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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QuarterlyReport Pursuant to Section 13 or 15d of the Securities Exchange Act of1934**

 

**For the quarterly period ended June 30, 2010**

 

**SummerInfant, Inc.**

(Name of Registrant as Specified in Its Charter)

 

**Commission file number 001-33346**

 

| **Delaware**                                          | ** ** | **20-1994619**                       |
|-------------------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                              |       | IRS Employer Identification Number   |
|                                                  |       |                                 |
| **1275 Park East Drive**                              | ** ** | ** **                           |
| **Woonsocket, RI 02895**                              | ** ** | **(401) 671-6550**                   |
| (Address of principal executive offices and zip code) |       | (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   Noo .

 

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 of this chapter) during the preceding 12 months (or for such shorterperiod that the 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 reportingcompany.

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

 

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

 

Asof July 15, 2010, there were 15,437,477 shares outstanding of theregistrant’s Common Stock, $.0001 par value per share.

 

 

 

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**Summer Infant, Inc.**

**Form 10-Q**

**Table of Contents**

 
| ** **        | ** **                                                                                                                  | **Page Number** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------|----------------------|
| **Part 1.**  | **Financial Statements**                                                                                                    |                 |
|              |                                                                                                                        |                 |
| **Item 1.**       | **Condensed Consolidated Financial Statements (unaudited)**                                                                 |                 |
|              |                                                                                                                        |                 |
| ** **        | **Condensed Consolidated Balance Sheets at June 30,  2010 (unaudited) and December 31, 2009**                     | **3**                |
|              |                                                                                                                        |                 |
|              | **Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2010 and 2009 (unaudited)** | **4**                |
|              |                                                                                                                        |                 |
|              | **Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  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**                             | **10**               |
|              |                                                                                                                        |                 |
| **Item 3.**       | **Quantitative  and Qualitative Disclosures About Market Risk**                                                             | **18**               |
|              |                                                                                                                        |                 |
| **Item 4T.**      | **Controls and  Procedures**                                                                                                | **18**               |
|              |                                                                                                                        |                 |
| **Part II.** | **Other  Information**                                                                                                      | **19**               |
| ** **        | ** **                                                                                                                  | ** **           |
| **Item  1.**      | **Legal  Proceedings**                                                                                                      | **19**               |
| **Item  1A.**     | **Risk  Factors**                                                                                                           | **19**               |
| **Item 2.**       | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                            | **19**               |
| **Item 3.**       | **Defaults  Upon Senior Securities**                                                                                        | **19**               |
| ** **        | ** **                                                                                                                  | ** **           |
| **Item  5.**      | **Other  Information**                                                                                                      | **19**               |
| **Item 6.**       | **Exhibits**                                                                                                                | **19**               |
| ** **        | ** **                                                                                                                  | ** **           |
| **Signatures**    | ** **                                                                                                                  | **20**               |

 

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**Summer Infant, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 

Notethat all amounts presented in the attached table are in thousands of US dollarsexcept share amounts.

 
| ** **                                                                                     | ** ** | **Unaudited  June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
|                                                                                           |       |                               |       |                        |       |
| ASSETS                                                                                         |       |                               |       |                        |       |
|                                                                                           |       |                               |       |                        |       |
| CURRENT ASSETS                                                                                 |       |                               |       |                        |       |
|                                                                                           |       |                               |       |                        |       |
| Cash and cash equivalents                                                                      |       | $                                  | 2,699      |                        | $          | 932 |   |
| Trade receivables, net of allowance for doubtful  accounts                                     |       | 40,678                             |       | 32,520                      |       |
| Inventory, net                                                                                 |       | 40,937                             |       | 32,012                      |       |
| Prepaids and other current assets                                                              |       | 3,147                              |       | 3,566                       |       |
| TOTAL CURRENT ASSETS                                                                           |       | 87,461                             |       | 69,030                      |       |
| Property and equipment, net                                                                    |       | 13,192                             |       | 11,486                      |       |
| Goodwill                                                                                       |       | 45,496                             |       | 45,496                      |       |
| Other intangible assets, net                                                                   |       | 15,219                             |       | 15,704                      |       |
| Other assets                                                                                   |       | 190                                |       | 237                         |       |
| TOTAL ASSETS                                                                                   |       | $                                  | 161,558    |                        | $          | 141,953 |   |
|                                                                                           |       |                               |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                      |       |                               |       |                        |       |
|                                                                                           |       |                               |       |                        |       |
| CURRENT LIABILITIES                                                                            |       |                               |       |                        |       |
|                                                                                           |       |                               |       |                        |       |
| Accounts payable and accrued expenses                                                          |       | $                                  | 38,753     |                        | $          | 29,966 |   |
| Current portion of long term debt                                                              |       | 3,088                              |       | 2,663                       |       |
| TOTAL CURRENT LIABILITIES                                                                      |       | 41,841                             |       | 32,629                      |       |
| Long term debt, less current portion                                                           |       | 38,587                             |       | 31,780                      |       |
| Other liabilities, including deferred taxes                                                    |       | 7,984                              |       | 8,564                       |       |
| TOTAL LIABILITIES                                                                              |       | 88,412                             |       | 72,973                      |       |
|                                                                                           |       |                               |       |                        |       |
| COMMITMENTS AND CONTINGENCIES (Note 6)                                                         |       |                               |       |                        |       |
|                                                                                           |       |                               |       |                        |       |
| STOCKHOLDERS’ EQUITY                                                                      |       |                               |       |                        |       |
| Common Stock $.0001 par value, issued and  outstanding 15,437,477 and 15,356,727, respectively |       | 1                                  |       | 1                           |       |
| Additional paid in capital                                                                     |       | 55,681                             |       | 55,342                      |       |
| Retained earnings                                                                              |       | 17,857                             |       | 13,903                      |       |
| Accumulated other comprehensive loss                                                           |       | (393                               | )          | (266                        | )          |
|                                                                                           |       |                               |       |                        |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                |       | 73,146                             |       | 68,980                      |       |
|                                                                                           |       |                               |       |                        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                |       | $                                  | 161,558    |                        | $          | 141,953 |   |

