Edgar Filing: Amplify Snack Brands, INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2015



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

For the transition period from to

Commission File Number: 001-37530

Amplify Snack Brands, Inc.

(Exact Name of Registrant as Specified in its Charter)



Delaware		47-1254894
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 West 5^th Street, Suite 1350

Austin, Texas 78701

(Address of principal executive offices)

512.600.9893

(Registrant’s Telephone number, including area code)

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

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 x No o

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 13, 2015, there were 75,000,000 shares of the registrant’s common stock outstanding.

Table of Contents

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS



		Page No.
	PART I - Financial Information
Item 1.	Condensed Consolidated Financial Statements of Amplify Snack Brands, Inc. and Subsidiaries (unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2015, Successor period July 17, 2014 to September 30, 2014 and Predecessor period July 1, 2014 to July 16, 2014 (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2015, Successor period July 17, 2014 to September 30, 2014 and Predecessor period January 1, 2014 to July 16, 2014 (unaudited)	2
	Condensed Consolidated Statements of Members'/Shareholders' Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015, Successor period July 17, 2014 to September 30, 2014 and Predecessor period January 1, 2014 to July 16, 2014 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements of Amplify Snack Brands, Inc. and Subsidiaries (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	44
Item 4.	Controls and Procedures	45

	PART II - Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Default Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	69
	Signatures

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except share data)



	Successor
	September 30, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	6,900		$	5,615
Accounts receivable, net of allowances of $2,021 and $2,961, respectively	11,863			10,066
Inventories	5,832			6,330
Net deferred tax assets-current portion	2,197			2,196
Other current assets	2,750			551
Total current assets	29,542			24,758
Property and equipment, net	2,030			746
Other assets:
Goodwill	47,421			45,694
Intangible assets	270,532			263,386
Net deferred tax assets-long term	—			930
Other assets	3,100			3,377
Total assets	$	352,625		$	338,891
Liabilities and shareholders' equity
Current Liabilities:
Accounts payable	$	7,360		$	6,443
Accrued liabilities	5,213			4,344
Senior term loan-current portion	10,250			10,000
Founder contingent consideration-current portion	17,164			593
Tax receivable obligation-current portion	6,613			—
Other current liabilities	217			—
Total current liabilities	46,817			21,380
Long-term liabilities:
Senior term loan	189,625			190,000
Revolving credit facility	1,500			—
Notes payable, net	3,741			—
Founder contingent consideration	3,576			6,343
Net deferred tax liabilities-long term	6,097			—
Tax receivable obligation	89,477			—
Other liabilities	1,451			—
Total long-term liabilities	295,467			196,343
Commitment and contingencies (note 11)
Shareholders' Equity:
Common stock, $0.0001 par value, 375,000,000 and 75,000,000 shares authorized at September 30, 2015 and December 31, 2014, respectively, and 75,000,000 shares issued and outstanding at September 30, 2015 and December 31, 2014	8			8
Additional paid in capital	121			116,423
Common stock held in treasury, at par, 5,743,190 and 7,411,263 shares at September 30, 2015 and December 31, 2014, respectively	(1		)	(1		)
Retained earnings	10,213			4,738
Total shareholders' equity	10,341			121,168
Total liabilities and shareholders' equity	$	352,625		$	338,891

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

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(unaudited, in thousands, except shares/units outstanding and per share/unit information)



	Successor					Predecessor
	Three Months Ended September 30, 2015			July 17, 2014 to September 30, 2014		July 1, 2014 to July 16, 2014
Net Sales	$	45,914		$	30,957	$	7,185
Cost of goods sold	20,260			14,255		2,719
Gross profit	25,654			16,702		4,466
Sales & marketing expenses	5,146			3,261		1,065
General & administrative expenses	16,068			5,493		126
Sponsor acquisition-related expenses	—			2,215		1,288
Total operating expenses	21,214			10,969		2,479
Operating income	4,440			5,733		1,987
Interest expense	3,311			1,853		—
Income before income taxes	1,129			3,880		1,987
Income tax expense	4,118			1,754		—
Net (loss) income	(2,989		)	2,126		1,987
Other comprehensive income, net of income taxes	—			—		—
Net comprehensive (loss) income	$	(2,989	)	$	2,126	$	1,987

Basic (loss) earnings per share/unit	$	(0.04	)	$	0.03	$	4,967.50
Diluted (loss) earnings per share/unit	$	(0.04	)	$	0.03	$	4,967.50

Basic and diluted weighted average shares/units outstanding	68,710,803			67,588,737		400

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

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (continued)

(unaudited, in thousands, except shares/units outstanding and per share/unit information)



	Successor				Predecessor
	Nine Months Ended September 30, 2015		July 17, 2014 to September 30, 2014		January 1, 2014 to July 16, 2014
Net Sales	$	137,543	$	30,957	$	68,353
Cost of goods sold	60,787		14,255		29,429
Gross profit	76,756		16,702		38,924
Sales & marketing expenses	13,780		3,261		5,661
General & administrative expenses	37,085		5,493		1,394
Sponsor acquisition-related expenses	—		2,215		1,288
Total operating expenses	50,865		10,969		8,343
Operating income	25,891		5,733		30,581
Interest expense	9,324		1,853		—
Income before income taxes	16,567		3,880		30,581
Income tax expense	11,092		1,754		—
Net income	5,475		2,126		30,581
Other comprehensive income, net of income taxes	—		—		—
Net comprehensive income	$	5,475	$	2,126	$	30,581

Basic (loss) earnings per share/unit	$	0.08	$	0.03	$	76,452.74
Diluted (loss) earnings per share/unit	$	0.07	$	0.03	$	76,452.74

Basic weighted average shares/units outstanding	68,253,104		67,588,737		400
Diluted weighted average shares/units outstanding	74,994,089		67,588,737		400

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

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Members'/Shareholders' Equity

(unaudited, in thousands, except for unit and share data)



	Units			Additional Paid in Capital			Retained Earnings			Total
	Units	Amount
Predecessor
BALANCE—December 31, 2013	400	$	—	$	—		$	7,067		$	7,067
Net income	—	—		—			30,581			30,581
Distributions paid	—	—		—			(28,533		)	(28,533		)
BALANCE—July 16, 2014	400	$	—	$	—		$	9,115		$	9,115

	Common Stock			Additional Paid in Capital			Treasury Stock						Retained Earnings		Total
	Shares	Amount					Shares			Amount
Successor
BALANCE—July 17, 2014	—	$	—	$	—		—			$	—		$	—	$	—
Net income	—	—		—			—			—			2,126		2,126
Net initial capital contributions	75,000,000	8		175,942			—			—			—		175,950
Effect of recapitalization on shares outstanding	—	—		1			7,411,263			(1		)	—		—
BALANCE—September 30, 2014	75,000,000	$	8	$	175,943		7,411,263			$	(1	)	$	2,126	$	178,076

	Common Stock			Additional Paid in Capital			Treasury Stock						Retained Earnings		Total
	Shares	Amount					Shares			Amount
Successor
BALANCE—December 31, 2014	75,000,000	$	8	$	116,423		7,411,263			$	(1	)	$	4,738	$	121,168
Net income	—	—		—			—			—			5,475		5,475
Capital distributions	—	—		(22,285		)	—			—			—		(22,285		)
Issuance of tax receivable agreement	—	—		(96,090		)	—			—			—		(96,090		)
Vesting of restricted stock awards	—	—		—			(1,668,073		)	—			—		—
Equity-based incentive compensation	—	—		2,073			—			—			—		2,073
BALANCE—September 30, 2015	75,000,000	$	8	$	121		5,743,190			$	(1	)	$	10,213	$	10,341

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

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)



	Successor						Predecessor
	Nine Months Ended September 30, 2015			July 17, 2014 to September 30, 2014			January 1, 2014 to July 16, 2014
Operating activities:
Net income	$	5,475		$	2,126		$	30,581
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	206			49			78
Amortization of intangible assets	3,165			862			—
Amortization of deferred financing costs and debt discount	627			127			—
Deferred income taxes	7,026			(1,404		)	—
Equity-based compensation expense	2,435			—			—
Founder contingent compensation	13,805			3,835			—
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable	(1,663		)	532			(4,600		)
Inventories	536			(1,017		)	(956		)
Other assets	(2,239		)	(522		)	353
Deferred rent and lease incentive liability	78			—			—
Accounts payable	738			2,365			952
Accrued and other liabilities	746			5,561			(69		)
Net cash provided by operating activities	30,935			12,514			26,339
Investing activities:
Purchase of Predecessor, net of cash acquired	—			(294,452		)	—
Purchase of Paqui, LLC, net of cash acquired	(7,830		)	—			—
Acquisition of property and equipment	(626		)	(107		)	(278		)
Net cash used in investing activities	(8,456		)	(294,559		)	(278		)
Financing activities:
Proceeds from issuance of common stock	—			150,950			—
Capital distributions	(22,285		)	—			(28,533		)
Term loan borrowing	7,500			150,000			—
Payments on term loan	(7,625		)	—			—
Draws from revolving credit facility	15,000			—			—
Pay downs on revolving credit facility	(13,500		)	—			—
Deferred financing costs	(284		)	(3,100		)	—
Net cash (used in) provided by financing activities	(21,194		)	297,850			(28,533		)
Increase (decrease) in cash and cash equivalents	1,285			15,805			(2,472		)
Cash and cash equivalents—Beginning of period	5,615			—			3,519
Cash and cash equivalents—End of period	$	6,900		$	15,805		$	1,047
Supplemental disclosure of cash flow information:
Income taxes paid	$	6,887		$	—		$	—
Interest paid	$	8,633		$	—		$	—
Non-cash activities during the period:
Issuance of tax receivable agreement	$	96,090		$	—		$	—
Purchase of Predecessor, non-cash consideration	$	—		$	25,000		$	—
Issuance of notes payable as consideration	$	3,715		$	—		$	—
Contingent consideration	$	390		$	—		$	—
Acquisition of property and equipment via financing	$	833		$	—		$	—

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

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. BUSINESS OVERVIEW

Amplify Snack Brands, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Company," and herein referred to as "we", "us", and "our") is a high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for better-for-you ("BFY") snacks. We contract with third-party firms to manufacture our products and we operate in multiple channels of trade to distribute our products to consumers.

