prmw20190630_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 JUNE 30, 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)

 

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

 

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 ☑

 

As of August 2, 2019, there were 39,218,402 shares of our Common Stock, par value $0.001 per share, outstanding.

 

 

 

PRIMO WATER CORPORATION

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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

20

   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

29

   

Item 4.  Controls and Procedures

29

   

PART II.  Other Information

 
   

Item 1.  Legal Proceedings

29

   

Item 1A.  Risk Factors

29

   

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

31

   

Item 3.  Defaults Upon Senior Securities

31

   

Item 4.  Mine Safety Disclosures

31

   

Item 5.  Other Information

31

   

Item 6.  Exhibits

32

   

Signatures 

33

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value information) 

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 4,277     $ 7,301  

Accounts receivable, net

    24,634       19,179  

Inventories

    13,742       9,965  

Prepaid expenses and other current assets

    6,948       7,004  

Total current assets

    49,601       43,449  
                 

Bottles, net

    5,405       4,618  

Property and equipment, net

    103,637       95,627  

Operating lease right-of-use assets

    3,604        

Intangible assets, net

    75,832       78,671  

Goodwill

    92,015       91,814  

Note receivable

    3,128        

Other assets

    669       661  

Assets held-for-sale at fair value

          5,288  

Total assets

  $ 333,891     $ 320,128  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 29,899     $ 25,191  

Accrued expenses and other current liabilities

    8,755       8,274  

Current portion of long-term debt and finance leases

    11,514       11,159  

Total current liabilities

    50,168       44,624  
                 

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

    187,860       178,966  

Operating leases, net of current portion

    2,134        

Other long-term liabilities

    1,191       607  

Liabilities held-for-sale at fair value

          1,438  

Total liabilities

    241,353       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, 39,185 and 38,567 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

    39       39  

Additional paid-in capital

    423,729       424,635  

Accumulated deficit

    (329,325 )     (328,599 )

Accumulated other comprehensive loss

    (1,905 )     (1,582 )

Total stockholders’ equity

    92,538       94,493  

Total liabilities and stockholders’ equity

  $ 333,891     $ 320,128  

   

 

See accompanying notes.

 

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net sales

  $ 79,261     $ 75,802     $ 149,308     $ 149,461  

Operating costs and expenses:

                               

Cost of sales

    58,203       52,729       109,724       106,150  

Selling, general and administrative expenses

    8,768       9,600       19,096       18,800  

Special items

    1,152       410       1,413       487  

Depreciation and amortization

    7,292       6,114       13,845       12,171  

Loss on disposal of property and equipment and other

    252       111       327       244  

Total operating costs and expenses

    75,667       68,964       144,405       137,852  

Income from operations

    3,594       6,838       4,903       11,609  

Interest expense, net

    2,721       11,158       5,302       16,444  

Income (loss) before income taxes

    873       (4,320 )     (399 )     (4,835 )

Income tax benefit

          (4,771 )           (6,496 )

Net income (loss)

  $ 873     $ 451     $ (399 )   $ 1,661  
                                 

Earnings (loss) per common share:

                               

Basic

  $ 0.02     $ 0.01     $ (0.01 )   $ 0.05  

Diluted

  $ 0.02     $ 0.01     $ (0.01 )   $ 0.05  
                                 

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

                               

Basic

    40,389       35,920       40,342       34,549  

Diluted

    41,043       37,232       40,342       35,836  

 

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands)

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income (loss)

  $ 873     $ 451     $ (399 )   $ 1,661  

Other comprehensive loss:

                               

Reclassification of gain recognized in net income on redemption of Glacier securities

          (86 )           (86 )

Unrealized gain on investment in Glacier securities

                      14  

Interest rate swap

    (640 )           (640 )      

Foreign currency translation adjustments, net

    142       (167 )     317       (429 )

Total other comprehensive loss

    (498 )     (253 )     (323 )     (501 )

Comprehensive income (loss)

