prmw20190331_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

OR

 

 

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

 


COMMISSION FILE NUMBER 001-34850

PRIMO WATER CORPORATION

 (Exact name of registrant as specified in its charter)

 

  Delaware   82-1161432  
  (State of incorporation)   (I.R.S. Employer Identification No.)  

 

101 North Cherry Street, Suite 501, Winston-Salem, NC 27101 

(Address of principal executive office)     (Zip code)

 

(336) 331-4000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑    No ☐

 

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

 

  Large accelerated filer  ☐ Accelerated filer  ☑   
  Non-accelerated filer  ☐  Smaller reporting company  ☐
  Emerging growth company ☐  

           

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which

registered

$0.001 Par Value Common Stock

PRMW

The NASDAQ Stock Market LLC

 

 

As of May 3, 2019, there were 39,050,029 shares of our Common Stock, par value $0.001 per share, outstanding.

 

 

 

PRIMO WATER CORPORATION

FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2019

 

INDEX

 

PART 1.   Financial Information

 Page number 

   

Item 1.   Financial Statements (Unaudited) 

3

   

Condensed Consolidated Balance Sheets

3

   

Condensed Consolidated Statements of Operations

4

   

Condensed Consolidated Statements of Comprehensive (Loss) Income

5

   

Condensed Consolidated Statements of Stockholders' Equity

6

   

Condensed Consolidated Statements of Cash Flows

7

   

Notes to Condensed Consolidated Financial Statements

8

   

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

19

   

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

25

   

Item 4.   Controls and Procedures

25

   

PART II.  Other Information

 
   

Item 1.   Legal Proceedings

26

   

Item 1A.   Risk Factors

26

   

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

27

   

Item 3.   Defaults Upon Senior Securities

27

   

Item 4.   Mine Safety Disclosures

27

   

Item 5.   Other Information

27

   

Item 6.   Exhibits

28

   

Signatures 

29

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value information)

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 4,223     $ 7,301  

Accounts receivable, net

    21,265       19,179  

Inventories

    13,650       9,965  

Prepaid expenses and other current assets

    8,152       7,004  

Total current assets

    47,290       43,449  
                 

Bottles, net

    4,932       4,618  

Property and equipment, net

    99,558       95,627  

Operating lease right-of-use assets

    3,797        

Intangible assets, net

    77,428       78,671  

Goodwill

    91,917       91,814  

Other assets

    667       661  

Assets held-for-sale at fair value

    5,288       5,288  

Total assets

  $ 330,877     $ 320,128  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 28,558     $ 25,191  

Accrued expenses and other current liabilities

    8,400       8,274  

Current portion of long-term debt and finance leases

    10,979       11,159  

Total current liabilities

    47,937       44,624  
                 

Long-term debt and finance leases, net of current portion and debt issuance costs

    188,112       178,966  

Operating leases, net of current portion

    2,325        

Other long-term liabilities

    579       607  

Liabilities held-for-sale at fair value

    1,438       1,438  

Total liabilities

    240,391       225,635  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Preferred stock, $0.001 par value - 10,000 shares authorized, none issued and outstanding

           

Common stock, $0.001 par value - 70,000 shares authorized, 39,029 and 38,567 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

    39       39  

Additional paid-in capital

    422,052       424,635  

Accumulated deficit

    (330,198 )     (328,599 )

Accumulated other comprehensive loss

    (1,407 )     (1,582 )

Total stockholders’ equity

    90,486       94,493  

Total liabilities and stockholders’ equity

  $ 330,877     $ 320,128  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

   

Three months ended March 31,

 
   

2019

   

2018

 
                 

Net sales

  $ 70,047     $ 73,659  

Operating costs and expenses:

               

Cost of sales

    51,522       53,421  

Selling, general and administrative expenses

    10,330       9,200  

Special items

    261       77  

Depreciation and amortization

    6,550       6,057  

Impairment charges and other

    75       133  

Total operating costs and expenses

    68,738       68,888  

Income from operations

    1,309       4,771  

Interest expense, net

    2,581       5,286  

Loss before income taxes

    (1,272 )     (515 )

Income tax benefit

          (1,725 )

Net (loss) income

  $ (1,272 )   $ 1,210  
                 

(Loss) earnings per common share:

               

Basic

  $ (0.03 )   $ 0.04  

Diluted

  $ (0.03 )   $ 0.04  
                 

Weighted average shares used in computing (loss) earnings per share:

               

Basic

    40,296       33,164  

Diluted

    40,296       34,424  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands)

 

   

Three months ended

 
   

March 31,

 
   

2019

   

2018

 
                 

Net (loss) income

  $ (1,272 )   $ 1,210  

Other comprehensive income (loss):

               

Unrealized gain on investment in Glacier securities

          14  

Foreign currency translation adjustments, net

    175       (262 )

Total other comprehensive income (loss)

    175       (248 )

Comprehensive (loss) income

  $ (1,097 )   $ 962  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

PRIMO WATER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands)

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, December 31, 2017

    30,084     $ 30     $ 345,963     $ (273,752 )   $ (770 )   $ 71,471  

Employee stock compensation plans

    1,584       2       2,345                   2,347  

Shares withheld for taxes related to net share settlement of equity awards

    (665 )     (1 )     (8,326 )                 (8,327 )

Net Income

                      1,210             1,210  

Other comprehensive loss

                            (248 )     (248 )

Balance, March 31, 2018

    31,003     $ 31     $ 339,982     $ (272,542 )   $ (1,018 )   $ 66,453  

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, December 31, 2018

    38,567     $ 39     $ 424,635     $ (328,599 )   $ (1,582 )   $ 94,493  

Effect of ASC 842 adoption

                      (327 )           (327 )

Employee stock compensation plans

    734       1       1,306                   1,307  

Shares withheld for taxes related to net share settlement of equity awards

    (279 )     (1 )     (3,957 )                 (3,958 )

Exercise of common stock warrants

    7             68                   68  

Net loss

                      (1,272 )           (1,272 )

Other comprehensive income

                            175       175  

Balance, March 31, 2019

    39,029     $ 39     $ 422,052     $ (330,198 )   $ (1,407 )   $ 90,486  

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (1,272 )   $ 1,210  

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

               

Depreciation and amortization

    6,550       6,057  

Impairment charges and other

    75       133  

Stock-based compensation expense

    1,475       1,292  

Non-cash interest expense (income)

    96       (20 )

Bad debt expense

    27        

Deferred income tax benefit

          (1,725 )

Realized foreign currency exchange loss and other, net

    (43 )     470  

Changes in operating assets and liabilities:

               

Accounts receivable

    (2,066 )     (4,861 )

Inventories

    (3,686 )     356  

Prepaid expenses and other current assets

    (1,142 )     (1,793 )

Accounts payable

    691       4,259  

Accrued expenses and other current liabilities

    (1,645 )     (912 )

Net cash (used in) provided by operating activities

    (940 )     4,466  
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (6,937 )     (3,490 )

Purchases of bottles, net of disposals

    (747 )     (275 )

Proceeds from the sale of property and equipment

          58  

Additions to intangible assets

    (8 )     (8 )

Net cash used in investing activities

    (7,692 )     (3,715 )
                 

Cash flows from financing activities:

               

Borrowings under Revolving Credit Facilities

    19,200       12,000  

Payments under Revolving Credit Facilities

    (8,600 )     (6,500 )

Payments under Term loans

    (2,375 )     (465 )

Finance lease payments

    (451 )     (418 )

Proceeds from warrant exercises, net

    68        

Stock option and employee stock purchase activity

    39       24  

Bank overdraft

    1,651       2,695  

Payments for taxes related to net share settlement of equity awards

    (3,957 )     (8,327 )

Debt issuance costs and other

    (33 )      

Net cash provided by (used in) financing activities

    5,542       (991 )
                 

Effect of exchange rate changes on cash and cash equivalents

    12       (16 )

Net decrease in cash and cash equivalents

    (3,078 )     (256 )

Cash and cash equivalents, beginning of year

    7,301       5,586  

Cash and cash equivalents, end of period

  $ 4,223     $ 5,330  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

PRIMO WATER CORPORATION 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands, except per share amounts)

 

 

1.

Description of Business and Significant Accounting Policies

 

Business

 

Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” or “us”) is North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada.

 

Unaudited Interim Financial Information

 

The accompanying interim condensed consolidated financial statements and notes have been prepared in accordance with our accounting practices described in our audited consolidated financial statements as of and for the year ended December 31, 2018. In the opinion of management, the unaudited interim condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2018 as filed on Form 10-K (the “2018 Form 10-K”). The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) with respect to annual audited financial statements. Significant accounting policies are summarized in our 2018 Form 10-K.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The update is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The updated guidance eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. The update is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently anticipate that adoption of the guidance will not have a material impact on our consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) along with subsequent amendments to the initial guidance in ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842) requiring lessees to recognize for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

 

We adopted Topic 842 effective January 1, 2019. The effects of adopting Topic 842 were the recognition of $4.2 million of operating lease right-of-use assets and $4.1 million of operating lease liabilities. We applied Topic 842 to all contracts conveying the right to control the use of identified property, plant, or equipment as of January 1, 2019, with comparative periods continuing to be reported under Topic 840 in accordance with the alternative transition method. In the adoption of Topic 842, we elected the package of practical expedients allowing us to carry forward the assessment from Topic 840 of whether our contracts contain or are leases, as well as, the classification and initial direct costs for any expired or existing leases. We also elected the practical expedient allowing us to use hindsight when determining the lease term and assessing impairment of right-of-use assets. For short-term leases with an initial term of 12 months or less, we have made an accounting policy election whereby a right-of-use asset and lease liability is not recognized. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. A portion of our leases contain lease and non-lease components in the form of maintenance and utilities. We have elected to combine non-lease and lease components and treat them as a single lease component, which increases the amount of our lease assets and corresponding liabilities. We implemented a lease management system to assist in centralizing, maintaining and accounting for all leases to ensure compliance with Topic 842 reporting and disclosure requirements. Our accounting for finance leases remains substantially unchanged. The standard does not have a significant impact on our condensed consolidated statements of operations or our condensed consolidated statements of cash flows. See “Note 3 – Leases” for further details.

 

 

2.

Revenue Recognition

 

Sales of Products

 

We earn revenue from contracts with customers, primarily through the sale of our purified, multi-gallon bottled water, self-service filtered drinking water, or through the sale of water dispensers. All revenue recognized in the current period is derived from contracts with customers. We account for these revenues under Topic 606.

 

In certain arrangements, depending on the nature and scope of the contract, our customer may be identified as the end consumer as we are interacting directly with the consumer via an implied contract upon the dispensing of self-service purified water. In other arrangements, our customer may be identified as the retailer, as we enter into contracts with retailers to resell purified multi-gallon bottled water or self-service filtered drinking water to the end consumer on our behalf. Our arrangements may also include standalone purchase orders from retailers to sell water dispensers. In such arrangements, the retailer is our customer.

 

Our performance obligations vary by business segment. Our performance obligations may include the delivery of purified water, the sale of the related bottle, or the sale of a water dispenser. In some instances, our sales arrangements may include multiple of the aforementioned performance obligations.

 

Our arrangements may include the shipping of products to our customers after the performance obligation related to that product has been satisfied. For such arrangements when shipping and handling activities are performed subsequent to the performance obligation being satisfied, we have elected to account for shipping and handling as activities to fulfill the promise to transfer goods. In such instances, we recognize shipping and handling costs at the same time as we recognize revenue.

 

We have no contractual obligation to accept returns nor do we guarantee sales. We may accept returns or issue credits for manufacturer defects or for items that were damaged in transit. We recognize revenue net of an estimated allowance for returns based on historical average return rates.

 

Typically, the transaction price of our products is fixed as agreed upon in our contracts with customers. Our arrangements may include variable consideration in the form of volume incentive agreements or coupon programs. We provide sales incentives to certain retailers in the form of a volume rebate to promote the sale of our products. Generally, the rebates are tiered, such that as sales increase, the rebate percentage increases. We estimate the expected amount of these rebates based on historical sales volume at the time of the original sale. We update our assessment of the amount of rebates that will be earned either quarterly or annually based on our best estimate of the volume levels the customer will reach during the measurement period. We also may include a redeemable coupon for the purchase of purified, multi-gallon bottled water upon the purchase of one of our products. We account for the coupons based on historical redemption rates. The customer’s right to redeem the coupon for a free purified, multi-gallon bottle of water is exercised at or near the purchase of our products such that it does not create a material timing difference in the recognition of revenue.

