**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**

 

**For the quarterly period ended March 31,2010**

 

**Summer Infant, Inc.**

(Name of Registrant as Specified in ItsCharter)

 

**Commission file 001-33346**

 

| **Delaware**              | ** ** | **20-1994619**        |
|---------------------------|------------|-----------------------|
| (State of  Incorporation) |       | IRS Employment Number |

 

| **1275  Park East Drive**                 |       |                                  |
|-------------------------------------------|------------|---------------------------------------|
| **Woonsocket,  RI 02895**                 | ** ** | **(401)  671-6550**                   |
| (Address of  principal executive offices) |       | (Registrant’s  telephone number) |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the last 90 days.  Yes x No o.

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

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

 

As of May 1,2010, there were 15,437,477 shares outstanding of the registrant’s CommonStock, $.0001 par value per share.

 

 

 

----

** **

**SummerInfant, Inc.**

**Form 10Q**

**Table ofContents**

 
| ** **                                                               | ** **                                                                                                                | ** ** | **Page Number** |
|--------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| **Part 1.**                                                         | **Financial  Information**                                                                                                |       |                 |
|                                                                     |                                                                                                                      |       |                 |
| **Item  1.**                                                             | **Condensed  Consolidated Financial Statements (unaudited)**                                                              |       |                 |
|                                                                     |                                                                                                                      |       |                 |
|                                                                     | **Condensed Consolidated Balance Sheets  March 31, 2010 (unaudited) and December 31, 2009**                     |       | **3**                |
|                                                                     |                                                                                                                      |       |                 |
|                                                                     | **Condensed Consolidated Statements of Income for the  three months ended  March 31, 2010 and 2009 (unaudited)**     |       | **4**                |
|                                                                     |                                                                                                                      |       |                 |
|                                                                     | **Condensed Consolidated Statements of Cash Flows for  the three months ended  March 31, 2010 and 2009 (unaudited)** |       | **5**                |
|                                                                     |                                                                                                                      |       |                 |
|                                                                     | **Notes to Condensed Consolidated Financial Statements**                                                                  |       | **6**                |
|                                                                     |                                                                                                                      |       |                 |
| **Item 2.**                                                              | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                           |       | **13**               |
|                                                                     |                                                                                                                      |       |                 |
| **Item 4T.**                                                             | **Controls and  Procedures**                                                                                              |       | **20**               |
|                                                                     |                                                                                                                      |       |                 |
| **Part II.**                                                        | **Other Information**                                                                                                     |       | **21**               |
|                                                                     |                                                                                                                      |       |                 |
| **Item 1. Legal Proceedings**                                            |                                                                                                                      | **21**     |
| **Item 1A. Risk Factors**                                                |                                                                                                                      | **21**     |
| **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds** |                                                                                                                      | **21**     |
| **Item 3. Defaults Upon Senior Securities**                              |                                                                                                                      | **21**     |
| **Item 5. Other Information**                                            |                                                                                                                      | **21**     |
| **Item 6. Exhibits**                                                     |                                                                                                                      | **21**     |
|                                                                     |                                                                                                                      |       |                 |
| **Signatures**                                                           |                                                                                                                      |       | **22**               |

 

2

----

 

**Summer Infant, Inc. andSubsidiaries**

**Condensed Consolidated Balance Sheets**

 

Note that all amountspresented in the attached table are in thousands of US dollars except shareamounts and par value amounts.

 
| ** **                                                                                      | ** ** | **Unaudited**            | ** ** | ** **                  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                      | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|                                                                                            |       |                     |       |                        |       |
| ASSETS                                                                                          |       |                     |       |                        |       |
|                                                                                            |       |                     |       |                        |       |
| CURRENT  ASSETS                                                                                 |       |                     |       |                        |       |
|                                                                                            |       |                     |       |                        |       |
| Cash  and cash equivalents                                                                      |       | $                        | 1,617      |                        | $          | 932 |   |
| Trade  receivables, net of allowance for doubtful accounts                                      |       | 39,464                   |       | 32,520                      |       |
| Inventory,  net                                                                                 |       | 31,648                   |       | 32,012                      |       |
| Prepaids  and other current assets                                                              |       | 2,960                    |       | 2,495                       |       |
| Deferred  tax assets                                                                            |       | 1,071                    |       | 1,071                       |       |
| TOTAL  CURRENT ASSETS                                                                           |       | 76,760                   |       | 69,030                      |       |
| Property  and equipment, net                                                                    |       | 12,040                   |       | 11,486                      |       |
| Goodwill                                                                                        |       | 45,496                   |       | 45,496                      |       |
| Other  intangible assets, net                                                                   |       | 15,434                   |       | 15,704                      |       |
| Other  assets                                                                                   |       | 202                      |       | 237                         |       |
| TOTAL  ASSETS                                                                                   |       | $                        | 149,932    |                        | $          | 141,953 |   |
|                                                                                            |       |                     |       |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                      |       |                     |       |                        |       |
|                                                                                            |       |                     |       |                        |       |
| CURRENT  LIABILITIES                                                                            |       |                     |       |                        |       |
|                                                                                            |       |                     |       |                        |       |
| Accounts  payable and accrued expenses                                                          |       | $                        | 29,876     |                        | $          | 29,966 |   |
| Current  portion of long term debt                                                              |       | 3,218                    |       | 2,663                       |       |
| TOTAL  CURRENT LIABILITIES                                                                      |       | 33,094                   |       | 32,629                      |       |
| Long  term debt, less current portion                                                           |       | 37,628                   |       | 31,780                      |       |
| Other  liabilities                                                                              |       | 6,725                    |       | 6,957                       |       |
| Deferred  tax liabilities                                                                       |       | 1,607                    |       | 1,607                       |       |
| TOTAL  LIABILITIES                                                                              |       | 79,054                   |       | 72,973                      |       |
|                                                                                            |       |                     |       |                        |       |
| COMMITMENTS  AND CONTINGENCIES                                                                  |       |                     |       |                        |       |
|                                                                                            |       |                     |       |                        |       |
| STOCKHOLDERS’  EQUITY                                                                      |       |                     |       |                        |       |
| Common  Stock $.0001 par value, issued and outstanding 15,437,477 and 15,356,727,  respectively |       | 1                        |       | 1                           |       |
| Additional  paid in capital                                                                     |       | 55,523                   |       | 55,342                      |       |
| Retained  earnings                                                                              |       | 15,668                   |       | 13,903                      |       |
| Accumulated  other comprehensive loss                                                           |       | (315                     | )          | (266                        | )          |
|                                                                                            |       |                     |       |                        |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                |       | 70,878                   |       | 68,980                      |       |
|                                                                                            |       |                     |       |                        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                |       | $                        | 149,932    |                        | $          | 141,953 |   |

