Summer Infant, Inc.
Q3 2014 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant’s third quarter 2014 financial results conference call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions) I will now turn the call over to Mr. Dennis Walsh from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

[Dennis Walsh:]

Good afternoon, ladies and gentlemen, and welcome to Summer Infant's second quarter 2014 conference call. On the call today are Chief Executive Officer; Carol Bramson; and Chief Financial Officer, Paul Francese. By now, everyone should have access to the Q3 news release, which went out today at approximately 4 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Summer Infant's website at summerinfant.com. This call is being recorded and webcasted and a replay will be available on the company's website as well. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and that management may make additional forward-looking statements in response to your questions. Forward-looking statements or information are based on a number of estimates and assumptions and are subject to a variety of risks and uncertainties, which could cause actual events or results to materially differ from those reflected in the forward-looking statements or information. Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects or similar references to the future. Examples of forward-looking statements include but are not limited to, statements management makes regarding the company's future financial performance, business prospects and operating strategies. There are many factors that can result in actual performance differing from projections and forward-looking statements. Please refer to the risk factors detailed in the company's Annual Report on its Form 10-K for the most recent fiscal year and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or should underlying estimates or assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information. The company does not expect to update forward-looking statements or information continually as conditions change. During the call, management will make references to adjusted EBITDA. This metric is a non-GAAP financial measure, which the company believes helps investors to gain a meaningful understanding of changes in Summer Infant's operations. For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures including in today's financial results release. And with that, I would like to turn the call over to Carol.

[Carol Bramson:]

