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Table of Contents

As filed with the Securities and Exchange Commission on July 16, 2015.

Registration No. 333-205274

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Amplify Snack Brands, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2000   47-1254894

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

500 West 5th Street, Suite 1350

Austin, Texas 78701

512.600.9893

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Thomas Ennis

Chief Executive Officer

Amplify Snack Brands, Inc.

500 West 5th Street, Suite 1350

Austin, Texas 78701

512.600.9893

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Jon M. Herzog, Esq.

Bradley C. Weber, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109

617.570.1000

     

LizabethAnn R. Eisen, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

212.474.1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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

 

Large accelerated filer       ¨   Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)   Smaller reporting company   ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated July 16, 2015

            Shares

 

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Amplify Snack Brands, Inc. All of the shares of common stock are being sold by the selling stockholders, which include certain of our directors and officers, identified in this prospectus. Amplify Snack Brands, Inc. will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $             and $            . We have applied to list our common stock on the New York Stock Exchange under the symbol “BETR”.

We are an “emerging growth company” as defined under the federal securities laws and, as such, are eligible for certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company” on page 8 and “Risk Factors” on page 21 to read about factors you should consider before buying shares of common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

  Per Share   Total  

Initial Public Offering Price

$                 $                

Underwriting Discounts and Commissions(1)

$      $     

Proceeds to Selling Stockholders (Before expenses)

$      $     

 

(1) See “Underwriting” for additional information regarding underwriting compensation.

The underwriters have the option to purchase up to an additional             shares from the selling stockholders at the initial price to the public less the underwriting discount. We will not receive any proceeds from the exercise of the underwriters’ option to purchase additional shares.

The underwriters expect to deliver the shares to purchasers on or about                     , 2015 through the book-entry facilities of The Depository Trust Company.

 

Goldman, Sachs & Co. Jefferies Credit Suisse

 

SunTrust Robinson Humphrey

 

William Blair Piper Jaffray

 

 

Prospectus dated                     , 2015


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     21   

Special Note Regarding Forward-Looking Statements

     49   

Corporate Reorganization

     51   

Use of Proceeds

     55   

Dividend Policy

     56   

Capitalization

     57   

Dilution

     59   

Unaudited Pro Forma Condensed Consolidated Financial Information

     61   

Selected Consolidated Financial Data

     68   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70   

Business

     109   

Management

     123   

Executive Compensation

     132   

Certain Relationships and Related Party Transactions

     142   

Principal and Selling Stockholders

     150   

Description of Capital Stock

     153   

Shares Eligible for Future Sale

     158   

Certain Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     161   

Underwriting

     165   

Legal Matters

     169   

Experts

     169   

Additional Information

     169   

Index to Consolidated Financial Statements

     F-1   

 

 

Neither we nor the selling stockholders have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

Unless otherwise specified or the context requires otherwise:

The terms “we”, “us”, “our” and the “Company” mean Amplify Snack Brands, Inc., which is currently a wholly-owned subsidiary of Topco, and its consolidated subsidiaries;

The term “All Commodity Volume” or “ACV” means the measurement of a product’s distribution (or distribution on promotion) weighted by the overall dollar retail sales attributable to the retail location distributing such product; a retail location would be counted as having sold the product or product group if at least one unit of the product was scanned for sale within the relevant time period; we believe this metric provides a measurement of retail penetration that takes into account the importance of selling through retail locations with higher overall retail sales volumes;

 

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The terms “Better-For-You” or “BFY” are industry terms not defined by the Food and Drug Administration and refer to foods that have some characteristics that cause consumers to view them as a healthier alternative to conventional food products; there is not a single definition of Better-For-You and we believe each individual customer may view Better-For-You characteristics differently, but common characteristics may include one or more of the following: products that are lower in salt, products that are lower in sugar, products that are lower in fat, products that are made without ingredients containing genetically modified organisms (or GMOs), products made with fewer ingredients, products made with simpler ingredients, products made with more recognizable ingredients, products that are organic, products that are viewed as natural, products that do not include artificial ingredients, preservatives or flavors, products that are major allergen-free, products that are Kosher, products that are vegetable-based, products that are vegan or products that are gluten-free;

The term “Corporate Reorganization” means the series of transactions as described under the heading “Corporate Reorganization”;

The term “December 2014 Special Dividend” means the $50.0 million of borrowings under our term loan under our credit agreement and the subsequent distribution of $59.8 million we paid to Topco in December 2014, which then distributed such amount to its members, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Sponsor Acquisition and Subsequent Financings”;

The term “Founder Contingent Compensation” means our agreement, made in connection with the Sponsor Acquisition and memorialized in the Founders’ ongoing employment agreements, to (i) pay each of the Founders $10 million of additional cash consideration in 2016 ($20 million in the aggregate), based on the Company’s achievement of certain contribution margin benchmarks during the year ending December 31, 2015 (a total of $1.5 million of which additional consideration has been pre-paid to the Founders as of the date of this prospectus), and (ii) make further payments contingent on, and equal to 100% of the value of, the potential future tax savings to the Company associated with the deductibility of the payments under these agreements, which we estimate could result in additional payments to the Founders in amounts of up to $6.8 million; we expect to be required to make the full amount of the remaining payments in cash in 2016;

The term “Founders” means Andrew S. Friedman and Pamela L. Netzky, the founders of the business currently conducted by SkinnyPop Popcorn LLC;

The term “May 2015 Special Dividend” means the $22.5 million of borrowings under our term loan and revolving credit loan under our credit agreement and the subsequent distribution of $22.3 million we paid to Topco in May 2015, which then distributed such amount to its members, as described in

“Management’s Discussion and Analysis of Financial Condition and Results of Operations—The

Sponsor Acquisition and Subsequent Financings”;

The term “Paqui” means Paqui LLC, a Texas limited liability company and wholly-owned subsidiary of SkinnyPop Popcorn LLC, which was acquired in April 2015;

The term “Performance Bonus Payments” means our payment, which is conditional on the completion of this offering, of $500,000, $350,000 and $300,000 to Messrs. Ennis, Goldberg and Shiver, respectively, and $350,000 to be allocated to other employees of the Company.

The term “Predecessor” means the business of SkinnyPop Popcorn LLC prior to the Sponsor Acquisition;

 

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The term “Pro Forma Year Ended December 31, 2014 (Unaudited)” means the unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2014 giving pro forma effect to the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend as if such transactions had occurred on January 1, 2014, as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, which section includes a comparative presentation showing all pro forma adjustments made to our historical statements of income for the Predecessor and Successor periods in accordance with the rules and regulations of the SEC. See “Unaudited Pro Forma Condensed Consolidated Financial Information”.

The term “retail location” means, as used in the determination of All Commodity Volume and Total Distribution Points by an industry source, a retail location (such as a store) that is counted in databases of that industry source and where a product has sold at least once in the applicable time period being measured;

The term “sales velocity” means the total product retail sales per million dollars of annual ACV of retail locations selling the product; we believe this metric is relevant to understanding our business because it represents the retail sales efficiency for a product in relation to its distribution; using the ACV of stores selling a product means this measure controls for store size, and can be used to determine how well a product sold while controlling for weighted distribution;

The term “SkinnyPop” means either the entity SkinnyPop Popcorn LLC or our product line and brand, SkinnyPop Popcorn, as the context requires;

The term “Sponsor” or “TA Associates” means investment funds affiliated with TA Associates Management, L.P. and its affiliates, a leading growth private equity firm;

The term “Sponsor Acquisition” means the series of transactions that were consummated in July 2014 pursuant to which (1) SkinnyPop Popcorn LLC became a wholly-owned subsidiary of the Company by way of a merger and (2) SkinnyPop Popcorn LLC was thereafter converted from an Illinois limited liability company into a Delaware limited liability company;

The term “Successor” means the business of the Company and its consolidated subsidiaries, including SkinnyPop Popcorn LLC, following the Sponsor Acquisition;

The term “Topco” means TA Topco 1, LLC, a Delaware limited liability company, which is the top parent entity of our business prior to the consummation of the Corporate Reorganization; and

The term “Total Distribution Points” or “TDPs” means the distribution of a brand (or “product aggregate”) while taking into account the number of retail locations and Universal Product Codes, or UPCs, selling within that brand or aggregate; the calculation is the sum of ACV across UPCs, and we believe this metric provides a relative indication of retail penetration factoring in both UPC count and retailer size.

Amounts and percentages appearing in this prospectus have been rounded to the amounts shown for convenience of presentation. Accordingly, the total of each column of amounts may not be equal to the total of the relevant individual items. All references to our business and products prior to April 2015 refer only to SkinnyPop. The Predecessor and Successor financial data has been prepared on different accounting bases and therefore the sum of the data for the two reporting periods should not be used as an indicator of our full year performance.

 

 

 

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INDUSTRY AND MARKET DATA

This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications, such as those published by Mintel Group Ltd, or Mintel, Nielsen Holdings N.V., or Nielsen, and Information Resources, Inc., or IRI, or other publicly available information, as well as other information based on internal sources. Unless we indicate otherwise, the information contained herein from IRI is based in part on data reported through its Syndicated Market Advantage service of retail sales, market share, category and other data for categories and segments of U.S. brands and outlets that have or sell products with attributes of Salty Snacks and Popcorn/Popcorn oil for the years 2010 to 2014. This information is interpreted solely by us, and is neither all-inclusive nor guaranteed by IRI. Without limiting the generality of the foregoing, specific data points from IRI may vary considerably from other information sources. Although we believe that the third-party sources referred to in this prospectus are reliable and the information generated internally is accurate, neither we nor the underwriters nor the selling stockholders have independently verified any of the information from third-party sources. While we are not aware of any misstatements regarding any information presented in this prospectus, estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

 

 

TRADEMARKS

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Our primary trademarks include “SKINNYPOP”, “SKINNYPACK”, “THE BIG SKINNY”, “PAQUI” and “DON’T WORRY BE PAQUI”, all of which are registered in the United States with the U.S. Patent and Trademark Office. Certain of our trademarks are also pending registration in Canada. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.

Our Company

Amplify Snack Brands is a high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for Better-For-You, or BFY, snacks. Our anchor brand, SkinnyPop, is a rapidly growing, highly profitable and market leading BFY ready-to-eat, or RTE, popcorn brand. Through its simple, major allergen-free and non-GMO ingredients, SkinnyPop embodies our BFY mission and has amassed a loyal and growing customer base across a wide range of food distribution channels in the United States. SkinnyPop’s continued success and robust financial characteristics, combined with our experienced and talented management team, position us to become an industry-leading BFY snacking company that capitalizes on the potential of great-tasting and high-quality BFY snack brands that we create and acquire. To that end, in April 2015, we acquired Paqui, an emerging BFY tortilla chip brand that has many of the same key taste and BFY attributes as SkinnyPop. Paqui allows us to leverage our infrastructure to help us grow into an adjacent snacking sub-segment with a second innovative BFY brand. We believe that our focus on building a portfolio of exclusively BFY snack brands differentiates us and will allow us to leverage our platform to realize material synergies across our family of BFY brands, as well as allow our retail customers to consolidate their vendor relationships in this large and growing category.

We target sizeable global and U.S. markets, with Nielsen estimating global retail snack sales to be in excess of $370 billion and North American retail snack sales in excess of $120 billion for the twelve months ended March 31, 2014. We estimate the U.S. salty snack segment to be approximately $18 billion in annual retail sales and that it will grow approximately 3% to 4% per year through 2019. To date, our focus has been on developing brands in the rapidly growing BFY sub-segment of salty snacks. We believe that within the salty snack segment, BFY-focused brands are taking share from conventional brands, and we estimate that BFY-focused brands experienced aggregate growth in excess of 10% in 2014. We believe a variety of favorable consumer trends, including a greater focus on health and wellness, increased consumption of smaller, more frequent meals throughout the day and a strong preference for convenient BFY products, will continue to drive both strong overall snacking growth as well as the continued outperformance of BFY products within the overall market. Over time, we expect to explore the development and acquisition of additional BFY brands within other U.S. and global segments of the overall snacking market.

Our SkinnyPop brand, established in 2010, embodies our BFY mission while also providing rapid revenue and earnings growth, robust and steady margins, and strong cash flows to help facilitate further investments in organic and inorganic growth opportunities. We believe SkinnyPop continues to take meaningful market share from a variety of sizeable sub-segments of the overall U.S. salty snack segment, although the brand competes most directly in the RTE popcorn sub-segment of salty snacks. The overall U.S. popcorn sub-segment is estimated at $1.9 billion in 2014 and grew 8.1% over the prior year. The $966 million RTE popcorn sub-segment is the fastest growing sub-segment within U.S. salty snacks, growing at a compound annual growth rate of 14.6% since 2010. Within RTE popcorn,

 

 

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SkinnyPop was the fastest growing brand of scale in 2014, increasing its share of the sub-segment by 6.5 percentage points to 12.1% and accounting for more than 40% of total sub-segment growth. SkinnyPop’s growth has been driven by continued gains in both distribution and sales velocity. Between 2012 and 2014, SkinnyPop’s sales velocity accelerated from $48 to $141, even as ACV increased from 17% to 52% over the same period, underscoring the brand’s ability to grow store level productivity even as we increased the number of retail locations where SkinnyPop is available. Despite our recent growth and a market-leading BFY presence, we believe significant opportunities remain for continued growth. For example, as of December 31, 2014, SkinnyPop’s household penetration, which represents the percentage of households that have purchased SkinnyPop over the prior 52 weeks, stood at 5.2% compared to an average of approximately 22.7% for the top 25 salty snack brands by dollar retail sales according to IRI data. SkinnyPop also has the opportunity to grow by increasing its product range in stores where the brand already has some existing presence. Our products are offered in the natural and conventional grocery, drug, convenience, club and mass merchandise channels. At December 31, 2014, our Total Distribution Points stood at approximately 136, versus an average of 919 TDPs for the top 25 leading salty snack brands. We plan to continue to grow SkinnyPop by increasing its distribution, household penetration, product offerings per retail location and sales velocity, all of which will be supported by increasing brand awareness, new product introductions and favorable consumer trends.

Total Distribution Points(1)

 

 

LOGO

 

(1) Total Distribution Points is an IRI metric used to illustrate the distribution of a brand while taking into account the number of UPCs selling within that brand. TDPs are not determined by reference to any GAAP financial measure over any period.
(2) The top 25 salty snack brands are those brands with the highest dollar retail sales in 2014 according to IRI data.

Company Growth and Performance

We have experienced strong financial performance over the past several years, including:

 

    Net sales increased from $55.7 million in the year ended December 31, 2013 to $132.4 million in the Pro Forma Year Ended December 31, 2014 (Unaudited), representing growth of 137.6%, and increased from $25.7 million in the three months ended March 31, 2014 to $44.3 million in the three months ended March 31, 2015, representing growth of 72.2%;

 

   

Consistent gross profit and Adjusted EBITDA (as defined below) margins of 58.6% and 44.5%, respectively, for the year ended December 31, 2013, 56.1% and 44.2%, respectively, for the

 

 

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Pro Forma Year Ended December 31, 2014 (Unaudited), 55.7% and 45.7%, respectively, for the three months ended March 31, 2014, and 55.1% and 43.4%, respectively for the three months ended March 31, 2015;

 

    Net income under GAAP decreased from $24.8 million in the year ended December 31, 2013 to $13.6 million for the Pro Forma Year Ended December 31, 2014 (Unaudited), representing a decrease of 45%, and decreased from $11.7 million for the three months ended March 31, 2014 to $4.9 million for the three months ended March 31, 2015, representing a decrease of 58%;

 

    Adjusted EBITDA increased from $24.8 million in the year ended December 31, 2013 to $58.5 million in the Pro Forma Year Ended December 31, 2014 (Unaudited), representing growth of 136.0% and increased from $11.7 million in the three months ended March 31, 2014 to $19.2 million in the three months ended March 31, 2015, representing growth of 63.7%; and

 

    Cash from operating activities was $26.3 million for the Predecessor period from January 1, 2014 to July 16, 2014, $12.7 million for the Successor period from July 17, 2014 to December 31, 2014 and $14.1 million for the three months ended March 31, 2015 and operating cash flow less capital expenditures was $26.1 million for the Predecessor period from January 1, 2014 to July 16, 2014, $12.5 million for the Successor period from July 17, 2014 to December 31, 2014 and $13.8 million for the three months ended March 31, 2015, driven by our asset-light and outsourced manufacturing model, which requires low levels of capital investment.

The Adjusted EBITDA margin and certain other metrics set forth above are non-GAAP financial measures. See “—Summary Consolidated Financial and Other Data—Non-GAAP Financial Measures”.

Industry Overview

Nielsen estimates the global snack market, as of March 2014, was in excess of $370 billion in annual retail sales, and growing at 2% annually when adjusted for inflation. Sweet and salty snacks are among the largest segments in the overall snack market. The SkinnyPop and Paqui brands currently compete in the salty snack segment, which includes products such as potato chips, tortilla chips, popcorn, cheese snacks and pretzels. IRI and Mintel estimate that these sub-segments totaled approximately $21 billion and $18 billion in U.S. retail sales, respectively, in 2014. Mintel forecasts that sub-segments within the salty snacks segment will grow between 2.2% per year (pretzels) and 6.0% per year (popcorn) through 2019, with popcorn serving as the fastest growing product within salty snacks. While we do not currently offer products in the potato chip, cheese snack or pretzel sub-segments, we may consider entering these markets in the future. We believe leading BFY brands within the salty snack segment grew at a rate in excess of 10% in 2014, significantly outpacing overall salty snack segment growth in the United States.

IRI estimates that total retail sales of popcorn in the United States were approximately $1.9 billion for 2014. The RTE popcorn sub-segment grew by 22.6% in 2014 to approximately $966 million in retail sales, while the microwave popcorn sub-segment declined by 3.6% over the same period to $853 million in retail sales. Since 2010, the RTE popcorn sub-segment has grown at a compound annual growth rate of approximately 14.6%, making it the fastest growing sub-segment in salty snacks. We believe that this growth has largely been achieved by converting consumers from conventional salty snack products to RTE popcorn, as consumers become aware of the great taste and healthier characteristics offered by RTE popcorn. Some of the growth has also been achieved by consumers’ changing preference for RTE popcorn compared to traditional popcorn. RTE popcorn has emerged as a convenient, BFY snack in recent years, driven by both the overall BFY segment growth and

 

 

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improvements in product ingredients and packaging. We believe consumers are increasingly purchasing RTE popcorn because of their historical familiarity with traditional popcorn and because of consumer trends towards BFY snacks.

IRI estimates that total retail sales of tortilla chips in the United States have grown at a compound annual growth rate of 5.3% between 2010 and 2014 to $4.7 billion in 2014. Given the fragmented nature of the BFY tortilla chip sub-segment, we believe that there is a significant opportunity to create a market-leading and great-tasting BFY brand.

Beyond popcorn and tortilla chips, there are several other sizeable sub-segments within salty snacks such as potato chips, cheese snacks and pretzels at approximately $7.2 billion, $1.8 billion and $1.2 billion, respectively, in total retail sales in the United States in 2014 according to IRI data. There is a significant potential opportunity to grow sales across multiple large categories as consumers are increasingly substituting for BFY snacks within these categories. We believe that the growth of BFY snacks will continue to be supported by increased consumer focus on healthier lifestyles, and we believe that we are well positioned to benefit from these market trends and preferences in the coming years.

Our Competitive Strengths

We believe the continued growth and profitability of our company will be driven by the following competitive strengths:

 

    Strong consumer appeal of our SkinnyPop Brand:    The SkinnyPop brand is a leading RTE popcorn brand with strong consumer loyalty and one of the fastest growing brands in the entire salty snack segment. SkinnyPop’s BFY positioning is reinforced through our unique packaging, which communicates the key attributes of our brand including a simple, short ingredient list that is major allergen-free and contains only non-GMO ingredients. According to IRI data, SkinnyPop has the highest level of repeat purchase in the RTE popcorn sub-segment and one of the highest rates of repeat purchase relative to overall salty snacks segment leaders.

 

    Highly attractive brand for retailers:    SkinnyPop’s premium price point and strong sales velocities generate a high level of dollar profits relative to the shelf space our SkinnyPop products occupy, making these products highly attractive to a diverse set of retailers across various distribution channels.

 

    Attractive financial profile:    We have a strong financial profile characterized by net sales growth of 137.6% and 72.2%, gross profit margin of 56.1% and 55.1% and Adjusted EBITDA margin of 44.2% and 43.4% in the Pro Forma Year Ended December 31, 2014 (Unaudited) and the three months ended March 31, 2015, respectively. Our gross profit and Adjusted EBITDA margins have been consistent over time. We are also highly cash generative given our outsourced manufacturing model, which requires modest capital investment, and low net working capital.

 

    BFY-focused snacking platform:    With SkinnyPop as the anchor brand in our BFY-focused snacking platform, we believe that we will be able to increase our share of the large and growing global snack industry. We believe that, in addition to the strength of the SkinnyPop brand, we are well positioned to capitalize on several strengths as we continue to expand our platform:

 

    Culture of innovation:    Because of our focus and ability to identify innovative BFY brands and nurture them through our talented team and expanding infrastructure, we believe we are attractive to entrepreneurs who are looking for a strategic partner, as evidenced by our recent acquisition of Paqui.

 

 

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    Experienced management team:    We have established a well-regarded, experienced management team who possess both entrepreneurial and classically-trained skill sets gained through their extensive branded consumer products experience.

 

    Established infrastructure:    We have the ability to leverage our sales force and strong relationships with our retail customers and distributors to help our brands gain distribution; leverage our operations team for improved demand planning and additional margin opportunities; and leverage our suppliers for purchasing and marketing resources for brand building.

Our Growth Strategies

We intend to continue growing net sales and profitability through the following growth strategies:

 

    Expand distribution through new customer wins:    We plan to capitalize on the strength of our SkinnyPop brand, positive market trends and our attractive retailer economics in order to penetrate new customers and increase the number of stores carrying our SkinnyPop and Paqui brands. Based on IRI data, management estimates that, as of December 31, 2014, SkinnyPop currently has less than 20% retail penetration within the more than 250,000 potential U.S. retail locations.

 

    Continue to increase shelf space with existing customers:    While SkinnyPop is highly attractive to retail customers given its premium price and attractive sales velocities, the average retail location carries only 2.3 of our UPCs per store compared to approximately 5.6 for our largest RTE popcorn competitors. We will continue to capitalize on our strong consumer appeal and attractive economics to retailers to increase UPCs per retailer and improve and increase our shelf space with both existing and new customers.

 

    Continue to grow awareness and expand household penetration:    Consumers who purchase SkinnyPop have a strong affinity for the brand as evidenced by our high level of repeat purchase. However, IRI data as of December 31, 2014 indicates that for that year, only 5.2% of households have purchased SkinnyPop compared to 22.7% of households purchasing the top 25 salty snack brands. We intend to increase our household penetration through marketing, including product sampling, social media tools and advertising, to educate consumers about our brands and benefits of our BFY snacks.

 

    Continue product innovation and brand extensions:    We intend to improve and strengthen our product offering by creating new and innovative flavors, packaging alternatives and additional products, while maintaining a focus on simple ingredients and BFY snacks that appeal to consumers.

 

    Leverage platform to expand in attractive snacking categories:    We intend to expand our business through the introduction of additional brands and products in the BFY snacking segment in order to generate incremental growth opportunities and synergies. We are actively looking to identify and evaluate new acquisition opportunities to complement our platform.

 

    Pursue international expansion opportunities:    According to Nielsen, North America represents approximately one-third of the global snacking market, and recent trends in North America, including a focus on BFY products, are becoming more prevalent globally. We believe our brands will resonate with consumers in markets outside North America.

 

 

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Risk Factors Summary

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

    Changes in consumer preferences and discretionary spending may have a material adverse effect on our brand loyalty, net sales, results of operations and financial condition.

 

    Consumers’ loyalty to our SkinnyPop brand may change due to factors beyond our control, which could have a material adverse effect on our business and operating results.

 

    We rely on sales to a limited number of distributors and retailers for the substantial majority of our net sales, and the loss of one or more such distributors or retailers may harm our business.

 

    Sales of a limited number of SkinnyPop products and flavors contributed all of our historical profitability and cash flow. A reduction in the sale of our SkinnyPop products would have a material adverse effect on our ability to remain profitable and achieve future growth.

 

    We currently depend exclusively on one third-party co-manufacturer with one location to manufacture all of our SkinnyPop products. The loss of this co-manufacturer or the inability of this co-manufacturer to fulfill our orders would adversely affect our ability to make timely deliveries of our product and would have a material adverse effect on our business.

 

    We do not have any contracts with our customers that require the purchase of a minimum amount of our products. The absence of such contracts could result in periods during which we must continue to pay costs and service indebtedness with reduced sales.

 

    Because we rely on a limited number of raw materials to create our products and a limited number of third-party suppliers to supply our raw materials, we may not be able to obtain raw materials on a timely basis, at cost effective pricing or in sufficient quantities to produce our products.

 

    Our SkinnyPop brand and reputation as a producer of BFY products may be diminished due to real or perceived quality or health issues with our products or a change in consumers’ perception of what is BFY itself, which could have an adverse effect on our business and operating results. BFY is an industry term and not defined by the Food and Drug Administration.

 

    We rely, in part, on our third-party co-manufacturer to maintain the quality of our products. The failure or inability of this co-manufacturer to comply with the specifications and requirements of our products could result in product recall and could adversely affect our reputation.

 

    Our gross profit and Adjusted EBITDA margins may be impacted by a variety of factors, including but not limited to variations in raw materials pricing, retail customer requirements and mix, sales velocities and required promotional support.

 

    Period-to-period comparisons may not be meaningful given the Sponsor Acquisition of SkinnyPop by TA Associates in 2014 and may not be representative of our future performance.

 

    A number of our products rely on independent certification that they are non-GMO, gluten-free or Kosher and the loss of any such certification could harm our business.

 

 

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Our Principal Stockholder

As of                    , 2015, investment funds affiliated with TA Associates owned approximately         % of our issued and outstanding common stock, after giving effect to the Corporate Reorganization, with the remainder owned by certain current and former directors and employees of Amplify Snack Brands, Inc. and its predecessor companies. Following this offering, TA Associates will beneficially own approximately    % of our issued and outstanding common stock (    % if the underwriters’ option to purchase additional shares is exercised in full). TA Associates will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult without the support of TA Associates. Furthermore, TA Associates may have interests that conflict with, or are different than, those of other stockholders.

Founded in 1968, TA Associates is one of the oldest and largest growth private equity firms in the world. TA Associates invests in growing private companies in exciting industries, with the goal of helping management teams build their businesses into great companies. With approximately $18 billion raised since inception and over four decades of experience, TA Associates offers its portfolio companies strategic guidance, global insight, strategic acquisition support, recruiting assistance and a significant network of contacts, in addition to sound financial backing.

