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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company designs, markets and distributes branded juvenile health, safety and wellness products that are sold globally to large national retailers as well as independent retailers, primarily in North America. The Company currently markets its products in several product categories including monitoring, safety, nursery, baby gear, and feeding products. Most products are sold under our core brand names of Summer®, SwaddleMe®, and Born Free®.
Basis of Presentation and Principles of Consolidation
It is the Company's policy to prepare its financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.
All dollar amounts included in the Notes to Consolidated Financial Statements are in thousands of U.S. dollars except share and per share amounts.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31 of each calendar year. There were fifty two weeks in the fiscal years ended December 31, 2016 and January 2, 2016.
Summary of Significant Accounting Policies
Revenue Recognition
The Company records revenue when all of the following occur: persuasive evidence of an arrangement exists, product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Sales are recorded net of provisions for returns and allowances, customer discounts, and other sales related discounts. The Company bases its estimates for discounts, returns and allowances on negotiated customer terms and historical experience. Customers do not have the right to return products unless the products are defective. The Company records a reduction of sales for estimated future defective product deductions based on contractual terms and historical experience.
Sales incentives or other consideration given by the Company to customers that are considered adjustments of the selling price of products, such as markdowns, are reflected as reductions of revenue. Sales incentives and other consideration that represent costs incurred by the Company for assets or services received, such as the appearance of the Company's products in a customer's national circular ad, are reflected as selling and marketing expenses in the accompanying statements of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents
Cash flows, 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.
Trade Receivables
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.
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.
Property and Equipment
Property and equipment are recorded at cost. The Company owns the tools and molds used in the production of its products by third party manufacturers. Capitalized mold costs include costs incurred for the pre-production design and development of the molds.
Depreciation is provided over the estimated useful lives of the respective assets using either straight-line or accelerated methods.
Long-Lived Assets with Finite Lives
The Company reviews long-lived assets with finite lives for impairment (using the group concept) whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered to be impaired when its carrying amount exceeds both the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition and the assets' fair value. Long-lived assets include property and equipment and finite-lived intangible assets. The amount of impairment loss, if any, is charged by the Company to current operations.
Indefinite-Lived Intangible Assets
The Company accounts for intangible assets in accordance with accounting guidance that requires that intangible assets with indefinite useful lives be tested annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company's annual impairment testing is conducted in the fourth quarter of every year.
The Company tests indefinite-lived intangible assets for impairment by comparing the asset's fair value to its carrying amount. If the fair value is less than the carrying amount, the excess of the carrying amount over fair value is recognized as an impairment charge and the adjusted carrying amount becomes the assets' new cost basis.
Management also evaluates the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, it is amortized prospectively over its estimated remaining useful life.
For the year ended December 31, 2016, the Company determined that certain indefinite-lived intangible assets were impaired. For the year ended January 2, 2016, the Company determined that no impairment existed on its indefinite-lived intangible assets. See Note 3 for a discussion on the fiscal year 2016 impairment charge.
Fair Value Measurements
The Company follows ASC 820, "Fair Value Measurements and Disclosures" which includes a framework for measuring fair value and expanded related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The standard established a three-level valuation hierarchy based upon observable and non-observable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3—Significant inputs to the valuation model are unobservable.
The Company maintains policies and procedures to value instruments using the best and most relevant data available. In addition, the Company utilizes third party specialists that review valuation, including independent price validation.
The Company's financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses, and short and long-term borrowings. Because of their short maturity, the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value. The carrying value of long-term borrowings approximates fair value.
Non-recurring Fair Value Measurements
The Company's assets measured at fair value on a nonrecurring basis include long-lived assets and intangible assets. The Company tests its long-lived assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the carrying value may exceed its fair value. The resulting fair value measurements are considered to be Level 3 inputs. During the fourth quarter of fiscal 2016, the Company determined that the estimated fair value of an indefinite lived asset was lower than its carrying value and the Company recorded a non-cash impairment charge of $2,993 which reduced the value of the intangible asset to approximately $915, as more fully described in "Note 3 to the Consolidated Financial Statements—Intangible Assets." The Company did not incur an impairment charge in fiscal 2015.
Income taxes
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 carryforwards. 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, it is more likely than not that such benefits will be realized.
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.
Translation of Foreign Currencies
The assets and liabilities of the Company's European, Canadian, Israeli, and Asian operations have been translated into U.S. dollars at year-end exchange rates and the income and expense accounts of these subsidiaries have been translated at average rates prevailing during each respective year. Resulting translation adjustments are made to a separate component of stockholders' equity within accumulated other comprehensive loss. Foreign exchange transaction gains and losses are included in the accompanying consolidated statements of operations.
Shipping Costs
Shipping costs to customers are included in selling expenses and amounted to approximately $1,477 and $1,882 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Advertising Costs
The Company charges advertising costs to selling expense as incurred. Advertising expense, which consists primarily of promotional and cooperative advertising allowances provided to customers, was approximately $12,863 and $14,743 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment utilizing an omni-channel distribution strategy.
Net Loss Per Share
Basic earnings per share is calculated by dividing net loss for the period by the weighted average number of common stock outstanding during the period.
Diluted loss per share for the Company is computed by dividing net loss by the dilutive weighted average shares outstanding which includes: the dilutive impact (using the "treasury stock" method) of "in the money" stock options and unvested restricted shares issued to employees. Options to purchase 1,023,825 and 1,380,147 shares of the Company's common stock and 268,432 and 197,572 of restricted shares were not included in the calculation, due to the fact that these instruments were anti-dilutive for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
New 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. We are still finalizing the analysis to quantify the adoption impact of the provisions of the new standard, but we do not currently expect it to have a material impact on our consolidated financial position or results of operations. Based on the evaluation of our current contracts and revenue streams, most will be recorded consistently under both the current and new standard. The FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018.