 

 

Our sales arrangements may involve collecting revenue directly from the end consumer. Tax on filtered water dispensed from a vended machine is exempt in several jurisdictions. For those remaining jurisdictions in which taxes are not exempt, we have analyzed our contracts with customers, concluding that we are the primary obligor to the respective taxing authority, and as such present sales tax charged to the end consumer utilizing the gross method.

 

We recognize revenue on the products we sell at a point in time. The delivery of purified water and sale of the related bottle are completed via a point-of-sale transaction at which time the customer obtains control and remits payment for the product. The shipment of a water dispenser to our customer reflects the transfer of control. We may grant credit limits and terms to customers based upon traditional practices and competitive conditions. In such instances, the terms may vary, but payments are generally due in 30 days or less from the invoicing date. Due to the point-of-sale nature of our products, we have not recognized revenue in the current period for performance obligations satisfied in previous reporting periods and have no unsatisfied performance obligations as of the end of the current period.

 

Multiple Performance Obligations

 

Our sales arrangements may include multiple performance obligations. We identify each of the performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its identified relative selling price. In such arrangements, all of the performance obligations are met simultaneously as our products are concurrently delivered and have the same pattern of transfer to the customer. Thus, revenue is recognized simultaneously for each performance obligation when the customer obtains control of the product.

 

Presentation of Revenue

 

Our arrangements may involve another party selling products to our customers. We partner with retailers to place our self-service filtered water dispensing machines in their stores. We pay retailers a commission on the amount of sales generated from our products. We evaluate whether we control the products before they are transferred to the customer. In such instances where we control our products prior to transferring them to the customer, we are the principal in the transaction and record revenue at the gross amount and record commission paid to retailers as cost of sales. If we conclude that we do not control the products, we are the agent in the transaction and record revenue net of commissions paid to retailers.

 

Accounts Receivable Net of Allowances

 

Trade accounts receivable represent amounts billed to customers and not yet collected, and are presented net of allowances. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis and is our best estimate of the amount of probable credit losses in our existing accounts receivable. Judgements are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. We also maintain an allowance for sales discounts, rebates and promotions based on our arrangements with customers. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. These allowances totaled $1,888 and $1,755 at March 31, 2019 and December 31, 2018, respectively. Bad debt write-offs for the three months ended March 30, 2019 and 2018 were immaterial.

 

Disaggregation of Revenue

 

The tables below present our consolidated net sales by geographic area.

 

   

Three months ended March 31, 2019

 
       
   

Refill

   

Exchange

   

Dispensers

   

Total

 

Geographical area

                               

United States

  $ 37,318     $ 18,522     $ 11,695     $ 67,535  

Canada

    1,008       830       674       2,512  
    $ 38,326     $ 19,352     $ 12,369     $ 70,047  

 

   

Three months ended March 31, 2018

 
       
   

Refill

   

Exchange

   

Dispensers

   

Total

 

Geographical area

                               

United States

  $ 40,145     $ 17,481     $ 12,933     $ 70,559  

Canada

    1,330       777       993       3,100  
    $ 41,475     $ 18,258     $ 13,926     $ 73,659  

 

 

 

3.

Leases

 

We determine if an arrangement is a lease or service contract at inception. Where an arrangement is a lease we determine if it is an operating lease or a finance lease. Subsequently, if the arrangement is modified we reevaluate our classification. We have entered into finance lease agreements for vehicles with lease periods expiring between 2019 and 2024. We have entered into operating lease agreements primarily for buildings and equipment expiring between 2019 and 2028. Our short-term leases are typically in the form of storage units with month-to-month terms located throughout the United States.

 

At lease commencement, we record a lease liability and corresponding right-of-use asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. We generally use the base, non-cancellable lease term to determine lease assets and liabilities. The interest rate implicit in our leases is not readily determinable and as such, the present value of our lease liability is determined using our incremental collateralized borrowing rate under the SunTrust Revolving Facility, which approximates the interest rate on a collateralized basis under similar terms as our underlying leased assets. Operating lease assets also include prepaid lease payments and lease incentives when present.

 

Operating lease right-of-use assets and liabilities are included on our Condensed Consolidated Balance Sheet beginning January 1, 2019. As of March 31, 2019 the current portion of our operating lease liabilities of $1,503 are presented within accrued expenses and other current liabilities. As of March 31, 2019 the long-term portion of our operating lease liabilities of $2,325 is presented within operating leases.

 

Finance lease right-of-use assets are presented within property and equipment, net. As of March 31, 2019 and December 31, 2018 vehicles under finance lease with a cost basis of $8,091 and $7,408, respectively, were included in property and equipment, net. As of March 31, 2019 the current portion of our finance lease liabilities of $1,479 are presented within current portion of long-term debt and finance leases. As of March 31, 2019 the long term portion of our finance lease liabilities of $2,323 are presented within long-term debt and finance leases, net of current portion and debt issuance costs.

 

Components of operating lease expense were as follows:

 

   

Three months ended

March 31, 2019

 
         

Long-term Operating

  $ 437  

Short-term Operating

    116  

Total Operating lease expense

  $ 553  

 

 

As of March 31, 2019, our operating leases had a weighted average remaining lease term of 3.6 years and a weighted average discount rate of 4.76%. Future lease payments under operating leases as of March 31, 2019 were as follows:

 

   

Operating Leases

 

Remainder of 2019

  $ 1,268  

2020

    1,530  

2021

    519  

2022

    421  

2023

    239  

Thereafter

    324  

Total future lease payments

    4,301  

Less: imputed interest

    (474 )

Total lease liability

  $ 3,827  

 

Supplemental information related to operating leases was as follows:

 

   

Three months ended

March 31, 2019

 
         

Operating cash flows used for operating leases

  $ 438  

 

 

 

4.

Ice Assets Held-for-Sale

 

During the quarter ended September 30, 2018, we concluded that a sale of certain assets of our Refill segment (the “Ice Assets”) was probable to take place within one year, which meets the criteria for assets held-for-sale treatment in accordance with FASB ASC Topic 360, Property, Plant, and Equipment. There have been no changes to the estimated fair value of the Ice Assets since December 31, 2018. The Ice Assets fair value less costs to sell at March 31, 2019 was as follows: 

 

   

March 31,

 
   

2019

 

Property and equipment, net

  $ 4,688  

Identifiable intangible assets

    600  

Assets held-for-sale at fair value

  $ 5,288  
         

Contingent consideration

  $ 1,438  

Liabilities held-for-sale at fair value

  $ 1,438  

Ice Assets, net

  $ 3,850  

 

The estimated fair value of the assets held-for-sale does not include accounts receivable for which we anticipate retaining the rights. 

 

 

5.

Debt and Finance Leases, net of Debt Issuance Costs

 

Debt and finance leases, net of debt issuance costs are summarized as follows:

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

Revolving Credit Facility

  $ 13,600     $ 3,000  

Term loans

    182,875       185,250  

Debt issuance costs, net

    (1,186 )     (1,265 )

Total Credit Facilities

    195,289       186,985  

Finance leases

    3,802       3,140  
      199,091       190,125  

Less current portion

    (10,979 )     (11,159 )

Long-term debt and finance leases, net of current portion and debt issuance costs

  $ 188,112     $ 178,966  

 

SunTrust Credit Facility

 

On June 22, 2018, we entered into a senior secured credit facility (the “SunTrust Credit Facility”) that provides for a $190,000 senior term loan facility (the “Term Loan”) and a $30,000 senior revolving loan facility (the “Revolving Facility”). SunTrust Bank serves as the Administrative Agent, Swingline Lender and Issuing Bank under the SunTrust Credit Facility. The SunTrust Credit Facility matures on June 22, 2023. The Term Loan requires annual principal payments (payable in quarterly installments) equal to 5% per annum, or $9,500, with the remaining indebtedness due at maturity. The SunTrust Credit Facility is secured by a first priority security interest in and lien on substantially all of our assets. The SunTrust Credit Facility and related obligations are guaranteed by certain of our domestic subsidiaries.

 

Interest on outstanding borrowings under the SunTrust Credit Facility is calculated at our option at either (1) a base rate (which is derived from the Administrative Agent’s prime lending rate, the federal funds effective rate plus 0.5%, or a London Interbank Offered Rate (“LIBOR”) plus 1.0%) or (2) LIBOR plus, in each case of the foregoing (1) and (2), a margin, initially set at 2.50% per annum with respect to LIBOR loans and 1.50% per annum for base rate loans. A commitment fee, initially set at 0.30% per annum, ranging from 0.15% to 0.30% per annum, is payable quarterly on the average undrawn portion of the Revolving Facility. The margins and commitment fee fluctuate based on our consolidated leverage ratio as specified in the SunTrust Credit Facility. Total issuance costs associated with the SunTrust Credit Facility were $1,700, which have been presented either as a direct deduction from the carrying amount of the debt within long-term debt and finance leases, net of current portion and debt issuance costs, with respect to costs attributable to the Term Loan, or within other assets, with respect to costs attributable to the Revolving Facility. The costs are being amortized as part of interest expense over the term of the SunTrust Credit Facility. As of March 31, 2019, we had $13,600 outstanding borrowings and $16,400 of availability under the Revolving Facility.

 

 

The SunTrust Credit Facility contains a number of affirmative and negative covenants that use consolidated adjusted EBITDA (“Adjusted EBITDA”). Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as net income (loss) before depreciation and amortization; interest expense, net; income taxes; change in fair value of warrant liability; non-cash stock-based compensation expense; non-recurring and acquisition-related costs; and loss (gain) on disposal of property and equipment and other assets, and other.

 

The primary operational covenants included in the SunTrust Credit Facility are as follows: (i) a minimum consolidated fixed charge coverage ratio of 1.10:1.00 beginning with the fiscal quarter ended June 30, 2018 and (ii) a maximum consolidated leverage ratio of 4.50:1.00 beginning with the fiscal quarter ended June 30, 2018 with the financial ratios tested as of the last day of each fiscal quarter. The leverage ratio steps down to 4.25:1.00 with respect to each fiscal quarter ending after June 30, 2019 and on or prior to June 30, 2020 and to 4.00:1.00 with respect to each fiscal quarter ending after June 30, 2020. At March 31, 2019, we were in compliance with all operational covenants, including (i) a consolidated fixed charge coverage ratio of 1.12:1.00 and (ii) a consolidated leverage ratio of 3.80:1.00.

 

Finance Leases

 

As of March 31, 2019, our finance leases had a weighted average remaining lease term of 3.0 years and a weighted average discount rate of 4.76%. Future finance lease obligations as of March 31, 2019 were as follows:

 

   

Finance Leases

 

Remainder of 2019

  $ 1,664  

2020

    1,118  

2021

    718  

2022

    368  

2023

    128  

Thereafter

    7  

Total future lease obligations

    4,003  

Less: imputed interest

    (201 )

Total finance lease liability

  $ 3,802  

 

 

6.

Stock-Based Compensation

 

Overview

 

Total non-cash stock-based compensation expense by award type for all of our plans, all of which is included in selling, general and administrative expenses on our condensed consolidated statements of operations, was as follows:

 

   

Three months ended March 31,

 
   

2019

   

2018

 

Stock options

  $ 78     $ 174  

Restricted stock

    968       809  

Long-Term Performance Plan

    402       272  

Employee Stock Purchase Plan

    27       37  
    $ 1,475     $ 1,292  

 

Long-Term Performance Plan

 

On February 28, 2017, we established the Long-Term Performance Plan (the “LTPP”). The LTPP provides equity grants for eligible employees based on the attainment of certain performance-based targets. Our intention is that all awards under the LTPP will be in the form of equity grants.

 

On March 20, 2017, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2017 through December 31, 2019 (the “March 2017 Grant”). The number of shares earnable under the March 2017 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2017 through 2019.

 

 

On March 9, 2018, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2018 through December 31, 2020 (the “March 2018 Grant”). The number of shares earnable under the March 2018 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2018 through 2020.

 

On March 8, 2019, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2019 through December 31, 2021 (the “March 2019 Grant”). The number of shares earnable under the March 2019 Grant awards vary based on achievement of the established financial targets of net sales and free cash flow on a cumulative basis for fiscal years 2019 through 2021.

