UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30,December 31, 2012

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period FromTo

Commission File Number: 001-35470

 

 

Annie’s, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 20-1266625

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1610 Fifth Street

Berkeley, CA

 94710
(Address of principal executive offices) (Zip Code)

(510) 558-7500

(Registrant’s telephone number, including area code)

 

 

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

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

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.

 

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

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

Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), Annie’s, Inc. qualifies as an “emerging growth company,” as defined under the JOBS Act.

On July 15, 2012,January 31, 2013, the registrant had 17,060,11117,338,339 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


Annie’s, Inc.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

PART I – FINANCIAL INFORMATION

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012

1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2012 and 2011

   2  
 

Condensed Consolidated Balance Sheets asStatement of June 30, 2012Convertible Preferred Stock and MarchStockholders’ Equity (Deficit) for the Nine Months Ended December 31, 2012

2
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2012 and 2011

   3  
 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)Cash Flows for the ThreeNine Months Ended June 30,December 31, 2012 and 2011

   
4
  
 

Notes to Condensed Consolidated Financial Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011

   5  

Item 2.

 Notes to Condensed Consolidated Financial Statements6
Item 2.

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

   1618  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   2231  

Item 4.

 

Controls and Procedures

   2332
PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

33  

Item 1A.

 PART II – OTHER INFORMATION
Item 1.

Legal ProceedingsRisk Factors

   2433  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   2534  

Item 6.

 

Exhibits

   2635  

Signatures

   2736  


PART I – FINANCIAL INFORMATION

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Annie’s, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands)

 

  June 30, March 31, 
  2012 2012   December 31,
2012
 March 31,
2012
 

ASSETS

      

CURRENT ASSETS:

      

Cash

  $5,102   $562    $12,960   $562  

Accounts receivable, net

   7,388    11,870     10,110    11,870  

Inventory

   14,596    10,202     21,127    10,202  

Deferred tax assets

   1,995    1,995     1,995    1,995  

Income tax receivable

   2,870    164     3,402    164  

Prepaid expenses and other current assets

   1,604    1,252     2,201    1,252  
  

 

  

 

   

 

  

 

 

Total current assets

   33,555    26,045     51,795    26,045  

Property and equipment, net

   4,888    4,298     5,517    4,298  

Goodwill

   30,809    30,809     30,809    30,809  

Intangible assets, net

   1,161    1,176     1,131    1,176  

Deferred tax assets, long-term

   4,504    4,650     4,115    4,650  

Deferred initial public offering costs

   —      5,343     —      5,343  

Other non-current assets

   103    108     145    108  
  

 

  

 

   

 

  

 

 

Total assets

  $75,020   $72,429    $93,512   $72,429  
  

 

  

 

 
  

 

  

 

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK ANDSTOCKHOLDERS’ EQUITY (DEFICIT)

      

CURRENT LIABILITIES:

      

Accounts payable

  $1,185   $861    $4,290   $861  

Related-party payable

   —      1,305     —      1,305  

Accrued liabilities

   4,304    7,452     8,699    7,452  
  

 

  

 

   

 

  

 

 

Total current liabilities

   5,489    9,618     12,989    9,618  

Credit facility

   —      12,796     —      12,796  

Convertible preferred stock warrant liability

   —      2,157     —      2,157  

Other non-current liabilities

   956    921     878    921  
  

 

  

 

   

 

  

 

 

Total liabilities

   6,445    25,492     13,867    25,492  
  

 

  

 

   

 

  

 

 

Convertible preferred stock

   —      81,373     —      81,373  

STOCKHOLDERS’ EQUITY (DEFICIT):

      

Preferred stock

   —      —       —      —    

Common stock

   17    1     17    1  

Additional paid-in capital

   105,256    4,392     111,140    4,392  

Accumulated deficit

   (36,698  (38,829   (31,512  (38,829
  

 

  

 

   

 

  

 

 

Total stockholders’ equity (deficit)

   68,575    (34,436   79,645    (34,436
  

 

  

 

 
  

 

  

 

 

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

  $75,020   $72,429    $93,512   $72,429  
  

 

  

 

   

 

  

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

Annie’s, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except share and per share amounts)

 

  Three Months Ended June 30,   Three Months Ended December 31, Nine Months Ended December 31, 
  2012 2011   2012 2011 2012 2011 

Net sales

  $34,293   $28,610  

Cost of sales

   20,486    17,022  

Net sales (net of product recall returns of $1,570 for the three and nine months ended December 31, 2012)

  $36,283   $30,838   $117,262   $98,320  

Cost of sales (including costs associated with product recall of $690 for the three and nine months ended December 31, 2012)

   23,267    18,275    72,539    60,034  
  

 

  

 

  

 

  

 

 
  

 

  

 

 

Gross profit

   13,807    11,588     13,016    12,563    44,723    38,286  

Operating expenses:

        

Selling, general and administrative

   10,211    8,303     10,687    8,847    32,437    25,206  
  

 

  

 

   

 

  

 

  

 

  

 

 

Income from operations

   3,596    3,285     2,329    3,716    12,286    13,080  

Interest expense

   (40  (18   (40  (25  (120  (66

Other income (expense), net

   49    (484   31    43    116    (428
  

 

  

 

   

 

  

 

  

 

  

 

 

Income before provision for income taxes

   3,605    2,783     2,320    3,734    12,282    12,586  

Provision for income taxes

   1,474    971     919    1,502    4,965    4,926  
  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

  $2,131   $1,812    $1,401   $2,232   $7,317   $7,660  
  

 

  

 

  

 

  

 

 
  

 

  

 

 

Net income attributable to common stockholders

  $2,131   $54    $1,401   $69   $7,317   $233  
  

 

  

 

   

 

  

 

  

 

  

 

 

Net income per share attributable to common stockholders

        

—Basic

  $0.13   $0.12  

– Basic

  $0.08   $0.15   $0.43   $0.50  
  

 

  

 

   

 

  

 

  

 

  

 

 

—Diluted

  $0.12   $0.04  

– Diluted

  $0.08   $0.07   $0.41   $0.24  
  

 

  

 

  

 

  

 

 
  

 

  

 

 

Weighted average shares of common stock outstanding used in computing net income per share attributable to common stockholders

        

—Basic

   16,936,007    464,994  

– Basic

   17,249,536    471,554    17,085,833    467,206  
  

 

  

 

   

 

  

 

  

 

  

 

 

—Diluted

   17,600,908    1,236,410  

– Diluted

   17,781,720    1,037,657    17,702,221    988,915  
  

 

  

 

   

 

  

 

  

 

  

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

Annie’s, Inc.

Condensed Consolidated StatementsStatement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(unaudited)

(in thousands, except share amounts)

 

 Convertible Preferred
Stock
          Additional
Paid-in
Capital
  Accumulated
Deficit
  Total
Stockholders’
Equity (Deficit)
   Convertible Preferred
Stock
 

 

Preferred Stock

   Common Stock   Additional
Paid-in

Capital
   Accumulated
Deficit
  Total
Stockholders’

Equity (Deficit)
 
 Preferred Stock Common Stock   Shares Amount Shares   Amount   Shares   Amount    
Shares Amount Shares Amount Shares Amount 

Balance at March 31, 2012

  12,281,553   $81,373    —     $—      483,242   $1   $4,392   $(38,829 $(34,436   12,281,553   $81,373    —      $—       483,242    $1    $4,392    $(38,829 $(34,436

Reclassification of convertible preferred stock warrant liability upon consummation of IPO

  —      —      —      —      —      —      2,170    —      2,170     —      —      —       —       —       —       2,170     —      2,170  

Conversion of convertible preferred stock into common stock upon consummation of IPO

  (12,281,553  (81,373  —      —      15,221,571    15    81,358    —      81,373     (12,281,553  (81,373  —       —       15,221,571     15     81,358     —      81,373  

Shares issued upon consummation of IPO

  —      —      —      —      950,000    1    11,145    —      11,146     —      —      —       —       950,000     1     11,145     —      11,146  

Exercise of stock options

  —      —      —      —      342,105    —      1,774    —      1,774     —      —      —       —       610,791     —        3,899     —      3,899  

Excess tax benefit from stock-based compensation

  —      —      —      —      —      —      4,201    —      4,201     —      —      —       —       —       —       7,499     —      7,499  

Net exercise of warrant to purchase shares of common stock

      63,193    —      —      —      —             63,193     —       —       —      —    

Stock-based compensation

  —      —      —      —      —      —      216    —      216     —      —      —       —       —       —       677     —      677  

Net Income

  —      —      —      —      —      —      —      2,131    2,131     —      —      —       —       —       —       —       7,317    7,317  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

Balance at June 30, 2012

  —     $—      —     $—      17,060,111   $17   $105,256   $(36,698 $68,575  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at December 31, 2012

   —     $—       —      $—       17,328,797    $17    $111,140    $(31,512 $79,645  
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

Annie’s, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

  Three Months Ended June 30,   Nine Months Ended December 31, 
  2012 2011   2012 2011 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net Income

  $2,131   $1,812  

Net income

  $7,317   $7,660  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

      

Depreciation and amortization

   200    152     749    578  

Stock-based compensation

   216    106     677    390  

Allowances for trade discounts and other

   —      (670   (579  (477

Inventory reserves

   (112  —       492    —    

Excess tax benefit from stock-based compensation

   (4,201  —       (7,499  —    

Accretion of imputed interest on purchase of intangible asset

   35    —       107    —    

Change in fair value of convertible preferred stock warrant liability

   13    518     13    538  

Amortization of deferred financing costs

   5    8     12    25  

Deferred taxes

   146    (332   535    (332

Changes in operating assets and liabilities:

      

Accounts receivable, net

   4,482    5,017     2,339    3,737  

Inventory

   (4,282  (7,146   (11,417  (2,478

Income tax receivable

   164    —       425    —    

Prepaid expenses, other current and non-current assets

   (352  (61   4,400    (508

Accounts payable

   284    (5,611   3,417    (9,193

Related-party payable

   (1,305  47     (1,305  (3

Accrued expenses and other non-current liabilities

   3,526    (515   4,527    (708
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) operating activities

   950    (6,675   4,210    (771
  

 

  

 

 
  

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of property and equipment

   (735  (380   (1,498  (1,504
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (735  (380   (1,498  (1,504
  

 

  

 

 
  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from credit facility

   735    20,198     2,952    52,114  

Payments to credit facility

   (13,531  (16,774   (15,748  (38,812

Proceeds from common shares issued in initial public offering, net of issuance costs

   11,146    —       11,146    —    

Payment for intangible asset acquired by financing transaction

   (7  —    

Payments of initial public offering costs

   —      (1,841

Dividends paid

   —      (13,550

Net repurchase of stock options

   —      (602   —      (602

Excess tax benefit from stock-based compensation

   4,201    —       7,499    —    

Proceeds from exercises of stock options

   1,774    —       3,844    47  
  

 

  

 

   

 

  

 

 

Net cash provided by financing activities

   4,325    2,822  

Net cash provided by (used in) financing activities

   9,686    (2,644
  

 

  

 

 
  

 

  

 

 

NET INCREASE (DECREASE) IN CASH

   4,540    (4,233   12,398    (4,919

CASH—Beginning of period

   562    7,333  
  

 

  

 

 

CASH—End of period

  $5,102   $3,100  

CASH – Beginning of period

   562    7,333  
  

 

  

 

 

CASH – End of period

  $12,960   $2,414  
  

 

  

 

 
  

 

  

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

      

Purchase of property and equipment funded through accounts payable

  $40   $—    

Conversion of convertible preferred stock into common stock

  $81,373   $—      $81,373   $—    

Purchase of property and equipment funded through accrued expenses and accounts payable

  $425   $120  

Deferred initial public offering costs funded through accounts payable

  $—     $621  

Intangible asset acquired by financing transaction

  $—     $1,023  

See accompanying notes to the unaudited condensed consolidated financial statements

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.Description of Business

Annie’s, Inc. (the “Company”), a Delaware corporation incorporated on April 28, 2004, is a natural and organic food company. The Company offers over 125 products in the following three product categories: meals; snacks; and dressings, condiments and other. The Company’s products are sold throughout the U.S. and Canada via a multi-channel distribution network that serves the mainstream grocery, mass merchandiser and natural retailer channels. The Company’s headquarters are located in Berkeley, California.