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. 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.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force). In an effort to reduce diversity in practice, ASU 2016-15 provides solutions for eight specific statement of cash flow classification issues. The ASU is effective for public companies beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company has evaluated the impact this guidance will have on its consolidated financial statements and expects the impact to be immaterial.
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.
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2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following:
|
|
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For the fiscal year |
|
|
||||
|
|
|
December 31, |
|
January 2, |
|
Depreciation/ |
||
|
Computer-related |
|
$ |
3,861 |
|
$ |
6,327 |
|
5 years |
|
Tools, dies, prototypes, and molds |
|
|
28,342 |
|
|
31,052 |
|
1 - 5 years |
|
Building |
|
|
4,156 |
|
|
4,156 |
|
30 years |
|
Other |
|
|
6,145 |
|
|
5,793 |
|
various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,504 |
|
|
47,328 |
|
|
|
Less: accumulated depreciation |
|
|
32,539 |
|
|
35,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
9,965 |
|
$ |
12,007 |
|
|
|
|
|
|
|
|
|
|
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Property and equipment included amounts acquired under capital leases of approximately $0 and $470 at December 31, 2016 and January 2, 2016, respectively, with related accumulated depreciation of approximately $0 and $257, respectively. Total depreciation expense was $4,304 and $4,142 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
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3. INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
|
For the |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
Brand names |
|
$ |
11,819 |
|
$ |
14,812 |
|
|
Patents and licenses |
|
|
3,766 |
|
|
3,766 |
|
|
Customer relationships |
|
|
6,946 |
|
|
6,946 |
|
|
Other intangibles |
|
|
1,882 |
|
|
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,413 |
|
|
27,406 |
|
|
Less: accumulated amortization |
|
|
(9,600 |
) |
|
(8,894 |
) |
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
14,813 |
|
$ |
18,512 |
|
|
|
|
|
|
|
|
|
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|
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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 assets have indefinite lives (certain brand names). Total of intangibles not subject to amortization amounted to $8,400 and $12,308 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Amortization expense amounted to $707 and $2,638 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively. In the fourth quarter of the year ended January 2, 2016, the Company recorded $1,532 of accelerated amortization due to the shortened estimated useful life on older technology as we moved to our next generation of technology that was being developed in our product lines.
The Company undertook its annual indefinite-lived intangible asset impairment analysis and engaged a third party to assist management in valuing the infinite lived intangible assets recorded on the balance sheet in the fourth quarter of fiscal 2016. The Company determined that the estimated fair value of that indefinite lived asset was lower than its carrying value, and the Company recorded a non-cash impairment charge of $2,993 in fiscal 2016. In addition, the Company deemed the remaining value of the indefinite lived asset to have a finite life subject to amortization over its remaining useful life estimated to be 15 years. This was a change in estimate and the financial impact was zero as of December 31, 2016. The Company also considered whether other long-lived assets in the asset group were impaired and concluded that they were not. No impairment was recorded for the fiscal year ended January 2, 2016.
Estimated amortization expense for the remaining indefinite-lived assets for the next five years is as follows:
|
Fiscal Year ending |
|
|
|
|
|
2017 |
|
$ |
767 |
|
|
2018 |
|
|
746 |
|
|
2019 |
|
|
738 |
|
|
2020 |
|
|
488 |
|
|
2021 |
|
|
488 |
|
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4. 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 then 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 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 and up to $2,000 of specified inventory dispositions in 2015, 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 December 31, 2016, the rate on base-rate loans was 4.75% and the rate on LIBOR-rate loans was 3.375%. The amount outstanding on the Revolving Facility at December 31, 2016 was $36,182. Total borrowing capacity under the Revolving Facility at December 31, 2016 was $47,196 and borrowing availability was $11,014. The amounts outstanding on the Term Loan Facility and FILO Facility at December 31, 2016 were $7,000 and $3,750, respectively.
Aggregate maturities of bank debt related to the BofA credit facility:
|
Fiscal Year ending: |
|
|
|
|
|
2017 |
|
$ |
4,500 |
|
|
2018 |
|
|
3,250 |
|
|
2019 |
|
|
2,000 |
|
|
2020 |
|
|
37,182 |
|
|
|
|
|
|
|
|
Total |
|
$ |
46,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs were $1,226 at December 31, 2016 and $1,489 at January 2, 2016, and are presented as a direct deduction of long-term debt on the consolidated balance sheets.
Subsequent to fiscal year end, on February 17, 2017, the Company amended the Credit Facility to provide additional flexibility under its covenant requirements to the Company during fiscal 2017. See Note 12 for additional information regarding the amendment.
Prior Credit Facility and Term Loan
The Credit Facility replaced the Company's prior credit facility with Bank of America and the Company's prior term loan agreement with Salus Capital Partners, LLC. Prior to April 2015, the Company had a loan and security agreement with Bank of America N.A. that provided for an $80,000, asset-based revolving credit facility, with a $10,000 letter of credit sub-line facility.
The Company evaluated the Credit Facility, by lender, to determine the proper accounting treatment for the transaction. Accordingly, debt extinguishment accounting was used to account for the pay off of the prior term loan agreement with Salus Capital Partners, LLC and for the pay off of a member of the prior credit facility with Bank of America who did not continue in the Credit Facility resulting in the write off of $549 in remaining unamortized deferred financing costs and $135 in termination fees. Debt modification accounting was used for the remaining members of the prior credit facility resulting in their remaining unamortized deferred financing costs of $601 and the new financing costs of $1,134 to be capitalized and amortized over the life of the new debt beginning in the second quarter of fiscal 2015.
