SUMR Summer Infant Inc

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 2, 2016

Summer Infant, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Commission File Number: 001-33346

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of August 1, 2016, there were 18,447,294 shares outstanding of the registrant’s Common Stock, $0.0001 par value per share.

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Summer Infant, Inc.`

Form 10-Q

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See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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SUMMER INFANT, INC. AND SUBSIDIARIES

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Inventory Valuation

Inventory is comprised mostly of finished goods and some component parts and is stated at the lower of cost using the first-in, first-out (“FIFO”) method, or market (net realizable value). The Company regularly reviews slow-moving and excess inventories, and writes down inventories to net realizable value if the ultimate expected net proceeds from the disposals of excess inventory are less than the carrying cost of the merchandise.

Income Taxes

Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred income tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carry-forwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, that it is more likely than not that such benefits will be realized.

The Company follows the appropriate guidance relative to uncertain tax positions. This standard provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet a recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the financial statements. Deferred taxes are presented as long term on the balance sheet.

Net Income (Loss) Per Share

Basic earnings (loss) per share for the Company are computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share includes the dilutive impact of outstanding stock options and unvested restricted shares.

Translation of Foreign Currencies

All assets and liabilities of the Company’s foreign subsidiaries, each of whose functional currency is in its local currency, are translated into U.S. dollars at the exchange rate in effect at the end of the quarter and the income and expense accounts of these affiliates have been translated at average rates prevailing during each respective quarter. Resulting translation adjustments are made to a separate component of stockholders’ equity within accumulated other comprehensive income (loss). Foreign exchange transaction gains and losses are included in the accompanying interim, condensed consolidated statement of operations.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This guidance was originally proposed to be effective for reporting periods beginning after December 15, 2016, however in July 2015, the FASB approved the delay in this guidance until reporting periods beginning after December 15, 2017.  The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. This guidance is effective for fiscal years beginning after December 15, 2015. The Company adopted this guidance in the first quarter of 2016 and it resulted in the retrospective reclassification of $1,489 as of January 2, 2016 in unamortized debt issuance costs from other assets to a direct reduction of long-term debt.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” This guidance requires inventory within the scope of ASU 2015-11 to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for fiscal years beginning after December 15, 2016. The Company has evaluated the impact this guidance will have on its consolidated financial statements and expects the impact to be immaterial.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This guidance eliminates the current requirement for an entity to separate deferred income tax liabilities and deferred tax assets into current and non-current amounts in a classified balance sheet. Instead, this guidance requires deferred tax liabilities, deferred tax assets, and valuation allowances be classified as noncurrent in a classified balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted.

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The Company adopted this guidance in the first quarter of 2016 and it resulted in the retrospective reclassification of $799 as of January 2, 2016 in current deferred tax assets to noncurrent deferred tax assets.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for leases with lease terms greater than twelve months and disclose key information about leasing arrangements. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

2.                                       DEBT

Credit Facilities

In April 2015, the Company and its wholly owned subsidiary, Summer Infant (USA), Inc., entered into an amended and restated loan and security agreement with Bank of America, N.A., as agent, providing for an asset-based credit facility. The amended and restated Credit Facility replaced the Company’s prior credit facility with Bank of America. The amended and restated credit facility was subsequently amended in December 2015 and May 2016 to (i) modify the interest rate under each of the Revolving Facility, FILO Facility and Term Loan Facility (each as defined below), (ii) modify the maximum leverage ratio financial covenant; (iii) amend the definition of EBITDA with respect to certain fees and expenses included within the definition; (iv) modify certain reporting requirements and (v) remove the occurrence of an event having a material adverse effect on the Company as an event of default (as amended, the “Credit Facility”).

The Credit Facility consists of a $60,000 asset-based revolving credit facility, with a $10,000 letter of credit sub-line facility (the “Revolving Facility”), a $5,000 “first in last out” (FILO) revolving credit facility (the “FILO Facility”) and a $10,000 term loan facility (the “Term Loan Facility”). Pursuant to an accordion feature, the Credit Facility includes the ability to increase the Revolving Facility by an additional $15,000 upon the Company’s request and the agreement of the lenders participating in the increase. The total borrowing capacity under the Revolving Facility is based on a borrowing base, generally defined as 85% of the value of eligible accounts plus the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less reserves. The total borrowing capacity under the FILO Facility is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts that steps down over time, plus a specified percentage of the value of eligible inventory that steps down over time.