 

Seenotes to condensed consolidated financial statements

 

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**Summer Infant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Income**

 

Notethat all dollar amounts presented in the table below are in thousands of USdollars except share and per share amounts.

 
| ** **                                       | ** ** | **Unaudited  For the three months ended** | ** ** | **Unaudited  For the six months ended** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                         | ** ** | **June 30,**                       | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                       | ** ** | **2010**                                  | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | ** **                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                     |       | $                                         | 49,483     |                                    | $          | 38,361 |   | $ | 93,599 |   | $ | 73,210 |   |
| Cost of goods sold                               |       | 30,981                                    |       | 24,744                                  |       | 58,168 |   | 47,936 |   |
| Gross profit                                     |       | 18,502                                    |       | 13,617                                  |       | 35,431 |   | 25,274 |   |
| Selling, general and administrative expenses (a) |       | 15,060                                    |       | 10,795                                  |       | 29,102 |   | 21,455 |   |
| Net operating income                             |       | 3,442                                     |       | 2,822                                   |       | 6,329 |   | 3,819 |   |
| Interest expense, net                            |       | (314                                      | )          | (475                                    | )          | (681 | ) | (896 | ) |
| Income before provision for income taxes         |       | 3,128                                     |       | 2,347                                   |       | 5,648 |   | 2,923 |   |
| Income tax expense                               |       | 938                                       |       | 704                                     |       | 1,694 |   | 877 |   |
| NET INCOME                                       |       | $                                         | 2,190      |                                    | $          | 1,643 |   | $ | 3,954 |   | $ | 2,046 |   |
|                                             |       |                                      |       |                                    |       |   |   |   |   |
| NET INCOME PER SHARE - BASIC                     |       | $                                         | 0.14       |                                    | $          | 0.11 |   | $ | 0.26 |   | $ | 0.14 |   |
| Weighted average shares outstanding - basic      |       | 15,437,477                                |       | 15,143,032                              |       | 15,425,054 |   | 15,135,801 |   |
|                                             |       |                                      |       |                                    |       |   |   |   |   |
| NET INCOME PER SHARE - DILUTED                   |       | $                                         | 0.13       |                                    | $          | 0.11 |   | $ | 0.24 |   | $ | 0.13 |   |
| Weighted average shares outstanding- diluted     |       | 16,508,386                                |       | 15,392,782                              |       | 16,353,211 |   | 15,392,782 |   |

 

Seenotes to condensed consolidated financial statements.

 

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(a) Includesnon-cash stock-based compensation expense of $339 and $499 for the six monthsended June 30, 2010 and 2009, respectively, and expense of $158 and $134for the three months ended June 30, 2010 and 2009, respectively.

 

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**Summer Infant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

 

Notethat all dollar amounts presented in the table below are in thousands of USdollars.