Sale-Leaseback
On March 24, 2009, Summer Infant (USA), Inc., the Company's wholly owned subsidiary ("Summer USA"), entered into a definitive agreement with Faith Realty II, LLC, a Rhode Island limited liability company ("Faith Realty") (the members of which are Jason Macari, the former Chief Executive Officer of the Company and current investor, and his spouse), pursuant to which Faith Realty purchased the corporate headquarters of the Company located at 1275 Park East Drive, Woonsocket, Rhode Island (the "Headquarters"), for $4,052 and subsequently leased the Headquarters back to Summer USA for an annual rent of $390 during the initial seven year term of the lease, payable monthly and in advance. The original lease was to expire on the seventh anniversary of its commencement. Mr. Macari had given a personal guarantee to secure the Faith Realty debt on its mortgage; therefore, due to his continuing involvement in the building transaction, the transaction had been recorded as a financing lease, with no gain recognition.
On February 25, 2009, the Company's Board of Directors (with Mr. Macari abstaining from such action) approved the sale leaseback transaction. In connection therewith, the Board of Directors granted a potential waiver, to the extent necessary, if at all, of the conflict of interest provisions of the Company's Code of Ethics, effective upon execution of definitive agreements within the parameters approved by the Board. In connection with granting such potential waiver, the Board of Directors engaged independent counsel to review the sale leaseback transaction and an independent appraiser to ascertain (i) the value of the Headquarters and (ii) the market rent for the Headquarters. In reaching its conclusion that the sale leaseback transaction is fair to the Company, the Board of Directors considered a number of factors, including Summer USA's ability to repurchase the headquarters at 110% of the initial sale price at the end of the initial term. The Company's Audit Committee approved the sale leaseback transaction (as a related party transaction) and the potential waiver and recommended the matter to a vote of the entire Board of Directors (which approved the transaction).
On May 13, 2015, Summer USA entered into an amendment (the "Amendment") to its lease dated March 24, 2009 (the "Lease") with Faith Realty (the "Landlord"). Pursuant to the Amendment, (i) the initial term of the Lease was extended for two additional years, such that the initial term now ends on March 31, 2018, and the term of the Lease may be extended at Summer USA's election for one additional term of three years (rather than five years) upon twelve months' prior notice, (ii) the annual rent for the last two years of the newly amended initial term was set at $429 and the annual rent for the extension period, if elected, was set at $468 and (iii) the Landlord agreed to provide an aggregate improvement allowance of not more than $78 for the newly amended initial term, to be applied against Summer USA's monthly rent, and an additional improvement allowance of $234 for the extension term, if elected, to be applied against Summer USA's monthly rent during such extension term. The Amendment was reviewed and approved by the audit committee because it was a related party transaction.
At December 31, 2016, approximately $404 of the lease obligation was included in accrued expenses, with the balance of approximately $2,429 included in other liabilities, in the accompanying consolidated balance sheet. This obligation is reduced each month (along with a charge to interest expense) as the rent payment is made to Faith Realty.
Approximate future minimum sale-leaseback payments due under the lease is as follows:
|
Fiscal Year Ending: |
|
|
|
|
|
2017 |
|
$ |
429 |
|
|
2018 |
|
|
107 |
|
|
2019 and beyond |
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
$ |
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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5. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows:
|
|
|
Fiscal 2016 |
|
Fiscal 2015 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
$ |
(150 |
) |
|
Foreign |
|
|
185 |
|
|
389 |
|
|
State and local |
|
|
6 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
191 |
|
|
244 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(406 |
) |
$ |
(3,386 |
) |
|
Foreign |
|
|
(910 |
) |
|
175 |
|
|
State and local |
|
|
(49 |
) |
|
(457 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(1,365 |
) |
|
(3,668 |
) |
|
|
|
|
|
|
|
|
|
|
Total benefit |
|
$ |
(1,174 |
) |
$ |
(3,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that comprise the deferred tax liabilities and assets are as follows:
|
|
|
December 31, |
|
January 2, |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
17 |
|
$ |
7 |
|
|
Inventory and Unicap reserve |
|
|
676 |
|
|
689 |
|
|
Research and development credit, foreign tax credit and net operating loss carry-forward |
|
|
7,658 |
|
|
7,183 |
|
|
Other |
|
|
102 |
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
8,453 |
|
|
7,982 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets and other |
|
|
(2,595 |
) |
|
(3,233 |
) |
|
Property, plant and equipment |
|
|
(653 |
) |
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(3,248 |
) |
|
(3.981 |
) |
|
Valuation allowance |
|
|
(1,357 |
) |
|
(1,518 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities and valuation allowance |
|
|
(4,605 |
) |
|
(5,499 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
3,848 |
|
$ |
2,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following reconciles the benefit for income taxes at the U.S. federal income tax statutory rate to the benefit in the consolidated financial statements:
|
|
|
Fiscal 2016 |
|
Fiscal 2015 |
|
||
|
Tax benefit at statutory rate |
|
$ |
(1,869 |
) |
$ |
(4,093 |
) |
|
State income taxes, net of U.S. federal income tax benefit |
|
|
(28 |
) |
|
(298 |
) |
|
Adjustment to uncertain tax position |
|
|
14 |
|
|
327 |
|
|
Stock options |
|
|
70 |
|
|
92 |
|
|
Foreign tax rate differential |
|
|
133 |
|
|
289 |
|
|
Tax credits |
|
|
(123 |
) |
|
(150 |
) |
|
Non-deductible expenses |
|
|
498 |
|
|
438 |
|
|
Other |
|
|
131 |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
Total benefit |
|
$ |
(1,174 |
) |
$ |
(3,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had undistributed earnings from certain foreign subsidiaries (Summer Infant Asia, Summer Infant Australia, and Born Free Holdings, Ltd) of approximately $12,588 at December 31, 2016, and all of these earnings are considered to be permanently reinvested due to the Company's plans to reinvest such earnings for future expansion in certain foreign jurisdictions. Earnings and profits from Summer Infant Europe and Summer Infant Canada are not considered to be permanently reinvested due to the bank refinancing as discussed in Note 4—Debt. The amount of taxes attributable to the permanently reinvested undistributed earnings is not practicably determinable.