We expect that more than 50% of our voting power will be held by investment funds and entities affiliated with TA Associates upon the consummation of this offering, and therefore we will be a “controlled company” as defined under the New York Stock Exchange, or NYSE, Listing Rules. We do not intend to take advantage of the “controlled company” exemption from certain of the corporate governance listing standards of the NYSE. See “Risk Factors—Risks Related to Ownership of Our Common Stock and this Offering” and “Principal and Selling Stockholders”. Additionally, we intend to enter into a stockholders agreement and a registration rights agreement with entities affiliated with TA Associates in connection with this offering. For more information regarding these agreements, see “Certain Relationships and Related Party Transactions—Stockholders Agreement” and “—Registration Rights Agreement”.

Corporate Information and Structure

We were originally organized as SkinnyPop Popcorn LLC, an Illinois limited liability company, in 2010. In July 2014, we completed the Sponsor Acquisition, pursuant to which SkinnyPop Popcorn LLC became a wholly-owned subsidiary of the Company and SkinnyPop Popcorn LLC was thereafter converted into a Delaware limited liability company.

The issuer in this offering, Amplify Snack Brands, Inc., is a Delaware corporation and is a wholly-owned subsidiary of Topco. Pursuant to the terms of the Corporate Reorganization that will be completed prior to the consummation of this offering, Topco will dissolve and in liquidation, will distribute all of the shares of capital stock of the Company to its members in accordance with the limited liability company agreement of Topco.

For more information on the Sponsor Acquisition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Sponsor Acquisition and Subsequent Financings”. For more information on the Corporate Reorganization and ownership of our common stock, see “Corporate Reorganization” and “Principal and Selling Stockholders”.

 

 

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Our principal executive offices are located at 500 West 5th Street, Suite 1350, Austin, Texas, 78701, telephone 512.600.9893. Our website address is www.amplifysnackbrands.com. Information contained on or that can be accessed through our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

    an option to present only two years of audited financial statements and only two years of related management’s discussion and analysis in the registration statement of which this prospectus is a part;

 

    an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting for so long as we qualify as an “emerging growth company”;

 

    an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements for so long as we qualify as an “emerging growth company”;

 

    reduced disclosure about our executive compensation arrangements for so long as we qualify as an “emerging growth company”; and

 

    exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or stockholder approval of any golden parachute arrangements for so long as we qualify as an “emerging growth company”.

We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer”, with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; or the last day of the fiscal year ending after the fifth anniversary of this public offering. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. See “Risk Factors—Risks Related to Ownership of Our Common Stock and this Offering” which describes that we are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

 

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THE OFFERING

 

Common stock offered by the selling stockholders

            shares.

 

Underwriters’ option to purchase additional shares from the selling stockholders

Up to             shares.

 

Common stock outstanding

75,000,000 shares.

 

Use of proceeds

The selling stockholders, which include certain of our directors and officers, will receive all the proceeds from the sale of shares in this offering. We will not receive any proceeds from the sale of shares in this offering.

 

Concentration of ownership

Upon the consummation of this offering, our executive officers and directors and stockholders holding more than 5% of our capital stock, and their affiliates, will beneficially own, in the aggregate, approximately     % of our outstanding shares of common stock (     % if the underwriters’ option to purchase additional shares is exercised in full).

 

Lock-up agreements

The selling stockholders and the officers and directors of the Company will be subject to customary lockup agreements with a duration of 180 days. See “Underwriting”.

 

Listing trading symbol

We have applied to list our common stock on the New York Stock Exchange under the symbol “BETR”.

 

Corporate Reorganization

The issuer in this offering, Amplify Snack Brands, Inc., is a Delaware corporation and is a wholly-owned subsidiary of Topco. Pursuant to the terms of the Corporate Reorganization that will be completed prior to the consummation of this offering, Topco will dissolve and in liquidation, will distribute all of the shares of capital stock of Amplify Snack Brands, Inc. to its members in accordance with the limited liability company agreement of Topco. See “Corporate Reorganization”.

 

Treatment of outstanding equity awards in Corporate Reorganization

In connection with the Corporate Reorganization, all of the outstanding equity awards (which are comprised of Class C units of Topco) that have been granted under the TA Topco 1, LLC 2014

 

 

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Equity Incentive Plan, or the 2014 Plan, will be converted into shares of common stock and restricted stock of Amplify Snack Brands, Inc. The portion of the outstanding Class C units that have vested as of the consummation of the Corporate Reorganization will be converted into shares of our common stock and the remaining portion of unvested outstanding Class C units will be converted into shares of our restricted stock. As a result, we will grant shares of common stock and restricted stock to current awardees under the 2015 Stock Option and Incentive Plan, or the 2015 Plan, in connection with the Corporate Reorganization. The shares of restricted stock will be subject to time-based vesting conditions, in accordance with the terms and conditions of the Class C units from which such shares are converted. See “Corporate Reorganization” for additional information.

 

Tax receivable agreements

In connection with the Corporate Reorganization, we will enter into a tax receivable agreement with the former holders of units of Topco. Pursuant to the tax receivable agreement, we will be required to make cash payments to the former holders of units of Topco equal to 85% of the tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of certain tax attributes that were generated when SkinnyPop was acquired by affiliates of TA Associates in July 2014. The amount of the cash payments that we may be required to make under the tax receivable agreement could be significant. Over the expected term of the tax receivable agreement, we estimate that the aggregate amount of these payments could be up to $95.5 million, assuming current tax rates remain unchanged. Payments will be made by us on an annual basis (assuming we earn sufficient taxable income in a given fiscal year so as to realize tax benefits) and generally within 60 days following the filing by us of our U.S. federal income tax return for the preceding fiscal year. We expect to fund our obligations under the tax receivable agreement with cash flow from operating activities. For more information, including an estimate of future payments under the tax receivable agreement, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

 

 

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The number of shares of common stock that will be outstanding after this offering is based on 75,000,000 shares outstanding as of                    , 2015, and includes:

 

                shares of our common stock that are issuable upon the conversion of             Class C units of Topco that were issued and outstanding and vested as of                     , 2015, which conversion will occur in connection with the Corporate Reorganization as described above; and

 

                shares of our restricted stock issuable upon the conversion of             Class C units of Topco that were issued and outstanding and unvested as of                     , 2015, which conversion will occur in connection with the Corporate Reorganization as described above.

The number of shares of common stock to be outstanding after this offering excludes:

 

 

                shares of common stock reserved for future issuance under our 2015 Plan, which will become effective upon the consummation of this offering, and which contains provisions that automatically increase its share reserve each year.

Except as otherwise indicated, all information in this prospectus assumes:

 

    a 75,000 for 1 forward split of our common stock that was effected on July 14, 2015.

 

    the completion of the Corporate Reorganization prior to the consummation of this offering, see “Corporate Reorganization”;

 

    the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the consummation of this offering; and

 

    no exercise by the underwriters of their option to purchase up to an additional             shares of common stock from the selling stockholders in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our historical consolidated financial and other data. We have derived the summary (1) statements of income data for the year ended December 31, 2013 and the period from January 1, 2014 to July 16, 2014 for the Predecessor (as discussed below) and for the period from July 17, 2014 to December 31, 2014 for the Successor (as discussed below) and (2) balance sheet data as of December 31, 2014 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary statement of income data for the year ended December 31, 2012, or the Summary 2012 Financial Data, for the Predecessor from our unaudited consolidated financial statements that are not included in this prospectus. We caution you not to place undue reliance on the Summary 2012 Financial Data. We have derived the summary (1) statements of income data for the three months ended March 31, 2014 for the Predecessor and the three months ended March 31, 2015 for the Successor and (2) balance sheet data as of March 31, 2015 from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the financial information set forth in those statements included elsewhere in this prospectus.

Our statements of income prior to the date of the Sponsor Acquisition, which are the years ended December 31, 2012 and December 31, 2013 and the period from January 1, 2014 to July 16, 2014, are presented as the results of the Predecessor, which includes the results of the then-existing SkinnyPop Popcorn LLC. The statements of income after the date of the Sponsor Acquisition, which are the periods from July 17, 2014 to December 31, 2014 and the three months ended March 31, 2015, are presented as the results of the Successor. The Predecessor and Successor financial data has been prepared on different accounting bases and therefore the sum of the data for the two reporting periods should not be used as an indicator of our full year performance.

After the consummation of the Sponsor Acquisition, the Company, along with its subsidiary SkinnyPop Popcorn LLC, are referred to collectively in this prospectus as the “Successor”. Prior to the consummation of Sponsor Acquisition, SkinnyPop Popcorn LLC is referred to in this prospectus as the “Predecessor”. We applied Financial Accounting Standards Board’s, or FASB, Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” on July 17, 2014, the closing date of the Sponsor Acquisition, and as a result, the merger consideration in the Sponsor Acquisition was allocated to the respective fair values of the assets acquired and liabilities assumed from the Predecessor. The fair value of identifiable intangibles was recorded at $265.3 million. For the period from July 17, 2014 to December 31, 2014, the Successor’s general and administrative expenses increased by $1.9 million as a result of the additional amortization that was recorded during the period. For the three months ended March 31, 2015, amortization expense was $1.0 million. As a result of the application of acquisition method accounting, the Successor balances and amounts presented in the audited consolidated financial statements and footnotes are not comparable with those of the Predecessor. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full year or any other period.

 

 

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The following summary consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Capitalization”, “Unaudited Pro Forma Condensed Consolidated Financial Information” and all of our consolidated financial statements and related notes included elsewhere in this prospectus.

The Pro Forma Year Ended December 31, 2014 (Unaudited) is derived from the “Unaudited Pro Forma Condensed Consolidated Financial Information” in this prospectus and is included for informational purposes only and does not purport to reflect the results of operations of Amplify Snack Brands, Inc. that would have occurred had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend occurred on January 1, 2014. The Pro Forma Year Ended December 31, 2014 (Unaudited) (as more fully described in the “Unaudited Pro Forma Condensed Consolidated Financial Information”) contains a variety of adjustments, assumptions and estimates, is subject to numerous other uncertainties and the assumptions and adjustments as described in the notes accompanying the unaudited pro forma condensed consolidated financial information included elsewhere in this prospectus and should not be relied upon as being indicative of our results of operations had the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend occurred on the dates assumed.

 

    Predecessor     Successor     Pro Forma     Predecessor     Successor  
(In thousands, except
share, per share and
percentage information)
  Year
ended
December 31,
2012
    Year
ended
December 31,
2013
    January 1,
2014 to
July 16,

2014
    July 17,
2014 to
December 31,
2014
    Year Ended
December 31,
2014
    Three months
ended
March 31,
2014
    Three months
ended
March 31,
2015
 

Statement of Income Data:

                     

Net sales

  $ 16,019      $ 55,710      $ 68,353      $ 64,004      $ 132,357      $   25,706      $   44,275   

Cost of goods sold

    7,047        23,054        29,429        28,724        58,153        11,378        19,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

    8,972        32,656        38,924        35,280        74,204        14,328        24,409   

Sales & marketing expenses

    1,495        5,938        5,661        6,977        12,638        1,945        3,618   

General & administrative expenses

    679        1,960        1,394        13,611       
27,238
  
   
669
 
   
9,032
  

Sponsor acquisition-related expenses(2)

                  1,288        2,215        510                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2,174        7,898        8,343        22,803       
40,386
  
   
2,614
  
    12,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    6,798        24,758        30,581        12,477        33,818        11,714        11,759   

Interest expense

                         4,253        12,884               2,955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

    6,798        24,758        30,581        8,224        20,934        11,714        8,804   

Income tax expense

                         3,486        7,326              
3,900
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 6,798      $ 24,758      $ 30,581      $ 4,738      $ 13,608      $ 11,714      $ 4,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per unit/share(3)

  $   16,995.01      $   61,895.01     $   76,452.74     $   .06     $   .18      $ 29,285.11      $ .07   

Basic and diluted weighted average units/shares outstanding(3)

    400        400       400       75,000,000       75,000,000        400        75,000,000   

Cash Flow Data:

                     

Cash from operating activities

  $ 6,386      $ 22,469      $ 26,339      $ 12,719        N/A      $ 11,640      $ 14,142   

Cash used in investing activities

    (16     (456     (278     (294,630     N/A        (82     (370

Cash from (used in) financing activities

    (5,848     (19,362     (28,533     287,526        N/A        (9,687     (2,500

Other Financial Information: (Non-GAAP):

                     

Adjusted EBITDA(4)

  $ 6,807      $ 24,805      $ 31,947      $ 26,592      $ 58,539      $ 11,748      $ 19,231   

Adjusted EBITDA margin

    42.5     44.5     46.7     41.5     44.2     45.7     43.4

Operating cash flow less capital expenditures(5)

  $ 6,370      $ 22,013      $ 26,061      $ 12,541        N/A      $ 11,558      $ 13,772   

 

 

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(1) Our gross profit margin for each of the periods presented was 56.0%, 58.6%, 56.9%, 55.1%, 56.1%, 55.7% and 55.1%, respectively.
(2) In the period from January 1 to July 16, 2014 and the period from July 17 to December 31, 2014, the Sponsor Acquisition-related expenses reflect the Sponsor Acquisition.
(3) See Note 2 and Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted earnings per unit/share and the basic and diluted weighted average number of units/shares outstanding used in the computation of the per unit/share amounts.
(4) Adjusted EBITDA is a non-GAAP financial performance measure. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(5) Operating cash flow less capital expenditures is a non-GAAP financial measure. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     At March 31, 2015
(In thousands)    Actual      As
Adjusted(1)
   As Further
Adjusted(2)

Balance Sheet Data:

        

Cash and cash equivalents

   $ 16,887         

Working capital(3)

     12,185         

Property and equipment—net

     1,029         

Other assets

     312,447         

Total assets

     350,491         

Total indebtedness(4)

     209,394         

Total stockholders’/members’ equity

     126,860         

 

  (1) The as adjusted column in the balance sheet data table above reflects the Corporate Reorganization, which will occur immediately prior to the consummation of this offering, as if such Corporate Reorganization had occurred on March 31, 2015.
  (2) The as further adjusted column in the balance sheet data table above gives effect to the adjustments set forth above and the sale of             shares of common stock by the selling stockholders in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the payment of the Performance Bonus Payments and the estimated offering expenses payable by us.
  (3) Working capital is the sum of current assets less current liabilities.
  (4) Total indebtedness consists of the accrued amounts due in connection with the Founder Contingent Compensation, the outstanding principal amount of the term loan under our credit agreement on an actual basis and as further adjusted to give effect to the May 2015 Special Dividend and other current liabilities.

Non-GAAP Financial Measures

We include Adjusted EBITDA and operating cash flow less capital expenditures, which we refer to as the non-GAAP metrics, in this prospectus because they are important measures upon which our management assesses our operating performance. We use Adjusted EBITDA as a key performance metric because we believe it facilitates operating performance comparisons from period-to-period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and the impact of equity-based compensation expense. In addition, our credit agreement contains financial maintenance covenants, including a total funded debt ratio and a minimum fixed charge ratio, that use Adjusted EBITDA as one of their inputs. We include operating cash flow less capital expenditures in this prospectus because we believe capital expenditures are essential to maintaining our operational capabilities and are a recurring and necessary use of cash. We view operating cash flow less capital expenditures as a key performance metric because it reflects changes in, or cash requirements for, our working capital needs, and is useful in evaluating the amount of cash available for discretionary investments. Because such non-GAAP metrics facilitate internal comparisons of our historical operating performance on a

 

 

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more consistent basis, we also use them for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe the non-GAAP metrics and similar measures are widely used by investors, securities analysts, ratings agencies and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

Our use of non-GAAP metrics has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    Adjusted EBITDA metric does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;

 

    Adjusted EBITDA metrics may not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

    Operating cash flow less capital expenditures does not reflect other non-discretionary expenditures such as mandatory debt service requirements or acquisition consideration paid that could impact residual cash flow available for discretionary expenditures; and

 

    Other companies, including companies in our industry, may calculate Adjusted EBITDA and other non-GAAP measures differently, which reduces their usefulness as a comparative measure.

In evaluating non-GAAP metrics, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of any non-GAAP metrics should not be construed as an inference that our future results will be unaffected by these expenses or any other expenses, whether or not they are unusual or non-recurring items. When evaluating our performance, you should consider the non-GAAP metrics alongside other financial performance measures, including our net income and other GAAP results.

Adjusted EBITDA

Adjusted EBITDA is a financial performance measure that is not calculated in accordance with GAAP. We define Adjusted EBITDA as net income adjusted to exclude, when applicable, interest expense, income tax expense, depreciation, amortization of intangible assets, inventory fair value adjustment, equity-based compensation expenses, Founder Contingent Compensation expense, expenses related to the Sponsor Acquisition, and other non-operational items. Below, we have provided a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we calculate the measure.

 

 

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The following tables present a reconciliation of Adjusted EBITDA to our net income, the most directly comparable GAAP measure, for each of the periods indicated:

 

    Predecessor     Successor  
    Three months
ended March 31,

2014
    Three months
ended March 31,
2015
 
(In thousands)            

Net income

  $ 11,714      $ 4,904   

Non-GAAP adjustments:

     

Interest expense

           2,955   

Income tax expense

           3,900   

Depreciation

    34        47   

Amortization of intangible assets

           1,042   

Equity-based compensation expenses

           788   

Founder Contingent Compensation(1)

           4,602   

Executive recruitment(2)

           308   

Other professional services(3)

           685   
 

 

 

   

 

 

 

Adjusted EBITDA

  $ 11,748      $ 19,231   
 

 

 

   

 

 

 
(1) Represents compensation expense associated with the Founder Contingent Compensation. See Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information.
(2) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires, and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our financial performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Indebtedness” for more information.
(3) Represents transaction costs associated with legal and accounting services.

 

     Predecessor   Successor     Pro Forma(9)  
(In thousands)    Year ended
December 31,
2012
     Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
         July 17,
2014 to
December 31,
2014
    Year ended
December 31,
2014
 

Net income

   $   6,798       $   24,758      $   30,581            $  4,738        $  13,608   

Non-GAAP adjustments:

               

Interest expense(1)

                               4,253        12,884   

Income tax expense(2)

                               3,486        7,326   

Depreciation

     9         47        78            99        177   

Amortization of intangible assets(3)

                               1,904        4,166   

Inventory fair value adjustment(4)

                               401        401   

Equity-based compensation expenses

                               235        235   

Founder Contingent Compensation(5)

                               8,437        18,408   

Sponsor Acquisition-related expenses(6)

                    1,288            2,215        510   

Recapitalization expenses(7)

                               178        178   

Executive recruitment(8)

                               646        646   
  

 

 

    

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

   $ 6,807       $ 24,805      $ 31,947            $  26,592        $  58,539   
  

 

 

    

 

 

   

 

 

       

 

 

   

 

 

 

 

(1) Represents interest expense of $4.3 million recorded in Successor period from July 17, 2014 to December 31, 2014, and $12.9 million recorded in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(2) Represents income tax expense of $3.5 million recorded in Successor period from July 17, 2014 to December 31, 2014, and $7.3 million recorded in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.

 

 

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(3) Represents amortization of intangible assets of $1.9 million recorded in Successor period from July 17, 2014 to December 31, 2014, and $4.2 million reflected as a component of general & administrative expenses in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(4) This adjustment reflects the elimination of the $0.4 million increase in cost of goods sold related to the Sponsor Acquisition.
(5) Represents compensation expense associated with the Founder Contingent Compensation of $8.4 million recorded in Successor period from July 17, 2014 to December 31, 2014 (see Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information), and $18.4 million reflected as a component of general & administrative expenses in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(6) Represents the following:

 

    Predecessor         Successor     Pro Forma  
(In thousands)   Year ended
December 31,
2012
    Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
         July 17, 2014
to
December 31,
2014
    Year ended
December 31,
2014
 

Predecessor transaction costs(i)

  $   —      $   —      $ 510          $      $ 510   

Transaction bonuses(ii)

                  778                     

Sponsor transaction costs(iii)

                             2,215          
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total

  $      $      $   1,288          $   2,215      $   510   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  i. Represents a supplemental transaction payment and related expenses of $0.5 million paid to Precision Capital, an advisor to the Predecessor, in connection with the Sponsor Acquisition, in recognition of the services that were provided by Precision Capital Group, LLC to the Predecessor. Although the Predecessor was not contractually obligated to pay such amounts, we believe that such payments would not have been made by the Predecessor to Precision Capital Group, LLC but for the consummation of the Sponsor Acquisition. In addition, we are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
  ii. Represents transaction bonuses paid to employees in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.
  iii. Represents legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.

 

(7) Represents the expenses we incurred in connection with the December 2014 Special Dividend. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the credit agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
(8) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires, and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our operating performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
(9) Represents Pro Forma Year Ended December 31, 2014 (Unaudited) net income, as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, adjusted to exclude, when appropriate, interest expense, income tax expense, depreciation, amortization of intangible assets, Founder Contingent Compensation expense, inventory fair value adjustment, equity-based compensation expenses, expenses related to the Sponsor Acquisition and other non-operational items.

 

 

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Our Credit Agreement contains financial maintenance covenants, including a total funded debt ratio and a minimum fixed charge ratio, that use Adjusted EBITDA as one of their inputs. Accordingly, we have provided a reconciliation of Adjusted EBITDA to our cash from operating activities, the most directly comparable liquidity measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to cash from operating activities or any other measure of liquidity calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner we calculate the measure. For more information on our Credit Agreement, its material terms, including the financial maintenance covenants, the amounts or limits required for compliance with the covenants and the effects of non-compliance with these covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness”.

The following tables present a reconciliation of Adjusted EBITDA to our cash from operating activities for each of the periods indicated:

 

     Predecessor    

 

  Successor  
(In thousands)    Three months
ended
March 31, 2014
   

 

  Three months
ended
March 31, 2015
 

Cash from operating activities

   $ 11,640          $ 14,142   

Reconciling items:

        

Interest expense

                2,955   

Income tax expense

                3,900   

Deferred income taxes(1)

                247   

Amortization of deferred financing costs(2)

                (185

Net change in operating assets and liabilities, net of effects of acquisition

     108            (2,821

Executive recruitment(3)

                308   

Other professional services(4)

                685   
  

 

 

   

 

 

 

 

 

Adjusted EBITDA

   $ 11,748          $ 19,231   
  

 

 

   

 

 

 

 

 
(1) Represents a non-cash component of income tax expense above.
(2) Represents a non-cash component of interest expense above.
(3) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our financial performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.

 

 

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(4) Represents transaction costs associated with legal and accounting services.

 

     Predecessor    

 

  Successor  
(In thousands)    Year ended
December 31,
2013
     January 1, 2014
to July 16, 2014
   

 

  July 17, 2014 to
December 31, 2014
 

Cash from operating activities

   $ 22,469       $ 26,339          $ 12,719   

Reconciling items:

           

Interest expense

                        4,253   

Income tax expense

                        3,486   

Deferred income taxes(1)

                        3,126   

Amortization of deferred financing costs(2)

                        (292

Net change in operating assets and liabilities, net of effects of acquisition

     2,336         4,320            (1,640

Inventory fair value adjustment

                        401   

Founder Contingent Compensation(3)

                        1,500   

Sponsor Acquisition-related expenses(4)

             1,288            2,215   

Recapitalization expenses(5)

                        178   

Executive recruitment(6)

                        646   
  

 

 

    

 

 

   

 

 

 

 

 

Adjusted EBITDA

   $ 24,805       $ 31,947          $ 26,592   
  

 

 

    

 

 

   

 

 

 

 

 

 

(1) Represents a non-cash component of income tax expense above.
(2) Represents a non-cash component of interest expense above.
(3) This adjustment reflects the prepayment of Founder Contingent Compensation. See Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information.
(4) Represents the following:

 

    Predecessor         Successor  
(In thousands)   Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
         July 17, 2014 to
December 31,
2014
 

Predecessor transaction costs(i)

  $     —      $ 510          $   

Transaction bonuses(ii)

           778              

Sponsor transaction costs(iii)

                      2,215   
 

 

 

   

 

 

       

 

 

 

Total

  $  —      $  1,288          $  2,215   
 

 

 

   

 

 

       

 

 

 

 

  i. Represents a supplemental transaction payment and related expenses of $0.5 million paid to Precision Capital, an advisor to the Predecessor, in connection with the Sponsor Acquisition, in recognition of the services that were provided by Precision Capital Group, LLC to the Predecessor. Although the Predecessor was not contractually obligated to pay such amounts, we believe that such payments would not have been made by the Predecessor to Precision Capital Group, LLC but for the consummation of the Sponsor Acquisition. In addition, we are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
  ii. Represents transaction bonuses paid to employees in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.
  iii. Represents legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.

 

(5) Represents the expenses we incurred in connection with the December 2014 Special Dividend. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.

 

 

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(6) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our operating performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.

Operating Cash Flow Less Capital Expenditures

Operating cash flow less capital expenditures is a financial measure that is not calculated in accordance with GAAP. We define “operating cash flow less capital expenditures” as cash from operating activities, which is the most comparable GAAP financial measure, reduced by capital expenditures. Below, we have provided a reconciliation of operating cash flow less capital expenditures to our cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP. Operating cash flow less capital expenditures should not be considered as an alternative to cash from operating activities or any other measure of financial performance calculated and presented in accordance with GAAP. Our operating cash flow less capital expenditures may not be comparable to similarly titled measures of other organizations because other organizations may not calculate operating cash flow less capital expenditures in the same manner as we calculate the measure. Since capital spending is essential to maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider capital spending when evaluating our cash from operating activities. We view operating cash flow less capital expenditures as an important measure because it reflects changes in, or cash requirements for, our working capital needs, and is one factor in evaluating the amount of cash available for discretionary investments.

The following tables present a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable GAAP measure, for each of the periods indicated:

 

     Predecessor          Successor  
     Three months
ended March 31,
2014
          Three months
ended March 31,
2015
 

(In thousands)

         

Cash from operating activities

   $   11,640           $   14,142   

Capital expenditures

     (82          (370
  

 

 

        

 

 

 

Operating cash flow less capital expenditures

   $ 11,558           $ 13,772   
  

 

 

      

 

 

 

 

     Predecessor          Successor  
(In thousands)    Year ended
December 31,
2012
    Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
          July 17, 2014
to
December 31,
2014
 

Cash from operating activities

   $ 6,386      $ 22,469      $ 26,339           $ 12,719   

Capital expenditures

     (16     (456     (278          (178
  

 

 

   

 

 

   

 

 

        

 

 

 

Operating cash flow less capital expenditures

   $   6,370      $   22,013      $   26,061           $   12,541   
  

 

 

   

 

 

   

 

 

        

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be harmed. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

Risks Related to Our Products

We rely on sales to a limited number of distributors and retailers for the substantial majority of our net sales, and the loss of one or more such distributors or retailers may harm our business.

