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 December 31, 2012September 30, 2013

OR

 

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

For the Transition Period From                    To                    

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–acceleratednon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b–212b-2 of the Exchange Act.

 

Large accelerated filer ¨  Accelerated filer ¨x
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–212b-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 January 31,October 15, 2013, the registrant had 17,338,33916,912,015 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


Annie’s, Inc.

FORM 10-Q

TABLE OF CONTENTS

 

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 StatementBalance Sheets as of Convertible Preferred StockSeptember 30, 2013 and Stockholders’ Equity (Deficit)March 31, 2013

2

Condensed Consolidated Statements of Operations for the NineThree and Six Months Ended December 31,September  30, 2013 and 2012

   3  
 

Condensed Consolidated StatementsStatement of Cash FlowsStockholders’ Equity for the NineSix Months Ended December 31, 2012 and 2011September 30, 2013

   4  
 

Notes to Condensed Consolidated Financial Statements of Cash Flows for the Six Months Ended September 30, 2013 and 2012

   5  

Item 2.Notes to Condensed Consolidated Financial Statements

  6
Item 2.

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

   18  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   31  

Item 4.

 

Controls and Procedures

   32  
PART II – OTHER INFORMATION  

Item 1.

 

Legal Proceedings

   33  

Item 1A.

 

Risk Factors

   33  

Item 2.

5.
 

Unregistered Sales of Equity Securities and Use of ProceedsOther Information

   34  

Item 6.

 

Exhibits

35

Signatures

   36  

Signatures

37


PART I – FINANCIAL INFORMATION

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Annie’s, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands)

 

  December 31,
2012
 March 31,
2012
   September 30,
2013
 March 31,
2013
 

ASSETS

      

CURRENT ASSETS:

      

Cash

  $12,960   $562    $11,090   $4,930  

Accounts receivable, net

   10,110    11,870  

Accounts receivable, net of allowance

   19,100   20,015  

Inventory

   21,127    10,202     17,333   15,147  

Deferred tax assets

   1,995    1,995     2,558   2,558  

Income tax receivable

   3,402    164     —     588  

Prepaid expenses and other current assets

   2,201    1,252     5,411   5,050  
  

 

  

 

   

 

  

 

 

Total current assets

   51,795    26,045     55,492    48,288  

Property and equipment, net

   5,517    4,298     6,192    6,138  

Goodwill

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

Intangible assets, net

   1,131    1,176     1,086    1,116  

Deferred tax assets, long-term

   4,115    4,650     3,617    3,704  

Deferred initial public offering costs

   —      5,343  

Other non-current assets

   145    108     147    157  
  

 

  

 

   

 

  

 

 

Total assets

  $93,512   $72,429    $97,343   $90,212  
  

 

  

 

   

 

  

 

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

   

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

CURRENT LIABILITIES:

      

Accounts payable

  $4,290   $861    $7,512   $4,342  

Related-party payable

   —      1,305  

Accrued liabilities

   8,699    7,452     13,652    12,021  
  

 

  

 

   

 

  

 

 

Total current liabilities

   12,989    9,618     21,164    16,363  

Credit facility

   —      12,796     —      7,007  

Convertible preferred stock warrant liability

   —      2,157  

Other non-current liabilities

   878    921     984    913  
  

 

  

 

   

 

  

 

 

Total liabilities

   13,867    25,492     22,148    24,283  
  

 

  

 

   

 

  

 

 

Convertible preferred stock

   —      81,373  

STOCKHOLDERS’ EQUITY (DEFICIT):

   

Preferred stock

   —      —    

Commitments and contingencies (Note 6)

   

STOCKHOLDERS’ EQUITY

   

Common stock

   17    1     17    17  

Additional paid-in capital

   111,140    4,392     94,875    93,190  

Accumulated deficit

   (31,512  (38,829   (19,697  (27,278
  

 

  

 

   

 

  

 

 

Total stockholders’ equity (deficit)

   79,645    (34,436

Total stockholders’ equity

   75,195    65,929  
  

 

  

 

   

 

  

 

 

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

  $93,512   $72,429  

Total liabilities and stockholders’ equity

  $97,343   $90,212  
  

 

  

 

   

 

  

 

 

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

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

   13,016    12,563    44,723    38,286  

Operating expenses:

     

Selling, general and administrative

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

 

 

  

 

 

  

 

 

  

 

 

 

Income from operations

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

Interest expense

   (40  (25  (120  (66

Other income (expense), net

   31    43    116    (428
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before provision for income taxes

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

Provision for income taxes

   919    1,502    4,965    4,926  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

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

 

 

  

 

 

  

 

 

  

 

 

 

Net income attributable to common stockholders

  $1,401   $69   $7,317   $233  
  

 

 

  

 

 

  

 

 

  

 

 

 

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  
  

 

 

  

 

 

  

 

 

  

 

 

 

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

     

– Basic

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

 

 

  

 

 

  

 

 

  

 

 

 

– Diluted

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

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended September 30,  Six Months Ended September 30, 
   2013  2012  2013  2012 

Net sales (including product recall benefit of $751 during the three and six months ended September 30, 2013)

  $58,650   $46,686   $97,690   $80,979  

Cost of sales (including product recall benefit of $490 and $273 during the three and six months ended September 30, 2013, respectively)

   36,749    28,786    61,027    49,272  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   21,901    17,900    36,663    31,707  

Operating expenses:

     

Selling, general and administrative expenses (including product recall benefit of $32 and expense of $11 during the three and six months ended September 30, 2013, respectively)

   12,538    11,539    23,865    21,750  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income from operations

   9,363    6,361    12,798    9,957  

Interest expense

   (104  (40  (175  (80

Other income (expense), net

   32    36    58    85  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before provision for income taxes

   9,291    6,357    12,681    9,962  

Provision for income taxes

   3,739    2,572    5,100    4,046  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $5,552   $3,785   $7,581   $5,916  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income per share

     

—Basic

  $0.33   $0.22   $0.45   $0.35  
  

 

 

  

 

 

  

 

 

  

 

 

 

—Diluted

  $0.32   $0.21   $0.44   $0.34  
  

 

 

  

 

 

  

 

 

  

 

 

 

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

     

—Basic

   16,896,227    17,070,327    16,882,965    17,003,534  
  

 

 

  

 

 

  

 

 

  

 

 

 

—Diluted

   17,392,447    17,702,516    17,376,646    17,656,356  
  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

Annie’s, Inc.

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

(unaudited)

(in thousands, except share amounts)

 

   Convertible Preferred
Stock
  

 

Preferred Stock

   Common Stock   Additional
Paid-in

Capital
   Accumulated
Deficit
  Total
Stockholders’

Equity (Deficit)
 
   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

Reclassification of convertible preferred stock warrant liability upon consummation of IPO

   —      —      —       —       —       —       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  

Shares issued upon consummation of IPO

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

Exercise of stock options

   —      —      —       —       610,791     —        3,899     —      3,899  

Excess tax benefit from stock-based compensation

   —      —      —       —       —       —       7,499     —      7,499  

Net exercise of warrant to purchase shares of common stock

         63,193     —       —       —      —    

Stock-based compensation

   —      —      —       —       —       —       677     —      677  

Net Income

   —      —      —       —       —       —       —       7,317    7,317  
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Balance at December 31, 2012

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

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
           Additional      Total 
   Common Stock   Paid-in   Accumulated  Stockholders’ 
   Shares   Amount   Capital   Deficit  Equity 

Balance at March 31, 2013

   16,849,016    $17    $93,190    $(27,278 $65,929  

Exercise of stock options

   60,530     —       633     —      633  

Excess tax benefit from stock-based compensation

   —       —       643     —      643  

Stock-based compensation

   —       —       409     —      409  

Net Income

   —       —       —       7,581    7,581  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Balance at September 30, 2013

   16,909,546    $17    $94,875    $(19,697 $75,195  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

Annie’s, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

  Nine Months Ended December 31,   Six Months Ended September 30, 
  2012 2011   2013 2012 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

  $7,317   $7,660  

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

   

Net Income

  $7,581   $5,916  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation and amortization

   749    578     637   463  

Stock-based compensation

   677    390     409   447  

Allowances for trade discounts and other

   (579  (477

Provision for doubtful accounts

   21   —    

Inventory reserves

   492    —       430   (80

Excess tax benefit from stock-based compensation

   (7,499  —       (643 (5,266

Accretion of imputed interest on purchase of intangible asset

   107    —       72   71  

Change in fair value of convertible preferred stock warrant liability

   13    538     —     13  

Amortization of deferred financing costs

   12    25     6   9  

Deferred taxes

   535    (332   87   217  

Changes in operating assets and liabilities:

      

Accounts receivable, net

   2,339    3,737     894   162  

Inventory

   (11,417  (2,478   (2,616 (2,119

Income tax receivable

   425    —       588   (149

Prepaid expenses, other current and non-current assets

   4,400    (508   (174 4,092  

Accounts payable

   3,417    (9,193   3,158   1,359  

Related-party payable

   (1,305  (3   —     (1,305

Accrued expenses and other non-current liabilities

   4,527    (708   2,273   5,426  
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) operating activities

   4,210    (771

Net cash provided by operating activities

   12,723    9,256  
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of property and equipment

   (1,498  (1,504   (649  (1,009
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (1,498  (1,504   (649  (1,009
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from credit facility

   2,952    52,114     7,720    2,663  

Payments to credit facility

   (15,748  (38,812   (14,727  (15,459

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

Excess tax benefit from stock-based compensation

   7,499    —       643    5,266  

Proceeds from exercises of stock options

   3,844    47     450    2,204  
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   9,686    (2,644   (5,914  5,820  
  

 

  

 

   

 

  

 

 

NET INCREASE (DECREASE) IN CASH

   12,398    (4,919

NET INCREASE IN CASH

   6,160    14,067  

CASH – Beginning of period

   562    7,333  

CASH—Beginning of period

   4,930    562  
  

 

  

 

   

 

  

 

 

CASH – End of period

  $12,960   $2,414  

CASH—End of period

  $11,090   $14,629  
  

 

  

 

   

 

  

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

      

Purchase of property and equipment funded through accounts payable

  $12   $13  

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 125135 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 December 31, 2012 and March 31, 2012,September 30, 2013, the interim condensed consolidated statement of convertible preferred stock and stockholders’ equity (deficit) for the ninesix months ended December 31, 2012,September 30, 2013, and the interim condensed consolidated statements of operations for the three and ninesix months ended December 31,September 30, 2013 and 2012, and 2011, and the interim condensed consolidated statements of cash flows for the ninesix months ended December 31,September 30, 2013 and 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, certainthey do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance withnotes required by U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.for complete financial statements. 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, 2012.14, 2013. The March 31, 20122013 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 auditedcomplete 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 December 31, 2012September 30, 2013 and results of our operations for the three and ninesix months ended December 31,September 30, 2013 and 2012, and 2011, and cash flows for the ninesix months ended December 31, 2012September 30, 2013 and 2011.2012. The interim results for the ninesix months ended December 31, 2012September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending March 31, 2013.2014.

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Annie’s Homegrown, Inc., Annie’s Enterprises, Inc. and Napa Valley Kitchen, 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 at an offering price of $19.00 per share 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. The Company sometimes refers to Solera Capital, LLC and its affiliates as Solera in this Quarterly Report on Form 10-Q.

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.