 
| ** **                                                                    | ** ** | **Unaudited  For the six months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **June 30,********2010**                          | ** ** | **June 30,********2009** | ** ** |
|                                                                          |       |                                                   |       |   |   |
| Cash flows from operating activities:                                         |       |                                                   |       |   |   |
| Net income                                                                    |       | $                                                      | 3,954      |   | $ | 2,046 |   |
| Adjustments to reconcile net income to net cash  used in operating activities |       |                                                   |       |   |   |
| Depreciation and amortization                                                 |       | 2,483                                                  |       | 2,029 |   |
| Non-cash stock option expense                                                 |       | 339                                                    |       | 499 |   |
|                                                                          |       |                                                   |       |   |   |
| Change in value of interest rate swap agreements                              |       | (208                                                   | )          | — |   |
| Changes in assets and liabilities net of effects  of acquisition:             |       |                                                   |       |   |   |
| Increase in accounts receivable                                               |       | (8,854                                                 | )          | (3,033 | ) |
| (Increase) decrease in inventory                                              |       | (9,691                                                 | )          | 4,304 |   |
| Increase (decrease) in accounts payable and  accrued expenses                 |       | 8,984                                                  |       | (544 | ) |
| Decrease in prepaids and other current assets                                 |       | 418                                                    |       | 407 |   |
|                                                                          |       |                                                   |       |   |   |
| Net cash provided by (used in) operating  activities                          |       | (2,575                                                 | )          | 5,708 |   |
| Cash flows from investing activities:                                         |       |                                                   |       |   |   |
| Acquisitions of property and equipment                                        |       | (3,708                                                 | )          | (1,897 | ) |
|                                                                          |       |                                                   |       |   |   |
| Net cash used in investing activities                                         |       | (3,708                                                 | )          | (1,897 | ) |
| Cash flows from financing activities:                                         |       |                                                   |       |   |   |
| Net borrowings (repayments) on debt and other  long-term liabilities          |       | 7,342                                                  |       | (6,389 | ) |
| Proceeds from sale of building                                                |       | —                                                 |       | 3,903 |   |
| Net cash provided by (used in) financing activities                           |       | 7,342                                                  |       | (2,486 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                 |       | 708                                                    |       | 144 |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                     |       | 1,767                                                  |       | 1,469 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                |       | 932                                                    |       | 988 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                      |       | $                                                      | 2,699      |   | $ | 2,457 |   |
| Non cash investing activities:                                                |       |                                                   |       |   |   |
| Building related finance obligation                                           |       | $                                                      | —     |   | $ | 3,903 |   |
|                                                                          |       |                                                   |       |   |   |
| Cash paid for interest                                                        |       | $                                                      | 958        |   | $ | 747 |   |
|                                                                          |       |                                                   |       |   |   |
| Cash paid for taxes                                                           |       | $                                                      | 344        |   | $ | 294 |   |
|                                                                          |       |                                                   |       |   |   |
| New Capital Lease Obligation                                                  |       | $                                                      | 286        |   | $ | 234 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**SUMMER INFANT, INC.  AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

Theaccompanying interim condensed consolidated financial statements of SummerInfant, Inc. (the “Company”) are unaudited, but in the opinion ofmanagement, reflect all adjustments, consisting of normal recurring accruals,necessary for a fair presentation of the results for the interim periods.Accordingly, they do not include all information and notes required bygenerally accepted accounting principles for complete financial statements. Theresults of operations for interim periods are not necessarily indicative ofresults to be expected for the entire fiscal year or any other period. Thebalance sheet at December 31, 2009 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements. These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes for the 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*

 

Theprovision for income taxes is based on the Company’s estimated annualizedeffective tax rate for the year.

 

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.  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 June 30, 2010 or 2009. The tax years 2006 through 2009remain open to examination by the major taxing jurisdictions. The Companyexpects no material changes to unrecognized tax positions within the nexttwelve 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 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.

 

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

 

OnApril 10, 2008, the Company entered into two, three-year secured creditfacilities (the “Loan Agreement”) with Bank of America, N.A., as AdministrativeAgent, and each of the financial institutions that were a signatory to the LoanAgreement.  The Loan Agreement provides for a $36,000,000 working capitalrevolving credit facility and a $10,000,000 non-restoring acquisition creditfacility.  The credit facilities mature on June 30, 2011.  TheCompany and its subsidiaries, Summer Infant (USA), Inc., Summer InfantEurope Limited, Summer Infant Asia Limited and Summer Infant Canada, Limitedare the borrowers under this Loan Agreement.

 

TheCompany’s ability to borrow under the Loan Agreement is subject to its ongoingcompliance with a  number of financial and other covenants, including thefollowing: (i) that  the Company and its subsidiaries maintain a networth of $50,000,000 plus the  sum of 50% of net income  earned ineach fiscal year, (ii) that the Company and its subsidiaries maintain aratio of total funded debt  to EBITDA of not greater than 3.50:1.00, and(iii) that the Company and  its subsidiaries maintain a ratio ofoperating cash flow  to debt service of not less than 1.25:1.00. Furthermore, if the Company’s ratio of total funded debt to EBITDA is greaterthan 3.25:1.00 for any fiscal year, the aggregate amount that may be borrowedunder the Loan Agreement will be determined 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, 2010, theblended interest rate for these credit facilities was 3.7%. 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 June 30, 2010 was$40,213,000.

 

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 theloan Agreement may be declared immediately due and payable.   Forcertain events of default relating to insolvency and receivership, all outstandingobligations become due and payable.

 

Subsequentto the end of the second quarter, on July 30, 2010 the Company entered into anew loan agreement led by Bank of America which includes a $60 millionrevolving credit facility, plus an “accordion” feature which would allow theCompany to borrow up to $70 million in total. This new loan agreement matures on June 30, 2012, and contains the samebasic features as the previous Loan Agreement, except that the interest rate isnow LIBOR plus 200 to 250 basis points, and the operating cash flow to debtservice covenant is now 1.50:1.00.

 

During2009, the Company initiated an agreement to borrow against certaininternational receivables.  Approximately$875,000 relating to this agreement is included in current portion of long-termdebt at June 30, 2010.

