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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, 2016
OR
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 5th 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.
 
Large accelerated filer
 
o
  
Accelerated filer
 
o
 
Non-accelerated filer
 
x  (do not check if a smaller reporting company)
  
Smaller reporting company
 
o
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 9, 2016, there were 76,784,345 shares of the registrant’s common stock outstanding.
 

Table of Contents

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share data)

 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,187

 
$
18,751

Accounts receivable, net of allowances of $8,481 and $2,272, respectively
39,740

 
11,977

Inventories
18,943

 
6,829

Other current assets
8,563

 
1,293

Total current assets
84,433

 
38,850

Property and equipment, net
51,959

 
2,153

Other assets:
 
 
 
Goodwill
177,541

 
47,421

Intangible assets, net
557,614

 
269,468

Other assets
55

 
40

Total assets
$
871,602

 
$
357,932

Liabilities and shareholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
31,959

 
$
9,302

Accrued liabilities
14,856

 
5,230

Senior term loan- current portion
6,000

 
12,750

Founder contingent consideration
2,197

 
25,197

Tax receivable obligation- current portion
6,594

 
6,632

Notes payable, net- current portion
984

 
—

Other current liabilities
4,675

 
217

Total current liabilities
67,265

 
59,328

Long-term liabilities:
 
 
 
Senior term loan, net
572,281

 
181,704

Revolving credit facility, net
4,144

 
—

Notes payable, net
6,642

 
3,757

Net deferred tax liabilities
62,277

 
5,115

Tax receivable obligation
89,498

 
89,498

Other liabilities
5,806

 
3,107

Total long-term liabilities
740,648

 
283,181

Commitment and contingencies (Note 11)

 

Shareholders' Equity:
 
 
 
Common stock, $0.0001 par value, 375,000,000 shares authorized at September 30, 2016 and December 31, 2015 and 76,881,921 and 74,843,470 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
8

 
8

Additional paid in capital
39,273

 
793

Common stock held in treasury, at par, 3,504,521 and 4,991,858 shares at September 30, 2016 and December 31, 2015, respectively
—

 
(1
)
Retained earnings
33,438

 
14,623

Accumulated other comprehensive loss
(9,030
)
 
—

Total shareholders' equity
63,689

 
15,423

Total liabilities and shareholders' equity
$
871,602

 
$
357,932

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

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Table of Contents

AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(unaudited, in thousands, except shares outstanding and per share information)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
67,982

 
$
45,914

 
$
182,193

 
$
137,543

Cost of goods sold
35,646

 
20,260

 
88,891

 
60,787

Gross profit
32,336

 
25,654

 
93,302

 
76,756

Sales & marketing expenses
8,903

 
5,146

 
22,551

 
13,780

General & administrative expenses
15,971

 
16,068

 
27,688

 
37,085

Gain on change in fair value of contingent consideration
(505
)
 
—

 
(505
)
 
—

Total operating expenses
24,369

 
21,214

 
49,734

 
50,865

Operating income
7,967

 
4,440

 
43,568

 
25,891

Interest expense
5,636

 
3,311

 
11,788

 
9,324

Other income
(4,221
)
 
—

 
(4,221
)
 
—

Loss on extinguishment of debt
1,100

 
—

 
1,100

 
—

Income before income taxes
5,452

 
1,129

 
34,901

 
16,567

Income tax expense
3,807

 
4,118

 
16,086

 
11,092

Net income (loss)
$
1,645

 
$
(2,989
)
 
$
18,815

 
$
5,475

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9,030
)
 
—

 
(9,030
)
 
—

Comprehensive (loss) income
$
(7,385
)
 
$
(2,989
)
 
$
9,785

 
$
5,475

 
 
 
 
 
 
 
 
Basic and diluted earnings per share
$
0.02

 
$
(0.04
)
 
$
0.25

 
$
0.07

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
75,455,047

 
74,982,461

 
75,032,287

 
74,707,855

Diluted
75,557,760

 
74,982,461

 
75,094,446

 
74,707,855















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

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Table of Contents

AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity
(unaudited, in thousands, except for share data)

 
Common Stock
 
Additional Paid
in Capital
 
Treasury Stock
 
Retained
Earnings
 
Total
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
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


 
Common Stock
 
Additional Paid
in Capital
 
Treasury Stock
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Total
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
BALANCE—December 31, 2015
74,843,470

 
$
8

 
$
793

 
4,991,858

 
$
(1
)
 
$
14,623

 
$
—

 
$
15,423

Net income
—

 
—

 
—

 
—

 
—

 
18,815

 
—

 
18,815

Issuance of common shares as consideration
2,083,689

 
1

 
35,318

 
—

 
—

 
—

 
—

 
35,319

Vesting of restricted stock awards
—

 
—

 
—

 
(1,442,099
)
 
—

 
—

 
—

 
—

Forfeiture of restricted stock awards
(45,238
)
 
(1
)
 
—

 
(45,238
)
 
1

 
—

 
—

 
—

Equity-based incentive compensation
—

 
—

 
3,162

 
—

 
—

 
—

 
—

 
3,162

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
—

 
(9,030
)
 
(9,030
)
BALANCE—September 30, 2016
76,881,921

 
$
8

 
$
39,273

 
3,504,521

 
$
—

 
$
33,438

 
$
(9,030
)
 
$
63,689











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

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Table of Contents

AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
18,815

 
$
5,475

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
814

 
206

Amortization of intangible assets
3,433

 
3,165

Amortization of deferred financing costs and debt discounts
888

 
627

Deferred income taxes
2,419

 
7,026

Equity-based compensation expense
3,972

 
2,435

Founder contingent compensation
—

 
13,805

Loss on disposal of property and equipment
39

 
—

Loss on extinguishment of debt
1,100

 
—

Gain on change in fair value of contingent consideration
(505
)
 
—

Tax receivable agreement non-cash item
(38
)
 
—

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
(5,801
)
 
(1,663
)
Inventories
(2,590
)
 
536

Other assets
(4,301
)
 
(2,239
)
Accounts payable
2,363

 
738

Accrued and other liabilities
73

 
824

Payments of founder contingent compensation
(23,000
)
 
—

Net cash (used in) provided by operating activities
(2,319
)
 
30,935

Investing activities:
 
 
 
Acquisition of Tyrrells, net of cash acquired
(365,616
)
 
—

Acquisition of Boundless Nutrition, net of cash acquired
(16,521
)
 
—

Acquisition of Paqui, net of cash acquired
—

 
(7,830
)
Acquisition of property and equipment
(2,980
)
 
(626
)
Net cash used in investing activities
(385,117
)
 
(8,456
)
Financing activities:
 
 
 
Capital distributions
—

 
(22,285
)
Term loan borrowings
593,420

 
7,500

Payments on term loans
(197,313
)
 
(7,625
)
Draws on revolving credit facilities
20,500

 
15,000

Payments on revolving credit facilities
(15,000
)
 
(13,500
)
Deferred financing costs
(15,517
)
 
(284
)
Net cash provided by (used in) financing activities
386,090

 
(21,194
)
Effect of exchange rate changes on cash and cash equivalents
(218
)
 
—

(Decrease) increase in cash and cash equivalents
(1,564
)
 
