Primo Water Corporation
Primo Water Corp (Form: 10-Q, Received: 05/04/2016 16:46:23)

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, 2016
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
 
30-0278688
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☑     No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  ☐
Accelerated filer  ☑
Non-accelerated filer  ☐  (Do not check if smaller reporting company)
Smaller reporting company  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐          No ☑
 
As of April 29, 2016, there were 25,909,578   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, 2016

INDEX

   
 Page number
PART 1.   Financial Information
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
17
     
Item 3.
24
     
Item 4.
24
     
PART II.  Other Information
     
Item 1.
25
     
Item 1A.
25
     
Item 2.
25
     
Item 3.
25
   
Item 4.
25
     
Item 5.
25
     
Item 6.
26
     
Signatures
27
 
PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

PRIMO WATER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value information)

   
March 31,
2016
   
December 31,
2015
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
1,143
   
$
1,826
 
Accounts receivable, net
   
14,301
     
11,098
 
Inventories
   
4,882
     
7,092
 
Prepaid expenses and other current assets
   
1,276
     
529
 
Total current assets
   
21,602
     
20,545
 
                 
Bottles, net
   
3,715
     
3,688
 
Property and equipment, net
   
33,391
     
31,997
 
Intangible assets, net
   
8,014
     
8,074
 
Other assets
   
184
     
183
 
Total assets
 
$
66,906
   
$
64,487
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
 
$
13,058
   
$
11,994
 
Accrued expenses and other current liabilities
   
2,600
     
3,748
 
Current portion of capital leases and notes payable
   
231
     
172
 
Total current liabilities
   
15,889
     
15,914
 
                 
Long-term debt and capital leases, net of current portion and debt issuance costs
   
21,492
     
19,903
 
Liabilities of disposal group, net of current portion, and other long-term liabilities
   
2,524
     
2,535
 
Total liabilities
   
39,905
     
38,352
 
                 
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, 25,895 and 25,810 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
   
26
     
26
 
Additional paid-in capital
   
281,126
     
281,476
 
Common stock warrants
   
7,492
     
7,492
 
Accumulated deficit
   
(260,416
)
   
(261,447
)
Accumulated other comprehensive loss
   
(1,227
)
   
(1,412
)
Total stockholders’ equity
   
27,001
     
26,135
 
Total liabilities and stockholders’ equity
 
$
66,906
   
$
64,487
 

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,
 
   
2016
   
2015
 
             
Net sales
 
$
32,296
   
$
29,213
 
Operating costs and expenses:
               
Cost of sales
   
22,947
     
21,557
 
Selling, general and administrative expenses
   
5,028
     
4,665
 
Non-recurring costs
   
207
     
22
 
Depreciation and amortization
   
2,408
     
2,585
 
Loss on disposal of property and equipment
   
193
     
64
 
Total operating costs and expenses
   
30,783
     
28,893
 
Income from operations
   
1,513
     
320
 
Interest expense, net
   
471
     
519
 
Income (loss) from continuing operations
   
1,042
     
(199
)
Loss from discontinued operations
   
(11
)
   
(38
)
Net income (loss)
 
$
1,031
   
$
(237
)
                 
Basic earnings (loss) per common share:
               
Income (loss) from continuing operations
 
$
0.04
   
$
(0.01
)
Loss from discontinued operations
   
(0.00
)
   
(0.00
)
Net income (loss)
 
$
0.04
   
$
(0.01
)
                 
Diluted earnings (loss) per common share:
               
Income (loss) from continuing operations
 
$
0.04
   
$
(0.01
)
Loss from discontinued operations
   
(0.00
)
   
(0.00
)
Net income (loss)
 
$
0.04
   
$
(0.01
)
                 
Weighted average shares used in computing earnings (loss) per share:
               
Basic
   
26,462
     
24,683
 
Diluted
   
29,211
     
24,683
 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
PRIMO WATER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

   
Three months ended
March 31,
 
   
2016
   
2015
 
             
Net income (loss)
 
$
1,031
   
$
(237
)
Other comprehensive income (loss):
               
Foreign currency translation adjustments, net
   
185
     
(318
)
Comprehensive income (loss)
 
$
1,216
   
$
(555
)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
PRIMO WATER   CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
Cash flows from operating activities:
           
Net income (loss)
 
$
1,031
   
$
(237
)
Less: Loss from discontinued operations
   
(11
)
   
(38
)
Income (loss) from continuing operations
   
1,042
     
(199
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
   
2,408
     
2,585
 
Loss on disposal of property and equipment
   
193
     
64
 
Stock-based compensation expense
   
560
     
635
 
Non-cash interest expense
   
28
     
28
 
Realized foreign currency exchange loss and other, net
   
(161
)
   
195
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(3,129
)
   
(1,861
)
Inventories
   
2,237
     
974
 
Prepaid expenses and other assets
   
(743
)
   
(284
)
Accounts payable
   
1,031
     
101
 
Accrued expenses and other liabilities
   
(751
)
   
(355
)
Net cash provided by operating activities
   
2,715
     
1,883
 
                 
Cash flows from investing activities:
               
Purchases of property and equipment
   
(2,938
)
   
(1,474
)
Purchases of bottles, net of disposals
   
(571
)
   
(706
)
Proceeds from the sale of property and equipment
   
3
     
5
 
Additions to and acquisitions of intangible assets
   
(16
)
   
(3
)
Net cash used in investing activities
   
(3,522
)
   
(2,178
)
                 
Cash flows from financing activities:
               
Borrowings under Revolving Credit Facility
   
8,600
     
7,500
 
Payments under Revolving Credit Facility
   
(7,100
)
   
(6,800
)
Note payable and capital lease payments
   
(74
)
   
(27
)
Stock option and employee stock purchase activity, net
   
(1,351
)
   
27
 
Debt issuance costs and other
   
     
(6
)
Net cash provided by financing activities
   
75
     
694
 
                 
Cash used in operating activities of discontinued operations
   
(32
)
   
(56
)
                 
Effect of exchange rate changes on cash and cash equivalents
   
81
     
(51
)
Net increase (decrease) in cash and cash equivalents
   
(683
)
   
292
 
Cash and cash equivalents, beginning of year
   
1,826
     
495
 
Cash and cash equivalents, end of period
 
$
1,143
   
$
787
 

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,” “us”) is a leading provider of multi-gallon purified bottled water, self-service refill 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 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, 2015, and are unaudited. 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, 2015. The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission 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 financial statements. Certain significant accounting policies, in addition to those described below, are summarized in our 2015 Form 10-K.

Revenue Recognition

Revenue is recognized for the sale of multi-gallon purified bottled water upon either the delivery of inventory to the retail store or the purchase by the consumer. Revenue is either recognized as an exchange transaction (where a discount is provided on the purchase of a multi-gallon bottle of purified water for the return of an empty multi-gallon bottle) or a non-exchange transaction. Revenues on exchange transactions are recognized net of the exchange discount. Self-service refill water revenue is recognized as the filtered water is purchased by the consumer or retailer, which is measured by the water dispensing equipment meter.