A substantial majority of our sales are generated from a limited number of distributors and retailers, which we refer to as customers. For the Pro Forma Year Ended December 31, 2014 (Unaudited), sales to our two largest customers, Costco and Sam’s Club, represented approximately 34.7% and 20.9% of our net sales, respectively. In addition, these two customers accounted for approximately 53.2% of our accounts receivable as of December 31, 2014. Although the composition of our significant customers may vary from period to period, we expect that most of our net sales and accounts receivable will continue to come from a relatively small number of customers for the foreseeable future. We do not have commitments or minimum volumes that ensure future sales of our products to any of our customers. Consequently, our financial results may fluctuate significantly from period to period based on the actions of one or more significant customers. A customer may take actions that affect us for reasons that we cannot always anticipate or control, such as their financial condition, changes in their business strategy or operations, the introduction of competing products or the perceived quality of our products. In addition, despite operating in different channels, our retailers sometimes compete for the same consumers. As a result of actual or perceived conflicts resulting from this competition, customers may take actions that negatively affect us. The loss of, or a reduction in sales or anticipated sales to, one or more of our most significant distributors or retailers may have a material adverse effect on our business, results of operation and financial condition.

Further, through our brand SkinnyPop, we have relatively new relationships with some of the largest U.S. retail chains such as Walmart, Target and CVS Pharmacy, and these customers may find, as they gain more experience selling our products, that their respective abilities to sell SkinnyPop products does not meet their expectations or they may not continue to place orders for our products.

Sales of a limited number of SkinnyPop products and flavors contributed all of our historical profitability and cash flow. A reduction in the sale of our SkinnyPop products would have a material adverse effect on our ability to remain profitable and achieve future growth.

All of our net sales for Pro Forma Year Ended December 31, 2014 (Unaudited) resulted from sales of our SkinnyPop products. Additionally, during this time period, approximately 87% of our SkinnyPop branded sales came from a variety of stock-keeping-units, or SKUs, under our Original flavor. All of our secondary flavors, White Cheddar Flavor, Naturally Sweet, Black Pepper and a rotational Hatch Chile flavored SKU, were first introduced in late 2013 or 2014 and represent a relatively small portion of our sales. We cannot be certain that we will be able to continue to commercialize or expand distribution of our existing flavors of popcorn products or that any of our future food products and flavors will be accepted in their markets. Any inability on our part to stay current with food and consumer trends through new products could have a material adverse effect on our business performance. Because sales of our SkinnyPop products make up all of our historical profitability and cash flows, reductions in sales of these products will have an adverse effect on our profitability and ability to generate cash to fund our product development, research and development efforts or potential acquisitions.

 

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The following factors, among others, could affect continued market acceptance and profitability of SkinnyPop products:

 

    the introduction of competitive products;

 

    changes in consumer preferences among RTE popcorn and other snack food products;

 

    changes in consumer eating and snacking habits, including trends away from certain categories, including major allergen-free, gluten-free and non-GMO products;

 

    changes in awareness of the social effects of farming and food production;

 

    changes in consumer perception about trendy snack products;

 

    changes in consumer perception regarding the healthfulness or BFY nature of our products;

 

    the level and effectiveness of our sales and marketing efforts;

 

    any unfavorable publicity regarding RTE popcorn products or similar products;

 

    any unfavorable publicity regarding the SkinnyPop brand;

 

    litigation or threats of litigation with respect to our products;

 

    the price of our products relative to other competing products;

 

    price increases resulting from rising commodity costs;

 

    any changes in government policies and practices related to our products, labeling and markets;

 

    regulatory developments affecting the manufacturing, labeling, marketing or use of our products;

 

    new science or research that disputes the healthfulness of our products; and

 

    adverse decisions or rulings limiting our ability to promote the benefits of popcorn products.

Adverse developments with respect to the sale of SkinnyPop products would significantly reduce our net sales and profitability and have a material adverse effect on our ability to maintain profitability and achieve our business plan.

We currently depend exclusively on one third-party co-manufacturer with one location to manufacture all of our SkinnyPop products. The loss of this co-manufacturer or the inability of this co-manufacturer to fulfill our orders would adversely affect our ability to make timely deliveries of our product and would have a material adverse effect on our business.

Currently, all of our SkinnyPop products are produced solely by Assemblers Food Packaging LLC, or Assemblers, which maintains only one facility for all of its customers. Our agreement with Assemblers provides that we will order a minimum amount of products from Assemblers each year during the agreement’s term. If we do not meet the minimum order amount, we must pay a penalty fee if Assemblers is no longer our exclusive manufacturer. The agreement may be terminated by us upon written notice and the payment of a termination fee. There can be no assurance that Assemblers’ capacity will be sufficient to fulfill our orders, and any supply shortfall could materially and adversely affect our business, results of operations and financial condition. Additionally, we face the risk of disruption to our production and sales processes if Assemblers is unable or unwilling to produce sufficient quantities of our products in a timely manner or renew contracts with us or suffers a natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic event. In addition, we are responsible for any increase in Assemblers’ manufacturing costs and may not be able to pass these costs on to our customers. In order to continue manufacturing our products in the event of a disruption to our production and sales processes, we would have to identify and qualify new manufacturers, including obtaining third party certifications for claims, which we may be unable to do in a timely manner, if at all. From time to time, we need to seek new manufacturers or enter into new arrangements with our existing manufacturer. However, only a limited number of manufacturers may have the ability to produce our products at the volumes we need, and it could take a significant

 

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period of time to locate and qualify such alternative production sources. Moreover, it may be difficult or expensive to find manufacturers to produce small volumes of our new products. Manufacturers may impose minimum order requirements and any failure on our part to meet these requirements could increase our costs. There can also be no assurance that we would be able to identify and qualify new manufacturers in a timely manner or that such manufacturers could allocate sufficient capacity in order to meet our requirements, which could materially adversely affect our ability to make timely deliveries of product. In addition, we may be unable to negotiate pricing or other terms with our existing or new manufacturers as favorable as what we currently enjoy. Furthermore, there is no guarantee a new third-party manufacturing partner could accurately replicate the production process and taste profile of our existing products.

Given our third-party co-manufacturer operates from a single site, shipments to and from the warehouses where our products are stored could be delayed for a variety of reasons, including weather conditions, strikes and shipping delays. Any significant delay in the shipments of product would have a material adverse effect on our business, results of operations and financial condition and could cause our sales and profitability to fluctuate during a particular period or periods.

We rely, in part, on our third-party co-manufacturer to maintain the quality of our products. The failure or inability of this co-manufacturer to comply with the specifications and requirements of our products could result in product recall and could adversely affect our reputation.

Our third-party co-manufacturer is required to maintain the quality of our products and to comply with our product specifications and requirements for certain certifications. Our third-party co-manufacturer is also required to comply with all federal, state and local laws with respect to food safety. Additionally, certain retail customers, such as Costco, require our third-party co-manufacturer to maintain minimum independent certifications, such as SQF Level 2 Certification or Hazard Analysis and Critical Control Points, or HACCP, certification. However, our third-party co-manufacturer may not continue to produce products that are consistent with our standards or that are in compliance with applicable laws, and we cannot guarantee that we will be able to identify instances in which our third-party co-manufacturer fails to comply with our standards or applicable laws. Any such failure, particularly if it is not identified by us, could harm our brand and reputation as well as our customer relationships. We would have these same issues with any new co-manufacturer, and they may be exacerbated due to the newness of the relationship. The failure of any manufacturer to produce products that conform to our standards could materially and adversely affect our reputation in the marketplace and result in product recalls, product liability claims and severe economic loss.

We do not have any contracts with our customers that require the purchase of a minimum amount of our products. The absence of such contracts could result in periods during which we must continue to pay costs and service indebtedness with reduced sales.

Our customers do not provide us with firm, long-term or short-term volume purchase commitments. As a result of the absence of such contracts, we could have periods during which we have no or limited orders for our products, but we will continue to have to pay our costs, including those to maintain our work force and service our indebtedness with reduced sales. We cannot assure you that we will be able to timely find new customers to supplement periods where we experience no or limited purchase orders or that we can recover fixed costs as a result of experiencing reduced purchase orders. Periods of no or limited purchase orders for our products could have a material adverse effect on our net income, cause us to incur losses or result in violations of the covenants contained in our Credit Agreement (as defined below).

Conversely, we may experience unanticipated increased orders for our products from these customers that can create supply chain problems and may result in orders we may be unable to meet. Unanticipated fluctuations in product requirements by our customers could result in fluctuations in our results from quarter to quarter.

 

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Because we rely on a limited number of raw materials to create our products and a limited number of third-party suppliers to supply our raw materials, we may not be able to obtain raw materials on a timely basis, at cost effective pricing or in sufficient quantities to produce our products.

We use a specific type of popcorn kernel of limited production, sunflower oil, a variety of seasonings and salt to make our popcorn products. There may be a limited market supply of any of our core ingredients, including in particular the specific popcorn kernel we use. In addition to the market limitations of the raw materials used to make our product, we rely on a limited number of third-party suppliers to supply us with such raw materials. Although we have multiple suppliers for our popcorn seasoning, we have a single supplier for the sunflower oil and only two key suppliers for the popcorn kernels used in our products. As of December 31, 2014, two vendors accounted for approximately 74% of our accounts payable. During the year ended December 31, 2014, all of our products were made using sunflower oil, popcorn kernels and salt as their bases. Any ordering error on our part or disruption in the supply of sunflower oil, popcorn kernels in general, or our specific type of popcorn kernel, could have a material adverse effect on our business, particularly our profitability and our margins. Our financial performance depends in large part on our ability to arrange for the purchase of raw materials in sufficient quantities at competitive prices. We are not assured of continued supply, pricing or exclusive access to raw materials from these sources. Any of our suppliers could discontinue or seek to alter their relationships with us. Additionally, we may be adversely affected if there are increases in demand for the specific raw materials we use in our products, there is a reduction in overall supply of our required raw materials or our suppliers raise their prices, stop selling to us or our third-party manufacturers or enter into arrangements that impair their abilities to provide us or our third-party manufacturers with raw materials.

Events that adversely affect our suppliers could impair our ability to obtain raw material inventory in the quantities that we desire. Such events include problems with our suppliers’ businesses, finances, labor relations, ability to import raw materials, costs, production, insurance, reputation and weather conditions during growing, harvesting or shipping, including flood, drought, frost and earthquakes, as well as natural or man-made disasters or other catastrophic occurrences.

If we experience significant increased demand for our products, or need to replace an existing supplier, there can be no assurance that additional supplies of raw materials will be available when required on acceptable terms, or at all, or that any supplier would allocate sufficient capacity to us in order to meet our requirements, fill our orders in a timely manner or meet our strict quality standards. Even if our existing suppliers are able to expand their capacities to meet our needs or we are able to find new sources of raw materials, we may encounter delays in production, inconsistencies in quality and added costs. We are not able to pass increased costs onto the customer immediately, if at all, which may decrease or eliminate our profitability in any period. Any delays or interruption in, or increased costs of, our supply of raw materials could have an adverse effect on our ability to meet consumer demand for our products and result in lower net sales and profitability both in the short and long term.

As a food production company, all of our products must be compliant with regulations by the Food and Drug Administration, or FDA, and in addition a number of our products rely on independent certification that they are non-GMO, gluten-free or Kosher. Any non-compliance with the FDA or the loss of any such certification could harm our business.

We must comply with various FDA rules and regulations, including those regarding product manufacturing, food safety, required testing and appropriate labeling of our products. It is possible that regulations by the FDA and its interpretation thereof may change over time. As such, there is a risk that our products could become non-compliant with the FDA’s regulations and any such non-compliance could harm our business. In addition, we rely on independent certification of our

 

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non-GMO, gluten-free and Kosher products and must comply with the requirements of independent organizations or certification authorities in order to label our products as such. Currently, the FDA does not directly regulate the labeling of Kosher or non-GMO products as such. The FDA has defined the term “gluten-free” and we must comply with the FDA’s definition if we include this label on our products. Our products could lose their non-GMO and gluten-free certifications if our raw material suppliers lose their product certifications for those specified claims. We could also lose our Kosher product certification if a contract manufacturing plant is found to be in violation of required manufacturing or cleaning processes. The loss of any of these independent certifications, including for reasons outside of our control, could harm our business.

We must expend resources to create consumer awareness, build brand loyalty and generate interest in our products. In addition, competitors may offer significant price reductions, and we cannot ensure that consumers will find our products suitably differentiated from products of our competitors.

Our ability to develop, market and sell new and existing products at an appropriate price may be hampered by unfavorable terms of sale imposed by our customers, the inability to obtain shelf space or preferable shelf placement for our products at a reasonable cost or, once placed, the failure to have an attractive price set for our products. Competitors, many of whom have greater resources than us, vie for the same shelf placement and may offer incentives to the retailers that we cannot match. In addition, unattractive shelf placement and pricing may put us at a disadvantage to our competitors.

Even if we do obtain shelf space or preferable shelf placement, our new and existing products may fail to achieve the sales expectations set by our retailers, potentially causing these retailers to remove our products from the shelf. Additionally, an increase in the number and quality of private-label products in the product categories in which we compete could create more pressure for shelf space and placement for branded products within each such category, which could adversely affect our sales.

To obtain and keep shelf placement for our products, we may need to increase our marketing and advertising spending in order to create consumer awareness, protect and grow our existing market share or to promote new products, which could impact our operating results. In addition, we consistently evaluate our product lines to determine whether or not to discontinue certain products. Discontinuing product lines may increase our profitability but could reduce our sales and hurt our brand, and a reduction in sales of certain products could result in a reduction in sales of other products. We cannot assure you that the discontinuation of product lines will not have an adverse effect on our business.

Ingredient and packaging costs are volatile and may rise significantly, which may negatively impact the profitability of our business.

We purchase large quantities of raw materials, including ingredients such as popcorn kernels, sunflower oil, seasonings and salt. In addition, we purchase and use significant quantities of film and corrugate to package our products. In recent periods, the prices of yellow corn (which impacts the price of popcorn kernels), sunflower oil and fuel have been priced below their respective historical five-year averages and we have realized some benefits from these low prices in the form of reduced cost of goods sold and resulting higher gross profit margins. Costs of ingredients and packaging are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, weather conditions, natural or man-made disasters, consumer demand and changes in governmental trade and agricultural programs. In particular, the availability, quality and cost of our specific type of popcorn kernels and sunflower oil are subject to risks inherent to farming, such as crop size, quality and yield fluctuations caused by poor weather and growing conditions, pest and disease problems and other factors beyond our control. Continued volatility in the prices of raw materials and other supplies we purchase could increase our cost of goods sold and reduce our profitability. We

 

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currently do not secure raw materials capacity and pricing for more than a year forward, nor do we hedge pricing or availability of any raw materials. As such, any material upward movement in raw materials pricing could negatively impact our margins, if we are not able to pass these costs on to our customers, or sales if we are forced to increase our prices. Additionally, should raw materials prices move meaningfully lower there is no guarantee our customers will not ask us to pass some or all of our savings on to them in the form of price reductions. If we are not successful in managing our ingredient and packaging costs, if we are unable to increase our prices to cover increased costs or if such price increases reduce our sales volumes, then such increases in costs will adversely affect our business, results of operations and financial condition.

Certain of our raw material contracts have minimum purchase commitments that could require us to continue to purchase raw materials even if our sales have declined. Future raw material prices may be impacted by new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, natural disasters, volatility in the price of crude oil and related petrochemical products and changes in exchange rates.

Our future business, results of operations and financial condition may be adversely affected by reduced availability of our core ingredients.

Our ability to ensure a continuing supply of our core ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow crops, the vagaries of these farming businesses (including poor harvests), changes in national and world economic conditions and our ability to forecast our ingredient requirements. The popcorn kernels and other ingredients used in our products are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of our core ingredients. In addition, we compete with other food producers in the procurement of ingredients, such as sunflower oil, which are often less plentiful in the open market than conventional ingredients. If supplies of our core ingredients are reduced or there is greater demand for such ingredients from us and others, we may not be able to obtain sufficient supply on favorable terms, or at all, which could impact our ability to supply products to distributors and retailers and may adversely affect our business, results of operations and financial condition.

Failure by our transportation providers to deliver our products on time or at all could result in lost sales.

We currently rely upon third-party transportation providers for a significant portion of our product shipments. Our utilization of delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact the ability of providers to provide delivery services that adequately meet our shipping needs. We may, from time to time, change third-party transportation providers, and we could therefore face logistical difficulties that could adversely affect deliveries. In addition, we could incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently use, which in turn would increase our costs and thereby adversely affect our operating results.

Severe weather conditions and natural disasters such as fires, floods, droughts, hurricanes, earthquakes and tornados can affect crop supplies, manufacturing facilities and distribution activities, and negatively impact the operating results of our business.

Severe weather conditions and natural disasters, such as fires, floods, droughts, frosts, hurricanes, earthquakes, tornados, insect infestations and plant disease, may affect the supply of raw materials on which we depend to make food products, or may curtail or prevent the manufacturing or

 

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distribution of food products by us. Competing manufacturers might be affected differently by weather conditions and natural disasters, depending on the location of their sources of supplies and manufacturing or distribution facilities. If supplies of raw materials available to us are reduced, we may not be able to find enough supplemental supply sources on favorable terms, which could adversely affect our business and operating results.

Risks Related to Our Brands

Changes in consumer preferences and discretionary spending may have a material adverse effect on our brand loyalty, net sales, results of operations and financial condition.

We compete in a market that relies on innovation and evolving consumer preferences. We focus on products that are or are perceived to be BFY, an industry term not defined by the Food and Drug Administration. However, the food processing industry in general, and the snacking and dietary-need specific industries (including the Kosher, major allergen-free and gluten-free industries) in particular, are subject to changing consumer trends, demands and preferences. Therefore, products once considered BFY may over time become disfavored by consumers or no longer perceived as BFY. Trends within the food industry change often and our failure to anticipate, identify or react to changes in these trends could, among other things, lead to reduced demand and price reductions, and could have a material adverse effect on our business, results of operations and financial condition. Factors that may affect consumer perception of BFY products include dietary trends and attention to different nutritional aspects of foods, concerns regarding the health effects of specific ingredients and nutrients, trends away from gluten-free or non-GMO products, trends away from specific ingredients in products and increasing awareness of the environmental and social effects of product production. Consumer perceptions of the nutritional profile of gluten-free and non-GMO products may shift, and consumers may perceive food products with fewer carbohydrates, higher levels of protein, lower levels of fat and additional fiber as BFY. Our success depends, in part, on our ability to anticipate the tastes and dietary habits of consumers and to offer products that appeal to their needs and preferences on a timely and affordable basis. A change in consumer discretionary spending, due to economic downturn or other reasons may have a material effect on sales. If consumer demand for our products declines, our sales and business would be negatively affected.

We may not be able to compete successfully in the highly competitive snack food industry.

The market for snack foods is large and intensely competitive. Competitive factors in the snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, innovation of on-trend snacks, variety of snacks offered, nutritional content, product packaging and package design. We compete in that market principally on the basis of product taste and quality, but also brand recognition and loyalty, marketing, advertising, price and the ability to satisfy specific consumer dietary needs (including Kosher, major allergen-free and gluten-free needs) against numerous multinational, regional and local companies. Substantial advertising and promotional expenditures may be required to maintain or improve a brand’s market position or to introduce a new product to the market, and participants in our industry are engaging with new media, including consumer outreach through social media and web-based channels. Our ability to compete may be also dependent on whether our products are placed in the BFY snack aisle or in the traditional snack food aisle, or both. An increasing focus on BFY products in the marketplace will likely increase these competitive pressures within the category in future periods.

A substantial majority of sales in the snack food industry is concentrated among large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., The Kellogg Company, ConAgra Foods, Inc., Diamond Foods, Inc., General Mills, Inc., Snyder’s-Lance, Inc. and others that have substantially greater financial and other resources than us and sell brands that are more widely recognized than ours. These and numerous other companies that are actual or potential competitors of ours, many of which have greater financial and other resources (including more employees and more

 

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extensive facilities) than us, offer products similar to ours or a wider range of products than we offer. Local or regional markets often have significant smaller competitors, many of whom offer products similar to ours and may have unique ties to regional or national retail chains. Additionally, many of our retail customers, such as Costco and Whole Foods, have historically emphasized private-label offerings across categories as a key part of their strategy and these customers may create or expand competitive RTE popcorn and tortilla chip private-label offerings. With expansion of our operations into new markets, we have and will continue to encounter significant competition from multinational, national, regional and local competitors that may be greater than that encountered by us in our existing markets. In addition, these competitors may challenge our position in our existing markets.

All of our sales involve the sale of BFY snack food products, which has various risks and uncertainties.

All of our sales involve the sale of products designed to be BFY snack food options. While BFY snack food products are currently popular and sales of such products have been increasing rapidly, consumers may not continue to be interested in BFY snack food products. Consumers may in the future choose to purchase other products that they perceive to be BFY or more “trendy” at a future time. Consumers may prefer products with fewer carbohydrates, higher levels of protein, lower levels of certain nutrients including fat, additional fiber or different nutritional characteristics that do not favor our products or RTE popcorn in general. In addition, our business could be adversely affected if larger, well-capitalized companies elect to either enter into the healthier snack food space or competed in irrational ways that could damage our margins, or if lower-priced private-label products gain market share. We also face the risk that competitors may significantly improve the taste and quality of the BFY snack foods they sell that are competitive with our products. Additionally, we face the risk our retail customers may request or require our products to deliver certain new “on trend” attributes in our products, which may either be impossible for us to achieve or cost prohibitive for us to deliver.

Our SkinnyPop brand and reputation as a producer of BFY products may be diminished due to real or perceived quality or health issues with our products or a change in consumers’ perception of what is BFY itself, which could have an adverse effect on our business and operating results.

We believe consumers of our products rely on us to provide them with high-quality, BFY food products containing no GMOs, gluten or major allergens. Concerns regarding the ingredients used in our products or the healthfulness, safety or quality of our products or our supply chain may cause consumers to stop purchasing our products, even if the basis for the concern is unfounded, has been addressed or is outside of our control. Although we believe we have a rigorous quality control process, there can be no assurance that our products will always comply with the standards we set for our products. Adverse publicity about the healthfulness, safety or quality of our products, whether or not ultimately based on fact, may discourage consumers from buying our products and have an adverse effect on our brand, reputation and operating results.

We have no control over our products once purchased by consumers. Accordingly, consumers may store our products for long periods of time, which may adversely affect the quality of our products. If consumers do not perceive our products to be of high quality, then the value of our brand would be diminished, and our business, results of operations and financial condition could be adversely affected.

Any loss of confidence on the part of consumers in the ingredients used in our products or in the safety and quality of our products may be difficult and costly to overcome. Any such adverse effect could be exacerbated by our position in the market as a purveyor of high-quality, BFY food products and may significantly reduce our brand value. Issues regarding the safety of any of our products, regardless of the cause, may have a substantial and adverse effect on our brand, reputation and operating results.

 

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Our SkinnyPop brand is of significant value and our brand and reputation may be diminished due to possible consumer disagreement with the use of the word “Skinny” on our product, differences in opinion as to what products are “Skinny” or increased negative connotation with the word “Skinny”. We may be subject to claims or litigation concerning our branding or labeling practices. Food product companies are, from time to time, subject to class actions lawsuits related their branding or labeling. In 2014, we settled one such lawsuit for a nominal amount. Related or similar claims or lawsuits may be brought against us in the future. Additionally, changes in applicable laws or regulations, or evolving interpretations thereof, could necessitate changes to our branding or labeling. While we have never claimed that SkinnyPop is a low fat product, the FDA and FTC currently have no definition of the word “Skinny” and could, in the future, define the term in a way that is not favorable to our existing product branding or labeling.

Consumers’ loyalty to our SkinnyPop brand may change due to factors beyond our control, which could have a material adverse effect on our business and operating results.

Our business currently depends in a large part on repeat purchases by the same consumers. We believe this purchasing pattern is indicative of brand loyalty. However, these consumers are under no obligation to continue to repeatedly purchase our product and could stop purchasing our product at any time. These consumers could cease purchasing our product for any number of reasons, some of which are beyond our control, including changing consumer trends, negative publicity regarding our brand, real or perceived quality or health issues with our products, a change in consumers’ perception of BFY, or the availability of lower priced alternative snack products, or for no reason at all. Erosion of our brand loyalty and the resulting decreased sales to consumers could have an adverse effect on our business and operating results.

We face competition in our business from generic or store branded RTE popcorn which may result in decreased demand for our products and pricing pressures.

We are subject to competition from companies, including from some of our customers, that either currently manufacture or are developing products directly in competition with our products. These generic or store-branded products may be a less expensive option for consumers than our products making it more difficult to sell our product. For example, Costco is well known for its Kirkland Signature brand, which offers high-quality products across a variety of categories at lower price points than many branded products. The development of Kirkland Signature products may cause Costco to decrease their orders of our products, require us to reduce the pricing of our products or drive Costco to change the shelf placement of our products in a detrimental way. Kroger, one of our largest customers, already competes with us through their Simple Truth RTE popcorn brand. Similarly, other large retail customers could follow similar private-label strategies. In future years, we may experience competition-induced pricing pressure from our customers due to such competition, which could have a material and adverse effect on our operating results.

If our brand or reputation is damaged, the attractive characteristics that we offer retailers may diminish, which could diminish the value of our platform.

We are currently an attractive brand for our customers because our products generate a high level of retail sales at a premium margin relative to their shelf space. This is due to both our premium price point and our sales velocity. If our brand or reputation is damaged for any reason, consumers may no longer be willing to pay a premium price for our products and we may no longer be able to generate a high sales velocity at our then-current prices. If we no longer offer these characteristics, customers may decrease their orders of our products and downgrade the in-store placement of our products, which could have an adverse effect on our business and platform.

 

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Risks Related to Our Business Generally

Our gross profit and Adjusted EBITDA margins may be impacted by a variety of factors, including but not limited to variations in raw materials pricing, retail customer requirements and mix, sales velocities and required promotional support.

We have operated our company with strong gross profit and Adjusted EBITDA margins as compared to other food and snacking companies. Our gross profit increased $41.5 million, or 127%, from $32.7 million for the year ended December 31, 2013 to $74.2 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). While we expect our gross profit to increase in absolute dollars in future periods, we expect that our gross profit as a percentage of net sales will fluctuate and may decrease as a result of the competitive and other factors described herein. Our gross profit is impacted by a number of factors, including product pricing, raw material, labor, packaging and fuel costs. Should the competitive dynamic change in our industry (which could impact our margins through forces including but not limited to requiring us to alter our pricing strategy or requiring additional promotional activity), raw materials prices increase dramatically, or any of our customer relationships change materially, then we may not be able to continue to operate at our current margins. Additionally, should unforeseen events require our company to make significant and unplanned investments in additional infrastructure or marketing activities, our gross profit and Adjusted EBITDA margins could be materially reduced.

