The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking information and statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All forward-looking statements included in this
document are based on information available to us on the date hereof. It is
important to note that our actual results could differ materially from those
projected in such forward-looking statements contained in this Quarterly Report
on Form 10-Q. These forward-looking statements may be identified by terms such
as "expect," "anticipate," "believe, "outlook, "may," "estimate," "should,"
"predict" and similar terms, and include statements concerning our expectations
regarding our ability to meet our operating plan and obtain financing or other
sources of capital in order to continue as a going concern, the impact of the
COVID-19 pandemic on costs and on our financial condition and results of
operations in 2022, our expected cash flow and liquidity and the expected
closing of the proposed merger with Kids2, Inc . These statements are based on
current expectations that involve numerous risks and uncertainties. These risks
and uncertainties include our ability to continue as a going concern; the
concentration of our business with certain retail customers who may change their
purchasing policies or other customers that could suffer liquidity problems or
bankruptcy; our ability to manage our supply chain and mitigate ongoing supply
chain challenges; our ability to manage and maintain sufficient inventory to
meet customer demand; our ability to maintain sufficient availability under and
to comply with financial and other covenants in our loan agreements; our ability
to complete the Proposed Merger with Kids2 in a timely manner or at all; the
widespread nature of the COVID-19 pandemic; our ability to compete by
introducing new products or enhancing existing products that satisfy consumer
preferences; our ability to develop and introduce new products in a timely and
cost-effective manner; our ability to compete effectively with larger and
smaller companies that have more financial resources and greater e-commerce
presence than us; our reliance on foreign suppliers and potential disruption in
foreign markets in which we operate; our ability to achieve the expected
long-term benefits and savings of our restructuring initiatives; increases in
the cost of raw materials used to manufacture our products; our ability to
protect our intellectual property; compliance with safety and testing
regulations for our products; product liability claims arising from use of our
products; potential exposure to greater than anticipated tax liabilities; a
material impairment of other intangible assets; our ability to maintain the
listing of our common stock on and to comply with the continued listing
requirements of the Nasdaq Capital Market; any failure, inadequacy or
interruption of our information technology systems resulting from cyberattacks
or other failures that may disrupt our operations and lead to disclosure of
confidential or proprietary data; and other risks as detailed in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended
January 1, 2022. All these matters are difficult or impossible to predict
accurately, many of which may be beyond our control. Although we believe that
the assumptions underlying our forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Quarterly Report on Form
10-Q will prove to be accurate.
The following discussion is intended to assist in the assessment of significant
changes and trends related to the results of operations and financial condition
of our Company and our consolidated subsidiaries. This Management's Discussion
and Analysis should be read together with the unaudited interim condensed
consolidated financial statements and related notes included elsewhere in this
filing and with our consolidated financial statements for the year ended January
1, 2022 included in our Annual Report on Form 10-K (the "2021 Form 10-K").
Note that all dollar amounts in this section are in thousands of U.S. dollars,
except share and per share data.
Overview
We are an infant and juvenile products company doing business under the name
SUMR Brands. We are a recognized authority in the juvenile product industry,
providing parents and caregivers a full range of innovative, high-quality, and
high-value products to care for babies and toddlers. We seek to improve the
quality of life of parents, caregivers, and babies through our product
offerings, while at the same time maximizing shareholder value over the long
term. Leveraging our strength in product development, global sourcing and sales
to national retailers, independent retailers, distributors and ecommerce
(pureplay and omni-channel), we are launching a new brand into the pet space,
Ozzy & Kazoo ™, in the second quarter of 2022.
We operate in one principal industry segment across geographically diverse
marketplaces, selling our products globally to large, national retailers as well
as independent retailers, on our partner's websites, and our own direct to
consumer website. In North America, our customers include Amazon.com, Wal-Mart,
Target, Buy Buy Baby, Home Depot, and Lowe's. Our largest European-based
customer is Smyths Toys. We also sell through international distributors,
representatives and to select international retail customers in geographic
locations where we do not have a direct sales presence. Our company was
originally founded in 1985 and has publicly traded on the Nasdaq Stock Market
since 2007 under the symbol "SUMR".