Thank you, Dennis. Good afternoon everyone and thanks so much for joining us today. We continue to execute on our profit improvement plan and we're pleased to be sharing with you some of our achievements this quarter. We're making excellent progress in our efforts to transform this company and with a new team and a new process for marketing development and marketing our brands. In terms of our financial results, net sales were up about 1% from Q3 a year ago, which is a good result, when you consider that the year-ago quarter included licensing revenue and a higher level of lower-margin furniture item, which we have been phasing out. Overall, demand was quite good for our product, both in-store and online. Our newest products are performing very well at retail and we're seeing a lot of excitement in the market. I'll discuss some of our marketing efforts around our new products in just a few minutes. Our bottom line also improved from the year-ago quarter. Although we reported a slight loss for the quarter, this was largely due to certain extraordinary expense items associated with changes in the team and additional cost incurred for recruitment and severance for departing employees. We expect the investments we are making in enhancing our team, our brands, and our product development efforts will have a profound and positive effect on our company and our financial results in the quarters in years ahead. I'm excited to update you on the progress we've made on our improvement strategy in the past quarter. The first element of our strategy is to focus on investing in highly talented people and creating a more entrepreneurial culture with a sharp focus on operational excellence. In September, we hired a new Vice President of our Specialty Retail Channel, Diane Lawley. Diane has deep specialty channel experience in the juvenile products market. As you probably know, specialty retail is an important growth and strategic driver for us. As we continue to pursue opportunities to get closer to the consumer and leverage this channel for new product introductions, we are enthusiastic about the work she is doing to add retailers and distributors that will target vertical markets where we do not currently have a strong presence. The energy and enthusiasm she has brought to the team in the short time she has been here is exciting. After the close of the quarter, we hired Ron Cardone as our new Senior Vice President of Information Technology. Ron brings tremendous depth of IT expertise and has proven success in transforming the IT infrastructure at other juvenile product companies. We know that his experience will be a valuable asset as we integrate our technology platform to access information that is critical to our sales and operations processes. His engagement and strategic vision in the business as a whole are also central to his success in this role. Last week, we announced the hiring of Lisa Harnisch as Senior Vice President of Sales. Lisa joins us from Toys "R" Us, where she was Senior Vice President - General Merchandise Manager. She will have a key role in large customer relationships. Lisa will also work within a sales function and the development and execution of business strategy, financial profitability, product forecasting and new product marketing. We are fortunate to have such a highly respected executive join our organization. We've also recently hired Anna Dooley as our new Senior Vice President of Product Development. Anna comes to Summer with 25 years of experience launching new brands as well as managing legacy brands. She has significant experience in the juvenile product space, including 10 years at Hasbro. Developing innovative products is core to our growth strategy and we're excited to benefit from Anna's experience. And today, we announced that we've hired a new CFO. Bill Mote, who will join us next week, comes to Summer with significant financial leadership experience. In the consumer products industry and with many years of experience with our existing retail channel and partners. Bill was introduced to Summer as a result of his previous successful working relationship with members of our leadership team as well as select board members. His financial acumen experience and longstanding relationships with the team will allow him to quickly integrate into the company and business. Bill will be a valuable asset and business partner as we continue to grow in key markets. We're delighted to have these highly talented individuals join our team and excited by the opportunities we expect they will create for Summer in the future. The second element of our strategy is to develop innovative products. I'd like to focus on a few of the products that received a lot of attention at the recent ABC Kids Expo, which was a huge success for both the Summer and Born Free brands. We were pleased to receive tremendous support from the retail channel and thrilled with media and analyst descriptions of the Summer booth as one of the most sought-out of the entire show. Not only did we feature our new items, but the booth also included video and interactive display on it to bring the products to life. We were very proud to have three of our new products up for awards. The Pop 'n Play Portable Playard, the Bottle Genius, and the Retractable Gate were all finalists for awards by the Juvenile Products Manufacturers Association. This was wonderful recognition and another tip of the hat to our ongoing innovation that we know the industry continues to increase. As it did throughout 2014, our Gear category really took the industry by storm. The new convenience strollers that have expanded to 3D lines literally drew oohs and aahs from the buyers and media as it was being presented. Parenting Magazine declared both our new 3D Zaire and 3D Flip among the top innovative trends of the show and applauded our team for their dedication to building high quality affordable strollers with all the bells and whistles. Bloggers posted images and videos on their social media sites, some of which have already received thousands of views. Parenting Magazine also placed our Pop 'n Play Portable Playard in this category as a top innovative trend of the show. This product is an ultra lightweight folding playard that can be set up and taken down in seconds. It was launched in June and has continued to receive a great amount of very positive feedback and discussion on social media. And that sentiment was reflected in person at our ABC show booth. A lot of energy at the booth but also due to our exciting monitor lineup, most related to the new HD video monitors that we plan to launch in the first quarter of 2015. These products are follow-ups to our