 

Restricted Stock under the Plans

 

A summary of restricted stock activity is presented below:

 

   

Number of

Shares

   

Weighted

Average Grant

Date Price Per

Share

 

Unvested at December 31, 2017

    308     $ 12.11  

Granted

    2,081     $ 12.25  

Vested

    (1,945 )   $ 11.87  

Forfeited

    (57 )   $ 12.55  

Unvested at December 31, 2018

    387     $ 12.34  

Granted

    753     $ 15.29  

Vested

    (726 )   $ 11.84  

Forfeited

    (1 )   $ 9.39  

Unvested at March 31, 2019

    413     $ 13.85  

 

 

7.

Special Items

 

We have incurred expenses that either we do not believe to be indicative of our core operations, or we believe are significant to our current operating results warranting separate classification. As such, we have separately classified these expenses as special items. The components of special items are as follows:

 

   

Three months ended March 31,

 
   

2019

   

2018

 
                 

Acquisition-related costs(1)

  $ 56     $ 75  

Other costs(2)

    205       2  

Total

  $ 261     $ 77  

 

 

(1)

Acquisition-related costs that represent transaction expenses associated with the acquisition of Glacier, including fees payable to financial, legal, accounting and other advisors.

 

(2)

Non-recurring costs that represent various other expenses associated with restructuring and other costs which had not occurred in the two years prior to recording them and were not reasonably likely to occur within two years of such recording.

 

 

8.

Commitments and Contingencies

 

Sales Tax

 

We routinely purchase equipment for use in operations from various vendors.  These purchases are subject to sales tax depending on the equipment type and local sales tax regulations; however, we believe certain vendors have not assessed the appropriate sales tax.  For purchases that are subject to sales tax in which we believe the vendor did not assess the appropriate amount, we accrue an estimate of the sales tax liability we ultimately expect to pay.

 

 

Other Contingencies

 

From time to time, we are involved in various claims and legal actions that arise in the normal course of business. Management believes that the outcome of such claims and legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.

 

 

9.

Income Tax (Benefit) Provision

 

For the three months ended March 31, 2019 there was $0 income tax expense recognized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income and tax planning strategies in making this assessment. Accordingly, we have provided a full valuation allowance to offset the net deferred tax assets that are not expected to be realized as of March 31, 2019.

 

For the three months ended March 31, 2018, we recorded an income tax benefit of $1,725 primarily due to the 2017 Tax Cuts and Jobs Act. We recorded an income tax benefit of $2,074 related to the federal net operating loss, which was partially offset by income tax expense of $349 related to goodwill and intangible assets.

 

Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We believe our prior ownership changes have created an annual limit, imposed by Section 382, on the amount of net operating loss we can utilize in a given year.  Realization of the loss carryforwards is dependent upon generating sufficient taxable income prior to the expiration of the loss carryforwards, subject to the Section 382 limitation. 

 

We have no unrecognized tax benefits and there are no uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will increase within the next 12 months. Substantially all tax years remain open by federal, state and foreign tax jurisdictions.

 

 

10.

Fair Value Measurements

 

Fair value rules currently apply to all financial assets and liabilities and for certain nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value. For this purpose, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

 

Level 1 — quoted prices in active markets for identical assets and liabilities.

 

 

Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

 

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

 

 

At March 31, 2019 and December 31, 2018, we held financial assets and liabilities that are required to be measured at fair value on a recurring basis. The financial assets and liabilities held by us and the fair value hierarchy used to determine their fair values are as follows:

 

   

March 31, 2019

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Assets held-for-sale at fair value

  $ 5,288     $     $     $ 5,288  

Total assets

  $ 5,288     $     $     $ 5,288  

Liabilities:

                               

Liabilities held-for-sale at fair value

  $ 1,438     $     $     $ 1,438  

Total liabilities

  $ 1,438     $     $     $ 1,438  

 

 

   

December 31, 2018

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Assets held-for-sale at fair value

  $ 5,288     $     $     $ 5,288  

Total assets

  $ 5,288     $     $     $ 5,288  

Liabilities:

                               

Liabilities held-for-sale at fair value

  $ 1,438     $     $     $ 1,438  

Total liabilities

  $ 1,438     $     $     $ 1,438  

 

The carrying amounts of cash and cash equivalents, accounts receivable, net, operating lease right-of-use assets and corresponding operating lease liabilities, accounts payable, and accrued expenses and other current liabilities, approximate their fair values due to their short maturities. Other long-term liabilities on our condensed consolidated balance sheets are presented at their carrying value, which approximates their fair value.  Based on borrowing rates currently available to us for loans with similar terms and the variable interest rate for borrowings under our SunTrust Credit Facility, the carrying value of debt and finance leases approximates fair value. There have been no changes in the recurring fair value measurements of assets or liabilities from December 31, 2018 to March 31, 2019.

 

There were no material nonrecurring fair value measurements recorded in the three months ended March 31, 2019 and 2018, respectively.

 

 

11.

Earnings Per Share

 

The following table sets forth the calculations of basic and diluted earnings per share:

 

   

Three months ended

March 31,

 
   

2019

   

2018

 

Basic:

               

Net (loss) income

  $ (1,272 )   $ 1,210  
                 

Weighted average shares

    40,296       33,164  
                 

Basic (loss) earnings per share

  $ (0.03 )   $ 0.04  
                 

Diluted:

               

Net (loss) income

  $ (1,272 )   $ 1,210  
                 

Weighted average shares

    40,296       33,164  

Potential shares arising from stock options, restricted stock and warrants

          1,260  

Weighted average shares - diluted

    40,296       34,424  
                 

Diluted (loss) earnings per share

  $ (0.03 )   $ 0.04  

 

For the three months ended March 31, 2019, stock options, restricted stock and warrants with respect to an aggregate of 2,232 shares have been excluded from the computation of the number of shares used in the diluted loss per share because we incurred a net loss for the period and their inclusion would be anti-dilutive.  

 

 

For the three months ended March 31, 2018, stock options, restricted stock and warrants with respect to an aggregate of 386 shares have been excluded from the computation of the number of shares used in the diluted earnings per share because the exercise or grant prices of the awards were greater than the average market price of the underlying common stock and the effect of their inclusion would have been anti-dilutive.

 

 

12.

Segments

 

We have three operating and reportable segments, Primo Refill (“Refill”), Primo Exchange (“Exchange”), and Primo Dispensers (“Dispensers”).

 

Our Refill segment sales consist of the sale of filtered drinking water dispensed directly to consumers through technologically advanced, self-service machines located at major retailers throughout the United States and Canada.

 

Our Exchange segment sales consist of the sale of multi-gallon purified bottled water offered through retailers in the United States and Canada. Our Exchange products are offered through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized.

 

Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major retailers in the United States and Canada, where we recognize revenues for the sale of the water dispensers when the customer obtains control. We support retail sell-through with domestic inventory.

 

We evaluate the financial results of these segments focusing primarily on segment net sales and segment (loss) income from operations before depreciation and amortization (“segment (loss) income from operations”). We utilize segment net sales and segment (loss) income from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.

 

Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays, costs of our field service operations and commissions paid to retailers associated with revenues earned. Cost of sales for Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

 

Selling, general and administrative expenses for Refill, Exchange, and Dispensers consist primarily of personnel costs for operations support as well as other supporting costs for operating each segment.

 

Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.

 

 

The following table presents segment information for the following periods:

 

   

Three months ended March 31,

 
   

2019

   

2018

 

Segment net sales:

               

Refill

  $ 38,326     $ 41,475  

Exchange

    19,352       18,258  

Dispensers

    12,369       13,926  
    $ 70,047     $ 73,659  
                 

Segment income from operations:

               

Refill

  $ 10,084     $ 11,584  

Exchange

    5,468       5,263  

Dispensers

    584       1,144  

Corporate

    (7,941 )     (6,953 )

Special items

    (261 )     (77 )

Depreciation and amortization

    (6,550 )     (6,057 )

Impairment charges and other

    (75 )     (133 )
    $ 1,309     $ 4,771  
                 
                 

Depreciation and amortization expense:

               

Refill

  $ 4,283     $ 4,174  

Exchange

    1,982       1,682  

Dispensers

    50       52  

Corporate

    235       149  
    $ 6,550     $ 6,057  
                 

Capital expenditures:

               

Refill

  $ 4,889     $ 2,569  

Exchange

    2,335       1,026  

Dispensers

    100        

Corporate

    360       170  
    $ 7,684     $ 3,765  

 

 

   

March 31,

2019

   

December 31,

2018

 
                 

Identifiable assets:

               

Refill

  $ 270,015     $ 268,427  

Exchange

    26,897       24,444  

Dispensers

    26,771       20,523  

Corporate

    7,194       6,734  
    $ 330,877     $ 320,128  

 

As of March 31, 2019 and December 31, 2018, we had goodwill of $91,917 and $91,814, respectively, as a result of our acquisition of Glacier Water Services, Inc. in December 2016 (the “Glacier Acquisition”). All goodwill is reported within our Refill segment.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2018. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “feel,” “forecasts,” “intends,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” or other comparable terms. These forward-looking statements are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” in this Item 2 and in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Overview

 

Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” or “us”) is North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada.  We believe the market for purified water continues to grow due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and filtered water.  We are a Delaware corporation that was incorporated in 2017 in connection with the creation of a holding company structure. Our predecessor was founded in Delaware in 2004.

 

Business

 

Our business is designed to generate recurring demand for our purified bottled water or self-service refill drinking water through the sale of innovative water dispensers. This business strategy is commonly referred to as “razor-razorblade” because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water or they are refilled at a self-service refill drinking water location. Each of our multi-gallon Exchange water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. As of March 31, 2019, our products were offered in the United States and in Canada at approximately 45,000 combined retail locations, including Lowe’s Home Improvement, Walmart, Sam’s Club, The Home Depot, Meijer, Kroger, Food Lion, H-E-B Grocery, Circle K, Family Dollar, Walgreens, Albertsons, Publix, and CVS. We believe the market for purified water continues to grow due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and refill drinking water.

 

We provide major retailers throughout the United States and Canada with a single-vendor solution for our three reporting segments, Primo Refill (“Refill”), Primo Exchange (“Exchange”), and Primo Dispensers (“Dispensers”), addressing a market demand that we believe was previously unmet. Our approximately 45,000 locations include approximately 24,300 Refill locations, 13,200 Exchange locations and 7,200 Dispenser locations. Our solutions are easy for retailers to implement, require minimal management supervision and store-based labor, and provide centralized billing and detailed performance reports. Exchange offers retailers attractive financial margins and the ability to optimize typically unused retail space with our displays.  Refill provides drinking water for consumer purchase through the installation of self-service vending displays at retail locations. The Refill business model eliminates the bottling and distribution infrastructure required to deliver traditional bottled water, thereby allowing us to provide refill drinking water at a value price as compared to alternatives in the marketplace. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic, highly predictable revenue and health and wellness focused consumers.

 

Business Segments

 

We have three operating and reportable segments, Refill, Exchange, and Dispensers.

 

Our Refill segment sales consist of the sale of filtered drinking water dispensed directly to consumers through technologically advanced, self-service machines located at major retailers throughout the United States and Canada.

 

Our Exchange segment sales consist of the sale of multi-gallon purified bottled water offered through retailers in the United States and Canada. Our Exchange products are offered through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized.

 

Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major retailers in the United States and Canada, where we recognize revenues for the sale of the water dispensers when the customer obtains control. We support retail sell-through with domestic inventory.

 

 

We evaluate the financial results of these segments focusing primarily on segment net sales and segment (loss) income from operations before depreciation and amortization (“segment (loss) income from operations”). We utilize segment net sales and segment (loss) income from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.

 

Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays, costs of our field service operations and commissions paid to retailers associated with revenues earned. Cost of sales for Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

 

Selling, general and administrative expenses for Refill, Exchange, and Dispensers consist primarily of personnel costs for operations support as well as other supporting costs for operating each segment.

 

Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.

 

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, when we refer to “same-store unit growth”, we are comparing retail locations at which our products have been available for at least 12 months at the beginning of the relevant period. In addition, “gross margin percentage” is defined as net sales less cost of sales, as a percentage of net sales.