1,285

Cash and cash equivalents—Beginning of period
18,751

 
5,615

Cash and cash equivalents—End of period
$
17,187

 
$
6,900

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid
$
14,555

 
$
6,887

Interest paid
$
7,616

 
$
8,633

Non-cash investing and financing activities during the period:
 
 
 
Issuance of common shares as consideration
$
35,319

 
$
—

Issuance of tax receivable agreement
$
—

 
$
96,090

Issuance of notes payable as consideration
$
3,777

 
$
3,715

Contingent consideration
$
1,085

 
$
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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Table of Contents
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.
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.
Refer to Note 9 for additional details regarding the Company's IPO and secondary public offering.
Crisps Topco Limited Acquisition
On September 2, 2016, the Company completed its acquisition of Crisps Topco Limited (“Tyrrells”), a company incorporated under the laws of England and Wales, which owns the Tyrrells international portfolio of premium snack brands, through Thunderball Bidco Limited (the “Purchaser”), a direct, wholly-owned subsidiary of the Company. The acquisition was completed pursuant to a Share Purchase Agreement (the “Purchase Agreement”) with SkinnyPop Popcorn LLC, a direct wholly-owned subsidiary of the Company (the “Purchaser Guarantor”), Crisps Holdings Limited, a company incorporated under the laws of the Cayman Islands (the “Institutional Seller”) and individual selling equityholders (the “Management Sellers”). The Company acquired all of the outstanding equity interests of Tyrrells for total consideration of approximately $416.4 million. Refer to Note 3 for more details regarding this transaction.
SkinnyPop Popcorn LLC Acquisition
On July 17, 2014, SkinnyPop Popcorn LLC ("SkinnyPop") was acquired by investment funds affiliated with TA Associates for aggregate purchase consideration of $320 million, which included rollover stock from existing equity holders in SkinnyPop valued at $25 million. The aggregate purchase consideration, plus transaction-related expenses and financing costs, was funded by TA Associates' equity investment in Topco, as well as from certain members of management and net proceeds from a $150 million term loan borrowing.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015, the interim condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and September 30, 2015, the interim condensed consolidated statement of shareholders' equity for the nine months ended September 30, 2016 and September 30, 2015, and the interim condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and September 30, 2015, are unaudited.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(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 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, 2015, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, with the exception of retrospective adoption of ASU 2015-03 as discussed herein, necessary for the fair presentation of the financial position as of September 30, 2016 and results of our operations for the three and nine months ended September 30, 2016 and September 30, 2015, and cash flows for the nine months ended September 30, 2016 and September 30, 2015. The interim results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2016. Operating results for the three and nine months ended September 30, 2016 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.
Foreign Currency
The financial statements of our foreign subsidiaries are translated to U.S. Dollars. The functional currency of our foreign subsidiaries is the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. Dollars at period-end exchange rates. Income and expense items are translated at the average rates prevailing during the period. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses. Our transaction gains and losses are reflected in earnings in our consolidated statements of comprehensive income. The cumulative translation adjustment in accumulated other comprehensive income loss reflects the unrealized adjustments resulting from translating the financial statements of our foreign subsidiaries.

Segment Reporting
On September 2, 2016, the Company acquired Tyrrells, which owns an international portfolio of premium snack brands. The Company is currently evaluating how the Tyrrells business will be integrated into the Company's current operations and whether the acquisition will qualify as a separate reportable segment(s). The Company will make a determination over the next quarter and disclose the impact in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Currently, the Company's operating segments are aggregated into one reportable segment because they have similar economic characteristics and meet the other aggregation criteria within the accounting standard on segment reporting, including similarities in the nature of the services provided, methods of service delivery, customers served and the regulatory environment in which they operate. Our chief executive officer is considered to be our chief operating

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Notes to Condensed Consolidated Financial Statements
(unaudited)


decision maker. He currently 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 credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair value. The fair value of our term loan and revolving credit facility are estimated based on Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.
The following table presents liabilities measured at fair value on a recurring basis (in thousands):
 
September 30, 2016
 
December 31, 2015
Liabilities:
 
 
 
Founder contingent compensation
$
2,197

 
$
25,197

Contingent consideration (1)
2,491

 
1,911

Total liabilities
$
4,688

 
$
27,108

(1)     Contingent consideration is reported in Other liabilities in the accompanying Condensed Consolidated Balance Sheets.
Founder Contingent Compensation
Considerable judgment was required in developing the estimate of the fair value of the 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 Company's acquisition of SkinnyPop in July 2014. As of December 31, 2015, the Company had accrued the entire liability balance of $25.2 million ratably over the contractual service period as expense in our condensed consolidated statements of comprehensive income. To determine the fair value, the Company valued the total contingent compensation liability based on the expected probability weighted compensation payments corresponding to certain contribution margin benchmarks defined in the employment agreements, as well as the associated income tax benefit using the estimated tax rates that will be in effect (Level 3). The current estimate represents the recognizable portion based on the maximum potential obligation allowable under the employment agreements.
The obligation totaled $25.2 million at December 31, 2015, which consisted of $18.5 million in remaining payments based on the Company's achievement of certain contribution margin benchmarks defined in the employment agreements, and $6.7 million based on estimated tax savings to the Company associated with the tax deductibility of

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Notes to Condensed Consolidated Financial Statements
(unaudited)


the payments under these employment agreements. In March 2016, the Company paid $23.0 million of the Founder Contingent Compensation obligation, leaving a remaining obligation of $2.2 million, which the Company satisfied with a final payment in October 2016. Refer to Note 10 for additional details regarding the founders' employment agreements.
The following table summarizes the Level 3 activity related to the Founder Contingent Compensation (in thousands):
 
Nine Months Ended September 30,
 
2016
 
2015
Balance at beginning of the period
$
25,197

 
$
6,936

Charge to expense
—

 
13,805

Payment
(23,000
)
 