We may be subject to significant liability should the consumption of any of our products cause or be claimed to cause illness or physical harm.

We sell products for human consumption, which involves risks such as product contamination or spoilage, product tampering, other adulteration, mislabeling and misbranding. Under certain circumstances, we may be required to, or may voluntarily, recall or withdraw products. A widespread product recall or product withdrawal may negatively and significantly impact our sales and profitability for a period of time and could result in significant losses depending on the costs of the recall, the destruction of product inventory, product availability, competitive reaction and customer and consumer reaction. We may also be subject to claims or lawsuits resulting in liability for actual or claimed injuries, illness or death. Any of these events may result in a material adverse effect on our business. Even if a product liability claim or lawsuit is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm could adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance in an amount that we believe to be adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Litigation or legal proceedings could expose us to significant liabilities and have a negative impact on our reputation.

From time to time, we may be party to various claims and litigation proceedings. We evaluate these claims and litigation proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our current assessments and estimates.

For example, in 2014, a putative class action lawsuit was filed against our Predecessor related to the compliance of its product labels with various state and federal laws. The case settled for a nominal amount and was later dismissed with prejudice in July 2014 after SkinnyPop Popcorn LLC updated its

 

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product labels. From time to time, we have received threats by plaintiffs’ attorneys to bring similar class action lawsuits related to other alleged product label claims, including relating to the BFY nature of our products. We would vigorously defend any threatened lawsuit if brought. Such a lawsuit or related or similar claims or lawsuits may be brought against us in the future and the cost of defending against any such claims could be significant. There is an additional risk that these types of suits may lead to consumer confusion, distrust and additional legal challenges for companies faced with them. Should we become subject to related or additional unforeseen lawsuits, including claims related to our products or their labeling or advertising, consumers may avoid purchasing our products or seek alternative products, even if the basis for the claims against us is unfounded. Additionally, adverse publicity about any lawsuit in which we are involved may further discourage consumers from buying our products. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Uncertainty as to the ingredients used in our products, regardless of the cause, may have a substantial and adverse effect on our brand and our business, results of operations and financial condition. In addition, some lawsuits have been filed against companies who make “natural” claims on their products. We make no “natural” claims on our products, but we do currently label our SkinnyPop products with “No Artificial Anything”.

We have also been a party to several claims and proceedings in both the US Patent and Trademark Office and federal court regarding competitors’ attempted or actual infringement of the “SKINNYPOP” trademark. Each of these proceedings has resulted in a resolution whereby the competitor has expressly acknowledged our exclusive trademark rights to use “SKINNY” with respect to popcorn products. In some instances, however, we have expressly acknowledged the competitor’s rights to the term “SKINNY” with respect to non-popcorn snack foods. Additional matters may continue to arise from time to time where other competitors use the term “SKINNY” to refer to their products, and we may or may not be able to assert our trademark rights based on the specific facts in each case. We will continue to monitor and address such facts on a case-by-case basis.

We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

Our ability to compete effectively depends in part upon protection of our rights in trademarks, trade dress, copyrights and other intellectual property rights we own or license. Our use of contractual provisions, confidentiality procedures and agreements, and trademark, copyright, unfair competition, trade secret and other laws to protect our intellectual property and other proprietary rights may not be adequate. We may not be able to preclude third parties from using the term “SKINNY” with respect to food or beverage products, and may not be able to leverage our branding beyond our current product offerings. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products or our use of intellectual property infringe their intellectual property rights. Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources. A successful claim of trademark, copyright or other intellectual property infringement against us could prevent us from providing our products, which could harm our business, financial condition or results of operations. In addition, a breakdown in our internal policies and procedures may lead to an unintentional disclosure of our proprietary, confidential or material non-public information, which could in turn harm our business, financial condition or results of operations.

We may not be successful in implementing our growth strategy, including without limitation, enhancing our brand recognition, increasing distribution of our products, attracting new consumers to our brands, and introducing new products and product extensions, either on a timely basis or at all.

Our future success depends in large part on our ability to implement our growth strategy, including without limitation, enhancing our brand recognition, increasing distribution of our products,

 

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attracting new consumers to our brands, driving repeat purchase of our products and introducing new products and product extensions. Our ability to implement our growth strategy depends, among other things, on our ability to develop new products, identify and acquire additional product lines and businesses, secure shelf space in grocery stores and supermarkets, increase customer awareness of our brands, enter into distribution and other strategic arrangements with third-party retailers and other potential distributors of our products and compete with numerous other companies and products. In late 2014 and early 2015, SkinnyPop achieved significant distribution gains with some of the largest U.S. retail chains, including Walmart, Target and CVS Pharmacy. We cannot provide assurances to you that these customers will achieve performances comparable to our more seasoned retail customers nor that we will continue to expand retail distribution by adding more retail locations or SKU varieties as we have done with several other key customers in the past. We also cannot assure you that we will be able to successfully implement our growth strategy and continue to maintain growth in our sales. If we fail to implement our growth strategy, our sales and profitability may be adversely affected.

We may be unable to successfully identify and execute or integrate acquisitions.

On April 17, 2015 we acquired Paqui, which we refer to in this prospectus as the “Paqui Acquisition”. In addition, we plan to selectively pursue acquisitions in the future, to continue to grow and increase our profitability. Our acquisition strategy is based on identifying and acquiring brands with products that complement our existing products and identifying and acquiring brands in new categories and in new geographies for purposes of expanding our platform of healthier snacks. However, although we regularly evaluate multiple acquisition candidates, we cannot be certain that we will be able to successfully identify suitable acquisition candidates, negotiate acquisitions of identified candidates on terms acceptable to us, or integrate acquisitions that we complete. Acquisitions involve numerous risks and uncertainties, including intense competition for suitable acquisition targets, which could increase prices and/or adversely affect our ability to consummate deals on favorable or acceptable terms, the potential unavailability of financial resources necessary to consummate acquisitions in the future, the risk that we improperly value and price a target, the potential inability to identify all of the risks and liabilities inherent in a target company notwithstanding our due diligence efforts, the diversion of management’s attention from the operations of our business and strain on our existing personnel, increased leverage due to additional debt financing that may be required to complete an acquisition, dilution of our stockholder’s net current book value per share if we issue additional equity securities to finance an acquisition, difficulties in identifying suitable acquisition targets or in completing any transactions identified on sufficiently favorable terms and the need to obtain regulatory or other governmental approvals that may be necessary to complete acquisitions. In addition, any future acquisitions may pose risks associated with entry into new geographic markets, including outside the United States, distribution channels, lines of business or product categories, where we may not have significant or any prior experience and where we may not be as successful or profitable as we are in businesses and geographic regions where we have greater familiarity and brand recognition. Potential acquisitions may also entail significant transaction costs and require a significant amount of management time, even where we are unable to consummate or decide not to pursue a particular transaction.

In addition, even when acquisitions, such as the Paqui Acquisition, are completed, integration of acquired entities can involve significant difficulties, such as failure to achieve financial or operating objectives with respect to an acquisition, strain on our personnel, systems and operational and managerial controls and procedures, the need to modify systems or to add management resources, difficulties in the integration and retention of customers or personnel and the integration and effective deployment of operations or technologies, amortization of acquired assets (which would reduce future reported earnings), possible adverse short-term effects on cash flows or operating results, diversion of management’s attention from the operations of our business, integrating personnel with diverse backgrounds and organizational cultures, coordinating sales and marketing functions and failure to obtain and retain key personnel of an acquired business. Failure to manage these acquisition growth risks could have an adverse effect on us.

 

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Our continued success depends to a large extent on our ability to innovate successfully and on a cost-effective basis.

The food industry and retailers in the grocery industry use new products as a way of creating excitement and variety of choices in order to attract consumers. Therefore, a key element of our growth strategy is to introduce new products and to successfully innovate our existing products and to keep up with changing consumer tastes and trends. Success in product development is affected by our ability to anticipate consumer preferences, to leverage our research and development capabilities, and to utilize our management’s ability to launch new or improved products successfully and on a cost-effective basis. It is possible that we will be unable to develop new products to address consumer demands.

The development and introduction of new products requires substantial research and development and marketing expenditures, which we may be unable to recover if the new products do not achieve commercial success and gain widespread market acceptance. Product innovation may also result in increased costs resulting from the use of new manufacturing techniques, capital expenditures, new raw materials and ingredients, new product formulas and possibly new manufacturers. There may also be regulatory restrictions on the production and advertising of our new products, and our new products may cannibalize sales of our existing products. In addition, underperformance of new product launches would damage overall brand credibility with customers and consumers.

Further, new products may not achieve success in the marketplace, due to lack of demand, failure to meet consumer tastes or otherwise. If we are unsuccessful in our product innovation efforts and demand for our products declines, our business would be negatively affected.

Additionally, we do not have exclusive rights to the term “SKINNY” and therefore other companies in the food and beverage categories could use the term, which would inherently limit our ability to enter new categories with our anchor brand.

Slotting fees and customer charges or charge-backs for promotion allowances, cooperative advertising and damaged, undelivered or unsold food products may have a significant impact on our operating results and may disrupt our customer relationships.

Retailers in the grocery industry charge slotting fees for access to shelf space and often enter into promotional and advertising arrangements with manufacturers that result in the sharing of promotional and advertising costs among the retail customer, distributor or manufacturer. As the retail grocery industry has consolidated and become more competitive, retail customers have sought greater participation by manufacturers in cooperative promotional and advertising arrangements, and are more inclined to pass on unanticipated increases in promotional and advertising costs to manufacturers. Additionally, retailers are exhibiting a greater willingness to take deductions for damaged, undelivered and unsold products or to return unsold products to manufacturers. If we are charged significant and unanticipated promotional allowances or advertising charges by retail customers, or if our customers take substantial charge-backs or return material amounts of our products, the operating results and liquidity of our business could be harmed, perhaps substantially. Moreover, an unresolved disagreement with a retail customer concerning promotional allowances, advertising charges, charge-backs or returns could significantly disrupt or cause the termination of a customer relationship, immediately reducing our sales and liquidity. Because of the limited number of retail customers in the U.S. grocery market, the loss of even a single retail customer could have a long-term negative impact on our financial condition and net sales.

 

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Changes in retail distribution arrangements can result in the temporary loss of retail shelf space and disrupt sales of food products, causing our sales to fall.

From time to time, retailers change distribution centers that supply some of their retail stores. If a new distribution center has not previously distributed our products in that region, it may take time to get a retailer’s distribution center to begin distributing new products in its region. Even if a retailer approves the distribution of products in a new region, product sales may decline while the transition in distribution takes place. If we do not get approval to have our products offered in a new distribution region or if getting this approval takes longer than anticipated, our sales and operating results may suffer.

Fluctuations in our results of operations from quarter to quarter because of changes in our promotional activities may impact, and may have a disproportionate effect on, our overall financial condition and results of operations.

Our business is subject to quarterly fluctuations due to the timing of and demand for customer-driven promotional activities, which may have a disproportionate effect on our results of operations. Historically, we have offered a variety of sales and promotion incentives to our customers and to consumers, such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees and in-store displays. Our net sales are periodically influenced by the introduction and discontinuance of sales and promotion incentives. Reductions in overall sales and promotion incentives could impact our net sales and affect our results of operations in any particular fiscal quarter.

In addition, our net sales increased $76.6 million, or 138%, from $55.7 million for the year ended December 31, 2013 to $132.4 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). While we expect our net sales to increase in absolute dollars in future periods, we expect that our net sales growth rate will not keep pace with our net sales growth rate in prior periods, due to the increasing cumulative size of the net sales base on which future growth rates will be measured.

Historical quarter-to-quarter and period-over-period comparisons of our sales and operating results are not necessarily indicative of future quarter-to-quarter and period-over-period results. You should not rely on the results of a single fiscal quarter or period as an indication of our annual results or our future performance.

Our future results of operations may be adversely affected by increased fuel costs.

Many aspects of our business have been, and may continue to be, directly affected by the rising cost of fuel. Increased fuel costs result in increased costs for the products and services we receive from our third-party providers including, but not limited to, increased distribution costs for our products and increased packaging costs. As the cost of doing business increases, we may not be able to pass these higher costs on to our customers and, therefore, any such cost increases may adversely affect our earnings. In addition, if fuel costs decline we may not benefit from these decreases because our customers may require us to pass on the benefit of lower prices to them.

Changes in the legal and regulatory environment could limit our business activities, increase our operating costs, reduce demand for our products or result in litigation.

The conduct of our businesses, including the production, storage, distribution, sale, display, advertising, marketing, labeling, health and safety practices, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to laws and regulations administered by government entities and agencies outside the United States in markets in which our products or components thereof (such as packaging) may be made, manufactured or sold. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic or social events. Such changes may include changes in:

 

    food and drug laws (including FDA regulations);

 

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    laws related to product labeling;

 

    advertising and marketing laws and practices;

 

    laws and programs restricting the sale and advertising of certain of our products;

 

    laws and programs aimed at reducing, restricting or eliminating ingredients present in certain of our products;

 

    laws and programs aimed at discouraging the consumption of products or ingredients or altering the package or portion size of certain of our products;

 

    increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the effects on health of ingredients in, or attributes of, certain of our products;

 

    state consumer protection and disclosure laws;

 

    taxation requirements, including the imposition or proposed imposition of new or increased taxes or other limitations on the sale of our products; competition laws;

 

    anti-corruption laws;

 

    employment laws;

 

    privacy laws;

 

    laws regulating the price we may charge for our products; and

 

    farming and environmental laws.

New laws, regulations or governmental policy and their related interpretations, or changes in any of the foregoing, including taxes or other limitations on the sale of our products, ingredients contained in our products or commodities used in the production of our products, may alter the environment in which we do business and, therefore, may impact our operating results or increase our costs or liabilities.

Loss of our key management or other personnel, or an inability to attract and retain such management and other personnel, could negatively impact our business.

Our success is substantially dependent on the continued service of certain members of our senior management, including Thomas Ennis, our Chief Executive Officer, or CEO, and Brian Goldberg, our Chief Financial Officer, or CFO. These executives have been primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand and culture, and the reputation we enjoy with suppliers, contract manufacturers, distributors, retailers and consumers. The loss of the services of any of these executives could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause the price of our common stock to decline. We have employment agreements with our key senior executives, including our CEO, CFO and Jason Shiver, our Senior Vice President of Sales, and each of our Founders. However, we do not maintain key-person life insurance with respect to any of them. In 2016, we expect to pay the Founders approximately $25.3 million of which $11.5 million has been accrued as of March 31, 2015. The Founders’ employment agreements each expire on December 31, 2015.

Additionally, we also depend on our ability to attract and retain qualified personnel to operate and expand our business. If we fail to attract talented new employees, our business and results of operations could be negatively affected.

 

 

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As a result of our rapid growth over the past few years, we need to continue developing an infrastructure and workforce sufficient to meet the growing demands for our products.

We have experienced rapid growth in the past few years, which included growing our net sales from $55.7 million in 2013 to $132.4 million in 2014. Rapid growth involves various risks related to ensuring that our infrastructure and personnel are sufficient to meet the growing demand for our products. For example, we must seek to identify our personnel needs in light of expected demand for our products, and we will need to identify, recruit, train and retain qualified employees in order to serve this anticipated demand, in all areas of our operations. Because we may hire additional employees in order to meet potential future needs and to ensure that our sales growth does not outgrow our infrastructure, we may experience higher levels of costs of goods sold and general and administrative expense as we build this infrastructure. While we do not anticipate extensive management needs, as we grow, we may add additional layers of management, process and bureaucracy into our governing structure. In doing so, we risk losing qualified employees and members of management who were attracted to our entrepreneurial culture but who may not want to remain at a larger company.

In addition, with sales and demand growing rapidly, we need to ensure that we have sufficient manufacturing capacity, both internal capacity and manufacturing arrangements, to meet actual and potential demand for our products. This could require us to make significant capital expenditure investments in order to make sure we have sufficient manufacturing capacity. If growth does not materialize as planned, these large investments could increase our cost of goods sold without increasing our profitability.

There can be no assurance that we will be successful in all of these efforts, and any failure to maintain sufficient infrastructure and personnel will have an adverse effect on our ability to grow and improve our profitability.

A failure of our new enterprise resource planning, or ERP, system could impact our ability to operate our business, lead to internal control and reporting weaknesses and adversely affect our results of operations and financial condition.

We have recently implemented a new ERP system to provide for greater depth and breadth of functionality and effectively manage our business data, communications, supply chain, order entry and fulfillment, inventory and warehouse management and other business processes. A failure of our new system to perform as we anticipate may result in transaction errors, processing inefficiencies and sales losses, may otherwise disrupt our operations and materially and adversely affect our business, results of operations and financial condition and may harm our ability to accurately forecast sales demand, manage our supply chain and production facilities, fulfill customer orders and report financial and management information on a timely and accurate basis. In addition, due to the systemic internal control features within ERP systems, we may experience difficulties that may affect our internal control over financial reporting, which may create a significant deficiency or material weakness in our overall internal controls. The risks associated with a new ERP system are greater for us as a newly public company.

We have a limited operating history, and our historical and as adjusted and as further adjusted financial information is not necessarily representative of the results we may achieve in the future.

Through our Predecessor, we have been in operation since 2010. However, we only have two years of available audited consolidated financial statements. Our relatively limited available historical financial information does not necessarily reflect our future financial position, results of operations, or cash flows, and the occurrence of any of the risks discussed in this “Risk Factors” section, or any other event, could cause our future financial position, results of operations, or cash flows to materially differ from our historical and as adjusted and as further adjusted financial information. While we have been profitable in the past, we cannot assure you that our profits will continue, at a similar level or at all.

 

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We rely on information technology systems, and any inadequacy, failure, interruption or security breach of those systems may harm our ability to effectively operate our business.

We are dependent on various information technology systems, including, but not limited to, networks, applications and outsourced services in connection with the operation of our business. A failure of our information technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and sales losses, causing our business to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, viruses and security breaches. Any such damage or interruption could have a material adverse effect on our business.

In addition, we sell our products over the internet through third-party websites, including those operated by Amazon.com. The website operations of such third parties may be affected by reliance on other third-party hardware and software providers, technology changes, risks related to the failure of computer systems through which these website operations are conducted, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, the ability of our third-party partners to conduct these website operations may be affected by liability for online content and state and federal privacy laws.

Further, because of our rapid growth, we need to ensure that we have sufficient personnel to manage our growing IT infrastructure, and that our systems generate sufficient information and reports so that our management team can better anticipate future business needs. As we grow, we may decide in the future to install a new company-wide information technology system. Any future migration to a new company-wide information technology system would be costly and potentially disruptive to our business.

Our indebtedness could adversely affect our financial condition and ability to operate our company, and we may incur additional debt.

As of December 31, 2014 and March 31, 2015, we had outstanding indebtedness in the aggregate principal amount of $200 million and $197.5 million, respectively. In May 2015, in connection with our Third Amended Credit Facility and as part of the May 2015 Special Dividend, we increased our term loan borrowings by $7.5 million to a total of $205 million, net of principal payments made in the first quarter of $2.5 million, and our revolving facility by $17.5 million to a total of $25 million and made a revolving loan borrowing of $15 million. The proceeds of the additional borrowings were used to fund the May 2015 Special Dividend. Our credit agreement, or the Credit Agreement, with a syndicate of lenders led by Jefferies Finance LLC, is secured by substantially all of our assets.

Our debt level and the terms of our financing arrangements could adversely affect our financial condition and limit our ability to successfully implement our growth strategy. In addition, our ability to increase the uncommitted portion of our revolving facility may be limited by our debt level or other factors.

Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in this prospectus. For the year ended December 31, 2014, our actual interest expense was $4.3 million, for the Pro Forma Year Ended December 31, 2014 (Unaudited) our pro forma interest expense would have been $12.9 million and we expect our interest expense for the year ended December 31, 2015 to be approximately $11.5 million. In addition, we expect to use $10.2 million of cash to make principal payments in 2015. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.

 

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Our outstanding indebtedness under the Credit Agreement bears interest at variable rates. If market interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flow.

The Credit Agreement governing our credit facility contains various covenants that impose restrictions on us that may affect our ability to operate our business if we fail to meet those covenants or otherwise suffer a default thereunder.

We are required to comply with certain financial maintenance covenants pursuant to the Credit Agreement as of the end of each fiscal quarter, including a total funded debt ratio and a minimum fixed charge coverage ratio. The Credit Agreement contains other negative incurrence-based covenants that, among other things, limit our ability to:

 

    borrow money or guarantee debt;

 

    create liens;

 

    make specified types of investments and acquisitions;

 

    pay dividends on or redeem or repurchase stock;

 

    enter into new lines of business;

 

    enter into transactions with affiliates; and

 

    sell assets or merge with other companies.

Should we be in default under any of such covenants, Jefferies Finance LLC shall have the right, upon written notice and after the expiration of any applicable period during which such default may be cured, to demand immediate payment of all of the then-unpaid principal and accrued but unpaid interest under the Credit Agreement and would permit lenders to foreclose upon the collateral securing the debt. As of March 31, 2015, we believe that we were in compliance with all covenants of the Credit Agreement.

As we execute our business strategy, we may not be able to remain in compliance with our financial covenants because various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. These restrictions on the operation of our business through the requirement that we meet certain ratios to take certain actions could harm us by, among other things, limiting our ability to take advantage of financing, merger and acquisition opportunities and other corporate opportunities. Additionally, any acceleration of the borrowings under the Credit Agreement prior to the applicable maturity dates could have a material adverse effect upon our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness”.

To the extent we further grow our business outside of the United States and Canada, we will face risks associated with conducting business in foreign markets.

We currently conduct most of our business in the United States and Canada, but we are evaluating the possibility of doing business in certain other foreign countries. The substantial up-front investment required, the lack of consumer awareness of our products in jurisdictions outside of the United States and Canada, differences in consumer preferences and trends between the United States and Canada and other jurisdictions, the risk of inadequate intellectual property protections and differences in packaging, labeling, food and related laws, rules and regulations are all substantial matters that need to be evaluated prior to doing business in new territories. To the extent we grow our business outside of the United States and Canada, we could be adversely affected by economic, legal,

 

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political and regulatory developments in the countries in which we do business in the future or in which we expand our business, particularly those countries that have historically experienced a high degree of political or economic instability.

Examples of risks inherent in doing business outside of North America include changes in the political and economic conditions in the countries in which we operate, unexpected changes in regulatory requirements, changes in tariffs, the adoption of foreign or U.S. laws limiting exports to or imports from certain foreign countries, fluctuations in currency exchange rates and the value of the U.S. dollar, restrictions on repatriation of earnings, expropriation of property without fair compensation, weak protection of intellectual property rights and the acceptance of business practices that are not consistent with or are antithetical to prevailing business practices we are accustomed to in the United States, including export compliance and anti-bribery practices and governmental sanctions. We may also face difficulties in operations and diversion of management time in connection with establishing our business in countries where we have not operated before.

Doing business outside the United States requires us to comply with the laws and regulations of the U.S. government and various foreign jurisdictions, which place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the Foreign Corrupt Practices Act, or FCPA, export controls and economic sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC. As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating anti-corruption and trade control laws and sanctions regulations. The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. In addition, the United Kingdom Bribery Act, or the Bribery Act, extends beyond bribery of foreign public officials and also applies to transactions with individuals that a government does not employ. The provisions of the Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Our continued expansion outside the United States, including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of FCPA, OFAC or Bribery Act violations in the future. Violations of anti-corruption and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment.

Period-to-period comparisons may not be meaningful given the Sponsor Acquisition of SkinnyPop by TA Associates in 2014 and may not be representative of our future performance.

Due to the Sponsor Acquisition, which was consummated on July 17, 2014, it may be difficult for you to compare our Predecessor and Successor financial results. The Sponsor Acquisition was accounted for utilizing acquisition method accounting, which resulted in new valuations for the assets and liabilities of SkinnyPop to their fair values on July 17, 2014. In addition, we are recognizing the Founder Contingent Compensation ratably over the 18 months after the date of completion of the Sponsor Acquisition. Accordingly, our historical financial information may be of limited use in evaluating our historical performance and comparing it to other periods. Additionally, due to the new valuations for the assets and liabilities of SkinnyPop, our Predecessor financial results may not be representative of our future performance. For example, for the year ended December 31, 2014, on an unaudited pro forma basis, our net income was $13.6 million, a 45% decrease from the year ended December 31, 2013.

 

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The pro forma financial information in this prospectus is presented for illustrative purposes only and does not represent what the results of operations of the combined company would have been had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend occurred on January 1, 2014, the date assumed for purposes of that pro forma information, nor does it represent the actual financial position or results of operations of the combined company following the Sponsor Acquisition. In addition, the pro forma financial information does not give effect to this offering.

The pro forma financial information in this prospectus is derived from our consolidated results of operations giving pro forma effect to the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Sponsor Acquisition and Subsequent Financings”, as if such transactions occurred on January 1, 2014. It is presented for illustrative purposes only and contains certain estimates and assumptions about the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend. It does not give effect to this offering, particularly the impact of the tax receivable agreement. The preparation of this pro forma financial information is based on certain assumptions and estimates that we believe are reasonable. Our assumptions may prove to be inaccurate over time and may be affected by other factors. Accordingly, the pro forma financial information may not reflect what our results of operations, financial positions and cash flows would have been had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend, respectively, occurred during the periods presented or what our results of operations, financial positions and cash flows will be in the future. The pro forma information contained in this prospectus is based on adjustments that our management believes are reasonable. Our estimate of these adjustments and allocation may differ from actual amounts that we report in the future.

The summary statement of income data for the year ended December 31, 2012 and the selected consolidated financial data as of and for the year ended December 31, 2012, or collectively, the Unaudited 2012 Financial Data, presented in this prospectus was not audited and investors are cautioned not to place undue reliance on such data.

The Unaudited 2012 Financial Data included in this prospectus was based on our unaudited consolidated financial statements that are not included in this prospectus. This financial data was not audited for any period and was not subject to adjustments or procedures, closing or otherwise. The Unaudited 2012 Financial Data included in this prospectus involves estimates, assumptions and judgments and is based on the Predecessor’s books and records and may not reflect what our results of operations would have been had the consolidated financial statements for the relevant periods been audited. The Unaudited 2012 Financial Data could materially vary from the results of operations had they been audited. Investors are cautioned not to place undue reliance on the Unaudited 2012 Financial Data.

Our tax receivable agreement will require us to make cash payments to the former holders of units in Topco in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.

