| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2014
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| 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) | |
| Large accelerated filer | Accelerated filer | |||||
| Non-accelerated filer | o | Smaller reporting company | ||||
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.
PART I – FINANCIAL INFORMATIONItem 1. 2Item 1.Condensed Consolidated Balance Sheets as of September 30, 2013 and March 31, 20132 3 4 56Item 2. 18Item 3. 31Item 4. 32Item 1. 33Item 1A. 33Item 5.34Item 6. 3637
Statements of Operations ASSETS CURRENT ASSETS: Cash Accounts receivable, net of allowance Inventory Deferred tax assets Income tax receivable Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred tax assets, long-term Other non-current assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable Accrued liabilities Total current liabilities Credit facility Other non-current liabilities Total liabilities Commitments and contingencies (Note 6) STOCKHOLDERS’ EQUITY Common stock Additional paid-in capital Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity thousands, except share and per share amounts) Balance Sheets Net sales (including product recall benefit of $751 during the three and six months ended September 30, 2013) Cost of sales (including product recall benefit of $490 and $273 during the three and six months ended September 30, 2013, respectively) Gross profit 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) Income from operations Interest expense Other income (expense), net Income before provision for income taxes Provision for income taxes Net income Net income per share —Basic —Diluted Weighted average shares of common stock outstanding used in computing net income per share —Basic —Diluted thousands) Cash Flows Balance at March 31, 2013 Exercise of stock options Excess tax benefit from stock-based compensation Stock-based compensation Net Income Balance at September 30, 2013 thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Provision for doubtful accounts Inventory reserves Excess tax benefit from stock-based compensation Accretion of imputed interest on purchase of intangible asset Change in fair value of convertible preferred stock warrant liability Amortization of deferred financing costs Deferred taxes Changes in operating assets and liabilities: Accounts receivable, net Inventory Income tax receivable Prepaid expenses, other current and non-current assets Accounts payable Related-party payable Accrued expenses and other non-current liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility Payments to credit facility Proceeds from common shares issued in initial public offering, net of issuance costs Excess tax benefit from stock-based compensation Proceeds from exercises of stock options Net cash provided by (used in) financing activities NET INCREASE IN CASH CASH—Beginning of period CASH—End of period NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of property and equipment funded through accounts payable Conversion of convertible preferred stock into common stock entire fiscal year. standard. Three Months Ended September 30, 2013 2012 Six Months Ended September 30, 2013 2012 following (in thousands): Raw materials Work in process Finished goods Inventory Equipment and automotive Software Leasehold improvements Plates and dies Total property and equipment Less: Accumulated depreciation and amortization Construction in progress Property and equipment, net Product formulas Other intangible assets Total intangible assets Less: accumulated amortization Intangible assets, net The estimated future amortization expense relating to intangible assets is anticipated to be $47,000 for the remainder of fiscal $713,000 after fiscal 2020. Payroll and employee-related expenses Accrued trade expenses Inventory received not invoiced Deferred rent Brokerage commissions Other accrued liabilities Total accrued liabilities Contingencies Six Months Ending March 31, 2014 Fiscal Year Ending March 31: 2015 2016 2017 2018 2019 Total future minimum lease payments is seeking injunctive relief, its expected results for fiscal 2015, and therefore previously issued financial statements were not revised and these costs were recorded in the three-month period ended June 30, 2014. Balance, March 31, 2013 Granted Forfeited Exercised Balance, September 30, 2013 2014: Shares-Based Awards Unvested at March 31, 2013 Granted Vested Forfeited Unvested at September 30, 2013 2014: Options to purchase common stock Restricted stock units Total Net income per share: Net income Weighted average shares of common stock outstanding used in computing net income—basic Potential dilutive options Potential dilutive restricted stock units Weighted average shares of common stock outstanding used in computing net income—diluted Net income per share —Basic —Diluted United States Canada Meals Snacks Dressings, condiments and other Benefit to net sales Benefit to cost of sales Benefit to/(incremental) selling, general and administrative expenses Total benefit to income before income taxes Benefit to net income Benefit to net income per diluted share Balance Sheetsthousands) September 30,
2013 March 31,
2013 $ 11,090 $ 4,930 19,100 20,015 17,333 15,147 2,558 2,558 — 588 5,411 5,050 55,492 48,288 6,192 6,138 30,809 30,809 1,086 1,116 3,617 3,704 147 157 $ 97,343 $ 90,212 $ 7,512 $ 4,342 13,652 12,021 21,164 16,363 — 7,007 984 913 22,148 24,283 17 17 94,875 93,190 (19,697 ) (27,278 ) 75,195 65,929 $ 97,343 $ 90,212 Three Months Ended June 30, 2014 2013 Net sales $ 43,297 $ 39,318 Cost of sales 31,069 24,278 Gross profit 12,228 15,040 Selling, general and administrative expenses 14,176 11,364 Income (loss) from operations (1,948 ) 3,676 Interest expense (91 ) (71 ) Other income, net 15 26 Income (loss) before provision for (benefit from) income taxes (2,024 ) 3,631 Provision for (benefit from) income taxes (804 ) 1,459 Net income (loss) $ (1,220 ) $ 2,172 Earnings (loss) per share —Basic $ (0.07 ) $ 0.13 —Diluted $ (0.07 ) $ 0.13 Weighted average shares of common stock outstanding used in computing earnings (loss) per share —Basic 17,059,147 16,869,557 —Diluted 17,059,147 17,353,222 Statements of Operationsthousands, except share and per share amounts) Three Months Ended September 30, Six Months Ended September 30, 2013 2012 2013 2012 $ 58,650 $ 46,686 $ 97,690 $ 80,979 36,749 28,786 61,027 49,272 21,901 17,900 36,663 31,707 12,538 11,539 23,865 21,750 9,363 6,361 12,798 9,957 (104 ) (40 ) (175 ) (80 ) 32 36 58 85 9,291 6,357 12,681 9,962 3,739 2,572 5,100 4,046 $ 5,552 $ 3,785 $ 7,581 $ 5,916 $ 0.33 $ 0.22 $ 0.45 $ 0.35 $ 0.32 $ 0.21 $ 0.44 $ 0.34 16,896,227 17,070,327 16,882,965 17,003,534 17,392,447 17,702,516 17,376,646 17,656,356 June 30,
2014 March 31,