 

See notes to condensed consolidated financial statements

 

3

----

 

**Summer Infant, Inc. andSubsidiaries**

**Condensed Consolidated Statements ofIncome**

 

Note that all amountspresented in the attached table are in thousands of US dollars except share andper share amounts.

 
| ** **                                                                                  | ** ** | **Unaudited**                   | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                  | ** ** | **For  the three months ended** | ** ** |
| ** **                                                                                  | ** ** | **March 31,  2010**        | ** ** | **March 31,  2009** | ** ** |
|                                                                                        |       |                            |       |   |   |
| Net  revenues                                                                               |       | $                               | 44,116     |   | $ | 34,849 |   |
|                                                                                        |       |                            |       |   |   |
| Cost  of goods sold                                                                         |       | 27,187                          |       | 23,192 |   |
|                                                                                        |       |                                 |       |   |   |
| Gross  profit                                                                               |       | 16,929                          |       | 11,657 |   |
|                                                                                        |       |                                 |       |   |   |
| Selling,  general and administrative expenses (including stock-based compensation  expense) |       | 14,042                          |       | 10,660 |   |
|                                                                                        |       |                                 |       |   |   |
| Net  operating income                                                                       |       | 2,887                           |       | 997 |   |
|                                                                                        |       |                                 |       |   |   |
| Interest  expense, net                                                                      |       | (367                            | )          | (421 | ) |
|                                                                                        |       |                                 |       |   |   |
| Income  before provision for income taxes                                                   |       | 2,520                           |       | 576 |   |
|                                                                                        |       |                                 |       |   |   |
| Provision  for income taxes                                                                 |       | 756                             |       | 173 |   |
|                                                                                        |       |                            |       |   |   |
| NET  INCOME                                                                                 |       | $                               | 1,764      |   | $ | 403 |   |
|                                                                                        |       |                            |       |   |   |
| Net  income per share:                                                                      |       |                            |       |   |   |
|                                                                                        |       |                            |       |   |   |
| BASIC                                                                                       |       | $                               | 0.11       |   | $ | 0.03 |   |
|                                                                                        |       |                            |       |   |   |
| DILUTED                                                                                     |       | $                               | 0.11       |   | $ | 0.03 |   |
|                                                                                        |       |                            |       |   |   |
| Weighted  average shares outstanding:                                                       |       |                            |       |   |   |
|                                                                                        |       |                            |       |   |   |
| BASIC                                                                                       |       | 15,412,631                      |       | 15,128,490 |   |
|                                                                                        |       |                                 |       |   |   |
| DILUTED                                                                                     |       | 16,134,659                      |       | 15,392,782 |   |

 

See notes to condensedconsolidated financial statements.

 

4

----

 

**Summer Infant, Inc. andSubsidiaries**

**Condensed Consolidated Statements ofCash Flows**

 

Note that all amountspresented in the attached table are in thousands of US dollars.

 
| ** **                                                                    | ** ** | **Unaudited**                                  | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                    | ** ** | **For the  three months ended** | ** ** |
| ** **                                                                    | ** ** | **March 31,  2010**                       | ** ** | **March 31,  2009** | ** ** |
|                                                                          |       |                                           |       |   |   |
| Cash  flows from operating activities:                                        |       |                                           |       |   |   |
|                                                                          |       |                                           |       |   |   |
| Net  income                                                                   |       | $                                              | 1,764      |   | $ | 403 |   |
|                                                                          |       |                                                |       |   |   |
| Adjustments  to reconcile net income to net cash used in operating activities |       |                                           |       |   |   |
|                                                                          |       |                                                |       |   |   |
| Depreciation  and amortization                                                |       | 1,215                                          |       | 1,001 |   |
|                                                                          |       |                                                |       |   |   |
| Stock-based  compensation                                                     |       | 181                                            |       | 365 |   |
|                                                                          |       |                                           |       |   |   |
| Change  in value of interest rate Swap agreements                             |       | (79                                            | )          | — |   |
|                                                                          |       |                                                |       |   |   |
| Changes  in assets and liabilities net of effects of acquisitions:            |       |                                           |       |   |   |
|                                                                          |       |                                                |       |   |   |
| Increase  in trade receivables                                                |       | (7,595                                         | )          | (3,209 | ) |
|                                                                          |       |                                                |       |   |   |
| Decrease  (increase) in inventory                                             |       | (356                                           | )          | 3,808 |   |
|                                                                          |       |                                                |       |   |   |
| Decrease  (increase) in prepaids and other assets                             |       | (495                                           | )          | 412 |   |
|                                                                          |       |                                                |       |   |   |
| Increase  (decrease) in accounts payable and accrued expenses                 |       | 71                                             |       | (4,268 | ) |
|                                                                          |       |                                                |       |   |   |
| Net  cash used in operating activities                                        |       | (5,294                                         | )          | (1,488 | ) |
|                                                                          |       |                                                |       |   |   |
| Cash  flows from investing activities:                                        |       |                                           |       |   |   |
|                                                                          |       |                                                |       |   |   |
| Acquisitions  of property and equipment                                       |       | (1,511                                         | )          | (844 | ) |
|                                                                          |       |                                                |       |   |   |
| Acquisition  of intangible assets                                             |       | —                                         |       | (37 | ) |
|                                                                          |       |                                                |       |   |   |
| Net  cash used in investing activities                                        |       | (1,511                                         | )          | (881 | ) |
|                                                                          |       |                                                |       |   |   |
| Cash  flows from financing activities:                                        |       |                                           |       |   |   |
|                                                                          |       |                                                |       |   |   |
| Proceeds  from sale of building (net of closing costs of $150)                |       | —                                         |       | 3,903 |   |
|                                                                          |       |                                                |       |   |   |
| Net  borrowings (repayments) on line of credit and other debt                 |       | 6,758                                          |       | (1,660 | ) |
|                                                                          |       |                                                |       |   |   |
| Net  cash provided by financing activities                                    |       | 6,758                                          |       | 2,243 |   |
|                                                                          |       |                                                |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                 |       | 733                                            |       | (50 | ) |
|                                                                          |       |                                                |       |   |   |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         |       | 685                                            |       | (176 | ) |
|                                                                          |       |                                                |       |   |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                               |       | 932                                            |       | 988 |   |
|                                                                          |       |                                                |       |   |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                     |       | $                                              | 1,617      |   | $ | 812 |   |
|                                                                          |       |                                                |       |   |   |
| Building  related finance obligation                                          |       | $                                              | —     |   | $ | 3,902 |   |
|                                                                          |       |                                                |       |   |   |
| Cash  paid for interest                                                       |       | $                                              | 342        |   | $ | 395 |   |
|                                                                          |       |                                                |       |   |   |
| Cash  paid for income taxes                                                   |       | $                                              | 577        |   | $ | 145 |   |