 

2.Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying interim condensed consolidated balance sheets as of June 30,December 31, 2012 and March 31, 2012, the interim condensed consolidated statement of convertible preferred stock and stockholders’ equity (deficit) for the nine months ended December 31, 2012, and the interim condensed consolidated statements of operations for the three and nine months ended December 31, 2012 and 2011, and the interim condensed consolidated statements of cash flows for the threenine months ended June 30,December 31, 2012 and 2011 are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of thecertain information and notes required byfootnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP for complete financial statements.have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012, filed with the SEC on June 8, 2012. The March 31, 2012 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP for completeaudited financial statements.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly our financial position as of June 30,December 31, 2012 and results of our operations for the three and nine months ended December 31, 2012 and 2011, and cash flows for the threenine months ended June 30,December 31, 2012 and 2011. The interim results for the threenine months ended June 30,December 31, 2012 are not necessarily indicative of the results that may be expected for the year ending March 31, 2013.

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries, Annie’s Homegrown, Inc., Annie’s Enterprises, Inc. and Napa Valley Kitchen, Inc. and Annie’s Enterprises, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Initial Public Offering (IPO)

On April 2, 2012, the Company closed its IPO, in which it sold 950,000 shares and certain stockholders sold 4,800,000 shares of common stock at aan offering price to the public of $19.00 per share. The aggregate amount of consideration for shares sold in the offering was $109.3 million. The shares sold by such stockholders included 750,000 additional shares purchased by the underwriters from certain of these stockholders pursuant to an option the underwriters held to cover overallotments of shares. The Company did not receive any proceeds from the sale of shares by the stockholders. The Companyshare and raised $11.1 million in net proceeds after deducting underwriting discounts and commissions of $1.3 million and other offering expenses of $5.6 million. In addition, certain of the Company’s stockholders, including funds affiliated with Solera Capital, LLC (“Solera”), sold 4.8 million shares at the $19.00 offering price in the IPO.

Immediately prior to the closing of the IPO, the outstanding shares of convertible preferred stock were automatically converted into 15,221,571 shares of common stock, the Company’s outstanding convertible preferred stock warrant was automatically converted into a common stock warrant to purchase a total of 80,560 shares of common stock and the related convertible preferred stock warrant liability was reclassified to additional paid-in capital.

Upon consummation ofPursuant to the IPO, ourCompany’s Amended and Restated Certificate of Incorporation, or Charter, and its Amended and Restated Bylaws, took effect. The Charterwhich became effective upon consummation of the IPO, the Company has authorized 35,000,000 shares of capital stock, 30,000,000 shares, par value $0.001 per share, of which are common Stockstock and 5,000,000 shares, par value $0.001 per share, of which are preferred stock. NoAs of December 31, 2012, 17,328,797 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding as of June 30, 2012.outstanding.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Secondary Public Offering

On August 6, 2012, the Company closed a secondary public offering, in which certain stockholders, including funds affiliated with Solera, sold 3,649,976 shares of common stock at an offering price of $39.25 per share. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The offering expenses incurred by the Company were $0.7 million, including legal, accounting and printing costs and various other fees associated with the registration and sale of common stock sold in the secondary public offering.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reported periods. Actual results could differ from those estimates.

Concentration Risk

Customers with 10% or more of the Company’s net sales consist of the following:

 

  Net Sales   Net Sales 
  Customer A Customer B Customer C   Customer A Customer B Customer C 

Three Months Ended June 30,

    

Three Months Ended December 31,

    

2012

   28  9  10   25  17  11

2011

   25  11  12   20  14  11

Nine Months Ended December 31,

    

2012

   26  13  12

2011

   24  13  12

As of June 30,December 31, 2012, two customersCustomer A and Customer B represented 25%26% and 22%35%, respectively, of accounts receivable. The same two customers represented 45%21% and 21%45%, respectively, of accounts receivable as of March 31, 2012.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—1 – Quoted prices in active markets for identical assets or liabilities.

Level 2—2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The carrying amounts of the Company’s financial instruments, including accounts receivable, accounts payable, and accrued liabilities and credit facility, approximate fair value due to their relatively short maturities. The carrying amount of the convertible preferred stock warrant liability at March 31, 2012 represented its estimated fair value (Note 7).value. Upon consummation of the IPO on April 2, 2012, prior to the automatic conversion of the convertible preferred stock warrant into a common stock warrant, itthe estimated fair value was remeasured and the change in fair value was recorded as a non-cash charge in other income (expense), net and the related liability was reclassified to additional paid-in capital.

Property and Equipment

The Company capitalizes certain internal and external costs related to the development and enhancement of the Company’s internal-use software. Capitalized internal-use software development costs are included in property and equipment on the accompanying consolidated balance sheets. At June 30,December 31, 2012 and March 31, 2012, capitalized software development costs, net of accumulated amortization, totaled $2.4$2.3 million and 2.0 million, respectively. As of June 30,December 31, 2012, of the $2.4Company had $2.0 million capitalized software development costs, net of accumulated amortization $2.2and $0.3 million was in construction in progress.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Shipping and Handling Costs

Shipping and handling costs are included in selling, general and administrative expenses in the consolidated statements of operations. Shipping and handling costs primarily consist of costs associated with moving finished products to customers, including costs associated with the Company’s distribution center, route delivery costs and the cost of shipping products to customers through third-party carriers. Shipping and handling costs recorded as a component of selling, general and administrative expenses were $1.3$1.4 million and $1.1$1.3 million for the three months ended June 30,December 31, 2012 and 2011, respectively, and were $4.2 million and $3.5 million for the nine months ended December 31, 2012 and 2011, respectively.

Research and Development Costs

Research and development costs primarily consist of the costs incurred to develop new products. These costs include consumer research, prototype development, materials and resources to conduct trial production runs, package development and employee-related costs for personnel responsible for the research and development of new products, supplies and materials.product innovation. Research and development costs recorded as a component of selling, general and administrative expenses were $0.8$0.6 million and $0.4$0.7 million for the three months ended June 30,December 31, 2012 and 2011, respectively, and were $2.1 million and $1.6 million for the nine months ended December 31, 2012 and 2011, respectively.

Advertising Costs

Advertising costs include the costs of producing advertisements and the costs of communicating advertisements. The costs of producing advertisements are expensed as incurred.incurred and the costs of communicating advertising are expensed over the period of communication. Total advertising costs for the three months ended June 30,December 31, 2012 and 2011 included in selling, general and administrative expenses were $0.3$0.2 million and $0.1 million, respectively. Total advertising costs were $0.6 million and $0.5 million for the nine months ended December 31, 2012 and 2011, respectively.

Product Recall

The Company establishes reserves for product recalls on a product-specific basis when circumstances giving rise to the recall become known. The Company, when establishing reserves for a product recall, considers cost estimates for any fees and incentives to customers for their effort to return the product, freight and destruction charges for returned products, warehouse and inspection fees, repackaging materials, point-of-sale materials and other costs including costs incurred by contract manufacturers. Additionally, the Company estimates product returns from consumers and customers across distribution channels, utilizing third-party data and other assumptions. These factors are updated and reevaluated each period and the related reserves are adjusted when these factors indicate that the recall reserves are either insufficient to cover or exceed the estimated product recall expenses.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Significant changes in the assumptions used to develop estimates for product recall reserves could affect key financial information, including accounts receivable, inventory, accrued liabilities, net sales, gross profit, operating expenses and net income. In addition, estimating product recall reserves requires a high degree of judgment in areas such as estimating consumer returns, shelf and in-stock inventory at retailers across distribution channels, fees and incentives to be earned by customers for their effort to return the products, future freight rates and consumers’ claims.

Net Income Per Share of Common Stock

Basic net income per share of common stock is calculated by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share of common stock is computed by giving effect to all potentially dilutive securities outstanding during the period. Potential common shares included those underlying our convertible preferred stock (using the if-converted method), stock options to purchase our common stock and restricted stock units (using the treasury stock method) and the warrant to purchase our common stock (using the treasury stock method). Performance share units were excluded from potential common shares since no shares were issuable as of June 30,December 31, 2012 and March 31, 2012. The performance share units vest based on achievement of specified percentage of targeted cumulative compounded earnings per share growth rate during the three-year period beginning April 1, 2012 and ending March 31, 2015.

The potential common shares from the convertible preferred stock warrant had an anti-dilutive effect on the earnings per share for the nine months ended December 31, 2011, and the potential common shares from convertible preferred stock had an anti-dilutive effect on the earnings per share for the three and nine months ended June 30,December 31, 2011, and, accordingly, were excluded from the calculation. Additionally, certain stock options to purchase our common stock had an anti-dilutive effect on the earnings per share for the periods presented, and were also excluded. Further, certain restricted stock units had an anti-dilutive effect on the earnings per share for the three and nine months ended December 31, 2012 and were excluded.

Net income attributable to common stockholders during the three and nine months ended June 30,December 31, 2011 was allocated using the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a company’s capital structure includes two or more classes of common stock or common stock and participating securities. Under this method, the Company reduced income from operations by the dividends paid to convertible preferred stockholders and the rights of the convertible preferred stockholders to participate in undistributed earnings. The undistributed earnings were allocated based on the relative percentage of weighted average shares of outstanding convertible preferred stock to the total number of weighted average shares of outstanding common and convertible preferred stock.

However, during the three months ended June 30, 2012, the Company did not allocate earnings using the two-class method because the earnings attributable to convertible preferred stockholders, prior to their conversion into common stockholders on April 2, 2012, were deemed not material.

Out-of-period Adjustment

During the first quarter of the prior fiscal year,nine months ended December 31, 2011, the Company corrected an error in the measurement of the convertible preferred stock warrant liability. The correction increased the fair value of the convertible preferred stock warrant liability by $0.9 million and decreased additional paid-in capital by $0.4 million with a corresponding increase in expense of $0.5 million, which was recorded in other income (expense), net in the accompanying statement of operations during the threenine months ended June 30,December 31, 2011. The correction was an accumulation of an error that should have been recorded in prior periods and would have increased net loss for fiscal 2009 by $44,000, increased net income by $79,000 for

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

fiscal 2010 and decreased net income by $0.6 million for fiscal 2011. Management had assessed the impact of this error and did not believe that it was material, either individually or in the aggregate, to any prior period financial statements or to the financial statements for the year ended March 31, 2012.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

3.Balance Sheet Components

Inventory

Inventory is comprised of the following (in thousands):

 

  June 30,   March 31,   December 31,
2012
   March 31,
2012
 
  2012   2012 

Raw materials

  $2,110    $1,938    $3,085    $1,938  

Work in process

   2,055     754     3,285     754  

Finished goods

   10,431     7,510     14,757     7,510  
  

 

   

 

   

 

   

 

 

Inventory

  $14,596    $10,202    $21,127    $10,202  
  

 

   

 

   

 

   

 

 

Property and Equipment, Net

Property and equipment, net are comprised of the following (in thousands):

 

  June 30, March 31,   December 31,
2012
 March 31,
2012
 
  2012 2012 

Equipment and automotive

  $1,701   $1,730    $2,480   $1,730  

Software

   1,281    1,188     3,200    1,188  

Leasehold improvements

   566    566     979    566  

Plates and dies

   352    352     371    352  
  

 

  

 

   

 

  

 

 

Total property and equipment

   3,900    3,836     7,030    3,836  

Less: Accumulated depreciation and amortization

   (1,852  (1,719   (2,370  (1,719

Construction in progress

   2,840    2,181     857    2,181  
  

 

  

 

   

 

  

 

 

Property and equipment, net

  $4,888   $4,298    $5,517   $4,298  
  

 

  

 

   

 

  

 

 

The Company incurred depreciation expense of $185,000$271,000 and $150,000 during$704,000 for the three and nine months ended December 31, 2012, respectively. The depreciation expense for the same periods in prior year was $270,000 and $567,000, respectively.