In connection with the consummation of the Corporate Reorganization, which will occur immediately prior to the consummation of this offering, we will enter into a tax receivable agreement with the former holders of units of Topco. Pursuant to the tax receivable agreement, we will be required to make cash payments to the former holders of units of Topco equal to 85% of the tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of certain tax attributes that were generated when SkinnyPop was acquired by affiliates of TA Associates in July 2014. The amount of the cash payments that we may be required to make under the tax receivable agreement is expected to be significant. Assuming no material changes in the relevant tax law and that we earn sufficient taxable

 

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income to realize all tax benefits that are subject to the tax receivable agreements, we expect that the reduction in tax payments for us associated with the federal, state and local tax benefits described above would aggregate to approximately $112.4 million through 2030. Under such scenario we would be required to pay the holders of existing units in Topco 85% of such amount, or $95.5 million through 2030. Payments under the tax receivable agreement may vary from the foregoing estimates and will be based on the tax reporting positions that we determine, which tax reporting positions will be based on the advice of our tax advisors. Any payments made by us to former holders of units of Topco under the tax receivable agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. If the Internal Revenue Service, or IRS, were to successfully challenge the tax benefits that give rise to any payments under the tax receivable agreement, our future payments under the tax receivable agreement to the former holders of units of Topco would be reduced by the amount of such payments, but the tax receivable agreement does not require the former holders of units of Topco to reimburse us for the amount of such payments to the extent they exceed any future amounts payable under the tax receivable agreement. Our obligation to make timely payments under the tax receivable agreement is not conditioned upon, and will not be modified based upon, our historical net income for any previous period or our ability to generate net income in any future period. If, however, we fail to make any payments on a timely basis under the tax receivable agreement because we do not have sufficient funds to make such payment despite using reasonable best efforts to obtain funds to make such payment (including by causing our subsidiaries to distribute or lend funds to us for such payment and accessing any sources of available credit to fund such payment), such failure will not be deemed to be a breach of a material obligation under the tax receivable agreement that would give rise to an acceleration of our payment obligations under the agreement. To the extent that we are unable to make timely payments under the tax receivable agreement for this or any other reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Furthermore, our future obligation to make payments under the tax receivable agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that may be deemed realized under the tax receivable agreement. Unless earlier terminated in accordance with its terms, the tax receivable agreement will continue in force and effect until there is no further potential for tax benefit payments to be made by us to the former holders of existing units in Topco in respect of the U.S. federal, state and local tax benefits that are the subject of such agreement. Based on current tax rules and regulations as of the date of this prospectus, we would expect the potential for tax benefit payments to cease no later than 2030 (or approximately fifteen years after the date of this offering). For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

Disruptions in the worldwide economy may adversely affect our business, results of operations, and financial condition.

Adverse and uncertain economic conditions may impact distributor, retailer and consumer demand for our products. In addition, our ability to manage normal commercial relationships with our suppliers, contract manufacturers, distributors, retailers, consumers and creditors may suffer. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns, making it more difficult to sell our premium products. During economic downturns, it may be more difficult to convince consumers to switch to our brands or convince new users to choose our brands without expensive sampling programs and price promotions. In particular, consumers may reduce the amount of products with no GMOs, gluten, or preservatives that they purchase when there are conventional offerings of similar products, which generally have lower retail prices. In addition, consumers may choose to purchase private-label products rather than branded products because they are generally less expensive. Distributors and retailers may become more conservative in response to these conditions and seek to reduce their inventories. For example, during the economic downturn from 2007 through 2009, distributors and retailers significantly reduced their inventories. Our results of operations depend upon, among other things, our ability to maintain and increase sales volume with

 

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our existing distributors and retailers, to attract new consumers and to provide products that appeal to consumers at prices they are willing and able to pay. Prolonged unfavorable economic conditions may have an adverse effect on our sales and profitability.

An impairment of goodwill could materially adversely affect our net income.

We have significant goodwill, which amounted to 0% and 13.5% of our total assets as of December 31, 2013 and 2014, respectively. Goodwill represents the excess of the purchase price over the fair value of the assets acquired and the liabilities assumed. In accordance with GAAP, we first assess qualitative factors to determine whether it is more likely than not that the fair value of our sole reporting unit is less than its carrying amount as a basis to determine whether it is necessary to perform the two-step goodwill impairment test, which we perform annually in the fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Future events that may trigger impairment include, but are not limited to, significant adverse change in customer demand, the business climate or a significant decrease in expected cash flows. When impaired, the carrying value of goodwill is written down to fair value. In the event that an impairment to goodwill is identified, an immediate charge to earnings would be recorded, which would adversely affect our operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Goodwill and Intangible Assets”.

We rely on sales agents for our products and there could be a disruption in our ability to sell products to our customers if our relationship with a major sales agent is terminated.

We are represented by 20 agents who represent almost all of our product line to supermarkets and food stores. There are a very limited number of national sales agents in the snack food industry. Our agreements with these agents are terminable by either us or them after satisfaction of a short notice period. The termination of these agreements would require us to seek other sales agents, likely causing significant disruption to our business, and could affect our relationships with our customers. New sales agents would also potentially face conflicts of interest with respect to their existing customers.

A determination that the employees of our current third-party manufacturer or any future third-party co-manufacturers constitute our employees could have a material adverse effect on us.

We currently outsource the manufacturing of all of our products to a third-party co-manufacturer and we expect that we will continue to outsource the manufacturing of all of our products to one or more third-party manufacturers in the future. We do not consider employees of these third-party manufacturers to be our employees. As such, we do not withhold federal or state income or other employment related taxes, make federal or state unemployment tax or Federal Insurance Contributions Act payments, provide workers’ compensation insurance or other employee-related benefits with respect to these manufacturers’ employees. Recently, there has been an increase in litigation against companies across industries claiming that certain individuals associated with outsourced business functions should be considered employees. Although we are not unique in our outsourcing of certain aspects of our business, such as manufacturing operations, to third parties, there is a risk that such claims may be brought against us. This risk would be increased to the extent that any of the employees of our third-party manufacturers work exclusively on the manufacture of our products. In the event of a determination by a court, federal or state taxing authorities or other relevant governmental authorities that the employees of our third-party manufacturers constitute our employees, we may be adversely affected and subject to retroactive taxes and penalties.

 

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Risks Related to Ownership of Our Common Stock and this Offering

Our stock price may be volatile or may decline regardless of our operating performance, and you may lose part or all of your investment.

The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

    market conditions or trends in the BFY packaged food industry or in the economy as a whole;

 

    actions by competitors;

 

    actual or anticipated growth rates relative to our competitors;

 

    the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission, or SEC;

 

    economic, legal and regulatory factors unrelated to our performance;

 

    any future guidance we may provide to the public, any changes in such guidance or any difference between our guidance and actual results;

 

    changes in financial estimates or recommendations by any securities analysts who follow our common stock;

 

    speculation by the press or investment community regarding our business;

 

    litigation;

 

    changes in key personnel; and

 

    future sales of our common stock by our officers, directors and significant stockholders.

In addition, the stock markets, including the NYSE, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

The market price of our common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market following this initial offering. These sales, or the perception that these sales might occur, could depress the market price of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. See “Shares Eligible for Future Sale”.

In connection with this offering, we, our directors, certain of our executive officers and the selling stockholders have each agreed to certain lock-up restrictions. We and they, subject to certain exceptions, will not be permitted to dispose of or hedge any shares of our common stock for 180 days (subject to extension) after the date of this prospectus, except as discussed in “Shares Eligible for Future Sale”, without the prior consent of the representatives. The representatives may, in their sole discretion, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above. See “Underwriting”.

Also, in the future, we may issue shares of our common stock in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

 

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Concentration of ownership among our existing executive officers, directors and principal stockholders, and our stockholders agreement with TA Associates, may prevent new investors from influencing significant corporate decisions.

Upon the consummation of this offering, our selling stockholders will own, in the aggregate, approximately     % of our outstanding common stock (or approximately     % if the underwriters’ exercise their option to purchase additional shares). As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies. This concentration of influence could be disadvantageous to other stockholders with interests different from those of the selling stockholders. As a result of these ownership positions, these stockholders could take actions that have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The concentration of voting power held by the selling stockholders may have an adverse effect on the price of our common stock. The interests of these stockholders may not be consistent with your interests as a stockholder.

In addition, we and entities affiliated with TA Associates intend to enter into a stockholders agreement in connection with this offering, which we refer to as our stockholders agreement. Under our stockholders agreement, TA Associates will have the right to designate three of the members of our board of directors if TA Associates owns at least 50% or more of the shares they hold immediately following the consummation of this offering regardless of the percentage such shares represent of our total outstanding shares, two members of our board of directors if TA Associates owns between 25% and 50% of the shares they hold immediately following the consummation of this offering regardless of the percentage such shares represent of our total outstanding shares and one member of our board of directors if TA Associates owns between 12.5% and 25% of the shares they hold immediately following the consummation of this offering regardless of the percentage such shares represent of our total outstanding shares.

Our stockholders agreement will also provide that so long as the entities affiliated with TA Associates hold at least 25% of the shares they hold immediately following the consummation of this offering regardless of the percentage such shares represent of our total outstanding shares, we, and our subsidiaries, shall not take the following actions (or enter into an agreement to take such actions) without the approval of at least one director designated by TA Associates:

 

    increase or decrease the authorized number of members of our board of directors;

 

    amend our amended and restated certificate of incorporation or amended and restated bylaws or the organizational documents of any of our subsidiaries;

 

    issue, create or assume any debt or equity security or debt obligation, or refinance, repurchase or prepay any security (other than repurchases of our common stock in accordance with agreements previously approved by our board of directors, including at least one director designated by TA Associates) or debt obligation;

 

    pay or declare any dividend or make any distribution on, or repurchase or redeem shares of our common stock (other than repurchases of our common stock in accordance with agreements previously approved by our board of directors, including at least one director designated by TA Associates);

 

    effect any sale, liquidation or dissolution of the Company, or sell, transfer or otherwise dispose of any of the material assets or properties of the Company or any of its subsidiaries, or merge with or into, or consolidate with, another entity or effect any recapitalization, reorganization, change of form of organization, forward or reverse split, dividend or similar transaction;

 

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    acquire any business, material assets or property for consideration in excess of $15,000,000, whether by acquisition of assets, capital stock or otherwise, and whether in consideration of the payment of cash, the issuance of capital stock or otherwise or make any investment in any person or entity in an amount in excess of $15,000,000

 

    hire or terminate any our executive officers, or enter into, amend or modify, or waive any material term of any employment agreement or material term of employment with any of our executive officers; or

 

    take any action to initiate, to cause or that would result in, the voluntary bankruptcy, insolvency, dissolution, liquidation or winding up of the Company or any of its subsidiaries.

None of the proceeds from the sale of shares of common stock by the selling stockholders in this offering will be available to fund our operations or to pay dividends.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders in this offering. The selling stockholders, which are investment funds and entities affiliated with TA Associates and other holders of existing units in Topco to be identified in this prospectus, will receive all proceeds from the sale of shares. Consequently, none of the proceeds from such sale will be available to fund our operations, capital expenditures or acquisition opportunities or to pay dividends. See “Use of Proceeds” and “Principal and Selling Stockholders”.

We identified a material weakness in connection with our 2014 audit. If we fail to remediate that material weakness and otherwise establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, it could have a material adverse effect on our business and stock price.

As a public company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which will require, beginning with our Annual Report on Form 10-K for the year ended December 31, 2016, annual management assessments of the effectiveness of our internal control over financial reporting. Additionally, as of the later of the filing of such Annual Report and the date we are no longer an “emerging growth company” we will require a report by our independent registered public accounting firm that addresses the effectiveness of our internal control over financial reporting. During the course of our testing, we may identify deficiencies that we may not be able to remediate in time to meet our deadline for compliance with Section 404.

Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. We also expect the regulations to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified executive officers and members of our Board, particularly to serve on our audit committee, and make some activities more difficult, time-consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 and, when applicable to us, our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations because there is presently no precedent available by which to measure compliance adequacy.

In connection with the 2014 audit of our financial statements, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on

 

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a timely basis. This material weakness related to our presentation and classification of certain promotional obligations in the consolidated financial statements as well as our accounting for pricing concessions. We are in the process of developing a remediation plan with respect to the tracking of demonstration expenses and pricing concessions along with developing and evaluating our other internal controls.

We cannot predict the success of remediation plan or the outcome of our review at this time. During the course of the review, we may identify additional control deficiencies, which could give rise to other material weaknesses in addition to the one previously identified. We may also find that our previous and planned remediation measures have not been successful to the extent we expected, if at all. As a result, our ability to report our financial results on a timely and accurate basis may be adversely affected, we may be subject to sanctions or investigations by regulatory authorities, and investors may lose confidence in our financial information, which in turn could adversely affect the market price of our common stock.

Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

As a public company with SEC reporting, regulatory and stock exchange listing requirements, we will incur additional legal, accounting, compliance and other expenses that we have not incurred historically. After the consummation of this offering, we will be obligated to file with the SEC annual and quarterly information and other reports that are specified in Section 13 and other sections of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and therefore will need to have the ability to prepare consolidated financial statements that are compliant with all SEC reporting requirements on a timely basis. In addition, we will be subject to other reporting and corporate governance requirements, including certain requirements of the and certain provisions of Sarbanes-Oxley and the regulations promulgated thereunder, which will impose significant compliance obligations upon us.

We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an emerging growth company, or EGC, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

Although the JOBS Act permits an EGC such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies, we are choosing to “opt out” of this provision, and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

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If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, one or more of the analysts who cover our company may change their recommendations regarding our company, and our stock price could decline.

Provisions of our amended and restated certificate of incorporation, amended and restated bylaws, our stockholders agreement and the General Corporation Law of the State of Delaware could prevent an acquisition or other change in control of our Company that may be beneficial to our stockholders.

Our amended and restated certificate of incorporation, amended and restated bylaws and provisions of the General Corporation Law of the State of Delaware, or the DGCL, to which we are subject contain provisions that could discourage, delay, or prevent a change in control of our Company or changes in our board of directors and management that the stockholders of our Company may deem advantageous.

After this offering, for as long as TA Associates continues to own a substantial number of shares of our common stock, representing a substantial number of votes entitled to be cast by holders of our common stock, it will have the ability to control decisions regarding an acquisition of us by a third party that are subject to a vote of our stockholders. In addition, our stockholders agreement will provide that so long as the entities affiliated with TA Associates hold at least 25% of the shares they hold immediately following the consummation of this offering regardless of the percentage such shares represent of our total outstanding shares, we, and our subsidiaries, shall not, without the approval of at least one director designated by TA Associates, amend our amended and restated certificate of incorporation or amended and restated bylaws or effect any sale, liquidation or dissolution of the Company, or sell, transfer or otherwise dispose of any of the material assets or properties of the Company or any of its subsidiaries. Accordingly, even though TA Associates may own a small percentage of our total outstanding shares of our common stock, they will continue to have substantial influence on our business and strategy. For more information, see “Certain Relationships and Related Party Transactions—Stockholders Agreement”.

In addition, our amended and restated certificate of incorporation, amended and restated bylaws and the DGCL contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include a classified board of directors with each class serving three-year staggered terms, restrictions on the ability of our stockholders to remove directors, the inability of our stockholders to fill vacancies on our board of directors, in certain instances supermajority voting requirements for stockholders to amend our amended and restated certificate of incorporation and amended and restated bylaws, prohibition on action by our stockholders by written consent, advance notice requirements for stockholder proposals and director nominations, and the inability of our stockholders to call special meetings of stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Moreover, we will be subject to the restrictions on business combinations set forth in Section 203 of the DGCL, which generally will prohibit us from engaging in a business combination with a person who owns in excess of 15% of our outstanding voting stock for a period of three years after the time of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless, among other exceptions, the transaction is approved in a prescribed manner. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher

 

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bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. See “Description of Capital Stock”.

Futures sales or other issuances of our common stock or issuances of securities convertible into our common stock would result in dilution to our stockholders and could adversely impact the market price of our common stock.

As of                     , 2015, and assuming the consummation of the Corporate Reorganization and the associated exchange or conversion of units of Topco for shares of our common stock or restricted stock, as applicable, we had outstanding 75,000,000 shares of our common stock and             shares of our restricted stock. In the future we may sell additional shares of our common stock or securities convertible into our common stock to raise capital or issue additional shares of our common stock or securities convertible into our common stock as consideration for future acquisitions, which would dilute the voting power and ownership percentage of our stockholders. In addition, we have a substantial number of shares of restricted stock that is subject to additional vesting, and the vesting of such shares will result in additional dilution of the voting power and ownership percentage of our stockholders. We cannot predict the size of future issuances of our common stock or securities convertible into our common stock or the effect, if any, that such future issuances might have on the market price for our common stock. The issuance and sale of substantial amounts of our common stock or securities convertible into our common stock, or the perception that such issuances and sales may occur, could also materially and adversely affect the market price of our common stock and impair our ability to raise capital through the issuance of additional equity securities.

No trading market currently exists for our common stock. We cannot assure you that an active trading market will develop for our common stock.

There currently is no public market for shares of our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of a trading market on the NYSE or otherwise, or how liquid that market might be. If an active market does not develop, you may have difficulty selling your shares of our common stock. The initial public offering price for our common stock has been determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following the consummation of this offering.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “could”, “intends”, “target”, “projects”, “contemplates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

    our future financial performance, including our net sales, cost of goods sold, gross profit or gross profit margin, operating expenses, ability to generate positive cash flow and ability to achieve and maintain profitability;

 

    our ability to maintain, protect and enhance our brands;

 

    our ability to attract and retain customers;

 

    the sufficiency of our cash and cash equivalents to meet our liquidity needs and service our indebtedness;

 

    our ability to produce sufficient quantities of our products to meet demands;

 

    demand fluctuations for our products;

 

    our ability to successfully innovate and compete in the food industry;

 

    changing trends, preferences and tastes in the food industry;

 

    our ability to successfully expand in our existing markets and into new U.S. and international markets;

 

    worldwide economic conditions and their impact on consumer spending;

 

    our expectations concerning relationships with third parties;

 

    our ability to effectively manage our growth and future expenses;

 

    future acquisitions of or investments in complementary companies or products;

 

    changes in regulatory requirements in our industry and our ability to comply with those requirements; and

 

    the attraction and retention of qualified employees and key personnel.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

 

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The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

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CORPORATE REORGANIZATION

The diagram below depicts our organizational structure immediately prior to the consummation of this offering:

 

 

LOGO

Topco (TA Topco 1, LLC)

Currently, the capital structure of Topco consists of four classes of membership units: (i) Class A Units, or preferred units, (ii) Class B Units, or common units, (iii) Class C-1 Units, which are profit interests and (iv) Class C-2 Units, which are profit interests (together with the Class C-1 Units, the “Class C Units”). Topco is the ultimate parent company of SkinnyPop Popcorn LLC, or SkinnyPop, which is the current operating company for our business operations. Topco owns 100% of the capital stock of Amplify Snack Brands, Inc., and Amplify Snack Brands, Inc. owns 100% of the membership units in SkinnyPop.

 

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The Corporate Reorganization

Immediately prior to the consummation of this offering, a series of related reorganization transactions will occur in the following sequence:

 

    Topco will liquidate in accordance with the terms and conditions of Topco’s existing limited liability company agreement. We refer to this transaction in this prospectus as the “Topco Liquidation”. The holders of existing units in Topco will receive, as a result of the Topco Liquidation, 100% of the capital stock of the Company. The capital stock of the Company will be allocated to such unit holders pursuant to the distribution provisions of the existing limited liability company agreement of Topco based upon the liquidation value of Topco, assuming it was liquidated at the time of this offering with a value implied by the initial public offering price of the shares of common stock to be sold in this offering. Topco will cease to exist following the Topco Liquidation.

 

    The Company will enter into a tax receivable agreement with the former holders of existing units in Topco pursuant to which such holders will receive the right to future payments from Amplify Snack Brands, Inc. See “—Tax Receivable Agreement”.

We refer to the foregoing transactions, collectively, as the “Corporate Reorganization”.

Immediately following the Corporate Reorganization, the selling stockholders identified in this prospectus will offer             shares of common stock of Amplify Snack Brands, Inc. to the public pursuant to the terms of the offering described in this prospectus (or             shares of common stock if the underwriters exercise in full their option to purchase additional shares of common stock from the selling stockholders). The holders of existing units in Topco, including the selling stockholders, will have the right to receive future payments pursuant to that certain tax receivable agreement described below in “—Tax Receivable Agreement”. New investors in this offering will not receive the right to receive any future payments pursuant to the tax receivable agreement.

As a result of the Corporate Reorganization and the subsequent consummation of the offering described in this prospectus:

 

    investors in this offering will collectively own             shares of common stock of Amplify Snack Brands, Inc. (or             shares of common stock if the underwriters exercise in full their option to purchase additional shares of common stock from the selling stockholders identified in this prospectus); and

 

    existing holders of units in Topco will collectively own             shares of common stock of Amplify Snack Brands, Inc. (or             shares of common stock if the underwriters exercise in full their option to purchase additional shares of common stock from the selling stockholders identified in this prospectus).

 

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The diagram below depicts our organizational structure immediately following the consummation of this offering:

 

 

LOGO

Tax Receivable Agreement

Pursuant to the tax receivable agreement to be entered into immediately prior to the consummation of this offering, the former holders of existing units in Topco will receive the right to future payments equal to 85% of the U.S. federal, state and local tax benefits realized by us and our subsidiaries from the utilization of certain tax attributes that were generated when SkinnyPop was acquired by affiliates of TA Associates in July 2014. Amplify Snack Brands, Inc. will retain approximately 15% of the U.S. federal, state and local tax benefits realized from the utilization of such tax attributes. Unless earlier terminated in accordance with its terms, the tax receivable agreement will continue in force and effect until there is no further potential for tax benefit payments to be made by us to the former holders of existing units in Topco in respect of the U.S. federal, state and local tax benefits that are the subject of the agreement. Based on current tax rules and regulations as of the date of this prospectus, we would expect the potential for tax benefit payments to cease no later than 2030 (or approximately fifteen years after the date of this offering).

The amount payable to the holders of existing units in Topco under the tax receivable agreement will be based on an annual calculation of the reduction in our U.S. federal, state and local taxes resulting from the utilization of these tax attributes. For purposes of determining the reduction in taxes resulting from the utilization of pre-IPO tax attributes, we will be required to assume that pre-IPO tax attributes are utilized before any other attributes. We expect that the payments that we may make under the tax receivable agreement may be substantial. In addition, if the IRS were to successfully challenge the tax benefits that give rise to any payments under the tax receivable agreement, our future payments under the tax receivable agreement to the former holders of units of Topco would be

 

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reduced by the amount of such payments, but the tax receivable agreement does not require the former holders of units of Topco to reimburse us for the amount of such payments to the extent they exceed any future amounts payable under the tax receivable agreement.

Payment under the tax receivable agreement may be accelerated in the event of certain mergers, stock or asset sales, other forms of combinations or other changes of control or upon a breach by us of our material obligations under the tax receivable agreement (such as by failing to make a payment within three months of the date on which such payment is due). Such accelerated payment would be based on the present value of projected future payments under the tax receivable agreement as of the date of the accelerating event. Such projected future payments could differ from the payments that would otherwise have resulted under the tax receivable agreement from our actual tax benefits realized from utilizing the pre-IPO tax attributes.

Our obligation to make timely payments under the tax receivable agreement is not conditioned upon, and will not be modified based upon, our historical net income for any previous period or our ability to generate net income in any future period. If, however, we fail to make any payments on a timely basis under the tax receivable agreement because we do not have sufficient funds to make such payment despite using reasonable best efforts to obtain funds to make such payment (including by causing our subsidiaries to distribute or lend funds for such payment and accessing any sources of available credit to fund such payment), such failure will not be deemed to be a breach of a material obligation under the tax receivable agreement that would give rise to an acceleration of our payment obligations under the agreement. To the extent that we are unable to make timely payments under the tax receivable agreement for this or any other reason, the unpaid amounts will be deferred and will accrue interest until paid by us.

The form of tax receivable agreement is filed as an exhibit to the registration statement of which this prospectus is a part.

Treatment of Outstanding Equity Awards of Topco

In connection with the Corporate Reorganization, all of the outstanding equity awards (which are currently comprised of Class C units of Topco consisting of C-1 units and C-2 units) that have been granted under the TA Topco 1, LLC 2014 Equity Incentive Plan will be converted into shares of the common stock and restricted stock of Amplify Snack Brands, Inc. The portion of the outstanding Class C units that have vested as of the consummation of the Corporate Reorganization will be converted into shares of our common stock and the remaining portion of unvested outstanding Class C units will be converted into shares of Amplify Snack Brand’s restricted stock, which will be granted under our 2015 Plan. As a result, we will grant shares of common stock and restricted stock to current awardees under the 2015 Plan in connection with the Corporate Reorganization. The shares of restricted stock will be subject to time-based vesting conditions, in accordance with the terms and conditions of the Class C units from which such shares are converted.

Holding Company Structure

Following the consummation of the Corporate Reorganization, Amplify Snack Brands, Inc. will be a holding company, and its sole material asset will be 100% of the membership units in SkinnyPop. As the sole and managing member of SkinnyPop, the Company will operate and control all of the business and affairs of SkinnyPop, Paqui and any other subsidiaries of the Company, through which we conduct our business. The Company will consolidate the financial results of its subsidiaries, including SkinnyPop and Paqui. Pursuant to the limited liability company agreement of SkinnyPop, the Company will have the right to determine when distributions will be made to the Company and the amount of any such distributions.

 

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USE OF PROCEEDS

The selling stockholders, which include certain of our directors and officers, are selling all of the shares of our common stock being sold in this offering, including any shares that may be sold in connection with the exercise of the underwriters’ option to purchase additional shares. See “Principal and Selling Stockholders”. Accordingly, we will not receive any proceeds from the sale of shares of our common stock in this offering. We will bear all costs, fees and expenses in connection with this offering, which are estimated to be $              , except that the selling stockholders will pay all underwriting commissions and discounts.

 

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DIVIDEND POLICY

Except as described below, we have not declared or paid a cash dividend on our capital stock. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. The Credit Agreement governing our credit facility prohibits the payment of any dividends without obtaining the prior written consent of the lenders representing a majority of the outstanding principal under the Credit Agreement, other than dividends payable solely in our common stock.

In December 2014, SkinnyPop made a $59.8 million distribution to the Company in connection with the second amendment to our Credit Agreement. The Company then distributed such amount to Topco, which then distributed such amount to its members. We refer to this distribution as the December 2014 Special Dividend.

