipments). In most cases the payments for the tools are spread out over athree to four month period.

 

For the six months ended June 30,2008, net cash used in operating activities was approximately $548,000.  This was primarily due to increases inaccounts receivable and inventory, which are a direct result of the significantincrease in sales for the Company, partially offset by the net income generatedby Summer.  Total sales were over$62,000,000 for the six months ended June 30, 2008, which represents a 74%increase over the sales in the first six months of the prior year.  See detailed discussion of the workingcapital cycle of Summer above.

 

Net cash used in investingactivities was approximately $16,713,000, which primarily relates to the cashportion of the Basic Comfort and Kiddopotamus acquisitions, in addition to yearto date capital expenditures of approximately $1,339,000.

 

Net cash provided byfinancing activities was approximately $18,500,000, which relates to amountsborrowed to fund increases in working capital and the acquisitions of Basic Comfortand Kiddopotamus.

 

Based on the above factors,the net cash increase for the six months ended June 30, 2008 wasapproximately $1,105,000, resulting in a cash balance of approximately$2,876,000 at June 30, 2008.

 

Summer believes that itscash on hand and current banking facilities are sufficient to fund its cashrequirements for at least the next 12 months. However, unforeseencircumstances, such as softness in the retail industry or deterioration in thebusiness of a significant customer, could create a situation where Summercannot access all of the available lines of credit due to not having sufficientassets or EBITDA. In addition, there is no assurance that Summer will meet allof its bank covenants in the future, or that its lenders will grant waivers ifthere are covenant violations.

 

Summer’s strategy forfunding its business going forward is a combination of increased profitability,and if necessary, negotiation of increased borrowing lines as required withtraditional lenders.

 

OnApril 10, 2008, Summer entered into two new three-year secured creditfacilities (the “Loan Agreement”) with Bank of America, N.A., as AdministrativeAgent, and each of the financial institutions a signatory to the LoanAgreement.  The Loan Agreement providesfor a $36,000,000 working capital revolving credit facility and a $10,000,000non-restoring acquisition credit facility. The new credit facilities mature on April 10, 2011.  The acquisition credit facility has beenutilized in its entirety as of June 30, 2008.

 

Summerand its subsidiaries, Summer Infant (USA), Inc. Summer Infant EuropeLimited, Summer Infant Asia Limited and Summer Infant Canada, Limited are theborrowers under the Loan Agreement. These credit facilities are secured by all assets of Summer and itssubsidiaries.  These credit facilitiesreplaced Summer’s prior line of credit, and are being used principally to fundgrowth opportunities and for working capital purposes.

 

Summer’sability to borrow under the Loan Agreement is subject to its ongoing compliancewith a number of financial and other covenants, including the following: (i) thatSummer and its subsidiaries maintain a new worth of $50,000,000 plus the sum of50% of net income earned in each fiscal year, (ii) that Summer and itssubsidiaries maintain a ratio of total funded debt to EBITDA of not greaterthan 3.50:1.00, and (iii) that Summer and its subsidiaries maintain aratio of operating cash flow to debt service of not less than 1.25:1.00.  In addition, if Summer’s ratio of totalfunded debt to EBITDA is greater than 3.25:1.00 as of December 31, 2008,the total commitment amount under the working capital revolving credit facilitywill reduce by $4,000,000 on March 31, 2009.  Furthermore, if Summer’s ratio of totalfunded debt to EBITDA is greater than 3.25:1.00 for any fiscal year, theaggregate amount that may be borrowed under the Loan Agreement will bedetermined by reference to a borrowing base.

 

Thesecredit facilities bear interest at a floating rate based on a spread over LIBORranging from 150 basis points to 200 basis points, depending upon the ratio ofthe Company’s total funded debt to EBITDA. As of June 30, 2008, the rate on these credit facilities was4.48%.  In addition, these creditfacilities have an unused line fee based on the unused amount of the creditfacilities equal to 25 basis points.