popular Baby Link and Baby Touch Wi-Fi series of video monitors which have been top performers for us in 2014. We created additional excitement with the Wi-Fi series as we shared the video footage from a giveaway on The Ellen Show earlier this year. Our team also brought innovation to the functional category of changing pads. Our most recently introduced product is the Safe Surround change pad which has been enthusiastically received by customers. The Safe Surround change pad provides comfort and safety while also thoughtfully addressing new flammability safety standards without flame retardant chemicals. We mentioned on last quarter's call that for the first time our Summer and Born Free brands would have separate booths at the show. This allowed Born Free the distinction it deserves in expressing the voice and mission of the brand and to introduce new messaging and product ideas. The Born Free booth was created to represent a baby's nursery, a great way to showcase our product that focused on nurturing during that special time. At the Born Free booth, we introduced the new Bottle Genius, which is designed to take the hassle out of getting bottles ready for baby. Like our Summer line of strollers, this was another product that was greeted with praise and excitement from media and buyers. We heard it described often at the booth as a (indiscernible) for babies. It's a one-stop station to make baby bottles with the right amount of formula at the perfect temperature. We'll have this exciting product available in stores in coming months. We have reinvigorated the product development process at Summer and we look forward to launching many exciting products in the months and years ahead. We are on target to meet our goal for 20% of sales from new products. And we are confident in our ability to deliver this level of new product revenue in the future. Another important area of focus for us this year is improving the positioning and awareness of our core Summer Infant Born Free and SwaddleMe brands. Brand equity is critically important and we have been very active in building our brand connection with consumers. In Mid-August we began a partnership with the award-winning agency, Marina Maher Communications, well known for their expertise in marketing to women. They jumped right into the business by attending several outreach events including ABC Kids Expo in Las Vegas, the Parenting Experience in New York City and the Red CARpet Safety Awareness event in Los Angeles. Throughout these events, they presented our products to editors, bloggers, expecting moms and celebrities, all in an effort to grow our brand awareness, and we're already receiving great coverage. Our enhanced social media strategy also continues to extend the power and reach of our brand as we educate and engage in conversations with consumers. In May we began some highly targeted advertising on social media and this effort has helped to significantly increase our fan base across all our social platforms. In fact during Q3 alone, the number of our Facebook fans more than doubled and has grown over 400% since January. We're also actively promoting our Born Free brand on social media. For the past two years we've participated in Club Momme Ultimate Online Baby Shower where consumers gift our products to their friend. Through this online event we've received tremendous visibility, placed our bottles in mom's hands and increased our social media fan base for Born Free. We're currently developing plans for targeted social advertising so that Born Free will achieve the same engagement and success as Summer. The fourth and final element of our strategy is to strengthen relationships with suppliers, retailers and end users to grow across all channels. As we discussed before, in addition to further penetrating our existing large retail customers, we've focused on making inroads into the e-commerce, international and specialty retail spaces. Let's start with e-commerce where we saw exceptional growth from our select online partners in Q3 and saw this channel grow by the mid double digits overall. During the quarter, we worked with two of our large retailer customers to refresh our brand pages on their e-com sites. Our own Summer Infant site continues to service customers and reports steady growth off a small base. Internationally we saw excellent growth from our Asia Pacific and Latin American geographic category while our more mature Canadian and UK markets were flat. Last quarter I mentioned that we had hired a new Director of International Sales, Derek Andrulat. He was quite busy at the ABC show greeting international visitors, switching quickly from one language to the next as he introduced the Summer brand and new products to potential customers. We're excited about the opportunity to expand to new geographic regions under Derek's leadership. The specialty channel was down in the quarter but as I mentioned, we are encouraged by the work that our new specialty channel sales leader is doing in this area. In addition to recruiting new distributors, over the next several months we'll be introducing differentiated products for specialty retailers and expect the strategy will increase our participation in this important sector. Let me summarize by leaving you with a few key thoughts. First, our new products are doing very well in the market. The Wi-Fi video monitors, 3D Lite strollers and the Pop 'n Play Portable Playard have received strong acceptance in the marketplace. At the same time we've made strategic decisions to phase out those products that were not contributing to profitability. Second, we are focused on bringing innovation to the forefront of our development process. We expect that the HD video monitors, the new 3D strollers and the Bottle Genius will be big successes when they are launched over the next few months. We have new leadership in the product development area and continue to strengthen our design and engineering team. Third, we continue to assemble a best-in-class team of leaders. Each is using their expertise and experience to collectively drive new product development, sales and profitability. We believe we have the right strategy and people to take Summer to the next level. Finally, going forward, while we may have quarters where we do not follow a sequential growth trajectory as we continue to work through the improvement plans, our strategy is on track and we are on a course for long-term sales and profit improvement. Before I turn the call over the Paul for the financial review, I'd like to take this opportunity to thank him for his service and contributions to Summer Infant over the past two years. Thank you, Paul. We wish you well.