As of December 31, 2016, the Company has approximately $7,016,000 of federal and state net operating loss carry forwards (or "NOLs") to offset future federal taxable income. The federal NOL will begin to expire in 2028 and the state NOL began to expire in 2016. The Company also has approximately $1,839, $530, and $708 of NOLs in Canada, Australia, and the United Kingdom, which can be carried forward indefinitely.
Authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported, if based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all evidence, including the Company's past earnings history and future earnings forecast, management has determined that a valuation allowance in the amount of $1,357 relating to certain state tax credits is necessary at December 31, 2016 and $1,518 at January 2, 2016.
A summary of the Company's adjustment to its uncertain tax positions in fiscal years ended December 31, 2016 and January 2, 2016 are as follows:
|
|
|
December 31, |
|
January 2, |
|
||
|
Balance, at beginning of the year |
|
$ |
327 |
|
$ |
— |
|
|
Increase for tax positions related to the current year |
|
|
— |
|
|
— |
|
|
Increase for tax positions related to prior years |
|
|
— |
|
|
283 |
|
|
Increase for interest and penalties |
|
|
14 |
|
|
44 |
|
|
Decrease for lapses of statute of limitations |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of year |
|
$ |
341 |
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrecognized tax benefits mentioned above include an aggregate of $58 of accrued interest and penalty balances related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. An increase in accrued interest and penalty charges of approximately $14, net of federal tax expense, was recorded as a tax expense during the current fiscal year. The Company does not anticipate that its accrual for uncertain tax positions will be reduced by a material amount over the next twelve month period, as it does not expect to settle any potential disputed items with the appropriate taxing authorities nor does it expect the statute of limitations to expire for any items.
The Company is subject to U.S. federal income tax, as well as to income tax of multiple state and foreign tax jurisdictions. On a global basis, the open tax years subject to examination by major taxing jurisdictions in which the Company operates is between two to six years.
|
|||
6. 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 (as amended, "2012 Plan"). Periodically, the Company also provides equity awards outside of the plans.
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 twelve months ended December 31, 2016 and January 2, 2016 of $482 and $865, respectively. Share based compensation expense is included in selling, general and administrative expenses.
As of December 31, 2016, there are 561,729 shares available to grant under the 2006 Plan and 1,393,797 shares available to grant under the 2012 Plan.
Stock Options
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 for grants of "plain vanilla" stock options as 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 fiscal 2016 and 2015 is based on awards that are ultimately expected to vest.
The following table summarizes the weighted average assumptions used for options granted during the fiscal years ended December 31, 2016 and January 2, 2016.
|
|
|
Fiscal |
|
Fiscal |
|
||
|
Expected life (in years) |
|
|
5.1 |
|
|
5.3 |
|
|
Risk-free interest rate |
|
|
1.3 |
% |
|
1.6 |
% |
|
Volatility |
|
|
70.8 |
% |
|
67.4 |
% |
|
Dividend yield |
|
|
0.0 |
% |
|
0.0 |
% |
|
Forfeiture rate |
|
|
21.0 |
% |
|
16.5 |
% |
The weighted-average grant date fair value of options granted during the year ended December 31, 2016 was $0.92 per share which totaled $316 for the 343,300 options granted during such period. During the year ended January 2, 2016, the weighted-average grant date fair value of options granted was $1.58 per share which totaled $767 for the 485,750 options granted during the year.
A summary of the status of the Company's options as of December 31, 2016 and changes during the year then ended is presented below:
|
|
|
Number Of |
|
Weighted-Average |
|
||
|
Outstanding at beginning of year |
|
|
1,302,213 |
|
$ |
3.45 |
|
|
Granted |
|
|
343,300 |
|
$ |
1.56 |
|
|
Canceled |
|
|
621,688 |
|
$ |
3.23 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
1,023,825 |
|
$ |
2.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2016 |
|
|
515,407 |
|
$ |
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options expected to vest as of December 31, 2016 is 882,342. The intrinsic value of options exercised totaled was zero and $27 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
The following table summarizes information about stock options at December 31, 2016:
|
|
|
Options Outstanding |
|
Options Exercisable |
|
||||||||||||||
|
Range of |
|
Number |
|
Remaining |
|
Weighted |
|
Number |
|
Remaining |
|
Weighted |
|
||||||
|
$1.29 - $2.00 |
|
|
355,300 |
|
|
8.9 |
|
$ |
1.56 |
|
|
50,750 |
|
|
7.4 |
|
$ |
1.82 |
|
|
$2.01 - $3.00 |
|
|
310,500 |
|
|
6.3 |
|
$ |
2.36 |
|
|
152,630 |
|
|
3.7 |
|
$ |
2.25 |
|
|
$3.01 - $4.00 |
|
|
134,000 |
|
|
7.0 |
|
$ |
3.32 |
|
|
88,002 |
|
|
6.8 |
|
$ |
3.34 |
|
|
$4.01 - $6.00 |
|
|
174,325 |
|
|
1.1 |
|
$ |
5.28 |
|
|
174,325 |
|
|
1.1 |
|
$ |
5.28 |
|
|
$6.01 - $8.00 |
|
|
49,700 |
|
|
4.0 |
|
$ |
7.04 |
|
|
49,700 |
|
|
4.0 |
|
$ |
7.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,023,825 |
|
|
6.3 |
|
$ |
2.93 |
|
|
515,407 |
|
|
3.8 |
|
$ |
3.88 |
|
The aggregate intrinsic value of options outstanding and exercisable at December 31, 2016 and January 2, 2016 are $9 and $36, respectively. As of December 31, 2016, there was approximately $322 of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.7 years.