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In the first quarter of 2022, sales declined 5.0% as compared to the prior year
period, primarily due to continued supply chain disruption and logistical issues
that resulted in missed shipment opportunities as customer demand continued to
outpace supply. Gross margin declined to 21.1% from 29.4% primarily due to
continued elevated shipping container costs and related transportation expenses.
General and administrative expenses increased 13.1% as compared to the prior
period primarily due to transaction related costs related to the Proposed Merger
discussed below. Net loss per diluted share for the quarter was $(1.81) per
share as compared to net income per diluted share of $0.12 per share for the
comparable prior period.
Proposed Merger with Kids2, Inc.
On March 16, 2022, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, Kids2, Inc., a Georgia corporation
("Parent"), and Project Abacus Acquisition Corp., a Delaware corporation and
wholly owned subsidiary of Parent ("Merger Sub"). The Merger Agreement provides,
subject to its terms and conditions, for the acquisition of the Company by
Parent through the merger of Merger Sub with and into the Company, with the
Company surviving the Merger as a wholly owned subsidiary of Parent (the
"Proposed Merger").
Under the terms of the Proposed Merger, each share of common stock of the
Company issued and outstanding immediately prior to the effective time of the
Merger (the "Effective Time") (other than shares of common stock (i) owned by
Parent, Merger Sub, the Company or any subsidiary of Parent, Merger Sub or
Company, or (ii) held by a stockholder who is entitled to, and who has
perfected, appraisal rights for such shares under Delaware law) automatically
will be converted into the right to receive cash in an amount of $12.00 per
share (the "Merger Consideration"), without interest, subject to any required
withholding of taxes.
The completion of the Proposed Merger is subject to closing conditions,
including: (i) the approval of the Merger Agreement by the Company's
stockholders; (ii) the absence of any laws or court orders making the Proposed
Merger illegal or otherwise prohibiting the Proposed Merger; (iii) other
customary closing conditions, including the accuracy of the representations and
warranties of each party (subject to certain materiality exceptions) and
material compliance by each party with its covenants under the Merger Agreement;
and (iv) the closing of a debt financing by Parent to fund the Merger
Consideration. The parties expect the transaction to close in the second quarter
of 2022, subject to the satisfaction or waiver of the closing conditions.
COVID-19 Impact and Ongoing Supply Chain Challenges
The COVID-19 pandemic continued to impact our business in the first quarter of
2022, as we experienced challenges in our shipping and distribution channels
throughout our global supply chain. In the first quarter of 2022, there were
significant COVID-19 related closures in China that impacted the ability of some
of our vendors to obtain necessary raw materials and supplies to produce our
goods, and certain of our vendors have had factory shutdowns related to
COVID-19. Additionally, certain ports in China experienced COVID-19 related
closures that impacted our ability to get inventory onto the water and into our
warehouses as well as a sales impact as certain direct import customers were not
able to pick up inventory due to both port closures and port congestion. We were
able to re-direct some shipments to open, functioning ports but that did not
fully mitigate the delays experienced with shipping.
If and to the extent these supply chain challenges continue, we may not be able
to meet demand and may result in lost, reduced or cancelled orders from our
customers. We also expect costs associated with these matters to remain elevated
in the second quarter of 2022, and beyond. To the extent we do not meet our
financial projections or are unable to mitigate the impact of these challenges,
our business, financial position, results of operations and cash flows would be
adversely affected. In addition, as discussed below, there is substantial doubt
about our ability to continue as a going concern through the next twelve months,
should the Proposed Merger not be consummated.
We have been successful and are continuing to implement price increases with
customers to mitigate some of the supply chain challenges and product cost
increases we faced in fiscal 2021 and continue to face in 2022 from certain
vendors, particularly increases in commodity costs, such as resin, steel and
cotton. Because the implementation of additional price increases occurs over
time, depending on the customer as our vendor agreements require varying lead
times of advance notice of up to 90 days, while our cost increases from
suppliers are often immediate, we do not expect to fully realize benefits from
our price increases until later in the second quarter.
We will continue to assess the impact of the COVID-19 pandemic on our supply
chain, consumer demand and overall business operations throughout 2022. We
believe COVID-19 in the United States, China and in other countries has added
greater uncertainty and unpredictable economic consequences in the coming
months, and therefore we cannot currently predict how it will impact our
business in the long term.
