SUMR Summer Infant Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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

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For the quarterly period ended April 2, 2022

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

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For the transition period from                 to               

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Commission file number: 001-33346

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Summer Infant, Inc.

(Exact name of registrant as specified in its charter)

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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 past 90 days. Yes ☒ No ☐

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

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

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As of May 13, 2022, there were 2,167,168 shares outstanding of the registrant’s Common Stock, $0.0001 par value per share. (number of shares include vested but unissued shares pursuant to stock awards).

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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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See notes to condensed consolidated financial statements.

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SUMMER INFANT, INC. AND SUBSIDIARIES

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However, there can be no assurance the Company’s plans will be achieved and that the Company will be able to meet its financial obligations as they become due without obtaining additional financing or sources of capital. Therefore, in accordance with applicable accounting guidance, and based on the Company’s current financial condition and availability of funds, there is substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date these financial statements were issued.

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Basis of Presentation and Principles of Consolidation

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The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods. Accordingly, they do not include all information and notes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year or any other period. The balance sheet at January 1, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes for the year ended January 1, 2022 included in its Annual Report on Form 10-K filed with the SEC on March 17, 2022.

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It is the Company’s policy to prepare its financial statements on the accrual basis of accounting in conformity with GAAP. The interim condensed consolidated financial statements include the accounts of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.

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All dollar amounts included in the Notes to Condensed Consolidated Financial Statements are in thousands of U.S. dollars, except share and per share amounts.

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Revenue Recognition

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The Company applies FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The guidance sets forth a five-step revenue recognition model and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services.

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The Company’s principal activities from which it generates its revenue is product sales. The Company has one reportable segment of business.

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Revenue is measured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control over a product to a customer when product delivery occurs. Consideration is typically paid approximately 60 days from the time control is transferred. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in selling costs.

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A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for the Company is transfer of primarily juvenile products to its customers. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.

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A transaction price is the amount of consideration the Company expects to receive under the arrangement. The Company is required to estimate variable consideration (if any) and to factor that estimation into the determination of the transaction price. The Company conducts its business with customers through valid purchase or sales orders each of which is considered a separate contract because individual orders are not interdependent on one another. Product transaction prices on a purchase or sale order are discrete and stand-alone. Purchase or sales orders may be issued under either a customer master service agreement or a reseller allowance agreement. Purchase or sales orders, master service agreements, and reseller allowance agreements, which are specific and unique to each customer, may include product price discounts, markdown allowances, return allowances, and/or volume rebates which reduce the consideration due from customers. Variable consideration is estimated using the most likely amount method, which is based on historical experience as well as current information such as sales forecasts.

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Contracts may also include cooperative advertising arrangements where the Company allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. These allowances are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit and fair value and are accounted for as direct selling expenses.

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Use of Estimates

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The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of revenues, expenses, assets, liabilities and related disclosures. These estimates are based on management’s best knowledge as of the date the financial statements are published of current events and actions the Company may undertake in the future. Accordingly, actual results could differ from those estimates.

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Cash and Cash Equivalents

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Cash and cash equivalents include money market accounts and investments with an original maturity of three months or less. At times, the Company possesses cash balances in excess of federally-insured limits.

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Trade Receivables

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Trade receivables are carried at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible. Amounts are considered to be uncollectable based upon historical experience and management’s evaluation of outstanding accounts receivable.

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Changes in the allowance for doubtful accounts are as follows:

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Inventory Valuation

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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 net realizable value. The Company regularly reviews slow-moving and excess inventories and writes down inventories to net realizable value if the expected net proceeds from the disposals of excess inventory are less than the carrying cost of the merchandise.

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Leases

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The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the Company’s condensed consolidated balance sheets.

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ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

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The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The lease component results in a ROU asset being recorded on the balance sheet. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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Income Taxes

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Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred 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. Deferred income tax assets are recorded on a net basis as a long term asset.

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The Company utilized the full year forecast method of accounting for income taxes in the U.S. for the three months ended April 2, 2022 and April 3, 2021.

The Company follows the applicable 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.

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On March 27, 2020, the U.S. CARES Act was enacted, which provided a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. The U.S. CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. No discrete items are being recognized for the three months ended April 2, 2022 and April 3, 2021. The tax rate for the three months ended April 2, 2022 includes an expected increase in valuation allowance of $599 for the increase in U.S. and foreign net operating losses and nondeductible interest expense. As of year ended January 1, 2022 and quarter ended April 2, 2022, the Company has uncertain tax positions of $7,543.