 

3.**FAIR VALUE MEASUREMENTS**

 

EffectiveJanuary 1, 2008, the Company adopted the new standard regarding fair valuewhich establishes a new framework for measuring fair value and expands relateddisclosures. Broadly, the framework requires fair value to be determined basedon the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants. Thestandard established a three-level valuation hierarchy based upon observableand non-observable inputs.

 

Observableinputs reflect market data obtained from independent sources, whileunobservable inputs reflect our market assumptions. Preference is given toobservable inputs. These two types of inputs create the following fair valuehierarchy:

 

Level 1—Quotedprices for identical instruments in active markets.

 

Level 2—Quotedprices for similar instruments in active markets; quoted prices for identicalor similar instruments in markets that are not active; and model-derivedvaluations whose inputs are observable or whose significant value drivers areobservable.

 

Level 3—Significantinputs to the valuation model are unobservable.

 

TheCompany maintains policies and procedures to value instruments using the bestand most relevant data available. In addition, the Company utilizes riskmanagement resources that review valuation, including independent pricevalidation. Management

 

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concludesthere has been no material change in the company’s credit risk nor that of Bankof America and therefore the valuation of the liability is reasonable.

 

TheCompany uses derivatives to fix interest rates. As a matter of policy, theCompany does not use derivatives for speculative purposes. This is arequirement in the Company’s loan agreement to mitigate interest rate risk.

 

TheCompany recognizes the fair value of interest rate swaps using Level 2inputs.

 

Asof June 30, 2010 the fair value of the swaps now reflects a liability ofapproximately $613,000, which is included in “other liabilities” on theaccompanying balance sheet. The change in fair value of the swap liability isrecorded in “interest expense-net”. The interest rate swaps are not accountedfor as hedges.

 

Thenotional amounts under the interest rate swap agreements total approximately$20 million, which is approximately 50% of the Company’s total outstandingbank debt at June 30, 2010.

 

**4. DERIVATIVE INSTRUMENTS**

 

TheCompany is exposed to interest rate risk primarily through its borrowingactivities.  The Company’s long-term debtis a variable rate instrument.  TheCompany entered into three interest rate swap contracts under which the Companyagreed to pay an amount equal to a specified fixed rate of interest times anotional principal amount, and to in turn receive an amount equal to aspecified variable rate of interest times the same notional principal amount.

 

TheCompany uses derivatives to fix interest rates. As a matter of policy, theCompany does not use derivatives for speculative purposes. This is arequirement in the Company’s loan agreement to mitigate interest rate risk.

 

Theinterest rate swap contracts require payment of a fixed rate of interest andthe receipt of a variable rate of interest at the LIBOR one month index rateplus 150-200 basis points on a notional amount of indebtedness.

 
| ** ** | ** ** | **Rate** | ** ** | **Notional Amt** | ** ** | **Eff. Date** | ** ** | **Mat. Date** | ** ** | **Mark-to-Market @ 6/30/10** | ** ** |
|------------|------------|----------|------------|------------------|------------|---------------|------------|---------------|------------|------------------------------|------------|
| Swap 1     |       | 7.06     | %          | 3,698,888        |       | 6/21/2007     |       | 6/7/2012      |       | (349,471                     | )          |
| Swap 2     |       | 3.50     | %          | 6,000,000        |       | 5/12/2008     |       | 4/08/2011     |       | (155,638                     | )          |
| Swap 3     |       | 2.92     | %          | 10,000,000       |       | 11/3/2008     |       | 11/01/2010    |       | (107,599                     | )          |
|       |       |     |       |             |       |          |       |          |       | (612,708                     | )          |

 

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

 

OnMarch 24, 2009 the Company entered into a definitive agreement with FaithRealty II, LLC, a Rhode Island limited liability company (“Faith Realty”) (themembers of which are Jason Macari, the current Chairman of the board ofDirectors and President of the Company, and his spouse), pursuant to whichFaith Realty purchased the corporate headquarters of the Company located at1275 Park East Drive, Woonsocket, Rhode Island (the “Headquarters”) andsubsequently leased the Headquarters back to Summer USA (collectively, the “Transactions”). Pursuant to the terms of a Purchase and Sale Agreement between Summer USA andFaith Realty, dated as of March 24, 2009, Faith Realty purchased theHeadquarters for $4,052,500 and then leased the Headquarters back to Summer USAfor an annual rent of $390,000 during the initial seven (7) year term ofthe lease, payable monthly and in advance.  The lease will expire on theseventh (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 foran additional five (5) years, the annual rent for the first two(2) years of the extension term shall be equal to $429,000 and for thefinal three (3) years of the extension term shall be equal to$468,000.  In addition, during the first six (6) months of the lastlease year of the initial term of the lease Summer USA has the option torepurchase 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 to secure theFaith Realty debt on its mortgage; therefore, due to his continuing involvementin the building transaction and the Company’s option to repurchase thebuilding, the building remains on the books of the Company and the transactionhas been recognized as a financing, with no gain recognized.  The Companyalso has recorded a finance obligation under other liabilities in regards tothis transaction; the outstanding liability at June 30, 2010 was $3,718,000.