Pursuant to the Company’s Amended and Restated Certificate of Incorporation or Charter and its Amended and Restated Bylaws, which 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 stock and 5,000,000 shares, par value $0.001 per share, of which are preferred stock. As of December 31, 2012, 17,328,797September 30, 2013, 16,909,546 shares of common stock were issued and outstanding and no shares of preferred stock were issued and 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.

Shelf Registration Statement

On July 16, 2013, the Company filed a registration statement on Form S-3 to register 2,537,096 shares of common stock of the Company held by Solera. In connection with preparations for filing of this registration statement, the Company incurred $86,000 for legal, accounting and other out-of-pocket expenses on Solera’s behalf in the six months ended September 30, 2013.

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 
   Customer A  Customer B  Customer C 

Three Months Ended December 31,

    

2012

   25  17  11

2011

   20  14  11

Nine Months Ended December 31,

    

2012

   26  13  12

2011

   24  13  12
   Net Sales 
   Customer A  Customer B  Customer C 

Three Months Ended September 30,

    

2013

   19  16  16

2012

   27  13  14

Six Months Ended September 30,

    

2013

   21  13  14

2012

   27  11  12

As of December 31, 2012, Customer ASeptember 30, 2013, three customers represented 31%, 19% and Customer B represented 26% and 35%10%, respectively, of accounts receivable. The same twothree customers represented 21%26%, 36% and 45%10%, respectively, of accounts receivable as of March 31, 2012.2013.

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.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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. 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, the estimated fair valueit 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.capital (Note 7).

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 condensed consolidated balance sheets. At December 31, 2012 and March 31, 2012, capitalized software development costs, net of accumulated amortization, totaled $2.3 million and 2.0 million, respectively. As of December 31, 2012,September 30, 2013, the Company had $2.0$2.2 million capitalized software development costs, net of accumulated amortization, and $0.3including $0.6 million in construction in progress. As of March 31, 2013, the Company had $2.1 million capitalized software development costs, net of accumulated amortization, including $0.4 million in construction in progress.

Shipping and Handling Costs

Shipping and handling costs are included in selling, general and administrative expenses in the condensed 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 $1.4$1.8 million and $1.3$1.5 million for the three months ended December 31,September 30, 2013 and 2012, and 2011, respectively and were $4.2$3.3 million and $3.5$2.8 million for the ninesix months ended December 31,September 30, 2013 and 2012, and 2011, respectively.

Research and Development Costs

Research and development costs 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 product innovation. Research and development costs recorded as a component of selling, general and administrative expenses were $0.6 million and $0.7 million for the three months ended December 31,September 30, 2013 and 2012, and 2011, respectively and were $2.1$1.2 million and $1.6$1.5 million for the ninesix months ended December 31,September 30, 2013 and 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 and the costs of communicating advertising are expensed over the period of communication. Total advertising costs for the three months ended December 31,September 30, 2013 and 2012 and 2011 included in selling, general and administrative expenses were $0.2$0.4 million and $0.1 million, respectively. Total advertising costsrespectively, and were $0.6$0.8 million and $0.5$0.4 million for the ninesix months ended December 31,September 30, 2013 and 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. PotentialThe Company utilizes the treasury stock method to calculate potential common shares included those underlying our convertible preferred stock (using the if-converted method),that underlie its 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).units. Performance share units were excluded from potential common shares since no shares were issuable as of December 31, 2012September 30, 2013 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 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 December 31, 2011, and, accordingly, were excluded from the calculation. Additionally, certain2013. Certain stock options to purchase our common stock and restricted stock units 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 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.

Out-of-period Adjustment

During the 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 nine months ended 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 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):

 

  December 31,
2012
   March 31,
2012
   September 30,
2013
   March 31,
2013
 

Raw materials

  $3,085    $1,938    $2,063    $1,391  

Work in process

   3,285     754     1,020     2,142  

Finished goods

   14,757     7,510     14,250     11,614  
  

 

   

 

   

 

   

 

 

Inventory

  $21,127    $10,202    $17,333    $15,147  
  

 

   

 

   

 

   

 

 

Property and Equipment, Net

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

 

  December 31,
2012
 March 31,
2012
   September 30,
2013
 March 31,
2013
 

Equipment and automotive

  $2,480   $1,730    $3,835   $2,959  

Software

   3,200    1,188     2,410   2,410  

Leasehold improvements

   979    566     1,344   1,195  

Plates and dies

   371    352     318   244  
  

 

  

 

   

 

  

 

 

Total property and equipment

   7,030    3,836     7,907    6,808  

Less: Accumulated depreciation and amortization

   (2,370  (1,719   (2,364  (1,760

Construction in progress

   857    2,181     649    1,090  
  

 

  

 

   

 

  

 

 

Property and equipment, net

  $5,517   $4,298    $6,192   $6,138  
  

 

  

 

   

 

  

 

 

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company incurred depreciation expense of $271,000$313,000 and $704,000$607,000 for the three and ninesix months ended December 31, 2012,September 30, 2013, respectively. The depreciation expense for the same periods in the prior year was $270,000$248,000 and $567,000,$433,000, respectively.

During the three months ended 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 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):

 

  December 31,
2012
 March 31,
2012
   September 30,
2013
 March 31,
2013
 

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

   (81  (36   (126  (96
  

 

  

 

   

 

  

 

 

Intangible assets, net

  $1,131   $1,176    $1,086   $1,116  
  

 

  

 

   

 

  

 

 

The Company incurred amortization expense of $15,000 and $45,000$30,000 on its intangible assets during the three and ninesix months ended December 31, 2012.September 30, 2013. The amortization expense for the same periods over the prior year was $6,000$15,000 and $11,000,$30,000, respectively.

The estimated future amortization expense relating to intangible assets is anticipated to be $15,000 for the remainder of fiscal 2013, $60,0002014, for each of the next five years from fiscal 2014 through fiscal 2018, totaling $300,0002019 and $816,000 after fiscal 2018.thereafter is $30,000, $60,000 and $756,000, respectively.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of September 30, 2013 and March 31, 2013 include receivables from contract manufacturers and suppliers of $3.0 million and $3.9 million, respectively.

Accrued Liabilities

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

 

  December 31,
2012
   March 31,
2012
   September 30,
2013
   March 31,
2013
 

Payroll and employee-related expenses

  $2,535    $2,768    $2,310    $3,779  

Accrued trade expenses

   2,074     2,631     5,060     2,299  

Inventory received not invoiced

   3,150     531     4,818     4,038  

Deferred rent

   258     264     253     260  

Brokerage commissions

   149     382     231     407  

Other accrued liabilities

   533     876     980     1,238  
  

 

   

 

   

 

   

 

 

Total accrued liabilities

  $8,699    $7,452    $13,652    $12,021  
  

 

   

 

   

 

   

 

 

4. Credit Facility

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

4.Credit Facility

In December 2011,2005, the Company entered into a second amendment and restatedbank line of credit agreement (the “Credit Agreement”) with Bank of America, N.A., which providesprovided for revolving loans up to $11.0 million. In March 2008, the Company amended the Credit Agreement with Bank of America to establish an inter-creditor agreement with another lender (Note 7). In August 2010, the Company amended the Credit Agreement to decrease the maximum borrowing limit on revolving loans to $10.0 million and lettersextended the expiration date to August 20, 2012. In December 2011, the Company entered into a second amended and restated credit facility with Bank of America that, among other things, provided for an increase in its line of credit up to $20.0 million and is available toan extension of the term through August 2014. In March 2013, the Company entered into another amendment to its credit facility. This amendment provides for, among other things, an increase in the line of credit to $40.0 million and extension of the term through August 2014.2016. The Credit Agreement is securedcollateralized by substantially all of the Company’s assets.

Revolving advancesThe Company may select from three interest rate options for borrowings under the Credit Agreement bearcredit facility: (i) LIBOR (as defined in the credit facility) plus 1.25%, (ii) IBOR (as defined in the credit facility) plus 1.25% or (iii) Prime Rate (as defined in the credit facility). Weighted average interest atwas 1.4% and 1.5% for the LIBOR plus 1.5%, as defined.three and six months ended September 30, 2013, respectively. Weighted average interest was 1.5% for each of the three and ninesix months ended December 31,September 30, 2012. Weighted average interest was 1.6% and 2.3% forThe Company is required to pay a commitment fee on the three and nine months ended December 31, 2011, respectively.unused credit facility commitments, if the outstanding balance is less than half the commitment at an annual rate ranging from 0.25% to 0.40% depending on the utilization rate. As of December 31, 2012September 30, 2013 and March 31, 2012,2013, there was $20.0$40.0 million and $7.2$33.0 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.

NotesThe credit facility contains restrictions on, among other things, the Company’s ability to Condensed Consolidated Financial Statements

(unaudited)

There are various financialincur additional indebtedness, pay dividends or make other distributions and other covenants undermake investments and loans. The credit facility also limits the Credit Agreement. Financial covenants, asCompany’s ability to make capital expenditures in excess of $15.0 million. The credit facility requires that the Company maintain a Funded Debt (as defined in the Credit Agreement, include a net income covenant, total liabilitiescredit facility) to tangible net worth covenantAdjusted EBITDA (as defined in the credit facility) ratio of not more than 2.75 to 1.0 and a minimum fixed charge coverage covenant.Net Worth (as defined in the credit facility) equal to at least $50.0 million, plus 30% of earnings after taxes earned each quarter (if positive), beginning with the June 2013 quarterly earnings. 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 DecemberSeptember 30, 2013 and March 31, 2012.2013.

 

5.Related Party Transactions

AgreementAgreements with Solera Capital, LLC

The Company had an advisory services agreement with Solera, 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 Company’s board of 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 December 31, 2011, the Company incurred $150,000 and $450,000, respectively, for such consulting and advisory services. The advisory services agreement with Solera wasit 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 entered 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 8,384 square feet of warehouse space. Pursuant to the Lease, the landlord reserved the right to elect to recapture fromAdditionally, the Company is a party to an amended and leaserestated registration rights agreement dated as of November 14, 2005, or Registration Rights Agreement, relating to a third party, a portionits shares of the warehouse space comprising not more than 6,525 square feet (“Recapture Space”), subject tocommon stock held by certain termsaffiliates of Solera 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.certain other stockholders. On September 25,August 6, 2012, the Company exercisedclosed a secondary public offering, in which certain stockholders, including 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 right and entered into an amendment tosale of shares by the Lease (the “Lease Amendment”).

selling stockholders. The Lease Amendment provided (i) for the reconfiguration of the warehouse space to additional office space in order to accommodate growth, and (ii)offering expenses incurred by 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”were $0.7 million, including legal, accounting and togetherprinting costs and various other fees associated with the First Option,registration and sale of common stock sold in the “Option Periods”). The terms, covenantssecondary public offering.