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Net Loss/Income Per Share

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

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Translation of Foreign Currencies

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Assets and liabilities of the Company’s foreign subsidiaries whose functional currency is 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 loss. Assets and liabilities of the Company’s foreign subsidiaries whose functional currency is the U.S. dollar are remeasured into U.S. dollars at their historical rates or the exchange rate in effect at the end of the quarter and the income and expense accounts of these affiliates have been remeasured at average rates prevailing during each respective quarter. Resulting remeasurement adjustments are made to the consolidated statement of operations. Foreign exchange transaction gains and losses are included in the accompanying interim, condensed consolidated statement of operations.

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2.          REVENUE

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Disaggregation of Revenue

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The Company’s revenue is primarily from distinct fixed-price product sales in the juvenile product market, to similar customers and channels utilizing similar types of contracts that are short term in nature (less than one year). The Company does not sell service agreements or goods over a period of time and does not sell or utilize customer financing arrangements or time-and-material contracts.

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The following is a table that presents net sales by geographical area:

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All Other consists of Canada, Europe, South America, Mexico, Asia, and the Middle East.

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Contract Balances

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The Company does not have any contract assets such as work-in-process or contract liabilities such as customer advances. All trade receivables on the Company’s condensed consolidated balance sheets are from contracts with customers.

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Contract Costs

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Costs incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract that are short term in nature are expensed as incurred. All contract costs incurred in the three months ended April 2, 2022 and three months ended April 3, 2021 fall under the provisions of the practical expedient and have therefore been expensed.

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3.          DEBT

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Loan Agreement with Bank of America.

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The Company and its 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.

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 the Company’s 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 the Company’s 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. The Company is 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.

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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 the Company’s option, at a base rate or at LIBOR, plus applicable margins, and beginning January 28, 2022 bears interest, at the Company’s 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 was $5,250 at April 2, 2022. The amount outstanding on the term loan was $5,625 at January 1, 2022.

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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 the Company’s option, at a base rate or at LIBOR, plus applicable margins, and beginning January 28, 2022 bear interest, at the Company’s 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.

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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, 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. As long as any obligations remain outstanding under the BofA Loan Agreement, the Company 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, the Company 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.

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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.

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Second-Lien, Subordinated Term Loan

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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. Subsequent to quarter end, on April 18, 2022, the New Term Loan Agreement was subsequently amended as set forth in Note 8.

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The New Term Loan Agreement, as amended, 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”). 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. 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 the Company in April 2022.

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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).

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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 the Company’s 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.

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PPP Loan

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On August 3, 2020, the Company 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 the Company’s 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. The Company was 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, the Company applied for full forgiveness of the PPP loan through Bank of America. In May 2021, the SBA determined that the PPP Loan was 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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Aggregate maturities of bank debt related to the BofA Loan Agreement and New Term Loan Agreement are as follows:

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Unamortized debt issuance costs were $1,215 at April 2, 2022 and $1,027 at January 1, 2022, and are presented as a direct deduction of long-term debt on the consolidated balance sheets.

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The amortization period for the majority of the intangible assets ranges from 5 to 18 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 $8,400 as of April 2, 2022 and January 1, 2022.

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5.          COMMITMENTS AND CONTINGENCIES

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Leases

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The Company leases office space and distribution centers primarily related to its United States, Canada, United Kingdom, and Hong Kong operations. In connection with these leases, there were no cash incentives from the landlord to be used for the construction of leasehold improvements within the facility.

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In April 2020, the Company entered into a twelve-month sublease agreement for a portion of the distribution warehouse located in Riverside, California. In February 2021, the Company entered into a six-month extension from April 1, 2021 through September 30, 2021. On October 1, 2021, the Company entered into a new twelve-month sublease agreement for a portion of the distribution warehouse located in Riverside, California. Fixed sublease payments received are recognized on a straight-line basis over the sublease term in general and administrative expenses.

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In February 2021, Summer USA extended its lease at its Riverside, California distribution center. The existing lease was set to expire on September 30, 2021 and has been extended for 61 months through October 31, 2026. In addition, the amended lease grants a 60-month extension option. The company concluded that this is a modification to the existing lease and continues to be classified as operating. Upon the execution of the lease extension, the Company recorded an increase in ROU asset and lease liability of $13,583, respectively. The Company did not include the extension option in the calculation of the ROU asset and lease liability.