In May 2015, SkinnyPop made a $22.3 million distribution to the Company in connection with our Third Amended Credit Facility. The Company then distributed such amount to Topco, which then distributed such amount to its members. For more information about this distribution, which we refer to as the May 2015 Special Dividend, as well as the December 2014 Special Dividend, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Sponsor Acquisition and Subsequent Financings”.

We do not currently intend to declare or pay any similar special dividends in the foreseeable future.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents, as well as our capitalization, as of                     , 2015 as follows:

 

    on an actual historical basis for the Company and its consolidated subsidiaries;

 

    on an adjusted basis to give effect to the completion of the Corporate Reorganization prior to the consummation of this offering (see “Corporate Reorganization”); and

 

    on an as further adjusted basis giving effect to the adjustments set forth above and the sale of             shares of common stock by the selling stockholders in this offering, based on an assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the payment of the Performance Bonus Payments, the May 2015 Special Dividend and the estimated offering expenses payable by us.

The as further adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other final terms of this offering. You should read this table together with our audited consolidated financial statements and related notes, and “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” that are included elsewhere in this prospectus.

 

     As of                     , 2015  
(In thousands, except share and per share information)        Actual          As
    Adjusted    
     As Further
    Adjusted    
 

Cash and cash equivalents and short-term investments(1)

   $                    $                    $                
  

 

 

    

 

 

    

 

 

 

Total debt

Total stockholders’/members’ equity:

Members’ equity

Preferred stock, par value $         per share: no shares authorized, issued, and outstanding, actual and as adjusted;              shares authorized, no shares issued and outstanding, as further adjusted

Common stock, par value $         per share:              shares authorized,              shares issued and outstanding, actual;              shares authorized,             shares issued and outstanding, as adjusted;             shares authorized,             shares issued and outstanding, as further adjusted

Additional paid-in capital(2)

Retained earnings

  

 

 

    

 

 

    

 

 

 

Total stockholders’/members’ equity

  

 

 

    

 

 

    

 

 

 

Total capitalization(3)

$      $      $     
  

 

 

    

 

 

    

 

 

 

 

(1) The as adjusted cash and cash equivalents reflects             . The as further adjusted cash and cash equivalents reflects the payment of the Performance Bonus Payments, the May 2015 Special Dividend and the estimated offering expenses payable by us.
(2) The as adjusted additional paid-in capital reflects                    .
(3) If the underwriters’ option to purchase additional shares from the selling stockholders were exercised in full, as further adjusted cash and cash equivalents, additional paid-in capital, total stockholders’/members’ equity and shares issued and outstanding as of                     , 2015 would not change.

 

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The as adjusted and as further adjusted columns in the table above include the following:

 

                shares of our common stock that are issuable upon the conversion of             Class C units of Topco that were issued, outstanding and vested as of                     , 2015, which conversion will occur in connection with the Corporate Reorganization; and

 

                shares of our restricted stock issuable upon the conversion of             Class C units of Topco that were issued, outstanding and unvested as of                     , 2015, which conversion will occur in connection with the Corporate Reorganization.

The as adjusted and as further adjusted columns in the table above exclude the following:

 

                shares of common stock reserved for future issuance under our 2015 Stock Option and Incentive Plan, which will become effective upon the consummation of this offering, and which contains provisions that automatically increase its share reserve each year.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our historical net tangible book value as of                 , 2015 was $                 million, or $                 per share. Our historical net tangible book value excludes $                 million of goodwill and intangible assets and $                 million of net deferred tax assets—long term.

Because all of the shares of our common stock to be sold in this offering, including those subject to the underwriters’ option to purchase additional shares, will be sold by the selling stockholders, there will be no increase in the number of shares of our common stock outstanding as a result of this offering. The common stock to be sold by the selling stockholders is common stock that will be currently issued and outstanding following the Corporate Reorganization. Accordingly, our pro forma net tangible book value as of                 , 2015, would be unchanged at $                 million, or $                 per share, prior to giving effect to the payment by us of the Performance Bonus Payments, the May 2015 Special Dividend and estimated offering expenses of $                 million in connection with this offering.

After deducting the payment of the Performance Bonus Payments, the May 2015 Special Dividend and the estimated offering expenses payable by us in connection with this offering, our pro forma as adjusted net tangible book value as of                  , 2015 would have been $                 million, or $                 per share. This represents an immediate decrease in pro forma net tangible book value of $                 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $                 per share to investors purchasing shares of common stock in this offering at the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

$              

Pro forma net tangible book value per share as of                 , 2015

$              

Decrease in pro forma net tangible book value per share attributable this offering

Pro forma as adjusted net tangible book value per share immediately after this offering

     

 

 

 

Dilution in pro forma net tangible book value share to new investors in this offering

$     
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would not affect our pro forma as adjusted net tangible book value per share to new investors, but would increase or decrease, as applicable, dilution per share to new investors in this offering by $            .

 

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The number of shares of common stock that will be outstanding after this offering is based on 75,000,000 shares outstanding as of                  , 2015, and includes:

 

                     shares of our common stock that are issuable upon the conversion of                  Class C units of Topco that were issued and outstanding and vested as of                  , 2015, which conversion will occur in connection with the Corporate Reorganization; and

 

                     shares of our restricted stock issuable upon the conversion of             Class C units of Topco that were issued and outstanding and unvested as of                 , 2015, which conversion will occur in connection with the Corporate Reorganization as described above.

The number of shares of common stock that will be outstanding after this offering excludes:

 

                     shares of common stock reserved for future issuance under our 2015 Plan, which will become effective upon the consummation of this offering, and which contains provisions that automatically increase its share reserve each year.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated statements of income for the fiscal year ended December 31, 2014 and the three months ended March 31, 2014 and 2015 present our consolidated results of operations giving pro forma effect to the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Sponsor Acquisition and Subsequent Financings”, as if such transactions had occurred on January 1, 2014. The unaudited pro forma condensed consolidated balance sheet as of March 31, 2015 presents our consolidated balance sheet giving effect to the May 2015 Special Dividend as if it had occurred on March 31, 2015. The pro forma financial information does not give effect to this offering, including the use of cash for offering expenses, the Performance Bonus Payments and the tax receivable agreement. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of our Predecessor and Successor entities, as applicable.

The unaudited pro forma condensed consolidated financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.

The Sponsor Acquisition was accounted for using the acquisition method of accounting. The initial estimated fair values of the acquired assets and assumed liabilities as of the date of acquisition, which are based on the consideration paid and estimates and our assumptions, are reflected herein. As explained in more detail in the accompanying Notes to the Unaudited Pro Forma Condensed Statement of Operations, the total purchase price of approximately $320 million to acquire the SkinnyPop business has been allocated to the assets acquired and assumed liabilities of SkinnyPop based upon estimated fair values at the date of acquisition. Independent valuation specialists conducted analyses in order to assist our management in determining the fair values of the acquired assets and liabilities assumed. Our management is responsible for these internal and third-party valuations and appraisals and they are continuing to review the amounts and allocations to finalize these amounts. Although our review is substantially complete and there are no pending items associated with accounting for the acquisition, we have one year from the date of completion of the Sponsor Acquisition to finalize these amounts and are therefore continuing to review.

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations of Amplify Snack Brands, Inc. that would have occurred had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend occurred on January 1, 2014. The unaudited pro forma consolidated financial information contains a variety of adjustments, assumptions and estimates, is subject to numerous other uncertainties and the assumptions and adjustments as described in the accompanying notes hereto and should not be relied upon as being indicative of our results of operations had the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations for any future period or date. The unaudited pro forma consolidated financial information does not include results of the Paqui, LLC acquisition. Company management evaluated the impact to the Company’s financial statements of the Paqui, LLC acquisition and concluded that the impact was not large enough to require or separately warrant the inclusion of pro forma financial results inclusive of Paqui, LLC under applicable SEC rules and regulations or under GAAP.

The pro forma adjustments give effect to the following items in connection with the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend:

 

    the asset and liability valuations and related purchase price allocations associated with the Sponsor Acquisition;

 

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    the effect of the incurrence of a $150 million term loan and a $7.5 million revolving facility in connection with the Sponsor Acquisition;

 

    the incurrence of an incremental $50 million under the Credit Agreement governing the $150 million term loan, increasing the aggregate term loan to $200 million, as part of the December 2014 Special Dividend;

 

    the incurrence of an incremental $7.5 million under the Credit Agreement governing the $200 million term loan, increasing the aggregate term loan to $207.5 million and the incurrence of a $15 million borrowing under our revolving facility increasing the aggregate revolving facility to $25 million, each as part of the May 2015 Special Dividend;

 

    the estimated compensation expense associated with the Founder Contingent Compensation in connection with the Sponsor Acquisition, based on our achievement of certain contribution margin benchmarks during the fiscal year 2015, and the tax benefit, to the extent realized by us, associated with the arrangement; and

 

    the associated income tax expense effect of the above adjustments.

 

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AMPLIFY SNACK BRANDS, INC.

Unaudited Pro Forma Condensed Consolidated Statement of Income

For the Year Ended December 31, 2014

 

     Historical(1)                 Pro Forma  
     Predecessor           Successor                 Combined  

In thousands, except share and per unit/share

information

   January 1,
2014 to
July 16,
2014
           July 17, 2014
to
December 31,
2014
     Pro Forma
Adjustments
         Year Ended
December 31,
2014
 

Net sales(2)

   $ 68,353            $ 64,004       $         $ 132,357   

Cost of goods sold(2)

     29,429              28,724                   58,153   
  

 

 

         

 

 

    

 

 

      

 

 

 

Gross profit

     38,924              35,280                   74,204   

Sales & marketing expenses

     5,661              6,977                   12,638   

General & administrative expenses

     1,394              13,611         12,233  (3)(4)         27,238   

Sponsor Acquisition-related expenses

     1,288              2,215         (2,993 )(5)         510   
  

 

 

         

 

 

    

 

 

      

 

 

 

Total operating expenses

  8,343        22,803      9,240      40,386   

Operating income

  30,581        12,477      (9,240   33,818   

Interest expense

                  4,253         8,631  (6)         12,884   
  

 

 

         

 

 

    

 

 

      

 

 

 

Pre-tax income

  30,581        8,224      (17,871   20,934   

Income tax expense

         3,486      3,840  (7)    7,326   
  

 

 

         

 

 

    

 

 

      

 

 

 

Net income

   $ 30,581            $ 4,738       $ (21,711      $ 13,608   
  

 

 

         

 

 

    

 

 

      

 

 

 

Basic and diluted earnings per unit/share

$ 76,452.74      $ .06    $ .18   

Basic and diluted weighted average units/shares outstanding:

     400              75,000,000              75,000,000   

 

(1) The amounts in these columns represent our Predecessor’s and Successor’s historical results of operations for the periods reflected.
(2) Includes the effect of $0.4 million of additional cost of sales associated with inventory acquired.
(3) This adjustment reflects the incremental amortization expense associated with the allocation of purchase price to finite-lived identifiable intangible assets consisting of amortization related to customer relationships and the non-competition agreements entered into with the Founders.
(4) This adjustment reflects the incremental compensation expense associated with the Founder Contingent Compensation that would have been recognized if the employment agreements with the Founders had been in effect for the full year. The total estimated obligation of $26.8 million is being recognized ratably over the 18-month contractual service period. See Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information.
(5) This reflects an adjustment to exclude the non-recurring Sponsor Acquisition-related expenses, which consist of the following:

 

     Predecessor          Successor  
     January 1,
2014 to
July 16,
2014
          July 17, 2014 to
December 31,
2014
 

Transaction bonuses(i)

   $ 778           $   

Sponsor transaction costs(ii)

                   2,215   
  

 

 

        

 

 

 

Total

   $ 778           $ 2,215   
  

 

 

        

 

 

 

 

  i. Represents transaction bonuses paid to employees in connection with the Sponsor Acquisition.
  ii. Represents legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition.

 

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AMPLIFY SNACK BRANDS, INC.

Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income

For the Year Ended December 31, 2014

 

(6) This adjustment reflects the following adjustments to increase interest expense as a result of the $150 million term loan and a $7.5 million revolving facility in connection with the Sponsor Acquisition; the incurrence of an incremental $50 million term loan increasing the aggregate term loan to $200 million, as part of the December 2014 Special Dividend and the incurrence of an incremental $7.5 million term loan increasing the aggregate term loan to $207.5 million as well as the incurrence of a $15 million borrowing under our revolving facility, increasing the aggregate revolving facility to $25 million each as part of the May 2015 Special Dividend:

 

Pro forma interest expense components:

  

Aggregate $207.5 million term loan and $15 million revolving loan interest expense(i)

   $ 12,026   

Amortization of capitalized debt issuance costs associated with aggregate term loan amortized over five years

     758   

Revolving facility unused commitment fees

     50   

Other administrative fees

     50   
  

 

 

 

Total pro forma interest expense

     12,884   

Less: actual interest expense for the period

     (4,253
  

 

 

 

Net pro forma adjustment to interest expense

   $ 8,631   
  

 

 

 

 

  (i) Reflects the impact of scheduled amortization payments. Assumes an interest rate of 5.50% per annum. A  18% change in the interest rate would change our annual interest expense by $0.3 million.

 

(7) Reflects the statutory tax rate of 35%.

Unaudited Pro Forma Condensed Consolidated Statement of Income

For the Three Months Ended March 31, 2015

 

    Historical(1)           Pro Forma  
(In thousands, except share and per share information)   Three months
ended March 31,
2015
    Pro Forma
Adjustments
    Three months
ended March 31,
2015
 

Net Sales

  $ 44,275      $      $ 44,275   

Cost of goods sold

    19,866               19,866   
 

 

 

   

 

 

   

 

 

 

Gross Profit

  24,409           24,409   

Sales and marketing expenses

  3,618           3,618   

General and administrative expenses

  9,032           9,032   

Sponsor Acquisition-related expenses

              
 

 

 

   

 

 

   

 

 

 

Total operating expenses

  12,650           12,650   

Operating income

  11,759           11,759   

Interest expense

    2,955        178 (2)      3,133   
 

 

 

   

 

 

   

 

 

 

Pre-tax income

    8,804        (178     8,626   

Income tax expense

    3,900        (881 )(3)      3,019   
 

 

 

   

 

 

   

 

 

 

Net income

  $ 4,904      $ 703      $ 5,607   
 

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

  $ .07        $ .07   

Basic and diluted weighted average shares outstanding

    75,000,000          75,000,000   

 

(1) The amounts in these columns represent our Successor’s historical results of operations for the three months ended March 31, 2015.

 

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(2) This adjustment reflects the following adjustments to interest expense as a result of the $150 million term loan and a $7.5 million revolving facility in connection with the Sponsor Acquisition; the incurrence of an incremental $50 million term loan increasing the aggregate term loan to $200 million as part of the December 2014 Special Dividend and the incurrence of an incremental $7.5 million term loan increasing the aggregate term loan to $207.5 million as well as the incurrence of a $15 million borrowing under our revolving facility, increasing the aggregate revolving facility to $25 million each as part of the May 2015 Special Dividend:

 

Pro forma interest expense components:

  

Aggregate $207.5 million term loan and $15 million revolving loan interest expense(i)

   $ 2,918   

Amortization of capitalized debt issuance costs associated with aggregate term loan amortized over five years

     189   

Revolving facility unused commitment fees

     13   

Other administrative fees

     13   
  

 

 

 

Total pro forma interest expense

     3,133   

Less: actual interest expense for the period

     (2,955
  

 

 

 

Net pro forma adjustments to interest expense

   $ 178   
  

 

 

 

 

  (i) Reflects the impact of scheduled amortization payments. Assumes an interest rate of 5.5% per annum. A 1/8% change in the interest rate would change our quarterly interest expense by $0.1 million.

 

(3) Reflects the statutory tax rate of 35%.

Unaudited Pro Forma Condensed Consolidated Statement of Income

For the Three Months Ended March 31, 2014

 

    Historical(1)           Pro Forma  
(In thousands, except share and per share information)   Three months
ended March 31,
2014
    Pro Forma
Adjustments
    Three months
ended March 31,
2014
 

Net Sales

  $ 25,706      $      $ 25,706   

Cost of goods sold

    11,378               11,378   
 

 

 

   

 

 

   

 

 

 

Gross Profit

  14,328           14,328   

Sales and marketing expenses

  1,945           1,945   

General and administrative expenses

  669      5,644 (4)    6,313   

Sponsor Acquisition-related expenses

              
 

 

 

   

 

 

   

 

 

 

Total operating expenses

  2,614      5,644      8,258   

Operating income

  11,714      (5,644   6,070   

Interest expense

           3,274 (2)      3,274   
 

 

 

   

 

 

   

 

 

 

Pre-tax income

    11,714        (8,918     2,796   

Income tax expense

           (979 )(3)      979   
 

 

 

   

 

 

   

 

 

 

Net income

  $ 11,714      $ (9,897   $ 1,817   
 

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

  $ 29,285.11        $ 0.02   

Basic and diluted weighted average shares outstanding

    400          75,000,000   

 

(1) The amounts in these columns represent our Predecessor’s historical results of operations for the three months ended March 31, 2014.
(2) This adjustment reflects the following adjustments to interest expense as a result of the $150 million term loan and a $7.5 million revolving facility in connection with the Sponsor Acquisition; the incurrence of an incremental $50 million term loan increasing the aggregate term loan to $200 million, as part of the December 2014 Special Dividend and the incurrence of an incremental $7.5 million term loan increasing the aggregate term loan to $207.5 million as well as the incurrence of a $15 million borrowing under our revolving facility, increasing the aggregate revolving facility to $25 million each as part of the May 2015 Special Dividend:

 

Pro forma interest expense components:

  

Aggregate $207.5 million term loan and $15 million revolving loan interest expense(i)

   $ 3,059   

Amortization of capitalized debt issuance costs associated with aggregate term loan amortized over five years

     189   

Revolving facility unused commitment fees

     13   

Other administrative fees

     13   
  

 

 

 

Total pro forma interest expense

     3,274   

Less: actual interest expense for the period

       
  

 

 

 

Net pro forma adjustments to interest expense

   $ 3,274   
  

 

 

 

 

  (i) Reflects the impact of scheduled amortization payments. Assumes an interest rate of 5.5% per annum. A 1/8% change in the interest rate would change our quarterly interest expense by $0.1 million.

 

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(3) Reflects the statutory tax rate of 35%.

 

(4) This adjustment reflects the incremental amortization expense associated with the allocation of purchase price to finite-lived identifiable intangible assets consisting of amortization related to customer relationships and the non-competition agreements entered into with the Founders.

AMPLIFY SNACK BRANDS, INC.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of March 31, 2015

 

     Historical (1)            Pro
Forma
 
     March 31,
2015
     Pro Forma
Adjustments (2)
    March 31,
2015
 

ASSETS

       

CURRENT ASSETS:

       

Cash and cash equivalents

   $ 16,887       $ 22,285      $ 39,172   

Accounts receivable

     13,319                13,319   

Inventories

     3,768                3,768   

Net deferred tax assets – current

     2,196                2,196   

Other current assets

     845                845   
  

 

 

    

 

 

   

 

 

 

Total current assets

     37,015         22,285        59,300   

PROPERTY AND EQUIPMENT – Net

     1,029                1,029   

OTHER ASSETS:

       

Goodwill

     45,694                45,694   

Intangible assets

     262,344                262,344   

Net deferred tax assets – long term

     1,177                1,177   

Other assets

     3,232         119        3,351   
  

 

 

    

 

 

   

 

 

 

TOTAL

   $   350,491       $ 22,404      $   372,895   
  

 

 

    

 

 

   

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

       

CURRENT LIABILITIES:

       

Accounts payable

   $ 6,500       $      $ 6,500   

Accrued liabilities

     7,737                7,737   

Dividend payable

             22,285        22,285   

Senior term loan – current portion

     10,000         250        10,250   

Other current liabilities

     593                593   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     24,830         22,535        47,365   

LONG-TERM LIABILITIES

       

Senior term loan

     187,500         22,250        209,750   

Founder contingent consideration

     10,945                10,945   

Other long term liabilities

     356                356   

Total long-term liabilities

     198,801         22,250        221,051   

STOCKHOLDER’S/MEMBERS’ EQUITY:

       

Capital stock

                      

Additional paid in capital

     117,218         (22,285     94,933   

Members’ equity

            

Retained earnings

     9,642         (96     9,546   

Total stockholders’/ members’ equity

     126,860         (22,381     104,479   
  

 

 

    

 

 

   

 

 

 

TOTAL

   $ 350,491       $ 22,404      $ 372,895   
  

 

 

    

 

 

   

 

 

 

 

(1) The amounts in this column represents our Successor’s balance sheet as of March 31, 2015.
(2) This adjustment reflects (i) the incurrence of an incremental $7.5 million term loan increasing the aggregate term loan to $205 million (after the payment of a scheduled principal payment), as well as the incurrence of a $15 million borrowing under our revolving facility, increasing the aggregate revolving facility to $25 million, each as part of the May 2015 Special Dividend and (ii) the accrual of the May 2015 Special Dividend.

 

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Pro forma debt components:

  

Incremental term loan

   $ 7,500   

Revolving facility

     15,000   
  

 

 

 

Total pro forma debt increase

     22,500   

Less: deferred financing costs paid

     (119

Less: other transaction fees paid

     (96
  

 

 

 

Total dividend payable

   $ 22,285   
  

 

 

 

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our historical consolidated financial data. We have derived the selected (1) statements of income data for the year ended December 31, 2013 and the period from January 1, 2014 to July 16, 2014 for the Predecessor (as discussed below) and for the period from July 17, 2014 to December 31, 2014 for the Successor (as discussed below) and (2) balance sheet data as of December 31, 2014 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the following selected consolidated financial data as of and for the year ended December 31, 2012, or the 2012 Financial Data, from our unaudited consolidated financial statements that are not included in this prospectus. We caution you not to place undue reliance on the 2012 Financial Data. We have derived the selected (1) statements of income data for the three months ended March 31, 2014 for the Predecessor and the three months ended March 31, 2015 for the Successor and (2) balance sheet data as of March 31, 2015 from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the financial information set forth in those statements included elsewhere in this prospectus.

Our financial data prior to the date of the Sponsor Acquisition, which are the years ended December 31, 2012 and December 31, 2013 and the period from January 1, 2014 to July 16, 2014, are presented as the financial data of the Predecessor, which includes the results of the then-existing SkinnyPop Popcorn LLC. The financial data after the date of the Sponsor Acquisition, which are the period from July 17, 2014 to December 31, 2014 and the three months ended March 31, 2015, are presented as the financial data of the Successor. The balance sheet data as of December 31, 2013 is presented as the balance sheet of the Predecessor and as of December 31, 2014 and March 31, 2015 is presented as the balance sheet of the Successor. The Predecessor and Successor financial data has been prepared on different accounting bases and therefore the sum of the data for the two reporting periods should not be used as an indicator of our full year performance.

After the consummation of the Sponsor Acquisition, the Company along with its subsidiary SkinnyPop Popcorn LLC, are referred to collectively in this prospectus as the “Successor”. Prior to the consummation of the Sponsor Acquisition, SkinnyPop Popcorn LLC is referred to in this prospectus as the “Predecessor”. We applied Financial Accounting Standards Board’s, or FASB, Accounting Standards Codification Topic 805, “Business Combinations” on July 17, 2014, the closing date of the Sponsor Acquisition, and as a result, the merger consideration in the Sponsor Acquisition was allocated to the respective fair values of the assets acquired and liabilities assumed from the Predecessor. The fair value of identifiable intangibles was recorded at $265.3 million. For the period from July 17, 2014 to December 31, 2014, the Successor’s general and administrative expenses increased by $1.9 million as amortization was recorded. For the three months ended March 31, 2015, amortization expense was $1.0 million. As a result of the application of acquisition method accounting, the Successor balances and amounts presented in the audited consolidated financial statements and footnotes are not comparable with those of the Predecessor. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full year or any other period.

 

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You should read the following selected consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Capitalization”, “Unaudited Pro Forma Condensed Consolidated Financial Information” and all of our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Predecessor     Successor     Predecessor     Successor  
(In thousands, except share
and per share information)
  Year
ended
December 31,
2012
    Year
ended
December 31,
2013
    January 1,
2014 to

July 16,
2014
    July 17,
2014 to
December 31,
2014
    Three
Months
ended
March 31,
2014
    Three
Months
ended
March 31,
2015
 

Statement of Income Data:

                 

Net sales

  $ 16,019      $ 55,710      $ 68,353      $ 64,004      $ 25,706      $ 44,275   

Cost of goods sold

    7,047        23,054        29,429        28,724        11,378        19,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     

Gross profit

    8,972        32,656        38,924        35,280        14,328        24,409   

Sales & marketing expenses

    1,495        5,938        5,661        6,977        1,945        3,618   

General & administrative expenses

    679        1,960        1,394        13,611        669        9,032   

Sponsor Acquisition-related expenses(1)

                  1,288        2,215                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2,174        7,898        8,343        22,803        2,614        12,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    6,798        24,758        30,581        12,477        11,714        11,759   

Interest expense

                         4,253               2,955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

    6,798        24,758        30,581        8,224        11,714        8,804   

Income tax expense

                         3,486               3,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 6,798      $ 24,758      $ 30,581      $ 4,738      $ 11,714      $ 4,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per unit/share(2)

  $   16,995.01     $   61,895.01     $   76,452.74     $ 0.06     $   29,285.11      $ 0.07   

Basic and diluted weighted average units/shares outstanding(2)

    400       400       400       75,000,000       400        75,000,000   
     

Cash Flow Data:

                 

Cash from operating activities

  $ 6,386      $ 22,469      $ 26,339      $ 12,719      $ 11,640      $ 14,142   

Cash used in investing activities

    (16     (456     (278     (294,630     (82     (370

Cash from (used in) financing activities

    (5,848     (19,362     (28,533     287,526        (9,687     (2,500

 

(1) In the period from January 1 to July 16, 2014 and the period from July 17 to December 31, 2014, the Sponsor Acquisition-related expenses reflect the Sponsor Acquisition.
(2) See Note 2 and Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted earnings per unit/share and the weighted average units/shares outstanding used in the computation of the per unit/share amounts.

 

(In thousands)    Predecessor           Successor  
   At December 31,
2012
     At December 31,
2013
           At December 31,
2014
     At March 31,
2015
 

Balance Sheet Data:

                

Cash and cash equivalents

   $ 870       $ 3,519            $ 5,615       $ 16,887   

Working capital(1)

     1,671         6,599              3,378         12,185   

Property and equipment—net

             468              746         1,029   

Other assets

                          313,387         312,447   

Total assets

       2,550           11,053                338,891         350,491   

Total indebtedness(2)

                          206,936         209,394   

Total stockholder’s/members’ equity

     1,671         7,067              121,168         126,860   

 

(1) Working capital is the sum of current assets less current liabilities.
(2) Total indebtedness consists of the accrued amounts due in connection with the Founder Contingent Compensation, the actual outstanding principal amount of the term loan under our Credit Agreement and other current liabilities. See “Unaudited Pro Forma Condensed Consolidated Financial Information”.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this prospectus.