In connection with Solera’s exercise of its rights under the Registration Rights Agreement, the Company filed a registration statement on Form S-3 on July 16, 2013 to register Solera’s remaining shares. In connection with preparations for filing of this registration statement, the Company incurred $86,000 for legal 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 payableother out-of-pocket expenses on Solera’s behalf 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 at 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.six months ended September 30, 2013.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

6.Commitments and Contingencies

Pursuant to the Lease Amendment, on September 25, 2012, theCommitments

The Company leases its offices 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.

other equipment under non-cancelable operating leases that expire through fiscal year 2019. Rent expense for non-cancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Rent expense for the three and ninesix months ended December 31, 2012September 30, 2013 was $146,000$156,000 and $386,000,$306,000, respectively. Rent expense for the three and ninesix months ended December 31, 2011September 30, 2012 was $80,000$120,000 and $360,000,$239,000, 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 noncancelablenon-cancelable operating leaseleases as of December 31, 2012September 30, 2013 are as follows (in thousands):

 

  Lease Payments   Lease Payments 

Three Months Ending March 31, 2013

  $147  

Six Months Ending March 31, 2014

  $330  

Fiscal Year Ending March 31:

    

2014

   601  

2015

   621     675  

2016

   638     673  

2017

   638     669  

2018

   638     662  

2019

   585     586  
  

 

   

 

 

Total future minimum lease payments

  $3,868    $3,595  
  

 

   

 

 

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 December 31, 2012,September 30, 2013, the Company’s purchase commitments totaled $14.0$14.5 million, which will substantially be incurred within a year.

TheIn September 2011, the Company hasentered into an agreement with its contract warehousing company that includes minimum overhead fees of $200,000 annually beginning April 1, 2012 through June 30, 2015. As of September 30, 2013, the remaining obligation under the agreement for overhead fees was $350,000.

In November 2011, the Company entered into an agreement with one of its contract manufacturers for the purchase of product formulas for a purchase price of $2.0 million. The expense is includedagreement requires annual payments of at least $150,000 in selling, general and administrative expenseseach of the first six years of the agreement with the balance of the $2.0 million payment due at the end of the seven-year term in November 2018. As of September 30, 2013, the condensed consolidated statements of operations.Company’s remaining obligation for product formulas was $1.85 million.

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, theThe Company has not paid any significant 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

FromOn September 4, 2013, a private organization called the Center for Environmental Health (“CEH”) issued a 60-day notice of intent to sue (“Notice”) the Company and its subsidiary, Annie’s Homegrown, Inc., under California Health & Safety Code §§ 25249.5 et seq. (commonly referred to as “Proposition 65”). In the Notice, CEH claims that warnings are required in California for alleged exposures to lead and lead compounds from cookies, including Annie’s Gluten-Free Ginger Snap Bunny Cookies. Under Proposition 65, any private enforcer such as CEH may file a lawsuit if it first issues a valid 60-day notice, and if the California Attorney General or other specified California public enforcers do not file suit within 60 days after service. A Proposition 65 plaintiff may seek

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

injunctive relief as well as civil penalties, which may be assessed up to a maximum of $2,500 per violation per day, and a private plaintiff does not need to show that anyone has been harmed by the alleged exposures. A prevailing plaintiff may also seek its attorneys’ fees and costs under other California laws.

Although CEH has not yet filed a lawsuit naming the Company or Annie’s Homegrown, Inc., within the past year CEH has filed several lawsuits against other manufacturers and retailers regarding various types of products containing molasses and/or ginger, such as licorice candy, cookies, and baking mix products. In CEH’s cases involving cookies and baking mix products, CEH’s operative complaints have put at issue only those cookies or baking mix products that contain ginger and/or molasses as ingredients. The Company cannot at this time reasonably estimate a range of exposure, if any, of the potential liability should a suit be brought in connection with the Notice.

Additionally, from time to time, the Company is subject to claims, and assessments or other legal proceedings in the ordinary course of business. The Companybusiness, including product liability claims, employee claims, and other general liability claims. While it is not currently a partyfeasible to any litigation matterpredict or determine the ultimate outcome of these matters, the Company believes that none of these legal proceedings, individually or in the aggregate, is expected towill have a material adverse effect on the Company’s business,its financial condition, results of operations or cash flows.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

position.

 

7.Convertible Preferred Stock Warrant

The outstandingIn March 2008, 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 convertible preferredSeries 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 immediately prior toor April 1, 2018. Upon the closingconsummation of the Company’s IPO on April 2, 2012, were automatically converted into 15,221,571the warrant became a warrant to purchase 80,560 shares of the Company’s common stock. As such, on April 2, 2012, the Company measured the fair value of the outstanding convertible preferred stock warrant using an option pricing method and recorded a non-cash charge of $13,000 related to the increase in the fair value of the convertible preferred stock warrant in other income (expense), net 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 Company’s 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. During the three and nine months ended December 31, 2011, the convertible preferred stockholders 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 result of participating in the common stock dividend. No dividend was declared or paid during the three and nine months ended December 31, 2012.

 

8.Preferred Stock

TheAs of each of September 30, 2013 and March 31, 2013, the Company’s Charter authorized 5,000,000 shares of preferred stock, $0.001 par value per share. As of December 31, 2012,September 30, 2013, no certificate of designations defining the rights and preferences of the preferred stock had been filed and no shares of preferred stock were issued and outstanding.

 

9.Common Stock

As of December 31, 2012each of September 30, 2013 and March 31, 2012,2013, the Company’s Charter authorized 30,000,000 and 24,000,000 shares of common stock, $0.001 par value per share, respectively, of which 17,328,79716,909,546 and 483,24216,849,016 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 out ofwhenever funds are legally available therefor and if, as and when declared by the Company’s boardBoard of 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.Directors. No dividends were declared or paid during the three and ninesix months ended December 31, 2012.September 30, 2013 and 2012, respectively.

 

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

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

continuance of the employment with the Company. The performance share units granted to employees vest based on achievement of required cumulative compounded adjusted diluted earnings per share growth during the stipulated three-year period ending March 31, 2015.applicable to a grant. Stock-based compensation expense included in selling, general and administrative expenses was $230,000$116,000 and $151,000$231,000 for the three months ended December 31,September 30, 2013 and 2012, and 2011, respectively, and was $677,000$409,000 and $390,000$447,000 for the ninesix months ended December 31,September 30, 2013 and 2012, and 2011, respectively.

The following table summarizes the activity of stock options during the ninesix months ended December 31, 2012:September 30, 2013:

 

   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  
  

 

 

  

 

 

 
   Number of Shares  Weighted-Average
Exercise Price
 

Balance, March 31, 2013

   1,203,990   $13.26  

Granted

   42,276    38.62  

Forfeited

   (77,746  18.31  

Exercised

   (60,530  10.46  
  

 

 

  

 

 

 

Balance, September 30, 2013

   1,107,990   $13.24  
  

 

 

  

 

 

 

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The weighted average grant date fair value of employee stock options granted during the six months ended September 30, 2013 was $14.03 per share. The total intrinsic value of stock options exercised during the six months ended September 30, 2013 was $1.9 million. The intrinsic value is calculated based on the difference between the exercise price and the fair value of the common stock at time of exercise.

The following table summarizes the activity of unvested restricted stock units and performance share units during the ninesix months ended December 31, 2012:September 30, 2013:

 

Shares-Based Awards

  Shares Weighted-
Average

Grant  Date
Fair Value
   Shares Weighted-Average
Grant Date
Fair Value
 

Unvested at March 31, 2012

   65,899   $19.00  

Unvested at March 31, 2013

   71,165   $21.73  

Granted

   7,220    44.07     47,366   39.91  

Vested

   —       —        (4,692 45.27  

Performance Shares Adjustment

   —       —     

Forfeited

   (3,568  19.00     (13,442 24.16  
  

 

  

 

   

 

  

 

 

Unvested at December 31, 2012

   69,551   $21.60  

Unvested at September 30, 2013

   100,397   $28.69  
  

 

  

 

   

 

  

 

 

As of December 31, 2012,September 30, 2013, there were 73,333 unvested performance share units outstanding, net of actual forfeitures. As of September 30, 2013, the number of shares estimated to be issued at the end of the performance period(s) is a total of 36,672 shares. The maximum number of total shares that could be issued at the end of performance period(s) is 110,005 shares.

As of September 30, 2013, there was $2.8$3.9 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 2.93.1 years.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

11.Employee Benefit PlansIncome Taxes

The Company offers a retirement savings plan under Section 401(k) ofCompany’s effective tax rate decreased to 40.2% for 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 upSeptember 30, 2013, compared 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 $0.9 million and $5.0 million40.5% for the three and nine months ended December 31, 2012, compared to $1.5 million and $4.9 million in the same periods last year.September 30, 2012. The effective tax rate was 40.4%40.2% for the ninesix months ended December 31, 2012,September 30, 2013, compared to 39.1% in40.6% for the same period last year.six months ended September 30, 2012. The effective tax rate is based on a projection of our fullthe Company’s annual fiscal year results. OurThe effective tax rate for the ninethree and six months ended December 31, 2012September 30, 2013 was higherlower than the effective tax rate for the ninethree and six months ended December 31, 2011 largelySeptember 30, 2012 due to a tax benefit recorded during the nine months ended December 31, 2011 related to an increase in the tax rate applied for deferred tax assets due to an increase in theimpact of permanent items and federal and state tax rates.

In addition, during the three and nine months ended December 31, 2012, we recognized $6.7 million and $20.8 million of tax deductions associated with stock option exercises. As of December 31, 2012, $6.0 million and $19.5 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.

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 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)

credits.

 

13.12.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 September 30,   Six Months Ended September 30, 
  2012   2011   2012   2011   2013   2012   2013   2012 

Convertible preferred stock

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

Options to purchase common stock

   2,562     167,314     2,562     167,314     85,046     2,562     133,515     2,562  

Restricted stock units

   —        —        6,256     —        5,434     6,256     12,864     6,256  

Convertible preferred stock warrant

   —        —        —        80,560  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   2,562     15,388,885     8,818     15,469,445     90,480     8,818     146,379     8,818  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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 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)

   Three Months Ended September 30,   Six Months Ended September 30, 
   2013   2012   2013   2012 

Net income per share:

        

Net income

  $5,552    $3,785    $7,581    $5,916  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   16,896,227     17,070,327     16,882,965     17,003,534  

Potential dilutive options

   482,058     625,684     480,517     646,468  

Potential dilutive restricted stock units

   14,162     6,505     13,164     6,354  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   17,392,447     17,702,516     17,376,646     17,656,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share

        

—Basic

  $0.33    $0.22    $0.45    $0.35  
  

 

 

   

 

 

   

 

 

   

 

 

 

—Diluted

  $0.32    $0.21    $0.44    $0.34  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14.13.Geographic Areas and Product Sales

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

 

  Three Months Ended December 31,   Nine Months Ended December 31,   Three Months Ended September 30,   Six Months Ended September 30, 
  2012   2011   2012   2011   2013   2012   2013   2012 

United States

  $34,413    $29,709    $111,984    $95,005    $56,226    $44,423    $93,671    $77,571  

Canada

   1,870     1,129     5,278     3,315     2,424     2,263     4,019     3,408  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $36,283    $30,838    $117,262    $98,320    $58,650    $46,686    $97,690    $80,979  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 September 30,   Six Months Ended September 30, 
  2012   2011   2012   2011   2013   2012   2013   2012 

Meals

  $16,223    $14,235    $52,759    $41,411    $29,739    $21,869    $46,293    $36,536  

Snacks

   14,908     12,225     47,517     40,461     22,057     19,146     37,878     32,609  

Dressings, condiments and other

   5,152     4,378     16,986     16,448     6,854     5,671     13,519     11,834  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $36,283    $30,838    $117,262    $98,320    $58,650    $46,686    $97,690    $80,979  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

14.15.Subsequent EventProduct Recall

OnIn January 22, 2013, the Company announced a voluntary product recall of 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. The Company initiated the recall of all lots of pizza product manufactured with this supplier’s flour from its first purchase from the supplier in May 2012. The Company recorded certain items associated with the recall in its financial results for the three and ninesix months ended December 31, 2012.September 30, 2013.