Restricted Stock Awards
Restricted stock awards require no payment from the grantee. The related compensation cost of each award is calculated using the market price on the grant date and is expensed equally over the vesting period. A summary of restricted stock awards made in the year ended December 31, 2016, is as follows:
|
|
|
Number of |
|
Grant Date |
|
||
|
Non-vested restricted stock awards as of January 2, 2016 |
|
|
175,844 |
|
$ |
2.70 |
|
|
Granted |
|
|
236,900 |
|
$ |
1.63 |
|
|
Vested |
|
|
102,524 |
|
$ |
2.39 |
|
|
Forfeited |
|
|
41,788 |
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock awards as of December 31, 2016 |
|
|
268,432 |
|
$ |
1.96 |
|
|
|
|
|
|
|
|
|
|
As of December 31, there was approximately $282 of unrecognized compensation cost related to non-vested stock compensation arrangements granted under the Company's stock incentive plan for restricted stock awards. That cost is expected to be recognized over the next 2.6 years.
Restricted Stock Units
In December 2015, the Company's Board of Directors granted restricted stock units ("RSUs") to the executive Chairman of the Board. 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. There was $26 of recognized compensation cost for the year ended December 31, 2016. The RSUs expired on August 3, 2016.
On July 13, 2016, the Company granted 100,000 performance-based RSUs to its new Chief Executive Officer. The RSUs represent the right to receive shares of the Company's common stock upon achievement of specified performance metrics, and only vest if such performance metrics are achieved for fiscal year 2017 and fiscal year 2018. The RSU's expire if the performance metrics are not achieved or if employment is terminated. The fair value of the RSUs will be recognized as it is earned and when it is probable that the performance conditions will be met. The Company has not recognized any compensation expense in 2016 related to this award.
|
|||
7. CAPITAL LEASE OBLIGATIONS
The Company leased certain equipment under capital leases which expired in December 2016. The capital lease liability balance of approximately $0 and $71 is included in debt on the consolidated balance sheets as of December 31, 2016 and January 2, 2016, of which approximately $0 and $2 is included in long-term liabilities as of December 31, 2016 and January 2, 2016, respectively.
|
|||
8. PROFIT SHARING PLAN
Summer Infant (USA), Inc. maintains a defined contribution salary deferral plan under Section 401(k) of the Internal Revenue Code. All employees who meet the plan's eligibility requirements can participate. Employees may elect to make contributions up to federal limitations. In 2007, the Company adopted a matching plan which was further amended in 2013, and which was funded throughout the year. For the years ended December 31, 2016 and January 2, 2016, the Company recorded 401(k) matching expense of $356 and $366, respectively.
|
|||
9. MAJOR CUSTOMERS
Sales to the Company's top seven customers together comprised more than 75% of our sales in fiscal 2016 and 73% of our sales in fiscal 2015. Of these customers, four generated more than 10% of sales for fiscal 2016: Babies R Us/Toys R Us (20%), Amazon.com (20%), Walmart (15%), and Target (11%). In fiscal 2015, four customers generated more than 10% of sales: Babies R Us/Toys R Us (23%), Walmart (14%), Amazon.com (14%) and Target (12%).
|
|||
10. COMMITMENTS AND CONTINGENCIES
Royalty Commitments
Summer Infant (USA), Inc. has entered into various license agreements with third parties for the use of product designs, software licenses, and trade names for the products manufactured by the Company. These agreements have termination dates through December 2017. Royalty expense under these licensing agreements for the years ended December 31, 2016 and January 2, 2016 were approximately $315 and $735, respectively.
Customer Agreements
The Company enters into annual agreements with its customers in the normal course of business. These agreements define the terms of product sales including, in some instances, cooperative advertising costs and product return privileges (for defective products only) or defective allowances (which are based upon historical experience). These contracts are generally annual in nature and obligate the Company only as to products actually sold to the customer pursuant to a purchase order.
Lease Commitments
For lease agreements with escalation clauses, the Company records the total rent to be paid under the lease on a straight-line basis over the term of the lease, with the difference between the expense recognized and the cash paid recorded as a deferred rent liability included in accrued expenses on the balance sheet for amounts to be recognized within twelve months and in other liabilities for amounts to be recognized after twelve months from the balance sheet date, in the consolidated balance sheets. Lease incentives are recorded as deferred rent at the beginning of the lease term and recognized as a reduction of rent expense over the term of the lease.
Summer Infant Europe Limited leases office space under a non-cancelable operating lease agreement. This lease is for a five-year term through April 2017, and requires monthly payments of approximately $6. In addition, Summer Infant Europe Limited is required to pay its proportionate share of property taxes.
Summer Infant Canada, Ltd. entered into a five-year lease for office and warehouse space under a non-cancelable operating lease agreement expiring June 2018. The Company is obligated as part of the lease to pay maintenance expenses as well as property taxes and insurance costs as defined in the agreement. Monthly payments are approximately $27 over the course of the lease term. Summer Infant Canada, Ltd. has the option to renew this lease for one additional period of five years under similar terms and conditions.
Summer Infant (USA) Inc. entered into a 72 month lease in September 2010 for warehouse space under a non-cancelable operating lease agreement. The Company is obligated to pay certain common area maintenance charges including insurance and utilities. The lease was extended in 2015 and now expires in September 2021. Monthly payments were $166 in fiscal 2016 and escalate to $186 over the remaining life of the lease.
During November 2015, Summer Infant Asia entered into a two year office lease which requires monthly payments of $10 through 2017.
Approximate future minimum rental payments due under these leases are as follows(a):
|
Fiscal Year Ending: |
|
|
|
|
|
2017 |
|
$ |
2,415 |
|
|
2018 |
|
|
2,215 |
|
|
2019 |
|
|
2,140 |
|
|
2020 |
|
|
2,185 |
|
|
2021 and beyond |
|
|
1,676 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Amounts exclude payments for sales-leaseback transaction as described in Note 4. |
Rent expense (excluding taxes, fees and other charges) for the years ended December 31, 2016 and January 2, 2016 totaled approximately $2,692 and $1,906, respectively.