 

5

----

 

** **

**SUMMER INFANT, INC.  ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1.****                      ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

The accompanying interim condensed consolidatedfinancial statements of Summer Infant, Inc. (the “Company”, or “Summer”)are unaudited, but in the opinion of management, reflect all adjustments,consisting of normal recurring accruals, necessary for a fair presentation ofthe results for the interim periods. Accordingly, they do not include allinformation and notes required by generally accepted accounting principles (“GAAP”)for complete financial statements. The results of operations for interimperiods are not necessarily indicative of results to be expected for the entirefiscal year or any other period. The balance sheet at December 31, 2009has been derived from the audited financial statements at that date but doesnot include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for complete financialstatements. These interim consolidated financial statements should be read inconjunction with the Company’s consolidated financial statements and notes forthe year ended December 31, 2009 filed on Form 10-K on March 10,2010.

 

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

 

*Income Taxes*

 

The provision forincome taxes is based on the Company’s estimated annualized effective tax ratefor the year.

 

Income taxes arecomputed using the asset and liability method of accounting. Under the assetand liability method, a deferred tax asset or liability is recognized forestimated 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.  The Company recognizes interest and penalties, if any,related to uncertain tax positions in selling, general and administrativeexpenses.  No interest and penalties related to uncertain tax positionswere accrued at March 31, 2010. The tax years 2006 through 2009 remainopen to examination by the major taxing jurisdictions in which the Companyoperates. The Company expects no material changes to unrecognized tax positionswithin the next twelve months.

 

*Use ofEstimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect certain reported amounts and disclosures.Accordingly, actual results could differ from those estimates.

 

*NetIncome Per Share*

 

Basic earnings pershare for the Company are computed by dividing net income by theweighted-average number of shares of common stock outstanding during theperiod. Diluted earnings per share includes the dilutive impact of outstandingstock options and unvested restricted shares.

 

*Translationof Foreign Currencies*

 

The assets and liabilities of the Company’s European, Canadian, andAsian operations have been translated into U.S. dollars at year-end exchangerates. All assets and liabilities of the Company’s foreign affiliates are translatedinto U.S. dollars at the exchange rate in effect at the end of the year and theincome and expense accounts of these affiliates have been translated at averagerates prevailing during each respective year. Resulting translation adjustmentsare made to a separate component of stockholders’ equity within accumulatedother comprehensive income (loss).

 

6

----

 

**RecentlyIssued Accounting Pronouncements**

 

In December 2007,the FASB issued a new standard which establishes principles and requirementsfor how the acquirer of a business recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquired company. The new standard alsoprovides guidance for recognizing and measuring the goodwill acquired in thebusiness combination and determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. The provisions of the new standard areeffective for financial statements issued for fiscal years beginning after December 15,2008. The Company adopted this standard, as applicable, on January 1,2009.

 

In December 2007,the FASB issued a new standard which establishes accounting and reportingstandards for the non-controlling interest in a subsidiary and for thedeconsolidation of a subsidiary. In addition, the new standard also includesexpanded disclosure requirements regarding interests of the parent and itsnon-controlling interest. The provisions of the new standard are effective forfinancial statements issued for fiscal years beginning after December 15,2008. The Company adopted this standard, as applicable, on January 1,2009.

 

7

----

 

In April 2008, theFASB issued new guidance which amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset. The intent of the new guidance is to improvethe consistency between the useful life of a recognized intangible asset andthe period of expected cash flows used to measure the fair value of the asset.The new guidance is effective for fiscal years beginning after December 15,2008 and is effective beginning January 1, 2009. Adoption did not have amaterial impact on the Company’s consolidated results of operations andfinancial condition.

 

Management does notbelieve that any other recently issued, but not yet effective, accountingstandards if currently adopted would have a material effect on the accompanyingfinancial statements.

 

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

 

On April 10,2008, the Company entered into two three-year secured credit facilities (the “LoanAgreement”) with Bank of America, N.A., as Administrative Agent, and each ofthe financial institutions that were a signatory to the Loan Agreement. The Loan Agreement provides for a $36,000,000 working capital revolving creditfacility and a $10,000,000 non-restoring acquisition credit facility.  Thenew credit facilities mature on June 30, 2011.  The Company and itssubsidiaries, Summer Infant (USA), Inc., Summer Infant Europe Limited,Summer Infant Asia Limited and Summer Infant Canada, Limited are the borrowersunder this Loan Agreement.