The Company recorded the estimated customer and consumer returns as a reduction of 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. AsThe Company recorded $1.2 million for insurance recoveries and a result$0.1 million in reduction of net sales reserve in connection with the voluntary product recall the Company recorded an estimated accrual for product returns and recall-related costsin each of approximately $2.3 million for the three and ninesix months ended December 31, 2012September 30, 2013, respectively. The impact of the recall-related charges and related insurance recoveries in the three and six months ended September 30, 2013 is 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.

   Three Months Ended
September 30, 2013
   Six Months Ended
September 30, 2013
 

Benefit to net sales

  $751    $751  

Benefit to cost of sales

   490     273  

Benefit to/(incremental) selling, general and administrative expenses

   32     (11
  

 

 

   

 

 

 

Total benefit to income before income taxes

  $1,273    $1,013  
  

 

 

   

 

 

 

Benefit to net income

  $761    $606  
  

 

 

   

 

 

 

Benefit to net income per diluted share

  $0.04    $0.03  
  

 

 

   

 

 

 

The Company is anticipatingdoes not expect any significant further 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.

recall. The Company carries product recall insurance and expects to recoverreceive additional recoveries from the involved insurance carriers in future quarters.

Annie’s, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

15.Subsequent Events

On November 5, 2013, the Company entered into an agreement of purchase and sale with Safeway Inc. and Safeway Australia Holdings, Inc. (together the “Selling Parties”) to acquire a substantial portionsnack manufacturing plant in Joplin, Missouri (the “Joplin Plant”) for $6.0 million of cash, plus the value of inventory and supplies at closing (calculated based on the Selling Parties’ costs and currently estimated at approximately $4.0 million). The Company expects to fund the acquisition with cash from operations and, if necessary, by drawing under its revolving credit facility and to close the acquisition in the first quarter of fiscal 2015. The Joplin Plant has been the primary manufacturer of the recall-related costs fromCompany’s cookie and cracker products for more than ten years. Company products produced in the Joplin Plant currently account for over 50% of its insurance. The Company may seek to recover additional costs fromtotal snacks net sales and represent the third-party flour mill. It is not possible to predict the outcomemajority of the success of any such recovery from insurance or claims againstJoplin Plant’s total production volume. In connection with the supplier, given the early stageclosing of the voluntary product recall. Consequently, no amounts have been recorded as receivable asacquisition, the Company expects to enter into a three-year supply agreement with an affiliate of December 31, 2012Safeway Inc., pursuant to which the Company will manufacture products for the affiliate.

On November 5, 2013, the Company entered into an amendment to its credit facility. This amendment provides for, among other things, consent for the Company to create a limited liability company (“LLC”) and guarantee performance of the LLC in the event and to the extent the Company assigns to the LLC any potential recoveries of any amounts from third partiesits rights or obligations under the Purchase Agreement and there can be no assurance there will be any recoveries.for the issuance of letters of credit. Additionally, the amendment revises certain covenants and representations and warranties of the Company under the Credit Agreement.

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, 20122013 (“fiscal 2012”2013”) included in our Annual Report on Form 10-K filed with the SEC on June 8, 2012.14, 2013. 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 relating to the acquisition of the Joplin manufacturing plant and those in our Form 10-K discussed in the section titled “Risk Factors.”Factors” including risks relating to competition; new product introductions; implementation of our growth strategy; our brand; our reputation; product liability claims; product recalls and related insurance recoveries (if any); economic disruptions; changes in consumer preferences; ingredient and packaging costs and availability; reliance on a limited number of distributors, retailers, contract manufacturers and third-party suppliers and an outside warehouse facility; efficiency projects; intellectual property and related disputes; regulatory compliance; transportation; our supply-chain; our and our customers’ inventory levels; and seasonality. 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 125135 products and are present in over 25,00026,500 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 snacksacross all product 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 resulted in low or negative quarter over quarter growth in that category in recent quarters. In the most recent quarter, despite the impact of 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.packaging costs.

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.

On November 5, 2013, we entered into an agreement with Safeway Inc. and Safeway Australia Holdings, Inc. (together the “Selling Parties”) to acquire a snack manufacturing plant in Joplin, Missouri (the “Joplin Plant”) for $6.0 million, plus the value of inventory and supplies at closing (calculated based on the Selling Parties’ costs and currently estimated at approximately $4.0 million) . We expect to fund the acquisition with cash from operations and, if necessary, by drawing under our revolving credit facility, and to close the acquisition in the first quarter of

fiscal 2015. The Joplin Plant has been the primary manufacturer of our cookie and cracker products for more than ten years. Our products produced in the Joplin Plant currently account for over 50% of our total snacks net sales and represent the majority of the Joplin Plant’s total production volume. In connection with the closing of the acquisition, we expect to enter into a three-year supply agreement with an affiliate of Safeway Inc., pursuant to which we will manufacture products for the affiliate. Including the impact of previously planned efficiency projects related to the Joplin Plant, the acquisition is not expected to materially impact our net income in fiscal 2015. The supply agreement is expected to have a positive impact on net sales and a negative impact on gross margin percentage. Over the long term, however, we expect the acquisition to have a positive impact on our gross margin percentage. Our Executive Vice President, Operations and Administration previously had oversight over the Joplin Plant when she was employed by Safeway, prior to joining us. Additionally, prior to joining us, our Senior Vice President, Supply Chain and Operations had experience running a variety of manufacturing plants.

At the end of fiscal year 2014, we will be deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as a result, we will cease to be an “emerging growth company,” as defined in the JOBS Act. As a result, we will no longer be exempted from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and our independent registered public accounting firm will be required to evaluate and report on internal control over financial reporting. In connection with the auditor attestation, we expect to incur additional fees, consulting and other costs of approximately $0.3 million in fiscal 2014.

Voluntary Product Recall

OnWe first began shipping organic frozen pizza in January 22,2012 and made with organic frozen pizza first shipped during second quarter of fiscal 2013. In January 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 sourcesourced 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 fullDirect costs of the voluntary product recall include customer and consumer returns, costs associated with returned product, costs incurred by our contract manufacturers, incremental costs associated with short-term sourcing of replacement flour, destruction charges and inventory write-off, retailer margin and customer fees and incentives. We also faceincurred administrative costs such as legal expenses, accounting fees and public relations expenses.

In the potential for lost sales from our consumers.

As a resultsecond quarter of the voluntary product recall,fiscal 2013, we recorded charges that negatively impacted our$1.2 million for insurance recoveries and $0.1 million in reduction of net sales and net income by $1.6 million and $1.3 million, respectively, forreserve in connection with 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.recall. We expect to recover a substantial portion of the recall-related costs from our product recall insurance. We may seek to recover additional costsamounts from the third-party flour mill. Any recovery would beinvolved insurance carriers in future quarters. Recoveries are recorded to offset the charges once recovery is probable. We expect to receive additional recoveries from the effects of the voluntary product recall to be reflectedinvolved insurance carriers in our financial statements over the next fewfuture 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 salesThe growth rates for the U.S. natural and organic food market have been, and are expected to continue to be, higher than those for the overall U.S. food market. We believe growth in the natural and organic food market is driven by various factors, including heightened awareness of the role that food and nutrition play in long-term health and wellness. Many consumers prefer natural and organic products due to increasing concerns over the purity and safety of food as a result of the presence of pesticide residues, growth hormones and artificial and genetically engineered ingredients in the foods we eat. In this growing market, we expect competition from other natural and organic packaged food companies as well as mainstream conventional packaged food companies to increase, as they may seek to introduce products in our key categories or seek to make existing products more attractive to the natural and organic consumer. We continue to experience greater consumer demand for natural and organic food products and increasing awareness of the Annie’s brand, which has contributed to increased growth in net sales.

Our top-line growth continues to be driven by our 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 twelve months ended December 31, 2012, we have experienced acceleration in consumer trends for many of our products. We also have benefited from improved placement in the mainstream grocery channel and continued product innovation which includes adding new flavors and sizes to existing lines as well as introduction of new product lines. In June 2013, we believe has resultedentered into the single-serve microwavable cup segment of the macaroni and cheese category and in increased sales of our products. Our net sales growth has been primarily driven by volume; however,August 2013, 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.entered into family-size frozen entrées.

We purchase finished products from independentour contract manufacturers. We have long standing, strategic relationships with manyWith an industry-wide commodity cost escalation starting in fiscal 2008, we became more directly involved in the sourcing of the ingredients for our products. This allowed us to consolidate ingredient sourcing across contract manufacturers in order to negotiate more favorable pricing on ingredients and, suppliers of organic ingredients. We enter, eitherin some cases, to lock in ingredient pricing for typically six to 12 months forward through non-cancelable purchase commitments, directly or through contract manufacturers, into forward pricing contracts with certain ingredient suppliers. This practice provides us with significant visibility into our cost structure over the next six to twelve months.manufacturers. In fiscal 2012,2013, our contracted ingredients represented approximately 48%50% of our materialmaterials costs and 25%over 31% of our cost of sales. OverThese efforts mitigated the past 18 months, we have experienced increased costs for manyimpact of our inputsvolatile and expect these higher costs to continue throughout the remainder of our fiscal year ending March 31, 2013 (“fiscal 2013”). We strive to maintain or improve gross margins despite increasing commodity costs through a combinationon our business. We plan to continue to expand our portfolio of contracted ingredients and negotiate pricing agreement for future purchases to allow us sufficient time to respond to changes in our ingredient costs over time.

Additionally, we have invested significant time and energy to offset higher costs and achieve cost managementreductions and price increases. We actively manage our input and production costs through commodity management practices, vendor negotiation, productivity improvements and cost reductions in our supply chain. We invest significant timeThese efficiency projects have focused on selecting more cost-effective contract manufacturers, negotiating lower tolling fees, consolidating in-bound freight, leveraging warehouse expense and effort to achieve permanent cost reductionsreducing ingredient and packaging costs through increased volume buys, contract consolidation, direct purchasing, investment 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 line throughput and improvereduce production costs, and price negotiation. We believe that our planned acquisition of the Joplin Plant is the next evolution of our hybrid model and provides us with the opportunity over the long-term to benefit from fixed cost leverage as we drive snacks volume.

While our cost structure continues to benefit from ongoing productivity and cost reducing initiatives, we have experienced increased margin pressure in fiscal 2014 resulting from several factors, including: continued input cost inflation; more limited price increases compared to prior years; a faster pace of product quality.innovation; customer and product mix changes; increased inventory obsolescence; and higher trade spending to support continued distribution and market share growth in a competitive food retailing environment. Although commodity costs for conventional ingredients have recently moderated or declined, we have not yet experienced similar cost changes to our ingredients and continue to experience year-over-year commodity increases.

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.growth. 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 compete effectively against conventional as well as natural and organic brands, and in research and development to support our robust innovation pipeline. StartingDespite these increased investments, our selling, general and administrative expenses did not increase as significantly as net sales, and resulted in fiscal 2012, we incurred incrementallower expense related to getting ready to operate as a public company. We expect to incur approximately $2 millionpercent of net sales in incremental expense annually related to being a public company.the three and six months ended September 30, 2013.

