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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

**of the Securities Exchange Act of 1934**

 

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

 

**Summer Infant, Inc.**

(Nameof Registrant as Specified in Its Charter)

 

**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) |

 

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

 

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

 

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

 

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

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

 

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

 

 

 

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Table of Contents

 

**Summer Infant, Inc.**

**Form 10Q**

 

**Table of Contents**

 
| ** **                                                            | **Page Number**                                                                                                              |
|-----------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
| **Part 1.**                                                      | **Financial  Information**                                                                                                        |   |
| ** **                                                            | ** **                                                                                                                        |   |
| **Item 1.**                                                           | **Condensed  Consolidated Financial Statements (unaudited)**                                                                      |   |
| ** **                                                            | ** **                                                                                                                        |   |
| ** **                                                            | **Condensed Consolidated Balance Sheets  September 30, 2008 (unaudited) and December 31, 2007**                         | **3** |
| ** **                                                            | ** **                                                                                                                        | ** ** |
| ** **                                                            | **Condensed Consolidated Statements of Income for the  three and nine months ended September 30, 2008 and 2007 (unaudited)** | **4** |
| ** **                                                            | ** **                                                                                                                        |   |
| ** **                                                            | **Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2008 and 2007 (unaudited)**       | **5** |
| ** **                                                            | ** **                                                                                                                        | ** ** |
| ** **                                                            | **Notes to Condensed Consolidated Financial Statements**                                                                          | **6** |
| ** **                                                            | ** **                                                                                                                        | ** ** |
| **Item 2.**                                                           | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                   | **11** |
| ** **                                                            | ** **                                                                                                                        |   |
| **Item  3.**                                                          | **Quantitative and  Qualitative Disclosures About Market Risk**                                                                   | **N/A** |
| ** **                                                            | ** **                                                                                                                        | ** ** |
| **Item 4T. Controls and Procedures**                                  | **18**                                                                                                                            |
| ** **                                                            |                                                                                                                              |
| **Part II.**                                                     | **Other Information**                                                                                                             | **19** |
| ** **                                                            | ** **                                                                                                                        | ** ** |
| **Item 1.**                                                           | **Legal  Proceedings**                                                                                                            |   |
| **Item  1A. Risk Factors**                                            | **19**                                                                                                                            |
| **Item 2. Unregistered Sales of Equity Securities and  Use of Funds** |                                                                                                                              |
| **Item 3. Defaults Upon Senior Securities**                           |                                                                                                                              |
| **Item 4. Submission of Matters to a Vote of Security  Holders**      | **19**                                                                                                                            |
| **Item  5. Other Information**                                        | **19**                                                                                                                            |
| **Item 6. Exhibits**                                                  | **19**                                                                                                                            |
| ** **                                                            |                                                                                                                              |
| **Signatures**                                                        | **20**                                                                                                                            |

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 

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

 
| ** **                                                                                             | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **Unaudited**                | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                 |       |                         |       |                        |       |
| CURRENT ASSETS                                                                                         |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                             |       | $                            | 1,451      |                        | $          | 1,771 |   |
| Trade  receivables, net of allowance for doubtful accounts                                             |       | 29,402                       |       | 21,245                      |       |
| Inventory,  primarily finished goods                                                                   |       | 31,164                       |       | 19,327                      |       |
| Prepaids and  other current assets                                                                     |       | 1,417                        |       | 970                         |       |
| Deferred tax  assets                                                                                   |       | 402                          |       | 134                         |       |
| TOTAL CURRENT  ASSETS                                                                                  |       | 63,836                       |       | 43,447                      |       |
| Property and  equipment, net                                                                           |       | 10,407                       |       | 9,279                       |       |
| Goodwill                                                                                               |       | 44,723                       |       | 30,820                      |       |
| Other intangible  assets, net                                                                          |       | 10,906                       |       | 9,463                       |       |
| Other assets                                                                                           |       | 244                          |       | 216                         |       |
|                                                                                                   |       |                         |       |                        |       |
| TOTAL ASSETS                                                                                           |       | $                            | 130,116    |                        | $          | 93,225 |   |
|                                                                                                   |       |                         |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                             |       |                         |       |                        |       |
| CURRENT  LIABILITIES                                                                                   |       |                         |       |                        |       |
| Line of credit -  bank                                                                                 |       | $                            | —     |                        | $          | 17,591 |   |
| Accounts payable  and accrued expenses                                                                 |       | 24,171                       |       | 17,574                      |       |
| Current portion  of long term liabilities                                                              |       | 2,312                        |       | 265                         |       |
| TOTAL CURRENT  LIABILITIES                                                                             |       | 26,483                       |       | 35,430                      |       |
| Long term  liabilities, less current portion                                                           |       | 41,315                       |       | 3,977                       |       |
| Deferred tax  liabilities                                                                              |       | 573                          |       | 548                         |       |
|                                                                                                   |       |                         |       |                        |       |
| TOTAL  LIABILITIES                                                                                     |       | 68,371                       |       | 39,955                      |       |
|                                                                                                   |       |                         |       |                        |       |
| COMMITMENTS AND  CONTINGENCIES                                                                         |       |                         |       |                        |       |
|                                                                                                   |       |                         |       |                        |       |
| STOCKHOLDERS’  EQUITY                                                                             |       |                         |       |                        |       |
| Common Stock  $.0001 par value, issued and outstanding 15,055,782 and 13,907,892 shares,  respectively |       | 2                            |       | 1                           |       |
| Additional paid  in capital                                                                            |       | 54,005                       |       | 49,078                      |       |
| Retained  earnings                                                                                     |       | 8,031                        |       | 4,095                       |       |
| Accumulated  other comprehensive income (loss)                                                         |       | (293                         | )          | 96                          |       |
|                                                                                                   |       |                         |       |                        |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                       |       | 61,745                       |       | 53,270                      |       |
|                                                                                                   |       |                         |       |                        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                       |       | $                            | 130,116    |                        | $          | 93,225 |   |