2014ASSETS CURRENT ASSETS: Cash $ 1,644 $ 17,308 Accounts receivable 17,288 18,324 Inventory 27,719 18,489 Deferred tax assets 4,077 3,312 Income tax receivable 2,472 — Prepaid expenses and other current assets 4,661 4,277 Total current assets 57,861 61,710 Restricted cash — 300 Property and equipment, net 13,215 6,620 Goodwill 32,105 30,809 Intangible assets, net 1,070 1,055 Deferred tax assets, long-term 4,265 3,039 Other non-current assets 105 108 Total assets $ 108,621 $ 103,641 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 7,844 $ 7,144 Accrued liabilities 12,023 10,680 Total current liabilities 19,867 17,824 Other non-current liabilities 2,881 905 Total liabilities 22,748 18,729 Commitments and contingencies (Note 6) STOCKHOLDERS’ EQUITY Common stock 17 17 Additional paid-in capital 99,912 97,731 Accumulated deficit (14,056 ) (12,836 ) Total stockholders’ equity 85,873 84,912 Total liabilities and stockholders’ equity $ 108,621 $ 103,641 StatementStatements of Stockholders’ Equitythousands, except share amounts) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity 16,849,016 $ 17 $ 93,190 $ (27,278 ) $ 65,929 60,530 — 633 — 633 — — 643 — 643 — — 409 — 409 — — — 7,581 7,581 16,909,546 $ 17 $ 94,875 $ (19,697 ) $ 75,195 Three Months Ended June 30, 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,220 ) $ 2,172 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 546 309 Stock-based compensation 1,223 293 Excess tax benefit from stock-based compensation (321 ) (370 ) Accretion of imputed interest on purchase of intangible asset 36 36 Deferred taxes (1,242 ) 144 Changes in operating assets and liabilities: Accounts receivable 1,036 4,328 Inventory (7,735 ) (3,326 ) Income tax receivable (2,472 ) 588 Prepaid expenses, other current and non-current assets (478 ) 1,418 Accounts payable 385 (1,867 ) Accrued expenses and other non-current liabilities 1,982 (583 ) Net cash provided by (used in) operating activities (8,260 ) 3,142 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Joplin Plant (7,508 ) — Purchase of property and equipment (1,221 ) (272 ) Purchase of intangible assets (30 ) — Restricted cash 300 — Net cash provided by (used in) investing activities (8,459 ) (272 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility 2,877 4,449 Payments under credit facility (2,877 ) (11,449 ) Excess tax benefit from stock-based compensation 321 370 Proceeds from exercises of stock options 734 392 Net cash provided by (used in) financing activities 1,055 (6,238 ) NET INCREASE (DECREASE) IN CASH (15,664 ) (3,368 ) CASH—Beginning of period 17,308 4,930 CASH—End of period $ 1,644 $ 1,562 Condensed Consolidated Statements of Cash Flows(unaudited)(in thousands) Six Months Ended September 30, 2013 2012 $ 7,581 $ 5,916 637 463 409 447 21 — 430 (80 ) (643 ) (5,266 ) 72 71 — 13 6 9 87 217 894 162 (2,616 ) (2,119 ) 588 (149 ) (174 ) 4,092 3,158 1,359 — (1,305 ) 2,273 5,426 12,723 9,256 (649 ) (1,009 ) (649 ) (1,009 ) 7,720 2,663 (14,727 ) (15,459 ) — 11,146 643 5,266 450 2,204 (5,914 ) 5,820 6,160 14,067 4,930 562 $ 11,090 $ 14,629 $ 12 $ 13 $ — $ 81,373 See accompanying notes to the unaudited condensed consolidated financial statements1.Description of Business135145 products in the following three product categories: meals; snacks; and dressings condiments and other.condiments. 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 Policiesinterim condensed consolidated balance sheets as of September 30, 2013, the interim condensed consolidated statement of stockholders’ equity for the six months ended September 30, 2013, and the interim condensed consolidated statements of operations for the three and six months ended September 30, 2013 and 2012, and cash flows for the six months ended September 30, 2013 and 2012 are unaudited. These interimunaudited condensed consolidated financial statements of Annie’s Inc. have been prepared in accordance withpursuant to generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the United States Securities and Exchange Commission (“SEC”(the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP 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 filed with the SEC on June 14, 2013.10-Q. The March 31, 20132014 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 complete financial statements.The unaudited interim condensed consolidatedGAAP. Certain information and note disclosures normally included in annual financial statements have been prepared oncondensed or omitted pursuant to the same basis asrules and regulations of the audited consolidated financial statements and, inSEC. In the opinion of management, reflect all adjustments (consisting only of a normal recurring natureadjustments, except as noted in Note 7 below) considered necessary to state fairly our financial position as of September 30, 2013 andfor a fair statement have been included. The results of our operations for the three and six months ended SeptemberJune 30, 2013 and 2012, and cash flows for the six months ended September 30, 2013 and 2012. The interim results for the six months ended September 30, 20132014 are not necessarily indicative of the results that mayof operations to be expected for the year ending March 31, 2014. unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned direct and indirect subsidiaries, Annie’s Homegrown, Inc., Annie’s Enterprises, Inc. and, Napa Valley Kitchen, Inc. and Annie’s Baking, LLC. 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 Certain reclassifications were made to the Company’s stockholders, including funds affiliatedprior financial statements to conform to the current year presentation. These condensed consolidated financial statements should be read in conjunction with Solera Capital, LLC, sold 4.8 million shares at the $19.00 offering pricefinancial statements and notes thereto included in the IPO. The Company sometimes refers to Solera Capital, LLC and its affiliates as Solera in this QuarterlyCompany’s Annual Report on Form 10-Q.Immediately prior10-K for the year ended March 31, 2014.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 stockuse in accounting for revenue arising from contracts with customers 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 becamesupersedes most current revenue recognition guidance. The accounting standard is 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 September 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 OfferingOn August 6, 2012, the Company closed 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.for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The Company did not receive any proceeds fromis currently evaluating 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 StatementOn 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 filingimpact 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. Three Months Ended June 30, 2013 Reported Correction Revised Net sales $ 39,040 $ 278 $ 39,318 Gross profit 14,762 278 15,040 Selling, general and administrative expenses 11,327 37 11,364 Income from operations 3,435 241 3,676 Income before provision for income taxes 3,390 241 3,631 Provision for income taxes 1,361 98 1,459 Net income 2,029 143 2,172 Earnings per share—basic $ 0.12 $ 0.01 $ 0.13 Earnings per share—diluted $ 0.12 $ 0.01 $ 0.13 Three Months Ended June 30, 2013 Reported Correction Revised CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,029 $ 143 $ 2,172 Deferred taxes 31 113 144 Changes in operating assets and liabilities: Accounts receivable 4,606 (278 ) 4,328 Accrued expenses and other non-current liabilities (605 ) 22 (583 ) Net cash provided by (used in) operating activities 3,142 — 3,142 withthat generated 10% or more of the Company’s net sales consist of the following: Net Sales Customer A Customer B Customer C 19 % 16 % 16 % 27 % 13 % 14 % 21 % 13 % 14 % 27 % 11 % 12 % Net Sales Customer A Customer B Customer C Three Months Ended June 30, 2014 12 % 12 % 14 % 2013 24 % 9 % 12 % SeptemberJune 30, 2013,2014, two customers represented 26% and 19%, respectively, of accounts receivable. As of March 31, 2014, three customers represented 31%, 19%17%, and 10%, respectively, of accounts receivable. The same three customers represented 26%, 36% and 10%, respectively, of accounts receivable as of March 31, 2013.Fair Value of Financial InstrumentsFair valuedefined 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—Quoted prices in active markets for identical assets or liabilities.Level 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 termcomprised of the assets or liabilities.Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair valuefollowing (in thousands): June 30,
2014 March 31,
2014Raw materials $ 4,901 $ 1,442 Work in process 815 616 Finished goods 22,003 16,431 Inventory $ 27,719 $ 18,489 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.The carrying amountsCompany’s financial instruments, including accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. 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, it 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 (Note 7).Property and Equipment June 30,
2014 March 31,