 

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OnFebruary 25, 2009, the Company’s board of Directors (with Mr. Macariand Mr. Gibree abstaining from such action) approved the Transactions,subject to the negotiation and execution of definitive agreements within theparameters approved by the Board.  In connection therewith, the boardgranted a potential waiver, to the extent necessary, if at all, of the conflictof interest provisions of the Company’s Model Code of Ethics, effective uponexecution of definitive agreements within the parameters approved by theBoard.  In connection with granting such potential waiver, the Board ofDirectors engaged independent counsel to review the proposed Transactions andan independent appraiser to ascertain (i) the value of the Headquartersand (ii) the market rent for the Headquarters.  In reaching itsconclusion that the Transactions are fair to the

 

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Company,the Board of Directors considered a number of factors, including Summer USA’sability to repurchase the Headquarters at 110% of the initial sale price at theend of the initial term.

 

Inaddition, the Company’s Audit Committee approved the Transactions (as a relatedparty transaction) and the potential waiver and recommended the matter to avote of the entire Board of Directors.

 

6.                        **COMMITMENTS AND CONTINGENCIES**

 

*Litigation*

 

TheCompany is a party to routine litigation and administrative complaints incidentalto its business.  Management does not believe that the resolution of anyor all of such routine litigation and administrative complaints is likely tohave a material adverse effect on the Company’s financial condition or resultsof operations.

 

7.                        **STOCK OPTIONS AND RESTRICTED SHARES**

 

Summerhas granted 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 us or our subsidiaries and whoare deemed to have contributed or to have the potential to contribute to oursuccess. The Company has issued both stock options and restricted sharesto employees and board members.

 

Share-basedcompensation expense for the six months ended June 30, 2010 and 2009 ofapproximately $339,000 and $499,000, respectively.  As of June 30, 2010,there were 2,141,600 stock options outstanding, and 161,500 unvested restrictedshares outstanding. During the three months ended June 30, 2010 the Company didnot grant any stock options.

 

**ITEM2.   MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The statements contained in this Form 10-Q, thatare not purely historical, are forward-looking information and statementswithin the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934. These includestatements regarding our expectations, intentions, or strategies regarding futurematters. All forward-looking statements included in this document are based oninformation available to us on the date hereof. It is important to note thatour actual results could differ materially from those projected in suchforward-looking statements contained in this Form 10-Q. Theforward-looking statements contained herein are based on current expectationsthat involve numerous risks and uncertainties.  These risks include theconcentration of the Company’s business with retail customers; the ability ofthe Company to compete in the industry; the Company’s dependence on keypersonnel; the Company’s reliance on foreign suppliers; the Company’s abilityto meet its debt obligations; and other risks as detailed in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2009, and subsequent filings with the Securities and Exchange Commission Allthese matters are difficult or impossible to predict accurately, and many ofwhich may be beyond our control. Although we believe that the assumptionsunderlying our forward-looking statements are reasonable, any of theassumptions could be inaccurate and, therefore, there can be no assurance thatthe forward-looking statements included in this Form 10-Q will prove to beaccurate.*

 

Theinformation contained in this section has been derived from our consolidatedfinancial statements and should be read together with the consolidatedfinancial statements and related notes included elsewhere in this filing.

 

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*

 

Ourcritical accounting policies are disclosed in the Company’s Annual Report onForm 10-K.  There have been no material changes to these policiesduring the first six months of 2010. This summary of critical accountingpolicies is presented to assist in understanding Summer’s consolidatedfinancial statements. The consolidated financial statements and notes arerepresentations of Summer’s management, which is responsible for theirintegrity and objectivity. These accounting policies conform to accounting 

 

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principlesgenerally accepted in the United States of America and have been consistentlyapplied in the preparation of the consolidated financial statements.

 

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 juvenileproducts.  Over 90% of the Company’s revenues are derived from retail customers in North America, with thebalance of revenues being generated in Europe, Asia, and Central/South America.

 

*Income taxes*

 

EffectiveJanuary 1, 2007, the Company adopted the provisions of new accountingguidance which provides detailed guidance for the financial statementrecognition, measurement and disclosure of uncertain tax positions recognizedin the financial statements. Tax positions must meet a “more-likely-than-not”recognition threshold at the effective date to be recognized upon adoption andin subsequent periods. Upon adoption, the Company had no unrecognized taxbenefits.

 

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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 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 June 30, 2010 or 2009. 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.

 

**Company Overview**

 

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.

 

Ourstrategy is to grow its sales through a variety of methods, including:

 

·                  Increased productpenetration (more products at each store);

 

·                  Increased storepenetration (more stores within each retail customer);

 

·                  New products(at existing and new customers);

 

·                  New massmerchant retail customers;

 

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

 

·                  New geographies(international expansion);

 

·                  New productcategories;

 

·                  Acquisitions.

 

Wehave been able to grow our annual revenues significantly through a combinationof all of the above factors. Each year we have been able to expand the numberof products into its main distribution channel, mass merchant retailers, andhas also added new customers each year. Therefore, even without new productintroductions, Summer could grow its business by simply selling more of theexisting product line to existing customers.