During the three months ended June 30,December 31, 2012, the Company began two construction projects. The first project was a remodel of the existing office space (the “Existing Space”). Costs totaling $131,000 related to the existing space have been recorded in leasehold improvements in the condensed consolidated balance sheet as of December 31, 2012. The Company expects to incur additional costs to complete the remodeling of the existing space in the fourth quarter of fiscal 2013.

In addition, pursuant to the Lease Amendment and 2011, respectively.Work Letter described in Note 6, the Company and the landlord began the reconfiguration of the warehouse space to additional office space in order to accommodate growth. The Company was considered to be the accounting owner pursuant toASC 840-40 Sale-Leaseback Transactionsbecause the Company was responsible for paying costs of the project directly to the supplier. The Company performed an analysis and determined that it qualified for sale/leaseback accounting. The structural components of the reconfiguration were completed as of December 31, 2012, at which time the asset was de-recognized and the asset and liability were removed from the balance sheet. Tenant improvements totaling approximately $282,000 were recorded in leasehold improvements on the Company’s condensed consolidated balance sheet as of December 31, 2012. The Company expects to incur additional costs for leasehold improvements related to the reconfiguration of the warehouse space.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Intangible Assets, Net

Intangible assets, net are comprised of the following (in thousands):

 

  June 30, March 31,   December 31,
2012
 March 31,
2012
 
  2012 2012 

Product formulas

  $1,023   $1,023    $1,023   $1,023  

Other intangible assets

   189    189     189    189  
  

 

  

 

   

 

  

 

 

Total intangible assets

   1,212    1,212     1,212    1,212  

Less: accumulated amortization

   (51  (36   (81  (36
  

 

  

 

   

 

  

 

 

Intangible assets, net

  $1,161   $1,176    $1,131   $1,176  
  

 

  

 

   

 

  

 

 

The Company incurred amortization expense of $15,000 and $2,000$45,000 on its intangible assets during the three and nine months ended June 30, 2012December 31, 2012. The amortization expense for the same periods over the prior year was $6,000 and 2011,$11,000, respectively.

The estimated future amortization expense relating to intangible assets is anticipated to be $15,000 for the remainder of fiscal 2013, $60,000 for each of the next five years from fiscal 2014 through fiscal 2018, and thereafter is $45,000, $60,000totaling $300,000 and $816,000 respectively.after fiscal 2018.

Accrued Liabilities

The following table shows the components of accrued liabilities (in thousands):

 

  June 30,   March 31,   December 31,
2012
   March 31,
2012
 
  2012   2012 

Payroll and employee-related expenses

  $1,480    $2,768    $2,535    $2,768  

Accrued trade expenses

   1,158     2,631     2,074     2,631  

Inventory received not invoiced

   845     531     3,150     531  

Deferred rent

   253     264     258     264  

Brokerage commissions

   317     382     149     382  

Other accrued liabilities

   251     876     533     876  
  

 

   

 

   

 

   

 

 

Total accrued liabilities

  $4,304    $7,452    $8,699    $7,452  
  

 

   

 

   

 

   

 

 

4. Credit Facility

4.Credit Facility

TheIn December 2011, the Company hasentered into a line ofsecond amendment and restated credit agreement (the “Credit Agreement”) with Bank of America, N.A., which provides for revolving loans and letters of credit up to $20.0 million and is available to the Company for a term through August 2014. The Credit Agreement is collateralizedsecured by substantially all of the Company’s assets.

Revolving advances under the Credit Agreement bear interest at the LIBOR plus 1.50 percentage points,1.5%, as defined. Weighted average interest was 1.5% for each of the three and 1.86%nine months ended December 31, 2012. Weighted average interest was 1.6% and 2.3% for the three and nine months ended June 30, 2012 andDecember 31, 2011, respectively. As of June 30,December 31, 2012 and March 31, 2012, there was $20.0 million and $7.2 million, respectively, of availability for borrowings under the Credit Agreement. An unused line fee of 0.0625% per quarter is applied to the available balance unless the Company’s outstanding borrowings exceed half of the borrowing limit. Interest is payable monthly.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

There are various financial and other covenants under the Credit Agreement. Financial covenants, as defined in the Credit Agreement, include a net income covenant, total liabilities to tangible net worth covenant and a minimum fixed charge coverage covenant, through the term of the agreement.covenant. The Credit Agreement requires the Company to submit interim and annual financial statements by specified dates after each reporting period. The Company was in compliance with the financial covenants under the Credit Agreement as of June 30, 2012 and MarchDecember 31, 2012.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

5.Related Party Transactions

Agreement with Solera Capital, LLC

The Company had a managementan advisory services agreement with Solera Capital, LLC, or Solera, an affiliate of its principal stockholder, Solera Partners, L.P., to provide consulting and advisory services to the Company for a term ending on the later of: (i) March 5, 2014, or (ii) the date on which Solera and its affiliates cease to own at least 10% of the voting equity of the Company (including any successor thereto). The services to be provided under the agreement included (i) assisting in the raising of additional debt and equity capital from time to time for the Company, if deemed advisable by the BoardCompany’s board of Directors of the Company,directors, (ii) assisting the Company in its long-term strategic planning generally, and (iii) providing such other consulting and advisory services as the Company may reasonably request.

In consideration of Solera providing the services listed above, effective April 1, 2011, the Company was obliged to pay Solera an annual advisory fee of $600,000, payable quarterly. The Company was also obliged to reimburse Solera for out-of-pocket costs and expenses incurred by Solera on behalf of the Company. During the three and nine months ended June 30,December 31, 2011, the Company incurred $150,000 and $450,000, respectively, for such consulting and advisory services. The advisory services agreement with Solera was terminated upon the consummation of the IPO and as such the Company paid Solera a one-time termination fee of $1.3 million in April 2012.

 

6.Commitments and Contingencies

Lease Commitments

The Company leasesentered into a lease agreement (the “Lease”) for its headquarters at 1610 Fifth Street, Berkeley, California on November 15, 2010 with an initial term that began on March 1, 2011 and expires in February 2016. The space was comprised of 25,127 square feet of office space and other equipment under noncancelable operating leases8,384 square feet of warehouse space. Pursuant to the Lease, the landlord reserved the right to elect to recapture from the Company, and lease to a third party, a portion of the warehouse space comprising not more than 6,525 square feet (“Recapture Space”), subject to certain terms and conditions provided for by the Lease. Notwithstanding the foregoing, the Company had a right of first refusal to lease the Recapture Space. The lease term for the Recapture Space was coterminous with the initial term, including any extensions. Further, in the event that the landlord did not elect to recapture the Recapture Space, the Company had the right, upon written notice to the landlord, to elect to lease the Recapture Space and the landlord shall build out the Recapture Space for office use. On September 25, 2012, the Company exercised the right and entered into an amendment to the Lease (the “Lease Amendment”).

The Lease Amendment provided (i) for the reconfiguration of the warehouse space to additional office space in order to accommodate growth, and (ii) the Company with a first option to extend the initial term of the Lease for three years (the “First Option”) followed by a second option to extend the Lease for an additional two years (the “Second Option” and, together with the First Option, the “Option Periods”). The terms, covenants and conditions of the Lease, as amended, will continue to govern the Options Periods, except that the applicable monthly rent for the Option Periods will be equal to 95% of the fair market rental rate for the property, however, the monthly rent payable during the Option Periods will not be less than the monthly rent payable during the immediately preceding month of the initial term or First Option period, as applicable. The landlord is required to deliver to the Company a notice of the fair market rental rate for the property no later than August 1, 2015. If the Company does not agree with the proposed fair market rental rate, then the term of the lease will expire through fiscal yearat the end of the initial term in February 2016. In such event, the Company will have to reimburse to the landlord an amount not to exceed 40% of the total tenant improvement allowance plus interest, as determined in accordance with the Lease. Concurrently with the execution of the Lease Amendment, the Company exercised the First Option to extend the initial lease for an additional three years to February 2019.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Pursuant to the Lease Amendment, on September 25, 2012, the Company and the landlord entered into a Work Letter Agreement (“Work Letter”) for the Recapture Space which specifies the landlord’s responsibilities and the amount of tenant improvement allowance. Pursuant to the Work Letter, the landlord performed the majority of the structural work.

Rent expense for non-cancellablenon-cancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense for the three and nine months ended June 30,December 31, 2012 was $146,000 and $386,000, respectively. Rent expense for the three and nine months ended December 31, 2011 was $120,000$80,000 and $160,000,$360,000, respectively.

Future minimum lease payments (after incorporating the effect of rent escalation and increase in rent for the recaptured space at the per square foot rate applicable to existing office space) under the noncancelable operating lease as of June 30,December 31, 2012 are as follows (in thousands):

 

  Lease Payments   Lease Payments 

Nine Months Ending March 31, 2013

  $412  

Three Months Ending March 31, 2013

  $147  

Fiscal Year Ending March 31:

    

2014

   563     601  

2015

   557     621  

2016

   476     638  

2017

   638  

2018

   638  

2019

   585  
  

 

 
  

 

 

Total future minimum lease payments

  $2,008    $3,868  
  

 

   

 

 

Purchase Commitments

The Company has material non-cancelable purchase commitments, directly or through contract manufacturers, to purchase ingredients to be used in the future to manufacture its products. As of June 30,December 31, 2012, the Company’s purchase commitments totaled $13.1$14.0 million, which will substantially be incurred within a year.

The Company has an agreement with its contract warehousing company that includes minimum overhead fees of $200,000 annually beginning April 1, 2012 through June 2015. The expense is included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Indemnifications

In the normal course of business, the Company enters into contracts that contain a variety of representations and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations, and, accordingly, the Company believes that the estimated fair value of these indemnification obligations is minimal and has not accrued any amounts for these obligations.

Legal Matters

From time to time, the Company is subject to claims and assessments in the ordinary course of business. The Company is not currently a party to any litigation matter that, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

7.Convertible Preferred Stock Warrant

In connection with a prior term loan, the Company had issued a warrant to Hercules Technology II, L.P. (“Hercules”) for the purchase of 80,560 shares of Series A 2005 Convertible Preferred Stock at an exercise price of $8.07 per share. The warrant was immediately exercisable on the date of issuance and was scheduled to expire at the earlier of five years from a qualifying IPO of the Company’s common stock or April 1, 2018. Upon the consummation of the Company’s IPO on April 2, 2012, the warrant became a warrant to purchase 80,560 shares of our common stock and the related convertible preferred stock warrant liability was reclassified to additional paid-in capital. On April 12, 2012, Hercules exercised the warrant to purchase 80,560 shares of our common stock by surrendering 17,367 shares to pay for the exercise. As a result, the Company issued Hercules 63,193 shares of common stock.

As of April 2, 2012, the Company measured the fair value of the outstanding convertible preferred stock warrant using an option pricing method with several possible distribution outcomes depending on the timing and kind of liquidity event utilizing the following assumptions:

April 2, 2012

Remaining contractual life (in years)

0.03

Risk-free interest rate

2.2

Expected volatility

41

Expected dividend rate

0

Remaining Contractual Life. The Company derived the remaining contractual life based on the remaining term through actual exercise on April 12, 2012.

Risk-Free Interest Rate. The risk-free interest rate was based upon U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the warrant.

Volatility. Since prior to the IPO the Company was a private entity with no historical data regarding the volatility of its preferred stock, the expected volatility used was based upon the volatility of a group of similar entities, referred to as “guideline” companies. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size.

Dividend Yield. Although the Company in the past declared dividends, no future dividends are expected to be available to benefit the warrant holder, and, accordingly, the Company used an expected dividend yield of zero in the valuation model.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

7.Convertible Preferred Stock

PriorThe outstanding shares of convertible preferred stock, immediately prior to the closing of the IPO on April 2, 2012 were automatically converted into 15,221,571 shares of common stock. During the Company categorizedthree and nine months ended December 31, 2011, the convertible preferred stock warrant liabilitystockholders received a cash dividend of $0.767 and $0.863 per share, respectively, or approximately $11.6 million and $13.1 million in the aggregate, respectively, as a Level 3 financial liability since there was no market activity for the underlying sharesresult of the 2005 Convertible Preferred Stock. The following table sets forth a summary of the changesparticipating in the fair value ofcommon stock dividend. No dividend was declared or paid during the Company’s Level 3 financial liabilities (in thousands):three and nine months ended December 31, 2012.