2014Equipment and automotive $ 8,807 $ 4,004 Software 3,499 2,722 Leasehold improvements 1,408 1,381 Building and improvements 920 — Plates and dies 501 402 Land 180 — Construction in progress 1,378 1,058 Total property and equipment 16,693 9,567 Less: Accumulated depreciation and amortization (3,478 ) (2,947 ) Property and equipment, net $ 13,215 $ 6,620 software. Capitalized internal-use software, development costswhich are included in property and equipment onin the accompanying condensed consolidated balance sheets. As of September 30, 2013, theThe Company had $2.2$3.2 million and $2.7 million in capitalized software development costs, net of accumulated amortization, including $0.6$0.9 million and $1.0 million in construction in progress. Asconstruction-in-progress as of June 30, 2014 and 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 CostsShipping 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 $1.82014, respectively.$1.5$0.3 million for the three months ended SeptemberJune 30, 20132014 and 2012, respectively and were $3.3 million and $2.8 million for the six months ended September 30, 2013 and 2012, respectively.Research and Development CostsResearch 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 September 30, 2013 and 2012, respectively and were $1.2 million and $1.5 million for the six months ended September 30, 2013 and 2012, respectively.Advertising CostsAdvertising 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 September 30, 2013 and 2012 included in selling, general and administrative expenses were $0.4 million and $0.1 million, respectively, and were $0.8 million and $0.4 million for the six months ended September 30, 2013 and 2012, respectively.Product RecallThe 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 StockBasic 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. The Company utilizes the treasury stock method to calculate potential common shares that underlie its stock options to purchase common stock and restricted stock units. Performance share units were excluded from potential common shares since no shares were issuable as of September 30, 2013 and March 31, 2013. 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.3.Balance Sheet ComponentsInventoryInventory is comprised of the following (in thousands): September 30,
2013 March 31,
2013 $ 2,063 $ 1,391 1,020 2,142 14,250 11,614 $ 17,333 $ 15,147 Property and Equipment, NetProperty and equipment, net are comprised of the following (in thousands): September 30,
2013 March 31,
2013 $ 3,835 $ 2,959 2,410 2,410 1,344 1,195 318 244 7,907 6,808 (2,364 ) (1,760 ) 649 1,090 $ 6,192 $ 6,138 Annie’s, Inc.Notes to Condensed Consolidated Financial Statements(unaudited)The Company incurred depreciation expense of $313,000 and $607,000 for the three and six months ended September 30, 2013, respectively. The depreciation expense for the same periods in the prior year was $248,000 and $433,000, respectively. September 30,
2013 March 31,
2013 $ 1,023 $ 1,023 189 189 1,212 1,212 (126 ) (96 ) $ 1,086 $ 1,116 The Company incurred amortization June 30, 2014 March 31, 2014 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Useful Amount Amortization Amount Amount Amortization Amount Lives Product formulas $ 1,053 $ (132 ) $ 921 $ 1,023 $ (119 ) $ 904 5 - 25 years Other intangible assets 189 (40 ) 149 189 (38 ) 151 5 - 25 years Total $ 1,242 $ (172 ) $ 1,070 $ 1,212 $ (157 ) $ 1,055 $15,000 and $30,000 on its intangible assets duringwas $15,000 for each of the three and six months ended SeptemberJune 30, 2014 and 2013. The amortization expense for the same periods over the prior year was $15,000 and $30,000, respectively.2014,2015, $62,000 for each of the next five years from fiscal 2016 through fiscal 20192020, totaling $310,000, and thereafter is $30,000, $60,000 and $756,000, respectively.SeptemberJune 30, 20132014 and March 31, 20132014 include receivables from contract manufacturers and suppliers of $3.0$2.3 million and $3.9$2.7 million, respectively. September 30,
2013 March 31,
2013 $ 2,310 $ 3,779 5,060 2,299 4,818 4,038 253 260 231 407 980 1,238 $ 13,652 $ 12,021 June 30,
2014 March 31, 2014 Payroll and employee-related expenses $ 3,244 $ 2,907 Inventory received not invoiced 4,114 2,744 Accrued trade expenses 2,373 1,601 Accrued professional fees 1,413 566 Income tax payable — 1,727 Other accrued liabilities 879 1,135 Total accrued liabilities $ 12,023 $ 10,680 Machinery and equipment $ 4,727 Inventory 1,495 Building and improvement 920 Deferred tax asset, long-term 749 Land 180 Deferred revenue (1,859 ) Goodwill 1,296 Total purchase price $ 7,508 4.Credit FacilityIn 2005, theentered intohas a bank linerevolving credit facility of credit agreement (the “Credit Agreement”)$40.0 million with Bank of America, N.A., which provided 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 extended the expiration date to August 20, 2012. In December 2011, the Company entered into a second amended and restated credit facility with Bank of AmericaN. A. that among other things, provided for an increaseexpires in its line of credit to $20.0 million and an 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 2016. The Credit Agreementcredit facility is collateralized by substantially all of the Company’s assets.The Company may select from three interest rate options for borrowings under the credit 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 was 1.4% and 1.5% for the three and six months ended September 30, 2013, respectively. Weighted average interest was 1.5% for each of the three and six months ended September 30, 2012. The Company is required to pay a commitment fee on the 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 September 30, 2013 and March 31, 2013, there was $40.0 million and $33.0 million, respectively, of availability forThere were no borrowings outstanding under the Credit Agreement. Interest is payable monthly.The credit facility contains restrictions on, among other things,and the Company’s ability to incur additional indebtedness, pay dividends or make other distributions and make investments and loans. The credit facility also limits the Company’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 facility) to Adjusted EBITDA (as defined in the credit facility) ratio of not more than 2.75 to 1.0 and a minimum 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 covenants as of SeptemberJune 30, 20132014 and March 31, 2013.5.Related Party TransactionsAgreements with Solera Capital, LLCThe Company had an advisory services agreement with Solera, which it terminated upon the consummation of the IPO2014.as such the Company paid Solera a one-time termination fee of $1.3 million in April 2012.Additionally, the Company is a party to an amended and restated registration rights agreement dated as of November 14, 2005, or Registration Rights Agreement, relating to its shares of common stock held by certain affiliates of Solera and certain other stockholders. On August 6, 2012, the Company closed 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 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.