Corporate Reorganization and Initial Public Offering

Prior to the consummation of our initial public offering ("IPO") on August 4, 2015, a series of related reorganization transactions (hereinafter referred to as the "Corporate Reorganization") occurred in the following sequence:

•

TA Topco 1, LLC ("Topco"), the former parent entity of the Company, liquidated in accordance with the terms and conditions of Topco's existing limited liability company agreement ("Topco Liquidation"). The holders of existing units in Topco received 100% of the capital stock of the Company, which was allocated to such unit holders pursuant to the distribution provisions of the existing limited liability company agreement of Topco based upon the liquidation value of Topco. Since Topco was liquidated at the time of our IPO, the implied liquidation value of Topco was based on the IPO price of $18.00 per share. Topco ceased to exist following the Topco Liquidation.


•	The Company entered into a tax receivable agreement ("TRA") with the former holders of units in Topco pursuant to which such holders received the right to future payments from the Company. Refer to Note 10 for more details regarding the TRA.

Immediately following the Corporate Reorganization, 15,000,000 common shares of the Company were sold by selling stockholders to the public at a price of $18.00 per share. The selling stockholders (formerly holders of units in Topco), which includes certain of our directors and officers, received all the proceeds from the sale of shares in this offering. The Company did not receive any proceeds from the sale of shares in this offering. Immediately following the IPO, former holders of units in Topco collectively owned 53,656,964 common shares of the Company and 6,343,036 shares of the Company's restricted stock, which is subject to vesting conditions. Refer to Note 13 for more details on the Company's restricted stock.

As of September 30, 2015, investment funds affiliated with TA Associates beneficially owned 58.0% of our outstanding common shares and is able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.

Sponsor Acquisition

On July 17, 2014, SkinnyPop Popcorn LLC (“Predecessor”) was acquired (the “Sponsor Acquisition”) by investment funds and entities associated with TA Associates, L.P., a private equity entity (“TA Associates”). To affect the Sponsor Acquisition, the Predecessor’s members entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Amplify Snack Brands, Inc. and TA Midco 1, LLC (“Midco”), whereby the members contributed all units of the Predecessor to Midco in exchange for cash and rollover stock. The Predecessor then merged with and into Midco, with Midco as the surviving entity. Midco subsequently changed its name to SkinnyPop Popcorn LLC, a subsidiary of Amplify Snack Brands, Inc.

The parties agreed to consummate the Sponsor Acquisition, subject to the terms and conditions set forth in the Unit Purchase Agreement, for an aggregate purchase consideration of $320 million, which included rollover stock from the Predecessor’s members representing approximately 14% of the Company. A portion of the purchase consideration is being held in escrow to secure post-closing purchase price adjustments and indemnity claims. The aggregate purchase consideration, plus related fees and expenses, was funded by the equity investment in Topco by affiliates of TA Associates as well as from certain members of management, and the net proceeds from the borrowing of a $150 million Term Loan due 2019 that bears initial interest at LIBOR (with a 1.00% LIBOR floor) plus 4.5% per annum. The Sponsor Acquisition and the financing transaction described above are collectively referred to herein as the “Transactions”. See Note 9 for a summary of the terms of the Term Loan.

The Transactions were consummated on July 17, 2014. The accompanying interim condensed consolidated financial statements are presented for two periods: predecessor and successor, which relate to the periods preceding and

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

succeeding the Sponsor Acquisition, respectively. The Sponsor Acquisition results in a new basis of accounting beginning on July 17, 2014 and the financial reporting periods are presented as follows:


•	The three and nine months ended September 30, 2015 is the successor period, reflecting the Sponsor Acquisition.

•

The three months ended September 30, 2014 includes the predecessor period of the Company from July 1, 2014 to July 16, 2014 and the successor period, reflecting the Sponsor Acquisition from July 17, 2014 to September 30, 2014. The nine months ended September 30, 2014 includes the predecessor period of the Company from January 1, 2014 to July 16, 2014 and the successor period, reflecting the Sponsor Acquisition from July 17, 2014 to September 30, 2014. The interim condensed consolidated financial statements for this predecessor period have been prepared using the historical basis of accounting for the Company. As a result of the Sponsor Acquisition and the associated acquisition accounting, the interim condensed consolidated financial statements of the successor are not comparable to periods preceding the Sponsor Acquisition. Total fees and expenses related to the Transactions aggregated to approximately $6.6 million consisting of $1.3 million of Sponsor Acquisition-related costs recognized in the predecessor period July 1, 2014 to July 16, 2014, $2.2 million of Sponsor Acquisition-related costs recognized in the successor period July 17, 2014 to September 30, 2014 and $3.1 million of deferred financing costs, also recognized in the successor period.

The Sponsor Acquisition has been accounted for under the acquisition method of accounting, whereby the purchase consideration was allocated to the tangible and intangible net assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The excess purchase consideration over fair value of net assets acquired and liabilities assumed was recorded as goodwill and represents a value attributable to brand recognition associated with the Company’s products and position in the BFY snack category. The fair value measurements for intangible assets were calculated using a discounted cash flow approach, which includes unobservable inputs classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows were based on the Company’s most recent operational forecasts. In preparing the purchase price allocations, the Company considered a report of a third party valuation expert. The Company has completed its review of the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition.

The following table summarizes the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition (in thousands):



Purchase consideration:
Cash paid as purchase consideration	$	280,750
Cash paid into escrow	14,250
Value of equity issued	25,000
Total purchase consideration	$	320,000
Less: Cash and cash equivalents acquired	(548		)
Total purchase price—net of cash and cash equivalents acquired	$	319,452
Fair value of net assets acquired and liabilities assumed:
Current assets	$	12,671
Property and equipment	667
Indefinite-lived identifiable intangible asset—trade name	202,900
Definite-lived identifiable intangible assets—customer relationships (15-year useful life)	62,300
Definite-lived identifiable intangible assets—non-competition agreements (7-year useful life)	90
Current liabilities	(4,870		)
Total fair value of net assets acquired and liabilities assumed	$	273,758
Excess purchase consideration over fair value of net assets acquired (goodwill)	$	45,694

In connection with the Sponsor Acquisition, the Company’s founders entered into employment agreements with the Company through December 31, 2015. Under the terms of these agreements, and subject to continuing employment, the founders are each eligible to receive up to $10 million upon the Company’s achievement of certain contribution

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

margin benchmarks during the period commencing on January 1, 2015 and ending on December 31, 2015. The founders are also eligible to receive further payment contingent on the potential future tax savings associated with the deductibility of the payments under these agreements. At September 30, 2015, total payments under these agreements were expected to amount to $26.8 million (the “Founder Contingent Compensation”), including the expected benefit associated with the tax savings. On December 23, 2014, the Company entered into a Prepayment Agreement with the founders to reflect a $750,000 bonus payment to each founder and a reduction of the Company’s future Founder Contingent Compensation obligations. The Company is recognizing the fair value of the associated obligation ratably over the contractual service period. Total expense recognized for the three and nine months ended September 30, 2015 was $4.6 million and $13.8 million, respectively. Expense recognized in the successor period July 17, 2014 to September 30, 2014 was $3.8 million.

Pro Forma Combined Financial Information (Unaudited)

The following unaudited pro forma combined financial information reflects the consolidated statements of comprehensive income giving pro forma effect to the Sponsor Acquisition, the incurrence of $50.0 million of borrowings under the Company's term loan under its credit agreement and the subsequent distribution of $59.8 million paid to its stockholders in December 2014 (the “December 2014 Special Dividend”) and the incurrence of $22.5 million of borrowings under the Company's term loan and revolving credit loan under its credit agreement and the subsequent distribution of $22.3 million paid to its stockholders in May 2015 (the “May 2015 Special Dividend”), as if such transactions had occurred on January 1, 2014. The pro forma information includes adjustments primarily related to the amortization of intangible assets acquired, exclusion of non-recurring Sponsor Acquisition-related expenses and interest expense associated with aggregate term loan and revolving facility borrowings totaling $207.5 million and $15.0 million, respectively, in connection with the Sponsor Acquisition and December 2014 and May 2015 Special Dividends. The pro forma combined financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date (in thousands, except per share data):



(Unaudited)	Pro Forma Three Months Ended September 30, 2014		Pro Forma Nine Months Ended September 30, 2014
Net sales	$	38,142	$	99,310
Net income	4,259		11,267
Basic and diluted net income per share	$	0.06	$	0.17

The previous information reflects the estimated compensation expense associated with the Founder Contingent Compensation (as defined above) in connection with the Sponsor Acquisition, based on our achievement of certain contribution margin benchmarks during the fiscal year 2015, and the tax benefit, to the extent realized by us, associated with the arrangement, that would have been recognized if the employment agreements had been in effect from January 1, 2014. The total estimated obligation of $26.8 million is being recognized ratably over the approximately 18-month contractual service period.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, the interim condensed consolidated statement of shareholders'/members' equity for the successor nine months ended September 30, 2015, successor period July 17, 2014 to September 30, 2014 and the predecessor period January 1, 2014 to July 16, 2014, the interim condensed consolidated statements of comprehensive income for the successor three and nine months ended September 30, 2015, the successor period July 17, 2014 to September 30, 2014 and predecessor period July 1, 2014 to July 16, 2014 and January 1, 2014 to July 16, 2014, and the interim condensed consolidated statements of cash flows for the successor nine months ended September 30, 2015 and successor period July 17, 2014 to September 30, 2014, and predecessor period January 1, 2014 to July 16, 2014, are unaudited.

Interim Financial Statements

The accompanying unaudited interim condensed consolidated financial statements of Amplify Snack Brands, Inc. (“Condensed Consolidated Financial Statements”) have been prepared in accordance with accounting principles

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required for annual financial statements. The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Condensed Consolidated Financial Statements have been prepared on the same basis as the audited consolidated financial statements at and for the fiscal year ended December 31, 2014, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial position as of September 30, 2015 and results of our operations for the successor nine months ended September 30, 2015 and July 17, 2014 to September 30, 2014, and predecessor periods July 1, 2014 to July 16, 2014 and January 1, 2014 to July 16, 2014, and cash flows for the successor nine months ended September 30, 2015 and July 17, 2014 to September 30, 2014, and predecessor period from January 1, 2014 to July 16, 2014. The interim results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Therefore, the Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form S-1, filed with the Securities and Exchange Commission on July 30, 2015. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any future periods.