Overview

Amplify Snack Brands is a high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for BFY snacks. Our anchor brand, SkinnyPop, is a rapidly-growing, highly-profitable and market-leading BFY RTE popcorn brand. We recently acquired a second BFY brand, Paqui, an emerging BFY tortilla chip brand, that has many of the same key taste and BFY attributes as SkinnyPop. We believe that our focus on building a portfolio of exclusively BFY snack brands will allow us to leverage our platform to realize material synergies across our family of BFY brands, as well as allow our retail customers to consolidate their vendor relationships in this large and growing segment.

Our SkinnyPop brand sells premium products made from high-quality, simple ingredients and is sold in over 47,000 retail locations in the United States and Canada. We distribute our products across a wide variety of retail channels, including natural and conventional grocery, drug, convenience, club and mass merchandise. We also have a presence in the foodservice and selected other non-food retail channels. Our SkinnyPop product portfolio consists of four core flavors (Original, Black Pepper, White Cheddar Flavor and Naturally Sweet), along with occasional rotational flavors, which are sold in a variety of packaging sizes and marketed under the SkinnyPop brand. Our SkinnyPop brand has experienced strong growth, driven by distribution gains, increases in sales velocities and new product introductions. As is evidenced by our high repeat purchase patterns, we have built a loyal and growing customer base for our SkinnyPop brand. Additionally, we believe retailers find our SkinnyPop products to be attractive because of our premium price points and strong sales velocities. While SkinnyPop’s growth has been rapid, we believe significant opportunity exists for continued growth.

Our corporate vision is to continue to build a diversified and BFY-focused snacking company that aligns with continued increases in consumer preferences for BFY products and overall snacking trends. We believe this focus gives us a competitive advantage in the large and intensely competitive snack foods market. We intend to achieve our goal by both developing and acquiring snacking brands and products that deliver exceptional taste, align with our BFY mission and allow us to leverage our management and infrastructure to help drive net sales growth and increased profitability.

Components of Our Results of Operations and Trends Affecting Our Business

Net Sales

Our net sales are derived from the sale of our products to our retailer customers, who purchase either directly from us or through third party distributors. Our products are sold to consumers through an increasing number of locations primarily in the natural and conventional grocery, drug and convenience, club and mass merchandise retail channels. We also have a growing presence in the foodservice and selected other non-food retail channels. Historically, all of our products have been sold

 

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under the SkinnyPop brand, which we continue to roll out in leading retailers across the United States. In April 2015, we acquired Paqui, a BFY tortilla chip brand.

Our net sales growth is driven by the following factors:

 

    Increased penetration of our more established retail channels, including the drug, natural and conventional grocery and club distribution channels as well as continued expansion into other sizeable distribution channels;

 

    Increasing sales velocity driven by growing awareness and consumer loyalty;

 

    Continued share gain by BFY products in the large and growing U.S. salty snacking market;

 

    The RTE popcorn category, into which we sell our SkinnyPop products, which was the fastest growing category across all U.S. salty snacking categories in 2014, with a growth rate of 22.6%; and

 

    Consumer trends and preferences, including a greater focus on health and wellness, increase consumption of smaller, more frequent meals throughout the day and a strong preference for convenient BFY products.

Our net sales increased by $76.7 million, or 138%, from $55.7 million for the year ended December 31, 2013 to $132.4 million for the Pro Forma Year Ended December 31, 2014 (Unaudited) and by $18.6 million, or 72%, from $25.7 million for the three months ended March 31, 2014 to $44.3 million for the three months ended March 31, 2015. While we expect our net sales to increase in absolute dollar in future periods, we expect that our net sales growth rate will not keep pace with our net sales growth rate in prior periods, due to the increasing cumulative size of the net sales base on which future growth rates will be measured.

Sales are recorded net of discounts, allowances, coupons, slotting fees and trade advertising that we offer our customers. Such amounts are estimated and recorded as a reduction in total gross sales in order to arrive at reported net sales. Management believes that net sales is the most appropriate measure of our revenues and the most useful measure for investors in understanding our business over time. Our net sales are periodically influenced by the introduction and discontinuance of sales and promotion incentives. We anticipate that promotional activities will continue to impact our net sales and that changes in such activities will continue to impact period-over-period results.

Our two largest customers in 2014, Costco and Sam’s Club, represented approximately 34.7% and 20.9% of our net sales on a pro forma unaudited basis for the year. We believe our relationships with these retailers have helped us increase the brand awareness for SkinnyPop and thereby enabled incremental sales to new and existing customers. In recent months, we have significantly increased both the number of retail locations where our products are sold and the number of our products found in individual retail locations across a variety of retail channels. We believe that by increasing penetration in all of our distribution channels, combined with greater brand awareness, new product introductions and favorable consumer trends, we will continue to drive our net sales growth in future periods. Although we have continued to grow and diversify our customer base, we expect that most of our sales will continue to come from a relatively small number of customers for the foreseeable future. In addition, we do not have purchase commitments or minimum volume requirements with any of our customers; accordingly, our net sales may fluctuate significantly from period to period.

We sell our products in varying package sizes and through multiple distribution channels. We do not charge the same price for our products on a per ounce basis across package sizes and we do not charge the same price for the same product across all distribution channels. Accordingly, the amount of our net sales that we recognize will vary from period to period depending on the mix of package sizes sold and distribution channels sold through during those periods.

 

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Gross Profit

Our gross profit reflects our net sales less our cost of goods sold, which consists of the costs of ingredients, packaging materials, contract manufacturing fees, shipping and handling costs, in-bound freight charges, equipment repairs, reserves for inventory obsolescence and depreciation of manufacturing equipment.

Our gross profit margins are impacted by input costs, which are subject to pricing movements driven by market supply and demand, and against which we do not engage in any hedging of our financial exposure. In recent periods, the prices of yellow corn (which impacts the price of popcorn kernels), sunflower oil and fuel have been priced below their respective historical five-year averages and we have realized some benefits from these low prices in the form of reduced cost of goods sold and resulting higher gross profit margins. We expect to mitigate any adverse movement in input costs through a combination of cost management and price increases. However, if our mitigation strategies do not eliminate increased costs, we may be unable to pass any such adverse movement in input costs onto our customers, which may thereby increase our cost of goods sold and, thus, reduce our gross profit. In addition, if our input costs decline, we may be asked to pass along these reduced costs to our customers in the form of lower prices for our products.

All of our SkinnyPop products are currently sourced from a single third-party co-manufacturing facility dedicated solely to manufacturing our products. We are subject to fluctuations in the cost of labor as well as the cost of film and corrugate for packaging of our products because these costs, plus a markup, are passed on to us by our single third-party co-manufacturer. Our relationship and contract terms with this third-party afforded us the opportunity to rapidly scale our business while maintaining our existing product quality, and provided us with significant predictability around contract manufacturing fees, and, as such, mitigated fluctuations in our cost of goods sold. While this relationship has historically been a benefit to us as we built our business, it also exposed us to the risks of relying on a single manufacturer and production facility.

Our gross profit increased by $41.5 million, or 127%, from $32.7 million for the year ended December 31, 2013 to $74.2 million for the Pro Forma Year Ended December 31, 2014 (Unaudited) and by $10.1 million, or 70%, from $14.3 million for the three months ended March 31, 2014 to $24.4 million for the three months ended March 31, 2015, driven by strong growth in net sales. Our gross profit margin decreased modestly from 58.6% for the year ended December 31, 2013 to 56.1% for the Pro Forma Year Ended December 31, 2014 (Unaudited), reflecting the effect of higher input costs and promotional activities. Our gross profit margin decreased modestly from 55.7% for the three months ended March 31, 2014 to 55.1% for the three months ended March 31, 2015, driven by higher trade promotional spending. While we expect our gross profit to increase in absolute dollars in future periods, we expect that our gross profit as a percentage of net sales will fluctuate and may decrease as a result of the competitive and other factors described herein.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses include salaries and wages, commissions, bonuses and incentives for our sales and marketing personnel, broker fees, sales-related travel and entertainment expenses and other marketing and advertising expenses. Our marketing programs also include selective event sponsorships designed to increase brand awareness and to provide opportunities to sample branded products to consumers. Included in sales and marketing expense are costs and fees relating to the execution of in-store product demonstrations.

Our sales and marketing expenses have remained relatively flat as a percentage of our net sales in recent periods, but we expect that our sales and marketing expenses in future periods will increase,

 

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as measured in both absolute dollars and as a percentage of our net sales, as we invest to support new product releases and drive greater brand awareness, attract new customers and increase household penetration.

General and Administrative Expenses

General and administrative expenses include salaries and wages for our management and general administrative personnel, liabilities associated with the Founder Contingent Compensation, depreciation of non-manufacturing property and equipment, professional fees to service providers including accounting and legal (both in connection with the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend, as well as costs incurred in the ordinary course of our business), costs associated with the implementation and utilization of our new corporate ERP system, amortization of intangible assets, insurance, travel and other operating expenses.

We continue to increase headcount, particularly in our management and finance departments, to support our continued growth. We expect our general and administrative expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company, which could impact our future operating profitability. After this offering, we expect to incur incremental annual costs related to operating as a public company in the range of $1.5 to $2.0 million.

Sponsor Acquisition-related Expenses

Sponsor Acquisition-related expenses with respect to Predecessor periods consist of (i) transaction expenses incurred by the Predecessor in connection with the Sponsor Acquisition and paid to the Predecessor’s advisors and (ii) transaction bonuses paid to employees of the Predecessor in connection with the Sponsor Acquisition. Sponsor Acquisition-related expenses for Successor periods consist of legal, accounting, tax, insurance and other diligence fees paid by the Successor to consultants in connection with the Sponsor Acquisition.

Interest Expense

In July 2014, SkinnyPop Popcorn LLC entered into senior secured credit facilities in connection with the Sponsor Acquisition. Interest expense in our results of operations consists of interest and commitment fees payable pursuant to these senior secured credit facilities, as well as costs incurred in connection with such debt financing that have been deferred and are being amortized using the effective interest method over the term of the indebtedness. The senior secured credit facilities consist of a term loan facility and a revolving facility. Proceeds from the initial term loan borrowings were primarily used to finance the Sponsor Acquisition and to pay fees and expenses in connection therewith. Proceeds from additional borrowings under the term loan facility were used to pay a $59.8 million distribution to the Company in 2014 to provide liquidity to our ultimate equityholders. The revolving facility may be used by us for working capital and for other general corporate purposes, including acquisitions and investments and dividends and distributions. See “—Indebtedness” and Note 8 in the notes to our consolidated financial statements included elsewhere in this prospectus for additional information.

At December 31, 2014 and March 31, 2015, we had $200 million and $197.5 million, respectively, outstanding under the term loan facility and no borrowings outstanding under the revolving facility. In May 2015, in connection with our Third Amended Credit Facility and as part of the May 2015 Special Dividend, we increased our term loan borrowings by $7.5 million to a total of $205 million, net of principal payments made in the first quarter of $2.5 million, and our revolving facility by $17.5 million to a total of $25 million and made a revolving loan borrowing of $15 million. The interest rates for the outstanding obligations at December 31, 2014 and March 31, 2015 for the term loan facility were LIBOR (with a 1.00% LIBOR floor) plus 4.5%, or 5.5% per annum. The commitment fee on the unused

 

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revolving facility was 0.5% per annum. The interest rates and commitment fee on the unused revolving facility remained unchanged in connection with our Third Amended Credit Facility. Assuming the interest rate and the outstanding principal amount of our indebtedness remains the same, we expect our cash interest expense to be approximately $11.5 million in 2015. This is a substantial increase from 2014. We also expect to use $10.2 million in cash in 2015 to make required principal payments on our term loans in accordance with the maturity schedule set forth below.

 

     As of
March 31,
2015
 

Remainder of 2015

   $ 7,688   

2016

     10,250   

2017

     10,250   

2018

     10,250   

2019

     166,562   
  

 

 

 

Total .

$ 205,000   
  

 

 

 

Competitive Factors

Competitive factors in the snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design. Although we have been able to compete effectively, we expect these competitive factors to continue to impact our business.

The Sponsor Acquisition and Subsequent Financings

The Sponsor Acquisition

On July 17, 2014, the Predecessor was acquired by investment funds and entities associated with TA Associates, a private equity entity. We refer to this transaction as the Sponsor Acquisition. To effect the Sponsor Acquisition, the Predecessor’s members entered into a Unit Purchase Agreement, or the Purchase Agreement, with us and TA Midco 1, LLC, or Midco, whereby the Predecessor’s members contributed all units of the Predecessor to Midco in exchange for cash and rollover stock. The Predecessor then merged with and into Midco, with Midco as the surviving entity. Midco subsequently changed its name to SkinnyPop Popcorn LLC, a subsidiary of the Company. The parties agreed to consummate the Sponsor Acquisition, subject to the terms and conditions set forth in the Purchase Agreement, for an aggregate purchase consideration of $320 million, which included rollover stock from the Predecessor’s members representing approximately 14% of the Company. A portion of the purchase consideration is being held in escrow to secure post-closing purchase price adjustments and indemnity claims. The aggregate purchase consideration, and related fees and expenses, were funded by the equity investment in Topco by TA Associates, as well as from certain members of management, and the net proceeds from the borrowing of $150 million under the Credit Agreement. For more information on the Credit Agreement, see “—Indebtedness”.

The December 2014 Special Dividend

In December 2014, SkinnyPop made a distribution of $59.8 million to us, which we distributed to our parent, Topco, who subsequently distributed such proceeds to its unit holders according to the terms of Topco’s Amended and Restated Limited Liability Company Agreement. We refer to this distribution as the December 2014 Special Dividend. The December 2014 Special Dividend was paid in order to provide a return on investment and liquidity to our equity holders and was not used to pay any part of the consideration for the Sponsor Acquisition. We paid for the December 2014 Special Dividend, in part, with the proceeds of the second amendment to our Credit Amendment. For more information on the Credit Agreement and the amendments thereto, see “—Indebtedness”.

 

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The May 2015 Special Dividend

In May 2015, SkinnyPop made a distribution of $22.3 million to us, which we distributed to our parent, Topco, which subsequently distributed such proceeds to its unit holders according to the terms of Topco’s Amended and Restated Limited Liability Company Agreement. We refer to this distribution as the May 2015 Special Dividend. The May 2015 Special Dividend was paid in order to provide a return on investment and liquidity to our equityholders and was not used to pay any part of the consideration of the Sponsor Acquisition. We paid for the May 2015 Special Dividend with the proceeds from borrowings under the Third Amended Credit Facility. For more information on the Credit Facility and the amendments thereto, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness”.

The board of directors considered a number of different factors in making its determination to declare and distribute the December 2014 Special Dividend and the May 2015 Special Dividend using proceeds from the Company’s Second Amended Credit Facility and Third Amended Credit Facility, respectively. As an overall objective, the board of directors desired to provide its stockholders with a modest return on equity capital in a manner that also optimized the Company’s balance sheet from a corporate finance perspective. Given the Company’s historical levels of operating cash flow less capital expenditures, the board of directors believed that incurring additional indebtedness at historically-favorable market rates would allow the Company to reduce its cost of capital, while at the same time preserving the Company’s ability to fund future acquisitions and meet the Company’s future growth objectives. The board of directors reviewed various analyses (some of which were prepared for the board of directors by independent third party advisors) regarding the Company’s expected pro forma interest and fixed charge coverage ratios and the Company’s ongoing ability to meet its pro forma debt service requirements for the foreseeable future. After considering all of these factors, the board of directors determined to pay both the December 2015 Special Dividend and the May 2015 Special Dividend, and to fund such dividends using proceeds from the Company’s Second Amended Credit Facility and Third Amended Credit Facility, respectively.

Results of Operations

Our results of operations prior to the date of the Sponsor Acquisition are presented as the results of the Predecessor, SkinnyPop Popcorn LLC. The results of operations, including the Sponsor Acquisition and results thereafter, are presented as the results of the Successor, the Company and its consolidated subsidiaries. The Pro Forma Year Ended December 31, 2014 (Unaudited) represents the unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2014 after giving pro forma effect to the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend as if such transactions had occurred on January 1, 2014, as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, which section includes a comparative presentation showing all pro forma adjustments made to our historical statements of income for the Predecessor and Successor periods in accordance with the rules and regulations of the SEC. We believe it provides useful information in assessing our business. See “Unaudited Pro Forma Condensed Consolidated Financial Information”. The unaudited pro forma condensed consolidated statement of income is included for informational purposes only and does not purport to reflect the results of operations of Amplify Snack Brands, Inc. that would have occurred had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend occurred on January 1, 2014. The unaudited pro forma condensed consolidated statement of income contains a variety of adjustments, assumptions and estimates, is subject to numerous other uncertainties and the assumptions and adjustments as described in the accompanying notes hereto and should not be relied upon as being indicative of our results of operations had the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend occurred on the dates assumed. The unaudited pro forma condensed consolidated statement of income also does not project our results of operations for any future period or date. The unaudited pro forma condensed consolidated statement of income does not include results of the Paqui, LLC acquisition. Company management

 

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evaluated the impact to the Company’s financial statements of the Paqui, LLC acquisition and concluded that the impact was not large enough to require or separately warrant the inclusion of pro forma financial results inclusive of Paqui, LLC under applicable SEC rules and regulations or under GAAP.

The following tables set forth our statements of income for the periods presented in dollars and as a percentage of our net sales:

 

     Predecessor          Successor  
(In thousands, except percentage information)    Three months
ended
March 31,
2014
     % of
Net
Sales
          Three months
ended
March 31,
2015
     % of
Net
Sales
 

Net sales

   $ 25,706         100        $ 44,275         100

Cost of goods sold

     11,378         44          19,866         45
  

 

 

    

 

 

        

 

 

    

 

 

 

Gross Profit

     14,328         56          24,409         55

Sales & marketing expenses

     1,945         7          3,618         8

General & administrative expenses

     669         3          9,032         20

Sponsor acquisition-related expense

             0                  0
  

 

 

    

 

 

        

 

 

    

 

 

 

Total operating expenses

     2,614         10          12,650         28
  

 

 

    

 

 

        

 

 

    

 

 

 

Operating income

     11,714         46          11,759         27

Interest expense

             0          2,955         7
  

 

 

    

 

 

        

 

 

    

 

 

 

Pre-tax income

     11,714         46          8,804         20

Income tax expense

             0          3,900         9
  

 

 

    

 

 

        

 

 

    

 

 

 

Net income(1)

   $ 11,714         46        $ 4,904         11
  

 

 

    

 

 

        

 

 

    

 

 

 

Other Financial Information (Non-GAAP):

               

Adjusted EBITDA(2)

   $ 11,748         46        $ 19,231         43

Operating cash flow less capital expenditures(3)

   $ 11,558         45        $ 13,772         31

 

(1) For the three months ended March 31, 2014, on a pro forma basis, as described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, our net income would have been $1.8 million.
(2) See “—Non GAAP Financial Measures—Adjusted EBITDA” for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(3) See “—Non GAAP Financial Measures—Operating Cash Flow Less Capital Expenditures” for more information and a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

(In thousands, except percentage
information)
  Predecessor         Successor     Pro Forma  
  Year ended
December 31,
2013
    % of
Net
Sales
     January 1,
2014 to
July 16,
2014
         July 17, 2014
to December 31,
2014
    Year ended
December 31,
2014
     % of
Net
Sales
 

Net sales

  $  55,710        100    $  68,353          $  64,004      $  132,357         100

Cost of goods sold

    23,054        41         29,429            28,724        58,153         44   
 

 

 

   

 

 

    

 

 

       

 

 

   

 

 

    

 

 

 

Gross Profit

    32,656        59         38,924            35,280        74,204         56   

Sales & marketing expenses

    5,938        11         5,661            6,977        12,638         10   

General & administrative expenses

    1,960        4         1,394            13,611        27,238         21   

Sponsor acquisition-related expense

                   1,288            2,215        510         0   
 

 

 

   

 

 

    

 

 

       

 

 

   

 

 

    

 

 

 

Total operating expenses

    7,898        14         8,343            22,803        40,386         31   
 

 

 

   

 

 

    

 

 

       

 

 

   

 

 

    

 

 

 

Operating income

    24,758        44         30,581            12,477        33,818         26   

Interest expense

                              4,253        12,884         10   
 

 

 

   

 

 

    

 

 

       

 

 

   

 

 

    

 

 

 

Pre-tax income

    24,758        44         30,581            8,224        20,934         16   

Income tax expense

                              3,486        7,326         6   
 

 

 

   

 

 

    

 

 

   

 

 

 

 

   

 

 

    

 

 

 

Net income

  $  24,758        44    $  30,581          $ 4,738      $ 13,608         10
 

 

 

   

 

 

    

 

 

       

 

 

   

 

 

    

 

 

 
                 

Other Financial Information (Non-GAAP):

                 

Adjusted EBITDA(1)

  $ 24,805        45    $ 31,947          $ 26,592      $ 58,539         44

Operating cash flow less capital expenditures(2)

  $ 22,013        40    $ 26,061          $ 12,541                  

 

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(1) See “—Non-GAAP Financial Measures—Adjusted EBITDA” for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(2) See “—Non-GAAP Financial Measures—Operating Cash Flow Less Capital Expenditures” for more information and a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Non-GAAP Financial Measures

We include Adjusted EBITDA and operating cash flow less capital expenditures, which we refer to as the non-GAAP metrics, in this prospectus because they are important measures upon which our management assesses our operating performance. We use Adjusted EBITDA as a key performance metric because we believe it facilitates operating performance comparisons from period-to-period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and the impact of equity-based compensation expense. In addition, our Credit Agreement contains financial maintenance covenants, including a total funded debt ratio and a minimum fixed charged ratio, that use Adjusted EBITDA as one of their inputs. We include operating cash flow less capital expenditures in this prospectus because we believe capital expenditures are essential to maintaining our operational capabilities and are a recurring and necessary use of cash. We view operating cash flow less capital expenditures as a key performance metric because it reflects changes in, or cash requirements for, our working capital needs, and is useful in evaluating the amount of cash available for discretionary investments. Because such non-GAAP metrics facilitate internal comparisons of our historical operating performance on a more consistent basis, we also use them for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe the non-GAAP metrics and similar measures are widely used by investors, securities analysts, ratings agencies and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

Our use of non-GAAP metrics has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    Adjusted EBITDA metric does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;

 

    Adjusted EBITDA metrics may not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

    Operating cash flow less capital expenditures does not reflect other non-discretionary expenditures such as mandatory debt service requirements or acquisition consideration paid that could impact residual cash flow available for discretionary expenditures; and

 

    Other companies, including companies in our industry, may calculate Adjusted EBITDA and other non-GAAP measures differently, which reduces their usefulness as a comparative measure.

In evaluating non-GAAP metrics, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of any non-GAAP metrics should not

 

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be construed as an inference that our future results will be unaffected by these expenses or any other expenses, whether or not they are unusual or non-recurring items. When evaluating our performance, you should consider the non-GAAP metrics alongside other financial performance measures, including our net income and other GAAP results.

Adjusted EBITDA

Adjusted EBITDA is a financial performance measure that is not calculated in accordance with GAAP. We define Adjusted EBITDA as net income adjusted to exclude, when appropriate, interest expense, income tax expense, depreciation, amortization of intangible assets, Founder Contingent Compensation expense, inventory fair value adjustment, equity-based compensation expenses, expenses related to the Sponsor Acquisition and other non-operational items. Below, we have provided a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we calculate the measure.

The following tables present a reconciliation of Adjusted EBITDA to our net income, the most directly comparable GAAP measure, for each of the periods indicated:

 

     Predecessor          Successor  
(In thousands)    Three months
ended March 31,
2014
          Three months
ended March 31,
2015
 

Net income

   $   11,714           $ 4,904   

Non-GAAP adjustments:

         

Interest expense

                 2,955   

Income tax expense

                 3,900   

Depreciation

     34             47   

Amortization of intangible assets

                 1,042   

Equity-based compensation expenses

                 788   

Founder Contingent Compensation(1)

                 4,602   

Executive recruitment(2)

                 308   

Other professional services(3)

                 685   
  

 

 

        

 

 

 

Adjusted EBITDA

   $ 11,748           $   19,231   
  

 

 

      

 

 

 

 

(1) Represents compensation expense associated with the Founder Contingent Compensation. See Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information.
(2) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our financial performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
(3) Represents transaction costs associated with legal and accounting services.

 

    Predecessor         Successor     Pro Forma(9)  
(In thousands)   Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
         July 17, 2014 to
December 31,
2014
    Year ended
December 31,
2014
 

Net income

  $ 24,758      $ 30,581          $ 4,738      $ 13,608   

Non-GAAP adjustments:

           

Interest expense(1)

                      4,253        12,884   

Income tax expense(2)

                      3,486        7,326   

Depreciation

    47        78            99        177   

Amortization of intangible assets(3)

                      1,904        4,166   

Inventory fair value adjustment(4)

                      401        401   

Equity-based compensation expenses

                      235        235   

Founder Contingent Compensation(5)

                      8,437        18,408   

Sponsor Acquisition-related expenses(6)

           1,288            2,215        510   

Recapitalization expenses(7)

                      178        178   

Executive recruitment(8)

                      646        646   
 

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $   24,805      $   31,947          $   26,592      $   58,539   
 

 

 

   

 

 

       

 

 

   

 

 

 

 

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(1) Represents interest expense of $4.3 million recorded in Successor period from July 17, 2014 to December 31, 2014, and $12.9 million recorded in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(2) Represents income tax expense of $3.5 million recorded in Successor period from July 17, 2014 to December 31, 2014, and $7.3 million recorded in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(3) Represents amortization of intangible assets of $1.9 million recorded in Successor period from July 17, 2014 to December 31, 2014, and $4.2 million reflected as a component of general & administrative expenses in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(4) This adjustment reflects the elimination of the $0.4 million increase in cost of goods sold related to the Sponsor Acquisition.
(5) Represents compensation expense associated with the Founder Contingent Compensation of $8.4 million recorded in Successor period from July 17, 2014 to December 31, 2014 (see Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information), and $18.4 million reflected as a component of general & administrative expenses in the Pro Forma Year Ended December 31, 2014 (Unaudited) as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”.
(6) Represents the following:

 

    Predecessor         Successor     Pro Forma  
(In thousands)   Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
         July 17, 2014 to
December 31,
2014
    Year ended
December 31,
2014
 

Predecessor transaction costs(i)

  $     —      $ 510          $      $     510   

Transaction bonuses(ii)

           778                     

Sponsor transaction costs(iii)

                      2,215          
 

 

 

   

 

 

       

 

 

   

 

 

 

Total

  $  —      $  1,288          $  2,215      $ 510   
 

 

 

   

 

 

       

 

 

   

 

 

 

 

  i. Represents a supplemental transaction payment and related expenses of $0.5 million paid to Precision Capital, an advisor to the Predecessor, in connection with the Sponsor Acquisition, in recognition of the services that were provided by Precision Capital Group, LLC to the Predecessor. Although the Predecessor was not contractually obligated to pay such amounts, we believe that such payments would not have been made by the Predecessor to Precision Capital Group, LLC but for the consummation of the Sponsor Acquisition. In addition, we are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
  ii. Represents transaction bonuses paid to employees in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.
  iii. Represents legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.