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 other out-of-pocket expenses on Solera’s behalf during the six months ended September 30, 2013.Annie’s, Inc.Notes to Condensed Consolidated Financial Statements(unaudited)6.Commitments and Contingenciesand six months ended SeptemberJune 30, 2014 and 2013 was $156,000$180,000 and $306,000,$150,000, respectively. Rent expense for the three and six months ended September 30, 2012 was $120,000 and $239,000, respectively.Future minimum lease payments under the non-cancelable operating leases as of September 30, 2013 are as follows (in thousands): Lease Payments $ 330 675 673 669 662 586 $ 3,595 Purchase CommitmentsThe 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 September 30, 2013, the Company’s purchase commitments totaled $14.5 million, which will substantially be incurred within a year.In September 2011, the Company entered 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 agreement requires annual payments of at least $150,000 in each 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 Company’s remaining obligation for product formulas was $1.85 million.September 4,December 6, 2013, a private organization called the Center for Environmental Health (“CEH”) issued a 60-day notice of intent to sue (“Notice”)sued the Company and its subsidiary, Annie’s Homegrown, Inc., in Superior Court of the State of California in the County of Alameda 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 under Proposition 65 for alleged exposures to lead and lead compounds from cookies that contain ginger or molasses, 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 seekAnnie’s, Inc.Notes to Condensed Consolidated Financial Statements(unaudited)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 undercosts. The lawsuit, entitled California laws.Although CEH hascompanies that are either suppliers or retailers of ginger- or molasses-containing cookies. The Company intends to vigorously defend against this claim and while the Company does not yetpresently believe that it will have a material adverse effect on its financial condition, given the early stages of the matter, it is not possible to estimate the amount or range of any potential loss.lawsuit namingpurported class action complaint against the Company, orand certain of its current and former officers, in the United States District Court for the Northern District of California. The lawsuit alleges violations of the Exchange Act by the Company and the officers for making allegedly material false and misleading public statements regarding the Company’s business and operations between August 8, 2013 and June 3, 2014 and seeks unspecified monetary damages and other relief against the defendants. On June 30, 2014, Donna Weiss filed a second purported class action complaint in the Northern District of California, against the same parties, containing substantially similar allegations and seeking a substantially similar recovery. Homegrown, Inc., withinagainst the pastCompany’s Board and Solera Capital LLC. On July 29, 2014 Dan Stanick, represented by the same law firm as Ms. Goodman, filed substantially the same complaint in the Superior Court of California, County of Alameda. These lawsuits generally allege breaches of fiduciary duties by each of the Board members and Solera Capital, by engaging in alleged wrongful conduct, including conduct complained of in the securities litigation matters described above, and seek unspecified monetary damages and other relief against the defendants.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.ended March 31, 2014. The Company cannot at this time reasonablyintends to defend vigorously against these claims and while the Company does not presently believe that they will have a material adverse effect on its financial condition, given the early stages of the matters, it is not possible to estimate athe amount or range of exposure, if any potential loss.position.7.Convertible Preferred Stock WarrantIn March 2008, in connection with a prior term loan, the Company had issued a warrant to Hercules Technology II, L.P. (“Hercules”) for the purchaseposition or results of 80,560 shares of Series A 2005 Convertible Preferred Stock at an exercise price of $8.07 per share. The warrant was immediately exercisable on the date of issuanceoperations and was scheduled to expire at the earlier of five years from a qualifying IPO of the Company’s common stock or April 1, 2018. Upon the consummation of the Company’s IPO on April 2, 2012, the warrant became a warrant to purchase 80,560 shares of 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.8.Preferred StockAs 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 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 StockAs of each of September 30, 2013 and March 31, 2013, the Company’s Charter authorized 30,000,000 shares of common stock, $0.001 par value per share, respectively, of which 16,909,546 and 16,849,016 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 whenever funds are legally available therefor and if, as and when declared by the Company’s Board of Directors. No dividends were declared or paid during the six months ended September 30, 2013 and 2012, respectively.10.Stock-Based CompensationThe 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, providedAnnie’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 applicable to a grant. cash flows.$116,000$1.2 million and $231,000$0.3 million for the three months ended SeptemberJune 30, 2014 and 2013, and 2012, respectively, and was $409,000 and $447,000respectively. In finalizing its results for the sixthree months ended SeptemberJune 30, 20132014, the Company identified $0.9 million of stock-based compensation expense that related to periods through March 31, 2014, but were not previously recorded. The Company determined that these costs were immaterial to its previously issued financial statements and 2012, respectively.thestock option activity of stock options during the sixthree months ended SeptemberJune 30, 2013: Number of Shares Weighted-Average
Exercise Price 1,203,990 $ 13.26 42,276 38.62 (77,746 ) 18.31 (60,530 ) 10.46 1,107,990 $ 13.24 Number of Shares Balance at March 31, 2014 913,825 $ 13.58 Granted 73,737 32.48 Forfeited (4,197 ) 19.00 Exercised (55,604 ) 13.20 Balance at June 30, 2014 927,761 $ 15.08 sixthree months ended SeptemberJune 30, 20132014 was $14.03$11.15 per share. The total intrinsic value of stock options exercised during the sixthree months ended SeptemberJune 30, 20132014 was $1.9$1.1 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 activity of unvested restricted stock unitsunit and performance share unitsunit activity during the sixthree months ended SeptemberJune 30, 2013: Shares Weighted-Average
Grant Date
Fair Value 71,165 $ 21.73 47,366 39.91 (4,692 ) 45.27 (13,442 ) 24.16 100,397 $ 28.69 Shares-Based Awards Shares Unvested at March 31, 2014 88,910 $ 31.84 Granted 82,431 32.48 Vested — — Forfeited (1,789 ) 27.40 Unvested at June 30, 2014 169,552 $ 32.20 SeptemberJune 30, 2013,2014, there were 73,33399,458 unvested performance share units outstanding, net of actual forfeitures. As of SeptemberJune 30, 2013,2014, the number of shares estimated to be issued at the end of the performance period(s) is a total of 36,67237,039 shares. The maximum number of total shares that could be issued at the end of performance period(s) is 110,005149,208 shares.SeptemberJune 30, 2013,2014, there was $3.9$5.3 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 3.1 years.Annie’s, Inc.Notes to Condensed Consolidated Financial Statements(unaudited)11.Income Taxesdecreased towas 39.7% and 40.2% for the three months ended SeptemberJune 30, 2014 and 2013, compared to 40.5% for the three months ended September 30, 2012. The effective tax rate was 40.2% for the six months ended September 30, 2013, compared to 40.6% for the six months ended September 30, 2012.respectively. The effective tax rate is based on a projection of the Company’s annual fiscal year results. The effective tax rate for the three and six months ended SeptemberJune 30, 2014 is comparable to the three months ended June 30, 2013 was lower thanafter considering a discrete item in the effective tax ratecurrent period.threeperiod. Diluted earnings (loss) per share is computed by giving effect to all potentially dilutive securities outstanding during the period. The Company utilizes the treasury stock method to calculate potentially dilutive common shares that underlie its stock options to purchase common stock and six months ended Septemberrestricted stock units. Performance share units were excluded from potentially dilutive common shares since the performance condition had not been satisfied as of June 30, 2012 due to the impact of permanent items2014 and federal and state income tax credits.