 

The Company’sability to borrow under the Loan Agreement is subject to its ongoing compliancewith a  number of financial and other covenants, including the following: (i) that the Company and its subsidiaries maintain a net worth of $50,000,000 plusthe  sum of 50% of net income  earned in each fiscal year, (ii) thatthe Company and its subsidiaries maintain a ratio of total funded debt  toEBITDA of not greater than 3.50:1.00, and (iii) that the Company and its subsidiaries maintain a ratio of operating cash flow  to debt serviceof not less than 1.25:1.00.  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 creditfacilities 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 March 31, 2010, theblended interest rate for these credit facilities was 4.1%. In addition, thesecredit facilities have an unused line fee based on the unused amount of thecredit facilities equal to 25 basis points. The total amount outstanding on these facilities at March 31, 2010was $39,187,000.

 

The Loan Agreementalso contains customary events of default, including a cross default provisionand a change of control provision.  In the event of a default, all of the obligationsof the Company and its subsidiaries under the Loan Agreement may be declaredimmediately due and payable.   For certain events of default relatingto insolvency and receivership, all outstanding obligations become due andpayable.

 

During 2009, the Company initiated an agreement to borrow againstcertain international receivables. Approximately $965,000 relating to thisagreement is included in current portion of long term debt at March 31, 2010.

 

8

----

 

***3.******                                     ******FairValue Measurements***

 

Effective January 1, 2008, the Company adopted the new standardregarding fair value which establishes a new framework for measuring fair valueand expands related disclosures. Broadly, the framework requires fair value tobe determined based on the exchange price that would be received for an assetor paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants. The standard established a three-level valuationhierarchy based upon observable and non-observable inputs.

 

Observable inputs reflect market data obtained from independent sources,while unobservable inputs reflect the Company’s market assumptions. Preference isgiven to observable inputs. These two types of inputs create the following fairvalue hierarchy:

 

Level1—Quoted prices for identical instruments in active markets.

 

Level2—Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-derived valuations whose inputs are observable or whose significant valuedrivers are observable.

 

Level3—Significant inputs to the valuation model are unobservable.

 

The Company maintains policies and procedures to value instrumentsusing the best and most relevant data available. In addition, the Companyutilizes risk management resources that review valuation, including independentprice validation. Management concludes there has been no material change in thecompany’s credit risk nor that of Bank of America and therefore the valuationof the liability is reasonable.

 

The Company recognizes the fair value of interest rate swaps usingLevel 2 inputs.

 

As of March 31, 2010 the fair value of the swaps now reflects aliability of approximately $742,000, which is included in “other liabilities”on the accompanying balance sheet. The change in fair value of the swapliability is recorded in “interest expense”. The interest rate swaps are notaccounted for as hedges.

 

The notional amounts under the interest rate swap agreements total $20million, which is approximately 50% of the Company’s total outstanding bankdebt at March 31, 2010.

 

***4.******                                     ******DerivativeInstruments***

 

The Company is exposed to interest rate risk primarily through itsborrowing activities. The Company’s long-term debt is a variable rateinstrument. The Company entered into three interest rate swap contracts underwhich the Company agreed to pay an amount equal to a specified fixed rate ofinterest times a notional principal amount, and to in turn receive an amountequal to a specified variable rate of interest times the same notionalprincipal amount.

 

The Company uses derivatives to fix interest rates. As a matter ofpolicy, the Company does not use derivatives for speculative purposes. This isa requirement in the Company’s loan agreement to mitigate interest rate risk.

 

9

----

 

The interest rate swap contracts require payment of a fixed rate ofinterest and the receipt of a variable rate of interest at the LIBOR one monthindex rate plus 150-200 basis points on a notional amount of indebtedness.

 
| ** ** | ** ** | **Rate** | ** ** | **Notional Amt** | ** ** | **Eff. Date** | ** ** | **Mat. Date** | ** ** | **Mark-to-Market @ 3/31/10** | ** ** |
|------------|------------|----------|------------|------------------|------------|---------------|------------|---------------|------------|------------------------------|------------|
| Swap  1    |       | 7.06     | %          | 3,771,904        |       | 6/21/2007     |       | 6/7/2012      |       | $                            | (363,414   | ) |
| Swap  2    |       | 3.50     | %          | 6,000,000        |       | 5/12/2008     |       | 4/08/2011     |       | $                            | (202,139   | ) |
| Swap  3    |       | 2.92     | %          | 10,000,000       |       | 11/3/2008     |       | 11/01/2010    |       | $                            | (176,601   | ) |
|       |       |     |       |             |       |          |       |          |       | $                            | (742,154   | ) |

 

10

----

 

**5.****                      ****REAL ESTATE TRANSACTION**

 

On March 24,2009 the Company entered into a definitive agreement with Faith Realty II, LLC,a Rhode Island limited liability company (“Faith Realty”) (the members of whichare Jason Macari, the current Chairman of the Board of Directors and Presidentof the Company, and his spouse), pursuant to which Faith Realty will purchasethe corporate headquarters of the Company located at 1275 Park East Drive,Woonsocket, Rhode Island (the “Headquarters”) and subsequently lease theHeadquarters back to Summer USA (collectively, the “Transactions”). Pursuant to the terms of that certain Purchase and Sale Agreement betweenSummer USA and Faith Realty, dated as of March 24, 2009, Faith Realtypurchased the Headquarters for $4,052,500 and then leased the Headquarters backto Summer USA for an annual rent of $390,000 during the initial seven (7) yearterm of the lease, payable monthly and in advance.  The lease will expireon the seventh (7th) anniversary of its commencement unless an option period isexercised by Summer USA.  At that time, Summer USA will have theopportunity to extend the lease for one (1) additional period of five (5) years. If Summer USA elects to extend the term of the lease for an additional five (5) years,the annual rent for the first two (2) years of the extension term shall beequal to $429,000 and for the final three (3) years of the extension termshall be equal to $468,000.  In addition, during the first six (6) monthsof the last lease year of the initial term of the lease Summer USA has theoption to repurchase the Headquarters for $4,457,750 (110% of the initial saleprice).  The Transactions were consummated concurrently with the executionof the definitive agreements.  With the majority of the proceeds of thesale of the Headquarters, Summer USA paid off the construction loan relating tothe Headquarters.  Mr. Macari has given a personal guarantee tosecure the Faith Realty debt on its mortgage; therefore, due to his continuinginvolvement in the building transaction and the Company’s option to repurchasethe building, the building remains on the books of the Company and thetransaction has been recognized as a financing, with no gain recognized. The Company also has recorded a finance obligation under other liabilities inregards to this transaction; the outstanding liability at March 31, 2010was $3,752,000, of which approximately $138,000 is included in accounts payableand accrued expenses and the remaining $3,614,000 is included in otherliabilities, in the accompanying consolidated balance sheet.