Use of Estimates

The unaudited interim condensed consolidated financial statements are prepared in conformity with GAAP. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The Company routinely evaluates its estimates, including those related to accruals and allowances for customer programs and incentives, bad debts, income taxes, long-lived assets, inventories, equity-based compensation, accrued broker commissions and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Segment Reporting

The Company operates as one reportable segment: the marketing and distribution of BFY, ready-to-eat ("RTE") snacking products. Management made this determination based on the similar quantitative and qualitative characteristics of our products. Our chief executive officer is considered to be our chief operating decision maker. He reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. Our term loan and revolving facility

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair value.

The following table presents liabilities measured at fair value on a recurring basis:



	Successor
	September 30, 2015		December 31, 2014
Liabilities:
Founder contingent compensation-current portion	$	17,164	$	593
Founder contingent compensation-long term portion	3,576		6,343
Contingent consideration ⁽¹⁾	390		—
Notes payable, net	3,741		—
Total liabilities	$	24,871	$	6,936


⁽¹⁾	Contingent consideration is reported in Other liabilities in the accompanying Condensed Consolidated Balance Sheets.

Founder Contingent Compensation

Considerable judgment is required in developing the estimate of fair value of Founder Contingent Compensation. The use of different assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.

The fair value measurement of the Founder Contingent Compensation obligation relates to the employment agreements entered into in connection with the Sponsor Acquisition. The fair value measurement is based upon significant inputs not observable in the market (Level 3). For the nine months ended September 30, 2015, we accrued $13.8 million as expense in our condensed consolidated statements of comprehensive income. To determine the fair value, we valued the total contingent compensation liability based on the expected probability weighted compensation payments corresponding to the performance thresholds agreed to under the applicable employment agreements, as well as the associated income tax benefit using the estimated tax rates that will be in effect. The current estimate represents the recognizable portion based on the maximum potential obligation allowable under the employment agreements. As discussed in Note 1, the Company is recognizing the fair value of the associated obligation ratably over the contractual service period.

Contingent Consideration

In April 2015, the Company acquired Paqui, LLC (“Paqui”) for total consideration of approximately $11.9 million, of which, approximately $0.4 million is contingent upon the achievement of a defined contribution margin in excess of the sum of the original principal amount and accrued interest of the notes issued to the sellers of Paqui. We utilized the Black-Scholes option pricing model to estimate the original fair value of the contingent consideration. The fair value measurement is based upon significant inputs not observable in the market (Level 3). The contingent consideration is included in other liabilities in the accompanying condensed consolidated balance sheets. The Company will satisfy this obligation with a cash payment to the sellers of Paqui upon the achievement of the milestone discussed above.

Notes Payable

As discussed in more detail in Note 3, in April 2015, the Company issued $3.9 million in unsecured notes to the sellers of Paqui in connection with its acquisition. The notes bear interest at a rate per annum of 1.5% with principal and interest due at maturity on March 31, 2018. We recorded an acquisition-date fair value discount of approximately $0.2 million based on market rates for debt instruments with similar terms (Level 3), which is amortized to interest expense over the term of the notes using the effective-interest method.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Inventories

Inventories are valued at the lower of cost or market using the weighted-average cost method. The Company procures certain raw material inputs and packaging from suppliers and contracts with a third-party firm to assemble and warehouse finished product. The third-party co-manufacturer invoices the Company monthly for labor and certain raw material inputs upon the sale of finished product to customers during that period.

Write-downs are provided for finished goods expected to become non-saleable due to age and provisions are specifically made for slow moving or obsolete raw ingredients and packaging. The Company also adjusts the carrying value of its inventories when it believes that the net realizable value is less than the carrying value. These write-downs are measured as the difference between the cost of the inventory, including estimated costs to complete, and estimated selling prices. Charges related to slow moving or obsolete items are recorded as a component of cost of goods sold. Charges related to packaging redesigns are recorded as a component of selling and marketing. Once inventory is written down, a new, lower-cost basis for that inventory is established.

Recognition of Net Sales, Sales Incentives and Trade Accounts Receivable

The Company offers its customers a variety of sales and incentive programs, including price discounts, coupons, slotting fees, in-store displays and trade advertising. The costs of these programs are recognized at the time the related sales are recorded and are classified as a reduction in net sales. These program costs are estimated based on a number of factors including customer participation and performance levels.

As of September 30, 2015 and December 31, 2014, the Company recorded total allowances against trade accounts receivable of $2.0 million and $3.0 million, respectively. Recoveries of receivables previously written off are recorded when received.

Concentration Risk

Customers with 10% or more of the Company’s net sales consist of the following:



	Successor				Predecessor
	Three Months Ended September 30, 2015		July 17, 2014 to September 30, 2014		July 1, 2014 to July 16, 2014
Customer:
Costco	29	%	38	%	34	%
Sam's Club	18	%	18	%	21	%



	Successor				Predecessor
	Nine Months Ended September 30, 2015		July 17, 2014 to September 30, 2014		January 1, 2014 to July 16, 2014
Customer:
Costco	32	%	38	%	33	%
Sam's Club	17	%	18	%	22	%

As of September 30, 2015, Costco and Sam’s Club represented 21% and 15%, respectively, of the accounts receivable balances outstanding. The same two customers represented 18% and 31%, respectively, of accounts receivable as of December 31, 2014. The Company outsources the manufacturing of its products to Assemblers Food Packaging LLC (“Assemblers”), a co-manufacturer in the United States. Assemblers represented 39% and 64% of accounts payable as of September 30, 2015 and December 31, 2014, respectively.

Earnings per Share/Unit

The Company follows ASC Topic 260 “Earnings Per Share” to account for earnings per share/unit. Basic earnings per share/unit has been computed based upon the weighted average number of common shares/units outstanding. Diluted

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

earnings per share/unit has been computed based upon the weighted average number of common shares/units outstanding plus the effect of all potentially dilutive common units/stock equivalents, except when the effect would be anti-dilutive. The dilutive effect of nonvested stock granted to employees has been accounted for using the treasury stock method.

As discussed in Note 1, in August 2015, the Company completed the Corporate Reorganization immediately prior to the Company's IPO. For purposes of computing net income per share, it is assumed that the reorganization of the Company had occurred for all successor periods presented and therefore the outstanding shares have been adjusted to reflect the conversion of shares that took place in contemplation of the IPO. Accordingly, the denominators in the computations of basic and diluted net income per share for the successor period July 17, 2014 to September 30, 2014, reflect the Company's reorganization.



	Successor					Predecessor
	Three Months Ended September 30, 2015			July 17, 2014 to September 30, 2014		July 1, 2014 to July 16, 2014
Basic and diluted earnings per share/unit:
Numerator:
Net (loss) income	(2,989		)	$	2,126	$	1,987
Denominator:
Basic and diluted weighted average common shares/units outstanding ⁽¹⁾	68,710,803			67,588,737		400
Basic and diluted (loss) earnings per share/unit	$	(0.04	)	$	0.03	$	4,967.50

⁽¹⁾A total of 6,289,197 unvested restricted stock awards were outstanding for the three months ended September

30, 2015, but were excluded from the computation of diluted earnings per share because the effects of their

inclusion would be anti-dilutive.



	Successor				Predecessor
	Nine Months Ended September 30, 2015		July 17, 2014 to September 30, 2014		January 1, 2014 to July 16, 2014
Basic and diluted earnings per share/unit:
Numerator:
Net income	$	5,475	$	2,126	$	30,581
Denominator:
Basic weighted average common shares/units outstanding	68,253,104		67,588,737		400
Unvested restricted stock awards	6,740,985		—		—
Diluted weighted average common shares/units outstanding	74,994,089		67,588,737		400

Basic earnings per share/unit	$	0.08	$	0.03	$	76,452.74
Diluted earnings per share/unit	$	0.07	$	0.03	$	76,452.74

Tax Receivable Agreement ("TRA")

As discussed in more detail in Notes 1 and 10, immediately prior to the consummation of the IPO in August 2015, the Company entered into a TRA with the former holders of units in Topco. The Company estimated an obligation of approximately $96.1 million based on the full and undiscounted amount of expected future payments under the TRA in consideration a of reduction in the Company's future U.S. federal, state and local taxes resulting from the utilization

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

of certain tax attributes. The Company accounted for the obligation under the TRA as a dividend and elected to reduce additional paid in capital. Subsequent adjustments of the TRA obligation due to certain events, such as potential changes in tax rates or insufficient taxable income, will be recognized in the consolidated statements of comprehensive income. Future cash payments under the TRA will be classified as a financing activity on the condensed consolidated statements of cash flows.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition”, and most industry-specific guidance throughout the Codification. The standard requires entities to recognize the amount of revenue that reflects the consideration to which the company expects to be entitled in exchange for the transfer of promised goods or services to customers. This ASU must be applied using either the retrospective or cumulative effect transition method and is effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. The Company is in the process of assessing both the method and the impact of the adoption of ASU No. 2014-09 on its financial position, results of operations, cash flows and financial statement disclosures.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern: Disclosures about an Entity’s Ability to Continue as a Going Concern”. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter. The Company is currently assessing the impact of the adoption of ASU No. 2014-15 on its financial position, results of operations and financial statement disclosures.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which changes the presentation of debt issuance costs in financial statements. ASU No. 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability, rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The ASU is effective for annual reporting periods beginning after December 15, 2016. The new guidance will be applied retrospectively to each prior period presented. The Company currently presents debt issuance costs as an asset and upon adoption of this ASU in 2017, will present such debt issuance costs as a direct deduction from the related debt liability.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively. The Company is currently assessing the impact of the adoption of ASU No. 2015-11 on its financial position, results of operations and financial statement disclosures.

In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” to clarify that given the absence of authoritative guidance within ASU No. 2015-03 for debt issuance costs related to the line-of-credit arrangements, such costs may be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement. The Company does not expect the adoption of this update to have a material effect on the condensed consolidated financial statements.

3. ACQUISITION

In April 2015, the Company acquired Paqui, LLC ("Paqui") a manufacturer and marketer of tortilla chips and pre-packaged tortillas for total consideration of approximately $11.9 million. This acquisition has been accounted for under the acquisition method of accounting, whereby the purchase consideration was allocated to tangible and intangible net assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The excess purchase consideration over fair value of net assets acquired and liabilities assumed was recorded as goodwill and represents

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

a value attributable to brand recognition associated with Paqui’s products and position in the BFY snack category. The Company incurred approximately $0.2 million of acquisition-related costs during the nine months ended September 30, 2015, which is included in general and administrative expenses in the accompanying consolidated statements of comprehensive income. The Company has completed its review of the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition.