March 31, 2014.12.Net Income per Share of Common Stock attributable to Common Stockholdersnet incomeearnings (loss) per share of common stock for the periods presented, because including them would have been anti-dilutive: Three Months Ended September 30, Six Months Ended September 30, 2013 2012 2013 2012 85,046 2,562 133,515 2,562 5,434 6,256 12,864 6,256 90,480 8,818 146,379 8,818 Three Months Ended June 30, 2014 2013 Options to purchase common stock 927,761 132,737 Restricted stock units 174,244 7,640 Total 1,102,005 140,377 net incomeearnings (loss) per share attributable to common stockholders is as follows (in thousands, except share and per share amounts): Three Months Ended September 30, Six Months Ended September 30, 2013 2012 2013 2012 $ 5,552 $ 3,785 $ 7,581 $ 5,916 16,896,227 17,070,327 16,882,965 17,003,534 482,058 625,684 480,517 646,468 14,162 6,505 13,164 6,354 17,392,447 17,702,516 17,376,646 17,656,356 $ 0.33 $ 0.22 $ 0.45 $ 0.35 $ 0.32 $ 0.21 $ 0.44 $ 0.34 13.Geographic Areas and Product Sales Three Months Ended June 30, 2014 2013 Earnings (loss) per share: Net income (loss) $ (1,220 ) $ 2,172 Weighted average shares of common stock outstanding used in computing earnings (loss)—basic 17,059,147 16,869,557 Potential dilutive options — 472,117 Potential dilutive restricted stock units — 11,548 Weighted average shares of common stock outstanding used in computing earnings (loss)—diluted 17,059,147 17,353,222 Earnings (loss) per share —Basic $ (0.07 ) $ 0.13 —Diluted $ (0.07 ) $ 0.13 Three Months Ended September 30, Six Months Ended September 30, 2013 2012 2013 2012 $ 56,226 $ 44,423 $ 93,671 $ 77,571 2,424 2,263 4,019 3,408 $ 58,650 $ 46,686 $ 97,690 $ 80,979 Three Months Ended June 30, 2014 2013 United States $ 41,436 $ 37,712 Canada 1,861 1,606 $ 43,297 $ 39,318 Three Months Ended September 30, Six Months Ended September 30, 2013 2012 2013 2012 $ 29,739 $ 21,869 $ 46,293 $ 36,536 22,057 19,146 37,878 32,609 6,854 5,671 13,519 11,834 $ 58,650 $ 46,686 $ 97,690 $ 80,979 Three Months Ended June 30, 2014 2013 Meals $ 17,545 $ 16,672 Snacks 17,861 15,934 Dressings and condiments 5,852 6,712 Sales to Safeway under supply agreement (Note 4) 2,039 — $ 43,297 $ 39,318 14.Product Recall and six months ended SeptemberJune 30, 2013.The Company recorded the estimated customer2014consumer returns2013 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 administrative costs associated with the recall such as legal expenses as selling, general and administrative expenses. The Company recorded $1.2 million for insurance recoveries and a $0.1 million in reduction of net sales reserve in connection with the product recall in each of the three and six months ended September 30, 2013, respectively. The impact of the recall-related charges and related insurance recoveriespresented in the three and six months ended September 30, 2013 is as followstable below (in thousands except per share amount)amounts): Three Months Ended
September 30, 2013 Six Months Ended
September 30, 2013 $ 751 $ 751 490 273 32 (11 ) $ 1,273 $ 1,013 $ 761 $ 606 $ 0.04 $ 0.03 Three Months Ended June 30, 2014 2013 Benefit to/(incremental) cost of sales $ 18 $ (217 ) Benefit to/(incremental) selling, general and administrative expenses — (43 ) Total benefit to/(reduction of) income before income taxes $ 18 $ (260 ) Benefit to/(reduction of) net income (loss) $ 11 $ (156 ) Benefit to/(reduction of) net income (loss) per diluted share $ — $ (0.01 ) recoveries from the involved insurance carriersrecoveries in future quarters.Annie’s, Inc.Notes to Condensed Consolidated Financial Statements(unaudited)15.Subsequent EventsOn November 5, 2013, the Company entered into an agreement
of Financial Results Net sales Cost of sales Gross profit Operating expenses: Selling, general and administrative expenses Total operating expenses Income from operations Interest expense Other income (expense), net Income before provision for income taxes Provision for income taxes Net income GAAP financial measures Reversal of net sales reserve related to product recall Recoveries from insurance carrier related to product recall: Net sales Cost of sales Selling, general and administrative expenses Administrative costs related to product recall Costs associated with our planned acquisition of the Joplin Plant Shelf registration costs Secondary offering costs Change in fair value of convertible preferred stock warrant liability Provision for income taxes Non-GAAP figures Meals Snacks Dressings, condiments and other Net sales Cost of sales Gross profit Gross margin % Operating expenses: Selling, general and administrative expenses Selling, general and administrative expense as a percentage of net sales Income from operations Income from operations as a percentage of net sales Interest expense Other income Provision for income taxes Effective tax rate Net income Meals Snacks Dressings, condiments and other Net sales Cost of sales Gross profit Gross margin % Operating expenses: Selling, general and administrative expenses Income from operations as a percentage of net sales Income from operations Income from operations as a percentage of net sales Interest expense Other income (expense), net Provision for income taxes Effective tax rate Net income affiliate. Cash Accounts receivable, net Accounts payable Accrued liabilities Working capital(1) Cash at beginning of period Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Cash at end of period second quarter. Activities in capital expenditures.20132014 (“fiscal 2013”2014”) included in our Annual Report on Form 10-K (“Form 10-K”) filed with the SEC on June 14, 2013.2, 2014. 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(the “Exchange Act”). These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “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 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” including risks relating to competition; new product introductions; implementation of our growth strategy; our brand; our reputation; product liability claims; competition; new product recalls and related insurance recoveries (if any); economic disruptions; changes in consumer preferences;introductions; ingredient and packaging costs and availability; a material weakness in our internal control over financial reporting; reliance on a limited number of distributors, retailers, contract manufacturers and third-party suppliers and an outside warehouse facility; efficiency projects;our acquisition of Joplin Plant; economic disruptions; changes in consumer preferences; intellectual property and related disputes; regulatory compliance;compliance and independent certification; product labeling and marketing; transportation; our supply-chain; productivity initiatives; our and our customers’ inventory levels; seasonality; employee recruitment and seasonality.retention; information technology systems; and our revolving credit facility. 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.offering consumers great-tasting products in large packaged foods categories. We sell premium products made from high-quality ingredients at affordable prices.sold across the mainstream grocery, mass merchandiser and natural retailer channels. We have the #1number one 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 135 products and are present in over 26,500 retail locations in the United States and Canada.condiments and other productscondiments under the Annie’s Homegrown and Annie’s Naturals brand names. We have experienced strong growth across all product categories, resulting from our focus on supporting our best-selling itemsexisting product portfolio and the introduction of new products in these categories.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 costsitems.in-bound freight charges. Ingredients accounttrends affecting our business the largest portion of the cost of sales followed by contract manufacturing fees and 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, stock-based compensation, commissions to outside sales representatives, legal and professional fees, travel expenses, other facility 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 offiscal 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 RecallWe first began shipping organic frozen pizza in January 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 sourced 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.Direct 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 incurred administrative costs such as legal expenses, accounting fees and public relations expenses.In the second quarter of fiscal 2013, we recorded $1.2 million for insurance recoveries and $0.1 million in reduction of net sales reserve in connection with the recall. We expect to recover additional amounts from the involved insurance carriers in future quarters. Recoveries are recorded to offset the charges once recovery is probable. We expect to receive additional recoveries from the involved insurance carriers in future quarters.Trends and Other Factors Affecting Our BusinessThe growth rates for the U.S. natural and organic food market have been, and are expectedproducts continues 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 productsrise 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 or have introduced 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 awarenessAnnie’s brand,quarterhas contributed to increased growthtook effect in net sales.Our top-line growththe current quarter.driven bythe driver of our increased penetration of mainstream grocery and mass merchandiser channels, improved placementyear-over-year growth, with higher prices contributing approximately one percent to growth for the quarter.mainstream grocery channelquarter was led by snacks, which increased 12% over the prior year. Our meals business grew approximately 5%, and continued product innovation which includes adding new flavorsour dressings and sizes to existing linescondiments business declined 13%. Overall, our revenue growth slowed in the quarter as well as introductiona result of new product lines. In June 2013, we entered into the single-serve microwavable cup segment of the macaroni and cheese category and45% reduction in August 2013, we entered into family-size frozen entrées.We purchase finished productsorders from our contract manufacturers. With an industry-wide commodity cost escalation starting in fiscal 2008, we became more directly involvedlargest customer, UNFI, as they strive to decrease their inventories.