 

On February 25,2009, the Company’s Board of Directors (with Mr. Macari and Mr. Gibreeabstaining from such action) approved the Transactions, subject to thenegotiation and execution of definitive agreements within the parameters approvedby the Board.  In connection therewith, the board granted a potentialwaiver, to the extent necessary, if at all, of the conflict of interestprovisions of the Company’s Model Code of Ethics, effective upon execution ofdefinitive agreements within the parameters approved by the Board.  Inconnection with granting such potential waiver, the Board of Directors engagedindependent counsel to review the proposed Transactions and an independentappraiser to ascertain (i) the value of the Headquarters and (ii) themarket rent for the Headquarters.  In reaching its conclusion that theTransactions are fair to the

 

11

----

 

Company, the Board ofDirectors considered a number of factors, including Summer USA’s ability torepurchase the headquarters at 110% of the initial sale price at the end of theinitial term.

 

In addition, theCompany’s Audit Committee approved the Transactions (as a related partytransaction) and the potential waiver and recommended the matter to a vote ofthe entire Board of Directors.

 

6.                        **COMMITMENTS ANDCONTINGENCIES**

 

*Litigation*

 

The Company is aparty to routine litigation and administrative complaints incidental to itsbusiness.  Management does not believe that the resolution of any or allof such routine litigation and administrative complaints is likely to have amaterial adverse effect on the Company’s financial condition or results ofoperations.

 

7.                        **STOCK OPTIONS ANDRESTRICTED SHARES**

 

The Company hasgranted stock options under its 2006 Performance Equity Plan (“2006 Plan”). Under the 2006 Plan, awards may be granted to participants in the form ofNon-Qualified Stock Options, Incentive Stock Options, Restricted Stock,Deferred Stock, Stock Reload Options and other stock-based awards. Subject to the provisions of the plan, awards may be granted to employees,officers, directors, advisors and consultants who are deemed to have renderedor are able to render significant services to the Company and who are deemed tohave contributed or to have the potential to contribute to the Company’ssuccess. The Company has issued both stock options and restricted sharesto employees and board members.

 

Share-basedcompensation expense for the three months ended March 31, 2010 and 2009 wasapproximately $181,000 and $365,000, respectively.  As of March 31,2010, there were 2,143,100 stock options outstanding, and 161,500 unvestedrestricted shares outstanding.

 

During the three months ended March 31, 2010, the Company granted128,500 stock options. The key assumptions used in determining the valuationincluded:

 
| ·      Expected life  | - | 6  years |
|-----------------------------------------------------|---|----------|
| ·      Volatility     | - | 60%      |
| ·      Discount  rate | - | 0.64%    |

 

12

----

 

**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The statements contained in this Report on Form 10-Q,that are not purely historical, are forward-looking information and statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities 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 include the concentration of the Company’sbusiness with retail customers; the ability of the Company to compete in theindustry; the Company’s dependence on key personnel; the Company’s reliance onforeign suppliers; and other risks as detailed in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2009, andsubsequent filings with the Securities and Exchange Commission All thesematters are difficult or impossible to predict accurately, many of which may bebeyond our control. Although we believe that the assumptions underlying ourforward-looking statements are reasonable, any of the assumptions could beinaccurate and, therefore, there can be no assurance that the forward-lookingstatements included in this Form 10-Q will prove to be accurate.*

 

Theinformation contained in this section has been derived from the Company’sconsolidated financial statements and should be read together with theconsolidated financial statements and related notes included elsewhere in thisfiling.

 

Thefollowing discussion is intended to assist in the assessment of significantchanges and trends related to the results of operations and financial conditionof Summer Infant, Inc. This discussion and analysis should be read inconjunction with Summer’s consolidated financial statements and notes theretoincluded herein. Summer’s business has grown organically in all of its markets.Summer derives its revenues from the sale of health, safety and wellnessproducts for infants and toddlers.  Summer’s revenue is driven by itsability 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*

 

TheFASB Accounting Standards CodificationTM (Codification) is the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with GAAP. Rules and interpretive releases of the Securitiesand Exchange Commission (SEC) under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants. The adoption ofthe codification had no impact on the Company’s financial position, results ofoperations or cash flows.

 

TheCompany’s critical accounting policies are disclosed in the Company’s AnnualReport on Form 10-K.  There have been no material changes to thesepolicies during the first three months of 2010. 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.

 

Summermakes certain estimates and assumptions that affect the reported amounts ofassets and liabilities and the reported amounts of revenues and expenses. Theaccounting policies described below are those Summer considers critical inpreparing its financial statements. Some of these policies include significantestimates made by management using information available at the time theestimates were made. However, these estimates could change materially ifdifferent information or assumptions were used.

 

*Nature of operations*

 

Summeris engaged in the design, marketing and distribution of juvenile products. Over 90% of the Company’s  revenues arederived from retail customers in North America, with the balance of revenuesbeing generated in Europe, Asia, and Central/South America.

 

13

----

 

*Incometaxes*

 

Effective January 1,2007, we adopted the provisions of new accounting guidance which providesdetailed guidance for the financial statement recognition, measurement anddisclosure of uncertain tax positions recognized in the financial statements.Tax positions must meet a “more-likely-than-not” recognition threshold at theeffective date to be recognized upon adoption and in subsequent periods. Uponadoption, we had no unrecognized tax benefits.