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In October 2021, the Company renewed its lease in Hong Kong for an additional two years beginning in November 2021 and terminating in November 2023. No options to renew were stipulated in the lease. Upon execution of the lease, the Company recorded an ROU asset and lease liability of $291.

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The Company identified and assessed the following significant assumptions in recognizing the right-of-use asset and corresponding liabilities:

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The components of the Company’s lease expense for the three months ended April 2, 2022 and April 3, 2021 were as follows:

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Cash paid for amounts included in the measurement of the Company’s lease liabilities were $904 and $765 for the three months ended April 2, 2022 and April 3, 2021 respectively.

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As of April 2, 2022, the present value of maturities of the Company’s operating lease liabilities were as follows:

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The future fixed sublease receipts under non-cancelable operating sublease agreements as of April 2, 2022 are as follows:

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Litigation

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The Company is a party to various routine claims, litigation and administrative complaints incidental to its business, including claims involving product liability, employee matters and other general liability claims, most of which are covered by insurance. We are not aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, results of operations or financial condition.

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6.          SHARE BASED COMPENSATION

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The Company is currently authorized to issue up to 374,889 shares for equity awards under the Company’s Amended and Restated 2012 Incentive Compensation Plan (“2012 Plan”). In May 2021, the Company’s stockholders approved an increase in the number of shares available for issuance under the 2012 Plan from 188,889 to 374,889. Periodically, the Company may also grant equity awards outside of its 2012 Plan as inducement grants for new hires.

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Under the 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,

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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, net of forfeitures for the three months ended April 2, 2022 of $32 and a credit of $7 for the three months ended April 3, 2021. Share based compensation expense is included in selling, general and administrative expenses.

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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 is based on awards that are ultimately expected to vest.

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As of April 2, 2022, there were 69,912 stock options outstanding and 5,989 unvested restricted shares outstanding.

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During the three months ended April 2, 2022, the Company granted 3,000 stock options and did not grant any shares of restricted stock. The following table summarizes the weighted average assumptions used for stock options granted during the three months ended April 2, 2022.

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As of April 2, 2022, there were 203,076 shares available to grant under the 2012 Plan.

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7.          WEIGHTED AVERAGE COMMON SHARES

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Basic and diluted earnings or loss per share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted weighted average number of common shares outstanding also included common stock equivalents such as stock options and restricted shares. The Company does not include the anti-dilutive effect of common stock equivalents in the calculation of dilutive common shares outstanding.

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A reconciliation of basic and diluted net income (loss) attributable to common stockholders is as follows:

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The computation of diluted common shares for the three months ended April 2, 2022 excluded 69,912 stock options and 5,989 shares of restricted stock outstanding because to include them would have been anti-dilutive. The computation of diluted common shares for the three months ended April 3, 2021 excluded 69,845 stock options and 2,850 shares of restricted stock outstanding because to include them would have been anti-dilutive.

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8.          SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and determined that no subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto except as described below:

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On April 18, 2022, the Company entered into an amendment to the New Term Loan that modified the borrowing terms under the New Term Loan 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 BofA Loan Agreement reflects availability (as defined in the BofA Loan Agreement) equal to or less than $5,500 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.

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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.

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Proposed Merger with Kids2, Inc.

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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”).

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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.

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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.

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COVID-19 Impact and Ongoing Supply Chain Challenges

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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.

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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.

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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.

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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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Three Months ended April 2, 2022 compared with Three Months ended April 3, 2021

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Liquidity and Capital Resources

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We fund our operations and working capital needs through cash generated from operations and borrowings under our credit facilities.

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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.

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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.

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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.

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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.

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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.

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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.

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Capital Resources

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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

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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.

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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.

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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.

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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.

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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.

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Loan Agreement with BofA

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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).

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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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directing the individual defendants to comply with their fiduciary duties and to disseminate a proxy statement that does not contain any untrue statements of material fact and that states all material facts required in it or necessary to make the statements contained therein not misleading, directing the defendants to account for damages sustained because of the allegations in the complaint, and awarding costs of the action, including plaintiff’s reasonable attorneys’ and experts’ fees.

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The Company believes that the claims asserted in the complaints are without merit, and at present, the Company is unable to estimate potential losses, if any, related to these complaints.

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