   April 2, 2012 

Fair value at March 31, 2012

  $2,157  

Change in fair value recorded in other income (expense), net

   13  
  

 

 

 

Fair value at April 2, 2012

  $2,170  
  

 

 

 

 

8.Preferred Stock

The Company’s certificate of incorporationCharter authorized 5,000,000 shares of preferred stock, $0.001 par value per share. As of June 30,December 31, 2012, no certificate of designations defining the rights and preferences of the preferred stock had been filed and no shares of preferred stock were outstanding.

 

9.Common Stock

As of June 30,December 31, 2012 and March 31, 2012, the Company’s certificate of incorporationCharter authorized 30,000,000 and 24,000,000 shares of common stock, $0.001 par value per share, respectively, of which 17,060,11117,328,797 and 483,242 shares were issued and outstanding, respectively. Each share of the common stock has the right to one vote. The holders of common stock are also entitled to receive dividends wheneverout of funds are legally available therefor and if, as and when or if declared by the BoardCompany’s board of Directors.directors. During the three and nine months ended December 31, 2011, the Company declared and paid common shareholders a cash dividend of $0.767 and $0.862 per share, respectively, or $363,000 and $408,000, respectively, in the aggregate. No dividends were declared or paid during the three and nine months ended June 30,December 31, 2012.

10.Stock-Based Compensation

The Company has adopted performance incentive plans (the 2004 Stock Option Plan and the Omnibus Incentive Plan, which together are the “Plans”) under which nonqualified stock options, restricted stock units and performance share units are granted to eligible employees, officers and directors. The Company has also granted non-plan performance based option awards to certain key management. Options granted under Plans to date generally vest over a two- to five-year period from the date of grant. Vested options can be exercised and generally expire ten years after the grant date. The restricted stock units granted to employees vest 50% on the second anniversary of the grant date, and the remaining 50% on the third anniversary of the grant date, provided continuance of employment with the Company. The performance share units granted to employees vest based on achievement of required cumulative compounded earnings per share growth during the three-year period ending March 31, 2015. Stock-based compensation expense included in selling, general and administrative expenses was $230,000 and $151,000 for the three months ended December 31, 2012 and 2011, respectively, and was $677,000 and $390,000 for the nine months ended December 31, 2012 and 2011, respectively.

The following table summarizes the activity of stock options during the nine months ended December 31, 2012:

   Number
of Shares
  Weighted-Average
Exercise Price
 

Balance, March 31, 2012

   1,759,367   $9.56  

Granted

   2,562    36.30  

Cancelled

   (15,606  16.62  

Exercised

   (610,791  6.38  
  

 

 

  

 

 

 

Balance, December 31, 2012

   1,135,532   $11.24  
  

 

 

  

 

 

 

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes the activity of unvested restricted stock units and performance share units during the nine months ended December 31, 2012:

Shares-Based Awards

  Shares  Weighted-
Average

Grant  Date
Fair Value
 

Unvested at March 31, 2012

   65,899   $19.00  

Granted

   7,220    44.07  

Vested

   —       —     

Performance Shares Adjustment

   —       —     

Forfeited

   (3,568  19.00  
  

 

 

  

 

 

 

Unvested at December 31, 2012

   69,551   $21.60  
  

 

 

  

 

 

 

As of December 31, 2012, there was $2.8 million of total unrecognized compensation cost related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted average period of 2.9 years.

 

10.11.Employee Benefit Plans

The Company offers a retirement savings plan under Section 401(k) of the Internal Revenue Code. The plan covers all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Under the plan, the Company match was increased from 25% to 50% during three months ended December 31, 2012 up to a maximum of 6% of eligible compensation, not to exceed $4,000. Contribution expense was not material for the periods presented.

12.Income Taxes

We recognized income tax expense of $1.4$0.9 million and $5.0 million for the three and nine months ended June 30,December 31, 2012, compared to $1.0$1.5 million and $4.9 million in the same periodperiods last year. The estimated effective tax rate was 40.9%40.4% for the threenine months ended June 30,December 31, 2012, compared to 34.9%39.1% in the same period last year. The effective tax rate is based on a projection of our annualfull fiscal year results. Our effective tax rate for the threenine months ended June 30,December 31, 2012 was higher than the effective tax rate for the threenine months ended June 30,December 31, 2011 largely due to a tax benefit recorded during the threenine months ended June 30,December 31, 2011 related to an increase in the tax rate applied for deferred tax assets due to an increase in the federal and state tax rates.

In addition, during the three and nine months ended June 30,December 31, 2012, we recognized $11.8$6.7 million and $20.8 million of tax deductions associated with stock option exercises. As of June 30,December 31, 2012, $11.4$6.0 million and $19.5 million of these tax deductions are considered “excess” stock compensation relatedcompensation-related deductions, resulting in a reduction in taxes payable of $1.3$4.5 million, recording a tax refund receivable of $2.9$3.0 million, with a corresponding increase in additional paid in capital of $4.2$7.5 million. We will recognize the remaining $0.4 million of stock compensation relatedcompensation-related deductions as a reduction in taxes payable in future periods as we generate state taxable income.

The Company files consolidated tax returns for federal income taxes as well as for state income taxes in various state jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. These audits include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal, state and local tax laws. The Company is potentially subject to U.S. federal, state and local income tax examinations for years 2005 and beyond.

The Company does not have any unrecognized tax positions as of June 30,December 31, 2012 that if recognized would affect the annual effective tax rate. No interest or penalties have been accrued for any period presented. Based on the Company’s assessment, including past experience and complex judgments about future events, the Company does not expect that changes in the liability for unrecognized tax benefits during the next twelve months will have a significant impact on its financial position or results of operations.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

11.13.Net Income per Share of Common Stock attributable to Common Stockholders

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net income per share of common stock for the periods presented, because including them would have been anti-dilutive:

 

  Three Months Ended December 31,   Nine Months Ended December 31, 
  Three Months Ended June 30,   2012   2011   2012   2011 
  2012   2011 

Convertible preferred stock

   —       15,221,571     —        15,221,571     —        15,221,571  

Options to purchase common stock

   2,562     68,164     2,562     167,314     2,562     167,314  

Restricted stock units

   —        —        6,256     —     

Convertible preferred stock warrant

   —       80,560     —        —        —        80,560  
  

 

   

 

   

 

   

 

 
  

 

   

 

 

Total

   2,562     15,370,295     2,562     15,388,885     8,818     15,469,445  
  

 

   

 

   

 

   

 

   

 

   

 

 

A reconciliation of the basic and diluted net income per share attributable to common stockholders is as follows (in thousands except share and per share amounts):

 

   Three Months Ended June 30, 
   2012   2011 

Net income per share:

    

Net income

  $2,131    $1,812  

Less: Income attributable to convertible preferred stockholders

   —       1,758  
  

 

 

   

 

 

 

Net income attributable to common stockholders—basic and diluted

  $2,131    $54  
  

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income attributable to common stockholders—basic

   16,936,007     464,994  

Potential dilutive options

   659,040     771,416  

Potential dilutive restricted stock units

   5,861     —    
  

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income attributable to common stockholders—diluted

   17,600,908     1,236,410  
  

 

 

   

 

 

 

Net income per share attributable to common stockholders

    

—Basic

  $0.13    $0.12  
  

 

 

   

 

 

 

—Diluted

    
  $0.12    $0.04  
  

 

 

   

 

 

 
   Three Months Ended December 31,  Nine Months Ended December 31, 
   2012   2011  2012   2011 

Net income per share:

       

Net income

  $1,401    $2,232   $7,317    $7,660  

Less: Dividends paid to convertible preferred stockholders

   —        11,667    —        13,141  

Less: Undistributed loss attributable to convertible preferred stockholders

   —        (9,504  —        (5,714
  

 

 

   

 

 

  

 

 

   

 

 

 

Net income attributable to common stockholders – basic and diluted

  $1,401    $69   $7,317    $233  
  

 

 

   

 

 

  

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income attributable to common stockholders – basic

   17,249,536     471,554    17,085,833     467,206  

Potential dilutive options

   523,881     522,370    609,222     521,709  

Potential dilutive convertible preferred stock warrant

   —        43,733    —        —     

Potential dilutive restricted stock units

   8,303     —       7,166     —     
  

 

 

   

 

 

  

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income attributable to common stockholders – diluted

   17,781,720     1,037,657    17,702,221     988,915  
  

 

 

   

 

 

  

 

 

   

 

 

 

Net income per share attributable to common stockholders

       

– Basic

  $0.08    $0.15   $0.43    $0.50  
  

 

 

   

 

 

  

 

 

   

 

 

 

– Diluted

  $0.08    $0.07   $0.41    $0.24  
  

 

 

   

 

 

  

 

 

   

 

 

 

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

12.14.Geographic Areas and Product Sales

The Company’s net sales by geographic areas,area, based on the location to wherewhich the product was shipped, are summarized as follows (in thousands):

 

  Three Months Ended December 31,   Nine Months Ended December 31, 
  Three Months Ended June 30,   2012   2011   2012   2011 
  2012   2011 

United States

  $33,148    $27,764    $34,413    $29,709    $111,984    $95,005  

Canada

   1,145     846     1,870     1,129     5,278     3,315  
  

 

   

 

   

 

   

 

   

 

   

 

 
  $34,293    $28,610  
  

 

   

 

   $36,283    $30,838    $117,262    $98,320  
  

 

   

 

   

 

   

 

 

The following table sets forth net sales by product category (in thousands):

 

  Three Months Ended December 31,   Nine Months Ended December 31, 
  Three Months Ended June 30,   2012   2011   2012   2011 
  2012   2011 

Meals

  $14,667    $10,452    $16,223    $14,235    $52,759    $41,411  

Snacks

   13,463     11,898     14,908     12,225     47,517     40,461  

Dressings, condiments and other

   6,163     6,260     5,152     4,378     16,986     16,448  
  

 

   

 

   

 

   

 

   

 

   

 

 
  $34,293    $28,610  
  

 

   

 

   $36,283    $30,838    $117,262    $98,320  
  

 

   

 

   

 

   

 

 

All of the Company’s long-lived assets are located in the U.S.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

13.15.Subsequent EventsEvent

Filing of S-1 Registration Statement

On July 17, 2012,January 22, 2013, the Company filedannounced a registration statement on Form S-1 undervoluntary product recall of certified organic and made with organic pizza products due to the Securities Act with the SEC (the “S-1 Registration Statement”) forpossible presence of fragments of flexible metal mesh from a secondary public offering of common stock of the Company. Certain stockholders, including Solera and certain other affiliates, intend to sell 3,173,892 shares of common stock in the offering.faulty screen at a third-party flour mill. The Company will not receive any proceedsinitiated the recall of all lots of pizza product manufactured with this supplier’s flour from its first purchase from the sale of shares by the stockholders. The underwriters have an option to purchase a maximum of 476,084 additional shares from the stockholders to cover overallotments of shares.supplier in May 2012. The Company will not receive any proceeds from the exercise of the underwriters’ option to purchase additional shares. The estimated offering expenses payable by the Company are $0.7 million, which includes legal, accounting and printing costs and various other feesrecorded certain items associated with the registrationrecall in its financial results for the three and nine months ended December 31, 2012.

The Company recorded the estimated customer and consumer returns as a reduction of common stock.net sales, related costs associated with product returns, destruction charges, inventory write-off and costs incurred by contract manufacturers as cost of sales, and will record administrative costs associated with the recall such as legal expenses as selling, general and administrative expenses. As a result of the voluntary product recall, the Company recorded an estimated accrual for product returns and recall-related costs of approximately $2.3 million for the three and nine months ended December 31, 2012 as follows (in thousands except per share amount):

   Amount 

Reduction of net sales

  $1,570  

Incremental cost of sales

   690  
  

 

 

 

Total reduction to income before income taxes

  $2,260  
  

 

 

 

Impact on net income

  $1,346  
  

 

 

 

Impact on net income per diluted share

  $0.08  
  

 

 

 

The accrual for product returns is based on preliminary estimates of cases of pizza products at retail stores included in channels through which the Company distributes its products and is based on the estimates derived from third-party data and other assumptions. A high degree of judgment is required in estimating consumer returns, shelf and in-stock inventory at retailers across distribution channels, fees and incentives to be earned by customers for their effort to return the products, future freight rates and consumers claims. Actual results could differ from those estimates.