 

14

----

 

Income taxes arecomputed using the asset and liability method of accounting. Under the assetand liability method, a deferred tax asset or liability is recognized forestimated future tax effects attributable to temporary differences andcarry-forwards. 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.  The Company recognizes interest and penalties, if any,related to uncertain tax positions in selling, general and administrativeexpenses.  No interest and penalties related to uncertain tax positionswere accrued at March 31, 2010. The tax years 2006 through 2009 remainopen to examination by the major taxing jurisdictions. The Company expects nomaterial changes to unrecognized tax positions within the next twelve months.

 

**CompanyOverview**

 

Summeris a designer, marketer, and distributor of branded juvenile health, safety andwellness products which are sold principally to large North American and UKretailers.  Summer currently has more than 80 proprietary products invarious product categories including nursery audio/video monitors, safetygates, durable bath products, bed rails, infant thermometers and related healthand safety products, booster and potty seats and bouncers.

 

Summer’sstrategy is to grow its sales through a variety of methods, including:

 

·                  Increased product penetration (more products at eachstore);

 

·                  Increased store penetration (more stores within eachretail customer);

 

·                  New products (at existing and new customers);

 

·                  New mass merchant retail customers;

 

·                  New distribution channels (food and drug chains, priceclubs, home centers, and web-based retailers);

 

·                  New geographies (international expansion); 

 

·                  New product categories

 

·                  Acquisitions

 

Summerhas been able to grow its annual revenues significantly through a combinationof all of the above factors. Each year it has been able to expand the number ofproducts into its main distribution channel, mass merchant retailers, and hasalso added new customers each year. Therefore, even without new productintroductions, Summer could grow its business by simply selling more of itsexisting product line to existing customers.

 

For2010 and beyond, the growth strategy of Summer will be to continue to developand sell new products to its existing customer base, sell new and existingproducts to new customers (or expand relationships with existing customers),and to expand in the UK and in other geographic regions (including Japan,Mexico and Australia, among others).

 

Summer’sgrowth strategy has included acquisitions.

 

On March 31,2008, Summer acquired substantially all of the assets of Basic Comfort, Inc.,a leading manufacturer and supplier of infant comfort and safety products,including infant sleep positioners, infant head supports and portable changingpads.

 

15

----

 

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

 

On July 17,2009 Summer acquired Butterfly Living, Inc., a manufacturer of cribs and relatednursery furniture.

 

Summerintends to pursue additional potential acquisition candidates to obtain newinnovative products, new product categories, new retail customers or new salesterritories.  There are approximately 400 active juvenile product companies,of which approximately 300 have less than $10,000,000 in sales. In addition,there are various product categories that Summer does not currently compete in,including car seats, strollers, walkers, nursery care, and other categories.Summer may look to develop its own products in these categories or attempt togain entrance into these categories through acquisitions.

 

AsSummer continues to grow through internal initiatives and any additional futureacquisitions, it will incur additional expenses.  Two of the key areas inwhich such increased expenses will likely occur are sales and productdevelopment. To grow sales, Summer will likely hire additional sales personnelto service new geographic territories, focus existing resources on specificparts of the United States market and retain product line specialists to drivesales of new and existing products in specific areas in which Summer believesit can readily increase sales. Product development expenses are expected toincrease as Summer develops new products in existing and new categories. As aresult of its acquisition strategy, Summer will face various challenges such asthe integration of the acquired companies’ product lines, employees, marketingrequirements and information systems. Ongoing infrastructure investment alsomay be required to support realized growth,including expenditures with respect to upgraded andexpanded information systems and enhancing the company’s management team.

 

*Sales*

 

Summer’ssales are primarily derived from the sale of juvenile health, safety andwellness products and are recognized upon transfer of title of product toSummer’s customers. Summer’s products are marketed through several distributionchannels including chain retailers, specialty retailers and direct toconsumers.

 

Over90% of sales are currently made to customers in North America. Sales are madeutilizing standard credit terms of 30 to 90 days. Summer generally acceptreturns only for defective merchandise.

 

*Cost of goods sold and other expenses*

 

Summer’sproducts are manufactured by third parties, with approximately 80-85% of thedollar value of products being manufactured in China and the majority of thebalance being manufactured in the United States and other countries.  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 we are unable to pass suchprice increases along to Summer’s customers, Summer’s gross margins woulddecrease.

 

Selling,general and administrative expenses primarily consist of payroll, insurance,professional fees, royalties, freight out to customers, product developmentcosts, advertising and marketing expenses (including co-op advertisingallowances as negotiated with certain customers) and sales commissions. Severalof these items fluctuate with sales, some based on sales to particularcustomers and others based on sales of particular products.

 

Thereare not significant variations in seasonal demand for Summer’s products. Salesto its retail customers are generally higher in the time frame when retailerstake initial shipments of new products; 

 

16

----

 

these orders usuallyincorporate enough product to fill each store plus additional amounts to bekept at the customer’s distribution center. The timing of these initialshipments varies by customer depending on when they finalize store layouts forthe upcoming year, and whether there are any mid-year product introductions.

 

**Resultsof Operations**

 

**Condensed Consolidated Statements ofIncome**

**For the Three Months Ending March 31,2010 and 2009**

**(in thousands of US dollars)**

 
| ** **                                                                                                                  | ** ** | **Three Months Ended  March 31, 2010** | ** ** | **Three Months Ended  March 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **(Unaudited)**                                            | ** ** | **(Unaudited)**                                            | ** ** |
| Net sales                                                                                                                   |       | $                                                          | 44,116     |                                                       | 100.0      | % | $ | 34,849 |   | 100.0 | % |
| Cost  of goods sold                                                                                                         |       | 27,187                                                     |       | 61.6                                                       | %          | 23,192 |   | 66.6 | % |
| Gross  profit                                                                                                               |       | 16,929                                                     |       | 38.4                                                       | %          | 11,657 |   | 33.4 | % |
|                                                                                                                        |       |                                                            |       |                                                       |       |   |   |   |   |
| OPERATING  EXPENSES                                                                                                         |       |                                                       |       |                                                       |       |   |   |   |   |
| Selling,  general and administrative expenses (excluding depreciation, amortization,  and stock-based compensation expense) |       | 12,646                                                     |       | 28.7                                                       | %          | 9,294 |   | 26.7 | % |
| EBITDA(a)                                                                                                                   |       | $                                                          | 4,283      |                                                       | 9.7        | % | $ | 2,363 |   | 6.8 | % |

 

----

(a) See non-GAAPdiscussion below regarding the computation of EBITDA.