—

Balance at end of the period
$
2,197

 
$
20,741

Contingent Consideration
In connection with the acquisition of Boundless Nutrition, LLC (“Boundless Nutrition”) in April 2016, payment of a portion of the purchase price is contingent upon the achievement for the year ended December 31, 2018 ("Boundless Earn-out Period") 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 Boundless Nutrition (see Notes Payable discussion below for additional details). As of the acquisition date, the Company estimated the fair value of the contingent consideration to be approximately $1.7 million. At September 30, 2016, the Company adjusted the fair value of the contingent consideration to be approximately $1.1 million, based on a change in estimate used in the fair value calculation as of the acquisition date. This adjustment resulted in a decrease to goodwill and intangible assets on the accompanying condensed consolidated balance sheet. The Company is required to reassess the fair value of the contingent consideration at each reporting period. As of September 30, 2016, the Company has finalized the valuation of the acquired intangible assets (see Note 3).
In connection with the acquisition of Paqui, LLC (“Paqui”) in April 2015, payment of a portion of the purchase price is contingent upon the achievement for the year ended December 31, 2018 ("Paqui Earn-out Period" and with the Boundless Earn-out Period, the "Earn-out Periods") 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 (see Notes Payable discussion below for additional details). As of the acquisition date, the Company estimated the fair value of the contingent consideration to be approximately $0.4 million (see Note 3) and the Company is required to reassess the fair value of the contingent consideration at each reporting period. At December 31, 2015, the Company remeasured the fair value of the contingent consideration to be approximately $1.9 million, based on a revised forecast of Paqui operating results for the Paqui Earn-out Period. At September 30, 2016, the Company remeasured the fair value of the contingent consideration to be approximately $1.4 million, based on a revised forecast of Paqui operating results for the Paqui Earn-out Period. These adjustments resulted in an increase to net earnings of $0.5 million on the accompanying condensed consolidated statement of comprehensive income.
The significant inputs used in this fair value estimates include numerous gross sales scenarios for the Earn-out Periods for which probabilities are assigned to each scenario to arrive at a single estimated outcome (Level 3). The estimated outcome is then discounted based on the individual risk analysis of the liability. The present value of the estimated outcome is used as the underlying price and the sum of the original principal amount and accrued interest of the notes issued to the sellers of Paqui and Boundless Nutrition ("Earn-Out Threshold") is used as the exercise price in the Black-Scholes option pricing model. Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of Paqui and Boundless Nutrition, or changes in the future may result in different estimated amounts.
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 each of Paqui and Boundless Nutrition upon the achievement of the respective milestone discussed above.

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Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes the Level 3 activity related to the Contingent Consideration (in thousands):
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Balance at beginning of the period
 
$
1,911

 
$
—

Fair value of contingent consideration at acquisition date
 
1,085

 
390

Gain on change in fair value of contingent consideration
 
(505
)
 
—

Balance at end of the period
 
$
2,491

 
$
390

Notes Payable
As discussed in more detail in Note 3, in April 2016, the Company issued $4.0 million in unsecured notes to the sellers of Boundless Nutrition in connection with its acquisition. The notes bear interest at a rate per annum of 0.67% with principal and interest due at varying maturity dates between April 29, 2017 and December 31, 2018. The Company 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.
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. The Company 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.
Inventories
In our North America operations, 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 third-party firms to assemble and warehouse finished product. The third-party co-manufacturers invoice the Company monthly for labor inputs upon the production or shipment of finished product during that period.
In our international operations, inventories are valued at the lower of cost or market using the first-in, first-out method. The Company owns the manufacturing facilities used for production. The costs of finished goods inventories include raw materials, direct labor, indirect production, and overhead costs.
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. Slotting fees are capitalized and amortized over the greater of twelve months or the life of the agreement and recorded as a reduction in net sales. Capitalized slotting fees are evaluated for impairment on an ongoing basis. The costs of the remaining 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, 2016 and December 31, 2015, the Company recorded total allowances related to sales and incentive programs against trade accounts receivable of approximately $8.5 million and $2.3 million, respectively. Acquisition of Tyrrells in September 2016 contributed $6.4 million. Recoveries of receivables previously written off are recorded when received.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Customer:
 
 
 
 
 
 
 
Costco
22
%
 
29
%
 
26
%
 
32
%
Sam's Club
10
%
 
18
%
 
13
%
 
17
%
As of September 30, 2016, Costco and Sam’s Club represented 10% and 4%, respectively, of the accounts receivable balance outstanding. The same two customers represented 15% and 13%, respectively, of the accounts receivable balance as of December 31, 2015. The decrease in customer concentration as of September 30, 2016 is due to the Tyrrells acquisition (See Note 3 for more details). The Company outsources a significant percentage of the manufacturing of its products to a single co-manufacturer in the United States. This co-manufacturer represented 17% and 36% of the accounts payable balance as of September 30, 2016 and December 31, 2015, respectively.
Earnings per Share
Basic earnings per share has been computed based upon the weighted average number of common shares outstanding. The Company's unvested shares of restricted common stock contain non-forfeitable rights to dividends and are considered to be participating securities in accordance with GAAP and, therefore are included in the computation of basic earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating securities according to dividends declared and participation rights in undistributed earnings. Diluted earnings per share has been computed based upon the weighted average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive. The dilutive effect of unvested restricted stock units ("RSUs") and unvested stock options has been accounted for using the two-class method or the treasury stock method, if more dilutive.
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 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 three and nine months ended September 30, 2015, reflect the Company's reorganization.


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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except share and per share amounts)
 
2016
 
2015
 
2016
 
2015
Basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
1,645

 
$
(2,989
)
 
$
18,815

 
$
5,475

Less: net (income) loss attributable to participating securities
 
(83
)
 
252

 
(1,078
)
 
(495
)
Net income (loss) attributable to common shareholders
 
1,562

 
(2,737
)
 
17,737

 
4,980

Denominator:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
75,455,047

 
74,982,461

 
75,032,287

 
74,707,855

Less: participating securities
 
(3,802,277
)
 
(6,312,221
)
 
(4,300,007
)
 
(6,754,654
)
Basic weighted average common shares outstanding
 
71,652,770

 
68,670,240

 
70,732,280

 
67,953,201

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.02

 
$
(0.04
)
 
$
0.25

 
$
0.07

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
75,455,047

 
74,982,461

 
75,032,287

 
74,707,855

Unvested RSUs (1)
 
89,053

 
—

 
62,159

 
—

Unvested stock options (2)
 
13,660

 
—

 
—

 
—

Diluted weighted average shares outstanding
 
75,557,760

 
74,982,461

 
75,094,446

 
74,707,855

Less: participating securities
 
(3,802,277
)
 
(6,312,221
)
 
(4,300,007
)
 
(6,754,654
)
Diluted weighted average common shares outstanding
 
71,755,483

 
68,670,240

 
70,794,439

 
67,953,201

 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.02

 
$
(0.04
)
 
$
0.25

 
$
0.07


(1)    Excludes the weighted average impact of 373,848 and 131,848 unvested RSUs for the three and nine months
ended September 30, 2016, respectively, because the effects of their inclusion would be anti-dilutive.

(2)    Excludes the weighted average impact of 87,703 and 179,174 unvested stock options for the three and nine
months ended September 30, 2016, because the effects of their inclusion would be anti-dilutive.

Tax Receivable Agreement ("TRA")
As discussed 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. In December 2015, all of the former holders of units in Topco collectively assigned their interests to a new counterparty. 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 of a reduction in the Company's future U.S. federal, state and local taxes resulting from the utilization 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 August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. This ASU is effective

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


for interim and annual periods beginning after December 15, 2017. Early application is permitted. The Company is in the process of assessing the impact of the adoption of ASU 2016-15 on its financial position, results of operations, cash flows and financial statement disclosures.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)". ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing". ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. In May 2019, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." ASU 2016-12 addresses narrow-scope improvements to the guidance on collectibility, noncash consideration, and completed contracts at transition. Additionally, this ASU provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is in the process of assessing both the method and the impact of the adoption of these ASUs on its financial position, results of operations, cash flows and financial statement disclosures.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting", which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted. The Company is in the process of assessing the impact of the adoption of ASU 2016-09 on its financial position, results of operations, cash flows and financial statement disclosures.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which requires lessees to recognize assets and liabilities related to lease arrangements longer than twelve months on the balance sheet. This standard also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is in the process of assessing the impact of the adoption of ASU No. 2016-02 on its financial position, results of operations, cash flows and financial statement disclosures.