The Company is anticipating additional accruals of approximately $1 million for product returns and related costs for sales subsequent to December 31, 2012, and expects to incur the majority of these costs associated with the voluntary product recall within the next three to six months.

The Company carries product recall insurance and expects to recover a substantial portion of the recall-related costs from its insurance. The Company may seek to recover additional costs from the third-party flour mill. It is not possible to predict the outcome of the success of any such recovery from insurance or claims against the supplier, given the early stage of the voluntary product recall. Consequently, no amounts have been recorded as receivable as of December 31, 2012 for any potential recoveries of any amounts from third parties and there can be no assurance there will be any recoveries.

ITEM 2 – 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 the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended March 31, 2012 (“fiscal 2012”) included in our Annual Report on Form 10-K filed with the SEC on June 8, 2012. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,( the “Exchange Act”). These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,”“estimate” or “continue,”“continue” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those in this Quarterly Report on Form 10-Q and in our Form 10-K discussed in the section titled “Risk Factors.” The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

Annie’s, Inc. is a rapidly growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged foods categories. We sell premium products made from high-quality ingredients at affordable prices. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Our loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across the mainstream grocery, mass merchandiser and natural retailer channels. We offer over 125 products and are present in over 25,000 retail locations in the United States and Canada.

Our net sales are derived primarily from the sale of meals, snacks, dressings, condiments and other products under the Annie’s Homegrown and Annie’s Naturals brand names. We have experienced strong growth, driven by our meals and snacks categories, resulting from our focus on supporting our best-selling items and the introduction of new products in these categories. We have reduced our offerings in our dressings and condiments product lines and discontinued our cereal product line in the fourth quarter of fiscal 2012, which has resulted in nolow or negative quarter over quarter growth in that category. Sales are reported netcategory in recent quarters. In the most recent quarter, despite the impact of estimated sales and promotion incentives, slotting, customer discounts and spoils.discontinuance of the cereal, the category achieved strong growth quarter over quarter driven by stronger consumption trends.

Gross profit is net of cost of sales, which consists of the costs of ingredients in the manufacture of products, contract manufacturing fees, inventory write-off, packaging costs and in-bound freight charges. Ingredients account for the largest portion of the cost of sales followed by contract manufacturing fees and packaging.

Our selling, general and administrative expenses consist primarily of marketing and advertising expenses, freight and warehousing, wages, related payroll and employee benefit expenses, including stock-based compensation, commissions to outside sales representatives, legal and professional fees, travel expenses, other facility relatedfacility-related costs, such as rent and depreciation, and consulting expenses. The primary components of our marketing and advertising expenses include trade advertising, samples, consumer events, sales data, consumer research and search engine and digital advertising.

Voluntary Product Recall

On January 22, 2013, we announced a voluntary product recall of our certified organic and made with organic pizza products. The voluntary product recall was a result of our contract manufacturer for pizza crusts identifying small metal fragments in the pizza dough during a manufacturing run and in some finished pizza crusts made on the same day. We immediately halted production and began investigating the issue. Soon thereafter, we determined that the small metal fragments originated at the third-party flour mill from where we source our pizza flour. We then initiated a recall of all lots of pizza product manufactured with this supplier’s flour from our first purchase from the supplier in May 2012.

The full costs of the voluntary product recall include customer and consumer returns, costs associated with returned product, destruction charges and inventory write-off, retailer margin and customer fees and incentives. We also face the potential for lost sales from our consumers.

As a result of the voluntary product recall, we recorded charges that negatively impacted our net sales and net income by $1.6 million and $1.3 million, respectively, for the three and nine months ended December 31, 2012. The recorded charges were based on our best estimates and information available to us when we recorded the charges. We expect to recover a substantial portion of the recall-related costs from our product recall insurance. We may seek to recover additional costs from the third-party flour mill. Any recovery would be recorded to offset the charges once recovery is probable. We expect the effects of the voluntary product recall to be reflected in our financial statements over the next few quarters.

In addition, we expect to incur approximately $1.0 million of costs associated with product returns and related costs for sales subsequent to December 31, 2012 including the destruction and write off of inventory consisting of non-pizza products manufactured with flour sourced from the same third-party flour mill that provided flour for the recalled pizza products. None of these affected non-pizza products were shipped to customers. We expect to record these costs associated with the voluntary product recall in the fourth quarter of fiscal 2013.

We have restarted the production of our certified organic and made with organic pizza products using flour from an alternative supplier with which we have a long-standing relationship and began shipping replacement product into distributors and retailers as of February 11, 2013 in order to replenish retail shelves and inventories. We expect to see a recovery in sales of our pizza products in the late fourth quarter of fiscal 2013 and first quarter of fiscal 2014, as retailers seek to restock inventory of pizza products.

Trends and Other Factors Affecting Our Business

Net sales growth continues to be driven by increased penetration of mainstream grocery and mass merchandiser channels, product innovation, increased brand awareness and greater consumer demand for natural and organic food products. In the second half of fiscaltwelve months ended December 31, 2012, through our first quarter of the fiscal year ending March 31, 2013 (“fiscal 2013”), we have experienced acceleration in consumer trends for many of our products. We also have benefited from improved placement in the mainstream grocery channel, which we believe has resulted in increased sales of our products. Our net sales growth has been primarily driven by volume; however, we have demonstrated the ability to execute price increases as needed to maintain margins, driven by our strong brand loyalty and perceived value relative to the competition.

We purchase finished products from independent contract manufacturers. We have long standing, strategic relationships with many of our contract manufacturers and suppliers of organic ingredients. We enter, either directly or through contract manufacturers, into purchase commitmentsforward pricing contracts with certain suppliers for key ingredients that represent approximately half our cost of goods sold.ingredient suppliers. This practice provides us with significant visibility into our cost structure over the next six to twelve months. In fiscal 2012, our contracted ingredients represented approximately 48% of our material costs and 25% of our cost of sales. Over the past 18 months, we have experienced increased costs for many of our inputs and expect these higher costs to continue throughout the remainder of our fiscal 2013.year ending March 31, 2013 (“fiscal 2013”). We have been successful in maintainingstrive to maintain or improvingimprove gross margins despite the increasing commodity cost environmentcosts through a combination of cost management and price increases. We actively manage our input and production costs through a combination of commodity management practices, vendor negotiation, productivity improvements and cost reductions in our supply chain. We invest significant time and effort to achieve permanent cost reductions in our supply chain. To drive these initiatives, we have begun to selectively invest capital in equipment located at our contract manufacturers to drive down costs, improve throughput and improve product quality.

Selling, general and administrative expenses have increased as a result of the investment we have made in building our organization and adding headcount to support our growth and operating as a public company. During the course of fiscal 2013, we have continued to invest in our business with the addition of customer facing sales and operations staff. Many of our selling, general and administrative expenses are variable with volume including freight and warehouse expenses and commissions paid to our sales brokers. In addition, we continue to make investments in marketing to drive trial of our products and promote awareness of our brand and in research and development to support our robust innovation pipeline. Starting in fiscal 2012, we incurred incremental expense related to getting ready to operate as a public company. We expect to incur approximately $2 million in incremental expense annually related to being a public company.

Results of Operations

The following table sets forth items included in our consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:

 

  Three Months Ended December 31, % of Net Sales Nine Months Ended December 31, % of Net Sales 
  Thee Months Ended June 30, % of Net Sales   2012 2011 2012 2011 2012 2011 2012 2011 
  2012 2011 2012 2011   (in thousands, except for percentages) 
  (in thousands, except for percentages) 

Net sales

  $34,293   $28,610    100.0  100.0  $36,283   $30,838    100.0  100.0 $117,262   $98,320    100.0  100.0

Cost of sales

   20,486    17,022    59.7  59.5   23,267    18,275    64.1  59.3  72,539    60,034    61.9  61.1
  

 

  

 

     

 

  

 

    

 

  

 

   

Gross profit

   13,807    11,588    40.3  40.5   13,016    12,563    35.9  40.7  44,723    38,286    38.1  38.9

Operating expenses:

              

Selling, general and administrative expenses

   10,211    8,303    29.8  29.0   10,687    8,847    29.5  28.7  32,437    25,206    27.7  25.6
  

 

  

 

     

 

  

 

    

 

  

 

   

Total operating expenses

   10,211    8,303    29.8  29.0   10,687    8,847    29.5  28.7  32,437    25,206    27.7  25.6
  

 

  

 

    

 

  

 

   
  

 

  

 

   

Income from operations

   3,596    3,285    10.5  11.5   2,329    3,716    6.4  12.1  12,286    13,080    10.5  13.3

Interest expense

   (40  (18  (0.1)%   (0.1)%    (40  (25  (0.1)%   (0.1)%   (120  (66  (0.1)%   (0.1)% 

Other income (expense), net

   49    (484  0.1  (1.7)%    31    43    0.1  0.1  116    (428  0.1  (0.4)% 
  

 

  

 

     

 

  

 

    

 

  

 

   

Income before provision for income taxes

   3,605    2,783    10.5  9.7   2,320    3,734    6.4  12.1  12,282    12,586    10.5  12.8

Provision for income taxes

   1,474    971    4.3  3.4   919    1,502    2.5  4.9  4,965    4,926    4.2  5.0
  

 

  

 

     

 

  

 

    

 

  

 

   

Net income

  $2,131   $1,812    6.2  6.3  $1,401   $2,232    3.9  7.2 $7,317   $7,660    6.2  7.8
  

 

  

 

     

 

  

 

    

 

  

 

   

Our discussion of our results of operations in this Quarterly Report on Form 10-Q includes certain net sales, gross profit, gross margin, selling, general and administrative expenses, income from operations and net income figures that exclude the impact of our voluntary product recall of pizza products announced on January 22, 2013. These figures are non-GAAP financial measures. We calculate these non-GAAP figures by eliminating the impact of our voluntary product recall, which we do not consider indicative of our ongoing operations. We believe these non-GAAP figures provide additional information to facilitate the comparison of our past and present financial results and better visibility into our normal operating results by isolating the effects of the voluntary product recall. These non-GAAP financial measures should not be considered in isolation or as alternatives to GAAP financial measures and investors should not rely on any single financial measure to evaluate our business.

Three Months Ended June 30,December 31, 2012 Compared to Three Months Ended June 30,December 31, 2011

Net Sales

 

  Three Months Ended December 31,   Change % of Net Sales 
  Three Months Ended June 30,   Change % of Net Sales   2012   2011   $   % 2012 2011 
  2012   2011   $ % 2012 2011   (in thousands, except for percentages) 
  (in thousands, except for percentages) 

Meals

  $14,667    $10,452    $4,215    40.3  42.8  36.5  $16,223    $14,235    $1,988     14.0  44.8  46.2

Snacks

   13,463     11,898     1,565    13.2  39.2  41.6   14,908     12,225     2,683     21.9  41.1  39.6

Dressings, condiments and other

   6,163     6,260     (97  (1.5)%   18.0  21.9   5,152     4,378     774     17.7  14.2  14.2
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

    

 

  

 

 

Net sales

  $34,293    $28,610    $5,683    19.9  100.0  100.0  $36,283    $30,838    $5,445     17.7  100.0  100.0
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

    

 

  

 

 

Net sales increased $5.7$5.4 million, or 19.9%17.7%, to $34.3$36.3 million during the three months ended June 30,December 31, 2012 compared to $28.6$30.8 million during the three months ended June 30,December 31, 2011. The net sales for the three months ended December 31, 2012 included a $1.6 million reduction due to the voluntary product recall of our certified organic and made with organic pizza products. The increase in net sales (net of the effects of the voluntary product recall) reflects an increase in net sales of snacks, meals and dressings, condiments and other of $2.7 million, $2.0 million and $0.8 million, respectively. The increase in snacks was primarily due to growth in our grahams, crackers, mixed snacks and snack mix product lines. The increase in meals was predominantly driven by strong growth in natural macaroni and cheese products offset by the voluntary product recall of frozen pizza products. Organic frozen pizza first shipped in January 2012 and made with organic frozen pizza first shipped during second quarter. As discussed earlier, we initiated a voluntary product recall of all frozen pizza products in January 2013.