 

TheLoan Agreement also contains customary events of default, including a crossdefault provision and a change of control provision.  In the event of a default, all of theobligations of the Company and its subsidiaries under the loan Agreement may bedeclared immediately due and payable.  For certain events of default relating to insolvency and receivership,all outstanding obligations become due and payable.

 

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As of June 30, 2008 theCompany had borrowed approximately $36,276,000 of the total committed amount of$46,000,000.

 

The Company was in compliancewith all covenants as of June 30, 2008.

 

Summer’s management believesthat the Company’s cash flows from operations, cash on hand, and availableborrowings will be sufficient to meet Summer’s working capital and capitalexpenditure requirements and provide the Company with adequate liquidity tomeet anticipated operating needs for at least the next 12 months. Summer’s cashrequirements for the period beyond that are expected to be met by the continueduse of bank facilities to meet working capital requirements.

 

**Non-GAAPDiscussion**

 

In addition to its GAAPresults, Summer considers non-GAAP measures of its performance. EBITDA, asdefined below, is an important supplemental financial measure of Summer’sperformance that is not required by, or presented in accordance with, GAAP.EBITDA represents net income (loss) before income taxes, interest expense,non-cash stock option expense, deal-related fees, and depreciation andamortization. Summer’s management uses EBITDA as a financial measure to assessthe ability of its assets to generate cash sufficient to pay interest on itsindebtedness, meet capital expenditure and working capital requirements, andotherwise meet its obligations as they become due. Summer’s management believesthat the presentation of EBITDA provides useful information regarding Summer’sresults of operations because they assist in analyzing and benchmarking theperformance and value of Summer’s business. Summer believes that EBITDA isuseful to stockholders as a measure of comparative operating performance, as itis less susceptible to variances in actual performance resulting fromdepreciation and amortization and more reflective of changes in pricingdecisions, cost controls and other factors that affect operating performance.

 

EBITDA also is used bySummer’s management for multiple purposes, including:

 

·                  Tocalculate and support various coverage ratios with Summer’s lenders;

·                  Toallow lenders to calculate total proceeds they are willing to loan to Summerbased on its relative strength compared to other competitors; and

·                  tomore accurately compare Summer’s operating performance from period to periodand company to company by eliminating differences caused by variations incapital structures (which affect relative interest expense), tax positions andamortization of intangibles.

 

In addition, EBITDA is animportant valuation tool used by potential investors when assessing therelative performance of a company in comparison to other companies in the sameindustry. Although Summer uses EBITDA as a financial measure to assess theperformance of its business, there are material limitations to using a measuresuch as EBITDA, including the difficulty associated with using it as the solemeasure to compare the results of one company to another and the inability toanalyze significant items that directly affect a company’s net income oroperating income because it does not include certain material costs, such asinterest and taxes, necessary to operate its business. In addition, Summer’scalculation of EBITDA may not be consistent with similarly titled measures of othercompanies and should be viewed in conjunction with measures that are computedin accordance with GAAP. Summer’s management compensates for these limitationsin considering EBITDA in conjunction with its analysis of other GAAP financialmeasures, such as net income.

 

The following table presentsa reconciliation of the Summer EBITDA to net income, its most directlycomparable GAAP financial measure, on a historical basis, for the six monthsended June 30, 2008 and 2007:

 

**Reconciliationof unaudited Net Income to EBITDA****(dollars in thousands)****:**

 
| ** **                                                    | ** ** | **Six Months Ended  June 30** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Net income  (assuming 6 months as a taxable entity in 2007)   |       | $                                            | 2,330      |   | $ | 1,659 |   |
| Income taxes  (assuming 6 months as a taxable entity in 2007) |       | 1,495                                        |       | 1,106 |   |
| Non-cash stock  option expense                                |       | 180                                          |       | 191 |   |
| Non-capitalizable  deal-related fees                          |       | 214                                          |       | — |   |
| Interest expense  (income)                                    |       | 967                                          |       | (84 | ) |
| Depreciation and  amortization                                |       | 1,125                                        |       | 630 |   |
| EBITDA, as  defined                                           |       | $                                            | 6,311      |   | $ | 3,502 |   |