Revenue is recognized for the sale of our water dispenser products when title is transferred to our retail customers. We have no contractual obligation to accept returns nor do we guarantee sales. However, we will at times accept returns or issue credits for manufacturer defects or for units that were damaged in transit. Revenues are recognized net of an estimated allowance for returns using an average return rate based upon historical experience.

In addition, we offer certain incentives such as coupons and rebates that are netted against and reduce net sales in the condensed consolidated statements of operations. With the purchase of certain of our water dispensers we include a coupon for a free multi-gallon bottle of purified water. No revenue is recognized with respect to the redemption of the coupon for a free multi-gallon bottle of water and the cost of the multi-gallon bottle of purified water is included in cost of sales.

Accounts Receivable

All trade accounts receivable are due from customers located within the United States and Canada. We maintain an allowance for sales discounts, rebates and promotions based on our arrangements with customers. Accounts receivable, net included allowances for sales discounts, rebates and promotions of $540 and $586 at March 31, 2016 and December 31, 2015, respectively. Accounts receivable, net included allowances for doubtful accounts of $102 and $101 at March 31, 2016 and December 31, 2015, respectively. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates. Accounts receivable, net includes an allowance for returns of $1,103 and $965 at March 31, 2016 and December 31, 2015, respectively. The allowance for returns is computed using an average return rate based upon historical experience.
 
Concentrations of Risk

Our principal financial instruments subject to potential concentration of credit risk are cash, trade receivables and accounts payable. We invest our funds in a highly rated institution and believe the financial risk associated with cash and cash equivalents in excess of federally insured amounts is minimal. We perform ongoing credit evaluations of our customers’ financial condition and maintain allowances for doubtful accounts that we believe are sufficient to provide for losses that may be sustained on realization of accounts receivable.

Stock-Based Compensation

We estimate the grant date fair value of equity awards and amortize this value over the performance or service period. We measure the fair value of awards granted under the Primo Water Corporation Value Creation Plan (the “VCP”) and stock options using a Black-Scholes option pricing model which incorporates multiple complex and subjective inputs and assumptions (see “Note 4 – Stock-Based Compensation”). These variables include the expected term of the award, the expected stock price volatility over the expected term and risk-free interest rate. For restricted stock awards, we measure the fair value based upon the market price of our common stock on the date of the grant.  Compensation expense is generally recognized on a straight-line basis for over the service period. For awards with performance conditions, we begin recognizing compensation expense when it becomes probable that the performance condition will be attained. Stock-based compensation expense is reflected in selling, general, and administrative expenses.

Basic and Diluted Earnings (Loss) Per Share

Earnings (loss) per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted amounts per share include the dilutive impact, if any, of our outstanding potential common shares, such as stock options, restricted stock units and warrants. Diluted amounts per share also include the dilutive impact, if any, of contingently issuable shares related to awards under the VCP. As performance-based awards, such dilutive impact is based on the number of shares, if any, that would be issuable under the terms of the VCP if the end of the reporting period were the end of the contingency period. Once the issuance is no longer contingent, such shares are included in the computation of basic earnings (loss) per share. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net loss per common share.

Cumulative Translation Adjustment and Foreign Currency Transactions

The local currency of our operations in Canada is considered to be the functional currency. Assets and liabilities of the Canada subsidiary are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are presented as foreign currency translation adjustments, net included in other comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss). With the exception of transaction gains and losses on certain intercompany balances which we have determined are of a long-term investment nature, realized gains and losses on foreign currency transactions are included in the condensed consolidated statements of operations. At March 31, 2016 and December 31, 2015, accumulated other comprehensive loss balances of $1,227 and $1,412, respectively, were related to unrealized foreign currency translation adjustments and transaction gains and losses on certain intercompany balances.

Non-recurring Costs

Transactions that are unusual in nature or which occur infrequently, but not both, are reported as non-recurring costs on our condensed consolidated statements of operations.  Non-recurring costs consist primarily of transition and other expenses associated with the strategic alliance agreement (the “DS Services Agreement”) with DS Services of America, Inc. (“DS Services”) as well as other legal and severance expenses.
 
Recent Accounting Pronouncements

In April 2015, the FASB issued updated guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. We have adopted the amendments of this updated guidance effective January 1, 2016 and retrospectively applied to all periods presented. The adoption resulted in the $386 reclassification of debt issuance costs, net from other assets to long-term debt and capital leases, net of current portion and debt issuance costs on the condensed consolidated balance sheets as of December 31, 2015.

In May 2014, the FASB issued updated guidance which supersedes existing revenue recognition requirements in U.S. GAAP. The updated guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the guidance establishes a five-step approach for the recognition of revenue. In March and April 2016, the FASB issued further guidance to provide clarity regarding principal versus agent considerations, the identification of performance obligations and certain other matters. The updates are currently effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

In August 2014, the FASB issued updated guidance clarifying management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The updated guidance requires that an entity’s management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The update is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The amendment is not expected to have an impact on our consolidated financial statements.

In July 2015, the FASB issued updated guidance requiring the measurement of certain inventory at the lower of cost and net realizable value. The update is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. We do not expect the adoption of this updated guidance to have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued updated guidance 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 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. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

In March 2016, the FASB issued updated guidance to provide for the simplification of aspects of accounting for stock compensation, specifically focusing on certain tax-related matters, the accounting for forfeitures, classification of certain items on the statement of cash flows and other matters. The update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

2. Discontinued Operations

During 2012, we committed to a plan to sell the assets of the Disposal Group, which includes sparkling beverage appliances, flavorings, CO 2 cylinders and accessories sold under the Flavorstation brand as well as the Omnifrio single-serve business and initiated an active program to execute this plan. In addition, we determined that the Disposal Group met all of the criteria for classification as discontinued operations. As a result, current and prior year amounts and disclosures reflect these operations as discontinued operations. For each period presented, loss from discontinued operations consisted primarily of selling, general and administrative costs associated with the resolution of contingencies and other matters that arose from and that are directly related to the operations of the Disposal Group before its disposal.

Accrued expenses and other current liabilities of the disposal group of $5 and $15 at March 31, 2016 and December 31, 2015, respectively, are presented within accrued expenses and other current liabilities on the condensed consolidated balances. Other long-term liabilities of the disposal group of $1,931 and $1,942 at March 31, 2016 and December 31, 2015, respectively, are presented within liabilities of disposal group, net of current portion, and other long-term liabilities on the condensed consolidated balance sheets.
 
3. Debt and Capital Leases, net of Debt Issuance Costs

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

   
March 31,
2016
   
December 31,
2015
 
             
Revolving Credit Facility, net of debt issuance costs
 
$
1,361
   
$
(149
)
Term Notes, net of debt issuance costs
   
19,780
     
19,763
 
Capital leases
   
582
     
461
 
     
21,723
     
20,075
 
Less current portion
   
(231
)
   
(172
)
Long-term debt and capital leases, net of current portion and debt issuance costs
 
$
21,492
   
$
19,903
 

Revolving Credit Facility and Term Notes

On June 20, 2014, we entered into a note purchase agreement (the “Credit Agreement”), which was subsequently amended on March 7, 2016, that provides up to $35,000 in secured indebtedness and consists of a $15,000 revolving credit facility (the “Revolving Credit Facility”) and $20,000 in term notes (the “Term Notes”). The Revolving Credit Facility matures on June 20, 2019 with all outstanding borrowings and accrued interest to be repaid on such date and the Term Notes mature on June 20, 2021 with all outstanding indebtedness and accrued interest to be repaid on such date. The Revolving Credit Facility and Term Notes are secured on a first priority basis by substantially all of our assets. Interest on outstanding amounts owed under the Term Notes is payable quarterly at the rate of 7.8%. Principal payments under the Term Notes are payable in five annual $4,000 installments beginning on June 20, 2017.