In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments", which simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This revised guidance was effective for annual reporting periods beginning after December 15, 2015, and related interim periods. The amendments in the update were applied prospectively to adjustments to provisional amounts that occurred after the effective date of the update with early application permitted for financial statements not yet issued. We have adopted this guidance and will apply it as necessary in our financial statements.

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. See discussion below regarding adoption of ASU 2015-03.

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

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


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 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 Company adopted the provisions of ASU 2015-03 retrospectively on January 1, 2016. Debt issuance costs are now presented as a reduction to the Senior term loan balance on the condensed consolidated balance sheet as of June 30, 2016 and December 31, 2015. As a result, the Company reclassified $2.9 million of debt issuance costs from Other assets to Senior term loan on the condensed consolidated balance sheet as of December 31, 2015. The adoption of ASU 2015-03 did not impact the Company's condensed consolidated statements of comprehensive income or condensed consolidated statements of cash flows.
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 May 2014, the FASB issued 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU No. 2014- 09 by one year, to December 15, 2017 for interim and annual reporting periods beginning after that date. The FASB will permit early adoption of the standard, but not before the original effective date of December 15, 2016. 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.
3. ACQUISITION
Tyrrells Acquisition
On September 2, 2016, the Company acquired Tyrrells, an international manufacturer and distributor of BFY snacks, for total consideration of approximately $416.4 million. The Company paid approximately $381.1 million in cash and issued approximately 2.1 million shares of its common stock with an acquisition date fair value of approximately $35.3 million. Refer to Note 9 for additional information regarding equity issued as consideration for Tyrrells. The Company financed the cash portion of the transaction with proceeds from term loans totaling $600 million. Refer to Note 8 for additional details regarding the financing arrangement entered into in connection with this transaction.
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 a value attributable to brand recognition associated with Tyrrells' products and position in the BFY snack category. The Company incurred approximately $8.4 million and $8.5 million of acquisition-related costs during the three and nine months ended September 30, 2016, respectively, which is included as part of general and administrative expense in the accompanying condensed consolidated statements of comprehensive income. Since the acquisition date, Tyrrells contributed approximately $8.6 million of net sales to the Company for the three and nine months ended September 30, 2016.

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Notes to Condensed Consolidated Financial Statements
(unaudited)


The Company has one year from the acquisition date to finalize the valuation of the acquired intangible assets, including goodwill. Management is responsible for these internal and third-party valuations and appraisals and is continuing to review the amounts and allocations. The following table summarizes the preliminary allocation of the purchase consideration for Tyrrells to the estimated fair value of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Purchase consideration:
 
Cash paid as purchase consideration
$
381,069

Fair value of equity issued to Sellers
35,319

Total purchase consideration
416,388

Less: cash and cash equivalents acquired
(15,451
)
Total purchase price- net of cash and cash equivalents acquired
400,937

Fair value of net assets acquired and liabilities assumed:
 
Accounts receivable
21,690

Inventory
8,404

Property and equipment
47,923

Other assets
2,869

Indefinite-lived identifiable intangible asset- trade names
252,289

Definite-lived identifiable intangible assets- customer relationships (15-year useful life)
33,878

Accounts payable
(19,498
)
Other liabilities
(15,024
)
Deferred tax liabilities
(55,953
)
Total fair value of net assets acquired and liabilities assumed
276,578

Excess purchase consideration over fair value of net assets acquired (goodwill)
$
124,359

Goodwill is calculated as the excess of consideration paid over the net assets acquired and represents synergies, organic growth and other benefits that are expected to arise from integrating Tyrrells into our operations. None of the goodwill recorded in this transaction is expected to be tax deductible.

Pro Forma Combined Statements of Operations (Unaudited)

The following unaudited pro forma combined statements of operations presents the Company's operations as if the Tyrrells acquisition and related financing activities had occurred on January 1, 2015. The pro forma information includes the following adjustments (i) amortization of acquired definite-lived intangible assets; (ii) depreciation based on the fair value of acquired property and equipment; (iii) interest expense incurred in connection with incremental term loan borrowings used to finance the acquisition of Tyrrells; (iv) inclusion of equity-based compensation expense associated with equity awards granted to certain Tyrrells' employees in connection with the acquisition; and (v) inclusion of acquisition-related expenses in the earliest period presented. The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date and are not intended to be a projection of future results (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Unaudited)
2016
 
2015
 
2016
 
2015
Net sales
$
90,048

 
$
73,747

 
$
269,781

 
$
212,500

Net (loss) income
$
(2,345
)
 
$
(6,025
)
 
$
6,610

 
$
(9,934
)
Basic net (loss) income per share
$
(0.03
)
 
$
(0.08
)
 
$
0.09

 
$
(0.13
)
Diluted net (loss) income per share
$
(0.03
)
 
$
(0.08
)
 
$
0.08

 
$
(0.13
)




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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


Boundless Nutrition Acquisition

In April 2016, the Company acquired Boundless Nutrition, a manufacturer and distributor of BFY protein bars and cookies for total consideration of approximately $21.4 million. This acquisition has been accounted for under the acquisition method of accounting and 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 Boundless Nutrition's products and position in the BFY snack category. The Company incurred approximately $0.1 million and $0.4 million of acquisition-related costs during the three and nine months ended September 30, 2016, respectively, which is included as part of general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.
The Company completed its review of the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition, with an adjustment to fair value of contingent consideration identified during the measurement period (see Note 2). The following table summarizes the final allocation of the purchase consideration for Boundless Nutrition to the estimated fair value of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Purchase consideration:
 
Cash paid as purchase consideration
$
16,651

Fair value of notes payable issued to sellers as consideration
3,776

Fair value of contingent consideration
1,085

Total purchase consideration
21,512

Less: cash and cash equivalents acquired
(129
)
Total purchase price- net of cash and cash equivalents acquired
21,383

Fair value of net assets acquired and liabilities assumed:
 
Accounts receivable and inventory
2,046

Property and equipment
751

Other assets
178

Indefinite-lived identifiable intangible asset- trade name
9,440

Definite-lived identifiable intangible assets- customer relationships and trade name
2,160

Accounts payable
(1,111
)
Other liabilities
(532
)
Total fair value of net assets acquired and liabilities assumed
12,932

Excess purchase consideration over fair value of net assets acquired (goodwill)
$
8,451

Management evaluated the impact to the Company's financial statements of the Boundless Nutrition acquisition and concluded that the impact was not significant enough to require or separately warrant the inclusion of pro forma financial results inclusive of Boundless Nutrition.

Paqui Acquisition
In April 2015, the Company acquired Paqui, a manufacturer and marketer of tortilla chips and pre-packaged tortillas for total consideration of approximately $11.9 million. This acquisition was accounted for under the acquisition method of accounting and the excess purchase consideration over fair value of net assets acquired and liabilities assumed was recorded as goodwill and represented a value attributable to brand recognition associated with Paqui’s products and position in the BFY snack category. The Company completed its review of the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the date of acquisition, with adjustments to provisional amounts that were identified during the measurement period considered not significant.