 

Results of Operations

 

The following table sets forth our results of operations (dollars in thousands):

 

   

Three months ended March 31,

 
   

2019

   

2018

 

Consolidated statements of operations data:

               

Net sales

  $ 70,047     $ 73,659  

Operating costs and expenses:

               

Cost of sales

    51,522       53,421  

Selling, general and administrative expenses

    10,330       9,200  

Special items

    261       77  

Depreciation and amortization

    6,550       6,057  

Impairment charges and other

    75       132  

Total operating costs and expenses

    68,738       68,888  

Income from operations

    1,309       4,771  

Interest expense, net

    2,581       5,286  

Loss before income taxes

    (1,272 )     (515 )

Income tax benefit

          (1,725 )

Net (loss) income

  $ (1,272 )   $ 1,210  

 

 

The following table sets forth our results of operations expressed as a percentage of net sales (percentage amounts may not add to totals due to rounding):

 

   

Three months ended March 31,

 
   

2019

   

2018

 

Consolidated statements of operations data:

               

Net sales

    100.0 %     100.0 %

Operating costs and expenses:

               

Cost of sales

    73.6       72.5  

Selling, general and administrative expenses

    14.7       12.5  

Special items

    0.4       0.1  

Depreciation and amortization

    9.4       8.2  

Impairment charges and other

    0.1       0.2  

Total operating costs and expenses

    98.2       93.5  

Income from operations

    1.9       6.5  

Interest expense, net

    3.7       7.2  

Loss before income taxes

    (1.8 )     (0.7 )

Income tax benefit

          (2.3 )

Net (loss) income

    (1.8 )%     1.6 %

 

 

The following tables set forth our segment net sales in dollars and as a percent of net sales, segment (loss) income from operations presented on a segment basis and reconciled to our consolidated income from operations, and segment gross margin percentages (dollars in thousands) (percentage amounts may not add to totals due to rounding):

 

   

Three months ended March 31,

 
   

2019

   

2018

 
           

Percent

           

Percent

 
   

Dollars

   

of Net Sales

   

Dollars

   

of Net Sales

 

Segment net sales:

                               

Refill

  $ 38,326       54.7 %   $ 41,475       56.3 %

Exchange

    19,352       27.6 %     18,258       24.8 %

Dispensers

    12,369       17.7 %     13,926       18.9 %

Total net sales

  $ 70,047       100.0 %   $ 73,659       100.0 %
                                 

Segment income from operations:

                               

Refill

  $ 10,084             $ 11,584          

Exchange

    5,468               5,263          

Dispensers

    584               1,144          

Corporate

    (7,941 )             (6,953 )        

Special items

    (261 )             (77 )        

Depreciation and amortization

    (6,550 )             (6,057 )        

Impairment charges and other

    (75 )             (133 )        
    $ 1,309             $ 4,771          

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Segment gross margin:

               

Refill

    30.1 %     31.6 %

Exchange

    30.8 %     31.3 %

Dispensers

    8.4 %     10.2 %

Total gross margin

    26.4 %     27.5 %

 

 

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

Net sales. Net sales decreased 4.9%, or $3.6 million, to $70.0 million for the three months ended March 31, 2019 from $73.7 million for the three months ended March 31, 2018. The change was due to decreases in sales for Refill and Dispensers of $3.1 million and $1.6 million, respectively, partially offset by the $1.1 million increase for Exchange.

 

Refill. Refill net sales decreased 7.6% to $38.3 million for the three months ended March 31, 2019. The decrease in Refill net sales was primarily due to a 14.8% decline in five-gallon equivalent units to 20.4 million attributable in part to fewer locations, partially offset by the implementation of price increases. The decline in Refill net sales was partially attributable to issues identified in 2018 related to the downtime of certain Refill machines and the speed at which those out-of-service machines were identified. Among other factors, these downtime issues may have prevented sales to current or prospective Refill customers, and may have impaired relationships with existing customers or prevented us from establishing relationships with new customers, and the effects of the previously identified downtime issues may continue through the foreseeable future. We continue to drive implementation of a number of changes to our Refill business arising from the identification and correction of these issues, and we believe that these changes will help drive incremental, sustainable and long-term growth in our Refill business.

 

Exchange. Exchange net sales increased 6.0% to $19.4 million for the three months ended March 31, 2019. Exchange sales growth was driven by the increase in U.S. same-store units of 13.6% for the three months ended March 31, 2019. In addition, five-gallon equivalent units for Exchange increased 10.2% to 4.1 million units for the three months ended March 31, 2019 from 3.7 million units for the same period in 2018.  The increase in sales units was greater than the increase in sales dollars, primarily due to the impact of consumer-focused promotional efforts including the instantly redeemable coupons for free water with the purchase of a dispenser.

        

Dispensers. Dispensers net sales decreased 11.2% to $12.4 million for the three months ended March 31, 2019 due primarily to the timing of orders from major retailers compared to the same period in the prior year. Consumer demand, which we measure as the dispenser unit sales to end consumers, was virtually unchanged for the three months ended March 31, 2019 at 185,000 units.

 

Gross margin percentage. The overall gross margin percentage was 26.4% for the three months ended March 31, 2019, compared to 27.5% for the three months ended March 31, 2018.

 

Refill. Gross margin as a percentage of net sales for our Refill segment was 30.1% for the three months ended March 31, 2019 compared to 31.6% for the three months ended March 31, 2018. While certain operational initiatives have driven a reduction in cost of sales, the magnitude of the decrease in net sales for Refill described above drove a lower gross margin percentage due to the fixed nature of certain costs in our Refill segment.

 

Exchange. Gross margin as a percentage of net sales for our Exchange segment was 30.8% for the three months ended March 31, 2019, compared to 31.3% for the three months ended March 31, 2018. The decrease was primarily due to costs associated with certain promotional efforts.

 

Dispensers. Gross margin as a percentage of net sales for our Dispensers segment decreased to 8.4% for the three months ended March 31, 2019 from 10.2% for the three months ended March 31, 2018. The decrease in gross margin percentage was primarily due to an increase in promotional activities as well as a shift in customer mix.

 

Selling, general and administrative expenses (“SG&A”). SG&A increased 12.3% to $10.3 million for the three months ended March 31, 2019 from $9.2 million for the three months ended March 31, 2018. The increase in SG&A expense was driven primarily by the increase in costs associated with marketing, advertising and consumer experience-related initiatives. In addition, we continue to develop and implement new marketing and brand activation strategies in order to increase awareness of the healthy and environmentally-friendly aspects of our products and the risks associated with consumption of tap water, and to drive increased sales and customer loyalty. While we expect these strategies to drive increased net sales and market penetration in the long-term, the near-term incremental costs associated with such strategies may adversely impact our expenses.

 

Special items. Special items were $0.3 million for the three months ended March 31, 2019 compared to $0.1 million for the three months ended March 31, 2018.

 

Depreciation and amortization. Depreciation and amortization increased 8.1% to $6.6 million for the three months ended March 31, 2019 from $6.1 million for the three months ended March 31, 2018.

 

Impairment Charges and Other. Impairment charges and other remained flat at $0.1 million for the three months ended March 31, 2019 and 2018, respectively. Impairment charges and other for the three months ended March 31, 2019 and 2018 were primarily related to losses on disposal of property and equipment.

  

 

Interest expense, net. Interest expense, net decreased to $2.6 million for the three months ended March 31, 2019 from $5.3 million for the three months ended March 31, 2018. The decrease was due primarily to the June 2018 refinancing of our outstanding senior indebtedness which resulted in lower interest rates and lower outstanding indebtedness. See “Note 5 – Debt and Finance Leases, net of Debt Issuance Costs” in the Notes to the Condensed Consolidated Financial Statements.

 

Income Tax Benefit. We recorded no income tax benefit for the three months ended March 31, 2019 compared to a benefit of $1.7 million for the three months ended March 31, 2018. The benefit recorded for the three months ended March 31, 2018 was primarily due to the Tax Cuts and Jobs Act changes that went into effect on January 1, 2018 related to federal net operating losses, which can be carried forward indefinitely.

 

Liquidity and Capital Resources

 

Adequacy of Capital Resources

 

We had capital expenditures of $7.7 million for the three months ended March 31, 2019 and we anticipate net capital expenditures to range between $15.0 million and $20.0 million for the remainder of 2019. Anticipated capital expenditures are related primarily to growth and maintenance in Refill and Exchange locations.

 

At March 31, 2019, our cash and cash equivalents totaled $4.2 million and we had $16.4 million in availability under our Revolving Facility. We anticipate using current cash, cash flow from operations and availability under our Revolving Facility to meet our current needs for working capital and capital expenditures in the ordinary course of business for the foreseeable future. If we do require additional debt financing, such debt financing may not be available to us on terms favorable to us, if at all.

 

Our future capital requirements may vary materially from those now anticipated and will depend on many factors including:  the number of growth initiatives, including our marketing and brand activation strategies and changes implemented in our Refill business resulting from the downtime issues identified in 2018 that we believe will drive same store sales and the rate of growth in new Refill and Exchange locations and related display, rack and reverse osmosis filtration system costs, cost to develop new Dispenser product lines, sales and marketing resources needed to further penetrate our markets, the expansion of our operations in the United States and Canada, the response of competitors to our solutions and products, as well as the completion of future acquisitions.  Historically, we have experienced increases in our capital expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we grow our business.

 

Our ability to satisfy our obligations or to fund planned capital expenditures will depend on our future performance, which to a certain extent is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control.  We also believe that if we pursue any material acquisitions in the foreseeable future we will need to finance this activity through the issuance of equity or additional debt financing, and such financing may not be available to us on terms favorable to us, if at all.

 

Changes in Cash Flows

 

The following table shows the components of our cash flows for the periods presented (in millions):

 

   

Three months ended March 31,

 
   

2019

         

Net cash (used in) provided by operating activities

  $ (0.9 )   $ 4.5  

Net cash used in investing activities

  $ (7.7 )   $ (3.7 )

Net cash provided by (used in) financing activities

  $ 5.5     $ (1.0 )

 

Net Cash Flows from Operating Activities

 

Net cash used in operating activities was $0.9 million for the three months ended March 31, 2019 compared to net cash provided by operating activities of $4.5 million for the same period of the prior year. The decrease was driven by changes in working capital, primarily the increase in inventory on hand at March 31, 2019 compared to March 31, 2018. We expect working capital to be a use of cash in the first half of the year and to be a source of cash in the second half of the year.

 

 

Net Cash Flows from Investing Activities

 

Net cash used in investing activities increased to $7.7 million for the three months ended March 31, 2019 from $3.7 million for the same period of the prior year, primarily due to an increase in purchases of property and equipment related to the growth and maintenance in Refill and Exchange locations.

 

Net Cash Flows from Financing Activities

 

Net cash provided by financing activities was $5.5 million for the three months ended March 31, 2019 compared to net cash used in financing activities of $1.0 million for the same period of the prior year. The change was due primarily to an increase in borrowings under the SunTrust Credit Facility, driven by the decrease in cash flow from operations and the increase in cash used in investing activities, partially offset by a decrease in shares purchased to pay taxes associated with equity awards.

 

Adjusted EBITDA U.S. GAAP Reconciliation

 

Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as net (loss) income before depreciation and amortization; interest expense, net; income taxes; change in fair value of warrant liability; non-cash stock-based compensation expense; non-recurring and acquisition-related costs; and impairment charges and other. Our SunTrust Credit Facility contains financial covenants that use Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management, investors and financial analysts regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors.

 

Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses that are required by U.S. GAAP to be recorded in our financial statements and is subject to inherent limitations. In addition, other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The table below provides a reconciliation between net loss and Adjusted EBITDA (dollars in thousands).

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

Net (loss) income

  $ (1,272 )   $ 1,210  

Depreciation and amortization

    6,550       6,057  

Interest expense, net

    2,581       5,286  

Income tax benefit

          (1,725 )

EBITDA

    7,859       10,828  

Non-cash, stock-based compensation expense

    1,475       1,292  

Special items (1)

    261       77  

Impairment charges and other

    173       184  

Adjusted EBITDA

  $ 9,768     $ 12,381  

 

 

(1)

For the three months ended March 31, 2019, “Special items” consisted of approximately $0.1 million of acquisition-related expenses associated with the Glacier Acquisition, including fees payable to legal advisors associated with restructuring, and $0.2 million of costs associated with restructuring and other costs. For the three months ended March 31, 2018, “Special items” consisted of approximately $0.1 million of transactional expenses associated with the Glacier Acquisition, including fees payable to financial, legal, accounting and other advisors.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we were not a party to any derivative contracts or synthetic leases as of March 31, 2019.