 

For2010 and beyond, the growth strategy of Summer will be to continue to developand sell new products to the 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).

 

Ourgrowth strategy has included acquisitions.

 

OnMarch 31, 2008,  Summer acquired substantially all of the assets ofBasic Comfort, Inc., a leading manufacturer and supplier of infant comfortand safety products, including infant sleep positioners, infant head supportsand portable changing pads.

 

OnApril 18, 2008, Summer acquired Kiddopotamus & Company, a leadingmanufacturer and supplier of infant nursery, travel and feeding accessories.

 

OnJuly 17, 2009 Summer acquired Butterfly Living, Inc., a manufacturer of cribsand related nursery furniture.

 

Weintend to pursue additional potential acquisitions in order to obtain newinnovative products, new product categories, new retail customers or new salesterritories.  There are approximately 400 active juvenile productcompanies, of which approximately 300 have less than $10,000,000 in sales. Inaddition, there are various product categories that Summer does not currentlycompete in, including car seats, strollers, walkers, feeding, and othercategories. We may look to develop its own products in these categories orattempt to gain entrance into these categories through acquisitions.

 

Aswe continues to grow through internal initiatives and any additional futureacquisitions, we will incur additional expenses.  Two key areas in which such increased expenseswill likely occur are sales and product development. To grow sales, we willlikely 

 

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hireadditional sales personnel to service new geographic territories, focusexisting resources on specific parts of the United States market and retainproduct line specialists to drive sales of new and existing products inspecific areas in which we believe we can readily increase sales. Productdevelopment expenses will increase as Summer develops new products in existingand new categories. As a result of its acquisition strategy, we will facevarious challenges such as the integration of the acquired companies’ productlines, employees, marketing requirements and information systems. Ongoinginfrastructure investment also may be required to support realized growth,including expenditures with respect to upgraded and expanded informationsystems 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 contract manufacturers.Substantially all of Summer’s purchases are made in US dollars, therefore mostof this activity is not subject to currency fluctuations. If Summer’s suppliersexperience increased raw materials, labor or other costs and pass along suchcost increases through higher prices for finished goods, Summer’s costs ofsales would increase, and to the extent the Company is 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; these orders usually incorporate enoughproduct to fill each store plus additional amounts to be kept at the customer’sdistribution center. 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 of Operations**

 

**Summer Infant and Subsidiaries**

**Consolidated Statements of Income**

**For the Three and Six Months Ending June 30, 2010and 2009**

**(In thousands)**

**(Unaudited)**

 
|                                                                                                                           |   | **Three Months********Ended June 30,********2010** |         | **Three Months********Ended June 30,********2009** |   | **Six Months Ended********June 30, 2010** |   | **Six Months Ended********June 30, 2009** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------------|---------------------------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                                           |   |                                                    |         |                                                    |   |                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Net  Sales                                                                                                                     |   | $                                                       |  49,483 |                                                    | 100.0  | %                                              | $      |  38,361                                   |   | 100.0 | % | $ |  93,599 |   | 100.0 | % | $ | 73,210 |   | 100.0 | % |
| Cost  of Goods Sold                                                                                                            |   | 30,981                                                  |         | 62.6                                                    | %      | 24,744                                         |   | 64.5                                           | %      | 58,168 |   | 62.1 | % | 47,936 |   | 65.5 | % |
| Gross  Profit                                                                                                                  |   | 18,502                                                  |         | 37.4                                                    | %      | 13,617                                         |   | 35.5                                           | %      | 35,431 |   | 37.9 | % | 25,274 |   | 34.5 | % |
| OPERATING  EXPENSES                                                                                                            |   |                                                    |         |                                                    |   |                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses (excluding depreciation, amortization,  and non-cash stock compensation expense) |   | 13,634                                                  |         | 27.6                                                    | %      | 9,633                                          |   | 25.1                                           | %      | 26,280 |   | 28.1 | % | 18,927 |   | 25.8 | % |
|                                                                                                                           |   |                                                    |         |                                                    |   |                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA(a)                                                                                                            |   | $                                                       |  4,868  |                                                    | 9.8    | %                                              | $      |  3,984                                    |   | 10.4 | % | $ |  9,151 |   | 9.8 | % | $ |  6,347 |   | 8.7 | % |

 

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(a)             See non-GAAP discussion below regarding the computationof Adjusted EBITDA.

 

*Three months ended June 30, 2010 compared withthree months ended June 30, 2009*

 

Netsales increased from $38,361,000 in the three months ended June 30, 2009to $49,483,000 for the three months ended June 30, 2010, an increase ofapproximately 29%. This sales increase was primarily attributable to increaseddistribution of Summer’s products throughout Summer’s customer base, plus newproduct introductions.  Increases were noted in most of the company’ssignificant customers.

 

Grossprofit increased from $13,617,000 for the three months ended June 30, 2009to $18,502,000 for the three months ended June 30, 2010.  The grossprofit as a percentage of sales increased to 37.4% from 35.5% in the prioryear. The increase as a percentage of sales is due to cost reductionsachieved during the second half of 2009, in addition to a favorable productmix.