 

See notes to condensedconsolidated financial statements

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Income**

 

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

 
| ** **                                        | ** ** | **Unaudited**                                      | ** ** | **Unaudited**                                     | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
| ** **                                        | ** ** | **September 30,   2008**                      | ** ** | **September 30,    2007**                    | ** ** | **September 30,    2008** |   | **September 30,    2007** |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Net revenues                                      |       | $                                                  | 35,575     |                                              | $          | 21,198 |   | $ | 97,982 |   | $ | 44,644 |   |
| Cost of goods  sold                               |       | 23,109                                             |       | 13,224                                            |       | 63,263 |   | 27,564 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Gross profit                                      |       | 12,466                                             |       | 7,974                                             |       | 34,719 |   | 17,080 |   |
| Selling, general  and administrative expenses (a) |       | 9,537                                              |       | 6,179                                             |       | 26,998 |   | 14,001 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Net operating  income                             |       | 2,929                                              |       | 1,795                                             |       | 7,721 |   | 3,079 |   |
| Interest income  (expense), net                   |       | (506                                               | )          | (78                                               | )          | (1,473 | ) | 474 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income before  provision for income taxes         |       | 2,423                                              |       | 1,717                                             |       | 6,248 |   | 3,553 |   |
| Income tax  expense                               |       | 817                                                |       | 657                                               |       | 2,312 |   | 1,364 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| NET INCOME                                        |       | $                                                  | 1,606      |                                              | $          | 1,060 |   | $ | 3,936 |   | 2,189 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| NET INCOME PER  SHARE- BASIC                      |       | $                                                  | 0.11       |                                              | $          | 0.08 |   | $ | 0.27 |   | $ | 0.17 |   |
| Weighted average  shares outstanding - basic      |       | 15,055,782                                         |       | 13,907,892                                        |       | 14,627,137 |   | 13,263,000 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| NET INCOME PER  SHARE - DILUTED                   |       | $                                                  | 0.11       |                                              | $          | 0.08 |   | $ | 0.27 |   | $ | 0.17 |   |
| Weighted average  shares outstanding- diluted     |       | 15,055,782                                         |       | 13,907,892                                        |       | 14,627,137 |   | 13,263,000 |   |

 

Seenotes to condensed consolidated financial statements.

 

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(a) Includesnon-cash stock compensation expense of $270 and $281 for the nine months ended September 30,2008 and 2007, and expense of $90 for each of the three months ended September 30,2008 and 2007, respectively.  The totalalso includes non-capitalizable deal-related fees of $214 for the nine monthsended September 30, 2008.

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

 

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

 
| ** **                                                                                                                                                                             | ** ** | **Unaudited**                                     | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **For the nine months ended** | ** ** |
| ** **                                                                                                                                                                             | ** ** | **September 30,  2008**                      |       | **September 30,  2007** |   |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Cash flows from  operating activities:                                                                                                                                                 |       |                                              |       |   |   |
| Net income                                                                                                                                                                             |       | $                                                 | 3,936      |   | $ | 2,189 |   |
| Adjustments to  reconcile net income to net cash used in operating activities                                                                                                          |       |                                              |       |   |   |
| Depreciation and  amortization                                                                                                                                                         |       | 1,866                                             |       | 804 |   |
| Non-cash stock  option expense                                                                                                                                                         |       | 270                                               |       | 281 |   |
| Deferred taxes                                                                                                                                                                         |       | (243                                              | )          |   |   |
| Changes in  assets and liabilities net of effects of acquisition:                                                                                                                      |       |                                              |       |   |   |
| Increase in  accounts receivable                                                                                                                                                       |       | (4,489                                            | )          | (6,706 | ) |
| Increase in  inventory                                                                                                                                                                 |       | (7,020                                            | )          | (4,716 | ) |
| Increase in  accounts payable and accrued expenses                                                                                                                                     |       | 3,083                                             |       | 4,436 |   |
| (Increase)  decrease in prepaid expenses and other current assets                                                                                                                      |       | 85                                                |       | (218 | ) |
| Increase in  other assets                                                                                                                                                              |       | (26                                               | )          | — |   |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Net cash used in  operating activities                                                                                                                                                 |       | (2,538                                            | )          | (3,930 | ) |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Cash flows from  investing activities:                                                                                                                                                 |       |                                              |       |   |   |
| Acquisitions of  property and equipment                                                                                                                                                |       | (2,273                                            | )          | (2,876 | ) |
| Acquisition of  Basic Comfort, Inc., Kiddopotamus & Company (2008) and Summer  Infant, Inc. (2007) net of cash acquired of $61 and $897, respectively                    |       | (15,586                                           | )          | (23,361 | ) |
| Acquisition of  intangible assets                                                                                                                                                      |       | (1,000                                            | )          | — |   |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Net cash used in  investing activities                                                                                                                                                 |       | (18,859                                           | )          | (26,237 | ) |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Cash flows from  financing activities:                                                                                                                                                 |       |                                              |       |   |   |
| Net borrowings  (repayments) on debt                                                                                                                                                   |       | 21,611                                            |       | (13,886 | ) |
| Principal  payments on capital lease obligations                                                                                                                                       |       | (144                                              | )          | — |   |
| Redemptions of  common stock                                                                                                                                                           |       | —                                            |       | (6,883 | ) |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Net cash  provided by (used in) financing activities                                                                                                                                   |       | 21,467                                            |       | (20,769 | ) |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                                                          |       | (390                                              | )          | 149 |   |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                                                                                                             |       | (320                                              | )          | (50,787 | ) |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD                                                                                                                                        |       | 1,771                                             |       | 52,094 |   |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                                                                                              |       | $                                                 | 1,451      |   | $ | 1,307 |   |
|                                                                                                                                                                                   |       |                                              |       |   |   |
| Non cash  investing activities:                                                                                                                                                        |       |                                              |       |   |   |
| Issuance of  common stock in conjunction with the acquisition of Basic Comfort, Inc.,  Kiddopotamus & Company (2008), and Summer Infant, Inc. (2007),  respectively |       | $                                                 | 4,657      |   | $ | 20,563 |   |
| New capital  lease obligations incurred                                                                                                                                                |       | 322                                               |       | — |   |
| Cash paid for  interest                                                                                                                                                                |       | 1,373                                             |       | 515 |   |
| Cash paid for  income taxes                                                                                                                                                            |       | 1,721                                             |       | 574 |   |