Employment Contracts
In accordance with United Kingdom and EU law, Summer Infant Europe Limited is required to have employment contracts with all of its employees. In connection with these contracts, Summer Infant Europe Limited makes individual pension contributions to certain employees at varying rates from 3-7% of the employee's annual salary, as part of their total compensation package. These pension contributions are expensed as incurred. There are no termination benefit provisions in these contracts.
Litigation
The Company is a party to routine litigation and administrative complaints incidental to its business. The Company does not believe that the resolution of 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.
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 No. 1:15-CV-00218-5-LDA) (the "Complaint"). The Complaint alleged theft and misappropriation of the Company's confidential and proprietary trade secrets, intellectual property, and business, branding and marketing strategies. Ms. Bramson is a former member of the Company's Board of Directors and the Company's former Chief Executive Officer, Ms. Dooley is the Company's former Senior Vice President of Product Development, and Mr. Price is the former President of Global Sales & Marketing of the Company. Mr. Darling and Ms. Madden are principals of Rest Devices, Inc., a former consultant to the Company (the "Rest Defendants").
On August 25, 2015, the Company and the Rest Defendants reached an agreement-in-principle with regard to a proposed settlement, and the Company subsequently withdrew its motion for a preliminary injunction. On November 1, 2015, the Company and the Rest Defendants entered into a confidential settlement agreement (the "Rest Settlement Agreement") pursuant to which the Company and the Rest Defendants mutually released claims against each other, and the Company voluntarily dismissed all claims in the Complaint against the Rest Defendants. The Rest Settlement Agreement did not release any claims against Mmes. Bramson or Dooley or Mr. Price.
In December 2016, the remaining parties in the action resolved their claims against each other, and the Court entered a Stipulation and Order of Voluntary Dismissal on January 19, 2017. There there was no material impact on the financial statements as a result of the settlement.
|
|||
11. GEOGRAPHICAL INFORMATION
The Company sells products throughout the United States, Canada, and the United Kingdom, and various other parts of the world. The Company does not disclose product line revenues as it is not practicable for the Company to do so.
The following is a table that presents net revenue by geographic area:
|
|
|
For the fiscal year |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
United States |
|
$ |
163,381 |
|
$ |
171,310 |
|
|
All Other |
|
|
30,947 |
|
|
34,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
194,328 |
|
$ |
205,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a table that presents total assets by geographic area:
|
|
|
December 31, |
|
January 2, |
|
||
|
United States |
|
$ |
84,519 |
|
$ |
90,890 |
|
|
All Other |
|
|
17,218 |
|
|
22,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101,737 |
|
$ |
113,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a table that presents total long lived assets by geographic area:
|
|
|
December 31, |
|
January 2, |
|
||
|
United States |
|
$ |
24,512 |
|
$ |
25,375 |
|
|
All Other |
|
|
4,212 |
|
|
7,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,724 |
|
$ |
33,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
12. SUBSEQUENT EVENTS
The Company has evaluated all events or transactions that occurred after December 31, 2016 through the date of this Annual Report.
On February 17, 2017, the Company and its subsidiaries, Summer Infant (USA), Inc., Summer Infant Canada, Limited and Summer Infant Europe Limited, entered into an amendment and waiver (the "Loan Amendment") to the Credit Facility. Pursuant to the Loan Amendment, the Lenders agreed to waive the existing delivery date by which the Company must deliver projections for the 2017 fiscal year, and extended the date to March 1, 2017. In addition, the Loan Amendment amended certain provisions of the Credit Facility to provide additional flexibility to the Company during fiscal 2017, including (i) amending the definitions of "Availability," "Availability Reserve" and "Eligible Account"; (ii) amending the definition of EBITDA with respect to bonus payments and certain fees and expenses that can be added back to the calculation of EBITDA; and (iii) amending the definition of "Fixed Charges" and revised the maximum leverage ratio financial covenant to be maintained as of the end of each fiscal quarter.
|
|||
Revenue Recognition
The Company records revenue when all of the following occur: persuasive evidence of an arrangement exists, product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Sales are recorded net of provisions for returns and allowances, customer discounts, and other sales related discounts. The Company bases its estimates for discounts, returns and allowances on negotiated customer terms and historical experience. Customers do not have the right to return products unless the products are defective. The Company records a reduction of sales for estimated future defective product deductions based on contractual terms and historical experience.
Sales incentives or other consideration given by the Company to customers that are considered adjustments of the selling price of products, such as markdowns, are reflected as reductions of revenue. Sales incentives and other consideration that represent costs incurred by the Company for assets or services received, such as the appearance of the Company's products in a customer's national circular ad, are reflected as selling and marketing expenses in the accompanying statements of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents
Cash flows, 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.
Trade Receivables
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.
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.
Property and Equipment
Property and equipment are recorded at cost. The Company owns the tools and molds used in the production of its products by third party manufacturers. Capitalized mold costs include costs incurred for the pre-production design and development of the molds.
Depreciation is provided over the estimated useful lives of the respective assets using either straight-line or accelerated methods.
Long-Lived Assets with Finite Lives
The Company reviews long-lived assets with finite lives for impairment (using the group concept) whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered to be impaired when its carrying amount exceeds both the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition and the assets' fair value. Long-lived assets include property and equipment and finite-lived intangible assets. The amount of impairment loss, if any, is charged by the Company to current operations.
Indefinite-Lived Intangible Assets
The Company accounts for intangible assets in accordance with accounting guidance that requires that intangible assets with indefinite useful lives be tested annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company's annual impairment testing is conducted in the fourth quarter of every year.
The Company tests indefinite-lived intangible assets for impairment by comparing the asset's fair value to its carrying amount. If the fair value is less than the carrying amount, the excess of the carrying amount over fair value is recognized as an impairment charge and the adjusted carrying amount becomes the assets' new cost basis.
Management also evaluates the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, it is amortized prospectively over its estimated remaining useful life.
For the year ended December 31, 2016, the Company determined that certain indefinite-lived intangible assets were impaired. For the year ended January 2, 2016, the Company determined that no impairment existed on its indefinite-lived intangible assets. See Note 3 for a discussion on the fiscal year 2016 impairment charge.