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AMPLIFY SNACK BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes the purchase consideration and final 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

Management evaluated the impact to the Company's 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.

4. INVENTORY

Inventories, net of reserves and provisions, consist of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Raw materials and packaging
$
9,814

 
$
4,433

Finished goods
9,129

 
2,396

Inventories, net
$
18,943

 
$
6,829

As of September 30, 2016 and December 31, 2015, we had approximately $1.0 million and $0.7 million in reserves, respectively, for finished goods deemed unsaleable and raw materials and packaging deemed obsolete. If future demand or market conditions are less favorable than those projected by our management, additional inventory write-downs may be required.


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Notes to Condensed Consolidated Financial Statements
(unaudited)


5. PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Accumulated depreciation is recognized ratably over the expected useful life of the asset. Property and equipment, net consist of the following (in thousands):

 
September 30, 2016
 
December 31, 2015
Machinery and equipment
$
39,773

 
$
1,128

Furniture and fixtures
2,071

 
664

Building
5,622

 
—

Land
888

 
—

Leasehold improvements
4,949

 
911

Property and equipment, gross
53,303

 
2,703

Less: accumulated depreciation
(1,344
)
 
(550
)
Property and equipment, net
$
51,959

 
$
2,153

Depreciation expense was approximately $0.5 million and $0.1 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and approximately $0.8 million and $0.2 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. Depreciation expense is included in cost of goods sold and general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill consists of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Beginning balance
$
47,421

 
$
45,694

Acquired during the period (1)
132,810

 
1,727

Foreign currency translation
(2,690
)
 
—

Ending balance
$
177,541

 
$
47,421


(1)     Refer to Note 3 for more details regarding goodwill recorded in connection with the Company's acquisition of
Tyrrells in September 2016, Boundless Nutrition in April 2016 and Paqui in April 2015.

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Notes to Condensed Consolidated Financial Statements
(unaudited)



Intangible assets consist of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
  Trade names (1)
$
468,132

 
$
—

 
$
468,132

 
$
211,900

 
$
—

 
$
211,900

Intangible assets with finite lives:
 
 
 
 
 
 
—
 
—
 
—
  Customer relationships (1)
98,935

 
(9,527
)
 
89,408

 
63,610

 
(6,113
)
 
57,497

  Non-competition agreement
90

 
(28
)
 
62

 
90

 
(19
)
 
71

  Trade name (1)
20

 
(8
)
 
12

 
—

 
—

 
—

Total
$
567,177

 
$
(9,563
)
 
$
557,614

 
$
275,600

 
$
(6,132
)
 
$
269,468


(1)    The change in the gross carrying amount of trade names and customer relationships is the result of the Company's
acquisition of Tyrrells in September 2016 and Boundless Nutrition in April 2016. Refer to Note 3 for more details.

Amortization of finite-lived intangibles was approximately $1.3 million and $1.1 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $3.4 million and $3.2 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. 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, 2016 (in thousands):
Remainder of 2016
 
$
1,657

2017
 
6,615

2018
 
6,609

2019
 
6,609

2020
 
6,609

Thereafter
 
61,383

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, 2016 for its SkinnyPop, Boundless Nutrition and Paqui reporting units and concluded there was no impairment related to goodwill and indefinite-lived intangibles.


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Notes to Condensed Consolidated Financial Statements
(unaudited)


7. ACCRUED LIABILITIES
The following table shows the components of accrued liabilities (in thousands):

 
September 30, 2016
 
December 31, 2015
Accrued income taxes
$
1,028

 
$
437

Unbilled inventory
1,953

 
693

Accrued commissions
434

 
629

Accrued bonuses
1,592

 
2,545

Accrued professional fees
3,717

 
398

Accrued interest
3,239

 
—

VAT
559

 
—

Other accrued liabilities
2,334

 
528

Total accrued liabilities
$
14,856

 
$
5,230


8. DEBT
Debt consists of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Term loans, net of unamortized original issue discount of $6,519 and $-0-, respectively
$
593,481

 
$
197,313

Revolving loans
5,500

 
—

Notes payable, net of unamortized discount of $279 and $147, respectively
7,626

 
3,757

Deferred financing costs, net of accumulated amortization of $189 and $1,094, respectively (1) 
(16,556
)
 
(2,859
)
   Total debt
590,051

 
198,211

Less: Current portion
(6,984
)
 
(12,750
)
   Long-term debt
$
583,067

 
$
185,461

(1) 
Upon adoption of ASU 2015-03, the Company is now presenting deferred financing costs, net as a reduction to the related liability in the condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015. As a result, the deferred financing costs, net balance of approximately $2.9 million was reclassified from Other assets to Senior term loan on the condensed consolidated balance sheet as of December 31, 2015.
New Credit Facility
In connection with the acquisition of Tyrrells, the Company entered into a Credit Agreement on September 2, 2016 (the "New Credit Facility"), which provided for term loans in the aggregate principal amount of $600 million (the "Term Loans") and revolving loans in the aggregate principal amount of $50 million (the "Revolving Loans"). The Company borrowed from the Term Loans in full to finance the acquisition of Tyrrells and pay down all outstanding indebtedness under the Credit Agreement entered into on July 17, 2014 (the "Prior Credit Facility"). The Company drew $5.5 million from the Revolving Loans as of September 30, 2016.
In connection with the issuance of the New Credit Facility, the Company incurred an original issue discount ("OID") of approximately $6.6 million and paid lender and legal fees of approximately $15.4 million, which are capitalized and presented as a direct reduction to the related debt instrument in the condensed consolidated balance sheets. These costs are recognized as additional interest expense over the term of the related debt instrument using the effective interest method. In addition, the Company recognized a loss on extinguishment of debt of approximately $1.1 million related to the write-off of unamortized deferred financing costs incurred under the Prior Credit Facility.
The Company must repay the Term Loans in installments of $1.5 million per quarter due on the last day of each quarter beginning with the quarter ending December 31, 2016, with the remaining balance due at maturity in a final installment

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Notes to Condensed Consolidated Financial Statements
(unaudited)


of $559.5 million. The Term Loans and Revolving Loans are scheduled to mature on September 2, 2023 and September 2, 2021, respectively.
In addition to the installment payments described above, the New Credit Facility includes an annual mandatory prepayment of the Term Loans from 50% of the Company's excess cash flow as measured on annual basis, with step- downs to 25% and 0% of the Company's excess cash flow if the Company's Total Leverage Ratio (as defined in the New Credit Facility), tested as of the last day of the Company's fiscal year, is less than 4.50 to 1.00 but greater than 3.75 to 1.00, and less than or equal to 3.75 to 1.00, respectively. Excess cash flow is generally defined as the Company's Consolidated Net Income (as defined in the New Credit Facility) less debt service costs, unfinanced capital expenditures, unfinanced acquisition expenditures, and certain restricted payments, as adjusted for changes in the Company's working capital and less other customary items.
In addition, the New Credit Facility requires mandatory prepayment of the Term Loans from the net cash proceeds of (i) certain debt issuances and (ii) certain asset sales outside the ordinary course of business and from proceeds of property insurance and condemnation events, in each case of this clause (ii) subject to the Company’s right in some circumstances to reinvest such proceeds in the Company’s business. Any voluntary prepayment as part of a repricing transaction shall be accompanied by a prepayment premium equal to 1.0% of the principal amount of such prepayment, if such prepayment is made on or prior to the date that is twelve months after September 2, 2016.
 