 

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**SUMMERINFANT, INC.  AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 

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

 

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

 

*Nature of Operations and Basis of Presentation*

 

TheCondensed Consolidated Statement of Income for the nine months ended September 30,2007 consists of the period from March 6, 2007 through September 30,2007 for Summer plus the full nine months of results of KBL (unaudited).  The acquisition of Summer by KBL occurred on March 6,2007, and therefore the results of Summer are included from that date forward.The interim financial information as of September 30, 2008, and for thethree and nine months then ended, is unaudited and has been prepared on thesame basis as the audited financial statements as of December 31,2007.  The 2008 results include theresults of Basic Comfort, Inc. and Kiddopotamus & Company fromthe dates of acquisition, which were March 31, 2008 and April 18,2008, respectively.  In the opinion ofmanagement, such unaudited financial information includes all adjustments(consisting only of normal recurring adjustments) necessary for a fairpresentation of the interim information. Operating results for the three andnine months ended September 30, 2008 are not necessarily indicative of theresults that may be expected for the year ended December 31, 2008.

 

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

 

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*Basic Comfort Acquisition*

 

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

 

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

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

 

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

 

*Kiddopotamus Acquisition*

 

On April 18, 2008, the Company, through Summer (USA),entered into an Agreement and Plan of Merger (the “Merger Agreement”), amongSummer (USA), Kiddo Acquisition Co., Inc., a wholly-owned subsidiary ofSummer (USA) (“Merger Sub”), Kiddopotamus & Company (“Kiddopotamus”),J. Chris Snedeker, Kristen Peterson Snedeker and Thomas K. Manning, under whichthe Company acquired Kiddopotamus, a leading manufacturer and supplier ofinfant nursery, travel and feeding accessories.  Pursuant to the terms ofthe Merger Agreement, on April 18, 2008, Merger Sub merged with and intoKiddopotamus, with Kiddopotamus continuing as the surviving entity (the “Merger”). As a result of the Merger, Kiddopotamus became an indirect, wholly-owned subsidiaryof the Company.

 

Under the merger agreement, the total purchase price paid by theCompany to the holders of Kiddopotamus common and preferred stock was$12,500,000, plus the payment of certain expenses.  Of the total purchase price, approximately $9,600,000was paid in cash, and approximately $2,900,000 was paid by the issuance of697,890 unregistered shares of the Company’s common stock at $4.126 per share,which represented the ten day trading average ending on the trading day twobusiness days prior to the closing of the merger.  Each holder of Kiddopotamus common andpreferred stock other than J. Chris Snedeker and Kristen Peterson Snedeker (the“Principal Stockholders”) elected to receive their allocation of the total netpurchase price in cash.  As required bythe Merger Agreement, the Principal Stockholders received one half of theirallocation of the total net purchase price in shares and one half in cash.

 

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

 

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

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

 

Thepro forma effect on net revenues, net income, and net income per share amountsfor the nine months ended September 30, 2008, assuming the Kiddopotamus transactionhad closed on January 1, 2008, are as follows:

 
| Net revenues:          |   | $ | 101,771,000    |   |
|------------------------|--------|---|----------------|--------|
| Net income:            |   | $ | 4,424,000      |   |
| Net income per  share: |   | $ | 0.30 per share |   |

 

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

 

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

 

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

 

*Use of Estimates*

 

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

 

*Net Income Per Share*

 

Basicnet income per share for the Company is computed by dividing net income by theweighted-average number of shares of common stock outstanding during theperiod. Options to purchase 

 

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1,039,200and 975,200 shares of the Company’s common stock, and 3,633,953 and 18,400,000warrants to purchase shares of common stock, were not included in thecalculation, because these options and warrants were anti-dilutive for thethree and nine months ended September 30, 2008 and 2007, respectively.

 

*Reclassifications*

 

Certain prior period amounts were reclassified toconform to current period presentation.