 

Selling,general and administrative expenses (excluding depreciation, amortization andnon-cash stock compensation expense) increased from $9,633,000 for the threemonths ended June 30, 2009 to $13,634,000 for the three months endedJune 30, 2010. This increase was primarily attributable to increases inheadcount, higher variable selling expenses due to the increase in sales, and costsassociated with the opening of new distribution centers to support the increasein sales.  Selling, general and administrative expenses increased to 27.6%of net sales in the three months ended June 30, 2010 from 25.1% of netsales in the three months ended June 30, 2009.

 

AdjustedEBITDA (as defined) increased from $3,984,000 for the three months endedJune 30, 2009 to $4,868,000 for the three months ended June 30, 2010,an increase of approximately 22%. This increase was primarily attributable tothe increased sales and gross profit dollars as described above.

 

*Six months ended June 30, 2010 compared with sixmonths ended June 30, 2009*

 

Netsales increased from $73,210,000 in the six months ended June 30, 2009 to$93,599,000 for the six months ended June 30, 2010, a 28% increase. Thissales increase was primarily attributable to increased distribution of Summer’sproducts throughout Summer’s customer base, plus new productintroductions.  Increases were noted in most of the significant customers.

 

Grossprofit increased from $25,274,000 for the six months ended June 30, 2009to $35,431,000 or the six months ended June 30, 2010.  The grossprofit as a percentage of sales increased to 37.9% from 34.5% in the prioryear. The increase as a percentage of sales is due to cost reductionsachieved during the second half of 2009, in addition to a favorable productmix.

 

Selling,general and administrative expenses increased from $18,927,000 for the sixmonths ended June 30, 2009 to $26,280,000 or the six months endedJune 30, 2010. This increase was primarily attributable to increases inheadcount, higher variable selling expenses due to the increase in sales, andcosts associated with the opening of new distribution centers to support theincrease in sales.  Selling, general and administrative expenses increasedto 28.1% of net sales in the six months ended June 30, 2010 from 25.8% ofnet sales in the six months ended June 30, 2009.

 

AdjustedEBITDA increased from $6,347,000 for the six months ended June 30, 2009 toequal to the $9,151,000 for the six months ended June 30, 2010, anincrease of approximately 44%. This increase was primarily attributable to theincreased sales and gross profit dollars as described above.

 

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**Liquidity and Capital Resources**

 

Summergenerally funds its operations and working capital needs through cash generatedfrom operations and borrowings under its 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:

 

·                  Inventory ispurchased 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.

 

·                  Sales tocustomers 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.

 

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 andJanuary (the typical time frame for new product shipments). In most casesthe payments for the tools are spread out over a three to four month period.

 

Forthe six months ended June 30, 2010, net cash used in operating activitieswas $2,575,000.  This was primarily due to increases in trade receivablesof $8,854,000, which is a direct result of the significant increase in salesfor the Company.

 

Netcash used in investing activities was $3,708,000, 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 $7,342,000, 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 six months endedJune 30, 2010 was $1,767,000, resulting in a cash balance of $2,699,000 atJune 30, 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 Adjusted EBITDA. In addition, there is no assurance that Summer willmeet all of its bank covenants in the future, or that its lenders will grantwaivers if there 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.

 

OnApril 10, 2008, Summer entered into two, 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 provides for a $36,000,000 working capitalrevolving credit facility and a $10,000,000 non-restoring acquisition creditfacility.  The credit facilities mature on June 30, 2011.

 

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 credit facilities are securedby all assets of 

 

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Summerand its subsidiaries.  These credit facilities replace Summer’s prior lineof credit, and are being used principally to fund growth opportunities and forworking 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 fiscalyear, (ii) that Summer and its subsidiaries maintain a ratio of totalfunded debt  to EBITDA of not greater than 3.50:1.00, and (iii) thatSummer and  its subsidiaries maintain a ratio of operating cash flow to debt service of not less than 1.25:1.00.  Furthermore, if Summer’sratio of total funded debt to EBITDA is greater than 3.25:1.00 for any fiscalyear, the aggregate amount that may be borrowed under the Loan Agreement willbe determined 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, 2010, theblended interest rate for these credit facilities was 3.7%.  In addition,these credit facilities have an unused line fee based on the unused amount ofthe credit facilities equal to 25 basis points. The total amount outstanding on these facilities was $40,213,000 at June 30,2010.

 

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 theloan Agreement may be declared immediately due and payable.   Forcertain events of default relating to insolvency and receivership, alloutstanding obligations become due and payable.

 

TheCompany was in compliance with all covenants under its line of credit as of June 30,2010.

 

Subsequentto the end of the second quarter, on July 30, 2010 the Company enteredinto a new loan agreement led by Bank of America which includes a $60 millionrevolving credit facility, plus an “accordion” feature which would allow theCompany to borrow up to $70 million in total. This new loan agreement matures on June 30, 2012, and contains thesame basic features as the previous Loan Agreement, except that the interestrate is now LIBOR plus 200 to 250 basis points, and the operating cash flow todebt service covenant is now 1.50:1.00.