Interest on outstanding borrowings under the Revolving Credit Facility is payable at our option at either (i) the Base Rate, defined as the greater of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or the LIBOR for a three-month interest period plus 1.0%, plus in each such case a margin of 3.25% or (ii) a one-, two-, three- or six-month LIBOR rate, plus a margin of 4.25%.  We are required to pay a commitment fee of 0.50% on the unused amount of the commitment under the Revolving Credit Facility. As of March 31, 2016, we had $1,500 in outstanding borrowings at a weighted-average interest rate of 5.38% and our remaining availability was $13,500 under the Revolving Credit Facility.

The Credit Agreement contains a number of affirmative and restrictive financial covenants (including limitations on dissolutions, sales of assets, investments, and indebtedness and liens) that use adjusted EBITDA (“Adjusted EBITDA”). Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as income (loss) from continuing operations before depreciation and amortization; interest expense; non-cash, stock-based compensation expense; non-recurring costs; and loss on disposal of property and equipment and other.

The primary covenants included in the Revolving Credit Facility are as follows: (i) a ratio of consolidated total indebtedness to Adjusted EBITDA of no more than 2.75 to 1.00 as of the last day of each month (measured on a trailing four-quarter basis), (ii) a consolidated tangible net worth requirement measured at the end of each month of no less than $11,000 plus 50% of consolidated net income on a cumulative basis for each fiscal quarter beginning with the quarter ended June 30, 2014 (net losses are disregarded), and (iii) a ratio of Adjusted EBITDA to consolidated fixed charges of no less than 1.00 to 1.00 as of the last day of each quarter (measured on a trailing four-quarter basis). At March 31, 2016 we were in compliance with all covenants with: (i) a consolidated total indebtedness to Adjusted EBITDA ratio of 1.14 to 1.00, (ii) consolidated tangible net worth of $18,988 compared to the adjusted minimum of $12,671 and (iii) an Adjusted EBITDA to consolidated fixed charges ratio of 1.70 to 1.00.
 
4. 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,
 
   
2016
   
2015
 
Stock options
 
$
147
   
$
111
 
Restricted stock
   
146
     
197
 
Value Creation Plan
   
254
     
315
 
Employee Stock Purchase Plan
   
13
     
12
 
   
$
560
   
$
635
 

Value Creation Plan

On May 7, 2012, we established the VCP, which was subsequently amended on May 14, 2013 and amended and restated on March 3, 2016. The VCP provides awards comprised of cash or equity grants for eligible employees as determined by the Compensation Committee, based on the attainment of certain performance-based targets. Our intention is that all awards under the VCP will be in the form of equity grants. The VCP provides for the issuance of up to three separate awards to eligible employees based on our attainment of financial targets of at least $15,000, $24,000 and $28,000 in Adjusted EBITDA for any fiscal year between 2014 and 2019. Once we attained the $15,000 Adjusted EBITDA target level during fiscal year 2015, the Adjusted EBITDA target level increased to $24,000 for subsequent fiscal years; and once we attain the $24,000 Adjusted EBITDA target level for a given fiscal year, the Adjusted EBITDA target level would increase to $28 ,000 for subsequent fiscal years.

The award pool for the first issuance equaled 15.0% of the market capital appreciation of our stock from May 11, 2012 to March 11, 2016, the market close on the third full trading day after public announcement of financial results for 2015. On March 11, 2016, 3,035 shares were issued or deferred into the Primo Water Corporation Executive Deferred Compensation Plan (the “Deferred Compensation Plan”) related to the $15,000 Adjusted EBITDA target. The deferral of certain shares did not alter the existing vesting conditions, number of awards vested or the form of the awards issued under the VCP.

The award pool for the second issuance is equal to 17.5% of the market capital appreciation of our stock from March 11, 2016 to the market close on the third full trading day after public announcement of the financial results for the fiscal year in which the $24,000 target is attained. The award pool for the third issuance is equal to 20.0% of the market capital appreciation of our stock from the date of the second issuance to the market close on the third full trading day after public announcement of the financial results for the fiscal year in which the $28,000 target is attained.

On March 11, 2016, a grant date was achieved with respect to the $24,000 Adjusted EBITDA target. As equity-classified awards, we determine the total compensation expense for awards under the VCP on their grant date based on the fair value method using the Black-Scholes option pricing model. The total fair value and the key assumptions used in the Black-Scholes model for the awards related to the $24,000 Adjusted EBITDA target were as follows:

   
$24,000 Adjusted
EBITDA Target Award
 
Total fair value
 
$
7,730
 
Assumptions:
       
March 11, 2016 closing stock price
 
$
9.39
 
Expected life of awards in years
   
1.7
 
Risk-free interest rate
   
0.7
%
Expected volatility
   
37.5
%
Dividend yield
   
0.0
%

The expected life of awards under the VCP is determined based on an estimate of the weighted average time for the relevant target to be attained. The risk free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on our historical volatility.
 
As the VCP consists of awards with performance-based targets, we will begin recognizing compensation expense only when it becomes probable that the performance-based target will be attained. As of March 31, 2016, we do not believe it is probable that the $24,000 Adjusted EBITDA target will be attained. We will perform an on-going analysis to determine probability of achievement of the $24,000 Adjusted EBITDA target. If attainment of that target becomes probable prior to the expiration of the VCP, we will record a cumulative catch-up of the compensation expense based on the portion of the requisite service period already past and will continue to recognize compensation expense through the end of the service period.

5. Commitments and Contingencies

Omnifrio Single-Serve Beverage Business

Deferred purchase price payments totaling $1,931 and $1,942 were included within liabilities of disposal group, net of current portion, and other long-term liabilities on the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively. These payments were related to the April 11, 2011 acquisition of certain intellectual property and other assets from the seller, Omnifrio Beverage Company LLC (“Omnifrio”). On July 19, 2013, we entered into a conditional settlement and release agreement with Omnifrio and certain other parties pursuant to which we agreed to, among other things, use commercially reasonable efforts to sell the assets purchased from Omnifrio in April 2011 and to provide Omnifrio certain amounts of the proceeds of any such sale in exchange for Omnifrio agreeing to release us from any claims related to the milestone payments included in our original purchase agreement with Omnifrio and, upon the sale of such assets, to release us from any claims related to the deferred purchase price payments included in such agreement. The conditional settlement and release agreement was amended on July 19, 2014, October 18, 2014, April 18, 2015, June 25, 2015 and January 1, 2016, each time to extend its term. The conditional settlement and release agreement is currently in effect through June 30, 2016.