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, in some cases, to lock in ingredient pricing for typically six to 12 months forward through non-cancelable purchase commitments, directly or through contract manufacturers. In fiscal 2013, our contracted ingredients represented approximately 50% of our materials costs and over 31% of our cost of sales. These efforts mitigated the impact of volatileorganic wheat, and increasing commodity costs on 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 reductions and productivity improvements in our supply chain. These efficiency projects have focused on selecting more cost-effective contract manufacturers, negotiating lower tolling fees, consolidating in-bound freight, leveraging warehouse expense and reducing ingredient and packaging costs through increased volume buys, contract consolidation, direct purchasing, investment in capital equipment at our contract manufacturers to improve line throughput and reduce 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 innovation; customer and product mix, changes; increased inventory obsolescence;partially offset by sales price increases 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 administrativesaving initiatives. have increased as a result of the investment we have made in building our organization and adding headcount to support our 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, 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. Despite these increased investments, our selling, general and administrative expenses did not increase as significantly as net sales, and resulted in lower expense as a percent of net sales in the three and six months ended September 30, 2013.Results of OperationsThe following table sets forth items included in our consolidated statements of operations in dollars andquarter increased as a percentage of net sales for the periods presented: Three Months Ended
September 30, % of Net
Sales Six Months Ended
September 30, % of Net
Sales 2013 2012 2013 2012 2013 2012 2013 2012 (in thousands, except for percentages) $ 58,650 $ 46,686 100.0 % 100.0 % $ 97,690 $ 80,979 100.0 % 100.0 % 36,749 28,786 62.7 % 61.7 % 61,027 49,272 62.5 % 60.8 % 21,901 17,900 37.3 % 38.3 % 36,663 31,707 37.5 % 39.2 % 12,538 11,539 21.4 % 24.7 % 23,865 21,750 24.4 % 26.9 % 12,538 11,539 21.4 % 24.7 % 23,865 21,750 24.4 % 26.9 % 9,363 6,361 16.0 % 13.6 % 12,798 9,957 13.1 % 12.3 % (104 ) (40 ) (0.2 )% (0.1 )% (175 ) (80 ) (0.2 )% (0.1 )% 32 36 0.1 % 0.1 % 58 85 0.1 % 0.1 % 9,291 6,357 15.8 % 13.6 % 12,681 9,962 13.0 % 12.3 % 3,739 2,572 6.4 % 5.5 % 5,100 4,046 5.2 % 5.0 % $ 5,552 $ 3,785 9.5 % 8.1 % $ 7,581 $ 5,916 7.8 % 7.3 % Our discussiondue to higher ongoing payroll costs, higher audit, legal and other consulting costs as well as additional stock-based compensation expense of our results of operations in this Quarterly Report on Form 10-Q includes certain adjusted net sales, gross profit, gross margin and net income figures that exclude 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. 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 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 $ 58,650 $ 21,901 $ 5,552 $ 3,785 $ 97,690 $ 36,663 $ 7,581 $ 5,916 (121 ) (121 ) (121 ) — (121 ) (121 ) (121 ) — (630 ) (630 ) (630 ) — (630 ) (630 ) (630 ) — — (490 ) (490 ) — — (273 ) (273 ) — — — (40 ) — — — (40 ) — — — 8 — — — 51 — — — 162 — — — 162 — — — 52 — — — 86 — — — — 704 — — — 704 — — — — — — — 13 — — 426 (285 ) — — 308 (286 ) $ 57,899 $ 20,660 $ 4,919 $ 4,204 $ 96,939 $ 35,639 $ 7,124 $ 6,347 Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012Net Sales Three Months Ended September 30, Change % of Net Sales 2013 2012 $ % 2013 2012 (in thousands, except for percentages) $ 29,739 $ 21,869 $ 7,870 36.0 % 50.7 % 46.9 % 22,057 19,146 2,911 15.2 % 37.6 % 41.0 % 6,854 5,671 1,183 20.9 % 11.7 % 12.1 % $ 58,650 $ 46,686 $ 11,964 25.6 % 100.0 % 100.0 % Net sales increased $12.0 million, or 25.6%, to $58.7 million in the three months ended September 30, 2013 compared to $46.7 million in the three months ended September 30, 2012. Net sales for the three months ended September 30, 2013 benefited from insurance recoveries of $0.6 million and a reversal of net sales reserve of $0.1$0.9 million related to our January 2013 voluntary product recall. The net sales increase was primarily driven by volume with approximately 240 basis pointsprior years.growth from higher average selling prices. Distribution gains and our mainline placement initiative contributed to the volume increase, primarily impacting mainstream grocery and mass merchandiser channels. These gains were partially offset by lower volume$(1.9) million versus operating income of $3.7 million a year ago.natural channel, due primarilycurrent quarter was $(0.07) compared to diluted earnings per share of $0.13 a year ago.reductions by a large customer.The increase in net sales reflects a $7.9 million, $2.9 million and $1.2 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 combinedsupplies at closing. We funded the acquisition 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 and granola bars 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 $11.2 million, or 24.0%, to $57.9$7.2 million in cash on hand and restricted cash of $0.3 million. The Joplin Plant has been the three months ended September 30, 2013 compared to $46.7 million inprimary manufacturer of our cookie and cracker products for more than ten years. In connection with the three months ended September 30, 2012.Gross Profit Three Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ 36,749 $ 28,786 $ 7,963 27.7 % $ 21,901 $ 17,900 $ 4,001 22.4 % 37.3 % 38.3 % Gross profit increased $4.0 million, or 22.4%, to $21.9 million in the three months ended September 30, 2013 from $17.9 million in the three months ended 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 1.0 percentage point to 37.3% in the three months ended September 30, 2013 from 38.3% in the three months ended September 30, 2012. The decrease in gross margin is primarily attributable to higher commodity costs, increased inventory obsolesce, 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 reversal of net sales reserve, our gross profit would have increased $2.8 million, or 15.4%, to $20.7 million in the three months ended September 30, 2013 from $17.9 million in the three months ended September 30, 2012 and gross margin would have decreased 2.6 percentage points to 35.7% from 38.3% in the three months ended September 30, 2013 compared to the three months ended September 30, 2012.Operating Expenses Three Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ 12,538 $ 11,539 $ 999 8.7 % 21.4 % 24.7 % Selling, General and Administrative ExpensesSelling, general and administrative expenses increased $1.0 million, or 8.7%, to $12.5 million in the three months ended September 30, 2013 from $11.5 million in the three 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 three months ended September 30, 2013, we incurred $0.2 million in legal, consulting and other costs associated with our planned acquisitionclosing of the Joplin Plant, $52,000 for legal, accounting and other out-of-pocket expenses on Solera’s behalfacquisition, we entered into a three-year supply agreement with an affiliate of Safeway, pursuant to which we will manufacture products for the registration statement on Form S-3 filed with the SEC on July 16, 2013, and $40,000 in insurance recoveries to offset pizza recall related expenses in prior quarters. During the three 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 3.3 percentage points to 21.4% in the three months ended September 30, 2013 from 24.7% in the three months ended September 30, 2012.Income from Operations Three Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ 9,363 $ 6,361 $ 3,002 47.2 % 16.0 % 