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Summary of Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and
estimates during the three months ended April 2, 2022 from our critical
accounting policies and estimates disclosed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our 2021 Form
10-K.
Results of Operations
For the Three Months Ended
(Unaudited)
April 2, 2022 April 3, 2021
Net sales $ 34,383 $ 36,201
Cost of goods sold 27,114 25,544
Gross profit 7,269 10,657
General and administrative expense 7,949 7,027
Selling expense 2,262 2,407
Depreciation and amortization 561 560
Operating (loss) income (3,503) 663
Interest expense, net 412 336
(Loss) income before income taxes (3,915) 327
Provision for income taxes - 67
Net (loss) income $ (3,915) $ 260
Three Months ended April 2, 2022 compared with Three Months ended April 3, 2021
Net sales decreased 5.0% from $36,201 for the three months ended April 3, 2021
to $34,383 for the three months ended April 2, 2022. The decrease was primarily
a result of our inability to ship retail orders in full due to COVID-19 related
manufacturing and logistical issues, including securing shipping containers, as
effects of the pandemic continued to disrupt the global supply chain.
Cost of goods sold includes cost of the finished product from suppliers, duties
on certain imported items, freight-in from suppliers, and miscellaneous charges.
The components of cost of goods sold remained substantially the same for the
quarter ended April 2, 2022 as compared to the quarter ended April 3, 2021. In
the second half of fiscal 2021 and into the first quarter of 2022, we
experienced a significant increase in container and other supply chain costs as
compared to the first half of fiscal 2021, which resulted in elevated cost of
goods despite lower sales, impacting our gross profit.
Gross profit decreased 31.8% from $10,657 for the three months ended April 3,
2021 to $7,269 for the three months ended April 2, 2022. Gross margin as a
percent of net sales declined from 29.4% for the three months ended April 3,
2021 to 21.1% for the three months ended April 2, 2022. Gross profit declined as
a result of elevated container costs and other increased supply chain and
product costs as well as lower sales, only partially offset with price increases
to our customers.
General and administrative expenses increased 13.1% from $7,027 for the three
months ended April 3, 2021 to $7,949 for the three months ended April 2, 2022.
General and administrative expenses increased from 19.4% of net sales for the
three months ended April 3, 2021 to 23.1% of net sales for the three months
ended April 2, 2022. The increase in dollars and as a percentage of sales is due
primarily to approximately $895 of transaction related costs related to the
Proposed Merger as well as lower sales.
Selling expenses decreased 6.0% from $2,407 for the three months ended April 3,
2021 to $2,262 for the three months ended April 2, 2022 as a result of lower
sales. Selling expenses as a percent of net sales remained flat at 6.6% for both
the three months ended April 3, 2021 and the three months ended April 2, 2022.
Depreciation and amortization remained flat at $561 for the three months ended
April 2, 2022 from $560 for the three months ended April 3, 2021.
Interest expense increased 22.6% from $336 for the three months ended April 3,
2021 to $412 for the three months ended April 2, 2022. Interest expense
increased primarily as a result of higher debt levels as well as higher interest
rates.
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For the three months ended April 3, 2021, we recorded a $67 tax provision for
income taxes on $327 of pretax income, reflecting an estimated 20.5% tax rate
for the quarter. The tax rate for the three months ended April 3, 2021 includes
an expected decrease in valuation allowance of $262 for the utilization of
nondeductible interest expense from prior years. For the three months ended
April 2, 2022, we recorded no tax benefit for income taxes on $3,915 of pretax
loss, reflecting an estimated 0.0% tax rate for the quarter.
Liquidity and Capital Resources
We fund our operations and working capital needs through cash generated from
operations and borrowings under our credit facilities.
In our typical operational cash flow cycle, inventory is purchased in U.S.
dollars to meet expected demand plus a safety stock. The majority of our
suppliers are based in Asia and such inventory currently takes approximately six
to eight weeks to arrive at the various distribution points we maintain in the
United States and Canada, an increase from three to four weeks in the first half
of 2021. Payment terms for these vendors are approximately 30-75 days from the
date the product ships from Asia and therefore we are generally paying for the
product a short time after it is physically received in the United States, and
in some cases before it is physically received into our warehouses. In turn,
sales to customers generally have payment terms of 60 days, however, direct
import sales with certain customers are paid beyond 60 day terms resulting in an
accounts receivable and increasing the amount of cash required to fund working
capital. To bridge the gap between paying our suppliers and receiving payment
from our customers for goods sold, we rely on our credit facilities.