  $ 375     $ 198     $ (722 )   $ 1,160  

 

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands)

 

   

Three Months Ended June 30, 2018

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, March 31, 2018

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

Employee stock compensation plans

    321       1       2,415                   2,416  

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

    (3 )           (35 )                 (35 )

Exercise of common stock warrants

    976       1       11,450                   11,451  

Proceeds from equity offering, net of costs

    5,339       5       70,786                   70,791  

Reclassification of equity issuance costs previously capitalized

                (171 )                 (171 )

Net income

                      451             451  

Other comprehensive loss

                            (253 )     (253 )

Balance, June 30, 2018

    37,636     $ 38     $ 424,427     $ (272,091 )   $ (1,271 )   $ 151,103  

 

   

Six Months Ended June 30, 2018

 
                                   

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

    1,905       2       4,760                   4,762  

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

    (668 )           (8,361 )                 (8,361 )

Exercise of common stock warrants

    976       1       11,450                   11,451  

Proceeds from equity offering, net of costs

    5,339       5       70,786                   70,791  

Reclassification of equity issuance costs previously capitalized

                (171 )                 (171 )

Net income

                      1,661             1,661  

Other comprehensive loss

                            (501 )     (501 )

Balance, June 30, 2018

    37,636     $ 38     $ 424,427     $ (272,091 )   $ (1,271 )   $ 151,103  

 

   

Three Months Ended June 30, 2019

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, March 31, 2019

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

Employee stock compensation plans

    159             1,713                   1,713  

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

    (3 )           (36 )                 (36 )

Net income

                      873             873  

Other comprehensive loss

                            (498 )     (498 )

Balance, June 30, 2019

    39,185     $ 39     $ 423,729     $ (329,325 )   $ (1,905 )   $ 92,538  

 

   

Six Months Ended June 30, 2019

 
                                   

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

    893       1       3,019                   3,020  

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

    (282 )     (1 )     (3,993 )                 (3,994 )

Exercise of common stock warrants

    7             68                   68  

Net loss

                      (399 )           (399 )

Other comprehensive loss

                            (323 )     (323 )

Balance, June 30, 2019

    39,185     $ 39     $ 423,729     $ (329,325 )   $ (1,905 )   $ 92,538  

 

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net (loss) income

  $ (399 )   $ 1,661  

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

               

Depreciation and amortization

    13,845       12,171  

Loss on disposal of property and equipment and other

    327       244  

Stock-based compensation expense

    2,493       2,679  

Non-cash interest expense

    170       2,445  

Bad debt expense

    53       170  

Deferred income tax benefit

          (6,496 )

Realized foreign currency exchange (gain) loss and other, net

    (200 )     399  

Changes in operating assets and liabilities:

               

Accounts receivable

    (5,426 )     (5,065 )

Inventories

    (3,762 )     (1,638 )

Prepaid expenses and other current assets

    215       (1,126 )

Operating lease right-of-use assets

    560        

Accounts payable

    2,624       5,248  

Accrued expenses and other current liabilities

    (1,117 )     (513 )

Operating lease liabilities

    (518 )      

Net cash provided by operating activities

    8,865       10,179  
                 

Cash flows from investing activities:

               

Purchases of property and equipment, net

    (12,429 )     (8,208 )

Purchases of bottles, net of disposals

    (1,767 )     (1,117 )

Proceeds from the sale of property and equipment

    129       154  

Proceeds from the sale of Ice Assets

    400        

Proceeds from redemption of investment in Glacier securities

          3,648  

Additions to intangible assets

    (25 )     (12 )

Net cash used in investing activities

    (13,692 )     (5,535 )
                 

Cash flows from financing activities:

               

Borrowings under Revolving Credit Facilities

    29,000       29,000  

Payments under Revolving Credit Facilities

    (18,900 )     (22,000 )

Borrowings under Term loans

          190,000  

Payments under Term loans

    (4,750 )     (184,140 )