Interest
The Term Loans bear interest, at the Company's option, at either the Eurodollar rate plus a margin of 5.50% or the prime rate plus a margin of 4.50%, with step-downs to 5.00% and 4.00%, respectively, if the Company's First Lien Leverage Ratio (as defined in the New Credit Facility) is less than or equal to 4.50 to 1.00. The Eurodollar rate is subject to no floor with respect to the Revolving Loans and an annual 1.00% floor with respect to the Term Loans and the prime rate is subject to a 1.00% floor with respect to the Revolving Loans and a 2.00% floor with respect to the Term Loans. The interest rate on the outstanding balance of our Term Loans and Revolving Loans was 6.50% and 6.36% per annum, respectively, at September 30, 2016.
The Company is also required to pay a commitment fee on the unused commitments under the Revolving Loans at a rate equal to 0.50% per annum with a step-down to 0.375% per annum, if the Company's First Lien Leverage Ratio is less than or equal to 3.25 to 1.00.
Guarantees
The New Credit Facility is secured by liens on substantially all the Company's assets, including a pledge of 100% of the equity interests in the Company's domestic subsidiaries and a pledge of 65% of the voting equity interests and 100% of the non-voting equity interests in the Company's direct foreign subsidiaries. All obligations under the New Credit Facility are unconditionally guaranteed by substantially all of the Company's direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of the guarantors, with certain exclusions.
Covenants
As of the last day of any fiscal quarter of the Company, the terms of the New Credit Facility require the Company and its subsidiaries (on a consolidated basis and subject to certain customary exceptions) to maintain a maximum First Lien Leverage Ratio of not more than 8.50 to 1.0, initially, and decreasing to 6.25 to 1.0 over the term of the New Credit Facility. As of September 30, 2016, the Company was in compliance with our financial covenant.
The New Credit Facility contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the parties, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The New Credit Facility contains customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity interests in the Company, entering into affiliate transactions and asset sales. The New Credit Facility also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults.

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Notes to Condensed Consolidated Financial Statements
(unaudited)



Other
Certain of the lenders under the New 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 2016, the Company issued $4.0 million in unsecured notes to the sellers of Boundless Nutrition in connection with its acquisition. The notes bear interest at a rate per annum of 0.67% with principal and interest due at varying maturity dates between April 29, 2017 and December 31, 2018. The Company recorded an acquisition-date fair value discount of approximately $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.
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. The Company recorded an acquisition-date fair value discount of approximately $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 debt (excluding the fair value discount of approximately $0.3 million, deferred financing costs, net of approximately $16.6 million and OID of approximately $6.6 million) as of September 30, 2016 are as follows (in thousands):

Remainder of 2016
$
1,500

2017
7,000

2018
12,905

2019
6,000

2020
6,000

Thereafter
580,000

Total
$
613,405


9. SHAREHOLDERS' EQUITY
Tyrrells Acquisition
The Company issued 2,083,689 shares of common stock to the Institutional Seller and Management Sellers (collectively referred to as the "Sellers") as share consideration for Tyrrells. The number of shares issued to the Sellers was based upon the calculation illustrated below:
Share consideration in pound sterling (£)
 
£
22,000,000

Pound sterling (£) to US dollar ($) exchange rate on August 5, 2016
 
1.3042

Share consideration in US dollars ($)
 
$
28,692,400

Closing stock price on August 5, 2016
 
$
13.77

Number of common shares issued as consideration
 
2,083,689


Secondary Public Offering

On May 19, 2016, the Company completed a secondary public offering in which 11,500,000 common shares of the Company were sold by selling stockholders to the public at a price of $11.25 per share. The selling stockholders, which included certain of our directors, received all the proceeds from the sale of shares in the offering. The Company did not receive any proceeds from the sale of shares in the offering and incurred approximately $0.6 million of offering-

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Notes to Condensed Consolidated Financial Statements
(unaudited)


related expenses during the nine months ended September 30, 2016, which is included as part of general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.
Initial Public Offering
As discussed in Note 1, 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.
Common Stock Ownership
As of September 30, 2016, investment funds affiliated with TA Associates, L.P., a private equity entity ("TA Associates") beneficially owned 43.1% of the Company's outstanding common shares and are able to exercise a significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.
The Company's executive officers and directors beneficially owned 13.3% of the Company's outstanding common shares as of September 30, 2016.

10. RELATED PARTY TRANSACTIONS
Employment Agreements
In July 2014, the Company entered into employment agreements with the founders of SkinnyPop. Under the terms of the founders' employment agreements, which ended on December 31, 2015, each founder received an annual base salary of $200,000 and were also each eligible to receive a cash payment of up to $10 million (the “Cash Payment”), based on achievement by the Company of certain contribution margin metrics during the period commencing on January 1, 2015 and ending on December 31, 2015. Furthermore, in connection with the Cash Payment, the Company will provide each founder with an additional payment 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 the Company in respect of such taxable year calculated without taking into account the Cash Payment over (B) the actual taxes payable by the Company 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. Refer to Note 2 for additional details regarding the estimated obligation related to the employment agreements and the associated payments.
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. In December 2015, all of the former holders of units in Topco collectively assigned their interests to a new counterparty. The TRA generally provides for payment by the Company to the counterparty of 85% of the U.S. federal, state and local tax benefits realized by the Company and its subsidiaries from the utilization of certain tax attributes that were generated when SkinnyPop was acquired by investment funds affiliated with 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 the Company to the counterparty 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, the Company would expect the potential for tax benefit payments to cease no later than 2030.

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Notes to Condensed Consolidated Financial Statements
(unaudited)


The amount payable to the counterparty is based on an annual calculation of the reduction in the Company's 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, the Company was required to assume that pre-IPO tax attributes are utilized before any other attributes. The Company expects the payments that it 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, the Company's future payments under the TRA would be reduced by the amount of such payments, but the TRA does not require the counterparty to reimburse the Company 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 payment in the amount of approximately $6.6 million was paid out in October 2016. Subsequent adjustments of the TRA obligation due to certain events, such as potential changes in tax rates or insufficient taxable income, will be recognized as a period expense in the statement of comprehensive income.

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, 2016, were as follows (in thousands): 

Remainder of 2016
$
7

2017
20

Total
$
27


11. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company entered into certain supply contracts for their popcorn kernels and sunflower oil for various periods through October 2018. As of September 30, 2016, the Company’s purchase commitments remaining under these contracts totaled $29.3 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 in June 2015.
Lease Commitments
The Company entered into an operating lease on February 26, 2015 ("Effective Date") for its corporate headquarters located in Austin, Texas. The lease in non-cancellable and has a nine year term.
Boundless Nutrition entered into an operating lease for an office space and manufacturing facility in November 2014, which the Company assumed as part of the acquisition. This lease is non-cancellable and has a seven year term.
Tyrrells has several operating leases for office space and manufacturing facilities which the Company assumed as part of the acquisition. These leases are non-cancellable and each have a five year term.