The majority of our capital expenditures are for tools and molds related
primarily to new product introductions. We receive indications from retailers
near the middle of each year as to what products they will be taking into their
product lines for the upcoming year. Based on these indications, we will then
acquire the tools and molds required to build and produce the products. In most
cases, the payments for the tools are spread out over a three to four month
period.
For the three months ended April 2, 2022, net cash provided by operating
activities totaled $2,079 primarily due to a reduction in inventory and accounts
receivable, partially offset by a reduction in accounts payable and accrued
expenses. For the three months ended April 3, 2021, net cash provided by
operating activities totaled $1,321 primarily due to a reduction in inventory,
mostly offset with a reduction in accounts payable and an increase in accounts
receivable.
For the three months ended April 2, 2022, net cash used in investing activities
was approximately $44. For the three months ended April 3, 2021, net cash used
in investing activities was $191.
Net cash used in financing activities was approximately $2,013 for the three
months ended April 2, 2022 which was comprised of $375 and $156 required
payments on the term and FILO loan facilities, respectively, as well as a $3,160
paydown of the revolving credit facility in order to maintain compliance with
its minimum availability covenant. Additionally, the Company received $2,000
from its new term loan agreement with Wynnefield Capital, Inc. described below.
A $50 payment was paid on the new subordinated term loan prematurely to the
first due date and was subsequently returned to the Company in April 2022. Net
cash used in financing activities was approximately $1,184 for the three months
ended April 3, 2021 which is comprised of $375 and $156 required payments on the
term and FILO facilities, respectively, as well as a paydown of the ABL facility
as a consequence of generating cash flow from operations.
Primarily as a result of the above factors, net cash increased for the three
months ended April 2, 2022 by $63, resulting in a cash balance of approximately
$598 at April 2, 2022.
Capital Resources
In addition to operating cash flow, we also rely primarily on our asset-based
revolving credit facility and FILO loan with Bank of America, N.A. to meet our
financing requirements, which are subject to changes in our working capital
levels. We regularly evaluate market conditions, our liquidity profile, and
various financing alternatives for opportunities to enhance our capital
structure, and in January 2022 we entered into a second lien, subordinated term
loan in an amount up to $5,000 with Wynnefield Capital, Inc., as agent, as
further described below for which we also rely upon for our financing
requirements.
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Going Concern
The condensed consolidated financial statements included elsewhere in this
report have been prepared on a going concern basis, which assumes that the
Company will continue to operate as a going concern and which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
normal course of business.
As described below, our asset-based loan agreement with Bank of America and
subordinated term loan agreement with Wynnefield Capital do not expire until
October 15, 2025, and both agreements have adjusted EBITDA and liquidity
covenants. While these covenants provide room for us to conduct our business in
the ordinary course, we currently face a challenging supply chain environment
that impacts our ability to execute on our operating plan and consequently, we
amended our loan agreements on March 16, 2022 to reset our financial covenants
to adjust for expected ongoing challenges to our operating plan in the near
term. Additionally, on April 18, 2022, we amended our agreement with Wynnefield
Capital modifying its borrowing terms as described below.
However, due to continuing losses, our financial position and the challenging
supply chain environment, there is no assurance that we will be able to maintain
compliance with our financial covenants under our loan agreements, which would
impair our ability to meet our financial obligations as they become due without
future amendments to our loan agreements. In addition, the COVID-19 pandemic has
significantly increased economic and demand uncertainty across the globe, and
while sales of many of our core categories have remained strong, including year
over year growth in strollers, specialty blankets, bath, entertainers and
boosters, if these challenges continue, we may not be able to meet demands of
our customers which could result in lost, reduced or cancelled orders from our
customers and could materially and adversely affect our business, financial
condition, and results of operations.