Payments upon redemption of Junior Subordinated Debentures

          (87,629 )

Finance lease payments

    (1,186 )     (818 )

Proceeds from common stock issuance, net of costs

          70,791  

Proceeds from warrant exercises, net

    68       9,486  

Stock option and employee stock purchase activity

    526       1,322  

Bank overdraft

    1,032        

Payments for taxes related to net share settlement of equity awards

    (3,994 )     (8,361 )

Debt issuance costs and other

          (1,640 )

Net cash provided by (used in) financing activities

    1,796       (3,989 )
                 

Effect of exchange rate changes on cash and cash equivalents

    7       (19 )

Net (decrease) increase in cash and cash equivalents

    (3,024 )     636  

Cash and cash equivalents, beginning of year

    7,301       5,586  

Cash and cash equivalents, end of period

  $ 4,277     $ 6,222  
                 

Supplemental cash flow information:

               

Promissory note received in exchange for sale of ice assets

  $ 3,278     $  

 

 

See accompanying notes.

 

 

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.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. The effect on our consolidated financial statements will largely depend on the composition and credit quality of our trade receivables at the time of adoption.

 

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 did 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.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to better align the Company's risk management activities with financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness, expands the ability to hedge specific risk components, and generally requires the change in value of the hedge instrument and hedged item to be presented in the same income statement line. We adopted ASU 2017-12 in the second quarter of 2019 upon entering into an interest rate swap on our variable rate term loan.  The new disclosure requirements were applied on a prospective basis. The adoption of the standard did not have a material impact on our consolidated financial statements.

 

 

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 $1,977 and $1,755 at June 30, 2019 and December 31, 2018, respectively. Bad debt write-offs for the three and six months ended June 30, 2019 and 2018 were immaterial.

 

 

Disaggregation of Revenue

 

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

 

   

Three months ended June 30, 2019

 
Geographical area  

Refill

   

Exchange

   

Dispensers

   

Total

 

United States

  $ 41,506     $ 20,169     $ 14,789     $ 76,464  

Canada

    770       834       1,193       2,797  
    $ 42,276     $ 21,003     $ 15,982     $ 79,261  

 

   

Three months ended June 30, 2018

 
Geographical area  

Refill

   

Exchange

   

Dispensers

   

Total

 

United States

  $ 43,496     $ 19,135     $ 9,536     $ 72,167  

Canada

    1,240       872       1,523       3,635  
    $ 44,736     $ 20,007     $ 11,059     $ 75,802  

 

   

Six months ended June 30, 2019

 
Geographical area  

Refill

   

Exchange

   

Dispensers

   

Total

 

United States

  $ 78,824     $ 38,691     $ 26,484     $ 143,999  

Canada

    1,777       1,664       1,868       5,309  
    $ 80,601     $ 40,355     $ 28,352     $ 149,308  

 

   

Six months ended June 30, 2018

 
Geographical area  

Refill

   

Exchange

   

Dispensers

   

Total

 

United States

  $ 83,641     $ 36,616     $ 22,469     $ 142,726  

Canada

    2,570       1,649       2,516       6,735  
    $ 86,211     $ 38,265     $ 24,985     $ 149,461  

 

 

 

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 June 30, 2019 the current portion of our operating lease liabilities of $1,524 are presented within accrued expenses and other current liabilities. As of June 30, 2019 the long-term portion of our operating lease liabilities of $2,134 is presented within operating leases.