The increase in dressings, condiments and other was attributable to strong performance of natural and organic dressings and condiments, partially offset by the discontinuation of our cereal product line. Distribution gains and our mainline placement initiatives also contributed to net sales growth, primarily in the mainstream grocery channel. The net sales increase was primarily driven by volume with approximately 3% of growth driven by higher average selling prices.

Excluding the impact of our voluntary product recall, our net sales would have increased $7.0 million, or 22.7%, to $37.9 million during the three months ended December 31, 2012 compared to $30.8 million during the three months ended December 31, 2011.

Gross Profit

   Three Months Ended December 31,  Change 
   2012  2011  $   % 
   (in thousands, except for percentages) 

Cost of sales

  $23,267   $18,275   $4,992     27.3
  

 

 

  

 

 

  

 

 

   

Gross profit

  $13,016   $12,563   $453     3.6
  

 

 

  

 

 

  

 

 

   

Gross margin %

   35.9  40.7   
  

 

 

  

 

 

    

Gross profit increased $0.5 million, or 3.6%, to $13.0 million for the three months ended December 31, 2012 from $12.6 million for the three months ended December 31, 2011. Gross margin decreased 4.8 percentage points to 35.9% from 40.7% during the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The decrease in gross margin is primarily attributable to a reduction in net sales of $1.6 million due to voluntary product recall and a corresponding increase in cost of sales of $0.7 million for estimated costs associated with the product recall. The estimated costs associated with the product recall comprised of affected inventory write-off $0.6 million and costs incurred by contract manufacturers $0.1 million. The effect of the charge for voluntary product recall costs on gross margin was approximately 4.5 percentage points. To a lesser extent, the decrease in gross margin resulted from higher commodity costs, partially offset by a price increase that was implemented in October 2012 and the cumulative impact of various cost reduction initiatives. We expect to see slightly higher commodity costs in the fourth quarter versus our year-to-date results driven by higher dairy costs. We also expect to invest in incremental trade promotions beyond our original plans to support pizza in our fourth quarter. As a result, we expect our fourth quarter gross margin to be in the low to mid 39 percentage range with a full year margin in the mid 39 percentage range.

Excluding the impact of the voluntary product recall, our gross profit would have increased $2.7 million, or 21.6%, to $15.3 million for the three months ended December 31, 2012 from $12.6 million for the three months ended December 31, 2011 and gross margin would have decreased 0.3 percentage points to 40.4% from 40.7% during the three months ended December 31, 2012 compared to the three months ended December 31, 2011.

Operating Expenses

   Three Months Ended December 31,   Change 
   2012   2011   $   % 
   (in thousands, except for percentages) 

Operating expenses:

        

Selling, general and administrative expenses

  $10,687    $8,847    $1,840     20.8
  

 

 

   

 

 

   

 

 

   

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.8 million, or 20.8%, to $10.7 million during the three months ended December 31, 2012 from $8.8 million during the three months ended December 31, 2011. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our growth and operations as a public company. Additionally, public company-related expenses impacted selling, general and administrative expenses during the three months ended December 31, 2012 compared with the three months ended December 31, 2011. Selling, general and administrative expenses for the three months ended December 31, 2012 were not impacted due to voluntary product recall since it was announced in January 2013. However, we expect an increase in expenses due to administrative costs associated with the management of the recall including legal expenses in our fourth fiscal quarter ending March 31, 2013. As a percentage of net sales, selling, general and administrative expenses increased 0.8 percentage points to 29.5% during the three months ended December 31, 2012 from 28.7% during the three months ended December 31, 2011. While leveraging in the second half of fiscal 2013, we expect selling, general and administrative expenses as a percentage of net sales for fiscal 2013 to be on par with our prior fiscal year.

Excluding the impact of the voluntary product recall, our selling, general and administrative expenses as a percentage of net sales would have decreased 0.5 percentage points to 28.2% during the three months ended December 31, 2012 from 28.7% during the three months ended December 31, 2011.

Income from Operations

   Three Months Ended December 31,  Change 
   2012  2011  $  % 
   (in thousands, except for percentages) 

Income from operations

  $2,329   $3,716   $(1,387  (37.3)% 
  

 

 

  

 

 

  

 

 

  

Income from operations as a percentage of net sales

   6.4  12.1  

As a result of the factors above, income from operations decreased $1.4 million, or 37.3%, to $2.3 million during the three months ended December 31, 2012, from $3.7 million during the three months ended December 31, 2011. Income from operations as a percentage of net sales decreased 5.7 percentage points to 6.4% in the three months ended December 31, 2012, from 12.1% in the three months ended December 31, 2011.

Excluding the impact of voluntary product recall, our income from operations would have increased $0.9 million, or 23.5% to $4.6 million for the three months ended December 31, 2012 from $3.7 million for the three months ended December 31, 2011.

Interest Expense

   Three Months Ended December 31,  Change 
   2012  2011  $  % 
   (in thousands, except for percentages) 

Interest expense

  $(40 $(25 $(15  nm  
  

 

 

  

 

 

  

 

 

  

Interest expense during the three months ended December 31, 2012 primarily related to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012. Interest expense during the three months ended December 31, 2011 consisted of expense related to borrowings on our revolving line of credit.

Other Income (Expense), Net

   Three Months Ended December 31,   Change 
   2012   2011   $  % 
   (in thousands, except for percentages) 

Other income (expense), net

  $31    $43    $(12  nm  
  

 

 

   

 

 

   

 

 

  

Other income (expense), net during the three months ended December 31, 2012 and 2011 consisted of royalty income.

Provision for income taxes

   Three Months Ended December 31,  Change 
   2012  2011  $  % 
   (in thousands, except for percentages) 

Provision for income taxes

  $919   $1,502   $(583  (38.8)% 
  

 

 

  

 

 

  

 

 

  

Effective tax rate

   39.6  40.2  

Our effective tax rate was 39.6% for the three months ended December 31, 2012, compared to 40.2% in the same period last year. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the three months ended December 31, 2012 was lower than the effective tax rate for the three months ended December 31, 2011 due to the impact of state income tax credits. We expect our full year effective tax rate for fiscal 2013 to be approximately 40.4%.

In addition, during the three months ended December 31, 2012, we recognized $6.7 million of tax deductions associated with stock option exercises. As of December 31, 2012, $6.0 million of these tax deductions are considered “excess” stock compensation-related deductions, resulting in a reduction in taxes payable of $4.5 million, recording a tax refund receivable of $3.0 million, with a corresponding increase in additional paid in capital of $7.5 million. We will recognize the remaining $0.4 million of stock compensation-related deductions as a reduction in taxes payable in future periods as we generate state taxable income.

Net income

   Three Months Ended December 31,   Change 
   2012   2011   $  % 
   (in thousands, except for percentages) 

Net income

  $1,401    $2,232    $(831  (37.2)% 
  

 

 

   

 

 

   

 

 

  

As a result of the factors above, net income decreased $0.8 million, or 37.2%, to $1.4 million for the three months ended December 31, 2012 from $2.2 million for the three months ended December 31, 2011.

Excluding the impact of the voluntary product recall, our net income would have increased $0.5 million, or 23.1%, to $2.7 million for the three months ended December 31, 2012 from $2.2 million for the three months ended December 31, 2011.

Nine Months Ended December 31, 2012 Compared to Nine Months Ended December 31, 2011

Net Sales

   Nine Months Ended December 31,   Change  % of Net Sales 
   2012   2011   $   %  2012  2011 
   (in thousands, except for percentages) 

Meals

  $52,759    $41,411    $11,348     27.4  45.0  42.1

Snacks

   47,517     40,461     7,056     17.4  40.5  41.2

Dressings, condiments and other

   16,986     16,448     538     3.3  14.5  16.7
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales

  $117,262    $98,320    $18,942     19.3  100.0  100.0
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales increased $18.9 million, or 19.3%, to $117.3 million during the nine months ended December 31, 2012 compared to $98.3 million during the nine months ended December 31, 2011. The net sales for the nine months ended December 31, 2012 included a $1.6 million reduction due to the voluntary product recall of our certified organic and made with organic pizza products. The increase in net sales (net of the effects of the voluntary product recall) reflects an increase in net sales of meals, and snacks of $4.2 million and $1.6 million, respectively, offset by a slight decrease in dressings, condiments and other of $0.1 million.$11.3 million, $7.1 million and $0.5 million, respectively. The increase in meals was predominantly driven by strong growth in the natural macaroni and cheese product line, with a modest increase from organicoffset by the voluntary product recall of frozen pizza which weproducts. Organic frozen pizza first shipped in January 2012. We experienced2012 and made with organic pizza first shipped during our

second quarter. As discussed earlier, we initiated a voluntary product recall of all frozen pizza products in January 2013. The increase in snacks was primarily due to growth across all ofin our snackgrahams, crackers, mixed snacks and fruit snacks product lines. The growth in snacks was more modest relative to prior quarters because of channel mix. The slight decreaseincrease in dressings, condiments and other was attributable to strong growth in natural and organic dressings, partially offset by the discontinuation of cereal. Excludingour cereal the dressings, condiments and other category grew by $0.5 million.product line. Distribution gains and our mainline placement initiatives also contributed to net sales growth, primarily in the mainstream grocery channel. The net sales increase was primarily driven by volume with slightly higher average selling prices adding modest growth.

Excluding the impact of our voluntary product recall, our net sales would have increased $20.5 million, or 20.9%, to $118.8 million during the nine months ended December 31, 2012 compared to $98.3 million during the nine months ended December 31, 2011.

Gross Profit

 

  Nine Months Ended December 31, Change 
  Three Months Ended June 30, Change   2012 2011 $   % 
  2012 2011 $   %   (in thousands, except for percentages) 
  (in thousands, except for percentages) 

Cost of sales

  $20,486   $17,022   $3,464     20.4  $72,539   $60,034   $12,505     20.8
  

 

  

 

  

 

     

 

  

 

  

 

   

Gross profit

  $13,807   $11,588   $2,219     19.1  $44,723   $38,286   $6,437     16.8
  

 

  

 

  

 

   
  

 

  

 

  

 

   

Gross margin %

   40.3  40.5      38.1  38.9   
  

 

  

 

      

 

  

 

    

Gross profit increased $2.2$6.4 million, or 19.1%16.8%, to $13.8$44.7 million for the threenine months ended June 30,December 31, 2012 from $11.6$38.3 million for the threenine months ended June 30,December 31, 2011. Gross margin decreased 0.20.8 percentage points to 40.3%38.1% from 40.5%38.9% during the threenine months ended June 30,December 31, 2012 compared to the threenine months ended June 30,December 31, 2011. The decrease in gross margin is primarily attributable to a reduction in net sales of $1.6 million due to voluntary product recall and a corresponding increase in cost of sales of $0.7 million for estimated costs associated with the product recall. The estimated costs associated with the product recall comprised of affected inventory write-off $0.6 million and costs incurred by contract manufacturers $0.1 million. The increase in gross profit was primarily driven by the increase in net sales. The slight decrease insales, partially offset by the negative impact of the product recall.

Excluding the impact of the voluntary product recall, our gross profit would have increased $8.7 million, or 22.7%, to $47.0 million for the nine months ended December 31, 2012 from $38.3 million for the nine months ended December 31, 2011 and gross margin resultedwould have increased 0.6 percentage points to 39.5% from higher commodity costs,38.9% during the nine months ended December 31, 2012 compared to the nine months ended December 31, 2011 due to price increases and the cumulative benefit of various cost reduction initiatives, which were partially offset by price increases and cost reduction initiatives.higher commodity costs.