Based on our known cash needs as of May 16, 2022, and the anticipated
availability under our loan agreements, we have developed plans to extend our
liquidity to support our working capital requirements and our ability to meet
our financial obligations. Our plans with regard to these matters include the
following: (1) continuing to explore price increases where possible, (2)
enhancing certain supply chain processes to obtain lower cost containers for its
products and reduce demurrage and detention charges through additional new
procedures, (3) shifting containers from COVID-19 impacted ports to alternative
functioning ports to mitigate potential lost sales, (4) reducing warehouse costs
through new processes as it relates to pallets, (5) reducing product costs
through re-engineering of certain products, (6) reducing discretionary marketing
to the extent that it does not impact revenue performance, and (7) considering
additional financing and/or strategic alternatives.
However, there can be no assurance that our plans will be achieved and that we
will be able to meet our financial obligations without obtaining additional
financing or sources of capital. Therefore, in accordance with applicable
accounting guidance, and based on our current financial condition and
availability of funds, there is substantial doubt about our ability to continue
as a going concern through twelve months from the date these financial
statements were issued.
If we are unable to meet our current operating plan, do not adequately control
expenses, or adjust our operations accordingly, we may experience constraints on
liquidity and may not meet the financial and other covenants under our loan
agreements, which could impact availability. There is no assurance that we will
meet all of our financial or other covenants in the future, or that our lenders
will grant waivers or agree to amend the terms of our agreements with them if
there are covenant violations. In such case, we may be required to seek to raise
additional funds through debt or equity financings, restructure its existing
debt, engage in strategic collaborations, and/or a strategic transaction that is
in the best interest of our stockholders. Any such financing or strategic
transaction could result in significant dilution to its existing stockholders,
depending on the terms of the transaction. If we are unable to identify a
strategic transaction, raise additional funds, and/or restructure its existing
debt, our operations could be limited and we may not be able to meet all of our
obligations under our existing loan agreements.
Loan Agreement with BofA
We and our wholly owned subsidiary, Summer Infant (USA), Inc., are parties to a
Third Amended and Restated Loan and Security Agreement with Bank of America,
N.A., as agent, originally entered into on October 15, 2020 and amended on
January 28 2022 and March 16, 2022 (the "BofA Loan Agreement") that provides for
(i) a $40,000 asset-based revolving credit facility, with a $5,000 unused letter
of credit sub-line facility, (ii) a $7,500 term loan and (iii) a $2,500 FILO
(first-in, last-out) loan.
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Pursuant to the BofA Loan Agreement, total borrowing capacity under the
revolving credit facility is based on a borrowing base, which is generally
defined as 85% of eligible receivables plus the lesser of (i) 70% of the value
of eligible inventory (subject to certain limitations) or (ii) 85% of the net
orderly liquidation value of eligible inventory, less applicable reserves. The
scheduled maturity date of the loans under the revolving credit facility is
October 15, 2025 (subject to customary early termination provisions). Loans
under the revolving credit facility provided prior to January 28, 2022 bore
interest, at our option, at a base rate or at LIBOR, plus applicable margins
based on average quarterly availability, and loans provided beginning January
28, 2022 bear interest, at our option, at a base rate or at the Bloomberg
Short-Term Bank Yield Index ("BSBY") rate administered by Bloomberg. Interest
payments are due monthly, payable in arrears. We are also required to pay an
annual non-use fee on unused amounts under the revolving credit facility, as
well as other customary fees as are set forth in the BofA Loan Agreement. As of
April 2, 2022, the interest rates on BSBY based revolver loans and on base rate
revolver loans were approximately 3.00% and 5.25%, respectively. At April 2,
2022, the amount outstanding on the revolving credit facility was $30,068, the
total borrowing base was $38,927 and borrowing availability was $8,859. The
total amount outstanding on the revolving credit facility agreement at January
1, 2022 was $33,228. Total borrowing base at January 1, 2022 was $36,177 and
borrowing availability was $2,949.
The principal of the term loan is to be repaid, on a quarterly basis, in
installments of $375, until paid in full on termination and subject to mandatory
repayment in certain circumstances. The scheduled maturity date of the term loan
is October 15, 2025 or earlier, if the revolving credit facility is terminated.
Prior to January 28, 2022, the term loan bore interest, at our option, at a base
rate or at LIBOR, plus applicable margins, and beginning January 28, 2022 bears
interest, at our option, at a base rate or at the BSBY rate. Interest payments
are due monthly, in arrears. As of April 2, 2022, the interest rates on BSBY
based term loans and on base rate term loans were approximately 4.53% and 6.50%,
respectively. The amount outstanding on the term loan under was $5,250 as of
April 2, 2022. The amount outstanding on the term loan was $5,625 at January 1,
2022.