 

(7) Represents the expenses we incurred in connection with the December 2014 Special Dividend. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
(8) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our operating performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.

 

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(9) Represents Pro Forma Year Ended December 31, 2014 (Unaudited) net income, as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, adjusted to exclude, when appropriate, interest expense, income tax expense, depreciation, amortization of intangible assets, Founder Contingent Compensation expense, inventory fair value adjustment, equity-based compensation expenses, expenses related to the Sponsor Acquisition and other non-operational items.

Our Credit Agreement contains financial maintenance covenants, including a total funded debt ratio and a minimum fixed charge ratio, that use Adjusted EBITDA as one of their inputs. Accordingly, we have provided a reconciliation of Adjusted EBITDA to our cash from operating activities, the most directly comparable liquidity measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to cash from operating activities or any other measure of liquidity calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner we calculate the measure. For more information on our Credit Agreement, its material terms, including the financial maintenance covenants, the amounts or limits required for compliance with the covenants and the effects of non-compliance with these covenants, see “—Indebtedness”.

The following tables present a reconciliation of Adjusted EBITDA to our cash from operating activities for each of the periods indicated:

 

     Predecessor    

 

  Successor  
(In thousands)    Three months
ended
March 31, 2014
   

 

  Three months
ended
March 31, 2015
 

Cash from operating activities

   $ 11,640          $ 14,142   

Reconciling items:

        

Interest expense

                2,955   

Income tax expense

                3,900   

Deferred income taxes(1)

                247   

Amortization of deferred financing costs(2)

                (185

Net change in operating assets and liabilities, net of effects of acquisition

     108            (2,821

Executive recruitment(3)

                308   

Other professional services(4)

                685   
  

 

 

   

 

 

 

 

 

Adjusted EBITDA

   $ 11,748          $ 19,231   
  

 

 

   

 

 

 

 

 
(1) Represents a non-cash component of income tax expense above.
(2) Represents a non-cash component of interest tax expense above.
(3) Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our financial performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.

 

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(4) Represents transaction costs associated with legal and accounting services.

 

    Predecessor         Successor  
(In thousands)   Year ended
December 31,
2013
    January 1, 2014
to July 16, 2014
         July 17, 2014 to
December 31, 2014
 

Cash from operating activities

  $ 22,469      $ 26,339          $ 12,719   

Reconciling items:

         

Interest expense

                      4,253   

Income tax expense

                      3,486   

Deferred income taxes(1)

                      3,126   

Amortization of deferred financing costs(2)

                      (292

Net change in operating assets and liabilities, net of effects of acquisition

    2,336        4,320            (1,640

Inventory fair value adjustment

                      401   

Founder Contingent Compensation (3)

                      1,500   

Sponsor Acquisition-related expenses(4)

           1,288            2,215   

Recapitalization expenses(5)

                      178   

Executive recruitment(6)

                      646   
 

 

 

   

 

 

       

 

 

 

Adjusted EBITDA

  $ 24,805      $ 31,947          $ 26,592   
 

 

 

   

 

 

       

 

 

 

 

(1) Represents a non-cash component of income tax expense above.
(2) Represents a non-cash component of interest tax expense above.
(3) This adjustment reflects the prepayment of Founder Contingent Compensation. See Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for more information.
(4) Represents the following:

 

    Predecessor         Successor  
(In thousands)   Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
         July 17, 2014 to
December 31,
2014
 

Predecessor transaction costs(i)

  $     —      $ 510          $   

Transaction bonuses(ii)

           778              

Sponsor transaction costs(iii)

                      2,215   
 

 

 

   

 

 

       

 

 

 

Total

  $  —      $  1,288          $  2,215   
 

 

 

   

 

 

       

 

 

 

 

  i. Represents a supplemental transaction payment and related expenses of $0.5 million paid to Precision Capital, an advisor to the Predecessor, in connection with the Sponsor Acquisition, in recognition of the services that were provided by Precision Capital Group, LLC to the Predecessor. Although the Predecessor was not contractually obligated to pay such amounts, we believe that such payments would not have been made by the Predecessor to Precision Capital Group, LLC but for the consummation of the Sponsor Acquisition. In addition, we are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
  ii. Represents transaction bonuses paid to employees in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.
  iii. Represents legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition. These have been excluded from the Pro Forma Year Ended December 31, 2014 (Unaudited) net income as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, and therefore no further adjustment is required in reconciling Pro Forma Year Ended December 31, 2014 (Unaudited) net income to Adjusted EBITDA.

 

(5) Represents the expenses we incurred in connection with the December 2014 Special Dividend. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial maintenance covenants and is therefore an important measure of our operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.
(6)

Represents the recognized expense associated with sign-on and retention bonuses for certain executive hires and certain recruiting fees. We are permitted to add back expenses of this type in determining Adjusted EBITDA under the Credit Agreement governing our term loan. Adjusted EBITDA (as defined therein) is used thereunder in determining our financial

 

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  maintenance covenants and for calculating ratios in our debt incurrence covenants and is therefore an important measure of our operating performance and our ability to take certain actions in operating our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” for more information.

Operating Cash Flow Less Capital Expenditures

Operating cash flow less capital expenditures is a financial measure that is not calculated in accordance with GAAP. We define “operating cash flow less capital expenditures” as cash from operating activities, which is the most comparable GAAP financial measure, reduced by capital expenditures. Below, we have provided a reconciliation of operating cash flow less capital expenditures to our cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP. Operating cash flow less capital expenditures should not be considered as an alternative to cash from operating activities or any other measure of financial performance calculated and presented in accordance with GAAP. Our operating cash flow less capital expenditures may not be comparable to similarly titled measures of other organizations because other organizations may not calculate operating cash flow less capital expenditures in the same manner as we calculate the measure. Since capital spending is essential to maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider capital spending when evaluating our cash from operating activities. We view operating cash flow less capital expenditures as an important measure because it reflects changes in, or cash requirements for, our working capital needs, and is one factor in evaluating the amount of cash available for discretionary investments.

The following tables present a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable GAAP measure, for each of the periods indicated:

 

     Predecessor         Successor  
(In thousands)    Three months
ended March 31,
2014
         Three months
ended March 31,
2015
 

Cash from operating activities

   $  11,640          $  14,142   

Capital expenditures

     (82         (370
  

 

 

       

 

 

 

Operating cash flow less capital expenditures

   $ 11,558          $ 13,772   
  

 

 

       

 

 

 

 

     Predecessor          Successor  
(In thousands)    Year ended
December 31,
2013
    January 1,
2014 to
July 16,
2014
          July 17,
2014 to
December 31,
2014
 

Cash from operating activities

   $ 22,469      $ 26,339           $ 12,719   

Capital expenditures

     (456     (278          (178
  

 

 

   

 

 

        

 

 

 

Operating cash flow less capital expenditures

   $  22,013      $  26,061           $  12,541   
  

 

 

   

 

 

        

 

 

 

 

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Comparison of the Three Months Ended March 31, 2014 and 2015

 

     Predecessor      Successor      Change  
(In thousands, except percentage information)    Three months
ended March 31,
2014
     Three months
ended March 31,
2015
     $     %  

Net sales

   $ 25,706       $ 44,275       $ 18,569        72

Cost of goods sold

     11,378         19,866         8,488        75
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     14,328         24,409         10,081        70

Sales and marketing expenses

     1,945         3,618         1,673        86

General and administrative expenses

     669         9,032         8,363        1,250

Sponsor acquisition-related expense

                              
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     2,614         12,650         10,036        384
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

     11,714         11,759         45        0

Interest expense

             2,955         2,955          
  

 

 

    

 

 

    

 

 

   

 

 

 

Pre-tax income

     11,714         8,804         (2,910     -25

Income tax expense

             3,900         3,900          
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 11,714       $ 4,904       $ (6,810     -58
  

 

 

    

 

 

    

 

 

   

 

 

 

Other Financial Information (Non-GAAP):

            

Adjusted EBITDA(1)

   $ 11,748       $ 19,231       $ 7,483        64

Operating cash flow less capital expenditures(2)

   $ 11,558       $ 13,772       $ 2,214        19

 

(1) See “—Non-GAAP Financial Measures—Adjusted EBITDA” for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(2) See “—Non-GAAP Financial Measures—Operating Cash Flow Less Capital Expenditures” for more information and a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Net Sales

Net sales increased $18.6 million, or 72%, from $25.7 million for the three months ended March 31, 2014 to $44.3 million for the three months ended March 31, 2015. Our net sales growth has been primarily driven by volume increases resulting from increases in both the number of distribution points and sales to existing customers and the addition of new customers, primarily in the drug, conventional grocery and mass merchandiser channels. Volume increases resulted in an increase in net sales of approximately $15.8 million. Total Distribution Points increased 104% from 76 at March 31, 2014 to 155 at March 31, 2015. New customers acquired after March 31, 2014 accounted for approximately $2.8 million of the increase in net sales. Product price changes did not significantly impact sales growth from quarter to quarter.

Cost of Goods Sold

Cost of goods sold increased $8.5 million, or 75%, from $11.4 million for the three months ended March 31, 2014 to $19.9 million for the three months ended March 31, 2015. The increase in cost goods sold was primarily driven by increased sales volume. The product cost component of cost of goods sold increased $7.6 million, or 73%, from $10.4 million for the three months ended March 31, 2014 to $18.0 million for the three months ended March 31, 2015. The shipping and handling cost component of cost of goods sold increased $0.9 million, or 90%, from $1.0 million for the three months ended March 31, 2014 to $1.9 million for the three months ended March 31, 2015. The volume increase resulted in a cost of goods sold increase of approximately $9.0 million in the three months ended March 31, 2015. Rate decreases resulted in a cost of goods sold decrease of approximately $0.5 million in three months ended March 31, 2015.

 

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Gross Profit

Gross profit increased $10.1 million, or 70%, from $14.3 million for the three months ended March 31, 2014 to $24.4 million for the three months ended March 31, 2015. The increase primarily related to the increase in net sales. Gross profit as a percentage of net sales declined approximately 60 basis points, from 55.7% for the three months ended March 31, 2014 to 55.1% for the three months ended March 31, 2015. The decrease in gross profit as a percentage of net sales was primarily a result of higher trade promotional spending in 2015 resulting from our increased product distribution. Trade promotional spending increased $5.0 million from the three months ended March 31, 2014 to the three months ended March 31, 2015.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.7 million, or 86%, from $1.9 million for the three months ended March 31, 2014 to $3.6 million for the three months ended March 31, 2015. The increase was due primarily to increases in compensation expense for sales and marketing personnel of $0.9 million as we began to build out our internal sales team in 2014. Demonstrations expense increased $0.3 million driven by increased investment in consumer trial activities. Sales and marketing expenses as a percentage of net sales were 7.6% for the three months ended March 31, 2014 and 8.2% for the three months ended March 31, 2015, representing consistent sales and marketing efforts in proportion to net sales.

General and Administrative Expenses

General and administrative expenses increased $8.4 million, or 1,250%, from $0.7 million for the three months ended March 31, 2014 to $9.0 million for the three months ended March 31, 2015. The increase was due primarily to higher compensation expense associated with the Founder Contingent Compensation of $4.6 million, equity-based compensation of $0.8 million, an increase in amortization expense of $1.0 million associated with the Sponsor Acquisition, an increase in compensation expense of $0.9 million and an increase in professional fees of $0.9 million due to increased headcount and professional services to support our growth and operations. General and administrative expenses as a percentage of net sales increased from 2.6% for the three months ended March 31, 2014 to 20.4% for the three months ended March 31, 2015. The increase was a result of the factors described above.

Operating Income

As a result of the factors above, operating income was $11.7 million for the three months ended March 31, 2014 compared to operating income of $11.8 million for the three months ended March 31, 2015. Operating income as a percentage of net sales decreased from 45.6% in the three months ended March 31, 2014 to 26.6% in the three months ended March 31, 2015.

Interest Expense

The Company did not incur interest expense for the three months ended March 31, 2014 compared to $3.0 million for the three months ended March 31, 2015. Interest expense increased due to the incurrence of term loan borrowings in connection with the Sponsor Acquisition and the December 2014 Special Dividend.

Income Tax Expense

Our effective tax rate was 44.3% for the Successor three months ended March 31, 2015. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state taxes, net of federal benefit. The Predecessor was not subject to federal income tax.

 

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Net Income

As a result of the increase in net sales, gross profit, operating expenses, and interest expense, as well as the other factors described above, net income decreased $6.8 million, or 58%, from $11.7 million for the three months ended March 31, 2014 to $4.9 million for the three months ended March 31, 2015 (as compared to $5.6 million for the three months ended March 31, 2015 and $1.8 million for the three months ended March 31, 2014, each on a pro forma basis). See “Unaudited Pro Forma Condensed Consolidated Financial Information”.

Adjusted EBITDA

As a result of the factors above, Adjusted EBITDA increased $7.5 million, or 64%, from $11.7 million for the three months ended March 31, 2014 to $19.2 million for the three months ended March 31, 2015. Adjusted EBITDA as a percentage of net sales decreased 230 basis points from 45.7% in the three months ended March 31, 2014 to 43.4% in the three months ended March 31, 2015. See “—Non-GAAP Financial Measures—Adjusted EBITDA” for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Operating Cash Flow Less Capital Expenditures

Operating cash flow less capital expenditures increased $2.2 million, or 19%, from $11.6 million for the three months ended March 31, 2014 to $13.8 million for the three months ended March 31, 2015. The increase was due primarily to the factors above, offset partially by interest and income tax payments in the Successor three months ended March 31, 2015. Mainly due to these factors, operating cash flow less capital expenditures as a percentage of net sales decreased from 45.0% in the three months ended March 31, 2014 to 31.1% in the three months ended March 31, 2015. See “Non-GAAP Financial Measures—Operating Cash Flow Less Capital Expenditures” for more information and a reconciliation of operating cash flow less capital expenditures to cash flow from operations, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Notes Regarding Pro Forma Results of Operations and Selected Consolidated Financial and Operating Information due to the Acquisition

Under GAAP, the audited consolidated financial statements for our fiscal year ended December 31, 2014 are presented in two distinct periods, as Predecessor and Successor entities, and are not comparable. However, in order to facilitate a discussion of our results of operations, liquidity and capital resources compared to a similar period within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, we prepared and are presenting financial information for the Pro Forma Year Ended December 31, 2014 (Unaudited). The Predecessor and Successor periods are presented on two different bases of accounting. The pro forma results may not be indicative of future results or financial presentation. Wherever practicable, the discussion below compares the pro forma consolidated financial statements for the Pro Forma Year Ended December 31, 2014 (Unaudited) to the consolidated financial statements for the fiscal year ended December 31, 2013. We believe this presentation provides the reader a more meaningful comparison of our operating results in the year ended December 31, 2014 with the other periods presented because it demonstrates our underlying business performance and reflects management’s assessment of our business. See “Risk Factors—Period-to-period comparisons may not be meaningful given the Sponsor Acquisition of SkinnyPop by TA Associates in 2014 and may not be representative of our future performance” and “Risk Factors—The pro forma financial information in this prospectus is presented for illustrative purposes only and does not represent what the results of operations of the

 

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combined company would have been had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend occurred on January 1, 2014, the date assumed for purposes of that pro forma information, nor does it represent the actual financial position or results of operations of the combined company following the Sponsor Acquisition.”

Comparison of the Years Ended December 31, 2013 and 2014

 

    Predecessor         Successor     Pro Forma
(Unaudited)
    Change  
(In thousands, except percentage information)   Year
ended
December

31, 2013
    January 1,
2014 to
July 16,
2014
         July 17,
2014 to
December

31, 2014
    Year ended
December

31, 2014
    $     %  

Net Sales

  $ 55,710      $ 68,353          $  64,004      $  132,357      $ 76,647        138

Cost of Goods Sold

    23,054        29,429            28,724        58,153        35,099        152   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    32,656        38,924            35,280        74,204        41,548        127   

Sales & marketing expenses

    5,938        5,661            6,977        12,638        6,700        113   

General & administrative expenses

    1,960        1,394            13,611        27,238        25,278        1,290   

Sponsor acquisition-related expenses

           1,288            2,215        510        510          
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,898        8,343            22,803        40,386        32,488        411   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  24,758      30,581        12,477      33,818      9,060      37   

Interest expense

                      4,253        12,884        12,884          
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

  24,758      30,581        8,224      20,934      (3,824   (15

Income tax expense

              3,486      7,326      7,326        

Net income

  $  24,758      $  30,581          $ 4,738      $ 13,608      $ (11,150     45
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Information (Non-GAAP):

               

Adjusted EBITDA(1)

  $ 24,805      $ 31,947          $ 26,592      $ 58,539      $ 33,734        136

Operating cash flow less capital expenditures(2)

  $ 22,013      $ 26,061          $ 12,541        N/A        N/A        N/A   

 

(1) See “—Non-GAAP Financial Measures—Adjusted EBITDA” for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(2) See “—Non-GAAP Financial Measures—Operating Cash Flow Less Capital Expenditures” for more information and a reconciliation of operating cash flow less capital expenditures to cash from operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Net Sales

Net sales increased $76.6 million, or 138%, from $55.7 million for the year ended December 31, 2013 to $132.4 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). Our net sales growth has been primarily driven by volume increases resulting from increases in both the number of distribution points and sales to existing customers and the addition of new customers, primarily in the drug, conventional grocery and mass merchandiser channels. Volume increases resulted in an increase in net sales of approximately $73.0 million. Total distribution points increased 178% from 49 at December 31, 2013 to 136 at December 31, 2014. New customers acquired during 2014 accounted for approximately $3.6 million of the increase in net sales. Product price changes did not significantly impact sales growth from period to period.

Cost of Goods Sold

Cost of goods sold increased $35.1 million, or 152%, from $23.1 million for the year ended December 31, 2013 to $58.2 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). The increase in cost goods sold was primarily driven by increased sales volume. The product cost

 

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component of cost of goods sold increased $31.5 million, or 147%, from $21.4 million for the year ended December 31, 2013 to $52.9 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). The shipping and handling cost component of cost of goods sold increased $3.6 million, or 212%, from $1.7 million for the year ended December 31, 2013 to $5.3 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). The volume increase resulted in a cost of goods sold increase of approximately $34.7 million in Pro Forma Year Ended December 31, 2014 (Unaudited). Rate increases resulted in a cost of goods sold increase of approximately $0.4 million in Pro Forma Year Ended December 31, 2014 (Unaudited).

Gross Profit

Gross profit increased $41.5 million, or 127%, from $32.7 million for the year ended December 31, 2013 to $74.2 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). The increase primarily related to the increase in net sales. Gross profit as a percentage of net sales declined approximately 250 basis points, from 58.6% for the year ended December 31, 2013 to 56.1% for the Pro Forma Year Ended December 31, 2014 (Unaudited). The decrease in gross profit as a percentage of net sales was primarily a result of higher trade promotional spending in 2014 resulting from our increased product distribution. Trade promotional spending increased $14.7 million from the year ended December 31, 2013 to the Pro Forma Year Ended December 31, 2014 (Unaudited).

Sales and Marketing Expenses

Sales and marketing expenses increased $6.7 million, or 113%, from $5.9 million for the year ended December 31, 2013 to $12.6 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). The increase was due primarily to increases in demonstrations expense of $2.0 million and broker fees of $3.0 million related to the increase in net sales. Compensation expense for sales and marketing personnel also increased $1.0 million as we began to build out our internal sales team in 2014. Sales and marketing expenses as a percentage of net sales were 10.7% for the year ended December 31, 2013 and 9.5% for the Pro Forma Year Ended December 31, 2014 (Unaudited), representing consistent sales and marketing efforts in proportion to net sales.

General and Administrative Expenses

General and administrative expenses increased $25.3 million, or 1290%, from $2.0 million for the year ended December 31, 2013 to $27.2 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). The increase was due primarily to an increase in compensation expense associated with the Founder Contingent Compensation of $18.4 million, an increase in amortization expense of $4.2 million associated with the Sponsor Acquisition, an increase in compensation expense of $1.2 million and an increase in professional fees of $1.2 million due to increased headcount and professional services to support our growth and operations. General and administrative expenses as a percentage of net sales increased from 3.5% for the year ended December 31, 2013 to 20.6% for the Pro Forma Year Ended December 31, 2014 (Unaudited). The increase was a result of the factors described above.

The Sponsor Acquisition-Related Costs

The Sponsor Acquisition-related costs for the Pro Forma Year Ended December 31, 2014 (Unaudited) included a total of $0.5 million. These costs primarily included a supplemental transaction payment and related expenses paid to Precision Capital, an advisor to Predecessor, in connection with the Sponsor Acquisition. There were no such costs in the year ended December 31, 2013.

 

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Operating Income

As a result of the factors above, operating income was $24.8 million for the year ended December 31, 2013 compared to operating income of $33.8 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). Operating income as a percentage of net sales decreased from 44.4% in the year ended December 31, 2013 to 25.6% in the Pro Forma Year Ended December 31, 2014 (Unaudited).

Interest Expense

Interest expense was $0.0 million for the year ended December 31, 2013 compared to $12.9 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). Interest expense increased in 2014 due to the incurrence of term loan and revolver borrowings in connection with the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend.

Income Tax Expense

Our effective tax rate was 42.4% for the Successor period in 2014. The difference between the consolidated effective income tax rate for the Successor period and the U.S. federal statutory rate is primarily attributable to state taxes, net of federal benefit. The Predecessor was not subject to federal income tax. See Note 12 of the audited consolidated financial statements included elsewhere in this prospectus for further detail.

In connection with the Corporate Reorganization, the former holders of existing units in Topco will receive the right to receive future payments pursuant to a tax receivable agreement. This tax receivable agreement will provide that we will be obligated to make annual payments to the holders of existing units in Topco equal to 85% of the U.S. federal, state and local tax benefits realized by us and our subsidiaries from the utilization of certain tax attributes that were generated when we were acquired by affiliates of TA Associates in July 2014. We will retain approximately 15% of the U.S. federal, state and local tax benefits realized from the utilization of such tax attributes.

The amount payable to the holders of existing units in Topco under the tax receivable agreement will be based on an annual calculation of the reduction in our U.S. federal, state and local taxes resulting from the utilization of these tax attributes. For purposes of determining the reduction in taxes resulting from the utilization of pre-IPO tax attributes, we will be required to assume that pre-IPO tax attributes are utilized before any other attributes. We expect that the payments that we may make under the tax receivable agreement may be substantial. In addition, if the IRS were to successfully challenge the tax benefits that give rise to any payments under the tax receivable agreement, our future payments under the tax receivable agreement to the former holders of units of Topco would be reduced by the amount of such payments, but the tax receivable agreement does not require the former holders of units of Topco to reimburse us for the amount of such payments to the extent they exceed any future amounts payable under the tax receivable agreement.

Payment under the tax receivable agreement would be accelerated in the event of a change of control including without limitation by way of mergers, stock or asset sales, other forms of combinations or upon a breach by us of our material obligations under the tax receivable agreement (such as by failing to make a payment within three months of the date on which such payment is due). Such accelerated payment would be based on the present value of projected future payments under the tax receivable agreement as of the date of the accelerating event. Such projected future payments could differ from the payments that would otherwise have resulted under the tax receivable agreement from our actual tax benefits realized from utilizing the pre-IPO tax attributes. For more information on the tax receivable agreement, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

 

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Net Income

As a result of the increase in Founder Contingent Compensation, amortization expense in connection with the Sponsor Acquisition, and interest expense in connection with the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend, as well as the other factors described above, net income decreased $11.2 million, or 45%, from $24.8 million for the year ended December 31, 2013 to $13.6 million for the Pro Forma Year Ended December 31, 2014 (Unaudited).

Adjusted EBITDA

As a result of the factors above, Adjusted EBITDA increased $33.7 million, or 136%, from $24.8 million for the year ended December 31, 2013 to $58.5 million for the Pro Forma Year Ended December 31, 2014 (Unaudited). Adjusted EBITDA as a percentage of net sales decreased 30 basis points from 44.5% in the year ended December 31, 2013 to 44.2% in the Pro Forma Year Ended December 31, 2014 (Unaudited). See “—Non-GAAP Financial Measures—Adjusted EBITDA” for more information and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Operating Cash Flow Less Capital Expenditures

Operating cash flow less capital expenditures was $22.0 million for the year ended December 31, 2013, $26.1 million for the Predecessor period from January 1, 2014 to July 16, 2014 and $12.5 million for the Successor period from July 17, 2014 to December 31, 2014. These represented 39.5%, 38.1%, and 19.6% of net sales, respectively. The decrease in the Successor period from July 17, 2014 to December 31, 2014 was due primarily to interest and income tax payments. See “—Non-GAAP Financial Measures—Operating Cash Flow Less Capital Expenditures” for more information and a reconciliation of operating cash flow less capital expenditures to cash flow from operations, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

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Quarterly Results of Operations

The following unaudited quarterly statements of income data for each of the nine quarters ended March 31, 2015 have been prepared on a basis consistent with our audited annual financial statements and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. These quarterly results of operations are not necessarily indicative of the results of operations that may be expected in the future and the results of operations in the periods presented are not necessarily indicative of results to be expected for any other period. The following quarterly financial data should be read in conjunction with all of our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

<

(In thousands, except percentage information)

2014

  Predecessor         Successor  
  Three
months
ended

March 31,
    2014    
    Three
months
ended

June 30,
    2014    
    July 1,
2014 to
July 16,
      2014      
         July 17,
2014 to
September 30,
2014
    Three
months
ended
December 31,
2014
    Three
months
ended
March 31,
2015
 
 

Results of Operations Data:

               

Net sales

  $     25,706      $     35,462      $     7,185          $     30,957      $     33,047      $     44,275   

Gross profit

    14,328        20,130        4,466            16,702        18,578        24,409   

Sales & marketing expenses

    1,945        2,652        1,065            3,261        3,715        3,618   

General & administrative expenses

    669        599        126            5,493        8,118        9,032   

Sponsor Acquisition-related expenses

                  1,288            2,215                 
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating income

    11,714        16,879        1,987            5,733        6,745        11,759