 

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

 

*New Credit Facilities*

 

On April 10, 2008, the Company enteredinto two new three-year secured credit facilities (the “Loan Agreement”) withBank of America, N.A., as Administrative Agent, and each of the financialinstitutions that were a signatory to the Loan Agreement.  The Loan Agreement provides for a $36,000,000working capital revolving credit facility and a $10,000,000 non-restoringacquisition credit facility.  The newcredit facilities mature on April 10, 2011.  The acquisition credit facility has beenutilized in its entirety as of September 30, 2008.

 

The Company and its subsidiaries, SummerInfant (USA), Inc. Summer Infant Europe Limited, Summer Infant AsiaLimited and Summer Infant Canada, Limited are the borrowers under this LoanAgreement.  The Loan Agreement is securedby substantially all assets of the Company and its subsidiaries.  These new credit facilities replace theCompany’s prior line of credit and are being used principally to fund growthopportunities and for working capital purposes.

 

The Company’s ability to borrow under theLoan Agreement is subject to its ongoing compliance with a number of financialand other covenants, including the following: (i) that the Company and itssubsidiaries maintain a net worth of $50,000,000 plus the sum of 50% of netincome earned in each fiscal year, (ii) that the Company and itssubsidiaries maintain a ratio of total funded debt to EBITDA (as defined in theLoan Agreement) of not greater than 3.50:1.00, and (iii) that the Companyand its subsidiaries maintain a ratio of operating cash flow to debt service ofnot less than 1.25:1,00.  In addition, ifthe Company’s ratio of total funded debt to EBITDA is greater than 3.25:1.00 asof December 31, 2008, the total commitment amount under the workingcapital revolving credit facility will reduce by $4,000,000 on March 31,2009.  Furthermore, if the Company’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 formula. 

 

Borrowings under the Loan Agreement bearinterest at a floating rate based on a spread over LIBOR ranging from 150 basispoints to 200 basis points, depending upon the ratio of the Company’s totalfunded debt to EBITDA.  As of September 30,2008, the rate on these credit facilities was approximately 5.46%.  In addition, these new credit facilities havean unused line fee based on the unused amount of the credit facilities equal to25 basis points.

 

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

 

*Amendment to Construction Loan*

 

In connection with the Company’s constructionof its principal offices in Woonsocket, Rhode Island, the Company previouslyassumed all obligations of Faith Realty under a $4,000,000 Construction Loanbetween Faith Realty and Bank of America, N.A. (the “Real Estate Loan”).    Inconnection with the new credit facilities described above, the Company and Bankof America, N.A. amended the Real Estate Loan to include a cross defaultprovision with these new credit facilities.

 

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

 

*Litigation*

 

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

 

**4. STOCK OPTIONS**

 

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

 

EffectiveJanuary 1, 2006, the Company adopted the fair value recognition provisionsof SFAS 123(R), using the modified prospective transition method.  The adoption of SFAS 123(R) resulted inshare-based compensation expense for the nine months ended September 30,2008 and 2007 of approximately $270,000 and $281,000, respectively, and expensefor the three months ended September 30, 2008 and 2007 was approximately$90,000 and $90,000, respectively.  Therewere no grants of stock options for the three or nine months ended September 30,2008.  As of September 30, 2008,there were 1,039,200 stock options outstanding.

 

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

 

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

 

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

 

The following discussion is intended to assist inthe assessment of significant changes and trends related to the results ofoperations and financial condition of Summer Infant, Inc. This discussionand analysis should be read in conjunction with Summer’s consolidated financialstatements and notes thereto included herein. Summer’s business has grownorganically in all of its markets. Summer derives its revenues from the sale ofhealth, safety and wellness products for infants and toddlers.  Summer’s revenue is driven by its ability todesign and market desirable products, identify business opportunities andsecure new and renew existing distribution channels. Summer’s income fromoperations is derived from its ability to generate revenue and collect cash inexcess of labor and other costs of providing its products and selling, generaland administrative costs.

 

*Summary ofcritical accounting policies and estimates*

 

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

 

Summer makes certain estimates and assumptions thataffect the reported amounts of assets and liabilities and the reported amountsof revenues and expenses. The accounting policies described below are those Summerconsiders critical in preparing its financial statements. Some of thesepolicies include significant estimates made by management using informationavailable at the time the estimates were made. However, these estimates couldchange materially if different information or assumptions were used.

 

*Nature ofoperations*

 

Summer is engaged in the design, marketing anddistribution of juvenile products.  Themajority of its revenues are derived from retail customers in North America,with approximately 10% of the business being generated in the UK.  The Company also maintains a research anddevelopment staff in Asia (no revenues are generated directly out of Asia).

 

*Income taxes*

 

Theprovision for income taxes is based on our estimated annualized effective taxrate for the year.

 

Effective January 1,2007, we adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.”FIN 48 provides detailed guidance for the financial statement recognition,measurement and disclosure of uncertain tax positions recognized in thefinancial statements in accordance with SFAS No. 109. Tax positions mustmeet a “more-likely-than-not” recognition threshold at the effective date to berecognized upon the adoption of FIN 48 and in subsequent periods. Upon theadoption of FIN 48, we had no unrecognized tax benefits. During the thirdquarter of 2008, we recognized no adjustments for uncertain tax benefits.