 

Inflation and Changing Prices

 

In the three most recent fiscal years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

 

 

Seasonality; Fluctuations of Results

 

We have experienced and expect to continue to experience seasonal fluctuations in our sales and operating income. Our sales and operating income have been highest in the spring and summer and lowest in the fall and winter. Our Refill and Exchange segments, which generally enjoy higher margins than our Dispensers segment, experience higher sales and operating income in the spring and summer. We have historically experienced higher sales and operating income from our Dispensers segment in spring and summer; however, we believe the seasonality of dispenser sales are more dependent on retailer inventory management and purchasing cycles and not correlated to weather. Sustained periods of poor weather, particularly in the spring and summer, can negatively impact our sales in our higher margin Refill and Exchange segments. Accordingly, our results of operations in any quarter will not necessarily be indicative of the results that we may achieve for a fiscal year or any future quarter.

 

Critical Accounting Policies and Estimates

 

Other than the adoption of ASC 842 on January 1, 2019, as described in “Note 3 - Leases” in the condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Cautionary Note Regarding Forward-Looking Statements

 

This document includes and other information we make public from time to time may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, projections, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “feel,” “forecasts,” “intends,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” and similar expressions to identify our forward-looking statements. These forward-looking statements are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known and unknown risks, including those factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

There has been no material change in our exposure to market risk during the three months ended March 31, 2019. Please refer to "Quantitative and Qualitative Disclosures about Market Risk" contained in Part II, Item 7A of our Form 10-K for the year ended December 31, 2018 for a discussion of our exposure to market risk.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures 

 

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

 

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Not applicable.

 

Item 1A.  Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in subsequently filed Quarterly Reports on Form 10-Q. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Other than as set forth below, there have been no material changes to such risk factors.

 

Recently imposed tariffs and other potential changes in international trade relations implemented by the U.S. presidential administration could have a material adverse effect on our business, financial condition, cash flows and results of operations. Further, any suspension, revocation, expiration, non-renewal or other loss of our recently secured temporary exemption from existing tariffs (including the extension of applicable tariffs beyond the duration of our temporary exemption) could adversely affect our business, financial condition, cash flows and results of operation.

 

Currently, all of our Dispensers are assembled by independent manufacturers in, and imported from, China. These import operations are subject to international trade regulations, including import charges and other agreements among the United States and its trading partners, including China.

 

The U.S. government recently proposed, among other actions, imposing new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China has responded by proposing new or higher tariffs on specified products imported from the United States. In a notice published on June 20, 2018, the Office of the United States Trade Representative (the “USTR”) issued a determination and request for public comment under Section 301 under the Trade Act of 1974 (the “Notices”) concerning the proposed imposition of an additional 25% tariff on specified products from China (the “June 2018 Tariffs”). The list of products set forth in the Notice included self-contained drinking water coolers, including our Dispensers, which we import from China. We have worked with our suppliers and secured a reduction in the amount we pay for Dispensers and with our customers to increase our prices to include the remaining incremental cost associated with the Tariff as implemented in the Notice. We believe the cost reduction and increased pricing will offset the impact of the Tariff as implemented in the Notice, however, if retailers increase prices to consumers, consumer demand may be reduced, and any increases in the rate of the Tariff or any additional tariffs may adversely affect us in a manner where we cannot negotiate cost reductions or price increases to offset any potential impact.

 

In July 2018, we applied to the USTR for a Request for Exclusion from the Tariffs for our Dispensers (the “Request for Exclusion”). Our Request for Exclusion was granted by the USTR in the fourth quarter of 2018. The exclusion is retroactive to July 6, 2018, and any amounts we paid in respect of such June 2018 Tariffs between the time of their implementation and the granting of our Request for Exclusion will be reimbursed. However, the exemption granted to us by the USTR is temporary and expires after one year from its granting. Any suspension, revocation, expiration, non-renewal or other loss of our temporary exemption from the June 2018 Tariffs, or the extension of the June 2018 Tariffs beyond the expiration date of our temporary exemption, could adversely affect our business, financial condition, cash flows and results of operations.

 

In addition, in September 2018, the USTR finalized a new list of products imported from China that are subject to a new 10% tariff, which went into effect on September 24, 2018 and which was scheduled to increase to 25% on January 1, 2019 (the “List 3 Tariffs” and, together with the June 2018 Tariffs, the “Tariffs”).  On February 28, 2019, President Trump delayed the increase from 10% to 25% to provide time for further negotiations with Chinese trade representatives.  On May 5, 2019, President Trump announced his intention to implement the previously-delayed increase in the List 3 Tariffs from 10% to 25%, effective May 10, 2019. In the event the List 3 Tariffs are increased to 25%, the USTR is considering making available an opportunity to allow certain affected parties to apply for a request for exclusion from the List 3 Tariffs. 

 

 

We import a small number of lower-priced products subject to the List 3 Tariffs, and we are continuing to monitor the U.S. government’s actions with respect to such List 3 Tariffs and will evaluate available options with respect thereto. The List 3 Tariffs, including the rate thereof and the availability of a request for exclusion process, are subject to the discretion of the President and may change at any time without advanced notice as to the timing or magnitude of such changes. The continued implementation of such List 3 Tariffs, and any increase in the duties subject to such List 3 Tariffs or any continuing or increased uncertainty with respect to the List 3 Tariffs, may have an adverse impact on our business, financial condition, cash flows and results of operations.

 

These Tariffs, along with any additional tariffs or other trade actions (including duties, import charges or other similar restrictions or other reductions in trade) that may be implemented, may further increase the cost of certain materials and/or products that we import from China, including our Dispensers, or any other foreign nation from which we may source any goods, thereby adversely affecting our profitability. These actions could require us to raise our prices, which could decrease demand for our products or otherwise impact the marketability of our products to retailers and consumers. The Tariffs could also force us to seek alternative suppliers for our Dispensers and other materials we import from China or force our existing suppliers to establish new manufacturing operations in other countries, and the products produced by such manufacturers may be of inferior quality, cost more than the Dispensers we currently import from China, or otherwise be sourced from suppliers with unproven operations or reliability. As a result, these actions, including potential retaliatory measures by China, may adversely impact our business. Given the uncertainty regarding the scope and duration of these trade actions by the United States or other countries, as well as the potential for additional trade actions, the impact on our operations and results remains uncertain and could be significant. To the extent that our supply chain, costs, sales or profitability are negatively affected by the Tariffs or any other trade actions (including duties, import charges or other similar restrictions or other reductions in trade), our business, financial condition and results of operations may be materially adversely affected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

 

Item 6. Exhibits

 

EXHIBIT INDEX

Exhibit
Number

Description

   

2.1

Agreement and Plan of Merger, dated May 18, 2017, by and among Primo Water Corporation, Primo Water Operations, Inc. and New PW Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 19, 2017)

3.1

Amended and Restated Certificate of Incorporation of Primo Water Corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 19, 2017)

3.2

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Primo Water Corporation (incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (File No. 333-200016) filed on May 19, 2017)

3.3

Bylaws of Primo Water Corporation (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017)

4.1

Specimen Certificate representing shares of common stock of Primo Water Corporation (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 19, 2017)

4.2 Amendment to Sixth Amended and Restated Certificate of Incorporation of Primo Water Operations, Inc. (contained in Certificate of Merger) (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on May 19, 2017)
10.1 Primo Water Corporation 2019 Omnibus Long-Term Incentive Plan (filed herewith)*

10.2

Amendment No. 3 to Primo Water Corporation 2010 Employee Stock Purchase Plan (file herewith)*

31.1

Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2

Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1

Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

 

 

 

(1)

Included herewith

 

 

* Indicates management contract or compensatory plan or arrangement.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

PRIMO WATER CORPORATION

 

(Registrant)

     

 

 

 

Date: May 9, 2019

By:

  /s/ Matthew T. Sheehan

 

 

Matthew T. Sheehan

 

 

Chief Executive Officer

     

Date: May 9, 2019

By:

  /s/ David J. Mills

   

David J. Mills

   

Chief Financial Officer

 

29

ex_143603.htm

Exhibit 10.1

 

PRIMO WATER CORPORATION

 

2019 OMNIBUS LONG-TERM INCENTIVE PLAN

 

Primo Water Corporation, a Delaware corporation (the “Company”), sets forth herein the terms of its 2019 Omnibus Long-Term Incentive Plan (the “Plan”), as follows:

 

1.

PURPOSE

 

The Plan is intended to enhance the Company’s and its Affiliates’ (as defined herein) ability to attract and retain highly qualified officers, non-employee members of the Board, key employees, consultants and advisors, and to motivate such officers, non-employee members of the Board, key employees, consultants and advisors to serve the Company and its Affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other stock-based awards and cash awards. Any of these awards may, but need not, be made as performance incentives to reward attainment of performance goals in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein. Upon becoming effective, the Plan replaces, and no further awards shall be made under the Primo Water Corporation 2010 Omnibus Long-Term Incentive Plan.

 

2.

DEFINITIONS

 

For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:

 

2.1.

“Affiliate” means any company or other trade or business that “controls,” is “controlled by” or is “under common control” with the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary.

 

2.2.

“Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, other Stock-based Award or cash award under the Plan.

 

2.3.

“Award Agreement” means a written agreement between the Company and a Grantee, or notice from the Company or an Affiliate to a Grantee that evidences and sets out the terms and conditions of an Award.

 

2.4.

“Board” means the Board of Directors of the Company.

 

 

 

 

 

2.5.

“Cause” shall be defined as that term is defined in a Grantee’s offer letter or other applicable employment agreement; or, if there is no such definition “Cause” means, as determined by the Company and unless otherwise provided in an applicable Award Agreement with the Company or an Affiliate: (i) engaging in any act, or failing to act, or misconduct that in any such case is injurious to the Company or its Affiliates; (ii) gross negligence or willful misconduct in connection with the performance of duties; (iii) conviction of (or entering a plea of guilty or nolo contendere to) a criminal offense (other than a minor traffic offense); (iv) fraud, embezzlement or misappropriation of funds or property of the Company or an Affiliate; (v) material breach of any term of any employment, consulting or other services, confidentiality, intellectual property or non-competition agreement, if any, between the Service Provider and the Company or an Affiliate; (vi) the entry of an order duly issued by any regulatory agency (including federal, state and local regulatory agencies and self-regulatory bodies) having jurisdiction over the Company or an Affiliate requiring the removal from any office held by the Service Provider with the Company or prohibiting or materially limiting a Service Provider from participating in the business or affairs of the Company or any Affiliate; or (vii) the revocation or threatened revocation of any of the Company’s or any Affiliate’s government licenses, permits or approvals, which is primarily due to the Service Provider’s action or inaction and such revocation or threatened revocation would be alleviated or mitigated in any material respect by the termination of the Service Provider’s Services.

 

2.6.

“Change in Control” shall have the meaning set forth in Section 15.2.

 

2.7.

“Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.

 

2.8.

“Committee” means the Compensation Committee of the Board, or such other committee as determined by the Board. The Compensation Committee of the Board may, in its discretion, designate a subcommittee of its members to serve as the Committee (to the extent the Board has not designated another person, committee or entity as the Committee). The Board will cause the Committee to satisfy the applicable requirements of any stock exchange on which the Common Stock may then be listed. For purposes of Awards to Grantees who are subject to Section 16 of the Exchange Act, Committee means all of the members of the Compensation Committee who are “non-employee directors” within the meaning of Rule 16b-3 adopted under the Exchange Act.

 

2.9.

“Company” means Primo Water Corporation, a Delaware corporation, or any successor corporation.

 

2.10.

“Common Stock” or “Stock” means a share of common stock of the Company, par value $.001 per share.

 

2.11.

“Disability” means as determined by the Company and unless otherwise provided in an applicable Award Agreement with the Company or an Affiliate, the Grantee is unable to perform each of the essential duties of such Grantee’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided, however, that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Grantee’s Service, “Disability” means “permanent and total disability” as set forth in Section 22(e)(3) of the Code.

 

2.12.

“Effective Date” means May 2, 2019.

 

2.13.

“Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as hereafter amended.

 

2.14.

“Fair Market Value” of a share of Common Stock as of a particular date shall mean (1) if the Common Stock is listed on a national securities exchange, the closing or last price of the Common Stock on the composite tape or other comparable reporting system for the applicable date, or if the applicable date is not a trading day, the trading day immediately preceding the applicable date, or (2) if the shares of Common Stock are not then listed on a national securities exchange, or the value of such shares is not otherwise determinable, such value as determined by the Board in good faith in its sole discretion (but in any event not less than fair market value within the meaning of Section 409A).

 

2.15.