13.6 % As a result of the factors discussed above, income from operations increased $3.0 million, or 47.2%, to $9.4 million in the three months ended September 30, 2013, from $6.4 million in the three months ended September 30, 2012. Income from operations as a percentage of net sales increased 2.4 percentage points to 16.0% in the three months ended September 30, 2013, from 13.6% in the three months ended September 30, 2012.Interest Expense Three Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ (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) $ 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) $ 3,739 $ 2,572 $ 1,167 45.4 % 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) $ 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, 2012Net Sales Six Months Ended September 30, Change % of Net Sales 2013 2012 $ % 2013 2012 (in thousands, except for percentages) $ 46,293 $ 36,536 $ 9,757 26.7 % 47.4 % 45.1 % 37,878 32,609 5,269 16.2 % 38.8 % 40.3 % 13,519 11,834 1,685 14.2 % 13.8 % 14.6 % $ 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) $ 61,027 $ 49,272 $ 11,755 23.9 % $ 36,663 $ 31,707 $ 4,956 15.6 % 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) $ 23,865 $ 21,750 $ 2,115 9.7 % 24.4 % 26.9 % Selling, General and Administrative ExpensesSelling, 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) $ 12,798 $ 9,957 $ 2,841 28.5 % 13.1 % 12.3 % As a result of the factors discussed above, income from operations increased $2.8 million, or 28.5%, to $12.8 million in the six months ended September 30, 2013, from $10.0 million in the six months ended 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 Six Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ (175 ) $ (80 ) $ (95 ) 118.8 % Interest expense increased in the six months ended September 30, 2013 compared to the six 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 (Expense), Net Six Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ 58 $ 85 $ (27 ) (31.8 )% Other income (expense), net during the six months ended 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.Provision for income taxes Six Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ 5,100 $ 4,046 $ 1,054 26.1 % 40.2 % 40.6 % Our effective tax rate decreased to 40.2% for the six months ended September 30, 2013, compared to 40.6% for the 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 six months ended September 30, 2013 was lower than the effective tax rate for the six 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 Six��Months Ended September 30, Change 2013 2012 $ % (in thousands, except for percentages) $ 7,581 $ 5,916 $ 1,665 28.1 % As a result of the factors discussed above, net income increased $1.7 million, or 28.1%, to $7.6 million in the six months ended September 30, 2013 from $5.9 million in the six 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 six months ended September 30, 2013, our net income would have increased $0.8 million, or 12.2%, to $7.1 million in the six months ended September 30, 2013 from $6.3 million in the six months ended September 30, 2012, which excludes secondary offering costs and the change in fair value of convertible preferred stock warrant liability.Liquidity and Capital Resources September 30,
2013 March 31,
2013 (in thousands) $ 11,090 $ 4,930 19,100 20,015 7,512 4,342 13,652 12,021 34,328 31,925 (1)Working capital consists of total current assets less total current liabilitiesindicated,presented: Three Months Ended
June 30, 2014 2013 2014 2013 (in thousands, except for percentages) Net sales $ 43,297 $ 39,318 100.0 % 100.0 % Cost of sales 31,069 24,278 71.8 % 61.7 % Gross profit 12,228 15,040 28.2 % 38.3 % Selling, general and administrative expenses 14,176 11,364 32.7 % 28.9 % Income (loss) from operations (1,948 ) 3,676 (4.5 )% 9.3 % Interest expense (91 ) (71 ) (0.2 )% (0.2 )% Other income, net 15 26 0.0 % 0.1 % Income (loss) before provision for (benefit from) income taxes (2,024 ) 3,631 (4.7 )% 9.2 % Provision for (benefit from) income taxes (804 ) 1,459 (1.9 )% 3.7 % Net income (loss) $ (1,220 ) $ 2,172 (2.8 )% 5.5 % Three Months Ended June 30, Change % of Net Sales 2014 2013 $ % 2014 2013 (in thousands, except for percentages) Meals $ 17,545 $ 16,672 $ 873 5.2 % 40.5 % 42.4 % Snacks 17,861 15,934 1,927 12.1 % 41.3 % 40.5 % Dressings and condiments 5,852 6,712 (860 ) (12.8 )% 13.5 % 17.1 % Sales to Safeway under supply agreement 2,039 — 2,039 n/m 4.7 % — % Net sales $ 43,297 $ 39,318 $ 3,979 10.1 % 100.0 % 100.0 % beginningmainline placement initiative, recent product introductions and contract manufacturing revenues related to our supply agreement with an affiliate of Safeway. These factors were offset by lower sales in our natural channel, resulting from distributor inventory reductions. Higher average selling prices contributed approximately one percent to net sales growth. Three Months Ended June 30, Change 2014 2013 $ % (in thousands, except for percentages) Cost of sales $ 31,069 $ 24,278 $ 6,791 28.0 % Gross profit $ 12,228 $ 15,040 $ (2,812 ) (18.7 )% Gross margin % 28.2 % 38.3 % Three Months Ended June 30, Change 2014 2013 $ % (in thousands, except for percentages) SG&A $ 14,176 $ 11,364 $ 2,812 24.7 % SG&A as a percentage of net sales 32.7 % 28.9 % Three Months Ended June 30, Change 2014 2013 $ % (in thousands, except for percentages) Interest expense $ (91 ) $ (71 ) $ (20 ) 28.2 % Three Months Ended June 30, Change 2014 2013 $ % (in thousands, except for percentages) Provision for (benefit from) income taxes $ (804 ) $ 1,459 $ (2,263 ) (155.1 )% Effective tax rate 39.7 % 40.2 % netfor operations. In addition, we invested approximately $1.2 million in property and equipment and on April 2, 2014, we funded our acquisition of the Joplin Plant with approximately $7.2 million in cash flowson hand and restricted cash of $0.3 million. In fiscal 2015 we expect our capital expenditures to be approximately $5.0 million to $7.0 million.investing and financing activities and our ending balance of cash: September 30,
2013 September 30,
2012 (in thousands) $ 4,930 $ 562 12,723 9,256 (649 ) (1,009 ) (5,914 ) 5,820 $ 11,090 $ 14,629 Cash Flows from Operating Activities.Operating activities in the sixthree months ended SeptemberJune 30, 2013 provided $12.72014 was $(8.3) million, of cashcompared to $3.1 million in the three months ended June 30, 2013.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$7.7 million increase in inventory and a $0.2 million decrease in prepaid expenses, other current and non-current assets due to insurance recoveriesanticipation of $1.2 million from the insurance carrier against claims submitted for the recall. The increaseseasonally higher sales 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 $9.3 million of cash during the six months ended September 30, 2012, primarily due to our net income of $5.9 million, which included non-cash charges of $0.5 million for depreciation andamortization, $0.4 million for stock-based compensation and a $1.1 million reduction in allowances for trade discounts and other. Changes in operating asset and liability accounts provided an additional $8.6 million of net cash, which was comprised of a $5.4 million increase in accrued expenses, a $4.1 million increase in prepaid expenses, other current and non-current assets, a $1.4 million increase in accounts payable and a $1.3 million decrease in 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 upon consummation of our IPO. This increase in cash was offset by the excess tax benefit from stock-based compensation of $5.3 million.Activities.purchasesacquisition of propertythe Joplin Plant and equipment during the six months ended September 30, 2013 and 2012 was $0.6$1.2 million and $1.0 million, respectively.Activities.Cash used inActivitiestotaled $5.9in the three months ended June 30, 2014 was $1.1 million, compared to $(6.2) million in the sixthree months ended SeptemberJune 30, 2013 including net pay down2013.$0.5financing activities of $1.1 million in the three months ended June 30, 2014 related to cash proceeds of $0.7 million from exercises of stock options and $0.6$0.3 million inof excess tax benefit from stock-based compensation.Cash provided by financing activities totaled $5.8 million during the six months ended September 30, 2012, comprised of:net proceeds of $11.1 million received from common shares issued in the IPO, net of issuance costs;
net pay down of $12.8 million of our credit facility
Contractual Obligations and Commitments
| Payments Due by Period | ||||||||||||||||||||
| Total | Less Than One Year | 1-3 Years | 3-5 Years | More than Five Years | ||||||||||||||||
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Rent obligations(1) | $ | 3,466 | $ | 635 | $ | 1,286 | $ | 1,279 | $ | 266 | ||||||||||
Equipment lease obligations(2) | 129 | 31 | 60 | 38 | — | |||||||||||||||
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Total operating lease obligations | 3,595 | 666 | 1,346 | 1,317 | 266 | |||||||||||||||
Purchase commitments(3) | 14,474 | 14,257 | 217 | — | — | |||||||||||||||
Product formula obligations(4) | 1,850 | 150 | 300 | 1,400 | — | |||||||||||||||