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  Three Months Ended
September 30,
 % of Net
Sales
 Six Months Ended
September 30,
 % of Net
Sales
 
  2012 2011 2012 2011 2012 2011 2012 2011  2013 2012 2013 2012 2013 2012 2013 2012 
  (in thousands, except for percentages)  (in thousands, except for percentages) 

Net sales

  $36,283   $30,838    100.0  100.0 $117,262   $98,320    100.0  100.0 $58,650   $46,686   100.0 100.0 $97,690   $80,979   100.0 100.0

Cost of sales

   23,267    18,275    64.1  59.3  72,539    60,034    61.9  61.1 36,749   28,786   62.7 61.7 61,027   49,272   62.5 60.8
  

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

Gross profit

   13,016    12,563    35.9  40.7  44,723    38,286    38.1  38.9  21,901    17,900    37.3  38.3  36,663    31,707    37.5  39.2

Operating expenses:

                 

Selling, general and administrative expenses

   10,687    8,847    29.5  28.7  32,437    25,206    27.7  25.6  12,538    11,539    21.4  24.7  23,865    21,750    24.4  26.9
  

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

Total operating expenses

   10,687    8,847    29.5  28.7  32,437    25,206    27.7  25.6  12,538    11,539    21.4  24.7  23,865    21,750    24.4  26.9
  

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

Income from operations

   2,329    3,716    6.4  12.1  12,286    13,080    10.5  13.3  9,363    6,361    16.0  13.6  12,798    9,957    13.1  12.3

Interest expense

   (40  (25  (0.1)%   (0.1)%   (120  (66  (0.1)%   (0.1)%   (104  (40  (0.2)%   (0.1)%   (175  (80  (0.2)%   (0.1)% 

Other income (expense), net

   31    43    0.1  0.1  116    (428  0.1  (0.4)%   32    36    0.1  0.1  58    85    0.1  0.1
  

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

Income before provision for income taxes

   2,320    3,734    6.4  12.1  12,282    12,586    10.5  12.8  9,291    6,357    15.8  13.6  12,681    9,962    13.0  12.3

Provision for income taxes

   919    1,502    2.5  4.9  4,965    4,926    4.2  5.0  3,739    2,572    6.4  5.5  5,100    4,046    5.2  5.0
  

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

Net income

  $1,401   $2,232    3.9  7.2 $7,317   $7,660    6.2  7.8 $5,552   $3,785    9.5  8.1 $7,581   $5,916    7.8  7.3
  

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

Our discussion of our results of operations in this Quarterly Report on Form 10-Q includes certain adjusted net sales, gross profit, gross margin selling, general and administrative expenses, income from operations and net income figures that exclude the impact of our January 2013 voluntary product recall, costs associated with our planned acquisition of pizza products announced on January 22, 2013.the Joplin Plant, shelf registration and secondary offering costs. These figures are non-GAAP financial measures. We calculate these non-GAAP figures by eliminating the impact of our January 2013 voluntary product recall, costs associated with our planned acquisition of the Joplin Plant, shelf registration and secondary offering costs, 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.items mentioned above. However, our computation of these non-GAAP measures is likely to differ from methods used by other companies in computing similarly titled or defined terms, limiting the usefulness of these measures. 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. The table below reconciles these non-GAAP figures to the most directly comparable GAAP financial measures:

  Three months ended
September 30, 2013
  Three months ended
September 30, 2012
  Six months ended
September 30, 2013
  Six months ended
September 30, 2012
 
  Net Sales  Gross Profit  Net Income  Net Income  Net Sales  Gross Profit  Net Income  Net Income 

GAAP financial measures

 $58,650   $21,901   $5,552   $3,785   $97,690   $36,663   $7,581   $5,916  

Reversal of net sales reserve related to product recall

  (121  (121  (121  —      (121  (121  (121  —    

Recoveries from insurance carrier related to product recall:

        

Net sales

  (630  (630  (630  —      (630  (630  (630  —    

Cost of sales

  —      (490  (490  —      —      (273  (273  —    

Selling, general and administrative expenses

  —      —      (40  —      —      —      (40  —    

Administrative costs related to product recall

  —      —      8    —      —      —      51    —    

Costs associated with our planned acquisition of the Joplin Plant

  —      —      162    —      —      —      162    —    

Shelf registration costs

  —      —      52    —      —      —      86    —    

Secondary offering costs

  —      —      —      704    —      —      —      704  

Change in fair value of convertible preferred stock warrant liability

  —      —      —      —      —      —      —      13  

Provision for income taxes

  —      —      426    (285  —      —      308    (286
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-GAAP figures

 $57,899   $20,660   $4,919   $4,204   $96,939   $35,639   $7,124   $6,347  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended December 31, 2012September 30, 2013 Compared to Three Months Ended December 31, 2011September 30, 2012

Net Sales

 

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

Meals

  $16,223    $14,235    $1,988     14.0  44.8  46.2

Snacks

   14,908     12,225     2,683     21.9  41.1  39.6

Dressings, condiments and other

   5,152     4,378     774     17.7  14.2  14.2
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales

  $36,283    $30,838    $5,445     17.7  100.0  100.0
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

   Three Months Ended September 30,   Change  % of Net Sales 
   2013   2012   $   %  2013  2012 
   (in thousands, except for percentages) 

Meals

  $29,739    $21,869    $7,870     36.0  50.7  46.9

Snacks

   22,057     19,146     2,911     15.2  37.6  41.0

Dressings, condiments and other

   6,854     5,671     1,183     20.9  11.7  12.1
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales

  $58,650    $46,686    $11,964     25.6  100.0  100.0
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales increased $5.4$12.0 million, or 17.7%25.6%, to $36.3$58.7 million duringin the three months ended December 31, 2012September 30, 2013 compared to $30.8$46.7 million duringin the three months ended December 31, 2011. The netSeptember 30, 2012. Net sales for the three months ended December 31, 2012 includedSeptember 30, 2013 benefited from insurance recoveries of $0.6 million and a $1.6reversal of net sales reserve of $0.1 million reduction duerelated to our January 2013 voluntary product recall. The net sales increase was primarily driven by volume with approximately 240 basis points of growth from higher average selling prices. Distribution gains and our mainline placement initiative contributed to the voluntary product recall of our certified organicvolume increase, primarily impacting mainstream grocery and made with organic pizza products. mass merchandiser channels. These gains were partially offset by lower volume in the natural channel, due primarily to inventory reductions by a large customer.

The increase in net sales (net of the effects of the voluntary product recall) reflects ana $7.9 million, $2.9 million and $1.2 million increase in net sales of meals, 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, gluten-free and single-serve microwavable macaroni and cheese products offset by the voluntary product recallcombined with initial shipments of frozen pizza products. Organic frozen pizza first shippedentrées which were introduced in January 2012August 2013. Net sales of meals also benefited from insurance recoveries and made with organic frozen pizza first shipped during second quarter. As discussed earlier, we initiated a voluntary product recallreversal of all frozen pizza products in January 2013.

net sales reserve mentioned above. The increase in snacks was primarily due to growth in our fruit snacks, grahams, mixed snacks and granola bars product lines. The increase in the dressings, condiments and other category was attributable to strong performance of natural and organicdriven by strength in both 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.condiments.

Excluding the impactbenefit of our voluntary product recall,insurance recoveries and reversal of net sales reserve, our net sales would have increased $7.0$11.2 million, or 22.7%24.0%, to $37.9$57.9 million duringin the three months ended December 31, 2012September 30, 2013 compared to $30.8$46.7 million duringin the three months ended December 31, 2011.September 30, 2012.

Gross Profit

 

  Three Months Ended December 31, Change   Three Months Ended September 30, Change 
  2012 2011 $   %   2013 2012 $   % 
  (in thousands, except for percentages)   (in thousands, except for percentages) 

Cost of sales

  $23,267   $18,275   $4,992     27.3  $36,749   $28,786   $7,963     27.7
  

 

  

 

  

 

     

 

  

 

  

 

   

Gross profit

  $13,016   $12,563   $453     3.6  $21,901   $17,900   $4,001     22.4
  

 

  

 

  

 

     

 

  

 

  

 

   

Gross margin %

   35.9  40.7      37.3  38.3   
  

 

  

 

      

 

  

 

    

Gross profit increased $0.5$4.0 million, or 3.6%22.4%, to $13.0$21.9 million forin the three months ended December 31, 2012September 30, 2013 from $12.6$17.9 million forin the three months ended December 31, 2011. September 30, 2012. The increase in gross profit was primarily driven by higher net sales, insurance recoveries and the reversal of net sales reserve related to our January 2013 voluntary product recall, partially offset by higher commodity costs.

Gross margin decreased 4.81.0 percentage pointspoint to 35.9% from 40.7% during37.3% in the three months ended December 31, 2012 compared toSeptember 30, 2013 from 38.3% in the three months ended December 31, 2011.September 30, 2012. 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, increased inventory obsolesce, customer and product mix changes, and increased trade spending, partially offset by a price increase that was implemented in October 2012higher average selling prices and the cumulative impact of various cost reduction initiatives. We expectinsurance recoveries related 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.January 2013 voluntary product recall.

Excluding the impactbenefit of the voluntary product recall,insurance recoveries and reversal of net sales reserve, our gross profit would have increased $2.7$2.8 million, or 21.6%15.4%, to $15.3$20.7 million forin the three months ended December 31, 2012September 30, 2013 from $12.6$17.9 million forin the three months ended December 31, 2011September 30, 2012 and gross margin would have decreased 0.32.6 percentage points to 40.4%35.7% from 40.7% during38.3% in the three months ended December 31, 2012September 30, 2013 compared to the three months ended December 31, 2011.September 30, 2012.

Operating Expenses

 

  Three Months Ended December 31,   Change   Three Months Ended September 30, Change 
  2012   2011   $   %   2013 2012 $   % 
  (in thousands, except for percentages)   (in thousands, except for percentages) 

Operating expenses:

              

Selling, general and administrative expenses

  $10,687    $8,847    $1,840     20.8  $12,538   $11,539   $999     8.7
  

 

   

 

   

 

     

 

  

 

  

 

   

Selling, general and administrative expense as a percentage of net sales

   21.4  24.7   

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.8$1.0 million, or 20.8%8.7%, to $10.7$12.5 million duringin the three months ended December 31, 2012September 30, 2013 from $8.8$11.5 million duringin the three months ended December 31, 2011.September 30, 2012. 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%.

growth. In addition, during the three months ended December 31, 2012,September 30, 2013, we recognized $6.7incurred $0.2 million of tax deductionsin legal, consulting and other costs 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 resultour planned acquisition of the factors above, net income decreased $0.8 million, or 37.2%,Joplin Plant, $52,000 for legal, accounting and other out-of-pocket expenses on Solera’s behalf for the registration statement on Form S-3 filed with the SEC on July 16, 2013, and $40,000 in insurance recoveries to $1.4 million foroffset pizza recall related expenses in prior quarters. During 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, snacks and dressings, condiments and other of $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, offset by the voluntary product recall of frozen pizza products. Organic frozen pizza first shipped in January 2012 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 in our grahams, crackers, mixed snacks and fruit snacks product lines. The slight increase in dressings, condiments and other was attributable to strong growth in natural and organic dressings, 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 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 
   2012  2011  $   % 
   (in thousands, except for percentages) 

Cost of sales

  $72,539   $60,034   $12,505     20.8
  

 

 

  

 

 

  

 

 

   

Gross profit

  $44,723   $38,286   $6,437     16.8
  

 

 

  

 

 

  

 

 

   

Gross margin %

   38.1  38.9   
  

 

 

  

 

 

    

Gross profit increased $6.4 million, or 16.8%, to $44.7 million for the nine months ended December 31, 2012 from $38.3 million for the nine months ended December 31, 2011. Gross margin decreased 0.8 percentage points to 38.1% from 38.9% during the nine months ended December 31, 2012 compared to the nine 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 increase in gross profit was primarily driven by the increase in net sales, 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 would have increased 0.6 percentage points to 39.5% from 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 higher commodity costs.