The total borrowing capacity under the FILO loan is the lesser of (i) the then
applicable aggregate FILO commitment amount and (ii) a borrowing base, generally
defined as a specific percentage of the value of eligible accounts, plus a
specified percentage of the value of eligible inventory. The aggregate FILO
commitment amount as of April 2, 2022 was $1,563 with no further availability,
and such amount will be proportionately reduced each quarter until the FILO loan
is terminated at maturity on October 15, 2024. There can be no voluntary
repayment on the FILO loan as long as there are loans outstanding under the
revolving credit facility, unless (i) there is an overadvance under the FILO
loan, or (ii) such prepayment is accompanied by a permanent dollar for dollar
reduction in the aggregate FILO commitment amount such that, after giving effect
to such prepayment and reduction, the outstanding principal amount of the FILO
loan is equal to but does not exceed the lesser of (A) the aggregate FILO
commitment amount and (B) the FILO borrowing base. Prior to January 28. 2022,
the FILO loan bore interest, at our option, at a base rate or at LIBOR, plus
applicable margins, and beginning January 28, 2022 bear interest, at our option,
at a base rate or at the BSBY rate. Interest payments are due monthly, in
arrears. As of April 2, 2022, the interest rates on the BSBY based FILO loans
and on base rate FILO loans were approximately 4.28% and 6.25%, respectively.
The aggregate FILO commitment amount of as of January 1, 2022 was $1,719.
All obligations under the BofA Loan Agreement are secured by substantially all
the assets of the Company, and the Company's subsidiaries, Summer Infant Canada
Limited and Summer Infant Europe Limited, are guarantors under the BofA Loan
Agreement. The BofA Loan Agreement contains customary affirmative and negative
covenants. Among other restrictions, we are restricted in our ability to incur
additional debt, make acquisitions or investments, dispose of assets, or make
distributions unless in each case certain conditions are satisfied. As long as
any obligations remain outstanding under the BofA Loan Agreement, we must
maintain minimum availability of $3,500 and must meet a specified minimum EBITDA
requirement on a rolling monthly basis beginning on April 2, 2022. Beginning on
the last day of each fiscal month commencing January 28, 2023, we must maintain
a fixed charge coverage ratio at the end of each fiscal month of at least 1.00
to 1.00 for the twelve-month period then ended. In connection with the March
2022 amendment to the BofA Loan Agreement, the lender also waived the
requirement that the Company's audit and certification with respect to its
fiscal year 2021 financial statements be without qualification.
The BofA Loan Agreement also contains customary events of default, including if
the Company fails to comply with any required financial covenants and the
occurrence of a change of control without the consent of the lender. In the
event of a default, all of the obligations under the BofA Loan Agreement may be
declared immediately due and payable. For certain events of default relating to
insolvency and receivership, all outstanding obligations become due and payable.
We were in compliance with the financial covenants under the BofA Loan Agreement
as of April 2, 2022.
For additional information on the BofA Loan Agreement, please see Note 3 to our
condensed consolidated financial statements included in this Quarterly Report.
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Second-Lien, Subordinated Term Loan
On January 28, 2022, we and our subsidiary, Summer Infant (USA), Inc., as
borrowers, entered into a Loan and Security Agreement with certain financial
institutions as lenders, and Wynnefield Capital, Inc., as agent for the lenders,
which was amended on March 16, 2022 (as amended, the "New Term Loan Agreement").
The lenders, Wynnefield Partners Small Cap Value, L.P. and Wynnefield Partners
Small Cap Value, L.P. I, are existing stockholders of the Company and, together
with affiliates, beneficially own approximately 36% of the Company's outstanding
common stock, and an employee of Wynnefield Capital, Inc., Stephen Zelkowicz,
serves on the Company's Board of Directors (the "Board"). Because the New Term
Loan Agreement is a related party transaction, it was reviewed and approved by
the Audit Committee of the Board. On April 18, 2022, the New Term Loan Agreement
was subsequently amended to modify the borrowing terms to (i) permit the Company
to request a standby term loan if, on the date of notice of borrowing and the
date of the borrowing, the borrowing base certificate delivered pursuant to the
Company's existing loan and security agreement with Bank of America reflects
availability (as defined in such agreement) equal to or less than $5,500
(previously $3,000) and (ii) reduce the period of time between borrowing
requests from 30 days to 5 days, provided that, at all times prior to May 15,
2022, the aggregate principal amount of standby term loans shall not exceed
$4,000.