“Family Member” means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive relationships, of the applicable individual, any person sharing the applicable individual’s household (other than a tenant or employee), a trust in which any one or more of these persons have more than fifty percent of the beneficial interest, a foundation in which any one or more of these persons (or the applicable individual) control the management of assets, and any other entity in which one or more of these persons (or the applicable individual) own more than fifty percent of the voting interests.

 

 

 

 

 

2.16.

“Grant Date” means, as determined by the Board, the latest to occur of (i) the date as of which the Board approves an Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be specified by the Board in the Award Agreement.

 

2.17.

“Grantee” means a person who receives or holds an Award under the Plan.

 

2.18.

“Incentive Stock Option” means an “incentive stock option” within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time.

 

2.19.

“Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

 

2.20.

“Option” means an option to purchase one or more shares of Stock pursuant to the Plan.

 

2.21.

“Option Price” means the exercise price for each share of Stock subject to an Option.

 

2.22.

“Performance Award” means an Award made subject to the attainment of performance goals (as described in Section 12) over a performance period determined by the Board.

 

2.23.

“Predecessor Plan” means each of (i) the Primo Water Corporation 2010 Omnibus Long-Term Incentive Plan and (ii) the Primo Water Corporation (formerly, Primier Corporation) 2004 Stock Plan.

 

2.24.

“Purchase Price” means the purchase price for each share of Stock pursuant to a grant of Restricted Stock.

 

2.25.

“Reporting Person” means a person who is required to file reports under Section 16(a) of the Exchange Act.

 

2.26.

“Restricted Stock” means shares of Stock, awarded to a Grantee pursuant to Section 10 hereof.

 

2.27.

“Restricted Stock Unit” means a bookkeeping entry representing the equivalent of shares of Stock, awarded to a Grantee pursuant to Section 10 hereof.

 

2.28.

“SAR Exercise Price” means the per share exercise price of a SAR granted to a Grantee under Section 9 hereof.

 

2.29.

“SEC” means the United States Securities and Exchange Commission.

 

2.30.

“Section 409A” shall mean Section 409A of the Code and all formal guidance and regulations promulgated thereunder.

 

2.31.

“Securities Act” means the Securities Act of 1933, as now in effect or as hereafter amended.

 

2.32.

“Separation from Service” means a termination of Service by a Service Provider, as determined by the Board, which determination shall be final, binding and conclusive; provided if any Award governed by Section 409A is to be distributed on a Separation from Service, then the definition of Separation from Service for such purposes shall comply with the definition provided in Section 409A.

 

 

 

 

 

2.33.

“Service” means service as a Service Provider to the Company or an Affiliate. Unless otherwise stated in the applicable Award Agreement, a Grantee’s change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate.

 

2.34.

“Service Provider” means an employee, officer, non-employee member of the Board, consultant or advisor of the Company or an Affiliate.

 

2.35.

“Stock Appreciation Right” or “SAR” means a right granted to a Grantee under Section 9 hereof.

 

2.36.

“Subsidiary” means any “subsidiary corporation” of the Company within the meaning of Section 424(f) of the Code.

 

2.37.

“Substitute Award” means any Award granted in assumption of or in substitution for an award of a company or business acquired by the Company or a Subsidiary or with which the Company or an Affiliate combines, shares issued or issuable.

 

2.38.

“Ten Percent Stockholder” means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.

 

2.39.

“Termination Date” means the date that is ten (10) years after the Original Effective Date, unless the Plan is earlier terminated by the Board under Section 5.2 hereof.

 

2.40.

“Transaction” shall have the meaning set forth in Section 15.2.

 

 

 

 

3.

ADMINISTRATION OF THE PLAN

 

3.1.

General.

 

The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Company’s certificate of incorporation and bylaws and applicable law. The Board shall have the power and authority to delegate its responsibilities hereunder to the Committee, which shall have full authority to act in accordance with its charter, and with respect to the authority of the Board to act hereunder, all references to the Board shall be deemed to include a reference to the Committee, to the extent such power or responsibilities have been delegated. Except as specifically provided in Section 14 or as otherwise may be required by applicable law, regulatory requirement or the certificate of incorporation or the bylaws of the Company, the Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan. The Committee shall administer the Plan; provided that, the Board shall retain the right to exercise the authority of the Committee to the extent consistent with applicable law and the applicable requirements of any securities exchange on which the Common Stock may then be listed. The interpretation and construction by the Board of any provision of the Plan, any Award or any Award Agreement shall be final, binding and conclusive. Without limitation, the Board shall have full and final authority, subject to the other terms and conditions of the Plan, to:

 

(i)

designate Grantees;

 

(ii)

determine the type or types of Awards to be made to a Grantee;

 

(iii)

determine the number of shares of Stock to be subject to an Award;

 

(iv)

establish the terms and conditions of each Award (including, but not limited to, the Option Price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options);

 

(v)

prescribe the form of each Award Agreement; and

 

(vi)

amend, modify, or supplement the terms of any outstanding Award including the authority, in order to effectuate the purposes of the Plan, to modify Awards to foreign nationals or individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom.

 

To the extent permitted by applicable law, the Board may delegate its authority as identified herein to any individual or committee of individuals (who need not be directors), including without limitation the authority to make Awards to Grantees who are not subject to Section 16 of the Exchange Act or who are not Covered Employees. To the extent that the Board delegates its authority to make Awards as provided by this Section 3.1, all references in the Plan to the Board’s authority to make Awards and determinations with respect thereto shall be deemed to include the Board’s delegate. Any such delegate shall serve at the pleasure of, and may be removed at any time by the Board.

 

3.2.

Restrictions; No Repricing.

 

Notwithstanding the foregoing, no amendment or modification may be made to an outstanding Option or SAR that causes the Option or SAR to become subject to Section 409A, without the Grantee’s written prior approval. Notwithstanding any provision herein to the contrary, the repricing of Options or SARs is prohibited without prior approval of the Company’s stockholders. For this purpose, a “repricing” means any of the following (or any other action that has the same effect as any of the following): (A) changing the terms of an Option or SAR to lower its Option Price or SAR Exercise Price; (B) any other action that is treated as a “repricing” under generally accepted accounting principles; and (C) repurchasing for cash or canceling an Option or SAR at a time when its Option Price or SAR Exercise Price is greater than the Fair Market Value of the underlying shares in exchange for another Award, unless the cancellation and exchange occurs in connection with a change in capitalization or similar change under Section 15. A cancellation and exchange under clause (C) would be considered a “repricing” regardless of whether it is treated as a “repricing” under generally accepted accounting principles and regardless of whether it is voluntary on the part of the Grantee.

  

 

 

 

3.3.

Award Agreements; Breach of Covenants; Cause.

 

The grant of any Award may be contingent upon the Grantee executing the appropriate Award Agreement. The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof or otherwise in competition with the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul an Award if the Grantee is terminated for Cause as defined in the applicable Award Agreement or the Plan, as applicable.

 

3.4.

Minimum Vesting.

 

Notwithstanding any other provision of the Plan to the contrary, equity-based Awards granted under the Plan shall vest no earlier than the first anniversary of the date the Award is granted, excluding, for this purpose, any (i) Substitute Awards, (ii) shares delivered in lieu of fully vested cash Awards, and (iii) Awards to non-employee members of the Board that vest on the earlier of the one year anniversary of the date of grant or the next annual meeting of stockholders (provided that such vesting period under this clause (iii) may not be less than 50 weeks after grant); provided that the Board may grant equity-based Awards without regard to the foregoing minimum vesting requirement with respect to a maximum of five percent (5%) of the available share reserve authorized for issuance under the Plan pursuant to Section 4 (subject to adjustment under Section 15); and, provided further, for the avoidance of doubt, that the foregoing restriction does not apply to the Committee’s discretion to provide for accelerated exercisability or vesting of any Award, including in cases of retirement, death, disability or a Change in Control, in the terms of the Award or otherwise.

 

3.5.

Clawbacks.

 

If any of the Company’s financial statements are required to be restated, the Company may recover all or a portion of any Award made to any Grantee with respect to any fiscal year of the Company the financial results of which are negatively affected by such restatement. The amount to be recovered shall be the amount, as determined by the Committee, by which the affected Award exceeds the amount that would have been payable had the financial statements been initially filed as restated. In no event shall the amount to be recovered by the Company be less than the amount required to be repaid or recovered as a matter of law.

 

3.6.

Deferral Arrangement.

 

The Board may permit or require the deferral of any Award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish and in accordance with Section 409A, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Stock units.

 

3.7.

No Liability.

 

No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan, any Award or Award Agreement.

 

3.8.

Book Entry.

 

Notwithstanding any other provision of this Plan to the contrary, the Company may elect to satisfy any requirement under this Plan for the delivery of stock certificates through the use of book-entry.

 

 

 

 

4.

STOCK SUBJECT TO THE PLAN

 

Subject to adjustment as provided in Section 15 hereof, the maximum number of shares of Stock available for issuance under the Plan shall be 1,500,000. In addition, shares of Stock underlying any outstanding award granted under a Predecessor Plan shall be available for the grant of new Awards under this Plan to the extent that, following the Effective Date, either: (i) the award expires, or is terminated, surrendered or forfeited for any reason without issuance of such shares, or (ii) shares of Stock are tendered (by either actual delivery or by attestation) or withheld from the award to cover any tax withholding requirement with respect to the award (not in excess of maximum statutory rates). As provided in Section 1, no new awards shall be granted under the Primo Water Corporation 2010 Omnibus Long-Term Incentive Plan following the Effective Date. Stock issued or to be issued under the Plan shall be authorized but unissued shares; or, to the extent permitted by applicable law, issued shares that have been reacquired by the Company.

 

Subject to adjustments in accordance with Section 15 hereof, 1,500,000 of such shares of Stock available for issuance under the Plan shall be available for issuance pursuant to Incentive Stock Options.

 

The Board may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or Substitute Awards) and make adjustments in accordance with Section 15. To the extent that an Award is canceled, expired, forfeited, settled in cash, settled by issuance of fewer shares than the number underlying the Award, or otherwise terminated without delivery of shares to the Grantee, the shares retained by or returned to the Company will be available under the Plan. If the Option Price of any Option, or if pursuant to Section 17.3 the withholding obligation of any Grantee with respect to an Option or other Award, is satisfied by tendering shares of Stock to the Company (by either actual delivery or by attestation) or by withholding shares of Stock, the number of shares of Stock issued net of the shares of Stock tendered or withheld shall be deemed delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan, and shares that are withheld from such an Award or separately surrendered by the Grantee in payment of any Option Price or taxes relating to such an Award shall be deemed to constitute shares not delivered to the Grantee and will be available under the Plan. In addition, in the case of any Substitute Award, such Substitute Award shall not be counted against the number of shares reserved under the Plan.

 

The maximum value of Awards granted during any calendar year to any nonemployee member of the Board or the board of directors of an Affiliate (“Nonemployee Director”), taken together with any cash fees paid to such Nonemployee Director during the calendar year and the value of awards granted to the Nonemployee Director under any other equity compensation plan of the Company or an Affiliate during the calendar year, shall not exceed the following in total value (calculating the value of any Awards or other equity compensation plan awards based on the grant date fair value for financial reporting purposes): (i) $900,000 for the Chair of the Board and (ii) $600,000 for each Nonemployee Director other than the Chair of the Board; provided, however, that awards granted to Nonemployee Directors upon their initial election to the Board or the board of directors of an affiliate shall not be counted towards the limit under this paragraph.

 

5.

EFFECTIVE DATE, DURATION AND AMENDMENTS

 

5.1.

Term.

 

The Plan shall become effective as of the Effective Date. The Plan shall terminate automatically on the 5-year anniversary of the Effective Date and may be terminated on any earlier date as provided in Section 5.2.

 

 

 

 

5.2.

Amendment and Termination of the Plan.

 

The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any Awards which have not been made. An amendment shall be contingent on approval of the Company’s stockholders to the extent stated by the Board, required by applicable law or required by applicable stock exchange listing requirements. Notwithstanding the foregoing, any amendment to Section 3.2 shall be contingent upon the approval of the Company’s stockholders. No Awards shall be made after the Termination Date. The applicable terms of the Plan, and any terms and conditions applicable to Awards granted prior to the Termination Date shall survive the termination of the Plan and continue to apply to such Awards. No amendment, suspension, or termination of the Plan shall, without the consent of the Grantee, materially impair rights or obligations under any Award theretofore awarded.

 

6.

AWARD ELIGIBILITY AND LIMITATIONS

 

6.1.