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Notes to Condensed Consolidated Financial Statements
(unaudited)


Rent expense from operating leases totaled approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2016, respectively, and approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2015, respectively.
As of September 30, 2016, minimum rental commitments under non-cancellable operating leases were as follows (in thousands):

Remainder of 2016
$
256

2017
1,022

2018
820

2019
698

2020
695

Thereafter
2,116

Total
$
5,607


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
The Company's effective tax rate for the year is dependent on many factors, including the impact of enacted tax laws in jurisdictions in which the Company operates and the amount of taxable income the Company earns. The effective tax rate was 69.8% and 46.1% for the three and nine months ended September 30, 2016, respectively. 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 for the three and nine months ended September 30, 2016 was driven by acquisition-related costs as well as certain equity based compensation charges, both of which are not tax deductible. The effective tax rate for the three and nine months ended September 30, 2015 was driven by significant IPO-related costs as well as certain equity based compensation charges, both of which are not tax deductible.
13. EQUITY-BASED COMPENSATION
In July 2015, the Amplify Snack Brands, Inc. 2015 Stock Option and Incentive Plan (the "2015 Plan") was adopted by the Company's board of directors, approved by the Company's stockholders and became effective immediately prior to the consummation of the Company's IPO in August 2015. The 2015 Plan provides for the grant of various equity-based incentive awards to officers, employees, non-employee directors and consultants of the Company and its subsidiaries. The types of awards that may be granted under the 2015 Plan include incentive stock options, non-qualified stock options, restricted stock awards ("RSAs"), restricted stock units ("RSUs"), stock appreciation rights ("SARs") and other equity-based awards. The Company initially reserved 13,050,000 shares of common stock for issuance under the 2015 Plan, which is subject to certain adjustments for changes in the Company's capital structure, as defined in the 2015 Plan. As of September 30, 2016, 4,007,388 shares were available for issuance under the 2015 Plan.
Stock Options
The Company awards stock options to certain employees under the 2015 Plan, which are subject to the following time-based vesting conditions, 33.333% on the first anniversary of the grant date, and thereafter, 2.778% on the monthly anniversary of the grant date for the remaining 24 months, subject to continued service through each applicable vesting date. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such award will become available for issuance under the 2015 Plan. The maximum contractual term for stock options is 10 years.

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Notes to Condensed Consolidated Financial Statements
(unaudited)


The fair value of these equity awards is amortized to equity-based compensation expense over the vesting periods described above, which totaled approximately $0.3 million and $0 for the three months ended September 30, 2016 and 2015, respectively, and $0.4 million and $0 for the nine months ended September 30, 2016 and 2015, respectively. The fair value of stock option awards are estimated on the grant date using the Black-Scholes valuation model with the following assumptions:
 
 
Nine Months Ended September 30, 2016
Expected volatility (1)
 
26% - 34%
Expected dividend yield (2)
 
—%
Expected option term (3)
 
5 years
Risk-free interest rate (4)
 
1.16% - 1.45%

(1) 
The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a five-year look back period ending on the grant date.

(2) 
We have not paid and do not anticipate paying a cash dividend on our common stock.

(3) 
We utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

(4) 
The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.

The following table summarizes the Company's stock option activity for the nine months ended September 30, 2016:

 
 
Number of Options
 
Weighted Average Remaining Contractual Life (years)
 
Weighted Average Exercise Price
 
Weighted Average Grant Date Fair Value
Outstanding as of January 1, 2016
 
150,000

 
9.22

 
$
10.72

 
$
3.50

Granted
 
342,667

 
9.61

 
12.64

 
4.05

Exercised
 
—

 
—

 
—

 
—

Forfeited
 
(150,000
)
(1) 
9.22

 
10.72

 
3.50

Outstanding as of September 30, 2016
 
342,667

 
9.61

 
$
12.64

 
$
4.05

Exercisable as of September 30, 2016
 
37,500

(1) 
 
 
 
 
 
(1) 
In September 2016, the Company accelerated vesting of 37,500 options concurrent with the termination of an employee and the original award of 150,000 options was forfeited. As a result, the Company reversed equity-based compensation expense of approximately$0.1 million previously recognized for the original unvested award and recognized equity-based compensation expense of approximately $0.3 million equal to the fair value of the modified award.
As of September 30, 2016, the total compensation cost related to nonvested stock options not yet recognized was approximately $1.0 million with a weighted average remaining period of 2.59 years over which it is expected to be recognized. The aggregate intrinsic value of outstanding stock options at September 30, 2016 was approximately $1.2 million.

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Notes to Condensed Consolidated Financial Statements
(unaudited)


Restricted Stock Units ("RSUs")
The Company awards RSUs to certain employees under the 2015 Plan, which vest over a three or four year period. RSUs that vest over a three year period are subject to the following time-based vesting conditions, 33.333% on the first anniversary of the grant date, and thereafter, 2.778% on the monthly anniversary of the grant date for the remaining 24 months, subject to continued service through each applicable vesting date. RSUs that vest over a four year period are generally subject to the following time-based vesting conditions, 25% on the first anniversary of the grant date, and thereafter, 6.25% on the quarterly anniversary of the grant date for the remaining 36 months, subject to continued service through each applicable vesting date. Upon a termination of service relationship by the Company, all unvested units 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 RSUs is calculated based on the closing market value of the Company’s common stock on the date of grant. The fair value of these equity awards is amortized to equity-based compensation expense over the vesting periods described above, which totaled approximately $0.7 million and $0 for the three months ended September 30, 2016 and 2015, respectively, and approximately $1.0 million and $0 for the nine months ended September 30, 2016 and 2015, respectively.

The following table summarizes the activity of the Company's unvested RSUs for the nine months ended September 30, 2016:

 
 
Number of RSUs
 
Weighted Average Grant Date Fair Value
Unvested as of January 1, 2016
 
98,500

 
$
12.65

Issued
 
1,404,200

(1) 
16.30

Forfeited
 
(12,250
)
 
12.65

Vested
 
—

 
—

Unvested as of September 30, 2016
 
1,490,450

 
$
16.09

(1)    The Company granted certain employees of Tyrrells and its subsidiaries RSUs under the 2015 Plan covering
approximately 1.2 million shares of the Company's common stock.

As of September 30, 2016, the total compensation cost related to unvested RSUs not yet recognized was approximately $23.0 million with a weighted average remaining period of 3.77 years over which it is expected to be recognized.

Restricted Stock Awards ("RSAs")
As discussed 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 2015 Plan.
The shares of restricted stock of the Company are generally 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 $0.9 million and $1.0 million for the three months ended September 30, 2016 and 2015, respectively, and $2.6 million and $2.4 million for the nine months ended September 30, 2016 and

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Notes to Condensed Consolidated Financial Statements
(unaudited)


2015, respectively. Equity-based compensation expense is included as part of general and administrative expense in the accompanying condensed consolidated statements of comprehensive income.