The New Term Loan Agreement provides for a second lien, subordinated term loan
in an amount up to $5,000, with requests for the funding of tranches limited to
every 5 days (previously 30 days) (the "New Term Loan"). As amended on April 18,
2022, at the time of a funding request, availability (as defined in the BofA
Loan Agreement) must be either (i) equal or less than $6,000 in the 30 days
immediately preceding the request date or (ii) on the date of request and on the
date of borrowing, equal or less than $5,500 (previously $3,000). An initial
funding tranche was made in the amount of $2,000, and an additional funding was
made on April [18], 2022 in the amount of $1,000. Subsequent tranches may not
exceed $1,000. As of April 2, 2022, the amount outstanding on the New Term Loan
Agreement was $1,950. A $50 payment was paid on the new subordinated term loan
prematurely to the first due date and was subsequently returned to us in April
2022.
Borrowings under the New Term Loan Agreement bear interest at a rate of 5.0% per
annum until January 27, 2024, and thereafter at a rate of 9.0% per annum,
payable in arrears on a quarterly basis. The principal amount of any borrowing
will be repaid quarterly in installments equal to 2.5% of the highest amount of
borrowings outstanding under the New Term Loan Agreement during the applicable
quarter, commencing on July 1, 2022 and continuing until the maturity date of
April 19, 2026. In addition, we will be required to make prepayments on any
outstanding borrowings under the New Term Loan Agreement in an amount equal to
50% of the average excess amount of availability (as defined in the BofA Loan
Agreement) for the prior 30 days in excess of $10,000 and so long as (i) before
and after giving effect to such mandatory prepayment, no default or event of
default has occurred or will occur as a result of the payment, and (ii) before
and after giving effect to the payment there is at least $10,000 of availability
(as defined in the BofA Loan Agreement).
Borrowings under the New Term Loan Agreement are secured by a second lien on
substantially all of the assets of the Company and are subordinated to our
obligations under the BofA Agreement. The New Term Loan Agreement contains
customary affirmative and negative covenants and events of default substantially
the same as the BofA Agreement. We were in compliance with the financial
covenants under the New Term Loan Agreement as of April 2, 2022.
For additional information on the New Term Loan Agreement, please see Note 3 to
our condensed consolidated financial statements included in this Quarterly
Report.
PPP Loan
On August 3, 2020, we received loan proceeds of $1,956 (the "PPP Loan") pursuant
to the Paycheck Protection Program ("PPP") administered by the U.S. Small
Business Administration ("SBA") under the U.S. CARES Act. The PPP Loan, which
was in the form of a promissory note (the "PPP Note"), between the Company and
BofA, as the lender, had a maturity date of July 27, 2025, and would bear
interest at a fixed rate of 1% per annum. Monthly principal and interest
payments were deferred until (i) the date on which the amount of forgiveness was
remitted to our lender, (ii) the date on which the Company's lender provided
notice that the Company was not entitled to loan forgiveness, and (iii) if a
borrower did not apply for loan forgiveness, 10 months after the date of the
loan forgiveness covered period. We were permitted to voluntarily prepay the
borrowings in full with no associated penalty or premium. Under the terms of the
PPP, the principal and interest could be forgiven if the PPP Loan proceeds were
used for qualifying expenses, including payroll costs, rent and utility costs.
The PPP Note contained customary representations, warranties, and covenants for
this type of transaction, including customary events of default relating to,
among other things, payment defaults and breaches of representations and
warranties or other provisions of the PPP Note. The occurrence of an event of
default could have resulted in, among other things, the Company becoming
obligated to repay all amounts outstanding under the PPP Note. On February 18,
2021, we applied for full forgiveness of the PPP loan through Bank of America.
In May 2021, the SBA determined that the PPP Loan was
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fully approved for forgiveness and on May 23, 2021, the PPP Loan was repaid in
full by the SBA to BofA. The forgiveness amount remitted was $1,956 in principal
and $16 in interest.
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