Operating Expenses

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

Operating expenses:

        

Selling, general and administrative expenses

  $32,437    $25,206    $7,231     28.7
  

 

 

   

 

 

   

 

 

   

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7.2 million, or 28.7%, to $32.4 million during the nine months ended December 31, 2012 from $25.2 million during the nine 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 nine months ended December 31, 2012 compared with the nine months ended December 31, 2011. Further, during the nine months ended December 31,September 30, 2012, we incurred $0.7 million includingin 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 2.1decreased 3.3 percentage points to 27.7% during21.4% in the ninethree months ended December 31, 2012September 30, 2013 from 25.6% during24.7% in the ninethree months ended December 31, 2011.September 30, 2012.

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 September 30, Change 
  2012 2011 $ %   2013 2012 $   % 
  (in thousands, except for percentages)   (in thousands, except for percentages) 

Income from operations

  $12,286   $13,080   $(794  (6.1)%   $9,363   $6,361   $3,002     47.2
  

 

  

 

  

 

    

 

  

 

  

 

   

Income from operations as a percentage of net sales

   10.5  13.3     16.0  13.6   

As a result of the factors discussed above, income from operations decreased $0.8increased $3.0 million, or 6.1%47.2%, to $12.3$9.4 million duringin the ninethree months ended December 31, 2012,September 30, 2013, from $13.1$6.4 million duringin the ninethree months ended December 31, 2011.September 30, 2012. Income from operations as a percentage of net sales decreased 2.8increased 2.4 percentage points to 10.5%16.0% in the ninethree months ended December 31, 2012,September 30, 2013, from 13.3%13.6% in the ninethree months ended December 31, 2011.September 30, 2012.

Interest Expense

   Three Months Ended September 30,  Change 
   2013  2012  $  % 
   (in thousands, except for percentages) 

Interest expense

  $(104 $(40 $(64  160.0
  

 

 

  

 

 

  

 

 

  

Interest expense increased in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 due to higher non-utilization fees under our revolving line of credit, which was increased to $40.0 million from $20.0 million in March 2013.

Other Income

   Three Months Ended September 30,   Change 
   2013   2012   $  % 
   (in thousands, except for percentages) 

Other income

  $32    $36    $(4  (11.1)% 
  

 

 

   

 

 

   

 

 

  

Other income during the three months ended September 30, 2013 and 2012 reflect royalty income.

Provision for income taxes

   Three Months Ended September 30,  Change 
   2013  2012  $   % 
   (in thousands, except for percentages) 

Provision for income taxes

  $3,739   $2,572   $1,167     45.4
  

 

 

  

 

 

  

 

 

   

Effective tax rate

   40.2  40.5   

Our effective tax rate decreased to 40.2% for the three months ended September 30, 2013, compared to 40.5% for the three months ended September 30, 2012. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the three months ended September 30, 2013 was lower than the effective tax rate for the three months ended September 30, 2012 due to the impact of permanent items and federal and state income tax credits. We expect our full year effective tax rate for fiscal 2014 to be approximately 40% to 41%.

Net income

   Three Months Ended September 30,   Change 
   2013   2012   $   % 
   (in thousands, except for percentages) 

Net income

  $5,552    $3,785    $1,767     46.7
  

 

 

   

 

 

   

 

 

   

As a result of the factors discussed above, net income increased $1.8 million, or 46.7%, to $5.6 million in the three months ended September 30, 2013 from $3.8 million in the three months ended September 30, 2012.

Excluding the impact of our recall-related insurance recoveries, reversal of net sales reserve, costs associated with our planned acquisition of the Joplin Plant and shelf registration costs recorded in the three months ended September 30, 2013, our net income would have increased $0.7 million, or 17.0%, to $4.9 million in the three months ended September 30, 2013 from $4.2 million in the three months ended September 30, 2012, which excludes secondary offering costs.

Six Months Ended September 30, 2013 Compared to Six Months Ended September 30, 2012

Net Sales

   Six Months Ended September 30,   Change  % of Net Sales 
   2013   2012   $   %  2013  2012 
   (in thousands, except for percentages) 

Meals

  $46,293    $36,536    $9,757     26.7  47.4  45.1

Snacks

   37,878     32,609     5,269     16.2  38.8  40.3

Dressings, condiments and other

   13,519     11,834     1,685     14.2  13.8  14.6
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales

  $97,690    $80,979    $16,711     20.6  100.0  100.0
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

 

Net sales increased $16.7 million, or 20.6%, to $97.7 million in the six months ended September 30, 2013 compared to $81.0 million in the six months ended September 30, 2012. Net sales for the six months ended September 30, 2013 benefited from insurance recoveries of $0.6 million and reversal of net sales reserve of $0.1 million related to our January 2013 voluntary product recall. The net sales increase was primarily driven by volume with approximately 210 basis points of growth from higher average selling prices. Distribution gains and our mainline placement initiative contributed to the volume increase, primarily impacting mainstream grocery and mass merchandiser channels. These gains were partially offset by lower volume in the natural channel, primarily driven by a reduction in inventory carrying levels at one of our major customers.

The increase in net sales reflects a $9.7 million, $5.3 million and $1.7 million increase in net sales of meals, snacks and dressings, condiments and other, respectively. The increase in meals was predominantly driven by strong growth in natural, gluten-free and single-serve microwavable macaroni and cheese products combined with initial shipments of frozen entrées which were introduced in August 2013. Net sales of meals also benefited from insurance recoveries and reversal of net sales reserve mentioned above. The increase in snacks was primarily due to growth in our fruit snacks, grahams, mixed snacks, granola bars and crackers product lines. The increase in the dressings, condiments and other category was driven by strength in both dressings and condiments.

Excluding the benefit of insurance recoveries and reversal of net sales reserve, our net sales would have increased $16.0 million, or 19.7%, to $96.9 million in the six months ended September 30, 2013 compared to $81.0 million in the six months ended September 30, 2012.

Gross Profit

   Six Months Ended September 30,  Change 
   2013  2012  $   % 
   (in thousands, except for percentages) 

Cost of sales

  $61,027   $49,272   $11,755     23.9
  

 

 

  

 

 

  

 

 

   

Gross profit

  $36,663   $31,707   $4,956     15.6
  

 

 

  

 

 

  

 

 

   

Gross margin %

   37.5  39.2   
  

 

 

  

 

 

    

Gross profit increased $5.0 million, or 15.6%, to $36.7 million in the six months ended September 30, 2013 from $31.7 million in the six months ended September 30, 2012. The increase in gross profit was primarily driven by higher net sales, insurance recoveries and the reversal of the net sales reserve related to our January 2013 voluntary product recall, partially offset by higher commodity costs.

Gross margin decreased 1.7 percentage points to 37.5% in the six months ended September 30, 2013 from 39.2% in the six months ended September 30, 2012. The decrease in gross margin is primarily attributable to higher commodity costs, increased inventory obsolescence, customer and product mix changes, and increased trade spending, partially offset by higher average selling prices and insurance recoveries related to our January 2013 voluntary product recall.

Excluding the benefit of insurance recoveries and the reversal of net sales reserve, our gross profit would have increased $3.9 million, or 12.4%, to $35.6 million in the six months ended September 30, 2013 from $31.7 million in the six months ended September 30, 2012 and gross margin would have decreased 2.4 percentage points to 36.8% from 39.2% in the six months ended September 30, 2013 compared to the six months ended September 30, 2012.

Operating Expenses

   Six Months Ended September 30,  Change 
   2013  2012  $   % 
   (in thousands, except for percentages) 

Operating expenses:

      

Selling, general and administrative expenses

  $23,865   $21,750   $2,115     9.7
  

 

 

  

 

 

  

 

 

   

Income from operations as a percentage of net sales

   24.4  26.9   

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $2.1 million, or 9.7%, to $23.9 million in the six months ended September 30, 2013 from $21.8 million in the six months ended September 30, 2012. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our growth. In addition, during the six months ended September 30, 2013, we incurred $0.2 million in legal, consulting and other costs associated with our planned acquisition of the Joplin Plant, $86,000 for legal, accounting and other out-of-pocket expenses on Solera’s behalf for the registration statement on Form S-3 filed with the SEC on July 16, 2013, and $11,000 in administrative costs associated with the voluntary product recall net of insurance recovery of $40,000. During the six months ended September 30, 2012, we incurred $0.7 million in 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. As a percentage of net sales, selling, general and administrative expenses decreased 2.5 percentage points to 24.4% in the six months ended September 30, 2013 from 26.9% in the six months ended September 30, 2012.

Income from Operations

   Six Months Ended September 30,  Change 
   2013  2012  $   % 
   (in thousands, except for percentages) 

Income from operations

  $12,798   $9,957   $2,841     28.5
  

 

 

  

 

 

  

 

 

   

Income from operations as a percentage of net sales

   13.1  12.3   

As a result of the factors discussed above, income from operations would have increased $1.5$2.8 million, or 11.2%28.5%, to $14.6$12.8 million forin the ninesix months ended December 31, 2012September 30, 2013, from $13.1$10.0 million forin the ninesix months ended December 31, 2011.September 30, 2012. Income from operations as a percentage of net sales increased 0.8 percentage points to 13.1% in the six months ended September 30, 2013, from 12.3% in the six months ended September 30, 2012.

Interest Expense

 

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

Interest expense

  $(120 $(66 $(54  nm  
  

 

 

  

 

 

  

 

 

  
   Six Months Ended September 30,  Change 
   2013  2012  $  % 
   (in thousands, except for percentages) 

Interest expense

  $(175 $(80 $(95  118.8
  

 

 

  

 

 

  

 

 

  

Interest expense duringincreased in the ninesix months ended December 31, 2012 primarily relatedSeptember 30, 2013 compared to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012. Interest expense during the ninesix months ended December 31, 2011 consisted of expense relatedSeptember 30, 2012 due to borrowings onhigher non-utilization fees under our revolving line of credit.

credit, which was increased to $40.0 million from $20.0 million in March 2013.

Other Income (Expense), Net

 

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

Other income (expense), net

  $116    $(428 $544     nm  
  

 

 

   

 

 

  

 

 

   
   Six Months Ended September 30,   Change 
   2013   2012   $  % 
   (in thousands, except for percentages) 

Other income (expense), net

  $58    $85    $(27  (31.8)% 
  

 

 

   

 

 

   

 

 

  

Other income (expense), net during the ninesix months ended December 31,September 30, 2013 reflects royalty income. Other income (expense), net during the six months ended September 30, 2012 primarily reflects royalty income partially offset by a 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 nine months ended 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   Six Months Ended September 30, Change 
  2012 2011 $   %   2013 2012 $   % 
  (in thousands, except for percentages)   (in thousands, except for percentages) 

Provision for income taxes

  $4,965   $4,926   $39     0.8  $5,100   $4,046   $1,054     26.1
  

 

  

 

  

 

     

 

  

 

  

 

   

Effective tax rate

   40.4  39.1      40.2  40.6   

Our effective tax rate was 40.4%decreased to 40.2% for the ninesix months ended December 31, 2012,September 30, 2013, compared to 39.1% in40.6% for the same period last year.six months ended September 30, 2012. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the ninesix months ended December 31, 2012September 30, 2013 was higherlower than the effective tax rate for the ninesix months ended December 31, 2011 largelySeptember 30, 2012 due to a tax benefit recorded during the nine months ended December 31, 2011 related to an increase in the tax rate applied for deferred tax assets due to an increase in theimpact of permanent items and federal and state tax rates, partially offset by the impact of state income tax credits. We expect our full year effective tax rate for fiscal 2014 to be approximately 40% to 41%.