[Paul Francese:]

Thank you, Carol, and good afternoon everyone. Details of our results are available in our press release that was issued this evening after the market closed and our Form 10-Q filing with the SEC. I encourage you to review these documents. Net revenues for the third quarter of 2014 were $51 million, up 1% from $50.5 million in the year-ago quarter but down 2.9% from the sequential quarter. You might remember that the monitor battery recall had a negative effect on sales in Q2 due to disruption in the channel. While this carried over into third quarter as well, we don’t expect this to have a material impact on the fourth quarter results. Looking at sales by product category, gear was up in the high double digits, driven by the success of our 3D stroller line. Sales in the safety and monitor categories were also up in the quarter. Conversely, feeding, nursery and furniture were down. Gross profit for the third quarter of 2014 increased to $16.6 million compared with $15 million in the same quarter last year, but declined from $17.4 million in the sequential quarter. The year-over-year increase in gross profit dollars is attributable to a favorable mix of products sold and a lower level of promotional and closeout sales. The sequential decline is due to lower sales volume and the impact of the recall returns. Gross profit as a percent of net sales was 32.5% for the third quarter of 2014 compared with 29.7% in third quarter of 2013 and 33.2% in the prior quarter. When adjusted for the effects of the battery recall and the impact to sales associated with product categories to be phased out, gross margin for Q3 was 33.3%. General and administrative expenses were $10.1 million for the third quarter of 2014 compared with $9.3 million a year ago and $9.9 million in the prior quarter. The increase in year-over-year and sequential G&A is primarily attributable to talent acquisition and severance costs. Selling expenses were $4.5 million for the third quarter of 2014 comparing with $4.9 million in both the prior quarter and the third quarter of 2013. The year-over over decrease was primarily attributable to cost controls implemented over retailer programs such as co-op advertising and lower royalty expenses under licensing agreements as part of our plan to discontinue certain licensing arrangements. We reported a net loss of $0.1 million or $0.01 per share, compared to net income of $0.3 million or $0.03 per diluted share in the prior quarter, and a net loss of $1.3 million, or $0.07 per share in the third quarter of 2013. As Carol mentioned, investments and – in line with our long-term strategic objectives and talent acquisition and innovation contributed to the loss in this quarter. Many of these expenses are not expected to continue in the future. Adjusted EBITDA for the third quarter of 2014 was $3.6 million compared with $3.4 million in the prior quarter and $1.5 million in the third quarter of 2013. Adjusted EBITDA for the third quarter of 2014 includes $1.1 million in add-back charges including $321,000 of costs associated with organizational changes in the quarter and $399,000 of costs associated with the decision to phase out certain product categories and exit certain licensing agreements. This compares with $0.4 million in add-back charges in both second quarter of 2014 and third quarter of 2013. Now, turning to the balance sheet. As of September 30, 2014, we had approximately $1.1 million of cash and $56.5 million of debt compared with $1.6 million of cash and $49.7 million of debt on December 31, 2013. The increase in debt is primarily due to higher inventory levels, which I'll explain in a moment. Since completing the restructuring of our debt in Q1 2013, we have been focused on reducing debt and maintaining a credit facility that would satisfy the long-term needs of the business including future growth. Our current borrowing availability at the end of the quarter remained in a very comfortable range based on available assets. We ended the quarter with $48.7 million in inventory compared with $38.4 million on December 31, 2013. Inventory turns declined to 2.8 turns at September 30 compared with 3.2 turns at the end of December 2013. Inventory levels are up primarily for three reasons. First, we discussed last year, we had replenished safety stock in order to fill order rates. Second, we had accelerated inventory shipments in the event of a port strike in order to mitigate risk and to continue to service customers. And finally, we had been increasing inventory of better selling items, planning for Q4 promotions and new product launches planned for Q1 2015. Our strategy is to reduce inventory to more normal levels over time and to improve inventory turns to 4. Trade receivables as of September 30, 2014, were $38.2 million compared with $34.6 million as of December 31, 2013. Days sales outstanding was 62 at the end of September 2014, compared to 63 days at the end of December 2013. Accounts payable and accrued expenses as of September 30, 2014 was $35.4 million compared with $31.7 million as of December 31, 2013. We procure inventory on credit terms and our current practice is to submit payments weekly. To summarize, we believe we are on solid financial footing with the right strategy in place to deliver long-term profitable growth and shareholder value. With that I will turn the call over to the operator. Carol and I are ready to take your questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Steph Wissink with Piper Jaffray. Please proceed with your question.