 

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Income taxes are computedusing the asset and liability method of accounting. Under the asset andliability method, a deferred tax asset or liability is recognized for estimatedfuture tax effects attributable to temporary differences and carryforwards. Themeasurement of deferred income tax assets is adjusted by a valuation allowance,if necessary, to recognize future tax benefits only to the extent, based onavailable evidence, it is more likely than not such benefits will berealized.  We recognize interest andpenalties, if any, related to uncertain tax positions in selling, general andadministrative expenses.  No interest and penalties related to uncertaintax positions were accrued at September 30, 2008. The tax years 2004through 2007 remain open to examination by the major taxing jurisdictions inwhich we operate. We expect no material changes to unrecognized tax positionswithin the next twelve months.

 

**Company Overview**

 

Summer is a designer, marketer, and distributor ofbranded juvenile health, safety and wellness products which are soldprincipally to large North American and UK retailers.  Summer currently has more than 70 proprietaryproducts in various product categories including nursery audio/video monitors,safety gates, durable bath products, bed rails, infant thermometers and relatedhealth and safety products, booster and potty seats and bouncers.

 

Summer’s strategy is to grow its sales through avariety of methods, including:

 

·                  increasedproduct penetration (more products at each store);

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

·                  Newproducts (at existing and new customers);

·                  Newmass merchant retail customers;

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

·                  Newgeographies (international expansion); and

·                  Newproduct categories

·                  Acquisitions

 

Summer has been able to substantially grow itsrevenues over the past seven years through a combination of all of the abovefactors. Each year it has been able to expand the number of products into itsmain distribution channel (mass merchant retailers) and has also added newcustomers each year. Therefore, even without new product introductions, Summercould grow its business by simply selling more of its existing product line toexisting customers.

 

For 2008 and beyond, the growth strategy of Summerwill be to continue to develop and sell new products to its existing customerbase, sell new and existing products to new customers (or expand relationshipswith existing customers), to begin to sell products from its soft goods productline, and to expand in the UK and in other geographic regions (including Japan,Mexico and Australia, among others).

 

Summer’s growth strategy has included acquisitions.

 

On March 31, 2008, Summer acquired substantially all of the assets ofBasic Comfort, Inc., a leading manufacturer and supplier of infantcomfort and safety products, including infant sleep positioners, infant headsupports and portable changing pads.

 

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

 

Summer may pursue additional potential acquisitioncandidates to obtain new innovative products, new product categories, newretail customers or new sales territories. There are approximately 400 active juvenile product companies, of whichapproximately 300 have less than $10,000,000 in sales. In addition, there arevarious product categories that Summer does not currently compete in, includingcar seats, strollers, walkers, and other categories. Summer may look to developits own products in these categories or attempt to gain entrance into thesecategories through acquisitions.

 

As Summer continues to grow through internalinitiatives and any additional future acquisitions, it will incur additionalexpenses.  Two of the key areas in whichsuch increased expenses will likely occur are sales and product development. Togrow sales, Summer will likely hire additional sales personnel to service newgeographic territories, focus existing resources on specific parts of theUnited States market and retain product line specialists to drive sales of newand existing products in specific areas in which Summer believes it can readilyincrease sales. Product development expenses will increase as Summer developsnew products in existing and new categories. As a result of its acquisitionstrategy, Summer 

 

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will face various challengessuch as the integration of the acquired companies’ product lines, employees,marketing requirements and information systems. Ongoing infrastructureinvestment also may be required to support realized growth, includingexpenditures with respect to upgraded and expanded information systems andenhancing the Company’s management team.

 

*Sales*

 

Summer’s sales are primarily derived from the saleof juvenile health, safety and wellness products and are recognized upontransfer of title of product to Summer’s customers. Summer’s products aremarketed through several distribution channels including chain retailers,specialty retailers and direct to consumers.

 

Approximately 90% of sales are currently made tocustomers in North America, with the remaining 10% made to customers in the UK.Sales are made utilizing standard credit terms of 30 to 60 days. Summergenerally accepts returns only for defective merchandise.

 

*Cost ofgoods sold and other expenses*

 

Summer’s products are manufactured by third parties,with approximately 80-85% of the dollar value of products being manufactured inChina and the majority of the balance being manufactured in Massachusetts. Costof goods sold primarily represents purchases of finished products from thesethird party manufacturers. The remainder of Summer’s cost of goods soldincludes tooling depreciation, freight-in from suppliers and miscellaneouscharges from contract manufacturers. Substantially all of Summer’s purchasesare made in US dollars; therefore most of this activity is not subject tocurrency fluctuations. If Summer’s suppliers experience increased rawmaterials, labor or other costs and pass along such cost increases throughhigher prices for finished goods, Summer’s costs of sales would increase, andto the extent it is unable to pass such price increases along to Summer’scustomers, Summer’s gross margins would decrease.

 

Selling, general and administrative expensesprimarily consist of payroll, insurance, professional fees, royalties, freightto customers, product development costs, advertising and marketing expenses(including co-op advertising allowances as negotiated with certain customers)and sales commissions. Several of these items fluctuate with sales, some basedon sales to particular customers and others based on sales of particularproducts.

 

There are not significant variations in seasonaldemand for Summer’s products. Sales to its retail customers are generallyhigher in the time frame when retailers take initial shipments of new products;these orders usually incorporate enough product to fill each store plus additionalamounts to be kept at the distribution centers of the customer. The timing ofthese initial shipments varies by customer depending on when they finalizestore layouts for the upcoming year, and whether there are any mid-year productintroductions.