Service Providers.

 

Subject to this Section 6, Awards may be made to any Service Provider, including any Service Provider who is an officer, Non-employee member of the Board, consultant or advisor of the Company or of any Affiliate, as the Board shall determine and designate from time to time in its discretion.

 

6.2.

Successive Awards.

 

An eligible person may receive more than one Award, subject to such restrictions as are provided herein.

 

6.3.

Stand-Alone, Additional, Tandem, and Substitute Awards.

 

Awards may, in the discretion of the Board, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Affiliate, or any business entity to be acquired by the Company or an Affiliate, or any other right of a Grantee to receive payment from the Company or any Affiliate. Such additional, tandem, and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award, the Board shall have the right to require the surrender of such other Award in consideration for the grant of the new Award. The Board shall have the right, in its discretion, to make Awards in substitution or exchange for any other award under another plan of the Company, any Affiliate, or any business entity to be acquired by the Company or an Affiliate. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Affiliate, in which the value of Stock subject to the Award is equivalent in value to the cash compensation (for example, Restricted Stock Units or Restricted Stock).

 

7.

AWARD AGREEMENT

 

Each Award shall be evidenced by an Award Agreement, in such form or forms as the Board shall from time to time determine. Without limiting the foregoing, an Award Agreement may be provided in the form of a notice which provides that acceptance of the Award constitutes acceptance of all terms of the Plan and the notice. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options.

 

 

 

 

 

8.

TERMS AND CONDITIONS OF OPTIONS

 

8.1.

Option Price.

 

The Option Price of each Option shall be fixed by the Board and stated in the related Award Agreement. The Option Price of each Option (except those that constitute Substitute Awards) shall be at least the Fair Market Value on the Grant Date of a share of Stock; provided, however, that in the event that a Grantee is a Ten Percent Stockholder as of the Grant Date, the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock.

 

8.2.

Vesting.

 

Subject to Section 8.3 hereof, each Option shall become exercisable at such times and under such conditions (including, without limitation, performance requirements) as shall be determined by the Board and stated in the Award Agreement.

 

8.3.

Term.

 

Each Option shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten (10) years from the Grant Date, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Board and stated in the related Award Agreement; provided, however, that in the event that the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option at the Grant Date shall not be exercisable after the expiration of five (5) years from its Grant Date.

 

8.4.

Limitations on Exercise of Option.

 

Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, (i) prior to the date the Plan is approved by the stockholders of the Company as provided herein or (ii) after the occurrence of an event which results in termination of the Option.

 

8.5.

Method of Exercise.

 

An Option that is exercisable may be exercised by the Grantee’s delivery of a notice of exercise to the Company, setting forth the number of shares of Stock with respect to which the Option is to be exercised, accompanied by full payment for the shares. To be effective, notice of exercise must be made in accordance with procedures established by the Company from time to time.

 

 

 

 

8.6.

Rights of Holders of Options.

 

Unless otherwise stated in the related Award Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject shares of Stock or to direct the voting of the subject shares of Stock ) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 15 hereof or the related Award Agreement, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.

 

8.7.

Delivery of Stock Certificates.

 

Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the shares of Stock subject to the Option.

 

8.8.

Limitations on Incentive Stock Options.

 

An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted.

 

9.

TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

 

9.1.

Right to Payment.

 

A SAR shall confer on the Grantee a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one share of Stock on the date of exercise over (ii) the SAR Exercise Price, as determined by the Board. The Award Agreement for an SAR shall specify the SAR Exercise Price, which shall be fixed at the Fair Market Value of a share of Stock on the Grant Date. SARs may be granted alone or in conjunction with all or part of an Option or at any subsequent time during the term of such Option or in conjunction with all or part of any other Award. A SAR granted in tandem with an outstanding Option following the Grant Date of such Option shall have a grant price that is equal to the Option Price; provided, however, that the SAR’s grant price may not be less than the Fair Market Value of a share of Stock on the Grant Date of the SAR.

 

9.2.

Other Terms.

 

The Board shall determine at the Grant Date or thereafter, the time or times at which and the circumstances under which an SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which SARs shall cease to be or become exercisable following Separation from Service or upon other conditions, the method of exercise, whether or not a SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR.

 

 

 

 

9.3.

Term of SARs. 

 

The term of a SAR granted under the Plan shall be determined by the Board, in its sole discretion; provided, however, that such term shall not exceed ten (10) years.

 

9.4.

Payment of SAR Amount.

 

Upon exercise of a SAR, a Grantee shall be entitled to receive payment from the Company (in cash or Stock, as determined by the Board) in an amount determined by multiplying:

 

(i)

the difference between the Fair Market Value of a share of Stock on the date of exercise over the SAR Exercise Price; by

(ii)

the number of shares of Stock with respect to which the SAR is exercised.

 

 

10.

TERMS AND CONDITIONS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS

 

10.1.

Restrictions.

 

At the time of grant, the Board may, in its sole discretion, establish a period of time (a “restricted period”) and any additional restrictions including the satisfaction of corporate or individual performance objectives applicable to an Award of Restricted Stock or Restricted Stock Units in accordance with Section 12.1 and 12.2. Each Award of Restricted Stock or Restricted Stock Units may be subject to a different restricted period and additional restrictions. Neither Restricted Stock nor Restricted Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to the satisfaction of any other applicable restrictions.

 

10.2.

Restricted Stock Certificates.

 

The Company shall issue stock, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates or other evidence of ownership representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the restrictions lapse, or (ii) such certificates shall be delivered to the Grantee; provided, however, that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and makes appropriate reference to the restrictions imposed under the Plan and the Award Agreement.

 

10.3.

Rights of Holders of Restricted Stock.

 

Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock shall have rights as stockholders of the Company, including voting and dividend rights, subject to the terms of Section 17.12.

 

 

 

 

10.4.

Rights of Holders of Restricted Stock Units.

 

10.4.1.

Settlement of Restricted Stock Units.

 

Restricted Stock Units may be settled in cash or Stock, as determined by the Board and set forth in the Award Agreement. The Award Agreement shall also set forth whether the Restricted Stock Units shall be settled (i) within the time period specified in Section 17.9.1 for short term deferrals or (ii) otherwise within the requirements of Section 409A, in which case the Award Agreement shall specify upon which events such Restricted Stock Units shall be settled.

 

10.4.2.

Voting and Dividend Rights.

 

Unless otherwise stated in the applicable Award Agreement, holders of Restricted Stock Units shall not have rights as stockholders of the Company, including no voting or dividend or dividend equivalents rights.

 

10.4.3.

Creditor’s Rights.

 

A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.

 

10.5.

Purchase of Restricted Stock.

 

The Grantee shall be required, to the extent required by applicable law, to purchase the Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if any, specified in the related Award Agreement. If specified in the Award Agreement, the Purchase Price may be deemed paid by Services already rendered. The Purchase Price shall be payable in a form described in Section 11 or, in the discretion of the Board, in consideration for past Services rendered.

 

10.6.

Delivery of Stock.

 

Upon the expiration or termination of any restricted period and the satisfaction of any other conditions prescribed by the Board, the restrictions applicable to shares of Restricted Stock or Restricted Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement, a stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee’s beneficiary or estate, as the case may be.

 

11.

FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

 

11.1.

General Rule.

 

Payment of the Option Price for the shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company, except as provided in this Section 11.

 

 

 

 

11.2.

Surrender of Stock.

 

To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be made all or in part through the tender to the Company of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price for Restricted Stock has been paid thereby, at their Fair Market Value on the date of exercise or surrender. Notwithstanding the foregoing, in the case of an Incentive Stock Option, the right to make payment in the form of already owned shares of Stock may be authorized only at the time of grant.

 

11.3.

Cashless Exercise.

 

With respect to an Option only (and not with respect to Restricted Stock), to the extent permitted by law and to the extent the Award Agreement so provides, payment of the Option Price may be made all or in part by delivery (on a form acceptable to the Board) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 17.3.

 

11.4.

Other Forms of Payment.

 

To the extent the Award Agreement so provides, payment of the Option Price or the Purchase Price for Restricted Stock may be made in any other form that is consistent with applicable laws, regulations and rules, including, but not limited to, the Company’s withholding of shares of Stock otherwise due to the exercising Grantee.

 

 

12.

TERMS AND CONDITIONS OF PERFORMANCE AWARDS

 

12.1.

Performance Conditions.

 

The right of a Grantee to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions. Such Awards are referred to as “Performance Awards.”

 

12.2.

Performance Goals Generally.

 

The performance goals for Performance Awards shall consist of one or more business or other criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 12. The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may, in the discretion of the Committee, be established on a Company-wide basis, or with respect to one or more business units, divisions, subsidiaries or business segments, as applicable. Performance goals may be absolute or relative (to the performance of one or more comparable companies or indices). The Committee may determine the extent to which measurement of performance goals may exclude the impact of charges for restructuring, discontinued operations, extraordinary items, debt redemption or retirement, asset write downs, litigation or claim judgments or settlements, acquisitions or divestitures, foreign exchange gains and losses, and other unusual non-recurring items, and the cumulative effects of tax or accounting changes (each as defined by generally accepted accounting principles and as identified in the Company’s financial statements or other SEC filings). Performance goals may differ for Performance Awards granted to any one Grantee or to different Grantees.

 

 

 

 

12.3.

Business Criteria.

 

For purposes of Performance Awards, the Committee may select any business criteria for the Company, on a consolidated basis, and/or specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), including any of the following: net sales; revenue; revenue growth or product revenue growth; operating income (before or after taxes); pre-or after-tax income (before or after allocation of corporate overhead and bonuses; net earnings; earnings per share; net income (before or after taxes); return on equity; total shareholder return; return on assets or net assets; appreciation in and/or maintenance of share price; market share; market capitalization; gross profits; earnings (including earnings before taxes, earnings before interest and taxes or earnings before interest, taxes depreciation and amortization); economic value-added models or equivalent metrics; comparisons with various stock market indices; reduction in costs; cash flow or cash flow per share (before or after dividends); return on capital (including return on total capital or return on invested capital; cash flow return on investment; improvement in or attainment of expense levels or working capital levels; operating margins; gross margins or cash margin; year-end cash; debt reductions; shareholder equity; regulatory performance; and implementation, completion or attainment of measurable objectives with respect to research, development, products or projects and recruiting and maintaining personnel.

 

13.

OTHER STOCK-BASED AWARDS

 

13.1.

Grant of Other Stock-based Awards.

 

Other Stock-based Awards, consisting of Stock units, or other Awards, valued in whole or in part by reference to, or otherwise based on, Common Stock, may be granted either alone or in addition to or in conjunction with other Awards under the Plan. Other Stock-based Awards may be granted in lieu of other cash or other compensation to which a Service Provider is entitled from the Company or may be used in the settlement of amounts payable in shares of Common Stock under any other compensation plan or arrangement of the Company, including without limitation, the Company’s Incentive Compensation Plan. Subject to the provisions of the Plan, the Committee shall have the sole and complete authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Common Stock to be granted pursuant to such Awards, and all other conditions of such Awards. Unless the Committee determines otherwise, any such Award shall be confirmed by an Award Agreement, which shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of this Plan with respect to such Award.

 

13.2.

Terms of Other Stock-based Awards.

 

Any Common Stock subject to Awards made under this Section 13 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses.

 

 

 

 

14.

REQUIREMENTS OF LAW

 

14.1.

General.

 

The Company shall not be required to sell or issue any shares of Stock under any Award if the sale or issuance of such shares would constitute a violation by the Grantee, any other individual exercising an Option, or the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, no shares of Stock may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Specifically, in connection with the Securities Act, upon the exercise of any Option or the delivery of any shares of Stock underlying an Award, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Award, the Company shall not be required to sell or issue such shares unless the Board has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such shares pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Board shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares of Stock pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable until the shares of Stock covered by such Option are registered or are exempt from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.

 

 

14.2.

Rule 16b-3.

 

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards and the exercise of Options granted to officers and directors hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Board or Committee does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify this Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.

 

15.

EFFECT OF CHANGES IN CAPITALIZATION

 

15.1.

Changes in Stock.