[Steph Wissink:]

Hi, thank you. Good afternoon everyone. I just have three questions. Paul, if you could just carry forward a bit on your conversation around inventory. I'm curious if you can give us some sense of the replenishment safety stock and the port strike, how much influence that over the year in your increase. And then maybe just give us an insight into – I think Carol you mentioned the new products plan for Q1 of '15 are monitors. Does that also elevate the inventory balance that you have on hand currently? And then just separately any additional hires that we should be planning for in the fourth quarter regarding the SG&A expense? And give us some insight into maybe the incentives comp that we should be thinking about in the fourth quarter. I'm not sure if you're hitting your minimums this year based on your improvement plan. And then just lastly if I could throw in one more, Carol, just as I think about your business product mix, your gear, safety and monitors, the feeding nursery business, what is the mix of revenues today and where do you that to be? What would be ideal in terms of the profitability equation of the business? Thank you.

[Paul Francese:]

Well, that was a mouthful Steph. Let me start off with addressing the question on inventory which you addressed to me. Going back to Q1 if you will remember we had actually on several of our better selling items put them on allocation to our customers and actually lost sales in that quarter. Our response to that was to very quickly build up our safety stock in those better selling items, particularly in the area of our 3D Lite stroller and our Wi-Fi monitor. So we did increase our safety stock levels for the better selling items that caused us some pain in the first quarter. We also then, knowing that there was risk of a port strike in LA, we accelerated the delivery of the inventory. If I were to put dollars on those two items, I would stay the port strike and accelerating delivery probably [wrote] (ph) in about $5 worth of inventory and our reaction to increasing our safety stock for our more popular items, probably $2 million, maybe $3 million. We do believe going forward – I can tell you that we are very focused on reducing our inventory levels to what I would call normal levels, which will eventually get us to 4 turns. I don't see a lot of improvement between now and the end of the year even though we are showing some decline but it's going to be a steady decrease, and in turn with better management over inventory we can use some of those funds to reduce some of our debt.

[Carol Bramson:]

And Steph, if I might add to that a little bit. You had asked a comment about whether the inventory levels had gone up as a result of some of our new product launches and that is part of the factor affecting how much we will be able to reduce inventory during the fourth quarter. But we are very much focused on it and we have a very clear understanding about the weeks of supply that we have in different skews and we are working with our retailer partners to address that and work to bring that down in cash into the organization. With regard to our Q1 plan product launches, there's basically three categories that we are very excited about there. As you mentioned, the HD video monitor that we're seeing at the trade show, it's planned for launch in Q1 and we will be bringing that stock in and are looking forward to that. We've gotten great reception from the retail community and we're looking forward to the enhancements that that will deliver to the consumer. Also we've had great excitement on the expansion of our 3D stroller line. As you may recall from the show that was one area in which we had a great deal of attention from the media and bloggers and the new features of these strollers have been well received by retailer and those two are coming in in the fourth quarter and will be going out so that they might be in stores earlier in the year as well. And then the last item is our Bottle Genius, which is also planned for a Q1 launch and we're really excited about that, again great feedback from the retailers and looking forward to getting that into stores. Another question you had here related to additional new hires. As you heard in the earnings script and read a little bit in the releases we've been pretty busy in that regard and I'm pleased to say that I'm incredibly excited about the talent and the team that's come together. I had the opportunity to spend some time with them as a group and I feel very good that we have in place the right leaders with the right experience to take Summer to the next level. We don’t have any significant plans for any changes to the organization going forward. We're always interested in enhancing our talents here and are thrilled that we are becoming sought out in terms of talent acquisition but right now from a leadership perspective I feel really good about the team that's coming in and that we're in a good place and looking forward to the changes that commence as a result of that. Lastly you asked about product mix and we're working – we're looking at our strategy, we're looking at the profitability of each of our product categories. I am very pleased with the performance we've seen from a profit perspective across the board. Our three largest categories are monitors, nursery and safety and all of those do deliver very attractive profitability margins which have been increasing over the year. But we also have some great plans in place in our feeding category as it relates to Born Free and the brand relaunch and the new innovation that's coming there. And as we discussed earlier, our gear category is showing great promise and we're very much focused on this convenience stroller niche segment where we've been successful and we've been able to deliver to the consumer a high quality affordable product with all of the bells and whistles. So we'll continue there.