Fair Value Measurements
The Company follows ASC 820, "Fair Value Measurements and Disclosures" which includes a framework for measuring fair value and expanded related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The standard established a three-level valuation hierarchy based upon observable and non-observable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3—Significant inputs to the valuation model are unobservable.
The Company maintains policies and procedures to value instruments using the best and most relevant data available. In addition, the Company utilizes third party specialists that review valuation, including independent price validation.
The Company's financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses, and short and long-term borrowings. Because of their short maturity, the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value. The carrying value of long-term borrowings approximates fair value.
Non-recurring Fair Value Measurements
The Company's assets measured at fair value on a nonrecurring basis include long-lived assets and intangible assets. The Company tests its long-lived assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the carrying value may exceed its fair value. The resulting fair value measurements are considered to be Level 3 inputs. During the fourth quarter of fiscal 2016, the Company determined that the estimated fair value of an indefinite lived asset was lower than its carrying value and the Company recorded a non-cash impairment charge of $2,993 which reduced the value of the intangible asset to approximately $915, as more fully described in "Note 3 to the Consolidated Financial Statements—Intangible Assets." The Company did not incur an impairment charge in fiscal 2015.
Income taxes
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 carryforwards. 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, it is more likely than not that such benefits will be realized.
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.
Translation of Foreign Currencies
The assets and liabilities of the Company's European, Canadian, Israeli, and Asian operations have been translated into U.S. dollars at year-end exchange rates and the income and expense accounts of these subsidiaries have been translated at average rates prevailing during each respective year. Resulting translation adjustments are made to a separate component of stockholders' equity within accumulated other comprehensive loss. Foreign exchange transaction gains and losses are included in the accompanying consolidated statements of operations.
Shipping Costs
Shipping costs to customers are included in selling expenses and amounted to approximately $1,477 and $1,882 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Advertising Costs
The Company charges advertising costs to selling expense as incurred. Advertising expense, which consists primarily of promotional and cooperative advertising allowances provided to customers, was approximately $12,863 and $14,743 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment utilizing an omni-channel distribution strategy.
Net Loss Per Share
Basic earnings per share is calculated by dividing net loss for the period by the weighted average number of common stock outstanding during the period.
Diluted loss per share for the Company is computed by dividing net loss by the dilutive weighted average shares outstanding which includes: the dilutive impact (using the "treasury stock" method) of "in the money" stock options and unvested restricted shares issued to employees. Options to purchase 1,023,825 and 1,380,147 shares of the Company's common stock and 268,432 and 197,572 of restricted shares were not included in the calculation, due to the fact that these instruments were anti-dilutive for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
New 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. We are still finalizing the analysis to quantify the adoption impact of the provisions of the new standard, but we do not currently expect it to have a material impact on our consolidated financial position or results of operations. Based on the evaluation of our current contracts and revenue streams, most will be recorded consistently under both the current and new standard. The FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018.
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. 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.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force). In an effort to reduce diversity in practice, ASU 2016-15 provides solutions for eight specific statement of cash flow classification issues. The ASU is effective for public companies beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company has evaluated the impact this guidance will have on its consolidated financial statements and expects the impact to be immaterial.
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.
|
|||
|
|
|
For the fiscal year |
|
|
||||
|
|
|
December 31, |
|
January 2, |
|
Depreciation/ |
||
|
Computer-related |
|
$ |
3,861 |
|
$ |
6,327 |
|
5 years |
|
Tools, dies, prototypes, and molds |
|
|
28,342 |
|
|
31,052 |
|
1 - 5 years |
|
Building |
|
|
4,156 |
|
|
4,156 |
|
30 years |
|
Other |
|
|
6,145 |
|
|
5,793 |
|
various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,504 |
|
|
47,328 |
|
|
|
Less: accumulated depreciation |
|
|
32,539 |
|
|
35,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
9,965 |
|
$ |
12,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
For the |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
Brand names |
|
$ |
11,819 |
|
$ |
14,812 |
|
|
Patents and licenses |
|
|
3,766 |
|
|
3,766 |
|
|
Customer relationships |
|
|
6,946 |
|
|
6,946 |
|
|
Other intangibles |
|
|
1,882 |
|
|
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,413 |
|
|
27,406 |
|
|
Less: accumulated amortization |
|
|
(9,600 |
) |
|
(8,894 |
) |
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
14,813 |
|
$ |
18,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ending |
|
|
|
|
|