The following table summarizes the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition (in thousands):



Purchase consideration:
Cash paid as purchase consideration	$	8,214
Fair value of notes payable issued to sellers as consideration	3,715
Fair value of contingent consideration	390
Total purchase consideration	12,319
Less: cash and cash equivalents acquired	(384		)
Total purchase price-net of cash and cash equivalents acquired	11,935
Fair value of net assets acquired and liabilities assumed:
Current assets	174
Property and equipment	31
Indefinite-lived identifiable intangible asset-trade name	9,000
Definite-lived identifiable intangible assets-customer relationships	1,310
Current liabilities	(307		)
Total fair value of net assets acquired and liabilities assumed	10,208
Excess purchase consideration over fair value of net assets acquired (goodwill)	$	1,727

Pro Forma Combined Financial Information (Unaudited)

The following unaudited pro forma combined financial information reflects the condensed consolidated statements of comprehensive income of the Company as if the acquisition of Paqui had occurred as of January 1, 2014. The pro forma information includes adjustments primarily related to the amortization of intangible assets acquired and interest expense associated with the issuance of approximately $3.9 million in notes payable to the sellers of Paqui. The pro forma combined financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date. The operations of Paqui are included in the accompanying condensed consolidated statements of comprehensive income for the full three months ended September 30, 2015. As a result, pro forma information for the three months ended September 30, 2015 is excluded from the table below (in thousands, except per share data):



(Unaudited)	Pro Forma Three Months Ended September 30, 2014		Pro Forma Nine Months Ended September 30, 2015		Pro Forma Nine Months Ended September 30, 2014
Net sales	$	38,856	$	137,672	$	100,368
Net income	3,976		5,140		31,935
Basic net income per share	$	0.06	$	0.08	$	0.47
Diluted net income per share	$	0.06	$	0.07	$	0.47

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

4. INVENTORY

Inventories, net consist of the following (in thousands):



	Successor
	September 30, 2015		December 31, 2014
Raw materials and packaging	$	3,012	$	4,263
Finished goods	2,820		2,067
Inventories, net	$	5,832	$	6,330

As of September 30, 2015, we had approximately $0.6 million in reserves for finished goods deemed unsaleable and raw materials and packaging deemed obsolete. We had no such reserve as of December 31, 2014. If future demand or market conditions are less favorable than those projected by our management, additional inventory write-downs may be required.

5. PROPERTY AND EQUIPMENT

Property and equipment are valued at cost. Property and equipment, net consist of the following (in thousands):



	Successor
	September 30, 2015			December 31, 2014
Machinery and equipment	$	1,052		$	929
Furniture and fixtures	550			44
Leasehold improvements	874			13
Property and equipment, gross	2,476			986
Less: accumulated depreciation	(446		)	(240		)
Property and equipment, net	$	2,030		$	746

Depreciation expense was approximately $0.1 million and $0.2 million for the successor three and nine months ended September 30, 2015, respectively, and approximately $49 thousand for the successor period July 17, 2014 to September 30, 2014. For the predecessor periods July 1, 2014 to July 16, 2014 and January 1, 2014 to July 16, 2014, depreciation expense was approximately $10 thousand and $0.1 million, respectively. Depreciation expense is included in cost of goods sold and general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following (in thousands):



		Successor
	Estimated Useful Life	September 30, 2015			December 31, 2014
Goodwill:
Beginning balance		$	45,694		$	—
Acquired during the year		1,727			45,694
Ending balance		$	47,421		$	45,694
Intangible assets:
Trade names	Indefinite	$	211,900		$	202,900
Customer relationships	15 years	63,610			62,300
Non-competition agreement	7 years	90			90
Intangible assets, gross		275,600			265,290
Less: accumulated amortization		(5,068		)	(1,904		)
Intangible assets, net		$	270,532		$	263,386

Amortization of finite-lived intangibles was approximately $1.1 million and $3.2 million for the successor three and nine months ended September 30, 2015, respectively, and approximately $0.9 million for the successor period July 17, 2014 to September 30, 2014. There was no amortization expense in the predecessor periods July 1, 2014 to July 16, 2014 or January 1, 2014 to July 16, 2014. Amortization of finite-lived intangible assets is included as part of general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.

The estimated future amortization expense related to finite-lived intangible assets is as follows as of September 30, 2015 (in thousands):



Remainder of 2015	$	1,063
2016	4,254
2017	4,254
2018	4,254
2019	4,254
Thereafter	40,553

ASC 350, "Intangibles- Goodwill and Other", requires companies to test goodwill and indefinite-lived intangibles for impairment annually and more frequently if indicators of impairment exist. Accordingly, the Company performed its annual assessment of fair value as of July 1, 2015 for its SkinnyPop and Paqui reporting units and concluded there was no impairment related to goodwill and indefinite-lived intangibles.

7. DEFERRED FINANCING COSTS

Deferred financing costs consist of the following (in thousands):



	Successor
	September 30, 2015			December 31, 2014
Deferred financing costs	$	3,953		$	3,669
Less: accumulated amortization	(893		)	(292		)
Deferred financing costs, net	$	3,060		$	3,377

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Amortization expense was approximately $0.2 million and $0.6 million for the successor three and nine months ended September 30, 2015, respectively. Amortization expense was approximately $0.1 million for the successor period July 17, 2014 to September 30, 2014. There was no amortization expense in the predecessor periods July 1, 2014 to July 16, 2014 or January 1, 2014 to July 16, 2014. Amortization of deferred financing costs is included as part of interest expense on the accompanying condensed consolidated statements of comprehensive income.

8. ACCRUED LIABILITIES

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



	Successor
	September 30, 2015		December 31, 2014
Accrued income taxes	$	—	$	1,012
Unbilled inventory	850		1,178
Accrued commissions	696		805
Accrued bonuses	1,715		536
Accrued marketing expense	303		411
Accrued professional fees	997		145
Other accrued liabilities	652		257
Total accrued liabilities	$	5,213	$	4,344

9. LONG-TERM DEBT AND LINE OF CREDIT

Long-term debt consists of the following (in thousands):



	Successor
	September 30, 2015			December 31, 2014
Term loan	$	199,875		$	200,000
Revolving facility	1,500			—
Notes payable, net of discount of $164 and $-0- , respectively	3,741			—
Total debt	205,116			200,000
Less: Current portion	(10,250		)	(10,000		)
Long-term debt	$	194,866		$	190,000

Credit Facility

On July 17, 2014, SkinnyPop Popcorn LLC entered into the Credit Agreement, which provided for a $150.0 million term loan facility and a $7.5 million revolving facility (with sublimits for swingline loans and the issuance of letters of credit). These senior secured credit facilities, or the Credit Facility, were guaranteed by the Company. The Credit Facility will mature on July 17, 2019, with an option to extend the maturity of the term loan with the consent of lenders willing to provide such extension.

On August 18, 2014, we amended the Credit Facility, or the Amended Credit Facility, to remove certain total funded debt-to-EBITDA interest rate reductions and implement a static interest rate margin based on either the Eurodollar Rate or the Base Rate (as each is defined in the Amended Credit Facility).

On December 23, 2014, we amended the Amended Credit Facility to increase its term loan borrowings by $50.0 million to a total of $200.0 million, with such borrowings having the same interest rate as the original term loans under the Amended Credit Facility. In addition, we amended the financial covenants in the Amended Credit Facility to increase the total funded debt-to-EBITDA covenant for each quarterly period to reflect our higher leverage. The Amended Credit Facility, as so amended, is referred to as the Second Amended Credit Facility.

On May 29, 2015, we amended the Second Amended Credit Facility to increase our term loan borrowings by $7.5 million to a total of $205 million, net of principal payments made in the first quarter of 2015 totaling $2.5 million, and our capacity on our revolving facility by $17.5 million to a total of $25 million. The Second Amended Credit Facility, as so amended, is referred to as the Third Amended Credit Facility. At the closing of the Third Amended Credit Facility,

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

we borrowed $15 million under our revolving facility, which, along with our term loan borrowings, have the same interest rate as the term and revolving loans under the Second Amended Credit Facility. The interest rate on our outstanding indebtedness was 5.5% per annum at September 30, 2015 and December 31, 2014.

Proceeds from the initial term loan borrowings were primarily used to finance the Sponsor Acquisition and to pay fees and expenses in connection therewith. Proceeds of the Second Amended Credit Facility were primarily used to pay the December 2014 Special Dividend to the equity holders of Topco. Proceeds from the Third Amended Credit Facility were primarily used to pay the May 2015 Special Dividend to the equity holders of Topco. In the future, we may use the revolving facility for working capital and for other general corporate purposes, including acquisitions, investments, dividends and distributions, to the extent permitted under the Third Amended Credit Facility. The Third Amended Credit Facility also provides that, upon satisfaction of certain conditions, we may increase the aggregate principal amount of the loans outstanding thereunder by an amount not to exceed $50 million, subject to receipt of additional lending commitments for such loans.

Interest

Outstanding term loan and revolving facility borrowings under the Third Amended Credit Facility bear interest at a rate per annum equal to (a) the Eurodollar Rate plus 4.50% or (b) the Base Rate (equal in this context to the greater of (i) the prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) the Eurodollar Rate plus 1.00%) (but subject to a minimum of 2.00%) plus 3.50%. The term loans under the Third Amended Credit Facility, amortize in equal quarterly installments of approximately $2.6 million, with the balance due at maturity.

We are required to pay a commitment fee on the unused commitments under the revolving facility at a rate equal to 0.50% per annum.

Guarantees

The loans and other obligations under the Third Amended Credit Facility (including in respect of hedging agreements and cash management obligations) are (a) guaranteed by the Company and its existing and future wholly-owned U.S. subsidiaries and (b) secured by substantially all of the assets of the Company and its existing and future wholly-owned U.S. subsidiaries, in each case subject to certain customary exceptions and limitations.

Covenants

As of the last day of any fiscal quarter of the Company, the terms of the Third Amended Credit Facility require the Company and its subsidiaries (on a consolidated basis and subject to certain customary exceptions) to maintain (x) a maximum total funded debt to consolidated EBITDA ratio of not more than 4.25 to 1.0, initially, and decreasing to 2.25 to 1.0 over the term of the Third Amended Credit Facility and (y) a minimum fixed charge coverage ratio of not less than 1.10 to 1.00. As of September 30, 2015, we were in compliance with our financial covenants.