Prism Arbitration

On August 5, 2014, Primo Distribution, LLC (also known as Prism Distribution) initiated an arbitration proceeding against us, claiming less than $1,000 in damages for alleged breach of contract.  The arbitration was filed with the American Arbitration Association, and was amended on December 19, 2014 to include additional claims for conversion, unfair and deceptive trade practices, fraud, and unjust enrichment.  Damages claimed remain less than $1,000.  We do not believe that the claim has any merit and plan to vigorously contest and defend against it. No accrual has been made for this claim at March 31, 2016, as we do not currently believe that any losses are probable.

Texas Regional Operator Litigation/Arbitration

On August 8, 2014, a lawsuit was commenced against us by our regional operators Artesia Springs, LLC, HOD Enterprises, L.P., and BBB Water, Inc. (the “ROs”) in the State of Texas.  DS Services is also named as a defendant in the lawsuit.  The lawsuit was filed in the 166th Judicial District Court of Bexar County, Texas, and was served upon us on August 25, 2014.  We removed the lawsuit to the United States District Court for the Western District of Texas on September 5, 2014.  The claims alleged against us in the lawsuit are breach of contract, conspiracy and fraud, and the ROs seek unspecified monetary damages as well as injunctive relief.  On January 31, 2015, the District Judge dismissed the case without prejudice and indicated that to pursue their claims, the plaintiffs would have to proceed with alternative dispute resolution in North Carolina as provided in their contracts.

On April 10, 2015, the ROs initiated an arbitration proceeding with the American Arbitration Association (“AAA”). The claims asserted are essentially the same as the ones made in their lawsuit described above. The ROs most recently re-filed their consolidated claims in the arbitration proceeding on September 15, 2015, and we filed counterclaims against Artesia Springs, LLC and HOD Enterprises, L.P. on October 20, 2015. We resolved the claims asserted by BBB Water, Inc. as of December 31, 2015, and BBB Water, Inc. is no longer a party to the arbitration proceedings. We do not believe that the ROs’ claims have any merit and plan to vigorously contest and defend against them. No accrual has been made for this claim at March 31, 2016 as we do not currently believe that any loss which may result can be reasonably estimated. An estimate of the possible loss or range of losses cannot be made.

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.

6. Income Taxes

We have established a full valuation allowance for our deferred tax assets that are not expected to be realized. For the three months ended March 31, 2016 and 2015, there was no income tax expense or benefit.

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, however, we believe the annual limit is such that we will be able to utilize our net operating loss carryforwards during their respective carryforward periods.

7. 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, 2016, we held financial assets that are required to be measured at fair value on a recurring basis. The financial assets held by the Company and the fair value hierarchy used to determine their fair values are as follows:

   
Total Fair
Value
   
Fair Value
Measurement
Using Level 1
 
Current assets:
           
Cash equivalents
 
$
695
   
$
695
 
Total
 
$
695
   
$
695
 
 
At March 31, 2016 and December 31, 2015, certain impaired Refill equipment reported in property and equipment, net on our condensed consolidated balance sheets was measured at its estimated fair value of $32 and $49, respectively, on a nonrecurring basis. The fair value is estimated based on the estimated salvage value of certain reusable components of the impaired equipment (Level 3 inputs).
 
The carrying amounts of cash and cash equivalents, accounts receivable, net, accounts payable, and accrued expenses and other current liabilities, approximate their fair values due to their short maturities.  Liabilities of the Disposal Group classified as held for sale and reported within accrued expenses and other current liabilities and liabilities of disposal group, net of current portion, and 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 Revolving Credit Facility, the carrying value of debt, capital leases and notes payable approximates fair value.
 
8. Earnings (Loss) Per Share

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

   
Three months ended March 31,
 
   
2016
   
2015
 
Basic:
           
Income (loss) from continuing operations
 
$
1,042
   
$
(199
)
Loss from discontinued operations
   
(11
)
   
(38
)
Net income (loss)
 
$
1,031
   
$
(237
)
                 
Weighted average shares
   
26,462
     
24,683
 
                 
Basic earnings (loss) per share from continuing operations
 
$
0.04
   
$
(0.01
)
Basic loss per share from discontinued operations
   
(0.00
)
   
(0.00
)
Basic earnings (loss) per share
 
$
0.04
   
$
(0.01
)
                 
Diluted:
               
Income (loss) from continuing operations
 
$
1,042
   
$
(199
)
Loss from discontinued operations
   
(11
)
   
(38
)
Net income (loss)
 
$
1,031
   
$
(237
)
                 
Weighted average shares
   
26,462
     
24,683
 
Potential shares arising from stock options, restricted stock, warrants and contingently issuable shares under the VCP
   
2,749
     
 
Weighted average shares - diluted
   
29,211
     
24,683
 
                 
Diluted earnings (loss) per share from continuing operations
 
$
0.04
   
$
(0.01
)
Diluted loss per share from discontinued operations
   
(0.00
)
   
(0.00
)
Diluted earnings (loss) per share
 
$
0.04
   
$
(0.01
)

For the three months ended March 31, 2016, contingently issuable shares related to the first award under the VCP were included in the computation of the number of shares used in the diluted earnings per share through the March 11, 2016 issuance or deferral into the Deferred Compensation Plan. Subsequent to March 11, 2016, such shares were used in the computation of the number of shares used in basic earnings per share. Refer to “Note 4 – Stock-Based Compensation” for further description.

For the three months ended March 31, 2016, stock options, warrants and unvested shares of restricted stock with respect to an aggregate of 1,101 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 three months ended March 31, 2015, stock options, warrants and unvested shares of restricted stock with respect to an aggregate of 3,082 shares have been excluded from the computation of the number of shares used in the diluted earnings per share because we incurred a net loss for the period and their inclusion would be anti-dilutive.
 
9. Segments

We have two operating segments and two reportable segments: Primo Water (“Water”) and Primo Dispensers (“Dispensers”).

Our Water segment sales consist of the sale of multi-gallon purified bottled water (“Exchange”) and our self-service filtered drinking water (“Refill”) offered through retailers in each of the contiguous United States and Canada. Our Water products are offered through point of purchase display racks or self-service filtered water displays 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 U.S. retailers, where we recognize revenues for the sale of the water dispensers when title is transferred. We support retail sell-through with domestic inventory.

We evaluate the financial results of these segments focusing primarily on segment net sales and segment income (loss) from operations before depreciation and amortization (“segment income (loss) from operations”). We utilize segment net sales and segment income (loss) 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 Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays as well as costs associated with obtaining meter readings to determine water usage. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

Selling, general and administrative expenses for Water 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,
 
   
2016
   
2015
 
Segment net sales
           
Water
 
$
22,378
   
$
20,657
 
Dispensers
   
9,918
     
8,556
 
   
$
32,296
   
$
29,213
 
                 
Segment income (loss) from operations
               
Water
 
$
7,730
   
$
6,428
 
Dispensers
   
698
     
331
 
Corporate
   
(4,107
)
   
(3,768
)
Non-recurring costs
   
(207
)
   
(22
)
Depreciation and amortization
   
(2,408
)
   
(2,585
)
Loss on disposal of property and equipment
   
(193
)
   
(64
)
   
$
1,513
   
$
320
 
                 
Depreciation and amortization expense:
               
Water
 
$
2,283
   
$
2,359
 
Dispensers
   
39
     
95
 
Corporate
   
86
     
131
 
   
$
2,408
   
$
2,585
 
                 
Capital expenditures:
               
Water
 
$
3,338
   
$
2,142
 
Corporate
   
171
     
38
 
   
$
3,509
   
$
2,180
 
 
Identifiable assets:
 
At March 31,
2016
   
At December 31,
2015
 
Water
 
$
52,488
   
$
50,617
 
Dispensers
   
13,227
     
12,843
 
Corporate
   
1,191
     
1,027
 
   
$
66,906
   
$
64,487
 
 
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, 2015. 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 and 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 “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” “anticipate” 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, 2015. 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,” “us”) is a leading provider of multi-gallon purified bottled water, self-service refill 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 founded in 2004 and is headquartered in Winston-Salem, North Carolina.