2017 |
|
$ |
767 |
|
|
2018 |
|
|
746 |
|
|
2019 |
|
|
738 |
|
|
2020 |
|
|
488 |
|
|
2021 |
|
|
488 |
|
|
|||
|
Fiscal Year ending: |
|
|
|
|
|
2017 |
|
$ |
4,500 |
|
|
2018 |
|
|
3,250 |
|
|
2019 |
|
|
2,000 |
|
|
2020 |
|
|
37,182 |
|
|
|
|
|
|
|
|
Total |
|
$ |
46,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending: |
|
|
|
|
|
2017 |
|
$ |
429 |
|
|
2018 |
|
|
107 |
|
|
2019 and beyond |
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
$ |
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Fiscal 2016 |
|
Fiscal 2015 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
$ |
(150 |
) |
|
Foreign |
|
|
185 |
|
|
389 |
|
|
State and local |
|
|
6 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
191 |
|
|
244 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(406 |
) |
$ |
(3,386 |
) |
|
Foreign |
|
|
(910 |
) |
|
175 |
|
|
State and local |
|
|
(49 |
) |
|
(457 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(1,365 |
) |
|
(3,668 |
) |
|
|
|
|
|
|
|
|
|
|
Total benefit |
|
$ |
(1,174 |
) |
$ |
(3,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
January 2, |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
17 |
|
$ |
7 |
|
|
Inventory and Unicap reserve |
|
|
676 |
|
|
689 |
|
|
Research and development credit, foreign tax credit and net operating loss carry-forward |
|
|
7,658 |
|
|
7,183 |
|
|
Other |
|
|
102 |
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
8,453 |
|
|
7,982 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets and other |
|
|
(2,595 |
) |
|
(3,233 |
) |
|
Property, plant and equipment |
|
|
(653 |
) |
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(3,248 |
) |
|
(3.981 |
) |
|
Valuation allowance |
|
|
(1,357 |
) |
|
(1,518 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities and valuation allowance |
|
|
(4,605 |
) |
|
(5,499 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
3,848 |
|
$ |
2,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 |
|
Fiscal 2015 |
|
||
|
Tax benefit at statutory rate |
|
$ |
(1,869 |
) |
$ |
(4,093 |
) |
|
State income taxes, net of U.S. federal income tax benefit |
|
|
(28 |
) |
|
(298 |
) |
|
Adjustment to uncertain tax position |
|
|
14 |
|
|
327 |
|
|
Stock options |
|
|
70 |
|
|
92 |
|
|
Foreign tax rate differential |
|
|
133 |
|
|
289 |
|
|
Tax credits |
|
|
(123 |
) |
|
(150 |
) |
|
Non-deductible expenses |
|
|
498 |
|
|
438 |
|
|
Other |
|
|
131 |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
Total benefit |
|
$ |
(1,174 |
) |
$ |
(3,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
January 2, |
|
||
|
Balance, at beginning of the year |
|
$ |
327 |
|
$ |
— |
|
|
Increase for tax positions related to the current year |
|
|
— |
|
|
— |
|
|
Increase for tax positions related to prior years |
|
|
— |
|
|
283 |
|
|
Increase for interest and penalties |
|
|
14 |
|
|
44 |
|
|
Decrease for lapses of statute of limitations |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of year |
|
$ |
341 |
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Fiscal |
|
Fiscal |
|
||
|
Expected life (in years) |
|
|
5.1 |
|
|
5.3 |
|
|
Risk-free interest rate |
|
|
1.3 |
% |
|
1.6 |
% |
|
Volatility |
|
|
70.8 |
% |
|
67.4 |
% |
|
Dividend yield |
|
|
0.0 |
% |
|
0.0 |
% |
|
Forfeiture rate |
|
|
21.0 |
% |
|
16.5 |
% |
|
|
|
Number Of |
|
Weighted-Average |
|
||
|
Outstanding at beginning of year |
|
|
1,302,213 |
|
$ |
3.45 |
|
|
Granted |
|
|
343,300 |
|
$ |
1.56 |
|
|
Canceled |
|
|
621,688 |
|
$ |
3.23 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
1,023,825 |
|
$ |
2.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2016 |
|
|
515,407 |
|
$ |
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options at December 31, 2016:
|
|
|
Options Outstanding |
|
Options Exercisable |
|
||||||||||||||
|
Range of |
|
Number |
|
Remaining |
|
Weighted |
|
Number |
|
Remaining |
|
Weighted |
|
||||||
|
$1.29 - $2.00 |
|
|
355,300 |
|
|
8.9 |
|
$ |
1.56 |
|
|
50,750 |
|
|
7.4 |
|
$ |
1.82 |
|
|
$2.01 - $3.00 |
|
|
310,500 |
|
|
6.3 |
|
$ |
2.36 |
|
|
152,630 |
|
|
3.7 |
|
$ |
2.25 |
|
|
$3.01 - $4.00 |
|
|
134,000 |
|
|
7.0 |
|
$ |
3.32 |
|
|
88,002 |
|
|
6.8 |
|
$ |
3.34 |
|
|
$4.01 - $6.00 |
|
|
174,325 |
|
|
1.1 |
|
$ |
5.28 |
|
|
174,325 |
|
|
1.1 |
|
$ |
5.28 |
|
|
$6.01 - $8.00 |
|
|
49,700 |
|
|
4.0 |
|
$ |
7.04 |
|
|
49,700 |
|
|
4.0 |
|
$ |
7.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,023,825 |
|
|
6.3 |
|
$ |
2.93 |
|
|
515,407 |
|
|
3.8 |
|
$ |
3.88 |
|
|
|
|
Number of |
|
Grant Date |
|
||
|
Non-vested restricted stock awards as of January 2, 2016 |
|
|
175,844 |
|
$ |
2.70 |
|
|
Granted |
|
|
236,900 |
|
$ |
1.63 |
|
|
Vested |
|
|
102,524 |
|
$ |
2.39 |
|
|
Forfeited |
|
|
41,788 |
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock awards as of December 31, 2016 |
|
|
268,432 |
|
$ |
1.96 |
|
|
|
|
|
|
|
|
|
|
|
|||
Approximate future minimum rental payments due under these leases are as follows(a):
|
Fiscal Year Ending: |
|
|
|
|
|
2017 |
|
$ |
2,415 |
|
|
2018 |
|
|
2,215 |
|
|
2019 |
|
|
2,140 |
|
|
2020 |
|
|
2,185 |
|
|
2021 and beyond |
|
|
1,676 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Amounts exclude payments for sales-leaseback transaction as described in Note 4. |
|
|||
|
|
|
For the fiscal year |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
United States |
|
$ |
163,381 |
|
$ |
171,310 |
|
|
All Other |
|
|
30,947 |
|
|
34,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
194,328 |
|
$ |
205,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
January 2, |
|
||
|
United States |
|
$ |
84,519 |
|
$ |
90,890 |
|
|
All Other |
|
|
17,218 |
|
|
22,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101,737 |
|
$ |
113,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
January 2, |
|
||
|
United States |
|
$ |
24,512 |
|
$ |
25,375 |
|
|
All Other |
|
|
4,212 |
|
|
7,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,724 |
|
$ |
33,097 |
|
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|
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|
|
|
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