 

**Non-GAAP Discussion**

 

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 (loss) before income taxes, interest expense, non-cash stock optionexpense, and depreciation and amortization. Summer’s management uses AdjustedEBITDA as a financial measure to assess the ability of its assets to generatecash sufficient to pay interest on its indebtedness, meet capital expenditureand working capital requirements, and otherwise meet its obligations as theybecome due. Summer’s management believes that the presentation of AdjustedEBITDA provides useful information regarding Summer’s results of operationsbecause they assist in analyzing and benchmarking the performance and value ofSummer’s business. Summer believes that Adjusted EBITDA is useful tostockholders as a measure of comparative operating performance, as it is lesssusceptible to variances in actual performance resulting from depreciation andamortization and more reflective of changes in pricing decisions, cost controlsand other factors that affect operating performance.

 

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

 

·                  To calculateand support various coverage ratios with Summer’s lenders;

 

·                  To allowlenders to calculate total proceeds they are willing to loan to Summer based onits relative strength compared to other competitors; and

 

·                  to moreaccurately compare Summer’s operating performance from period to period andcompany to company by eliminating differences caused by variations in capitalstructures (which affect relative interest expense), tax positions andamortization 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 to operateits business. In addition, Summer’s calculation of Adjusted EBITDA may not beconsistent with similarly titled measures of other companies and should beviewed in conjunction with measures 

 

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thatare computed in accordance with GAAP. Summer’s management compensates for theselimitations in considering Adjusted EBITDA in conjunction with its analysis ofother GAAP financial measures, such as net income.

 

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

 

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**Reconciliation of unaudited Adjusted EBITDA to Net Income (in$000’s):**

 
| ** **                    | ** ** | **Six Months Ended********June 30** | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|
| ** **                    | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
|                          |       |                                               |       |   |   |
| Net income                    |       | $                                                  | 3,954      |   | $ | 2,046 |   |
|                          |       |                                               |       |   |   |
| Income taxes                  |       | 1,694                                              |       | 877 |   |
|                          |       |                                               |       |   |   |
| Non-cash stock option expense |       | 339                                                |       | 499 |   |
|                          |       |                                               |       |   |   |
| Interest expense              |       | 681                                                |       | 896 |   |
|                          |       |                                               |       |   |   |
| Depreciation and amortization |       | 2,483                                              |       | 2,029 |   |
|                          |       |                                               |       |   |   |
| Adjusted EBITDA, as defined   |       | $                                                  | 9,151      |   | $ | 6,347 |   |

 

ITEM3. Quantitative and Qualitative Disclosures About Market Risk.

 

Notapplicable.

 

**ITEM 4T.  Controls and Procedures**

 

*(a) Evaluation of Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, as ofthe end of the period covered by this Quarterly Report, Summer carried out anevaluation, under the supervision and with the participation of the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures, as of June 30, 2010. Our ChiefExecutive Officer and Chief Financial Officer have concluded, based on theirevaluation, that the Company’s controls and procedures were effective as ofJune 30, 2010.

 

*(b) Changes in Internal Control Over Financial Reporting*

 

Therewas no change in Summer’s internal control over financial reporting thatoccurred during the period covered by this Quarterly Report that has materiallyaffected, or is reasonably likely to materially affect, Summer’s internalcontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. Legal Proceedings**

 

None.

 

**ITEM 1A.  Risk Factors**

 

Therehave been no material changes from the risk factors previously disclosed in Part 1, Item1A (“Risk Factors”), of our Annual Report on Form 10-K for the fiscal yearended December 31, 2009.

 

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

 

None.

 

**ITEM 3.  Defaults Upon SeniorSecurities**

 

None.

 

**ITEM 5. Other Information**

 

None.

 

**ITEM 6. Exhibits**

 

Exhibit10.1 – Amended and Restated Credit Agreement Dated as of August 2, 2010 amongSummer Infant, Inc., Summer Infant (USA), Inc., Kiddopotamus & Company, asBorrowers, and Bank of America, N.A., as Administrative Agent, Swing LineLender and L/C Issuer, RBS Citizens, National Association, as Collateral Agent,and The Other Lenders Party Hereto.

 

31.1Chief Executive Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2Chief Financial Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1Certification of Jason Macari, Chief Executive Officer of SummerInfant, Inc., pursuant to 18 U.S.C Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2Certification of Joseph Driscoll, Chief Financial Officer of SummerInfant, Inc., pursuant to 18 U.S.C Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**Signatures**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| **Summer Infant, Inc.** |                     |
|------------------------------|--------------------------|
|                         |                     |   |
|                         |                     |   |
| August 9, 2010          |                     |
|                         |                     |   |
|                         | /s/  Jason Macari        |   |
|                         | Jason  Macari            |   |
|                         | Chief  Executive Officer |   |
|                         |                     |   |
|                         |                     |   |
| August 9, 2010          |                     |
|                         |                     |   |
|                         | /s/  Joseph Driscoll     |   |
|                         | Joseph  Driscoll         |   |
|                         | Chief  Financial Officer |   |

 

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