 

**Results of Operations**

 

**SummerInfant Inc. and Subsidiaries**

**Condensed ConsolidatedStatements of Income**

**For theThree and Nine Months Ending September 30, 2008 and 2007**

**(Inthousands of US dollars)**

 
| ** **                             | ** ** | **Three Months Ended  September 30, 2008** | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Nine Months Ended  September 30, 2008** | ** ** | **Nine Months Ended  September30, 2007** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **(Unaudited)**                                                | ** ** | **(Unaudited)**                                                | ** ** | **(Unaudited)**                                               | ** ** | **(Unaudited)**                                         | ** ** |
| Net revenues                           |       | $                                                              | 35,575     |                                                           | $          | 21,198                                                        |       | $                                                       | 97,982     |   | $ | 44,644 |   |
| Cost of goods  sold                    |       | 23,109                                                         |       | 13,224                                                         |       | 63,263                                                        |       | 27,564                                                  |       |
| Gross profit                           |       | 12,466                                                         |       | 7,974                                                          |       | 34,719                                                        |       | 17,080                                                  |       |
|                                   |       |                                                           |       |                                                           |       |                                                          |       |                                                    |       |
| Operating  expenses including interest |       | 10,043                                                         |       | 6,257                                                          |       | 28,471                                                        |       | 13,527                                                  |       |
| Income tax  expense                    |       | 817                                                            |       | 657                                                            |       | 2,312                                                         |       | 1,364                                                   |       |
|                                   |       |                                                           |       |                                                           |       |                                                          |       |                                                    |       |
| Net income                             |       | $                                                              | 1,606      |                                                           | $          | 1,060                                                         |       | $                                                       | 3,936      |   | $ | 2,189 |   |

 

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The results of operations for the nine months ended September 30,2007 represents the combined activity of KBL Healthcare from January 1,2007 through March 6, 2007 (which represents general and administrativeexpenses of KBL Healthcare, net of interest income generated by the $52,000,000cash balance prior to the acquisition of Summer Infant on March 6, 2007)and the activity of Summer Infant from March 6, 2007 through September 30,2007.

 

**To give the reader some additional information on theperformance of the underlying Summer Infant operations, the following tablerepresents the unaudited results of Summer for the three and nine months ended September 30,2008 and the unaudited results of the Summer Infant operating company for thethree and nine months ended September 30, 2007.  This table is being presented to give thereader more information about the underlying performance of the ongoingoperating company.**

 

**SummerInfant and Subsidiaries**

**Condensed ConsolidatedStatements of Income**

**For theThree and Nine Months Ending September 30, 2008 and 2007**

**(Inthousands of US dollars)**

 
| ** **                                                                                                                                            | ** ** | **Three Months Ended  September 30, 2008** | ** ** | **Three Months  Ended September  30, 2007** | ** ** | **Nine Months  Ended  September30,  2008** | ** ** | **Nine Months  Ended  September 30,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(unaudited)**                                                | ** ** | **(unaudited)**                                            | ** ** | **(unaudited)**                                 | ** ** | **(unaudited)**                                       | ** ** |
| Net Sales                                                                                                                                             |       | $                                                              | 35,575     |                                                       | 100.0      | %                                               | $          | 21,198                                                |       | 100.0 | % | $ | 97,982 |   | 100.0 | % | $ | 57,043 |   | 100.0 | % |
| Cost of Goods  Sold                                                                                                                                   |       | 23,109                                                         |       | 65.0                                                       | %          | 13,224                                          |       | 62.4                                                  | %          | 63,263 |   | 64.6 | % | 35,246 |   | 61.8 | % |
| Gross Profit                                                                                                                                          |       | 12,466                                                         |       | 35.0                                                       | %          | 7,974                                           |       | 37.6                                                  | %          | 34,719 |   | 35.4 | % | 21,797 |   | 38.2 | % |
| OPERATING  EXPENSES                                                                                                                                   |       |                                                           |       |                                                       |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses (excluding depreciation, amortization,  non-capitalizable deal fees and non- cash stock option expense) |       | 8,706                                                          |       | 24.4                                                       | %          | 5,717                                           |       | 27.0                                                  | %          | 24,648 |   | 25.1 | % | 16,038 |   | 28.1 | % |
|                                                                                                                                                  |       |                                                           |       |                                                       |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| EBITDA (a)                                                                                                                                            |       | $                                                              | 3,760      |                                                       | 10.6       | %                                               | $          | 2,257                                                 |       | 10.6 | % | $ | 10,071 |   | 10.3 | % | $ | 5,759 |   | 10.1. | % |

 

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(a)          See “Non-GAAP Discussion” below regarding thecomputation of EBITDA.

 

*Three months ended September 30,2008 compared with three months ended September 30, 2007*

 

Net sales increased from approximately $21,198,000in the three months ended September 30, 2007 to approximately $35,575,000for the three months ended September 30, 2008, an increase ofapproximately 68%. This sales increase was primarily attributable to increaseddistribution of Summer’s products throughout Summer’s customer base, plus newproduct introductions.  Significantincreases were noted in large accounts such as Babies R Us, in addition toseveral other new accounts which have been added over the past year, including Lowe’sand Wal-Mart.  The acquisitions of BasicComfort and Kiddopotamus contributed approximately $6,500,000 to sales for thethree months ended September 30, 2008.

 

Gross profit increased from approximately $7,974,000for the three months ended September 30, 2007 to approximately $12,466,000for the three months ended September 30, 2008.  The gross profit as a percentage of salesdecreased to 35.0% from 37.6% in the prior year.  The decrease as a percentage of sales is dueto increased costs of finished goods from the Company’s vendors in Asia and theUS.  The increase in these costs is dueto increased raw material and labor costs from our Chinese contract manufacturers.