Our business is designed to generate recurring demand for our purified bottled water or self-service filtered 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 (“Exchange”) or they are refilled at a self-service filtered drinking water location (“Refill”). 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, 2016, our products were offered in each of the United States and in Canada at approximately 26,000 combined retail locations, including Lowe’s Home Improvement, Walmart, The Home Depot, Kmart, Meijer, Kroger, Food Lion, H-E-B Grocery, Sobeys and Walgreens.

We provide major retailers throughout the United States and Canada with a single-vendor solution for Dispensers and Water, addressing a market demand that we believe was previously unmet. 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 filtered water through the installation and servicing of reverse osmosis water filtration systems in the back room of the retailer’s store location, which minimizes the usage of the customer’s retail space. The self-service filtered water display , which is typically accompanied by a sales display containing empty reusable bottles, is located within the retailer customer’s floor space. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic and highly predictable revenue.

Business Segments

We have two operating segments and two reportable segments: Primo Water (“Water”) and Primo Dispensers (“Dispensers”).

Our Water segment sales consist of our Exchange and Refill products, which are offered through retailers in each of the contiguous United States and Canada. Our Water products are offered through point of purchase display racks or self-service filtered water displays 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 U.S. and Canada, where we recognize revenues for the sale of the water dispensers when title is transferred. We support retail sell-through with domestic inventory.

We evaluate the financial results of these segments focusing primarily on segment net sales and segment income (loss) from operations before depreciation and amortization (“segment income (loss) from operations”). We utilize segment net sales and segment income (loss) 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 Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays as well as costs associated with obtaining meter readings to determine water usage. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

Selling, general and administrative expenses for Water 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” for our Water segment, 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:

   
Three months ended March 31,
 
   
2016
   
2015
 
Consolidated statements of operations data:
           
Net sales
 
$
32,296
   
$
29,213
 
Operating costs and expenses:
               
Cost of sales
   
22,947
     
21,557
 
Selling, general and administrative expenses
   
5,028
     
4,665
 
Non-recurring costs
   
207
     
22
 
Depreciation and amortization
   
2,408
     
2,585
 
Loss on disposal of property and equipment
   
193
     
64
 
Total operating costs and expenses
   
30,783
     
28,893
 
Income from operations
   
1,513
     
320
 
Interest expense, net
   
471
     
519
 
Income (loss) from continuing operations
   
1,042
     
(199
)
Loss from discontinued operations
   
(11
)
   
(38
)
Net income (loss)
 
$
1,031
   
$
(237
)
 
The following table sets forth our results of operations expressed as a percentage of net sales:

   
Three months ended March 31,
 
   
2016
   
2015
 
Consolidated statements of operations data:
           
Net sales
   
100.0
%
   
100.0
%
Operating costs and expenses:
               
Cost of sales
   
71.1
     
73.8
 
Selling, general and administrative expenses
   
15.6
     
16.0
 
Non-recurring costs
   
0.5
     
0.1
 
Depreciation and amortization
   
7.5
     
8.8
 
Loss on disposal of property and equipment
   
0.6
     
0.2
 
Total operating costs and expenses
   
95.3
     
98.9
 
Income from operations
   
4.7
     
1.1
 
Interest expense, net
   
1.5
     
1.8
 
Income (loss) from continuing operations
   
3.2
     
(0.7
)
Loss from discontinued operations
   
     
(0.1
)
Net income (loss)
   
3.2
%
   
(0.8
)%
 
The following table sets forth our segment net sales and segment income from operations presented on a segment basis and reconciled to our consolidated income from operations.

   
Three months ended March 31,
 
   
2016
   
2015
 
Segment net sales
           
Water
 
$
22,378
   
$
20,657
 
Dispensers
   
9,918
     
8,556
 
Total net sales
 
$
32,296
   
$
29,213
 
                 
Segment income from operations
               
Water
 
$
7,730
   
$
6,428
 
Dispensers
   
698
     
331
 
Corporate
   
(4,107
)
   
(3,768
)
Non-recurring costs
   
(207
)
   
(22
)
Depreciation and amortization
   
(2,408
)
   
(2,585
)
Loss on disposal of property and equipment
   
(193
)
   
(64
)
   
$
1,513
   
$
320
 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Net Sales .  Net sales increased 10.6%, or $3.1 million, to $32.3 million for the three months ended March 31, 2016 from $29.2 million for the three months ended March 31, 2015. The change was due to increases of $1.7 million and $1.4 million for Water and Dispensers net sales, respectively.

Water. Water net sales increased 8.3% to $22.4 million, representing 69.3% of our total net sales for the three months ended March 31, 2016. The increase was primarily due to the 11.9% increase in U.S. Exchange sales attributable to the addition of retail exchange locations and same-store unit growth of approximately 9.3%. Additionally, U.S. Refill net sales increased 5.2% due to same-store unit growth, the addition of retail locations and growth in sales of empty bottles. Overall, five-gallon equivalent units for Water increased 6.2% to 8.7 million for the three months ended March 31, 2016 from 8.2 million for the same period of the prior year.
 
Dispensers. Dispensers net sales increased 15.9% to $9.9 million, representing 30.7% of our total net sales for the three months ended March 31, 2016.  The increase in Dispensers net sales was primarily due to the timing of orders from major retailers compared to the prior year and increased consumer demand. Consumer demand, which we measure as the dispenser unit sales by our retail customers to consumers, was 146,000, or an increase of 22.0% for the three months ended March 31, 2016 compared to the same period in 2015. Driven primarily by the increased consumer demand, our dispenser unit sales to retailers increased by 24.2% for the three months ended March 31, 2016 compared to the same period in 2015 . The increase in sales units was greater than the increase in sales dollars primarily due to a shift in customer and item mix.
 
Gross Margin Percentage. The overall gross margin percentage increased to 28.9% for the three months ended March 31, 2016 from 26.2% for the three months ended March 31, 2015 due to improvements in both Water and Dispensers.
 
Water. Gross margin as a percentage of net sales for our Water segment increased to 37.4% for the three months ended March 31, 2016 from 34.2% for the three months ended March 31, 2015 due to improvements for both Exchange and Refill. Gross margin as a percentage of net sales for Refill improved to 52.0% for the three months ended March 31, 2016 compared to 50.1% for the same period in 2015, due primarily to the reduction in reusable empty bottle supply chain costs. Gross margin as a percentage of net sales for Exchange improved to 31.2% for the three months ended March 31, 2016 compared to 26.9% for the same period in 2015, due primarily to improved supply chain costs.