In addition, during the nine months ended December 31, 2012, we recognized $20.8 million of tax deductions associated with stock option exercises. As of December 31, 2012, $19.5 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

 

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

Net income

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

 

 

   

 

 

   

 

 

  
   Six��Months Ended September 30,   Change 
   2013   2012   $   % 
   (in thousands, except for percentages) 

Net income

  $7,581    $5,916    $1,665     28.1
  

 

 

   

 

 

   

 

 

   

As a result of the factors discussed above, net income decreased $0.3increased $1.7 million, or 4.5%28.1%, to $7.3$7.6 million forin the ninesix months ended December 31, 2012September 30, 2013 from $7.7$5.9 million forin the ninesix months ended December 31, 2011.September 30, 2012.

Excluding the impact of our recall-related insurance recoveries, reversal of net sales reserve, costs associated with our planned acquisition of the voluntary product recall,Joplin Plant and shelf registration costs recorded in the six months ended September 30, 2013, our net income would have increased $1.0$0.8 million, or 13.1%12.2%, to $8.7$7.1 million forin the ninesix months ended December 31, 2012September 30, 2013 from $7.7$6.3 million forin the ninesix months ended December 31, 2011.September 30, 2012, which excludes secondary offering costs and the change in fair value of convertible preferred stock warrant liability.

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’ and retailers’ merchandising and promotional activities around the back-to-school and spring seasons. Concurrently, inventory levels and working capital requirements generally 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

 

  September 30,
2013
   March 31,
2013
 
  December 31,
2012
   March 31,
2012
   
  (in thousands)   (in thousands) 

Cash

  $12,960    $562    $11,090    $4,930  

Accounts receivable, net

   10,110     11,870     19,100     20,015  

Accounts payable, related-party payable and accrued liabilities

   12,989     9,618  

Accounts payable

   7,512     4,342  

Accrued liabilities

   13,652     12,021  

Working capital(1)

   38,806     16,427     34,328     31,925  

 

(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, 
   2012  2011 
   (in thousands) 

Cash at beginning of period

  $562   $7,333  

Net cash provided by (used in) operating activities

   4,210    (771

Net cash used in investing activities

   (1,498  (1,504

Net cash provided by (used in) financing activities

   9,686    (2,644
  

 

 

  

 

 

 

Cash at end of period

  $12,960   $2,414  
  

 

 

  

 

 

 

   September 30,
2013
  September 30,
2012
 
    
   (in thousands) 

Cash at beginning of period

  $4,930   $562  

Net cash provided by operating activities

   12,723    9,256  

Net cash used in investing activities

   (649  (1,009

Net cash provided by (used in) financing activities

   (5,914  5,820  
  

 

 

  

 

 

 

Cash at end of period

  $11,090   $14,629  
  

 

 

  

 

 

 

Cash Flows from Operating Activities.

Operating activities in the six months ended September 30, 2013 provided $12.7 million of cash primarily due to our net income of $7.6 million, which included non-cash charges totaling $1.6 million, primarily comprised of $0.6 million for depreciation and amortization, $0.4 million for stock-based compensation and $0.4 million for increased inventory reserves. Changes in operating assets and liabilities provided an additional $4.1 million of net cash, which is primarily comprised of a $3.2 million increase in accounts payable, a $2.3 million increase in accrued expenses and other non-current liabilities, a $0.9 million decrease in accounts receivable and a $0.6 million decrease in income tax receivable offset by a $2.6 million increase in inventory and a $0.2 million decrease in prepaid expenses, other current and non-current assets due to insurance recoveries of $1.2 million from the insurance carrier against claims submitted for the recall. The increase in accounts payable was driven by the timing of check payments relative to quarter end. The decrease in accounts receivable and increase in inventory reflects seasonality related to quarterly sales trends. These increases were partially offset by the excess tax benefit from stock-based compensation of $0.6 million.

Operating activities provided $4.2$9.3 million of cash during the ninesix months ended December 31,September 30, 2012, primarily due to our net income of $7.3$5.9 million, which included non-cash charges of $0.7$0.5 million for depreciation and

amortization, $0.7$0.4 million for stock-based compensation and a $0.6$1.1 million reduction in allowances for trade discounts and a $0.5 million increase in inventory reserves due to inventory write-off associated with the product recall.other. Changes in operating asset and liability accounts provided an additional $3.0$8.6 million of net cash, which was primarily comprised of a $4.5$5.4 million increase in accrued expenses, a $4.4$4.1 million increase in prepaid expenses, other current and non-current assets, a $3.4$1.4 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 $10.8 million increase in inventory and a $1.3 million decrease in related-party payable,accounts receivable, partially offset by a $2.1 million increase in inventory, other current and non-current assets and a $1.3 million decrease in related party-payable, resulting from the termination of our advisory services agreement with Solera upon consummation of our IPO. This increase in cash was offset by the excess tax benefit from stock-based compensation of $7.5$5.3 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 $0.8 million of cash during the nine months ended December 31, 2011, primarily due to our net income of $7.7 million, which included net non-cash charges of $0.7 million. Changes in operating asset and liability accounts used $9.2 million of net cash during the nine months ended December 31, 2011.

Cash Flows from Investing Activities.

Cash used in investing activities related to purchases of property and equipment during the ninesix months ended December 31,September 30, 2013 and 2012 and 2011 was $1.5$0.6 million and $1.5$1.0 million, 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.respectively.

Cash Flows from Financing Activities.

Cash used in financing activities totaled $5.9 million in the six months ended September 30, 2013 including net pay down of $7.0 million for borrowings from our credit facility offset by $0.5 million in proceeds from exercises of stock options and $0.6 million in excess tax benefit from stock-based compensation.

Cash provided by financing activities totaled $9.7$5.8 million during the ninesix months ended December 31,September 30, 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 $7.5$5.3 million;

 

proceeds of $3.8$2.2 million received from exercises of stock options; and

net pay down of $12.8 million of our credit facility.

Cash used in financing activities totaled $2.6 million during the nine months ended December 31, 2011, which primarily consisted of $13.6 million in cash dividend payments made to stockholders, $1.8 million in payments of IPO costs and $0.6 million to repurchase certain stock options partially offset by proceeds of $13.3 million from net borrowings under our credit facility.

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 December 31, 2012:September 30, 2013:

 

  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)

  $3,868    $596    $1,250    $1,277    $745    $3,466    $635    $1,286    $1,279    $266  

Equipment lease obligations(2)

   31     25     6     —        —        129     31     60     38     —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total operating lease obligations

   3,899     621     1,256     1,277     745     3,595     666     1,346     1,317     266  

Purchase commitments(3)

   14,033     14,023     10     —        —        14,474     14,257     217     —       —    

Warehousing overheads obligations(4)

   500     200     300      

Product formula obligations(4)

   1,850     150     300     1,400     —    

Warehousing overhead obligations(5)

   350     200     150     —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $18,432    $14,844    $1,566    $1,277    $745    $20,269    $15,273    $2,013    $2,717    $266  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)We lease approximately 33,500 square feet of space that houses our corporate headquarters and a sample storage area at 1610 Fifth Street, Berkeley, California pursuant to a lease agreement, or Lease, that expireswas originally scheduled to expire in February 2016 (the “Lease”). On2016. In September 25, 2012, we entered into an amendment (the “Lease Amendment”) to the Lease for reconfiguration of approximately 6,700 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 extendand extended the initial term of the lease for three additional 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”).February 2019. 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 Periodsadditional three years will be equal to 95% of the then fair market rental rate for the property,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.term. 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 withThe table above assumes rent for 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 footmonthly rental rate applicable to existing office space.last month’s rate of the original Lease.
(2)We lease equipment under non-cancelable operating leases. These leases expire at various dates through 2015.2019, excluding extensions at our option, and contain provisions for rental adjustments.

(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)This represents our obligation, to one of our contract manufacturers, for the product formulas purchased in November 2011. Of these amounts, $1.1 million is included in total liabilities in our condensed consolidated balance sheet as of September 30, 2013.
(5)We have an agreement with our contract warehousing company to pay minimum overhead fees through June 2015.

Off-balanceOff-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 nine months of the prior fiscal year, we corrected an error in our 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 statement of operations during the nine months ended 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 2012,2013, filed with the SEC on June 8, 2012,14, 2013, 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 ninesix months ended December 31, 2012.September 30, 2013.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintainhave established disclosure controls and procedures and internal controls that are designed to provide reasonable assuranceensure that the information required to be disclosed by the Company in ourthe reports that it files or submits under the Securities Exchange Act reportsof 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer, as appropriate to allow timely decisions regarding required disclosures.disclosure.

Our management, including our disclosure committee, Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer evaluated the effectiveness of our disclosure controls and procedures. Based on this review, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures as required by(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of the Exchange Act. Based on this review, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures1934) were effective as of December 31, 2012.September 30, 2013.

Changes in Internal Control Over Financial Reporting

There werewas no changeschange in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) that haveoccurred during the quarterly period ended September 30, 2013 that has materially affected, or areis 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

FromOn September 4, 2013, a private organization called the Center for Environmental Health (“CEH”) issued a 60-day notice of intent to sue (“Notice”) us and our subsidiary, Annie’s Homegrown, Inc. under California Health & Safety Code §§ 25249.5 et seq. (commonly referred to as “Proposition 65”). In the Notice, CEH claims that warnings are required in California for alleged exposures to lead and lead compounds from cookies, including our Gluten-Free Ginger Snap Bunny Cookies. Under Proposition 65, any private enforcer such as CEH may file a lawsuit if it first issues a valid 60-day notice, and if the California Attorney General or other specified California public enforcers do not file suit within 60 days after service. A Proposition 65 plaintiff may seek injunctive relief as well as civil penalties, which may be assessed up to a maximum of $2,500 per violation per day, and a private plaintiff does not need to show that anyone has been harmed by the alleged exposures. A prevailing plaintiff may also seek its attorneys’ fees and costs under other California laws.

Although CEH has not yet filed a lawsuit naming us or Annie’s Homegrown, Inc., within the past year CEH has filed several lawsuits against other manufacturers and retailers regarding various types of products containing molasses and/or ginger, such as licorice candy, cookies, and baking mix products. In CEH’s cases involving cookies and baking mix products, CEH’s operative complaints have put at issue only those cookies or baking mix products that contain ginger and/or molasses as ingredients. We cannot at this time reasonably estimate a range of exposure, if any, of the potential liability should a suit be brought in connection with the Notice.

Additionally, from time to time, we are subject to a variety ofclaims, assessments or other legal proceedings in the ordinary course of our business. We arebusiness, including product liability claims, employee claims, and other general liability claims. While it is not currently a partyfeasible to anypredict or determine the ultimate outcome of these matters, we believe that none of these legal proceeding that,proceedings, individually or in the aggregate, is expected towill have a material adverse effect on our business, financial condition, results of operations or cash flows.position.