 

Selling, general and administrative expensesincreased from approximately $5,717,000 for the three months ended June 30,2007 to approximately $8,706,000 for the three months ended September 30,2008. This increase was primarily attributable to increases in headcount,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 andadministrative expenses decreased to 24.4% of net sales in the three monthsended September 30, 2008 from 27.0% of net sales in the three months endedSeptember 30, 2007.  This decreaseas a percentage of sales was primarily due to the leveraging of the Company’sfixed cost structure over a larger sales base.

 

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EBITDA (as herein defined) increased fromapproximately $2,257,000 for the three months ended September 30, 2007 toapproximately $3,760,000 for the three months ended September 30, 2008, anincrease of approximately 67%. This increase was primarily attributable to theincreased sales and gross profit dollars as described above.

 

*Nine months ended September 30,2008 compared with nine months ended September 30, 2007*

 

Net sales increased from approximately $57,043,000in the nine months ended September 30, 2007 to approximately $97,982,000for the nine months ended September 30, 2008, a 72% increase. This salesincrease was primarily attributable to increased distribution of Summer’sproducts throughout Summer’s customer base, plus new productintroductions.  Significant increaseswere noted in large accounts such as Babies R Us, in addition to several othernew accounts which have been added over the past year, including Lowe’s andWal-Mart.  The acquisitions of BasicComfort and Kiddopotamus contributed approximately $12,200,000 to sales for thenine months ended September 30, 2008.

 

Gross profit increased from approximately$21,797,000 for the nine months ended September 30, 2007 to approximately$34,719,000 for the nine months ended September 30, 2008.  The gross profit as a percentage of salesdecreased to 35.4% from 38.2% in the prior year.  The decrease as a percentage of sales is dueto increased costs of finished goods from the Company’s vendors in Asia and theUS.  The increase in these costs is dueto increased raw material and labor costs from our Chinese contract manufacturers.

 

Selling, general and administrative expensesincreased from approximately $16,038,000 for the nine months ended September 30,2007 to approximately $24,648,000 for the nine months ended September 30,2008. This increase was primarily attributable to increases in headcount,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 andadministrative expenses decreased to 25.1% of net sales in the nine monthsended September 30, 2008 from 28.1% of net sales in the nine months ended September 30,2007.  This decrease as a percentage ofsales is due to the leveraging of the Company’s fixed cost structure over alarger sales base.

 

EBITDA as defined herein increased fromapproximately $5,759,000 for the nine months ended September 30, 2007 toapproximately $10,071,000 for the nine months ended September 30, 2008, anincrease of 75%. This increase was primarily attributable to the increasedsales and gross profit dollars as described above.

 

**Liquidity and Capital Resources**

 

Summer generally funds its operations and workingcapital needs through cash generated from operations and borrowings under itscredit facilities.

 

Summer’s sales have increased significantly over thepast several years. For the year ended December 31, 2003, net sales were$17,600,000. For the year ended December 31, 2007, net sales exceeded$80,000,000. This sales growth has led to a substantial increase in workingcapital requirements, specifically accounts receivable and inventory. Thetypical cash flow cycle is as follows:

 

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

 

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

 

Summer had traditionally been able to fund itsincreased working capital through asset-based lines of credit with banks. Thelenders generally follow a borrowing base formula that allows advances based onthe levels of accounts receivable and inventory.

 

The majority of capital expenditures for Summer arefor tools related to new product introductions. Summer receives indicationsfrom retailers generally around the middle of each year as to what products theretailer will be taking into its product line for the upcoming year. Based onthese indications, Summer will then acquire the tools required to build theproducts. The majority of these expenditures are therefore made in the thirdand fourth quarters of each year so that initial 

 

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

 

For the nine months ended September 30, 2008,net cash used in operating activities was approximately $2,538,000.  This was primarily due to increases inaccounts receivable and inventory, which are a direct result of the significantincrease in sales for the Company, partially offset by the net income generatedby Summer.  Total sales were over$97,000,000 for the nine months ended September 30, 2008, which representsa 72% increase over the sales in the first nine months of the prior year.  See detailed discussion of the workingcapital cycle of Summer above.

 

Net cash used in investing activities wasapproximately $18,859,000 which primarily relates to the cash portion of theBasic Comfort and Kiddopotamus acquisitions, in addition to year to datecapital expenditures of approximately $2,273,000.

 

Net cash provided by financing activities wasapproximately $21,467,000, which relates to amounts borrowed to fund increasesin working capital and the acquisitions of Basic Comfort and Kiddopotamus.

 

Based on the above factors, the net cash decreasefor the nine months ended September 30, 2008 was approximately $320,000,resulting in a cash balance of approximately $1,451,000 at September 30,2008.

 

Summer believes that its cash on hand and currentbanking facilities are sufficient to fund its cash requirements for at leastthe next 12 months. However, unforeseen circumstances, such as softness in theretail industry or deterioration in the business of a significant customer,could create a situation where Summer cannot access all of the available linesof credit due to not having sufficient assets or EBITDA. In addition, there isno assurance that Summer will meet all of its bank covenants in the future, orthat its lenders will grant waivers if there are covenant violations.

 

Summer’s strategy for funding its business goingforward is a combination of increased profitability, and if necessary,negotiation of increased borrowing lines as required with traditional lenders.  Summer is in regular communication with itslenders, and considers its relationship to be strong at the present time.