Dispensers. Gross margin as a percentage of net sales for our Dispensers segment increased to 9.8% for the three months ended March 31, 2016 from 6.8% for the three months ended March 31, 2015. The increase in gross margin percentage was primarily due to a favorable change in sales mix towards higher margin products and improved supply chain costs.

Selling, General and Administrative Expenses (“SG&A”). SG&A increased 7.8% to $5.0 million for the three months ended March 31, 2016 from $4.7 million for the three months ended March 31, 2015. As a percentage of net sales, SG&A decreased to 15.6% for the three months ended March 31, 2016 from 16.0% for the three months ended March 31, 2015. The increase in SG&A expense was primarily due to the $0.8 million increase in employee-related costs driven primarily by an increase in compensation expenses related to performance-based incentives. This change was partially offset by the $0.3 million decrease in realized foreign currency loss due to the weakening of the U.S. dollar relative to the Canadian dollar during the three months ended March 31, 2016, compared to the strengthening of the U.S. dollar relative to the Canadian dollar during the same period in 2015.

Non-Recurring Costs. Non-recurring costs were $0.2 million for the three months ended March 31, 2016 compared to less than $0.1 million for the same period in 2015. For both periods, non-recurring costs consisted primarily of legal and other expenses associated with the Texas regional operators litigation/arbitration.

Depreciation and Amortization. Depreciation and amortization decreased 6.8% to $2.4 million for the three months ended March 31, 2016 from $2.6 million for the three months ended March 31, 2015.

Loss on Disposal of Property and Equipment . Loss on disposal of property and equipment was $0.2 million for the three months ended March 31, 2016 compared to $0.1 million for the three months ended March 31, 2015.

Interest Expense, net. Interest expense decreased 9.3% to $0.5 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The decrease was primarily attributable to lower debt levels compared to the prior year.

Liquidity and Capital Resources

Adequacy of Capital Resources

Since our inception, we have financed our operations primarily through the sale of stock, the issuance of debt, borrowings under credit facilities and cash provided by operations. While we had no material commitments for capital expenditures as of March 31, 2016, we anticipate net capital expenditures to range between $7.0 million and $9.0 million for the remainder of 2016. Anticipated capital expenditures are related primarily to growth in Water locations.
 
At March 31, 2016, our cash and cash equivalents totaled $1.1 million and we had $13.5 million available under our $15.0 million revolving credit facility. We anticipate that our current cash, availability under our revolving credit facility and cash flow from operations will be sufficient to meet our current needs for working capital and capital expenditures in the ordinary course of business for the foreseeable future.

Our future capital requirements may vary materially from those now anticipated and will depend on many factors including:  the rate of growth in new Water 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 acquisitions of other businesses.  Historically, we have experienced increases in our capital expenditures consistent with the growth in our operations and personnel, 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.

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,
 
   
2016
   
2015
 
Net cash provided by operating activities
 
$
2.7
   
$
1.9
 
Net cash used in investing activities
 
$
(3.5
)
 
$
(2.2
)
Net cash provided by financing activities
 
$
0.1
   
$
0.7
 

Net Cash Flows from Operating Activities

Net cash provided by operating activities increased to $2.7 million for the three months ended March 31, 2016 from $1.9 million for the three months ended March 31, 2015, driven primarily by the increase in income from continuing operations.

Net Cash Flows from Investing Activities

Net cash used in investing activities increased to $3.5 million for the three months ended March 31, 2016 from $2.2 million for the three months ended March 31, 2015, primarily as a result of the timing of investment in capital expenditures. Our primary investing activities are typically capital expenditures for equipment and bottles and include expenditures related to the installation of our recycle centers, display racks and reverse osmosis filtration systems at new Water locations.

Net Cash Flows from Financing Activities

Net cash provided by financing activities decreased to $0.1 million for the three months ended March 31, 2016 from $0.7 million for the three months ended March 31, 2015, primarily due to an increase in shares purchased to pay taxes associated with certain incentive stock award payouts. This change was partially offset by an increase in net borrowings under the Revolving Credit Facility.

Credit facility

On June 20, 2014, we entered into a note purchase agreement (the “Credit Agreement”), which was subsequently amended on March 7, 2016, that provides up to $35.0 million in secured indebtedness and consists of a $15.0 million revolving credit facility (the “Revolving Credit Facility”) and $20.0 million in term notes (the “Term Notes”). The Revolving Credit Facility matures on June 20, 2019 with all outstanding borrowings and accrued interest to be repaid on such date and the Term Notes mature on June 20, 2021 with all outstanding indebtedness and accrued interest to be repaid on such date. The Revolving Credit Facility and Term Notes are secured on a first priority basis by substantially all of our assets.
 
Interest on outstanding amounts owed under the Term Notes is payable quarterly at the rate of 7.8%. Principal payments under the Term Notes are payable in five annual $4.0 million installments beginning on June 20, 2017. As of March 31, 2016, we had $1.5 million in outstanding borrowings at a weighted-average interest rate of 5.38% and $13.5 million available under the Revolving Credit Facility.

The Credit Agreement contains a number of affirmative and restrictive financial covenants (including limitations on dissolutions, sales of assets, investments, and indebtedness and liens) and contains the following financial covenants: (i) a ratio of consolidated total indebtedness to adjusted EBITDA of no more than 2.75 to 1.00 as of the last day of each month (measured on a trailing four-quarter basis), (ii) a consolidated tangible net worth requirement measured at the end of each month of no less than $11 million plus 50% of consolidated net income on a cumulative basis for each fiscal quarter beginning with the quarter ended June 30, 2014 (net losses are disregarded), and (iii) a ratio of adjusted EBITDA to consolidated fixed charges of no less than 1.00 to 1.00 as of the last day of each quarter (measured on a trailing four-quarter basis). At March 31, 2016 we were in compliance with all covenants with: (i) a consolidated total indebtedness to adjusted EBITDA ratio of 1.14 to 1.00, (ii) consolidated tangible net worth of $19.0 million compared to the adjusted minimum of $12.7 million and (iii) an adjusted EBITDA to consolidated fixed charges ratio of 1.70 to 1.00.

Adjusted EBITDA U.S. GAAP Reconciliation

Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as income (loss) from continuing operations before depreciation and amortization; interest expense, net; non-cash, stock-based compensation expense; non-recurring costs; and loss on disposal of property and equipment and other. Our Credit Agreement contains financial covenants that use Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors 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 income (loss) from continuing operations and Adjusted EBITDA.

   
Three Months Ended
March 31,
 
   
2016
   
2015
 
Income (loss) from continuing operations
 
$
1,042
   
$
(199
)
Depreciation and amortization
   
2,408
     
2,585
 
Interest expense, net
   
471
     
519
 
EBITDA
   
3,921
     
2,905
 
Non-cash, stock-based compensation expense
   
560
     
635
 
Non-recurring costs
   
207
     
22
 
Loss on disposal of property and equipment and other
   
233
     
102
 
Adjusted EBITDA
 
$
4,921
   
$
3,664
 
 
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 are not a party to any derivative contracts or synthetic leases.