 

*Three months ended March 31, 2010 compared with threemonths ended March 31, 2009*

 

Netsales increased 27% from approximately $34,849,000 for the three months ended March 31,2009 to approximately $44,116,000 for the three months ended March 31,2010. This sales increase was primarily attributable to increased distributionof Summer’s products throughout Summer’s customer base, and new productintroductions.  Significant increases were noted in many key accounts.

 

Grossprofit increased 45% from approximately $11,657,000 for the three months ended March 31,2009 to approximately $16,929,000 for the three months ended March 31,2010.  The gross profit as a percentage of sales increased to 38.4% from33.4% in the prior year.  The increase as a percentage of sales isprimarily due to lower costs of finished goods from the Company’s vendors inAsia and the US, in addition to an improved product mix.

 

Selling,general and administrative expenses increased from approximately $9,294,000 forthe three months ended March 31, 2009 to approximately $12,646,000 for thethree months ended March 31, 2010. This increase was primarilyattributable to increases in headcount, higher variable selling expenses due tothe increase in sales, increased promotional costs, and costs associatedwith new product development.  Selling, general and administrativeexpenses increased to 28.7% of net sales in the three months ended March 31,2010 from 26.7% of net sales in the three months ended March 31, 2009.

 

EBITDAincreased from approximately $2,363,000 for the three months ended March 31,2009 to approximately $4,283,000 for the three months ended March 31,2010, an increase of 81%.

 

**Liquidity and Capital Resources**

 

Summergenerally funds its operations and working capital needs through cash generatedfrom operations and borrowings under its secured credit facilities.

 

Summer’ssales have increased significantly over the past several years. This salesgrowth has led to a substantial increase in working capital requirements,specifically trade receivables and inventory. The typical cash flow cycle is asfollows:

 

17

----

 

 

·                  Inventory is purchased to meet expected demand plus asafety stock. Since the majority of Summer’s vendors are based in Asia,inventory takes from four to six weeks to arrive from Asia to the variousdistribution points Summer maintains in the US and the UK. Payment terms forthese vendors average 60 days from the date the product ships from Asia,therefore Summer is generally paying for the product a short time after it isphysically received in the US. The increased sales Summer has experienced resultin increased levels of inventory, and therefore an increase in the amount ofcash required to fund its inventory level.

 

·                  Sales to customers generally have payment terms of 30to 60 days. The increased sales have resulted in an increase in the level ofaccounts receivable, and therefore have increased the amount of cash requiredto fund working capital.

 

Summerhad traditionally been able to fund its increased working capital throughasset-based lines of credit with banks. The lenders generally follow aborrowing base formula that allows advances based on the levels of accountsreceivable and inventory.

 

Themajority of capital expenditures for Summer are for tools related to newproduct introductions. Summer receives indications from retailers generallyaround the middle of each year as to what products the retailer will be takinginto its product line for the upcoming year. Based on these indications, Summerwill then acquire the tooling required to build the products. The majority ofthese expenditures are therefore made in the third and fourth quarters of eachyear so that initial shipments of products can be made in December and January (thetypical time frame for new product shipments). In most cases the payments forthe tools are spread out over a three to four month period.

 

Forthe three months ended March 31, 2010, net cash used in operatingactivities was $5,294,000.  This was primarily due to increases in tradereceivables of $7,595,000, which is a direct result of the significant increasein sales for the Company.   See detailed discussion of the workingcapital cycle of Summer above.

 

Netcash used in investing activities was $1,511,000, which primarily relates tothe purchase of tooling used in the manufacturing process and other additionsto property, plant and equipment.

 

Netcash provided by financing activities was $6,758,000, which relates toborrowings on the line of credit to fund working capital increases and capitalspending.

 

Basedon the above factors, the net cash increase for the three months ended March 31,2010 was $686,000, resulting in a cash balance of $1,617,000 at March 31,2010.

 

Summerbelieves that its cash on hand and current banking facilities are sufficient tofund its cash requirements 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’sstrategy for funding its business going forward is a combination of increasedprofitability, and if necessary, negotiation of increased borrowing lines asrequired with traditional lenders.

 

On April 10,2008, Summer entered into two new three-year secured credit facilities (the “LoanAgreement”) with Bank of America, N.A., as Administrative Agent, and each ofthe financial institutions a signatory to the Loan Agreement.  The LoanAgreement provides for a $36,000,000 working capital revolving credit facilityand a $10,000,000 non-restoring acquisition credit facility.  The newcredit facilities mature on June 30, 2011.

 

18

----

 

Summerand its subsidiaries, Summer Infant (USA), Inc., Summer Infant EuropeLimited, Summer Infant Asia Limited and Summer Infant Canada, Limited are theborrowers under this Loan Agreement.  These new credit facilities aresecured by all assets of Summer and its subsidiaries.  These new creditfacilities replace Summer’s prior line of credit, and are being usedprincipally to fund growth 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) that Summer and its subsidiaries maintain a new worth of $50,000,000 plus the sum of 50% of net income  earned in each fiscal year, (ii) thatSummer and its subsidiaries maintain a ratio of total funded debt  toEBITDA of not greater than 3.50:1.00, and (iii) that Summer and  itssubsidiaries maintain a ratio of operating cash flow  to debt service ofnot less than 1.25:1.00.  Furthermore, if Summer’s ratio of total fundeddebt to EBITDA is greater than 3.25:1.00 for any fiscal year, the aggregateamount that may be borrowed under the Loan Agreement will be determined byreference to a borrowing base.

 

Thesenew credit facilities bear interest at a floating rate based on a spread overLIBOR ranging from 150 basis points to 200 basis points, depending upon theratio of the Company’s total funded debt to EBITDA.  As of March 31,2010, the blended interest rate for these credit facilities was 4.1%.  Inaddition, these new credit facilities have an unused line fee based on theunused amount of the credit facilities equal to 25 basis points.  The total amount outstanding on thesefacilities was $39,187,000 at March 31, 2010.