Operating Expenses

 

  Nine Months Ended December 31,   Change 
  Three Months Ended June 30,   Change   2012   2011   $   % 
  2012   2011   $   %   (in thousands, except for percentages) 
  (in thousands, except for percentages) 

Operating expenses:

                

Selling, general and administrative expenses

  $10,211    $8,303    $1,908     23.0  $32,437    $25,206    $7,231     28.7
  

 

   

 

   

 

     

 

   

 

   

 

   

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.9$7.2 million, or 23.0%28.7%, to $10.2$32.4 million during the threenine months ended June 30,December 31, 2012 from $8.3$25.2 million during the threenine months ended June 30,December 31, 2011. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our

growth and operatingoperations as a public company. In addition, during the three months ended June 30, 2012, we made additional investments in

research and development to support our innovation pipeline compared with the three months ended June 30, 2011. Additionally, public company relatedcompany-related expenses impacted selling, general and administrative expenses during the threenine months ended June 30,December 31, 2012 compared with the threenine months ended June 30,December 31, 2011. Further, during the nine months ended December 31, 2012, we incurred $0.7 million including legal, accounting and printing costs and various other fees associated with the registration and sale of common stock in the secondary public offering by certain stockholders, including Solera. We did not receive any proceeds from the sale of shares by the selling stockholders. Selling, general and administrative expenses for the nine months ended December 31, 2012 were not impacted due to voluntary product recall since it was announced in January 2013. However, we expect an increase in expenses due to administrative costs associated with the management of the recall including legal expenses in our fourth fiscal quarter ending March 31, 2013. As a percentage of net sales, selling, general and administrative expenses increased 0.82.1 percentage points to 29.8%27.7% during the threenine months ended June 30,December 31, 2012 from 29.0%25.6% during the threenine months ended June 30,December 31, 2011.

Excluding the impact of the voluntary product recall, our selling, general and administrative expenses as a percentage of net sales would have increased 1.7 percentage points to 27.3% during the nine months ended December 31, 2012 from 25.6% during the nine months ended December 31, 2011.

Income from Operations

 

  Nine Months Ended December 31, Change 
  Three Months Ended June 30, Change   2012 2011 $ % 
  2012 2011 $   %   (in thousands, except for percentages) 
  (in thousands, except for percentages) 

Income from operations

  $3,596   $3,285   $311     9.5  $12,286   $13,080   $(794  (6.1)% 
  

 

  

 

  

 

     

 

  

 

  

 

  

Income from operations as a percentage of net sales

   10.5  11.5      10.5  13.3  

As a result of the factors above, income from operations increased $0.3decreased $0.8 million, or 9.5%6.1%, to $3.6$12.3 million during the threenine months ended June 30,December 31, 2012, from $3.3$13.1 million during the threenine months ended June 30,December 31, 2011. Income from operations as a percentage of net sales decreased 1.02.8 percentage pointpoints to 10.5% in the threenine months ended June 30,December 31, 2012, from 11.5%13.3% in the threenine months ended June 30,December 31, 2011.

Excluding the impact of voluntary product recall, our income from operations would have increased $1.5 million, or 11.2% to $14.6 million for the nine months ended December 31, 2012 from $13.1 million for the nine months ended December 31, 2011.

Interest Expense

 

   Three Months Ended June 30,  Change 
   2012  2011  $  % 
   (in thousands, except for percentages) 

Interest expense

  $(40 $(18 $(22  nm  
  

 

 

  

 

 

  

 

 

  
   Nine Months Ended December 31,  Change 
   2012  2011  $  % 
   (in thousands, except for percentages) 

Interest expense

  $(120 $(66 $(54  nm  
  

 

 

  

 

 

  

 

 

  

Interest expense increased slightly during the threenine months ended June 30,December 31, 2012 compared to the three months ended June 30, 2011 dueprimarily related to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012. Interest expense during the nine months ended December 31, 2011 consisted of expense related to borrowings on our revolving line of credit.

Other Income (Expense), Net

 

   Three Months Ended June 30,  Change 
   2012   2011  $   % 
   (in thousands, except for percentages) 

Other income (expense), net

  $49    $(484 $533     nm  
  

 

 

   

 

 

  

 

 

   
   Nine Months Ended December 31,  Change 
   2012   2011  $   % 
   (in thousands, except for percentages) 

Other income (expense), net

  $116    $(428 $544     nm  
  

 

 

   

 

 

  

 

 

   

Other income (expense), net during the threenine months ended June 30,December 31, 2012 primarily reflects royalty income partially offset by non-cash charge of $13,000 related to the increase in the fair value of the convertible preferred stock warrant on April 2, 2012, prior to its conversion into a common stock warrant. Other income (expense), net during the three monthnine months ended June 30,December 31, 2011 primarily reflects a non-recurring, non-cash out-of-period charge of $0.5 million related to the increase in the fair value of our convertible preferred stock warrant liability partially offset by royalty income.

Provision for income taxes

 

  Nine Months Ended December 31, Change 
  Three Months Ended June 30, Change   2012 2011 $   % 
  2012 2011 $   %   (in thousands, except for percentages) 
  (in thousands, except for percentages) 

Provision for income taxes

  $1,474   $971   $503     nm    $4,965   $4,926   $39     0.8
  

 

  

 

  

 

     

 

  

 

  

 

   

Effective tax rate

   40.9  34.9      40.4  39.1   

Our estimated effective tax rate was 40.9%40.4% for the threenine months ended June 30,December 31, 2012, compared to 34.9%39.1% in the same period last year. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the threenine months ended June 30,December 31, 2012 was higher than the effective tax rate for the threenine months ended June 30,December 31, 2011 largely due to a tax benefit recorded during the threenine months ended June 30,December 31, 2011 related to an increase in the tax rate applied for deferred tax assets due to an increase in the federal and state tax rates.rates, partially offset by the impact of state income tax credits.

In addition, during the threenine months ended June 30,December 31, 2012, we recognized $11.8$20.8 million of tax deductions associated with stock option exercises. As of June 30,December 31, 2012, $11.4$19.5 million of these tax deductions are considered “excess” stock compensation related deductions, resulting in a reduction in taxes payable of $1.3$4.5 million, recording a tax refund receivable of $2.9$3.0 million, with a corresponding increase in additional paid in capital of $4.2$7.5 million. We will recognize the remaining $0.4 million of stock compensation related deductions as a reduction in taxes payable in future periods as we generate state taxable income.

Net income

 

   Three Months Ended June 30,   Change 
   2012   2011   $   % 
   (in thousands, except for percentages) 

Net income

  $2,131    $1,812    $319     17.6
  

 

 

   

 

 

   

 

 

   
   Nine Months Ended December 31,   Change 
   2012   2011   $  % 
   (in thousands, except for percentages) 

Net income

  $7,317    $7,660    $(343  (4.5)% 
  

 

 

   

 

 

   

 

 

  

As a result of the factors above, net income increaseddecreased $0.3 million, or 17.6%4.5%, to $2.1$7.3 million for the threenine months ended June 30,December 31, 2012 from $1.8$7.7 million for the threenine months ended June 30,December 31, 2011.

Excluding the impact of the voluntary product recall, our net income would have increased $1.0 million, or 13.1%, to $8.7 million for the nine months ended December 31, 2012 from $7.7 million for the nine months ended December 31, 2011.

Seasonality

Historically, we have experienced greater net sales in the second and fourth fiscal quarters than in the first and third fiscal quarters due to our customers’ merchandising and promotional activities around the back-to-school and spring seasons. Concurrently, inventory levels and working capital requirements increase during the first and third fiscal quarters of each fiscal year to support higher levels of net sales in the subsequent quarters. We anticipate that this seasonal impact on our net sales and working capital is likely to continue. Accordingly, our results of operations for any particular quarter are not indicative of the results we expect for the full year.

Liquidity and Capital Resources

 

  June 30,   March 31,   December 31,
2012
   March 31,
2012
 
  2012   2012   (in thousands) 
  (in thousands) 

Cash

  $5,102    $562    $12,960    $562  

Accounts receivable, net

   7,388     11,870     10,110     11,870  

Accounts payable, related-party payable and accrued liabilities

   5,489     9,618     12,989     9,618  

Working capital(1)

   28,066     16,427     38,806     16,427  

 

(1)Working capital consists of total current assets less total current liabilities

Our principal sources of liquidity are our cash and accounts receivable, as well as cash flows from operations. Our cash balance and working capital increased by $12.4 million and $22.4 million, respectively, as of December 31, 2012. The increase in working capital includes a $10.9 million increase in inventory. Following unanticipated demand spikes during the second quarter of fiscal 2013 related to strong back-to-school promotion efficiencies, we have significantly increased inventory levels to ensure our ability to meet peak demand in the fourth quarter, our largest sales quarter. Despite this investment in inventory levels, we generated $4.2 million cash from our operating activities during the nine months ended December 31, 2012. Working capital as of December 31, 2012 included a decrease in accounts receivable $1.6 million, a decrease in inventory $0.6 million and an increase in accrued liabilities $0.1 million, as a result of the provisions for product returns and costs associated with the product recall. We expect inventory levels to decrease in the fourth fiscal quarter of fiscal 2013.

Additionally, we have a credit facility with Bank of America, N.A., which provides for revolving loans and letters of credit up to $20.0 million and is available to us through August 2014. We believe that our cash and accounts receivable and potential cash flows from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. We have historically generated cash from our operations, however, there can be no assurance that our operations will continue to generate cash flows in the future. We use cash generated from our operations to fund our ongoing operations including business expansion and growth.

The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by (used in) operating, investing and financing activities and our ending balance of cash:

 

  Nine Months Ended December 31, 
  June 30, June 30,   2012 2011 
  2012 2011   (in thousands) 
  (in thousands) 

Cash at beginning of period

  $562   $7,333    $562   $7,333  

Net cash provided (used in) by operating activities

   950    (6,675

Net cash provided by (used in) operating activities

   4,210    (771

Net cash used in investing activities

   (735  (380   (1,498  (1,504

Net cash used in financing activities

   4,325    2,822  

Net cash provided by (used in) financing activities

   9,686    (2,644
  

 

  

 

 
  

 

  

 

 

Cash at end of period

  $5,102   $3,100    $12,960   $2,414  
  

 

  

 

   

 

  

 

 

Cash Flows from Operating Activities.

Operating activities provided $1.0$4.2 million of cash during the threenine months ended June 30,December 31, 2012, primarily due to our net income of $2.1$7.3 million, which included net non-cash charges of $0.7 million for depreciation and amortization, $0.7 million for stock-based compensation a $0.6 million reduction in allowances for trade discounts and a $0.5 million.million increase in inventory reserves due to inventory write-off associated with the product recall. Changes in operating asset and liability accounts provided an additional $2.5$3.0 million of net cash, which was primarily comprised of a $4.5 million decrease in accounts receivable, a $3.5 million increase in accrued expenses, a $4.4 million increase in prepaid expenses, other current and non-current assets, a $3.4 million increase in accounts payable, a $2.3 million increase in accounts receivable and a $0.4 million in income tax receivable and, offset by a $4.3$10.8 million increase in inventory and a $1.3 million decrease in related-party payable, resulting from the termination of our advisory services agreement with Solera effective upon the consummation of our IPO. This increase in cash was offset by the excess tax benefit from stock-based compensation of $4.2$7.5 million. During three months ended December 31, 2012, we significantly increased inventory levels to ensure our ability to meet peak demand in the fourth quarter, our largest sales quarter. The increase in accrued expenses was driven by the purchases of inventory, which had been received as of December 31, 2012 but not yet invoiced. The increase in accounts payable was related to timing of invoices received and check runs in relation to the quarter end, which can vary from year to year.

Operating activities used $6.7$0.8 million of cash during the threenine months ended June 30,December 31, 2011, primarily due to our net income of $1.8$7.7 million, which included net non-cash benefitcharges of $0.2$0.7 million. Changes in operating asset and liability accounts used $8.3$9.2 million of net cash during the threenine months ended June 30,December 31, 2011.

Cash Flows from Investing Activities.

Cash used in investing activities related to purchases of property and equipment during the threenine months ended June 30,December 31, 2012 and 2011 was $0.7$1.5 million and $0.4$1.5 million, respectively.respectively, primarily related to investments made in our new enterprise resource planning system and manufacturing equipment to support our cost efficiency projects during the periods presented.

Cash Flows from Financing Activities.