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 Water segment, which generally enjoys higher margins than our Dispensers segment, experiences higher sales and operating income in the spring and summer. We have historically experienced higher sales and operating income from our water dispensers 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 Water segment. Accordingly, our results of operations in any quarter will not necessarily be indicative of the results that we may achieve for a year or any future quarter.

Critical Accounting Policies and Estimates

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, 2015.

Recent Accounting Pronouncements

In April 2015, the FASB issued updated guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. We have adopted the amendments of this updated guidance effective January 1, 2016 and retrospectively applied to all periods presented. The adoption resulted in the $0.4 million reclassification of debt issuance costs, net from other assets to long-term debt and capital leases, net of current portion and debt issuance costs on the condensed consolidated balance sheets as of December 31, 2015.

In May 2014, the FASB issued updated guidance which supersedes existing revenue recognition requirements in U.S. GAAP. The updated guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the guidance establishes a five-step approach for the recognition of revenue. In March and April 2016, the FASB issued further guidance to provide clarity regarding principal versus agent considerations, the identification of performance obligations and certain other matters. The updates are currently effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

In August 2014, the FASB issued updated guidance clarifying management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The updated guidance requires that an entity’s management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The update is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The amendment is not expected to have an impact on our consolidated financial statements.

In July 2015, the FASB issued updated guidance requiring the measurement of certain inventory at the lower of cost and net realizable value. The update is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. We do not expect the adoption of this updated guidance to have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued updated guidance 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 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. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
 
In March 2016, the FASB issued updated guidance to provide for the simplification of aspects of accounting for stock compensation, specifically focusing on certain tax-related matters, the accounting for forfeitures, classification of certain items on the statement of cash flows and other matters. The update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

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,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the 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, 2015.

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, 2016. 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, 2015 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, 2015. 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.

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

None.
Item 6. Exhibits

EXHIBIT INDEX
 
Exhibit
Number
 
Description
     
3.1
 
Sixth Amended and Restated Certificate of Incorporation of Primo Water Corporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-173554) filed on May 31, 2011)
3.2
 
Amended and Restated Bylaws of Primo Water Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed November 16, 2010)
 
Primo Water Corporation Amended and Restated Value Creation Plan (filed herewith)*
10.2
 
First Amendment to Note Purchase Agreement dated as of March 7, 2016 by and among the Company, Primo Products, LLC, Primo Direct, LLC, Primo Refill, LLC, Primo Ice, LLC, Primo Refill Canada Corporation, The Prudential Life Insurance Company of America and PICA Hartford Life Insurance Comfort Trust (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K filed March 9, 2016)
 
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)
 
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)
 
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)
 * Indicates management contract or compensatory plan or arrangement.
 
(1)
Included herewith
 
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 4, 2016
By:
/s/ Billy D. Prim
   
Billy D. Prim
   
Chairman and Chief Executive Officer
     
Date:  May 4, 2016
By:
/s/ Mark Castaneda
   
Mark Castaneda
   
Chief Financial Officer
 
 
27


Exhibit 10.1
 
Primo Water Corporation
Amended and Restated Value Creation Plan
(March 3, 2016)

Purpose of Plan

This Amended and Restated Value Creation Plan (“ Plan ”) is established to assist Primo Water Corporation (the “ Company ”) in attracting and retaining highly qualified executive officers and motivating such executive officers to serve the Company and expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to earn incentive compensation based on the achievement by the Company of pre-established performance goals, as provided herein.  This Plan amends and restates in its entirety the Value Creation Plan originally established by the Company in May 2012 and later amended by the Company in May 2013.

Award Formula

The Company will issue to eligible Participants (as defined below) up to three separate equity/cash awards based on the Company’s achieving targets of at least $15 million, $24 million and $28 million in Adjusted EBITDA for any fiscal year between 2013 and 2019 (including fiscal 2019).  Once the Company achieves the $15 million Adjusted EBITDA target level for a given fiscal year, the Adjusted EBITDA target level would increase to $24 million for subsequent fiscal years; and once the Company thereafter achieves the $24 million Adjusted EBITDA target level for a given fiscal year, the Adjusted EBITDA target level would increase to $28 million for subsequent fiscal years.  The bonus issuance to the eligible Participants will be (a) 15% for the $15 million Adjusted EBITDA target level, (b) 17.5% for the $24 million Adjusted EBITDA target level and (c) 20% for the $28 million Adjusted EBITDA target level, in each case of the incremental market capitalization appreciation (excluding additional share issuances), with the allocation of the pool among Participants to be recommended by the Company’s CEO and determined and approved by the Company’s Compensation Committee (the “ Compensation Committee ”) in its sole discretion.  Market capitalization appreciation would be determined based on (i) the Company’s closing stock price on the later to occur of May 11, 2012 or the third full trading day following the public announcement of financial results for the fiscal year in which the last Adjusted EBITDA threshold was achieved, (ii) the number of shares outstanding on May 11, 2012, and (iii) the Company’s closing stock price on the third full trading day following the public announcement of financial results for the fiscal year for which an award is being made.

o Example – $15 million Adjusted EBITDA is attained for the first time in fiscal 2014:

5/11/12 Share price at start
 
$
1.39
 
3/17/15 Achieve $15 million Adjusted EBITDA for fiscal 2014
 
 
 
 
3/20/15 (closing share price on the third full trading day after announcing results)
 
$
3.00 (ex)
 
Number of shares outstanding at 5/11/12
 
 
23,749,212
 
Value created ($3.00 - $1.39 x shares) (millions)
 
$
38.2
 
15% bonus pool of value created (millions)
 
$
5.7
 
Bonus pool to be split among Participants
 
 
 
 

o Example – Following attainment of $15 million Adjusted EBITDA for fiscal 2014, $24 million of Adjusted EBITDA is attained for the first time in fiscal 2016:

Share price at start (since last incentive)
 
$
3.00
 
3/16/17 Achieve $24 million Adjusted EBITDA for fiscal 2016
 
 
 
 
3/21/17 (closing share price on the third full trading day after announcing results)
 
$
5.00 (ex)
 
Number of shares outstanding at 5/11/12
 
 
23,749,212
 
Incremental Value created ($5.00 - $3.00 x shares) (millions)
 
$
47.5
 
17.5% bonus pool of value created (millions)
 
$
8.3
 
Bonus pool to be split among Participants
 
 
 
 

 
 
 
 
 
 
 
o Example – Following attainment of $24 million Adjusted EBITDA for fiscal 2016, $28 million of Adjusted EBITDA is attained for the first time in fiscal 2018:
 
1

Share price at start (since last incentive)
 
$
5.00
 
3/16/19 Achieve $28 million Adjusted EBITDA for fiscal 2018
 
 
 
 
3/19/19 (closing share price on the third full trading day after announcing results)
 
$
8.00 (ex)
 
Number of shares outstanding at 5/11/12
 
 
23,749,212
 
Incremental Value created ($8.00 - $5.00 x shares) (millions)
 
$
71.3
 
20% bonus pool of value created (millions)
 
$
14.3
 
Bonus pool to be split among Participants
 
 
 
 
 
 
 
 
 
 
 
 
o Example – $24 million Adjusted EBITDA is attained for the first time in fiscal 2015 (both the $15 million Adjusted EBITDA and $24 million EBITDA levels were attained in 2015 – no prior award under the Plan has been issued)
 
5/11/12 Share price at start
 
$
1.39
 
3/17/16 Achieve $24 million Adjusted EBITDA for fiscal 2015
 
 
 
 
3/22/16 (closing share price on the third full trading day after announcing results)
 
$
6.00 (ex)
 
Number of shares outstanding at 5/11/12
 
 
23,749,212
 
Incremental Value created ($6.00 - $1.39 x shares) (millions)
 
$
109.5
 
17.5% bonus pool of value created (millions)
 
$
19.2
 
Bonus pool to be split among Participants
 
 
 
 

 
 
 
 
 
 
 
Calculation of Awards and Other Terms and Conditions:

  Award pool will be calculated effective at the market close on the third full trading day after public announcement of year-end financial results (after completion of the audited financial statements), upon attaining the targeted Adjusted EBITDA (as defined in the Company’s then current credit agreements).