 

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**ITEM4T.  Controls and Procedures**

 

*(a) Evaluationof Disclosure Controls and Procedures*

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, as of the end of the period coveredby this Quarterly Report, Summer carried out an evaluation, under thesupervision and with the participation of its Chief Executive Officer and itsChief Financial Officer, of the effectiveness of our disclosure controls andprocedures, as of June 30, 2008. Summer’s management has concluded, basedon their evaluation, that as of the end of the period covered by this report,the Company’s controls and procedures were effective as of June 30, 2008to ensure that information required to be disclosed by the Company in thereports it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

There was no change inSummer’s internal control over financial reporting that occurred during theperiod covered by this Quarterly Report that has materially affected, or isreasonably likely to materially affect, Summer’s internal control overfinancial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1A. Risk Factors**

 

Therehave been no material changes pertaining to risk factors that were contained inthe Annual Report on Form 10-K for the year ended December 31, 2007,filed on March 27, 2008.

 

**ITEM 4.  Submission of Matters to a Vote of SecurityHolders**

 

TheCompany’s Annual Meeting of Shareholders was held on June 5, 2008.  There were two matters presented toshareholders for a vote; total shares voted were 12,594,937, and the results ofthe voting were as follows:

 

1.               Election of directors- to elect two directorsto serve for three years, with terms expiring in 2011:

 

Myra Hart- Votes for:  12,525,815; votes against:  69,122

 

Robert Stebenne: Votes for:  11,626,764; votesagainst 968,173

 

Both individuals were therefore elected to the boardof directors to serve three year terms.

 

2.               Amendment of the 2006 Performance Equity Planto increase the number of authorized shares available for issuance under theplan from 1,600,000 to 3,000,000:

 

Votes for: 5,693,490;  votes against:4,248,455; not voted: 2,652,992

 

This amendment was therefore approved.

 

**ITEM 5. Other Information**

 

Priorto March 28, 2008, the Company’s units, consisting of one share of commonstock and two warrants, separately traded on the Nasdaq Capital Market underthe symbol “SUMRU”.  On March 28,2008, these units were separated into their component securities.  As a result, beginning on March 28,2008, the units ceased trading.

 

**ITEM 6. Exhibits**

 

10.1 Ninth Amendment to the Revolving CreditAgreement (dated July 19, 2005) entered into on March 31, 2008 among theCompany, Summer Infant (USA), Inc., Summer Infant Europe Limited, Summer InfantAsia Limited and Bank of America, N.A. *

 

10.2 Agreement and Plan of Merger amongSummer USA, Kiddo Acquisition Co., Inc., Kiddopotamus & Company, J. ChrisSnedeker, Kristen Peterson Snedeker and Thomas K. Manning entered into on April18, 2008. **

 

31.1 Chief Executive Officer Certification Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Chief Financial Officer Certification Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification of Jason Macari, Chief ExecutiveOfficer of Summer Infant, Inc., pursuant to 18 U.S.C Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 Certification of Joseph Driscoll, ChiefFinancial Officer of Summer Infant, Inc., pursuant to 18 U.S.C Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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| *  | Incorporated  by reference to the Current Report on Form 8-K filed April 4, 2008.  |
|----|------------------------------------------------------------------------------------|
| ** | Incorporated  by reference to the Current Report on Form 8-K filed April 24, 2008. |

 

 

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**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

**Summer Infant, Inc.**

 

 
| August 8, 2008 |                    |   |
|---------------------|-------------------------|--------|
|                |                    |   |
|                | /s/ Jason Macari        |   |   |
|                | Jason Macari            |   |   |
|                | Chief Executive Officer |   |   |
|                |                    |   |   |
|                |                    |   |   |
| August 8, 2008 |                    |   |
|                |                    |   |
|                | /s/ Joseph Driscoll     |   |   |
|                | Joseph Driscoll         |   |   |
|                | Chief Financial Officer |   |   |

 

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