The scheduled maturity date of the loans under the Revolving Facility and the Term Loan Facility is April 21, 2020, and loans under the FILO Facility terminate April 21, 2018, subject in each case to customary early termination provisions. Any termination of the Revolving Facility would require termination of the Term Loan Facility and the FILO Facility.

All obligations under the Credit Facility are secured by substantially all of the Company’s assets. In addition, Summer Infant Canada Limited and Summer Infant Europe Limited, subsidiaries of the Company, are guarantors under the Credit Facility. Proceeds from the loans were used to (i) repay the Company’s outstanding term loan, (ii) pay fees and transaction expenses associated with the closing of the Credit Facility, (iii) pay obligations under the Credit Facility, and (iv) pay for lawful corporate purposes, including working capital.

Borrowings under the Revolving Facility will bear interest, at the Company’s option, at a base rate or at LIBOR, plus applicable margins based on average quarterly availability and ranging between 2.0% and 2.5% on LIBOR borrowings and 0.5% and 1.0% on base rate borrowings. Loans under the FILO Facility and Term Loan Facility will bear interest, at the Company’s option, at a base rate or at LIBOR, plus a margin of 4.25% on LIBOR borrowings and 2.75% on base rate borrowings.

Beginning on July 1, 2015, the Company was required to begin repaying the Term Loan Facility in quarterly installments of $500. Beginning with the fiscal year ending January 2, 2016, the Company was required to prepay the Term Loan Facility in an amount equal to 50% of the Company’s “excess cash flow,” as such term is defined in the Credit Facility, at the end of each fiscal year.

Under the Credit Facility, the Company must comply with certain financial covenants, including that the Company (i) maintain a fixed charge coverage ratio of at least 1.0 to 1.0 for the twelve consecutive fiscal months most recently ended and (ii) maintain a certain leverage ratio at the end of each fiscal quarter. For purposes of the financial covenants, consolidated EBITDA is defined as net income before interest, taxes, depreciation and amortization, plus certain customary expenses, fees, non-cash charges

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and up to $2,000 of specified inventory dispositions, and minus certain customary non-cash items increasing net income and other specified items.

The Credit Facility contains customary affirmative and negative covenants. Among other restrictions, the Company is restricted in its ability to incur additional debt, make acquisitions or investments, dispose of assets, or make distributions unless in each case certain conditions are satisfied. The Credit Facility also contains customary events of default, including the occurrence of a change of control. In the event of a default, all of the Company’s obligations under the Credit Facility may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations immediately become due and payable.

As of July 2, 2016, the base rate on loans was 4.5% and the LIBOR rate was 3.125%. The amount outstanding on the Revolving Facility at July 2, 2016 was $39,201. Total borrowing capacity under the Revolving Facility at July 2, 2016 was $48,769 and borrowing availability was $9,568. The amounts outstanding on the Term Loan Facility and FILO Facility at July 2, 2016 were $7,500 and $5,000, respectively.

Aggregate maturities of bank debt related to the BofA credit facility:

Unamortized debt issuance costs were $1,415 at July 2, 2016 and $1,489 at January 2, 2016, and are presented as a direct deduction of long-term debt on the consolidated balance sheets.

The amortization period for the majority of the intangible assets ranges from 5 to 20 years for those assets that have an estimated life; certain of the assets have indefinite lives (brand names). Total of intangibles not subject to amortization amounted to $12,308 at July 2, 2016 and January 2, 2016.

4.                                       COMMITMENTS AND CONTINGENCIES

Litigation

The Company is a party to routine litigation and administrative complaints incidental to its business. The Company does not believe that any or all of such routine litigation and administrative complaints is likely to have a material adverse effect on the Company’s financial condition or results of operations, except as noted below.

On May 27, 2015, the Company filed a Complaint against Carol E. Bramson, Annamaria Dooley, Kenneth N. Price, Carson J. Darling, Dulcie M. Madden, and Bruce Work in the United States District Court for the District of Rhode Island (Civil Action

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No. 1:15-CV-00218-5-LDA) (the “Complaint”). The Complaint alleges theft and misappropriation of the Company’s confidential and proprietary trade secrets, intellectual property, and business, branding and marketing strategies.  The following updates information previously reported in Note 10, Commitments and Contingencies, under Part IV, Item 15 of the Company’s Annual Report on Form 10-K for the year ended January 2, 2016 and Note 4, Commitments and Contingencies, under Part 1, Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2016.