  Awards will be paid as soon as practicable following the time the award pool is calculated, but in all events (except as provided below under “Change in Control”) during the year following the year of attainment of the applicable Adjusted EBITDA target.

  Awards may be paid in cash and/or equity in the sole discretion of the Compensation Committee.  No fractional shares will be issued pursuant to this Plan.  Any fractional shares resulting from a calculation under this Plan will be rounded down to the nearest whole share.

  Award is dependent on the Company being in compliance (including via a waiver) with all applicable loan agreements, as such may be amended.

  The Compensation Committee shall review and approve, in its sole discretion, individual awards under this Plan promptly after the award pool is established, as described above.

  All equity awards made under this Plan shall be valued for such purpose at the closing price on the third full  trading day following the public announcement of the year-end financial results and issued under the Primo Water Corporation 2010 Omnibus Long-Term Incentive Plan (or any successor plan) (the “Omnibus Plan”) or, if so determined by the Compensation Committee, under another equity compensation plan maintained by the Company.

Separation of Employment:

  A Participant who leaves the Company voluntarily, is dismissed for Cause (as defined in the Omnibus Plan), or is terminated by the Company shall forfeit all rights to his/her current-year award.

  A Participant who separates employment because of death, Disability (as defined in the Omnibus Plan), or retirement shall remain eligible for a current-year award (payable at the same time as awards for such year are paid to other Participants).  In the event of a Participant’s retirement after June 30 of a given year, the Compensation Committee may in its discretion award the Participant a full current-year award based on the Company’s progress toward the applicable Adjusted EBITDA target at the time of such retirement.  For example, if the retirement occurs 75% of the way through a given year and if the Company has earned 75% of a certain Adjusted EBITDA target on the date of such retirement, the Compensation Committee may pay out a full award, in its discretion, in connection therewith.  In the case of a Participant’s death, any payments shall be made to the participant’s estate.
 
2

Change in Control:

  In the event of a Change in Control (as defined in the Omnibus Plan) that occurs on or after June 30 of a given year, the Company shall, upon the Change in Control, make a full current-year award based on the Company’s successful progress toward the applicable Adjusted EBITDA target at the time of such Change in Control.  For example, if a Change in Control occurs 75% of the way through a given year and if the Company has earned 75% of a certain Adjusted EBITDA target on the date of such Change in Control, the Company shall pay out a full award that would otherwise be payable in connection with the achievement of such Adjusted EBITDA target in connection with the Change in Control.

Eligibility:

  “Participant” shall mean any employee eligible to participate in this Plan as determined by Compensation Committee.

  The Company’s Board of Directors (the “Board”) may add or remove employees in this Plan at any time without prior notice.

General Requirements:

  Nothing contained in this Plan shall give any employee the right to be retained in the employment of the Company or affect the right of the Company to relocate, change the position of, or dismiss any employee.

  The Compensation Committee reserves the right, in its sole discretion, to make adjustments to this Plan or to individual awards when it believes the integrity, purpose and fairness of this Plan would be better served.  Any decisions of the Board or the Compensation Committee shall be conclusive and binding on all parties.

  It is intended that this Plan be ongoing, however, it may be necessary for the Board to amend or terminate this Plan at any time without prior notification.

  This Plan will be in effect starting January 1, 2012 and will automatically terminate upon the earliest of (i) any payout based on the Company’s attaining $28 million in Adjusted EBITDA for any fiscal year including or prior to 2019 (which assumes previous payouts based on the Company’s attaining $24 million and $15 million in Adjusted EBITDA for previous fiscal years); (ii) any payout based on the Company’s achieving $24 million or more in Adjusted EBITDA for fiscal 2019 (which assumes a previous payout based on the Company’s attaining $15 million in Adjusted EBITDA for a previous fiscal year); (iii) any payout based on the Company’s achieving $15 million or more in Adjusted EBITDA for fiscal 2019, assuming there had been no previous payout under this Plan, or (iv) a final determination that the Company has not achieved the then-applicable Adjusted EBITDA target level under this Plan for fiscal 2019.

  To the extent the Company is subject to any tax deduction limits under Section 162(m) of the Internal Revenue Code, the compensation under this Plan is intended to qualify for the “performance-based compensation” exception under Section 162(m) and will be administered and interpreted accordingly.

  To the extent applicable, this Plan shall be interpreted in accordance with Section 409A of the Internal Revenue Code of 1986.  Notwithstanding any provision of this Plan to the contrary, in the event that the Company determines in good faith that any compensation or benefits payable under this Plan may not be either exempt from or compliant with Section 409A, the Company shall adopt such amendments to this Plan or adopt other policies or procedures (including amendments, policies and procedures with retroactive effect), or take any other commercially reasonable actions necessary or appropriate (i) to preserve the intended tax treatment of the compensation and benefits payable hereunder, to preserve the economic benefits of such compensation and benefits, and/or to avoid less favorable accounting or tax consequences for the Company and/or (ii) to exempt the compensation and benefits payable hereunder from Section 409A or to comply with the requirements of Section 409A and thereby avoid the application of penalty taxes thereunder; provided, however, that this provision does not, and shall not be construed so as to, create any obligation on the part of the Company to adopt any such amendments, policies or procedures or to take any other such actions or to indemnify any Participant for any failure to do so.
 
3

  The Company shall have the authority, duty, and power to withhold from any award under this Plan the amount of any applicable federal, state, and local tax required to be withheld by the Company pursuant to any applicable laws or regulations.

 
4

EXHIBIT 31.1

MANAGEMENT CERTIFICATION

I, Billy D. Prim, 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 4, 2016
 
 
/s/ Billy D. Prim
 
 
Billy D. Prim
 
     
 
Chairman and Chief Executive Officer
 
 
 


EXHIBIT 31.2

MANAGEMENT CERTIFICATION

I, Mark Castaneda, certify that:

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 4, 2016
 
 
 /s/ Mark Castaneda
 
 
Mark Castaneda
 
 
Chief Financial Officer
 
 
 


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, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Billy D. Prim, Chairman and Chief Executive Officer of the Company, and Mark Castaneda, 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/ Billy D. Prim
 
/s/ Mark Castaneda
Billy D. Prim
 
Mark Castaneda
Chairman and Chief Executive Officer
 
Chief Financial Officer
May 4, 2016
 
May 4, 2016