Cash provided by financing activities totaled $4.3$9.7 million during the threenine months ended June 30,December 31, 2012, comprised of:

 

net proceeds of $11.1 million received from common shares issued in the IPO, net of issuance costs;

 

excess tax benefit from stock-based compensation of $4.2$7.5 million;

 

proceeds of $1.8$3.8 million received from exercises of stock options; and

 

net pay down of the outstanding balance of $12.8 million of our credit facility.

Cash provided byused in financing activities totaled $2.8$2.6 million during the threenine months ended June 30,December 31, 2011, including net proceedswhich primarily consisted of $3.4$13.6 million received from borrowings under our credit facility offset byin cash dividend payments made to stockholders, $1.8 million in payments of IPO costs and $0.6 million to repurchase certain stock options.options partially offset by proceeds of $13.3 million from net borrowings under our credit facility.

Credit Facility

In December 2011, we entered into a second amended and restated credit agreement (the “Credit Agreement”) with Bank of America, N.A., which provides for revolving loans and letters of credit up to $20.0 million and is available to us through August 2014. The Credit Agreement is secured by a lien on substantially all of our assets.

Revolving advances under the Credit Agreement bear interest at the LIBOR plus 1.50%, as defined. Weighted average interest was 1.5% for each of the three and nine months ended December 31, 2012. Weighted average interest was 1.6% and 2.3% for the three and nine months ended December 31, 2011, respectively. As of December 31, 2012 and March 31, 2012, there was $20.0 million and $7.2 million, respectively, of availability for borrowings under the Credit Agreement. An unused line fee of 0.0625% per quarter is applied to the available balance unless our outstanding borrowing exceeds half of the borrowing limit. Interest is payable monthly.

There are various financial and other covenants under the Credit Agreement. Financial covenants, as defined in the Credit Agreement, include a net income covenant, total liabilities to tangible net worth covenant and a minimum fixed charge coverage covenant. The Credit Agreement requires us to submit interim and annual financial statements by specified dates after each reporting period. We were in compliance with the financial covenants under the Credit Agreement as of December 31, 2012.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30,December 31, 2012:

 

  Payments Due by Period   Payments Due by Period 
  Total   Less Than
One Year
   1-3 Years   3-5 Years   More  than
Five Years
   Total   Less Than
One Year
   1-3 Years   3-5 Years   More than
Five Years
 
    (in thousands) 
  (in thousands) 

Rent obligations(1)

  $1,964    $524    $1,440    $—      $—      $3,868    $596    $1,250    $1,277    $745  

Equipment lease obligations(2)

   44     25     19     —       —       31     25     6     —        —     
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total operating lease obligations

   2,008     549     1,459     —       —       3,899     621     1,256     1,277     745  

Purchase commitments(3)

   13,064     12,792     272     —       —       14,033     14,023     10     —        —     

Warehousing overheads obligations(4)

   600     200     400         500     200     300      
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $15,672    $13,541    $2,131    $—      $—      $18,432    $14,844    $1,566    $1,277    $745  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)We lease approximately 33,500 square feet of space that houses our corporate headquarters and a sample warehousestorage area at 1610 Fifth Street, Berkeley, California pursuant to a lease agreement that expires in February 2016. Our lease has escalating rent provisions over2016 (the “Lease”). On September 25, 2012, we entered into an amendment (the “Lease Amendment”) to the initial term and set rental ratesLease for two option terms through February 2021 based on a percentagereconfiguration of the then fair market rental rate. We are working on reconfiguring approximately 6,5006,700 square feet from the sample storage area to additional office space to accommodate our growth. The amendment also provided us with, among other things, an option to extend the initial term of the lease for three years (the “First Option”) followed by a second option to extend the lease for an additional two years (the “Second Option” and, together with the First Option, the “Option Periods”). The terms, covenants and conditions of the Lease, as amended, will continue to govern the Option Periods, except that the applicable monthly rent for the Option Periods will be equal to 95% of the fair market rental rate for the property, however, the monthly rent payable during the Option Periods will not be less than the monthly rent payable during the immediately preceding month of the initial term or First Option period, as applicable. The landlord is required to deliver to us a notice of the fair market rental rate for the property no later than August 1, 2015. If we do not agree with the proposed fair market rental rate, then the term of the lease will expire at the end of the initial term in February 2016. In such event, we will have to reimburse to the landlord, an amount not to exceed 40% of the total tenant improvement allowance plus interest, as determined in accordance with the Lease. Concurrently with the execution of the Lease Amendment, we exercised the First Option to extend the initial lease for an additional three years to February 2019. The rent obligations above incorporate the effect of rent escalation and the increase in rent for the recaptured space at the per square foot rate applicable to existing office space.
(2)We lease equipment under non-cancelable operating leases. These leases expire at various dates through 2016, excluding extensions at our option, and contain provisions for rental adjustments.2015.
(3)We have non-cancelable purchase commitments, directly or through contract manufacturers, to purchase ingredients to be used in the future to manufacture products.
(4)We have an agreement with our contract warehousing company to pay minimum overhead fees through June 2015.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements or any holdings in variable interest entities.

Out-of-period Adjustment

During the first quarternine months of the prior fiscal year, we corrected an error in theour measurement of ourthe convertible preferred stock warrant liability. The correction increased the fair value of the convertible preferred stock warrant liability by $0.9 million and decreased additional paid-in capital by $0.4 million with a corresponding increase in expense of $0.5 million, which was recorded in other income (expense), net in the statement of operations during the threenine months ended June 30,December 31, 2011. The correction was an accumulation of an error that should have been recorded in prior periods and would have increased net loss for fiscal 2009 by $44,000, increased net income by $79,000 for fiscal 2010 and decreased net income by $0.6 million for fiscal 2011. Management had assessed the impact of this error and did not believe that it was material, either individually or in the aggregate, to any prior period financial statements or to the financial statements for the fiscal year ended March 31, 2012.

Critical Accounting Policies

There were no material changes to the Company’s critical accounting policies during the three-month period ended December 31, 2012, except for the following:

Product Recall

We establish reserves for product recalls on a product-specific basis when circumstances giving rise to the recall become known. When establishing reserves for a product recall, we consider cost estimates for any fees and incentives to customers for their effort to return the product, freight and destruction charges for returned products, warehouse and inspection fees, repackaging materials, point-of-sale materials and other costs including costs incurred by contract manufacturers. Additionally, we estimate product returns from consumers and customers across distribution channels, utilizing third-party data and other assumptions. These factors are updated and reevaluated each period and the related reserves are adjusted when these factors indicate that the recall reserves are either insufficient to cover or exceed the estimated product recall expenses.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Form 10-K for fiscal 2012, filed with the SEC on June 8, 2012, provides a detailed discussion of the market risks affecting our operations. We believe our exposure to these market risks did not change materially during the three and nine months ended June 30,December 31, 2012.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures and internal controls that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our disclosure committee, Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as required by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended.Act. Based on this review, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of June 30,December 31, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified(as defined in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter13a-15(f) and 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to claims and assessmentsa variety of legal proceedings in the ordinary course of our business. We are not currently a party to any litigation matterlegal proceeding that, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS

The following risk factor has been added to address our voluntary product recall and is a supplement to the risk factors previously disclosed in our Annual Report on Form 10-K for fiscal 2012 filed with the SEC on June 8, 2012.

Risks Related to Our Business and Industry

Our voluntary recall of certified organic and made with organic pizza products has affected our third quarter financial results and will continue to impact our financial results in future quarters.

On January 22, 2013, we initiated a voluntary recall of our certified organic and made with organic pizza products due to the possible presence of fragments of flexible metal mesh from a faulty screen at a third-party flour mill. We have accounted for the voluntary recall primarily as a reduction to net sales to account for customer and consumer returns and an increase in cost of sales to account for the destruction of finished goods and raw materials inventory. In addition, we will record administrative costs associated with the management of the recall, including fees and incentives to customers and legal expenses in our fourth fiscal quarter ending March 31, 2013. Certain of these accounting charges are based on our best estimates and may be subject to change as we move forward in completing the voluntary recall. We will also incur some additional costs in future quarters. While we expect to recover a substantial portion of the charges for costs related to the voluntary recall in future quarters through our existing recall insurance and from the third-party supplier, we cannot guarantee that the amounts we recover will cover all costs associated with the voluntary recall. While we have restarted the production and began shipping replacement product into distributors and retailers as of February 11, 2013 in order to replenish retail shelves and inventories, we anticipate that pizza sales will be reduced in the fourth quarter ending March 31, 2013, as compared to our original expectations for the product line. Additionally, we may find it challenging to re-establish strong growth in pizza product sales for a period of time following the voluntary recall. Further, while there have been no illnesses or injuries reported to date, the occurrence of any illnesses or injuries could have serious consequences on pizza product sales and sales of our other products, our brand and reputation, any of which could harm our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Dividend Policy

No cash dividends were paid during the three months ended June 30, 2012 and 2011. Although we have paid cash dividends on our capital stock from time to time in the past, we currently expect to retain all future earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition and contractual restrictions, including under our revolving credit facility and other indebtedness we may incur.

Use of Proceeds from Public Offering of Common Stock

On April 2, 2012, we closed our IPO, in which we sold 950,000 shares and certain stockholders sold 4,800,000 shares of common stock at a price to the public of $19.00 per share. The aggregate amount of consideration for shares sold in the offering was $109.3 million. The shares sold by such stockholders included 750,000 additional shares purchased by the underwriters from certain of these stockholders pursuant to an option the underwriters held to cover overallotments of shares. We did not receive any proceeds from the sale of shares by the stockholders.

The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-178270), which was declared effective by the SEC on March 27, 2012. The offering commenced as of March 28, 2012 and did not terminate before all of the securities registered in the registration statement were sold. Credit Suisse Securities (USA) LLC, J. P. Morgan Securities LLC, William Blair & Company, LLC, RBC Capital Markets, LLC, Stifel, Nicolaus & Company, Incorporated and Canaccord Genuity, Inc., acted as the underwriters. We raised $11.1 million in net proceeds after deducting underwriting discounts and commissions of $1.3 million and other offering expenses of $5.6 million.

We used $1.3 million of the net proceeds to pay Solera in connection with the termination of its advisory services agreement with us and the remaining balance of the net proceeds was used to repay a portion of our indebtedness outstanding under our credit facility. No other payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board or board committee service.

Sales of Unregistered Securities

During the fiscalthird quarter ended June 30December 31, 2012, we issued an aggregate of 326,612201,350 shares and 15,4936,198 shares of our common stock to certain employees and officers upon the exercise of options awarded under our 2004 Plan and non-plan based awards, respectively.respectively, and since January 1, 2013 through January 31, 2013, we issued an aggregate of 3,344 and 6,198 shares, respectively, of our common stock to employees upon the exercises of options awarded under our 2004 Plan and non-plan based awards. We received aggregate proceeds of $1.8$1.7 million during the three months ended June 30,December 31, 2012 and $85,000 in the period since January 1, 2013 through January 31, 2013 as a result of the exercise of these options. We believe these transactions were exempt from the registration requirements of the Securities Act in reliance on Rule 701 thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. As of July 15, 2012,January 31, 2013, options to purchase an aggregate of 992,053725,726 shares and 161,122148,726 shares of our common stock remain outstanding under the 2004 Plan and non-plan based awards, respectively. All option awards granted under the 2004 Plan and non-plan based awards were made prior to the effectiveness of our IPO. No further option grants will be made under our 2004 Plan.

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering.

ITEM 6. EXHIBITS

The exhibits listed below are filed as a part of this Quarterly Report on Form 10-Q.

 

Exhibit


Number

  

Description

  31.1  Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2  Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1  Certification of Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101  The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended MarchDecember 31, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language):
(i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated StatementsStatement of Comprehensive Income,Convertible Preferred Stock and Stockholders’ Equity (Deficit) (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: July 27, 2012February 11, 2013

 

ANNIE’S, INC.

By:

 

/s/ Kelly J. Kennedy

 Kelly J. Kennedy
 Chief Financial Officer
 (Principal Financial and Accounting
Officer and Duly Authorized Officer)

 

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