On May 19, 2016, a hearing was held on the Company’s motion to dismiss certain counterclaims made by Mr. Price and on Ms. Dooley’s motion to amend her counterclaims and bring a third party complaint.  The court granted Ms. Dooley’s motion and denied the Company’s motion to dismiss, with leave to renew the motion if Mr. Price amended his answer and counterclaims.  Ms. Dooley filed an amendment to her counterclaims on May 25, 2016, which the Company and Mr. Almagor answered on July 5, 2016.  Mr. Price filed a motion for leave to amend his answer and counterclaims on June 17, 2016, to which the Company has filed an opposition based on the grounds that one of the counterclaims has failed to state a claim upon which relief can be granted.  On June 6, 2016, the remaining defendants filed a motion against the Company for sanctions based on the Company’s alleged failure to disclose applicable insurance policies, to which the Company has filed an opposition.  On July 26, 2016, Ms. Bramson filed a motion for leave to amend her answer and counterclaim to add a claim against the Company and Mr. Almagor for gender discrimination.  The Company and the remaining defendants are concluding discovery, and no trial date has been set. The Company has incurred significant expenses related to this lawsuit to date and may continue to incur expenses related to this lawsuit. In connection with the litigation, the Company has informed its insurers of the litigation, and has received indication that portions of our defense costs may be covered as well as defense costs of the defendants.  However, the Company cannot estimate at this time the amounts that may be reimbursed under its policies, and any insurance reimbursements would be subject to applicable deductibles. The Company cannot predict the outcome of this lawsuit or for how long it will remain active.

5.                                       SHARE BASED COMPENSATION

The Company is authorized to issue up to 3,000,000 shares for equity awards under the Company’s 2006 Performance Equity Plan (“2006 Plan”) and 1,700,000 shares for equity awards under the Company’s 2012 Incentive Compensation Plan (“2012 Plan”). Periodically, the Company may also grant equity awards outside of its 2006 Plan and 2012 Plan as inducement grants for new hires.

Under the 2006 Plan and 2012 Plan, awards may be granted to participants in the form of non-qualified stock options, incentive stock options, restricted stock, deferred stock, restricted stock units and other stock-based awards. Subject to the provisions of the plans, awards may be granted to employees, officers, directors, advisors and consultants who are deemed to have rendered or are able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the Company’s success. The Company accounts for options under the fair value recognition standard. The application of this standard resulted in share-based compensation expense for the three months ended July 2, 2016 and July 4, 2015 of $91 and $245, respectively, and share-based compensation expense for the six months ended July 2, 2016 and July 4, 2015 of $218 and $419, respectively. Stock based compensation expense is included in selling, general and administrative expenses.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the table below. The Company uses the simplified method to estimate the expected term of the options, but used an estimate for grants of “plain vanilla” stock options based on a formula prescribed by the Securities and Exchange Commission. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense recognized in the consolidated financial statements in 2016 and 2015 is based on awards that are ultimately expected to vest.

As of July 2, 2016, there were 1,437,240 stock options outstanding and 225,073 unvested restricted shares outstanding.

During the six months ended July 2, 2016, the Company granted 193,300 stock options and granted 109,400 shares of restricted stock, respectively. The following table summarizes the weighted average assumptions used for stock options granted during the six months ended July 2, 2016 and July 4, 2015.

As of July 2, 2016, there are 385,689 shares available to grant under the 2006 Plan and 1,034,722 shares available to grant under the 2012 Plan.

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Restricted Stock Units

In December 2015, the Company’s Board of Directors granted restricted stock units to the executive Chairman of the Board (the “RSUs”).  The RSUs represent the right to receive shares of the Company’s common stock upon achievement of specified stock price performance metrics, and only vest if such market-based performance metrics are achieved.  The RSUs expire on the date of the Company’s 2017 annual stockholder meeting or when the Chairman leaves the Board of Directors, if sooner. The amount of shares that ultimately vest may range from 0 shares to 194,209. The fair value of the restricted stock units was determined by utilizing a Monte Carlo simulation model, which projects the value of the Company’s stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes. During the six months ended July 2, 2016, 38,278 RSUs vested.

There was $26 of compensation cost recognized in the six months ending July 2, 2016 and no unrecognized compensation cost related to the RSUs. Expected cost is recognized over a weighted-average period ending August 3, 2016.