In addition, the Third Amended Credit Facility contains (a) customary provisions related to mandatory prepayment of the loans thereunder with (i) 50% of Excess Cash Flow (as defined in the Third Amended Credit Facility), subject to step-downs to 25% and 0% of Excess Cash Flow at certain leverage-based thresholds and (ii) the proceeds of asset sales and casualty events (subject to certain customary limitations, exceptions and reinvestment rights) and (b) certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, investments, acquisitions, loans and advances, mergers, consolidations and asset dispositions, dividends and other restricted payments, transactions with affiliates and other matters customarily restricted in such agreements, in each case, subject to certain customary exceptions. The first payment based on Excess Cash Flow (as defined in the Third Amended Credit Facility) is dependent on our results for the year ended December 31, 2015 and due not later than May 6, 2016.

Although the Third Amended Credit Facility generally prohibits payments and dividends and distributions, we are permitted, subject to certain customary conditions such absence of events of default and compliance with financial covenants, to make payments, dividends or distributions including (a) earnout payments, (b) payments, dividends or distributions in cash from retained excess cash flow and certain proceeds from distributions from or sales of investments, (c) payments, dividends or distributions in an unlimited amount from the proceeds of equity issuances and (d) payments, dividends or distributions not to exceed $5.0 million in the aggregate.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Under the Third Amended Credit Facility the Founder Contingent Compensation may be paid at any time so long as no payment default under the Third Amended Credit Facility has occurred and is continuing and, immediately after giving effect to such payment, the Company has at least $5.0 million of cash and cash equivalents subject to a first priority lien in favor of the lenders party thereto plus availability under the revolving facility. In the event we are not permitted to pay the Founder Contingent Compensation under the Third Amended Credit Facility we are no longer obligated to make such payment under the employment agreements with the Founders subject to limited exceptions

The Third Amended Credit Facility also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, certain impairments to the guarantees or collateral documents, and change in control defaults.

Other

Certain of the lenders under the Third Amended Credit Facility (or their affiliates) may provide, certain commercial banking, financial advisory and investment banking services in the ordinary course of business for the Company and its subsidiaries, for which they receive customary fees and commissions.

Notes Payable

As discussed in more detail in Note 3, in April 2015, the Company issued $3.9 million in unsecured notes to the sellers of Paqui in connection with its acquisition. The notes bear interest at a rate per annum of 1.5% with principal and interest due at maturity on March 31, 2018. We recorded an acquisition-date fair value discount of approxmately $0.2 million based on market rates for debt instruments with similar terms, which is amortized to interest expense over the term of the notes using the effective-interest method.

Annual maturities of long-term debt (excluding the fair value discount of approximately $0.2 million) as of September 30, 2015 are as follows (in thousands):



Remainder of 2015	$	2,563
2016	10,250
2017	10,250
2018	14,155
2019	168,062
Total	$	205,280

10. RELATED PARTY TRANSACTIONS

Employment Agreements

In connection with the Sponsor Acquisition, we entered into employment agreements with certain of our managers who held equity interests in our company prior to the acquisition and continue to hold equity interests in the Company. We entered into employment agreements with the founders, which include the Founder Contingent Compensation. The employment agreements set forth each executive’s initial annual base salary of $200,000 and eligibility to participate in our benefit plans generally. The employment agreements also provide for each executive’s eligibility to receive a cash payment of up to $10 million (the “cash payment”), based on achievement by SkinnyPop Popcorn LLC of certain contribution margin metrics during the period commencing on January 1, 2015 and ending on December 31, 2015. Furthermore, in connection with the payments, SkinnyPop Popcorn LLC will provide each executive with an additional tax benefit equal to (i) in the case of the taxable year in which the cash payment is paid or any subsequent taxable year, the net excess (if any) of (A) the taxes that would have been paid by SkinnyPop Popcorn LLC in respect of such taxable year calculated without taking into account the payment of the cash payment over (B) the actual taxes payable by SkinnyPop Popcorn LLC in respect of such taxable year and (ii) in the case of any taxable year prior to the year in which the cash payment is paid, the amount of any tax refund resulting from carrying back any operating losses to the extent attributable to the cash payment. See Note 1-Business Overview.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Tax Receivable Agreement

Immediately prior to the consummation of the IPO in August 2015, the Company entered into a Tax Receivable Agreement ("TRA") with the former holders of units in Topco. The TRA generally provides for the payment by the Company to the TRA Holders of 85% of the U.S. federal, state and local tax benefits realized by us and our subsidiaries from the utilization of certain tax attributes that were generated when SkinnyPop Popcorn LLC was acquired by affiliates of TA Associates in July 2014. The Company will retain approximately 15% of the U.S. federal, state and local tax benefits realized from the utilization of such tax attributes. Unless earlier terminated in accordance with its terms, the TRA will continue in force and effect until there is no further potential for tax benefit payments to be made by us to the TRA Holders in respect of the U.S. federal, state and local tax benefits that are subject of the agreement. Based on current tax rules and regulations, we would expect the potential for tax benefit payments to cease no later than 2030.

The amount payable to the TRA Holders is based on an annual calculation of the reduction in our U.S. federal, state and local taxes resulting from the utilization of these tax attributes. For purposes of determining the reduction in taxes resulting from the utilization of these pre-IPO tax attributes, we were required to assume that pre-IPO tax attributes are utilized before any other attributes. We expect the payments that we may make under the TRA will be substantial. In addition if the IRS were to successfully challenge the tax benefits that give rise to any payments under the TRA, our future payments under the TRA would be reduced by the amount of such payments, but the TRA does not require the TRA Holders to reimburse us for the amount of such payments to the extent they exceed any future amounts payable under the TRA.

In August 2015, the Company recorded an obligation of approximately $96.1 million based on the full and undiscounted amount of expected future payments under the TRA, with a corresponding reduction to additional paid in capital. The Company's first annual estimated payment in the amount of approximately $6.6 million is expected to be paid within the next 12 months. Subsequent adjustments of the TRA obligation due to certain events, such as potential changes in tax rates or insufficient taxable income, will be recognized in the statement of comprehensive income.

Precision Capital Group LLC Consulting Services Agreements

We entered into two consulting services agreements with one of our stockholders, Precision Capital Group LLC, or (“Precision”). Our senior vice president of sales is a former employee and a current equity holder of Precision. In addition to his investment in the Company in connection with the Sponsor Acquisition, this same employee also invested in the Company through Precision in 2013.

Sales Consulting Services Agreement

We entered into a sales consulting services agreements with Precision. Under the terms of this sales consulting services agreement, which we refer to as the Precision Sales Consulting Agreement, Precision agreed to provide sales professionals to work on behalf of the Company. Such sales professionals were entitled to a monthly stipend plus a commission based on sales performance. The Precision sales professionals were, at the time of the agreement, employees of Precision. Fees for consulting services under this agreement totaled $0.1 million for the predecessor period July 1, 2014 to July 16, 2014 and $0.9 million for the predecessor period January 1, 2014 to July 16, 2014. There were no fees related to this agreement for the successor period July 17, 2014 to September 30, 2014 or the nine months ended September 30, 2015. These fees are included as part of sales and marketing expense.

Business Consulting Services Agreement

We entered into a business consulting agreement with Precision, which, together with the Precision Sales Consulting Agreement, we refer to as the Precision Agreements. Under this agreement, Precision provided business consulting services to us. Fees for consulting services under this agreement totaled $12 thousand for the predecessor period July 1, 2014 to July 16, 2014 and $0.1 million for the predecessor period January 1, 2014 to July 16, 2014. There were no fees related to this agreement for the successor period July 17, 2014 to September 30, 2014 or the nine months ended September 30, 2015. These fees are included as part of sales and marketing expense.

Transition Services Agreement

The Precision Agreements were terminated on July 18, 2014, in connection with the Sponsor Acquisition. In connection with the termination of the Precision Agreements, we entered into a transition services agreement with Precision

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

whereby, for a period of 90 days, Precision agreed to provide substantially the same services as it was providing under the Precision Agreements. The transition services agreement was not renewed at the expiration of its term. Fees for transition services under this agreement totaled approximately $0.3 million for the successor period July 17, 2014 to September 30, 2014.

Monticello Partners LLC Lease Agreement

The Company leases office space from a related party, Monticello Partners LLC, which is wholly owned by one of the Company's shareholders. The lease agreement expires on August 31, 2017 and the Company is responsible for all taxes and utilities. Payments under this agreement were not material to the periods presented.

Future minimum lease payments for this lease, which had a non-cancelable lease term in excess of one year as of September 30, 2015, were as follows (in thousands):



Remainder of 2015	$	7
2016	28
2017	19
Total	$	54

11. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

The Company entered into certain supply contracts for their popcorn kernels for various periods through September 2017. As of September 30, 2015, the Company’s purchase commitments remaining under these contracts totaled $14.2 million. The contracts also stipulate that if the Company fails to purchase the stated quantities within the time period specified, the Company has the option to purchase all remaining quantities under the contract, or the seller has the right to assess liquidated damages, including payment of the excess of the contract price over the market price for all remaining contracted quantities not purchased.

On April 29, 2015, the Company and a third-party co-manufacturer amended their manufacture and supply agreement dated February 27, 2014 (the “Amended Contract”). The Amended Contract extends the initial term through February 27, 2022. Pursuant to the terms of the Amended Contract, the Company is required to pay an early termination fee and is obligated to make certain annual minimum purchases from the third-party co-manufacturer. As part of the Amended Contract, the Company purchased $1.9 million of film and corrugate raw materials from the third-party co-manufacturer.

Lease Commitments

The Company entered into an operating lease for its headquarters office location in Austin, Texas. The lease was effective February 26, 2015 and has a nine year term.

Rent expense from operating leases totaled approximately $0.1 million and $0.2 million for the successor three and nine months ended September 30, 2015, respectively. Rent expense for the successor period July 17, 2014 to September 30, 2014 and predecessor period July 1, 2014 to July 16, 2014 were not material.