 

Finance lease right-of-use assets are presented within property and equipment, net. As of June 30, 2019 and December 31, 2018 vehicles under finance lease with a cost basis of $11,196 and $7,408, respectively, were included in property and equipment, net. As of June 30, 2019 the current portion of our finance lease liabilities of $2,014 are presented within current portion of long-term debt and finance leases. As of June 30, 2019 the long term portion of our finance lease liabilities of $4,867 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

June 30, 2019

 

Long-term Operating

  $ 436  

Short-term Operating

    130  

Total Operating lease expense

  $ 566  

 

 

   

Six months ended

June 30, 2019

 

Long-term Operating

  $ 873  

Short-term Operating

    246  

Total Operating lease expense

  $ 1,119  

 

As of June 30, 2019, our operating leases had a weighted average remaining lease term of 3.7 years and a weighted average discount rate of 4.76%. Future lease payments under operating leases as of June 30, 2019 were as follows:

 

 

   

Operating Leases

 

Remainder of 2019

  $ 858  

2020

    1,567  

2021

    553  

2022

    456  

2023

    281  

Thereafter

    440  

Total future lease payments

    4,155  

Less: imputed interest

    (497 )

Total lease liability

  $ 3,658  

 

 

Supplemental information related to operating leases was as follows:

 

   

Six months ended

June 30, 2019

 

Operating cash flows used for operating leases

  $ 927  

 

 

 

4.        Ice Assets Held-for-Sale and Promissory Note 

 

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 December 31, 2018 was as follows: 

 

   

December 31,

 
   

2018

 

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  

 

On June 28, 2019, we sold the Ice Assets to a buyer in exchange for cash consideration of $400 and a promissory note of $3,600.  The note has a five-year term and requires the buyer to make quarterly principal payments of $50 and quarterly interest payments at an annual interest rate of 7%.  At the end of the five-year term of the note, the entire remaining outstanding principal amount is due and payable in full. Under the terms of the note, the buyer, under certain circumstances may make elections that would allow for a reduction in the interest rate and principal amount upon the prepayment of amounts owed under the promissory note. The note was recorded at its fair value of $3,278 which was measured based upon the present value of estimated future cash flows taking into consideration the terms and non-market interest rate of the note.  As of June 30, 2019 the current portion of the note of $150 is presented within prepaid expenses and other assets, and the non-current portion of $3,128 is presented as a promissory note on the condensed consolidated balance sheet.

 

 

The buyer is not a related party and our continuing involvement following the sale will be minimal. The sale of the Ice Assets resulted in a loss of $580 for the three and six months ended June 30, 2019 presented within loss on disposal of property and equipment and other.

 

 

5.        Debt and Finance Leases, net of Debt Issuance Costs

 

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

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Revolving Credit Facility

  $ 13,100     $ 3,000  

Term loans

    180,500       185,250  

Debt issuance costs, net

    (1,107 )     (1,265 )

Total Credit Facilities

    192,493       186,985  

Finance leases

    6,881       3,140  
      199,374       190,125  

Less current portion

    (11,514 )     (11,159 )

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

  $ 187,860     $ 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 June 30, 2019, we had $13,100 outstanding borrowings and $16,900 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; special items; 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 June 30, 2019, we were in compliance with all operational covenants, including (i) a consolidated fixed charge coverage ratio of 1.23:1.00 and (ii) a consolidated leverage ratio of 3.92:1.00.

 

 

Goldman Credit Facility

 

On December 12, 2016, to complete the acquisition by merger (the “Acquisition”) of Glacier Water Services, Inc. (“Glacier”), we entered into a senior secured credit facility with Goldman Sachs Bank USA (the “Goldman Credit Facility”) that provided for an $186,000 term loan facility and a $10,000 revolving loan facility.  We repaid all outstanding borrowings and accrued interest under the Goldman Credit Facility with the proceeds from a follow-on equity offering completed in the second quarter of 2018 and the proceeds from the SunTrust Credit Facility.  In connection with the repayment and termination of the Goldman Credit Facility during the second quarter of 2018, we immediately charged to interest expense, net on the condensed consolidated statements of operations the remaining $2,960 in unamortized debt issuance costs related to the Goldman Credit Facility and $3,904 related to early payment penalties.