ITEM 1A. RISK FACTORS

The following risk factor hasfactors have been added to address our voluntary product recallplanned acquisition of a snack manufacturing plant in Joplin, Missouri and is a supplementare supplemental to the risk factors previously disclosed in our Annual Report on Form 10-K for fiscal 20122013 filed with the SEC on June 8, 2012.14, 2013.

Risks Related to Our Business and Industrythe Acquisition of the Joplin Manufacturing Plant

Our voluntary recallbusiness and prospects may be adversely affected by our failure to successfully consummate the recently announced acquisition of certified organicthe Joplin manufacturing plant.

While we have signed an agreement to purchase the Joplin manufacturing plant from Safeway, there can be no assurance that we will complete the acquisition of the Joplin manufacturing plant under the terms set forth in the agreement, or at all, because the obligation of the parties to consummate the acquisition is subject to conditions as set forth in the agreement, many of which are beyond our control, including (i) receipt of necessary permits; (ii) acceptance by key employees of Safeway of employment by us; (iii) Safeway’s satisfaction that it has fulfilled any collective bargaining obligations that it is required to undertake with the labor organization presently representing employees at the plant; and made(iv) satisfaction of other customary closing conditions. There can be no assurance that the conditions to closing will be satisfied.

If consummated, our results may be adversely affected if we fail to integrate the Joplin manufacturing operations successfully.

The acquisition of the Joplin manufacturing plant, if consummated, will pose additional risks, including the inability to integrate the acquired business efficiently into our existing operations, diversion of management’s attention from other business concerns, loss of employees key to the operation of the Joplin plant, potential assumption of unknown liabilities, potential disputes with organic pizza products has affected our third quarterthe seller and potential impairment charges if purchase assumptions are not achieved or market conditions decline. These risks are exacerbated by the fact that we have not previously operated a manufacturing plant. Our business or financial results may be negatively affected if the Joplin acquisition is not successfully integrated.

We may fail to realize the productivity enhancements and other benefits expected from our acquisition of the Joplin manufacturing plant.

The success of the Joplin acquisition will continuedepend, in part, on our ability to impactcontrol costs, drive incremental volume and successfully integrate the Joplin manufacturing plant into our financial resultscompany. If we are not able to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected and our business may be adversely affected. In addition, efforts to integrate the Joplin manufacturing plant into our company may also divert management attention and resources. Issues that may arise in connection with integrating the Joplin manufacturing plant include, among other things: integration of manufacturing and distribution activities; implementation and management of information systems; conforming the manufacturing plant’s controls, procedures and accounting and other policies to our own; retaining key management and employees; and labor negotiations and collective bargaining. In addition, our ability to realize the benefits expected from our acquisition is dependent on our ability to drive future quarters.

On January 22, 2013,sales growth in our cookie and cracker business. If the demand for our cookie and cracker products does not increase at the rate we initiated a voluntary recall of our certified organic and made with organic pizza productsexpect over the long term, due to the possible presencecompetition or other factors, our results of fragments of flexible metal mesh from a faulty screen at a third-party flour mill.operations may be adversely affected. 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,cannot assure you that we will record administrative costs associated withbe able to integrate the managementoperations of the recall, including fees and incentivesJoplin manufacturing plant successfully, control costs, drive incremental volume or operate the Joplin manufacturing plant as profitably as anticipated. Our beliefs regarding the benefits to customers and legal expenses in our fourth fiscal quarter ending March 31, 2013. Certainbe derived from the acquisition of these accounting chargesthe Joplin manufacturing plant are based on our best estimates and may benumerous assumptions that are subject to changerisks and uncertainties that could deviate materially from our expectations.

In connection with the acquisition of the Joplin manufacturing plant, we will be expanding our business model to include manufacturing for us and for an affiliate of the seller. We cannot assure you that our expansion into manufacturing and co-packing will succeed.

We have not owned or operated a manufacturing plant in the past and we may encounter increased financial and operational difficulties in integrating the Joplin manufacturing plant with our current operations. In the past, we relied exclusively on contract manufacturers to produce our products and we have not previously manufactured products for others. While we have invested in manufacturing equipment and worked closely with our contract manufacturers on the manufacturing of our products and efficiency initiatives, the operation of a manufacturing plant presents additional challenges and risks for our business. Operating a manufacturing plant requires different operating strategies and different managerial experience than our current operations, and a manufacturing plant is subject to additional and different regulations than our current operations. Our lack of experience in operating manufacturing facilities and co-packing for third parties could result in fewer benefits to us than we anticipate, as well as increased costs. Further, we move forward in completing the voluntary recall. We will also incur someexpect there to be additional costs in future quarters. While we expect to recover a substantial portionconnection with the acquisition and integration of the charges forJoplin manufacturing plant into our operations, including costs related to information technology systems, additional personnel needs at both the voluntary recall in future quarters throughplant and corporate level, and transitional services provided by Safeway or its affiliates. The operation of the Joplin manufacturing plant may also divert management’s attention from the development of our existing recall insuranceoperations and fromcause our existing business to suffer.

In addition, any interruption in, or the third-party supplier,loss of operations at the Joplin manufacturing plant, which may be caused by work stoppages, disease outbreaks or pandemics, acts of war, terrorism, fire, tornadoes, earthquakes, flooding or other natural disasters, could delay or postpone production of our products and the products that we cannot guaranteehave committed to manufacture for Safeway, which could have a material adverse effect on our business, results of operations and financial condition, especially until such time as such interruption is resolved or an alternate source of production is secured.

ITEM 5. OTHER INFORMATION

Agreement of Purchase and Sale

On November 5, 2013, we entered into an Agreement of Purchase and Sale (the “Agreement”) with Safeway Inc., a Delaware corporation (“Safeway”), and Safeway Australia Holdings, Inc., a Delaware corporation (“Safeway AUS” and, together with Safeway, the “Selling Parties”). Pursuant to the Agreement, we will acquire Safeway’s cookie and cracker manufacturing plant in Joplin, Missouri (the “Joplin Plant”) and related inventory and supplies (the “Joplin Acquisition”). The Joplin Plant has been the primary manufacturing facility for our cookie and cracker products for more than ten years. The aggregate purchase price for the Joplin Acquisition consists of $6.0 million of cash, plus the value of inventory and supplies at closing (calculated based on the Selling Parties’ costs and currently estimated at approximately $4.0 million). Effective at the closing of the Joplin Acquisition, we are also required to extend offers of employment (subject to customary pre-employment conditions) to 95% of Safeway’s active

employees at the Joplin Plant. The Agreement contains limited representations, warranties, covenants and indemnities by the Selling Parties. The Joplin Acquisition is subject to (i) the receipt of necessary permits; (ii) acceptance by key employees of Safeway of employment by us; (iii) Safeway’s satisfaction that the amounts we recover will cover all costs associatedit has fulfilled any collective bargaining obligations that it is required to undertake with the voluntary recall. Whilelabor organization presently representing employees at the plant; and (iv) satisfaction of other customary closing conditions. The Joplin Acquisition is expected to close in the first quarter of fiscal 2015.

At closing of the Joplin Acquisition, we have restartedwill enter into a contract manufacturing agreement with Lucerne Foods, Inc. (“Lucerne”), an indirect, wholly owned subsidiary of Safeway, pursuant to which we will produce and supply certain products to Lucerne for an initial term of three years. In addition, Safeway has agreed to provide us with transition services for up to one year after closing.

From time to time and in the productionordinary course of business, we sell our products to Safeway. Except for the foregoing arms-length relationships, neither the Company nor any of its affiliates has any material relationships with Safeway, Safeway AUS or Lucerne, or any of their respective directors, officers or affiliates.

This description of the Agreement does not purport to be complete and began shipping replacement productis qualified in its entirety by the terms and conditions of the Agreement, a copy of which is attached hereto as Exhibit 2.1 and is incorporated herein by reference.

Second Amendment to Credit Facility

On November 5, 2013, we entered into distributorsan Amendment No. 2 to Second Amended and retailersRestated Loan Agreement (the “Amendment”) by and between Bank of America, N.A. (the “Bank”) and Annie’s, Inc., Annie’s Enterprises, Inc., Annie’s Homegrown, Inc. and Napa Valley Kitchens, Inc. The Amendment amends our Second Amended and Restated Loan Agreement dated as of February 11,December 21, 2011, as amended by that certain Amendment No. 1 to Second Amended and Restated Loan Agreement dated as of March 7, 2013 (together with any previous amendments, the “Loan Agreement”) 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 expectationsamong other things, (1) provide for the product line. Additionally, we may find it challengingissuance of letters of credit under the Loan Agreement, (2) obtain the Bank’s consent to re-establish strong growthvarious transactions contemplated by or relating to the Agreement of Purchase and Sale dated November 5, 2013; and (3) amend covenants relating to other debt and permitted liens on our assets as well as certain representations and warranties.

This description of the Amendment does not purport to be complete and is qualified in pizza product sales forits entirety by the terms and conditions of the Agreement, 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, anycopy of which could harm our business.is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

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

Sales of Unregistered Securities

During the third quarter ended December 31, 2012, we issued an aggregate of 201,350 shares and 6,198 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, 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 $1.7 million during the three months ended 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 January 31, 2013, options to purchase an aggregate of 725,726 shares and 148,726 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.

      

Incorporation by Reference

Exhibit

Number

  

Description

  

Form

  

File No.

  

Exhibit(s)

  

Filing Date

    2.1*  Agreement of Purchase and Sale by and among Safeway Australia Holdings, Inc., Safeway Inc. and Annie’s, Inc., dated November 5, 2013        
    3.3  Second Restated Certificate of Incorporation of Annie’s, Inc., dated September 10, 2013  Form 8-K  001-35470    3.3  September 12, 2013
    3.4  Second Amended and Restated Bylaws of Annie’s, Inc., effective September 10, 2013  Form 8-K  001-35470    3.4  September 12, 2013
  10.1  Executive Employment Agreement dated October 16, 2013 between Annie’s, Inc. and Zahir Ibrahim+  Form 8-K  001-35470  10.1  October 21, 2013
  10.2  Transition and Separation Agreement dated October 16, 2013 between Annie’s, Inc. and Kelly J. Kennedy +  Form 8-K  001-35470  10.2  October 21, 2013
  10.3*  Amendment No. 2 to the Second Amended and Restated Loan Agreement dated as of November 5, 2013 among Bank of America, N.A., Annie’s, Inc., Annie’s Homegrown, Inc., Annie’s Enterprises, Inc. and Napa Valley Kitchens, Inc.        
  31.1*  Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended        
  31.2*  Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended        
  32.1*  Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350        
101*  The following materials from Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2013, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets as of September 30, 2013 and March 31, 2013, (ii) Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2013 and 2012, (iii) Condensed Consolidated Statement of Stockholders’ Equity for the six months ended September 30, 2013, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2013 and 2012 and (v) Notes to Condensed Consolidated Financial Statements.        

 

+Indicates a management contract or compensatory plan or arrangement.
*

Exhibit
Number

Description

  31.1Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1Certification of Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended December 31, 2012 are furnishedFurnished or filed 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 Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.as applicable

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: February 11,November 7, 2013

 

ANNIE’S, INC.
By: 

/s/ Kelly J. Kennedy

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

 

3637