As of September 30, 2015, minimum rental commitments under noncancellable operating leases were (in thousands):



Remainder of 2015	$	89
2016	361
2017	360
2018	349
2019	358
Thereafter	1,678
Total	$	3,195

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Legal Matters

From time to time, the Company is subject to claims and assessments in the ordinary course of business. The Company is not currently a party to any litigation matter that, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition, results from operations or cash flow.

12. INCOME TAXES

Our effective tax rate for the year is dependent on many factors, including the impact of enacted tax laws in jurisdictions in which we operate and the amount of taxable income we earn. The effective tax rate was 364.7% and 66.9% for the three and nine months ended September 30, 2015, respectively. The effective tax rate was 45.2% for the successor period July 17, 2014 to September 30, 2014. The increase in the effective tax rate for the three and nine months ended September 30, 2015, is primarily due to the significant IPO-related costs as well as our equity based compensation charges, both of which are not tax deductible.

13. EQUITY-BASED COMPENSATION

As discussed in in Note 1, in connection with the Corporate Reorganization in August 2015, all of the outstanding equity awards (which were comprised of Class C-1 and C-2 units of Topco) that were granted under the TA Topco 1, LLC 2014 Equity Incentive Plan, were converted into shares of the common stock and restricted stock of the Company. The portion of outstanding Class C units that had vested as of the consummation of the Corporate Reorganization were converted into shares of the Company’s common stock and the remaining portion of unvested outstanding Class C units were converted into shares of the Company’s restricted stock, which were granted under the Amplify Snack Brands, Inc. 2015 Stock Option and Incentive Plan (the “2015 Plan”).

The shares of restricted stock of the Company are subject to the following time-based vesting conditions, in accordance with the terms and conditions of the Class C units from which such shares were converted, 25% on the first anniversary of the vesting reference date applicable to individual grants, and thereafter, 2.0833% on the final day of each of the following 36 months, subject to continued service through each applicable vesting date. Upon a termination of service relationship by the Company, all unvested awards will be forfeited and the shares of common stock underlying such award will become available for issuance under the 2015 Plan.

The fair value of these equity awards is amortized to equity-based compensation expense over the vesting periods described above, which totaled approximately $1.0 million and $2.4 million for the three and nine months ended September 30, 2015. There was no equity-based compensation expense in the successor period July 17, 2014 to September 30, 2014 or the predecessor periods July 1, 2014 to July 16, 2014 and January 1, 2014 to July 16, 2014. Equity-based compensation expense is included as part of general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes the activity of the Company's unvested restricted stock awards ("RSAs") for the nine months ended September 30, 2015:



	Successor
Number of RSAs	Nine Months Ended September 30, 2015
Unvested as of December 31, 2014	—
Issued ⁽¹⁾	6,343,036
Forfeited	(43,610		)
Vested	(599,846		)
Unvested as of September 30, 2015	5,699,580
Expected to vest at September 30, 2015	5,699,580

Weighted Average Grant Date Fair Value
Unvested as of December 31, 2014	$	—
Issued ⁽¹⁾	1.37
Forfeited	1.05
Vested	1.07
Unvested as of September 30, 2015	$	1.41
(In Thousands)
Unamortized costs at September 30, 2015 ⁽²⁾	$	8,863
Weighted average remaining vesting term of unvested RSAs as of September 30, 2015	36			months

⁽¹⁾Issued in connection with the conversion of 12,182,050 Class C Units of Topco, the former parent entity of the Company prior

to the consummation of the Corporate Reorganization.

⁽²⁾ Includes incentive awards issued to a non-employee which are remeasured at fair value at each reporting date until the awards

vest.

Prior to the consummation of the Corporate Reorganization in August 2015, certain employees of the Company participated in Topco's 2014 Equity Incentive Plan (the "2014 Plan"), which was adopted by Topco's board of directors and approved by its unitholders in July 2014. The outstanding equity awards under the 2014 Plan were comprised of Class C-1 and Class C-2 units which represented profit interests and had no capital contribution requirement. As discussed above, in connection with the Corporate Reorganization in August 2015, all of the outstanding Class C-1 and C-2 units were converted into shares of the common stock and restricted stock of the Company.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes the activity of the unvested incentive units for the nine months ended September 30, 2015:



	Successor
	Nine Months Ended September 30, 2015
	Class C-1 Units			Class C-2 Units
Number of units
Unvested as of December 31, 2014	6,955,194			5,571,410
Issued	1,151,419			477,869
Forfeited	—			—
Vested ⁽¹⁾	(1,106,172		)	(867,670		)
Converted ⁽²⁾	(7,000,441		)	(5,181,609		)
Unvested as of September 30, 2015	—			—

Weighted Average Grant Date Fair Value
Unvested as of December 31, 2014	$	0.95		$	0.18
Issued	1.60			0.97
Forfeited	—			—
Vested ⁽¹⁾	0.95			0.18
Converted ⁽²⁾	1.06			0.25
Unvested as of September 30, 2015	$	—		$	—

⁽¹⁾Represents incentive units that had vested as of the consummation of the Corporate Reorganization in August

2015.

⁽²⁾Represents unvested incentive units that were converted into 6,343,036 shares of the Company's restricted stock

in connection with the Corporate Reorganization in August 2015.

Valuation of Class C-1 and C-2 Incentive Units

Prior to the Company's IPO in August 2015, the Company’s board of directors determined the estimated fair value of the equity-based compensation awards (comprised of Class C-1 and C-2 incentive units of Topco) at the date of grant based upon several factors, including its consideration of input from management and contemporaneous third-party valuations.

The valuation of Topco’s equity was determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions the Company used in the valuation models were highly complex and subjective. The Company based its assumptions on future expectations combined with management judgment and considered numerous objective and subjective factors to determine the fair value of the equity awards as of the grant date including, but not limited to, the following factors:


•	lack of marketability;


•	the Company’s actual operating and financial performance;


•	current business conditions and projections;


•	the U.S. capital market conditions;


•	the Company’s stage of development; and

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

•

likelihood of achieving a liquidity event, such as an IPO, given prevailing market conditions. The valuation of the equity-based compensation awards involved a two-step process. First, the Company determined its business equity value using an enterprise value based on the income approach, specifically a discounted cash flow ("DCF") analysis. A market approach, which estimated the fair value of the Company, by applying market multiples of comparable peer companies in its industry or similar lines of business to its historical and/or projected financial metrics, was also developed to corroborate the reasonableness of the DCF indication of enterprise value.

The values determined by the income and the market approach were comparable. Second, the business equity value was allocated among the securities that comprise the capital structure of the Company using the Option-Pricing Method, or OPM, as described in the AICPA Practice Aid entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation. See below for a description of the valuation and allocation methods.

The DCF analysis required the development of the forecasted future financial performance of the Company, including revenues, operating expenses and taxes, as well as working capital and capital asset requirements. The discrete forecast period analyzed extended to the point at which the Company expected to reach a steady state of growth and profitability. The projected cash flows of the discrete forecast period were discounted to a present value employing a discount rate that properly accounted for the estimated market weighted average cost of capital. Finally, an assumption was made regarding the sustainable long-term rate of growth beyond the discrete forecast period, and a residual value was estimated and discounted to a present value. The sum of the present value of the discrete cash flows and the residual, or “terminal” value represented the estimated fair value of the total enterprise value of the Company. This value was then adjusted for non-operational assets, liabilities and interest bearing debt to conclude the equity value of the Company.

The financial forecasts prepared took into account the Company’s past results and expected future financial performance. There was inherent uncertainty in these estimates as the assumptions used were highly subjective and may change as a result of new operating data and economic and other conditions that may impact the Company’s business.

Once the equity value of the Company was estimated, it was then allocated among the various classes of securities to arrive at the fair value of the awards. For this allocation, the OPM was used for all grants. The OPM entails allocating the equity value to the various share classes based upon their respective claims on a series of call options with strike prices at various value levels depending upon the rights and preferences of each class. A Black-Scholes option pricing model was employed to value the call options. This model defines the securities’ fair values as functions of the current fair value of a company and requires the use of assumptions such as the anticipated holding period and the estimated volatility of the equity securities.

The following table summarizes the key assumptions used in the OPM allocation as of December 4, 2014:

Assumptions



• Time to liquidity event	2 years
• Volatility	30.00	%
• Risk-free rate	0.55	%
• Dividend yield	—	%
• Lack of marketability discount	16	%

The expected term of 2 years represents management’s expected time to a liquidity event as of the valuation date. The volatility assumption is based on the estimated stock price volatility of a peer group of comparable public companies over a similar term. The risk-free rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term. As of December 4, 2014, the only grant date in 2014, the Company used an expected dividend yield of zero as we had never declared or paid any ordinary cash dividends and at that time did not plan to pay cash dividends in the foreseeable future.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

The value derived from the OPM model was reduced by a 16% lack of marketability discount in the determination of fair values of the awards at the grant date. A discount for lack of marketability was applied to reflect the increased risk arising from the inability to readily sell the equity awards.

For awards granted on February 24, 2015 and June 10, 2015, the Company used the Probability Weighted Expected Return Method ("PWERM"), whereby the value of the various classes of securities was estimated based upon the analysis of future values for the company assuming various possible future liquidity events such as an IPO, sale or merger. Share value was based upon the probability-weighted present value of expected future net cash flows, considering each of the possible future events, as well as the rights and preferences of each share class. The PWERM was selected due to the established nature of the Company, the prospect of a near term exit via an IPO or sale, and our ability to reasonably forecast financial performance.

First, future enterprise values of the Company were estimated using a range of Enterprise-to-EBITDA multiples. The valuation multiple range was established by consideration of valuation multiples indicated by the comparable public company and comparable transaction methods, both versions of the Market Approach. A DCF analysis was also performed to corroborate the Market Approach indications of value.

Second, the Company’s implied equity value was allocated among the various classes of securities using the PWERM. To apply the PWERM, the Company first estimated future enterprise values under various exit scenarios, and adjusted projected values of cash and debt for each scenario to determine the total expected equity value of the Company at the exit date.

As of February 24, 2015, the PWERM analysis reflected the Company’s belief that there was a 60% probability that the Company would complete an IPO and a 40% probability of a sale of the Company. The valuation used a risk adjusted discount rate of 14% and an estimated time to a liquidity event of 6 months.