 

Junior Subordinated Debentures and Investments

 

In connection with the Acquisition, we assumed $89,529 of 9-1/16% Junior Subordinated Deferrable Interest Debentures due 2028 (the “Subordinated Debentures”) issued to Glacier Water Trust I (“the Trust”), a wholly owned subsidiary of Primo following the Acquisition. On June 29, 2018, in connection with the closing of the SunTrust Credit Facility, we paid $87,938, including accrued interest of $309, to redeem the Subordinated Debentures. In connection with the redemption of the Subordinated Debentures, we recorded a gain of $475 in interest expense, net on the condensed consolidated statements of operations resulting from the accretion of the remaining fair value adjustment allocated to the Subordinated Debentures as part of the purchase price allocation of the Acquisition.

 

In connection with the redemption of the Subordinated Debentures described above, the Trust issued a revocable notice of redemption of all outstanding capital securities of the Trust, and all outstanding capital securities of the Trust were redeemed on June 29, 2018. We owned a portion of such securities and received $6,277 in proceeds upon their redemption, resulting in a $161 loss on the redemption of the securities which is included in loss (gain) on disposal of property and equipment and other assets on the condensed consolidated statements of operations. At June 30, 2018, $2,629 of the proceeds were recorded as a receivable included in prepaid expenses and other current assets in the consolidated condensed balance sheets. These proceeds were received subsequent to the period end. Subsequent to the redemption of the Subordinated Debentures and the redemption of all outstanding capital securities of the Trust, the Trust and all related agreements were terminated and effectively dissolved.

 

Finance Leases

 

As of June 30, 2019, our finance leases had a weighted average remaining lease term of 3.6 years and a weighted average discount rate of 4.76%. Future finance lease obligations as of June 30, 2019 were as follows:

 

   

Finance Leases

 

Remainder of 2019

  $ 2,425  

2020

    1,970  

2021

    1,525  

2022

    1,061  

2023

    448  

Thereafter

    65  

Total future lease obligations

    7,494  

Less: imputed interest

    (613 )

Total finance lease liability

  $ 6,881  

  

Interest Rate Swap

 

To mitigate the risks associated with future interest rate movements, we have employed an interest rate swap to fix the rate on a portion of our outstanding borrowings under the SunTrust Credit Facility. We executed an interest rate swap agreement in April 2019. The notional amount of the interest rate swap agreement was $25 million as of June 30, 2019. The interest rate swap matures April 2023. The change in fair value for the interest rate swap entered into during the current quarter was not material for the three months ended June 30, 2019.

 

 

 

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 June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Stock options

  $ 69     $ 102     $ 147     $ 276  

Restricted stock

    1,098       912       2,066       1,721  

Long-Term Performance Plan

    (180 )     360       221       632  

Employee Stock Purchase Plan

    31       13       59       50  
    $ 1,018     $ 1,387     $ 2,493     $ 2,679  

 

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.

 

 

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 June 30,

 
   

2019

   

2018

 
                 

Acquisition-related costs(1)

  $ 250     $ 287  

Other costs(2)

    902       123  

Total

  $ 1,152     $ 410  

 

   

Six months ended June 30,

 
   

2019

   

2018

 
                 

Acquisition-related costs(1)

  $ 306     $ 361  

Other costs(2)

    1,107       126  

Total

  $ 1,413     $ 487  

 

 

(1)

Acquisition-related expenses, including fees payable to financial, legal, accounting and other advisors.

 

(2)

Restructuring, severance, and other costs not indicative of our core operations.

 

 

 

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 and six months ended June 30, 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 June 30, 2019.

 

For the three and six months ended June 30, 2018, we recorded an income tax benefit of $4,771 and $6,496, respectively, primarily due to the 2017 Tax Cuts and Jobs Act. We recorded an income tax benefit of $4,769 and $6,843, respectively, for the three and six months ended June 30, 2018 related to the federal net operating loss and interest expense limitation, 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 June 30, 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:

 

   

June 30, 2019

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Liabilities:

                               

Interest rate swap

  $ 640     $     $ 640     $  

Total liabilities

  $ 640     $     $ 640     $  

 

   

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.