[Steph Wissink:]

Well, the product looks great. Best of luck guys.

[Carol Bramson:]

Thank you.

[Paul Francese:]

Thank you.

[Operator:]

Our next question comes from Dave King with ROTH Capital Partners. Please proceed with your question.

[Dave King:]

Thanks. Good afternoon, Carol and Paul. First off I was just curious, I don't know if you touched on it in your remarks, it sounds like you did on the gross margin side but in terms of the recall, how much do you think that weighed on trends during the quarter and then similarly if we back out for the licensing revenues and phased-out furniture items, what was the organic growth rate if you will in terms of the business during the quarter? And then as a follow-up to that, there is a comment in the release and then Carol, you touched on it as well in terms of the outlook for revenues. I'm just curious as – should we read anything into the comment that we may not see the sequential – continued sequential improvement going forward, or was that more just a comment on what we saw during the quarter? Thanks.

[Carol Bramson:]

Well, if I might I'll touch on that first off. It was very much focused on this quarter. This quarter incurred some extraordinary expenses, largely associated with the talent acquisition. The degree of severance, some executive search, some relocation expenses, have been an expense item that wasn't anticipated to this level and therefore it's – and it's not expected to continue. On the topline side, we actually are looking to a good fourth quarter and for that to continue from here on out. We had been burdened a bit by the implications of the recall, both on a topline basis and a gross profit basis. Year to date, topline revenue suffered $1.7 million as a result of the recall, and year to date, our gross profit was lower by just under $700,000 as a result of the recall. And we also incurred and reserved for an additional $300,000 worth of expenses that hit our gross profit margin throughout the period. So we're looking forward to getting that behind us. We don't expect for there to be much in the way of recall-related returns in the fourth quarter. And again some of these other extraordinary items will not be continuing with us into the year.

[Dave King:]

Right, okay. That helps. And then in terms of just the thought that these – the recall-related stuff won't continue into the fourth, is that based on what you are seeing currently or what gives you that confidence as you look forward?

[Carol Bramson:]

Well, early in the process we had worked with each of our large retail customers to understand what inventory they had in stock and in certain instances they hired a third party or reviewed the date codes on the inventory on onsite. In other instances they have returned the product to us and we have done that review process and replaced batteries as needed and shipped out the new product back to them to the extent they provided us with POs. So we had a pretty good understanding of what was going to be coming in, it's come in over a longer period of time than we might have originally anticipated, and therefore we have a good handle on what yet might be remaining there and are not expecting much in Q4.

[Dave King:]

Okay, fantastic, that's very helpful. And then switching gears a bit, in terms of the debt, $55 million or so, I think higher cost piece of it if I remember correctly, around $15 million, what are your updated thoughts there in terms of willingness, the ability to either pay that down, refinance it et cetera, and – yeah, I'll just stop there.

[Carol Bramson:]

Yeah, our current – the term loan is about $13 million and it is expensive, layer of debt that we'd like to reduce our cost of capital and we are currently actively evaluating opportunities to restructure our capital structure in that regard and pay down certain expensive debts as well as possibly raise capital for other strategic objectives. Part of this inventory build has influenced our total debt level so we're looking to that as well.