The aggregate value of the Class C-1 and Class C-2 units derived from the PWERM allocation method was then divided by the number of respective units outstanding to arrive at the per unit value. A lack of marketability discount was applied to reflect the increased risk arising from the inability to readily sell the units. This discount was 12% under an assumed IPO scenario and 8% under an assumed sale scenario. The higher discount under the IPO scenario reflects a potential delay in liquidity, relative to a sale scenario, due to typical IPO lock-up provisions.

As of June 10, 2015, the PWERM analysis reflected the Company’s belief that there was a 90% probability that the Company would complete an IPO and a 10% probability of a sale of the Company. The valuation used a risk adjusted discount rate of 12% and an estimated time to a liquidity event of 2 months.

The aggregate value of the Class C-1 and Class C-2 units derived from the PWERM allocation method was then divided by the number of respective units outstanding to arrive at the per unit value. A lack of marketability discount was applied to reflect the increased risk arising from the inability to readily sell the units. This discount was 10% under an assumed IPO scenario and 5% under an assumed sale scenario. The higher discount under the IPO scenario reflects a potential delay in liquidity, relative to a sale scenario, due to typical IPO lock-up provisions. The key subjective factors and assumptions used in the Company’s valuations of February 24, 2015 and June 10, 2015 grants primarily consisted of:


•	the probability and timing of the various possible liquidity events;


•	the selection of the appropriate market comparable transactions;


•	the selection of the appropriate comparable publicly traded companies;


•	the financial forecasts utilized to determine future cash balances and necessary capital requirements;


•	the estimated weighted-average cost of capital; and


•	the discount for lack of marketability.

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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 condensed consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this report.

Forward-looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may”, “will”, "seek", “should”, “expects”, “plans”, “anticipates”, “could”, “intends”, “target”, “projects”, “strategy", "future", “believes”, “estimates”, "goal", “potential”, "likely", or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this report include, but are not limited to, statements about:

• our future financial performance, including our net sales, cost of goods sold, gross profit or gross profit margin, operating expenses, ability to generate positive cash flow and ability to achieve and maintain profitability;

• our ability to maintain, protect and enhance our brands;

• our ability to attract and retain customers;

• the sufficiency of our cash and cash equivalents to meet our liquidity needs and service our indebtedness;

• our ability to produce sufficient quantities of our products to meet demands;

• demand fluctuations for our products;

• our ability to successfully innovate and compete in the food industry;

• changing trends, preferences and tastes in the food industry;

• our ability to successfully expand in our existing markets and into new U.S. and international markets;

• worldwide economic conditions and their impact on consumer spending;

• our expectations concerning relationships with third parties;

• our ability to effectively manage our growth and future expenses;

• future acquisitions of or investments in complementary companies or products;

• changes in regulatory requirements in our industry and our ability to comply with those requirements; and

• the attraction and retention of qualified employees and key personnel.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this report.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

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The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

Our Company and Our Business

Amplify Snack Brands is a high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for better-for-you ("BFY") snacks. Our anchor brand, SkinnyPop, is a rapidly-growing, highly-profitable and market-leading BFY ready-to-eat ("RTE") popcorn brand. In April 2015, we acquired Paqui, LLC ("Paqui"), an emerging BFY tortilla chip brand, that has many of the same key taste and BFY attributes as SkinnyPop. We believe that our focus on building a portfolio of exclusively BFY snack brands will allow us to leverage our platform to realize material synergies across our family of BFY brands, as well as allow our retail customers to consolidate their vendor relationships in this large and growing segment.

Our SkinnyPop brand sells premium products made from high-quality, simple ingredients and is sold in retail locations in the United States and Canada. We distribute our products across a wide variety of retail channels, including natural and conventional grocery, drug, convenience, club and mass merchandise. We also have a presence in the food service and selected other non-food retail channels. Our SkinnyPop product portfolio consists of four core flavors (Original, Black Pepper, White Cheddar Flavor and Naturally Sweet), along with occasional rotational flavors, which are sold in a variety of packaging sizes and marketed under the SkinnyPop brand. Our SkinnyPop brand has experienced strong growth, driven by distribution gains, increases in sales velocities and new product introductions. As is evidenced by our high repeat purchase patterns, we have built a loyal and growing customer base for our SkinnyPop brand. Additionally, we believe retailers find our SkinnyPop products to be attractive because of our premium price points and strong sales velocities. While SkinnyPop’s growth has been rapid, we believe significant opportunity exists for continued growth.

Our corporate vision is to continue to build a diversified and BFY-focused snacking company that aligns with continued increases in consumer preferences for BFY products and overall snacking trends. We believe this focus gives us a competitive advantage in the large and intensely competitive snack foods market. We intend to achieve our goal by both developing and acquiring snacking brands and products that deliver exceptional taste, align with our BFY mission and allow us to leverage our management and infrastructure to help drive net sales growth and increased profitability.

Recent Developments

As discussed more fully in Note 1 in the accompanying Notes to Consolidated Financial Statements contained in Item 1, we completed our initial public offering ("IPO") on August 4, 2015, in which 15,000,000 common shares from the 75,000,000 common shares then issued, were sold by selling stockholders to the public at a price of $18.00 per share. We did not receive any proceeds from the sale of shares in this offering.

As discussed more fully in Note 3 in the accompanying Notes to Consolidated Financial Statements contained in Item 1, we acquired Paqui, an emerging BFY tortilla chip brand, in April 2015 for total consideration of approximately $11.9 million. We plan to leverage our existing sales force and relationships with retail customers and distributors to help gain distribution for Paqui.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated statements of income for the three and nine month ended September 30, 2014 present our consolidated results of operations giving pro forma effect to the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend, as more fully described in Note 1 in the accompanying Notes to Consolidated Financial Statements contained in Item 1, as if such transactions had occurred as of January 1, 2014. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of our Predecessor and Successor entities, as applicable.

The unaudited pro forma condensed consolidated financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” and the historical condensed consolidated financial statements and related notes included elsewhere in this document.

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The Sponsor Acquisition was accounted for using the acquisition method of accounting. The initial estimated fair values of the acquired assets and assumed liabilities as of the date of acquisition, which are based on the consideration paid and estimates and our assumptions, are reflected herein. As explained in more detail in Note 1 in the accompanying Notes to Consolidated Financial Statements contained in Item 1, the total purchase price of approximately $320 million to acquire the SkinnyPop business has been allocated to the assets acquired and assumed liabilities of SkinnyPop based upon estimated fair values at the date of acquisition. Independent valuation specialists conducted analyses in order to assist our management in determining the fair values of the acquired assets and liabilities assumed. The Company has completed its review of the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition.

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations of Amplify Snack Brands, Inc. that would have occurred had the Sponsor Acquisition, the December 2014 Special Dividend or the May 2015 Special Dividend occurred as of January 1, 2014. The unaudited pro forma consolidated financial information contains a variety of adjustments, assumptions and estimates, is subject to numerous other uncertainties and the assumptions and adjustments as described in the accompanying notes hereto and should not be relied upon as being indicative of our results of operations had the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations for any future period or date. The acquisition of Paqui occurred in April 2015. The unaudited pro forma consolidated financial information for the three and nine months ended September 30, 2014 does not include results of the Paqui, LLC acquisition. The unaudited condensed consolidated financial information for the nine months ended September 30, 2015 includes the results of Paqui from April 17, 2015, the date of acquisition, through September 30, 2015, but was not given pro forma effect as if the acquisition had occurred as of January 1, 2014. Company management evaluated the impact to the Company’s financial statements of the Paqui, LLC acquisition and concluded that the impact was not significant enough to require or separately warrant the inclusion of pro forma financial results inclusive of Paqui under applicable SEC rules and regulations or under GAAP. The pro forma adjustments give effect to the following items in connection with the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend:


•	the asset and liability valuations and related purchase price allocations associated with the Sponsor Acquisition;


•	the exclusion of non-recurring Sponsor Acquisition-related expenses;


•	the effect of the incurrence of a $150 million term loan and a $7.5 million revolving facility in connection with the Sponsor Acquisition;


•	the incurrence of an incremental $50 million under the Credit Agreement governing the $150 million term loan, increasing the aggregate term loan to $200 million, as part of the December 2014 Special Dividend;


•	the incurrence of an incremental $7.5 million under the Credit Agreement governing the $200 million term loan, increasing the aggregate term loan to $207.5 million and the incurrence of a $15 million borrowing under our revolving facility increasing the aggregate revolving facility to $25 million, each as part of the May 2015 Special Dividend;


•	the estimated compensation expense associated with the Founder Contingent Compensation in connection with the Sponsor Acquisition, based on our achievement of certain contribution margin benchmarks during the fiscal year 2015, and the tax benefit, to the extent realized by us, associated with the arrangement; and


•	the associated income tax expense effect of the above adjustments.

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Unaudited Pro Forma Condensed Consolidated Statement of Income

For the three months ended September 30, 2014



	Historical(1)								Pro Forma
	Successor		Predecessor						Combined
In thousands, except share/unit and per share/unit information	July 17, 2014 to September 30, 2014		July 1, 2014 to July 16, 2014		Pro Forma Adjustments				Three months ended September 30, 2014
Net sales	$	30,957	$	7,185	$	—			$	38,142
Cost of goods sold	14,255		2,719		—				16,974
Gross profit	16,702		4,466		—				21,168
Sales & marketing expenses	3,261		1,065		—				4,326
General & administrative expenses	7,708		1,414		(2,046		)	(2)(3)(4)	7,076
Total operating expenses	10,969		2,479		(2,046		)		11,402
Operating income	5,733		1,987		2,046				9,766
Interest expense	1,853		—		1,360			(5)	3,213
Pre-tax income	3,880		1,987		686				6,553
Income tax expense	1,754		—		540			(6)	2,294
Net income	$	2,126	$	1,987	$	146			$	4,259

Basic and diluted earnings per share/unit	$	0.03	$	4,967.50					$	0.06

Basic and diluted weighted average shares/units outstanding	67,588,737		400						67,588,737


(1)	The amounts in these columns represent our Predecessor’s and Successor’s historical results of operations for the periods reflected.


(2)	This adjustment reflects the incremental amortization expense associated with allocation of purchase price to finite-lived identified intangible assets consisting of customer relationships and non-competition agreements entered into with the founders.


(3)	This adjustment reflects the incremental compensation expense associated with the Founder Contingent Compensation that would have been recognized if the employment agreements with the founders had been in effect on January 1, 2014. The total estimated obligation of $26.8 million is being recognized ratably over the 18-month contractual service.