6.                                       WEIGHTED AVERAGE COMMON SHARES

Basic and diluted earnings or loss per share (“EPS”) is based upon the weighted average number of common shares outstanding during the period.  Common stock equivalents, including stock options, are included in the calculation of dilutive common shares outstanding. However, since there was a net loss in both periods presented, the inclusion of common stock equivalents was anti-dilutive. The computation of diluted common shares for the three months ended July 2, 2016 excluded 1,437,240 stock options and 210,073 shares of restricted stock outstanding. The computation of diluted common shares for the six months ended July 2, 2016 excluded 1,437,240 stock options and 225,073 shares of restricted stock outstanding. The computation of diluted common shares for the three months and six months ended July 4, 2015 excluded 1,996,533 stock options and 239,790 shares of restricted stock outstanding.

7.                                       SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this Quarterly Report and determined that no subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.

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In June 2016, we announced the appointment of Mark Messner as our new President and Chief Executive Officer, effective July 13, 2016. Prior to joining our Company, Mr. Messner spent 13 years with Artsana USA, Inc. (Chicco), a manufacturer of baby care products under the Chicco brand. Mr. Messner originally joined Artsana USA in 2003 as Vice President of Marketing and Product Development and served as Chief Operating Officer for three years before taking over as Chief Executive Officer in 2012. Mr. Messner began his career in 1991 at Graco Children’s Products, Inc. (now part of Newell Brands).

Summary of Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the six months ended July 2, 2016 from our critical accounting policies and estimates disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016.

Three months ended July 2, 2016 compared with three months ended July 4, 2015

Net sales declined 2.4% from $51,807 for the three months ended July 4, 2015 to $50,575 for the three months ended July 2, 2016. The three months ended July 4, 2015 included $1,126 of sales related to our bank-approved inventory reduction plan. Excluding the impact of the above sales that did not occur in the three months ended July 2, 2016, net sales for the three months ended July 2, 2016 was essentially flat with the three months ended July 4, 2015.

Cost of goods sold included the cost of the finished product from suppliers, duties on certain imported items, freight-in from suppliers, and miscellaneous charges. The components remained relatively the same for the quarter ended July 2, 2016 as compared to the quarter ended July 4, 2015.

Gross profit increased 17.6% from $13,771 for the quarter ended July 4, 2015 to $16,201 for the quarter ended July 2, 2016. Gross margin increased from 26.6% for the quarter ended July 4, 2015 to 32.0% for the quarter ended July 2, 2016. The three months ended July 4, 2015 included $1,775 in losses on the sale of inventory below cost relating to our bank-approved inventory reduction plan and $734 of inventory charges taken as we completed our exit of the furniture category. Excluding the impact of the above charges that did not occur in the three months ended July 2, 2016, gross margin for the three months ended July 2, 2015 as a percent of net sales would have been 32.1%.

General and administrative expenses decreased 16.6% from $11,972 for the quarter ended July 4, 2015 to $9,981 for the quarter ended July 2, 2016. General and administrative expenses also decreased as a percent of sales from 23.1% for the quarter ended July 4, 2015 to 19.7% for the quarter ended July 2, 2016. The decrease in general and administrative expense dollars and as a percent of net sales is primarily attributable to lower litigation costs of $785 in the three months ended July 2, 2016 as compared to $1,702 for the three months ended July 4, 2015, as well as the impact of cost reduction actions taken in the latter half of fiscal 2015. Excluding the impact of litigation costs, general and administrative expenses for the three months ended July 2, 2016 would have been down 10.5% at $9,196 as compared to $10,270 for the three months ended July 4, 2015, or 18.2% and 19.8%, of net sales, respectively.

Selling expenses decreased 9.4% from $4,308 for the quarter ended July 4, 2015 to $3,901 for the quarter ended July 2, 2016. Selling expenses also decreased as a percent of sales from 8.3% for the quarter ended July 4, 2015 to 7.7% for the quarter

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ended July 2, 2016. This decrease in selling expense was primarily attributable to lower sales volume. The decrease in percent of net sales was primarily attributable to customer mix and lower royalty costs.

Depreciation and amortization decreased 12.0% from $1,318 in the quarter ended July 4, 2015 to $1,160 for the quarter ended July 2, 2016. The decrease in depreciation is attributable to a reduction in capital investment as a result of disciplined capital expenditure management.

Interest expense decreased 52.4% from $1,318 in the quarter ended July 4, 2015 to $628 for the quarter ended July 2, 2016, reflecting reduced debt levels and lower interest rates on the Company’s credit facility. Interest expense for the quarter ended July 4, 2015 included a write off of $685 for past unamortized financing fees and termination fees in connection with the refinancing of our credit factility in April 2015.