Warehousing overhead obligations(5) | 350 | 200 | 150 | — | — | |||||||||||||||
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Total | $ | 20,269 | $ | 15,273 | $ | 2,013 | $ | 2,717 | $ | 266 | ||||||||||
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| Payments Due by Period | |||||||||||||||||||
| Total | Less Than One Year | 1-3 Years | 3-5 Years | More than Five Years | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Rent obligations(1) | $ | 2,999 | $ | 654 | $ | 1,279 | $ | 1,066 | $ | — | |||||||||
| Equipment lease obligations(2) | 126 | 36 | 73 | 17 | — | ||||||||||||||
| Total operating lease obligations | 3,125 | 690 | 1,352 | 1,083 | — | ||||||||||||||
| Purchase commitments(3) | 25,240 | 24,878 | 362 | — | — | ||||||||||||||
| Product formula obligations(4) | 1,700 | 150 | 300 | 1,250 | — | ||||||||||||||
| Warehousing overhead obligations(5) | 200 | 200 | — | — | — | ||||||||||||||
| Total | $ | 30,265 | $ | 25,918 | $ | 2,014 | $ | 2,333 | $ | — | |||||||||
| (1) | We lease |
| (2) | We lease equipment under |
| (3) | We have |
| (4) |
| (5) | We have an agreement with our contract warehousing company to pay minimum overhead fees through June 2015. |
2013, filed with the SEC on June 14, 2013,2014 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 six months ended SeptemberJune 30, 2013.2014.
2014.as amended,(the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer (who are our Chief Executive Officer and Chief Financial Officer , respectively) as appropriate to allow timely decisions regarding required disclosure.procedures.procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period covered by this report. Based on this review, theevaluation, our principal executive officer and principal financial officer of the Company have concluded that, the Company’sdue to a material weakness in internal control over financial reporting described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective as of SeptemberJune 30, 2013.There waschangechanges in our internal control over financial reporting (as definedidentified in Rules 13a-15(f) and 15d-15(f) underconnection with the Exchange Act) that occurredevaluation of our controls performed during the quarterly periodquarter ended SeptemberJune 30, 20132014 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
loss.September 4,December 6, 2013, a private organization called the Center for Environmental Health (“CEH”) issued a 60-day notice of intent to sue (“Notice”)sued us and our subsidiary, Annie’s Homegrown, Inc., in Superior Court of the State of California in the County of Alameda 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 under Proposition 65 for alleged exposures to lead and lead compounds from cookies that contain ginger or molasses, 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 seekis seeking 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 undercosts. The lawsuit, entitled Center for Environmental Health v.Mondelez International, Inc., et al., Alameda County Superior Court Case No. RG13-677800, names twenty-two other California laws.Although CEH hascompanies that are either suppliers or retailers of ginger- or molasses-containing cookies. We intend to vigorously defend against this claim and while we do not yetpresently believe that it will have a material adverse effect on our financial condition, given the early stages of the matter, it is not possible to estimate the amount or range of any potential loss.naming us oralleges violations of the Exchange Act by the Company and the officers for making allegedly material false and misleading public statements regarding the Company’s business and operations between August 8, 2013 and June 3, 2014 and seeks unspecified monetary damages and other relief against the defendants. On June 30, 2014, Donna Weiss filed a second purported class action complaint in the Northern District of California, against the same parties, containing substantially similar allegations and seeking a substantially similar recovery. Homegrown, Inc., withinagainst our Board and Solera Capital LLC. On July 29, 2014 Dan Stanick, represented by the pastsame law firm as Ms. Goodman, filed substantially the same complaint in the Superior Court of California, County of Alameda. These lawsuits generally allege breaches of fiduciary duties by each of the Board members and Solera Capital, by engaging in alleged wrongful conduct, including conduct complained of in the securities litigation matters described above, and seek unspecified monetary damages and other relief against the defendants.CEH has filed several lawsuitsended March 31, 2014. We intend to defend vigorously against other manufacturersthese claims and retailers regarding various typeswhile we do not presently believe that they will have a material adverse effect on our financial condition, given the early stages 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 reasonablythe matters, it is not possible to estimate athe amount or range of exposure, if any of the potential liability should a suit be brought in connection with the Notice.position.position or results of operations and cash flows. We do not accrue for legal fees that may be incurred in the future in connection with defending litigation.
ContentsThe following risk factorsadded to address our planned acquisition of a snack manufacturing plant in Joplin, Missouri and are supplemental tono material changes from the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for fiscal 2013 filed with the SEC on June 14, 2013.Risks Related to the Acquisitionyear ended March 31, 2014.the Joplin Manufacturing PlantOur business and prospects may be adversely affected by our failure to successfully consummate the recently announced acquisition of the 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 (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 the 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 depend, in part, on our ability to control costs, drive incremental volume and successfully integrate the Joplin manufacturing plant into our company. 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 sales growth in our cookie and cracker business. If the demand for our cookie and cracker products does not increase at the rate we expect over the long term, due to competition or other factors, our results of operations may be adversely affected. We cannot assure you that we will be able to integrate the operations of the Joplin manufacturing plant successfully, control costs, drive incremental volume or operate the Joplin manufacturing plant as profitably as anticipated. Our beliefs regarding the benefits to be derived from the acquisition of the Joplin manufacturing plant are based on numerous assumptions that are subject to risks 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 expect there to be additional costs in connection with the acquisition and integration of the Joplin manufacturing plant into our operations, including costs related to information technology systems, additional personnel needs at both the plant 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 operations and cause our existing business to suffer.In addition, any interruption in, or the 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 have 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 INFORMATIONAgreement of Purchase and SaleOn 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 activeemployees 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 it has fulfilled any collective bargaining obligations that it is required to undertake with the labor 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 will 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 ordinary 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 is 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 FacilityOn November 5, 2013, we entered into an Amendment No. 2 to Second Amended and Restated 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 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, among other things, (1) provide for the issuance of letters of credit under the Loan Agreement, (2) obtain the Bank’s consent to various 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 its entirety by the terms and conditions of the Agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.
Incorporation by Reference Exhibit Number Description Form File No. Exhibit(s) Filing Date /s/ 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.Incorporation by Reference Description Form File No. Exhibit(s) Filing Date 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 June 30, 2014, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Statements of Operations for the three months ended June, 2014 and 2013, (ii) Condensed Balance Sheets as of June 30, 2014 and March 31, 2014, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2014 and 2013, and (v) Notes to Condensed Consolidated Financial Statements. *Furnished or filed herewith, as applicableNovemberAugust 7, 20132014ANNIE’S, INC. By: Kelly J. Kennedy Kelly J. KennedyZahir M. Ibrahim Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer)
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