(4)	This adjustment reflects the exclusion of non-recurring Sponsor Acquisition-related expenses consisting of transaction bonuses paid to employees in connection with the Sponsor Acquisition, and legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition.


(5)	This adjustment reflects the following adjustments to increase interest expense as a result the following financing activities:


i.	Incurrence of a $150 million term loan and a $7.5 million borrowing under our revolving credit facility in connection with the Sponsor Acquisition;


ii.	Incurrence of an incremental $50 million term loan, increasing the aggregate term loan to $200 million, in connection with the financing of the December 2014 Special Dividend; and


iii.	Incurrence of an incremental $7.5 million term loan, increasing the aggregate term loan to $207.5 million, as well as the incurrence of a $15 million borrowing under our revolving credit facility, each in connection with the financing of the May 2015 Special Dividend.

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Pro forma interest expense components:
Interest expense incurred in connection with term loan and revolving credit facility borrowings described above	$	2,989
Amortization of capitalized debt issuance costs associated with term loan amortized over five years	198
Revolving credit facility unused commitment fee	13
Other administrative fees	13
Total pro forma interest expense	3,213
Less: actual interest expense for the period	(1,853		)
Net pro forma adjustment to interest expense	$	1,360


(6)	Reflects the statutory tax rate of 35%

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Unaudited Pro Forma Condensed Consolidated Statement of Income

For the nine months ended September 30, 2014



	Historical(1)								Pro Forma
	Successor		Predecessor						Combined
In thousands, except share/unit and per share/unit information	July 17, 2014 to September 30, 2014		January 1, 2014 to July 16, 2014		Pro Forma Adjustments				Nine months ended September 30, 2014
Net Sales	$	30,957	$	68,353	$	—			$	99,310
Cost of goods sold	14,255		29,429		—				43,684
Gross profit	16,702		38,924		—				55,626
Sales & marketing expenses	3,261		5,661		—				8,922
General & administrative expenses	7,708		2,682		9,240			(2)(3)(4)	19,630
Total operating expenses	10,969		8,343		9,240				28,552
Operating income	5,733		30,581		(9,240		)		27,074
Interest expense	1,853		—		7,888			(5)	9,741
Pre-tax income	3,880		30,581		(17,128		)		17,333
Income tax expense	1,754		—		4,312			(6)	6,066
Net income	$	2,126	$	30,581	$	(21,440	)		$	11,267

Basic and diluted earnings per share/unit	$	0.03	$	76,452.74					$	0.17

Basic and diluted weighted average shares/units outstanding	67,588,737		400						67,588,737


(1)	The amounts in these columns represent our Predecessor’s and Successor’s historical results of operations for the periods reflected.


(2)	This adjustment reflects the incremental amortization expense associated with allocation of purchase price to finite-lived identified intangible assets consisting of customer relationships and non-competition agreements entered into with the founders.


(3)	This adjustment reflects the incremental compensation expense associated with the Founder Contingent Compensation that would have been recognized if the employment agreements with the founders had been in effect on January 1, 2014. The total estimated obligation of $26.8 million is being recognized ratably over the 18-month contractual service.


(4)	This adjustment reflects the exclusion of non-recurring Sponsor Acquisition-related expenses consisting of transaction bonuses paid to employees in connection with the Sponsor Acquisition, and legal, accounting, tax, insurance and other diligence fees paid to consultants in connection with the Sponsor Acquisition.


(5)	This adjustment reflects the following adjustments to increase interest expense as a result the following financing activities:


i.	Incurrence of a $150 million term loan and a $7.5 million borrowing under our revolving credit facility in connection with the Sponsor Acquisition;


ii.	Incurrence of an incremental $50 million term loan, increasing the aggregate term loan to $200 million, in connection with the financing of the December 2014 Special Dividend; and


iii.	Incurrence of an incremental $7.5 million term loan, increasing the aggregate term loan to $207.5 million, as well as the incurrence of a $15 million borrowing under our revolving credit facility, each in connection with the financing of the May 2015 Special Dividend.

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Pro forma interest expense components:
Interest expense incurred in connection with term loan and revolving credit facility borrowings described above	$	9,072
Amortization of capitalized debt issuance costs associated with term loan amortized over five years	593
Revolving credit facility unused commitment fee	38
Other administrative fees	38
Total pro forma interest expense	9,741
Less: actual interest expense for the period	(1,853		)
Net pro forma adjustment to interest expense	$	7,888


(6)	Reflects the statutory tax rate of 35%

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Results of Operations

Our results of operations prior to the date of the Sponsor Acquisition are presented as the results of the Predecessor, SkinnyPop Popcorn LLC. The results of operations, including the Sponsor Acquisition and results thereafter, are presented as the results of the Successor, the Company and its consolidated subsidiaries. The Pro Forma three and nine months ended September 30, 2014 (unaudited) represent the unaudited pro forma condensed consolidated statements of income for the three and nine months ended September 30, 2014 after giving pro forma effect to the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend as if such transactions had occurred on January 1, 2014, as more fully described in “Unaudited Pro Forma Condensed Consolidated Financial Information”, which section includes a comparative presentation showing all pro forma adjustments made to our historical statements of income for the Predecessor and Successor periods in accordance with the rules and regulations of the SEC. We believe it provides useful information in assessing our business. See “Unaudited Pro Forma Condensed Consolidated Financial Information”. The unaudited pro forma condensed consolidated statements of income are included for informational purposes only and do not purport to reflect the results of operations of Amplify Snack Brands, Inc. that would have occurred had the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend occurred on January 1, 2014. The unaudited pro forma condensed consolidated statements of income contain a variety of adjustments, assumptions and estimates, are subject to numerous other uncertainties and the assumptions and adjustments as described in the accompanying notes hereto and should not be relied upon as being indicative of our results of operations had the Sponsor Acquisition, the December 2014 Special Dividend and the May 2015 Special Dividend occurred on the dates assumed. The unaudited pro forma condensed consolidated statements of income also do not project our results of operations for any future period or date. The unaudited pro forma condensed consolidated statements of income do not include results of the Paqui acquisition. We evaluated the impact to our financial statements of the Paqui acquisition and concluded that the impact was not significant enough to require or separately warrant the inclusion of pro forma financial results inclusive of Paqui under applicable SEC rules and regulations or under GAAP.

The following tables set forth our condensed consolidated statements of income for the periods presented in dollars and as a percentage of our net sales:



						Pro Forma
	Successor					Predecessor
	Three Months Ended September 30, 2015			% of Net Sales		Three Months Ended September 30, 2014		% of Net Sales
Net sales	$	45,914		100	%	$	38,142	100	%
Cost of goods sold	20,260			44		16,974		45
Gross profit	25,654			56		21,168		55
Sales & marketing expenses	5,146			11		4,326		11
General & administrative expenses	16,068			35		6,566		17
Sponsor acquisition-related expenses	—			—		510		1
Total operating expenses	21,214			46		11,402		30
Operating income	4,440			10		9,766		26
Interest expense	3,311			7		3,213		8
Pre-tax income	1,129			2		6,553		17
Income tax expense	4,118			9		2,294		6
Net (loss) income	$	(2,989	)	(7	)%	$	4,259	11	%

Net Sales

Net sales increased $7.8 million, or 20.4%, from $38.1 million for the Pro Forma three months ended September 30, 2014 to $45.9 million for the three months ended September 30, 2015. Our net sales growth was primarily driven by increased distribution and strong brand velocity across our sales channels, partially offset by our decision to not run a large promotion in the third quarter of 2015 that we ran in the third quarter of 2014.

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Cost of Goods Sold/Gross Profit

Gross profit increased $4.5 million, or 21.2%, from $21.2 million for the Pro Forma three months ended September 30, 2014 to $25.7 million for the three months ended September 30, 2015. This increase was primarily related to the increase in net sales. Gross profit as a percentage of net sales increased approximately 40 basis points, from 55.5% for the Pro Forma three months ended September 30, 2014 to 55.9% for the three months ended September 30, 2015. The increase in gross profit as a percentage of net sales was principally driven by improved rates on materials and ingredients, partially offset by product mix shift from expansion into lower margin products and higher transportation costs from geographic and channel expansion.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.8 million, or 19.0%, from $4.3 million for the Pro Forma three months ended September 30, 2014 to $5.1 million for the three months ended September 30, 2015. The increase was primarily driven by higher compensation expense associated with our efforts to build out our internal sales team. Sales and marketing expenses as a percentage of net sales decreased slightly from 11.3% for the Pro Forma three months ended September 30, 2014 to 11.2% for the three months ended September 30, 2015.

General and Administrative Expenses

General and administrative expenses increased $9.5 million, or 144.7%, from $6.6 million for the Pro Forma three months ended September 30, 2014 to $16.1 million for the three months ended September 30, 2015. The increase was primarily due to the incurrence of costs related to our IPO which closed in August 2015, as well as infrastructure investments, including personnel and systems, and new administrative costs required to operate effectively as a public company. General and administrative expenses as a percentage of net sales was 17.2% for the Pro Forma three months ended September 30, 2014 and 35.0% for the three months ended September 30, 2015.

Sponsor Acquisition-Related Costs

The Sponsor Acquisition-related costs of $0.5 million for the Pro Forma three months ended September 30, 2014 included a supplemental transaction payment and related expenses paid to Precision Capital, an advisor to the Predecessor, in connection with the Sponsor Acquisition. There were no such costs for the three months ended September 30, 2015.

Interest Expense

Interest expense increased $0.1 million, or 3.1%, from $3.2 million for the Pro Forma three months ended September 30, 2014 to $3.3 million for the three months ended September 30, 2015. The increase was primarily due to interest expense associated with notes payable issued to the sellers of Paqui in April 2015.

Income Tax Expense

The effective tax rate was 35.0% for the Pro Forma three months ended September 30, 2014 and 364.7% for the three months ended September 30, 2015. The increase to the effective tax rate was primarily due to significant IPO-related costs as well as equity-based compensation charges, both of which are not tax deductible.

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The following tables set forth our condensed consolidated statements of income for the periods presented in dollars and as a percentage of our net sales:



					Pro Forma
	Successor				Predecessor
	Nine Months Ended September 30, 2015		% of Net Sales		Nine Months Ended September 30, 2014		% of Net Sales
Net Sales	$	137,543	100	%	$	99,310	100	%
Cost of goods sold	60,787		44		43,684		44
Gross profit