 

At June 30, 2019 we held financial assets in the form of a $3,278 promissory note acquired in connection with the sale of the Ice Assets that is required to be measured at fair value on a nonrecurring basis.  The note was measured based on the present value of estimated future cash flows.  There were no material nonrecurring fair value measurements recorded in the six months ended June 30, 2018.

 

 

11.       Earnings Per Share

 

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

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Basic:

                               

Net income (loss)

  $ 873     $ 451     $ (399 )   $ 1,661  
                                 

Weighted average shares

    40,389       35,920       40,342       34,549  
                                 

Basic earnings (loss) per share

  $ 0.02     $ 0.01     $ (0.01 )   $ 0.05  
                                 

Diluted:

                               

Net income (loss)

  $ 873     $ 451     $ (399 )   $ 1,661  
                                 

Weighted average shares

    40,389       35,920       40,342       34,549  

Potential shares arising from stock options, restricted stock and warrants

    654       1,312             1,287  

Weighted average shares - diluted

    41,043       37,232       40,342       35,836  
                                 

Diluted earnings (loss) per share

  $ 0.02     $ 0.01     $ (0.01 )   $ 0.05  

 

 

For the three months ended June 30, 2019, stock options, restricted stock and warrants with respect to an aggregate of 211 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.

 

For the six months ended June 30, 2019, stock options, restricted stock and warrants with respect to an aggregate of 2,171 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 and six months ended June 30, 2018, stock options, restricted stock and warrants with respect to an aggregate of 67 and 226 shares, respectively, 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 June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Segment net sales:

                               

Refill

  $ 42,276     $ 44,736     $ 80,601     $ 86,211  

Exchange

    21,003       20,007       40,355       38,265  

Dispensers

    15,982       11,059       28,352       24,985  
    $ 79,261     $ 75,802     $ 149,308     $ 149,461  
                                 

Segment income from operations:

                               

Refill

  $ 11,477     $ 13,894     $ 21,561     $ 25,478  

Exchange

    5,894       6,030       11,362       11,293  

Dispensers

    1,125       842       1,709       1,986  

Corporate

    (6,206 )     (7,293 )     (14,144 )     (14,246 )

Special items

    (1,152 )     (410 )     (1,413 )     (487 )

Depreciation and amortization

    (7,292 )     (6,114 )     (13,845 )     (12,171 )

Loss on disposal of property and equipment and other

    (252 )     (111 )     (327 )     (244 )
    $ 3,594     $ 6,838     $ 4,903     $ 11,609  
                                 
                                 

Depreciation and amortization expense:

                               

Refill

  $ 4,888     $ 3,879     $ 9,170     $ 8,054  

Exchange

    2,124       1,671       4,106       3,353  

Dispensers

    50       44       100       96  

Corporate

    230       520       469       668  
    $ 7,292     $ 6,114     $ 13,845     $ 12,171  
                                 

Capital expenditures:

                               

Refill

                  $ 9,087     $ 5,546  

Exchange

                    4,428       3,394  

Dispensers

                    100        

Corporate

                    452       385  
                    $ 14,067     $ 9,325  

 

                   

June 30,

2019

   

December 31,

2018

 
                                 

Identifiable assets:

                               

Refill

                  $ 264,226     $ 268,427  

Exchange

                    29,418       24,444  

Dispensers

                    28,115       20,523  

Corporate

                    12,132       6,734  
                    $ 333,891     $ 320,128  

 

As of June 30, 2019 and December 31, 2018, we had goodwill of $92,015 and $91,814, respectively, primarily 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 and in Item 1A of Part II of our subsequently filed Quarterly Reports on Form 10-Q. 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 June 30, 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 23,100 Refill locations, 12,800 Exchange locations and 8,700 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 June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Consolidated statements of operations data:

                               

Net sales

  $ 79,261     $ 75,802     $ 149,308     $ 149,461  

Operating costs and expenses:

                               

Cost of sales

    58,203       52,729       109,724       106,150  

Selling, general and administrative expenses

    8,768       9,600       19,096       18,800  

Special items

    1,152       410       1,413       487  

Depreciation and amortization

    7,292       6,114       13,845       12,171  

Loss on disposal of property and equipment and other

    252       111       327       244  

Total operating costs and expenses

    75,667       68,964       144,405       137,852  

Income from operations

    3,594       6,838       4,903       11,609  

Interest expense, net

    2,721       11,158       5,302       16,444  

Income (loss) before income taxes

    873       (4,320 )     (399 )     (4,835 )

Income tax benefit

          (4,771 )           (6,496 )

Net income (loss)

  $ 873     $ 451     $ (399 )   $ 1,661  

 

 

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 June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Consolidated statements of operations data:

                               

Net sales

    100.0 %     100.0 %     100.0 %     100.0 %

Operating costs and expenses:

                               

Cost of sales

    73.4       69.6       73.5       71.0  

Selling, general and administrative expenses

    11.1       12.7       12.8       12.6  

Special items

    1.5       0.5       0.9       0.3  

Depreciation and amortization

    9.2       8.1       9.3       8.1  

Loss on disposal of property and equipment and other

    0.3       0.2       0.2       0.2  

Total operating costs and expenses

    95.5       91.0       96.7       92.2  

Income from operations

    4.5       9.0       3.3       7.8  

Interest expense, net

    3.4       14.7       3.6       11.0  

Income (loss) before income taxes

    1.1       (5.7 )     (0.3 )     (3.2 )

Income tax benefit

          (6.3 )           (4.3 )

Net income (loss)

    1.1 %     0.6 %     (0.3 )%     1.1 %

 

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 June 30,

 
   

2019

   

2018

 
           

Percent

           

Percent

 
   

Dollars

   

of Net Sales

   

Dollars

   

of Net Sales

 

Segment net sales:

                               

Refill

  $ 42,276       53.3 %   $ 44,736       59.0 %

Exchange

    21,003       26.5 %     20,007       26.4 %

Dispensers

    15,982       20.2 %     11,059       14.6 %

Total net sales

  $ 79,261       100.0 %   $ 75,802       100.0 %
                                 

Segment income from operations:

                               

Refill

  $ 11,477             $ 13,894          

Exchange

    5,894               6,030          

Dispensers

    1,125               842          

Corporate

    (6,206 )             (7,293 )        

Special items

    (1,152 )             (410 )        

Depreciation and amortization

    (7,292 )             (6,114 )        

Loss on disposal of property and equipment and other

    (252 )             (111 )        
    $ 3,594             $ 6,838          

 

 

   

Three Months Ended June 30,

 
   

2019

   

2018

 

Segment gross margin:

               

Refill

    30.7 %     34.6 %

Exchange

    30.7 %     32.5 %

Dispensers

    10.2 %     9.9 %

Total gross margin

    26.6 %     30.4 %

 

 

   

Six months ended June 30,

 
   

2019

   

2018

 
           

Percent

           

Percent

 
   

Dollars

   

of Net Sales

   

Dollars

   

of Net Sales

 

Segment net sales:

                               

Refill

  $ 80,601       54.0 %   $ 86,211       57.7 %

Exchange

    40,355       27.0 %     38,265       25.6 %

Dispensers

    28,352       19.0 %     24,985       16.7 %

Total net sales

  $ 149,308       100.0 %   $ 149,461       100.0 %
                                 

Segment income from operations:

                               

Refill

  $ 21,561             $ 25,478          

Exchange

    11,362               11,293          

Dispensers

    1,709               1,986          

Corporate

    (14,144 )             (14,246 )        

Special items

    (1,413 )             (487 )        

Depreciation and amortization

    (13,845 )             (12,171 )        

Loss on disposal of property and equipment and other

    (327 )