 

On April 10, 2008, Summer entered intotwo new three-year secured credit facilities (the “Loan Agreement”) with Bankof America, N.A., as Administrative Agent, and each of the financialinstitutions that are a signatory to the Loan Agreement.  The Loan Agreement provides for a $36,000,000working capital revolving credit facility and a $10,000,000 non-restoringacquisition credit facility.  The newcredit facilities mature on April 10, 2011.  The acquisition credit facility has beenutilized in its entirety as of June 30, 2008.

 

Summer and its subsidiaries, Summer Infant(USA), Inc. Summer Infant Europe Limited, Summer Infant Asia Limited andSummer Infant Canada, Limited are the borrowers under the Loan Agreement.  These credit facilities are secured by allassets of Summer and its subsidiaries. These credit facilities replaced Summer’s prior line of credit, and arebeing used principally to fund growth opportunities and for working capitalpurposes.

 

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

 

These credit facilities bear interest at afloating rate based on a spread over LIBOR ranging from 150 basis points to 200basis points, depending upon the ratio of the Company’s total funded debt toEBITDA.  As of September 30, 2008,the rate on these credit facilities was 5.46%. In addition, these credit facilities have an unused line fee based onthe unused amount of the credit facilities equal to 25 basis points.

 

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

 

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As of September 30,2008 the Company had approximately $39,276,000 outstanding of the totalcommitted amount of $46,000,000.  Inaddition, the Company has $3,884,000 outstanding on the loan related to theconstruction of the corporate headquarters.

 

The Company was in compliance with all covenants asof September 30, 2008.

 

Summer’s management believes that the Company’s cashflows from operations, cash on hand, and available borrowings will besufficient to meet Summer’s working capital and capital expenditurerequirements and provide the Company 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-GAAP Discussion**

 

In addition to its GAAP results, Summer considersnon-GAAP measures of its performance. EBITDA, as defined below, is an importantsupplemental financial measure of Summer’s performance that is not required by,or presented in accordance with, GAAP. EBITDA represents net income (loss)before income taxes, interest expense, non-cash stock option expense, deal-relatedfees, and depreciation and amortization. Summer’s management uses 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 EBITDA providesuseful information regarding Summer’s results of operations because they assistin analyzing and benchmarking the performance and value of Summer’s business.Summer believes that EBITDA is useful to stockholders as a measure ofcomparative operating performance, as it is less susceptible to variances inactual performance resulting from depreciation and amortization and morereflective of changes in pricing decisions, cost controls and other factorsthat affect operating performance.

 

EBITDA also is used by Summer’s management formultiple purposes, including:

 

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

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

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

 

In addition, EBITDA is an important valuation toolused by potential investors when assessing the relative performance of acompany in comparison to other companies in the same industry. Although Summeruses EBITDA as a financial measure to assess the performance of its business,there are material limitations to using a measure such as 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 EBITDA may not beconsistent with similarly titled measures of other companies and should beviewed in conjunction with measures that are computed in accordance with GAAP.Summer’s management compensates for these limitations in considering EBITDA inconjunction with its analysis of other GAAP financial measures, such as netincome.

 

The following table presents a reconciliation of theSummer EBITDA to net income; it’s most directly comparable GAAP financialmeasure, on a historical basis, for the nine months ended September 30,2008 and 2007:

 

**Reconciliation of unaudited EBITDAto Net Income (in thousands of US dollars):**

 
| ** **                                                    | ** ** | **Nine Months Ended  September 30** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| Net income  (assuming 9 months as a taxable entity in 2007)   |       | $                                                  | 3,936      |   | $ | 2,690 |   |
| Income taxes  (assuming 9 months as a taxable entity in 2007) |       | 2,312                                              |       | 1,793 |   |
| Non-cash stock  option expense                                |       | 270                                                |       | 281 |   |
| Non-capitalizable  deal-related fees                          |       | 214                                                |       | — |   |
| Interest expense  (income)                                    |       | 1,473                                              |       | (7 | ) |
| Depreciation and  amortization                                |       | 1,866                                              |       | 1,002 |   |
|                                                          |       |                                               |       |   |   |
| EBITDA, as  defined                                           |       | $                                                  | 10,071     |   | $ | 5,759 |   |

 

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**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, Summer carried out an evaluation, under thesupervision and with the participation of its Chief Executive Officer and itsChief Financial Officer, of the effectiveness of our disclosure controls andprocedures, as of September 30, 2008. Summer’s management has concluded,based on their evaluation, that as of the end of the period covered by thisreport, the Company’s controls and procedures were effective as of September 30,2008 to ensure that information required to be disclosed by the Company in thereports it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

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

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 1A. Risk Factors**

 

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

 

**ITEM 4.  Submission of Matters toa Vote of Security Holders**

 

None.

 

**ITEM 5. Other Information**

 

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

 

**ITEM 6. Exhibits**

 

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 Summer Infant, Inc.,pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

32.2Certification of Joseph Driscoll, Chief Financial Officer of Summer Infant, Inc.,pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906of 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.**

 

 

November 7,2008

 
|   | /s/ Jason Macari         |   |
|--------|--------------------------|--------|
|   | Jason Macari             |   |
|   | Chief  Executive Officer |

 

 

November 7,2008

 
|   | /s/  Joseph Driscoll     |   |
|--------|--------------------------|--------|
|   | Joseph  Driscoll         |
|   | Chief  Financial Officer |

 

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