For the quarter ended July 4, 2015, we recorded a $1,672 tax benefit on $5,145 of pretax loss for the quarter, reflecting an estimated 32.5% tax rate for the quarter. For the quarter ended July 2, 2016, we recorded a $275 tax provision on $531 of pretax income for the quarter, reflecting an estimated 51.8% tax rate for the quarter. The increase in tax rate for the first three months of 2016 is attributable to an increase in non-deductible expenses in foreign jurisdictions on a lower level of consolidated income.

Six months ended July 2, 2016 compared with six months ended July 4, 2015

Net sales decreased 4.4% from $104,820 for the six months ended July 4, 2015 to $100,245 for the six months ended July 2, 2016. The six months ended July 4, 2015 included $2,006 of sales related to our bank-approved inventory reduction plan. Excluding the impact of the above sales that did not occur in the six months ended July 2, 2016, net sales for the six months ended July 2, 2016 decreased 2.5% in comparison with the six months ended July 4, 2015. The decrease in net sales was primarily attributable to a decrease in channel inventory in advance of new product launches as well as in delays of some of our new product introductions, such as the BornFree® Breeze™ bottle and Summer™ monitors.

Cost of goods sold included the cost of the finished product from suppliers, duties on certain imported items, freight-in from suppliers, and miscellaneous charges. The components remained relatively the same for the six months ended July 2, 2016 as compared to the quarter ended July 4, 2015.

Gross profit increased 3.8% from $30,746 for the six months ended July 4, 2015 to $31,927 for the six months ended July 2, 2016. Gross margin increased from 29.3% for the six months ended July 4, 2015 to 31.8% for the six months ended July 2, 2016. The six months ended July 4, 2015 included $2,098 in losses on the sale of inventory below cost relating to our bank-approved inventory reduction plan and $734 of inventory charges taken as we completed our exit of the furniture category. Excluding the impact of the above charges that did not occur in the six months ended July 2, 2016, gross margin for the six months ended July 2, 2015 as a percent of net sales would have been 32.7%. The lower gross margin percent for the six months ended June 2, 2016 was primarily attributable to initial cost overages related to product introduction delays of our new BornFree® Breeze™ bottle as well as unfavorable foreign exchange and temporary demurrage costs in the first quarter.

General and administrative expenses decreased 6.9% from $22,282 for the six months ended July 4, 2015 to $20,734 for the six months ended July 2, 2016. General and administrative expense decreased as a percent of sales from 21.3% for the six months ended July 4, 2015 to 20.7% for the six months ended July 2, 2016. The decrease in general and administrative expense dollars and as a percent of net sales is primarily attributable to cost reduction actions implemented in the latter half of fiscal 2015, after excluding litigation costs. Litigation costs were $2,141 for the six months ended July 2, 2016 as compared to $1,979 for the six months ended July 4, 2015. Excluding the impact of litigation costs, general and administrative expenses for the six months ended July 2, 2016 would have been down 8.4% at $18,593 as compared to $20,303 for the three months ended July 4, 2015, or 18.5% and 19.4%, of net sales, respectively.

Selling expenses decreased 14.8% from $9,176 for the six months ended July 4, 2015 to $7,817 for the six months ended July 2, 2016. Selling expenses also decreased as a percent of sales from 8.8% for the six months ended July 4, 2015 to 7.8% for the six months ended July 2, 2016. This decrease in selling expense was primarily attributable to lower sales volume. The decrease in percent of net sales was primarily attributable to customer mix and lower royalty costs.

Depreciation and amortization decreased 12.7% from $2,652 for the six months ended July 4, 2015 to $2,316 for the six months ended July 2, 2016. The decrease in depreciation is attributable to a reduction in capital investment as a result of disciplined capital expenditure management.

Interest expense decreased 41.4% from $2,164 for the six months ended July 4, 2015 to $1,268 for the six months ended July 2, 2016, reflecting reduced debt levels and lower interest rates. Interest expense for the six months ended July 4, 2015 included a write off of $685 for past unamortized financing fees and termination fees in connection with the refinancing of our credit facility in April 2015.

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For the six months ended July 4, 2015, we recorded a $1,813 tax benefit on $5,528 of pretax loss for the period resulting in an estimated tax rate of 32.8% for the period.  For the six months ended July 2, 2016, we recorded a $131 tax benefit on $208 of pretax loss for the period resulting in an estimated tax rate of 63.0% for the period. The increase in tax rate for the first six months of 2016 is attributable to an increase in non-deductible expenses in foreign jurisdictions on a lower level of consolidated income.