 

TheLoan Agreement also contains customary events of default, including a crossdefault provision and a change of control provision.  In the event of adefault, all of the obligations of the Company and its subsidiaries under the LoanAgreement may be declared immediately due and payable.   For certainevents of default relating to insolvency and receivership, all outstandingobligations become due and payable.

 

TheCompany was in compliance with all covenants under its line of credit as of March 31,2010.

 

During 2009, the Company also initiated an agreementto borrow against certain international receivables.  Approximately $965,000 relating to thisagreement is included in current portion of long term debt at March 31, 2010.

 

Webelieve that Summer’s cash flows from operations, cash on hand, and availableborrowings will be sufficient to meet Summer’s working capital and capitalexpenditure requirements and provide us with adequate liquidity to meetanticipated 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**

 

Inaddition to its GAAP results, Summer considers non-GAAP measures of itsperformance. Adjusted EBITDA, as defined below, is an important supplementalfinancial measure of Summer’s performance that is not required by, or presentedin accordance with, GAAP. As used herein, “Adjusted EBITDA” represents netincome before income taxes, interest expense, non-cash stock option expense, anddepreciation and amortization. Summer’s management uses Adjusted EBITDA as afinancial measure to assess the ability of its assets to generate cashsufficient to pay interest on its indebtedness, meet capital expenditure andworking capital requirements, and otherwise meet its obligations as they becomedue. Summer’s management believes that the presentation of Adjusted EBITDAprovides useful information regarding Summer’s results of operations becausethey assist in analyzing and benchmarking the performance and value of Summer’sbusiness. Summer believes that Adjusted EBITDA is useful to stockholders as ameasure of comparative operating performance, as it is less susceptible tovariances in actual performance resulting from depreciation and amortizationand more reflective of changes in pricing decisions, cost controls and otherfactors that affect operating performance.

 

AdjustedEBITDA also is used by Summer’s management for multiple purposes, including:

 

·                  To calculate and support various coverage ratios withSummer’s lenders;

 

·                  To allow lenders to calculate total proceeds they arewilling to loan to Summer based on its relative strength compared to othercompetitors; and

 

19

----

 

·                  To more accurately compare Summer’s operatingperformance from period-to-period and company-to-company by eliminatingdifferences caused by variations in capital structures (which affect relativeinterest expense), tax positions and amortization of intangibles.

 

Inaddition, Adjusted EBITDA is an important valuation tool used by potentialinvestors when assessing the relative performance of a company in comparison toother companies in the same industry. Although Summer uses Adjusted EBITDA as afinancial measure to assess the performance of its business, there are materiallimitations to using a measure such as Adjusted EBITDA, including thedifficulty associated with using it as the sole measure to compare the resultsof one company to another and the inability to analyze significant items thatdirectly affect a company’s net income or operating income because it does notinclude certain material costs, such as interest and taxes, necessary tooperate its business. In addition, Summer’s calculation of Adjusted EBITDA maynot be consistent with similarly titled measures of other companies and shouldbe viewed in conjunction with measures that are computed in accordance withGAAP. Summer’s management compensates for these limitations in consideringAdjusted EBITDA in conjunction with its analysis of other GAAP financialmeasures, such as net income.

 

Thefollowing table presents a reconciliation of Summer’s Adjusted EBITDA to netincome, its most directly comparable GAAP financial measure, on a historicalbasis, for the periods presented:

 

**Reconciliationof unaudited****Adjusted EBITDA****to Net Income (in thousands of USdollars):**

 
| ** **                                 | ** ** | **Three Months Ended  March 31** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
| Net  income                                |       | $                                               | 1,764      |   | $ | 403 |   |
| Income  taxes                              |       | 756                                             |       | 173 |   |
| Non  cash stock-based compensation expense |       | 181                                             |       | 365 |   |
| Interest  expense                          |       | 367                                             |       | 421 |   |
| Depreciation  and amortization             |       | 1,215                                           |       | 1,001 |   |
| Adjusted  EBITDA, as defined               |       | $                                               | 4,283      |   | $ | 2,363 |   |

 

**ITEM 4T.  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, we carried out an evaluation, under the supervisionand with the participation of our Chief Executive Officer and our ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures, as of March 31, 2010.  Our principal executive officerand principal financial officer have concluded, based on their evaluation, thatas of the end of the period covered by this report, our controls and procedureswere effective as of March 31, 2010.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

There was nochange in our internal control over financial reporting that occurred duringthe period covered by this Quarterly Report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

20

----

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.**                **Legal Proceedings**

 

None.

 

**ITEM 1A.**       **Risk Factors**

 

Not applicable.

 

**ITEM 2.**                **Unregistered Sales of EquitySecurities and Use of Funds.**

 

None.

 

**ITEM 3.**                **Defaults Upon Senior Securities**

 

None.

 

**ITEM 5.**                **Other Information.**

 

None.

 

**ITEM 6.**                      **Exhibits**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                             |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1        |       | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                       |
|        |       |                                                                                                                                                                                                        |
| 31.2        |       | Chief Financial Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                       |
|        |       |                                                                                                                                                                                                        |
| 32.1        |       | Certification of Jason  Macari, Chief Executive 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    |
|        |       |                                                                                                                                                                                                        |
| 32.2        |       | Certification of Joseph  Driscoll, Chief Financial 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 |

 

21

----

 

**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

**SummerInfant, Inc.**

 

 
| May 11, 2010  |                    |
|--------------------|-------------------------|
|               |                    |   |
|               | /s/ Jason Macari        |   |
|               | Jason Macari            |   |
|               | Chief Executive Officer |   |
|               |                    |   |
|               |                    |   |
| May 11,  2010 |                    |
|               |                    |   |
|               | /s/ Joseph Driscoll     |   |
|               | Joseph Driscoll         |   |
|               | Chief Financial Officer |   |

 

22

----