 

If (i) the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company occurring after the Original Effective Date or (ii) there occurs any spin-off, split-up, extraordinary cash dividend or other distribution of assets by the Company, the number and kinds of shares for which grants of Options and other Stock-based Awards may be made under the Plan (including the per-Grantee maximums set forth in Section 4) shall be equitably adjusted by the Company; provided that any such adjustment shall comply with Section 409A. In addition, in the event of any such increase or decease in the number of outstanding shares or other transaction described in clause (ii) above, the number and kind of shares for which Awards are outstanding and the Option Price per share of outstanding options and SAR Exercise Price per share of outstanding SARs shall be equitably adjusted; provided that any such adjustment shall comply with Section 409A.

 

 

 

 

15.2.

Effect of Certain Transactions.

 

Except as otherwise provided in an Award Agreement, in the event of (a) the liquidation or dissolution of the Company or (b) a reorganization, merger, exchange or consolidation of the Company or involving the shares of Common Stock (a “Transaction”), the Plan and the Awards issued hereunder shall continue in effect in accordance with their respective terms, except that following a Transaction either (i) each outstanding Award shall be treated as provided for in the agreement entered into in connection with the Transaction or (ii) if not so provided in such agreement, each Grantee shall be entitled to receive in respect of each share of Common Stock subject to any outstanding Awards, upon exercise or payment or transfer in respect of any Award, the same number and kind of stock, securities, cash, property or other consideration that each holder of a share of Common Stock was entitled to receive in the Transaction in respect of a share of Common stock; provided, however, that, unless otherwise determined by the Committee, such stock, securities, cash, property or other consideration shall remain subject to all of the conditions, restrictions and performance criteria which were applicable to the Awards prior to such Transaction. Without limiting the generality of the foregoing, the treatment of outstanding Options and Stock Appreciation Rights pursuant to this Section 15.1.2 in connection with a Transaction in which the consideration paid or distributed to the Company’s stockholders is not entirely shares of common stock of the acquiring or resulting corporation may include the cancellation of outstanding Options and Stock Appreciation Rights upon consummation of the Transaction as long as, at the election of the Committee, (x) the holders of affected Options and SARs have been given a period of at least fifteen days prior to the date of the consummation of the Transaction to exercise the Options or SARs (whether or not they were otherwise exercisable) or (y) the holders of the affected Options and SARs are paid (in cash or cash equivalents) in respect of each Share covered by the Option or SAR being canceled an amount equal to the excess, if any, of the per share price paid or distributed to stockholders in the transaction (the value of any non-cash consideration to be determined by the Committee in its sole discretion) over the Price Option or SAR Exercise Price, as applicable. For avoidance of doubt, (1) the cancellation of Options and SARs pursuant to clause (y) of the preceding sentence may be effected notwithstanding anything to the contrary contained in this Plan or any Award Agreement and (2) if the amount determined pursuant to clause (y) of the preceding sentence is zero or less, the affected Option or SAR may be cancelled without any payment therefore. The treatment of any Award as provided in this Section 15.1.2 shall be conclusively presumed to be appropriate for purposes of Section 15.1.1.

 

15.3.

Definition of Change in Control.

 

“Change in Control” means:

 

(1)

Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (A) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this Section 15.2, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company, or (iv) any acquisition pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C).

 

 

 

 

 

 

(2)

Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board;

 

 

(3)

Consummation of a reorganization, merger, statutory share exchange or consolidation or similar transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

 

(4)

Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

 

Notwithstanding the foregoing, if it is determined that an Award hereunder is subject to the requirements of Section 409A and is intended to be payable upon a Change in Control, the Company will not be deemed to have undergone a Change in Control for purposes of payment of such Award unless the Company is deemed to have undergone a “change in control event” pursuant to the definition of such term in Section 409A.

 

15.5.

Effect of Change in Control

 

The Board shall determine the effect of a Change in Control upon Awards, and such effect may be set forth in the appropriate Award Agreement. Without limiting the foregoing, the Board may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, the actions that will be taken upon the occurrence of a Change in Control, including, but not limited to, accelerated vesting, termination, cash-out or assumption. The Board may also provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, for different provisions to apply to an Award in place of those described in Sections 15.1 and 15.2.

 

 

 

 

15.6.

Reorganization Which Does Not Constitute a Change in Control.

 

If the Company undergoes any reorganization, merger, or consolidation of the Company with one or more other entities which does not constitute a Change in Control, any Option or SAR theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option or SAR would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall be the same as the aggregate Option Price or SAR Exercise Price of the shares remaining subject to the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement, any restrictions applicable to such Award shall apply as well to any replacement shares received by the Grantee as a result of the reorganization, merger or consolidation.

 

15.7.

Adjustments.

 

Adjustments under this Section 15 related to shares of Stock or securities of the Company shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share.

 

 

16.

NO LIMITATIONS ON COMPANY

 

The making of Awards pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets.

 

17.

TERMS APPLICABLE GENERALLY TO AWARDS GRANTED UNDER THE PLAN

 

17.1.

Disclaimer of Rights.

 

No provision in the Plan or in any Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any Affiliate, or to interfere in any way with any contractual or other right or authority of the Company either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a Service Provider. The obligation of the Company to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.

 

 

 

 

17.2.

Nonexclusivity of the Plan.

 

Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals), including, without limitation, the granting of stock options as the Board in its discretion determines desirable.

 

17.3.

Withholding Taxes.

 

The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by law to be withheld (i) with respect to the vesting of or other lapse of restrictions applicable to an Award, (ii) upon the issuance of any shares of Stock upon the exercise of an Option or SAR, or (iii) otherwise due in connection with an Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company or the Affiliate, which may be withheld by the Company or the Affiliate, as the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, or the Company may require such obligations (up to maximum statutory rates) to be satisfied, in whole or in part, (i) by causing the Company or the Affiliate to withhold the number of shares of Stock otherwise issuable to the Grantee as may be necessary to satisfy such withholding obligation or (ii) by delivering to the Company or the Affiliate shares of Stock already owned by the Grantee. The shares of Stock so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations (up to maximum statutory rates). The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 17.3 may satisfy his or her withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.

 

17.4.

Captions.

 

The use of captions in this Plan or any Award Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or any Award Agreement.

 

17.5

Other Provisions.

 

Each Award Agreement may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Board, in its sole discretion.

 

17.6

Number and Gender.

 

With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires.

 

 

 

 

17.7.

Severability.

 

If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.

 

17.8.

Governing Law.

 

The Plan shall be governed by and construed in accordance with the laws of the Sate of North Carolina without giving effect to the principles of conflicts of law, provided that the provisions set forth herein that are required to be governed by the Delaware General Corporation Law shall be governed by such law.

 

17.9.

Section 409A.

 

17.9.1.

Short-Term Deferrals.

 

For each Award intended to comply with the short-term deferral exception provided for under Section 409A, the related Award Agreement shall provide that such Award shall be paid out by the later of (i) the 15th day of the third month following the Grantee’s first taxable year in which the Award is no longer subject to a substantial risk of forfeiture or (ii) the 15th day of the third month following the end of the Company’s first taxable year in which the Award is no longer subject to a substantial risk of forfeiture.

 

17.9.2.

Adjustments.

 

To the extent that the Board determines that a Grantee would be subject to the additional 20% tax imposed on certain deferred compensation arrangements pursuant to Section 409A as a result of any provision of any Award, to the extent permitted by Section 409A, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The Board shall determine the nature and scope of such amendment.

 

17.10.

Separation from Service.

 

The Board shall determine the effect of a Separation from Service upon Awards, and such effect shall be set forth in the appropriate Award Agreement. Without limiting the foregoing, the Board may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, the actions that will be taken upon the occurrence of a Separation from Service, including, but not limited to, accelerated vesting or termination, depending upon the circumstances surrounding the Separation from Service. Notwithstanding the foregoing, following grant of an Award, the Board does not have discretion to accelerate vesting of the Award, except upon a Separation from Service due to death or Disability.

 

17.11.

Transferability of Awards.

 

17.11.1.

Transfers in General.

 

Except as provided in Section 17.11.2, no Award shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution, and, during the lifetime of the Grantee, only the Grantee personally (or the Grantee’s personal representative) may exercise rights under the Plan.

 

 

 

 

17.11.2.

Family Transfers.

 

If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of an Award (other than Incentive Stock Options) to any Family Member. For the purpose of this Section 17.11.2, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 17.11.2, any such Award shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred Awards are prohibited except to Family Members of the original Grantee in accordance with this Section 17.11.2 or by will or the laws of descent and distribution.

 

17.12.

Dividends and Dividend Equivalent Rights.

 

If specified in the Award Agreement, the recipient of an Award under this Plan may be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the Common Stock or other securities covered by an Award. The terms and conditions of a dividend equivalent right may be set forth in the Award Agreement. Dividend equivalents credited to a Grantee may be paid currently or may be deemed to be reinvested in additional shares of Stock or other securities of the Company at a price per unit equal to the Fair Market Value of a share of Stock on the date that such dividend was paid to shareholders, as determined in the sole discretion of the Committee. Notwithstanding any provision herein to the contrary, in no event will dividends or dividend equivalents vest or otherwise be paid out prior to the time that the underlying Award (or portion thereof) has vested and, accordingly, will be subject to cancellation and forfeiture if such Award does not vest (including both time-based and performance-based Awards).

 

 

PRIMO WATER CORPORATION

 

 

 

 

By:

 /s/ Matthew T. Sheehan

 

Name:

 Matthew T. Sheehan

 

Title:

 CEO

 

Date:

 February 28, 2019

 

 

 

ex_143604.htm

Exhibit 10.2

 

Amendment No. 3 to
Primo Water Corporation
2010 Employee Stock Purchase Plan

 

This Amendment No. 3 (“Amendment”) to the 2010 Employee Stock Purchase Plan (the “Existing Plan”; as amended hereby, the “Plan”) of Primo Water Corporation, a Delaware corporation (the “Company”), is adopted by the Company February 28, 2019, subject to approval by the Company’s stockholders (the “Stockholders”).

 

Statement of Purpose

 

The Existing Plan was originally approved by the Company’s Board of Directors (the “Board”) on March 5, 2010, and by the Stockholders on April 22, 2010, upon which date it became effective. The Existing Plan was previously amended pursuant to both that certain Amendment No. 1, which was approved by the Board on April 11, 2012 and by the Stockholders on May 16, 2012, and which became effective upon Stockholder approval and that certain Amendment No. 2, which was approved by the Board on March 3, 2017 and by the Stockholders on April 27, 2017, and which became effective upon Stockholder approval. Under Section 10.1 of the Existing Plan, the Board may amend the Existing Plan at any time, contingent on the approval of the Stockholders if Stockholder approval is required by applicable law. The Board has determined that it is in the best interests of the Company to extend the term of the Existing Plan for an additional five years so that the term of the Plan is extended to the fifteenth anniversary of the Effective Date.

 

NOW, THEREFORE, the Existing Plan is hereby amended as follows, subject to the approval of the Stockholders:

 

1.

Capitalized Terms. All capitalized terms used and not defined herein shall have the meanings given thereto in the Existing Plan.

 

2.

Amendment to Existing Plan.

 

The fourth sentence of ARTICLE XI, TERM OF PLAN is hereby deleted in its entirety and replaced with the following:

 

“The Plan shall be in effect until the fifteenth anniversary of the Effective Date, unless sooner terminated under Article 10.”

 

3.

Reference to and Effect on the Plan. The Plan, as amended hereby, and all other documents, instruments and agreements executed or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed.

 

4.

Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware.

 

***

 

Effective this 28th day of February 2019, subject to Stockholder approval.

 

 

 

ex_143605.htm

EXHIBIT 31.1

 

MANAGEMENT CERTIFICATION

 

I, Matthew T. Sheehan, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Primo Water Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: May 9, 2019

 

 

 

/s/ Matthew T. Sheehan

 

Matthew T. Sheehan

 

Chief Executive Officer

 

 

ex_143659.htm

EXHIBIT 31.2

 

MANAGEMENT CERTIFICATION

 

I, David J. Mills, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Primo Water Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: May 9, 2019

 

 

 

 /s/ David J. Mills

 

David J. Mills

 

Chief Financial Officer

 

 

ex_143606.htm

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Quarterly Report of Primo Water Corporation, (the “Company”) on Form 10-Q for the period ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Matthew T. Sheehan, Chief Executive Officer of the Company, and David Mills, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

A signed original of this written statement required by Section 906 has been provided to Primo Water Corporation and will be retained by Primo Water Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

/s/ Matthew T. Sheehan

 

/s/ David J. Mills

Matthew T. Sheehan

 

David J. Mills

Chief Executive Officer

 

Chief Financial Officer

May 9, 2019

 

May 9, 2019