[Dave King:]

Okay, that helps. Congrats on the continued progress.

[Carol Bramson:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from James Fronda from Sidoti. Please proceed with your qeuston.

[James Fronda:]

Hi guys, good morning.

[Carol Bramson:]

Hello.

[James Fronda:]

Hello, can you hear me?

[Carol Bramson:]

Yeah.

[James Fronda:]

Okay, can you just talk a little bit about the somewhat of the turnaround we're seeing at Toys "R" Us and Babies "R" Us with their same-store sales improving a little bit, and is that going to change your focus at all because I know last time it was more the smaller regional bias coming back, but are you seeing anything? Would you say that this is the early innings of the turnaround there?

[Carol Bramson:]

Well, Babies "R" Us is a very important retailer partnership of ours.

[James Fronda:]

Right.

[Carol Bramson:]

And we're looking forward to improving upon it and continuing to grow on it. As you rightly noticed, we recently brought in Lisa Harnisch to join our team and she was a very well-respected senior executive there and we feel privileged to have her on our team going forward. We anticipate that that will help improve the partnership even further. We've seen consistent performance from them throughout the year and are looking forward to the improvements that they've made and any way we can help participate with them in their turnaround plan as well.

[James Fronda:]

Okay, all right, thanks.

[Operator:]

(Operator Instructions) Our next question comes from George Santana with Ascendiant Capital.

[George Santana –Ascendiant Capital Markets:]

Hi, thanks for taking the question and congratulations on the additions to the management team with what appear to be very strong hires – not taking anything away from you, Paul – and what reads like a very good quarter. So reading back through the filings and notes it appears that your adjusted EBITDA for the first nine months of 2014 is already greater than the adjusted EBITDA for the full years of both 2013 and 2012. Is this correct, and considering the business drivers of new products, the strong growth in e-commerce and expanded sales and distribution footprints, without asking for any forward guidance, can you speak at least qualitatively to the continued growth of these metrics?

[Carol Bramson:]

Well, thank you for citing those metrics, we appreciate it and we are very proud of the turnaround that has been demonstrated. And particularly through that adjusted earnings because that does take into consideration some of the one-time elements or extraordinary elements that we have incurred as a result of the recall and the turnaround itself. We are excited about the platform that's been put in place here and the team resources that are coming to bear. Each of those individuals has demonstrated successful experience in each of their respective functional areas. Some of them have even worked together in the past which is great, so we'll be able to hit the ground running. We anticipate that there are further improvements we'll be able to make on the profitability of the business going forward. But we're still working through all those transition elements right now. Anything else?

[George Santana –Ascendiant Capital Markets:]

Well, thanks, and good luck guys, good job.

[Carol Bramson:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from Rob Strauss with Gilford Securities. Please proceed.

[Robert Straus:]

Thank you for taking my question, and Paul, best wishes. I just have two questions. My first question is regarding Toys "R" Us or Babies "R" Us. What percentage of sales was that for the third quarter and year to date? And then my second question is regarding new products, will all of those be margin accretive?

[Paul Francese:]

Currently Toys "R" Us/Babies "R" Us continues to be a very large customer for us and they are averaging anywhere between 27% and 28% of our business.

[Carol Bramson:]

And in terms of the new product launches, yes, we're very much focused on contribution margins attributed to those products and opportunities to improve our overall gross profit margin with every new product launch, particularly the ones that I've identified in the earnings release and where we are demonstrating true innovation in the category.

[Robert Straus:]

Thank you very much, good luck.

[Carol Bramson:]

Thank you.

[Operator:]

Thank you. At this time I would like to turn the floor back over to Ms. Carol Bramson for closing comments.

[Carol Bramson:]

Thank you and thanks everyone for joining us today. We look forward to speaking with you next quarter. Take care.

[Operator:]

And this concludes our teleconference today. Thank you for joining today. You may disconnect your lines at this time.