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 US dollars to meet expected demand plus a safety stock. Because the majority of our suppliers are based in Asia, inventory takes from three to four weeks to arrive from Asia to the various distribution points we maintain in the United States, Canada and the United Kingdom. Payment terms for these vendors are approximately 60-90 days from the date the product ships from Asia, therefore we are generally paying for the product a short time after it is physically received in the United States.  In turn, sales to customers generally have payment terms of 30 to 60 days, 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 to new product introductions. We receive indications from retailers generally around the middle of each year as to what products the retailer will be taking into its product line 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 six months ending July 2, 2016, net cash provided by operating activities totaled $3,047. For the six months ending July 4, 2015, net cash provided by operating activities totaled $6,030. The decrease in net cash generated from operating activities for the six months ended July 2, 2016 as compared to the same period in the prior year is primarily attributable to lower sales and decreased accounts payable within the period.

For the six months ended July 2, 2016, net cash used in investing activities was approximately $1,242. For the six months ended July 4, 2015, net cash used in investing activities was approximately $1,433.

For the six months ended July 2, 2016, net cash used by financing activities was $1,779. For the six months ended July 4, 2015, net cash used in financing activities was approximately $3,398. The decrease in net cash used in financing activities is primarily attributable to lower operating cash generated in the first six months of 2016 compared to the first six months of 2015.

Based primarily on the above factors, net cash increased for the six months ended July 2, 2016 by $224, resulting in a cash balance of approximately $1,147 at July 2, 2016.

Capital Resources

In addition to operating cash flow, we also rely on our asset-based revolving credit facility with Bank of America, N.A. to meet our financing requirements, which are subject to changes in our inventory and account receivable levels. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If market conditions are favorable, we may refinance our existing debt or issue additional securities. Based on past performance and current expectations, we believe that our anticipated cash flow from operations and availability under our existing credit facility are sufficient to fund our working capital, capital expenditures and debt service requirements for at least the next 12 months.

However, if we are unable to meet our current financial forecast or to manage our legal and other general and administrative costs and expenses and cannot raise additional funds or adjust our operations accordingly, we may not remain in compliance with the financial covenants required under our credit facility. Unforeseen circumstances, such as softness in the retail industry or deterioration in the business of a significant customer, could create a situation where we cannot access all of our available lines of credit due to not having sufficient assets or fixed charge coverage ratio as required under our credit facility. 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 if there are covenant violations. In addition, should we need to raise additional funds through additional debt or equity financings, any sale of additional debt or equity securities may cause dilution to existing stockholders. If sufficient funds are not available or are not available on acceptable terms, our ability to address any unexpected changes in our operations could be limited. Furthermore, there can be no assurance that we will be able to raise such funds if and when they are required. Failure to obtain future funding when needed or on acceptable terms could materially adversely affect our results of operations.

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Credit Facility

We and our wholly owned subsidiary, Summer Infant (USA), Inc., are parties to an amended and restated loan and security agreement with Bank of America, N.A., as agent, providing for an asset-based credit facility (as amended in December 2015 and May 2016, the “Credit Facility”).

The Credit Facility consists of a $60,000 asset-based revolving credit facility, with a $10,000 letter of credit sub-line facility (the “Revolving Facility”), a $5,000 “first in last out” (FILO) revolving credit facility (the “FILO Facility”) and a $10,000 term loan facility (the “Term Loan Facility”).  Pursuant to an accordion feature, the Credit Facility includes the ability to increase the Revolving Facility by an additional $15,000 upon the Company’s request and the agreement of the lenders participating in the increase.  The total borrowing capacity under the Revolving Facility is based on a borrowing base, generally defined as 85% of the value of eligible accounts plus the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less reserves.  The total borrowing capacity under the FILO Facility is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts that steps down over time, plus a specified percentage of the value of eligible inventory that steps down over time. For additional information on the Credit Facility, please see Note 2 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

As of July 2, 2016, the base rate on loans was 4.5% and the LIBOR rate was 3.125%.  The amount outstanding on the Revolving Facility at July 2, 2016 was $39,201. Total borrowing capacity under the Revolving Facility at July 2, 2016 was $48,769 and borrowing availability was $9,568.  The amounts outstanding on the Term Loan Facility and FILO Facility at July 2, 2016 were $7,500 and $5,000, respectively.

We were in compliance with the financial covenants under the Credit Facility as of July 2, 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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