The following table summarizes the activity of the Company's unvested RSAs for the nine months ended September 30, 2016:
 
 
Number of RSAs
 
Weighted Average Grant Date Fair Value
Unvested as of January 1, 2016
 
4,991,858

 
$
1.45

Issued
 
—

 
—

Forfeited
 
(45,238
)
 
1.21

Vested
 
(1,442,099
)
 
1.52

Unvested as of June 30, 2016
 
3,504,521

 
$
1.43


As of September 30, 2016, the total compensation cost related to unvested RSAs not yet recognized was approximately $6.3 million with a weighted average remaining period of 1.92 years over which it is expected to be recognized.


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Notes to Condensed Consolidated Financial Statements
(unaudited)


14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company entered into a foreign currency option contract in August 2016, to hedge its exposure to currency fluctuations in connection with the anticipated acquisition of Tyrrells, because the purchase price was denominated in pounds sterling (£). The Company subsequently terminated this foreign currency option contract and entered into a forward currency exchange contract to purchase £278 million at a US dollar to pound sterling forward rate of 1.3157. In connection with the acquisition of Tyrrells on September 2, 2016, the Company settled this forward currency exchange contract and recorded a gain of approximately $3.6 million, representing the difference between the forward rate of 1.3157 and the spot rate on the settlement date. The Company did not designate this forward currency exchange contract as a cash flow hedge for accounting purposes and the resulting gain was recognized within other income in the accompanying condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016.

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

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• 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.
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, Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively, the "Company", "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. Our anchor brand, SkinnyPop, is a highly-profitable and market-leading BFY ready-to-eat ("RTE") popcorn brand. Through its simple, major allergen-free and non-GMO ingredients, SkinnyPop embodies our BFY mission and has amassed a loyal and growing customer base across a wide range of food distribution channels in the United States. In September 2016, we acquired Crisps Topco Limited ("Tyrrells") and its international portfolio of premium BFY snack brands. This acquisition allows us to broaden our international customer reach, diversify our product and brand and realize the benefits of operating scale. In April 2015, we acquired Paqui, LLC ("Paqui"), an emerging BFY tortilla chip brand and in April 2016, we acquired Boundless Nutrition, LLC ("Boundless Nutrition"), which manufactures and distributes its Oatmega protein snack bars and Perfect Cookie products to natural, grocery, mass and foodservice retail partners across the Unites States. These acquisitions allow us to leverage our infrastructure to help us grow into adjacent snacking sub-segments with innovative BFY brands. We believe that our focus on building a portfolio of exclusively BFY snack brands differentiates us and 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 category.
Recent Developments
As discussed more fully in Note 3 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1, we acquired Tyrrells on September 2, 2016 for total consideration of approximately $416.4 million. In connection with our acquisition of Tyrrells, we entered into a Credit Agreement on September 2, 2016 (the "New Credit Facility"), which provided for term loans in the aggregate principal amount of $600 million (the "Term Loans") and revolving loans in the aggregate principal amount of $50 million (the "Revolving Loans"). We borrowed from the Term Loans in full to finance our acquisition of Tyrrells and pay off all of the outstanding indebtedness under our Credit Agreement entered into on July 17, 2014 (the "Prior Credit Facility"). Refer to Note 8 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1 for additional details regarding the New Credit Facility.
As discussed more fully in Note 9 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1, we completed a secondary public offering on May 19, 2016, in which 11,500,000 common shares were sold by selling stockholders to the public at a price of $11.25 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 Condensed Consolidated Financial Statements contained in Item 1, we acquired Boundless Nutrition in April 2016 for total consideration of approximately $21.4 million. We may be required to pay additional consideration of up to $10 million in 2019, which is contingent upon the

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achievement of a defined contribution margin during 2018. We borrowed $12.0 million under the Prior Credit Facility and used $4.7 million of cash on hand to fund the acquisition of Boundless Nutrition.

Results of Operations

Comparison of Three Months Ended September 30, 2016 and September 30, 2015

The following table compares our results of operations, including as a percentage of net sales, for the three months ended September 30, 2016 and 2015. Amounts are in thousands except percentage information.

 
Three Months Ended 
 September 30, 2016
 
% of
Net
Sales
 
Three Months Ended 
 September 30, 2015
 
% of
Net
Sales
Net sales
$
67,982

 
100.0
 %
 
$
45,914

 
100.0
 %
Cost of goods sold
35,646

 
52.4
 %
 
20,260

 
44.1
 %
Gross profit
32,336

 
47.6
 %
 
25,654

 
55.9
 %
Sales & marketing expenses
8,903

 
13.1
 %
 
5,146

 
11.2
 %
General & administrative expenses
15,971

 
23.5
 %
 
16,068

 
35.0
 %
Gain on change in fair value of contingent consideration
(505
)
 
(0.7
)%
 
—

 
—
 %
Total operating expenses
24,369

 
35.9
 %
 
21,214

 
46.2
 %
Operating income
7,967

 
11.7
 %
 
4,440

 
9.7
 %
Interest expense
5,636

 
8.3
 %
 
3,311

 
7.2
 %
Other income
(4,221
)
 
(6.2
)%
 
—

 
—
 %
Loss on extinguishment of debt
1,100

 
1.6
 %
 
—

 
—
 %
Income before income taxes
5,452

 
8.0
 %
 
1,129

 
2.5
 %
Income tax expense
3,807

 
5.6
 %
 
4,118

 
9.0
 %
Net income (loss)
$
1,645

 
2.4
 %
 
$
(2,989
)
 
(6.5
)%

Net Sales

Net sales increased approximately $22.1 million, or 48.1%, from $45.9 million for three months ended September 30, 2015 to $68.0 million for the three months ended September 30, 2016. Our increase in net sales was primarily due to volume increases of the SkinnyPop brand driven by increased distribution and additional trade promotional support, along with the national launch of our Paqui brand in 2016 and the acquisitions of the Oatmega brand in April 2016 and the Tyrrells' international portfolio of brands on September 2, 2016. Our acquisition of the Tyrrells' international portfolio of brands contributed net sales of approximately $8.6 million for the three months ended September 30, 2016. We expect to see continued growth in net sales in 2016 when compared to 2015 for the reasons discussed above.

Cost of Goods Sold/Gross Profit

Gross profit increased approximately $6.7 million, or 26.0%, from $25.6 million for the three months ended September 30, 2015 to $32.3 million for the three months ended September 30, 2016. This increase was primarily related to the increase in net sales discussed above. Gross profit as a percentage of net sales decreased 830 basis points, from 55.9% for the three months ended September 30, 2015 to 47.6% for the three months ended September 30, 2016. The decrease in gross profit as a percentage of net sales was due primarily to our acquisition of the Tyrrells' international portfolio of brands in September 2016 and increased contribution of the Paqui and Oatmega brands, which have lower gross margin profiles than our SkinnyPop brand. We also experienced a higher level of trade promotional activity for the three months ended September 30, 2016. These decreases were slightly offset by improved rates on materials and ingredients. We expect gross profit as a percentage of net sales to decrease in 2016 when compared to 2015 for the reasons discussed above.

Sales and Marketing Expenses
Sales and marketing expenses increased approximately $3.8 million, or 73.0%, from $5.1 million for the three months ended September 30, 2015 to $8.9 million for the three months ended September 30, 2016. We experienced an increase in consumer marketing expenses to drive brand awareness and trial of our SkinnyPop, Paqui and Oatmega

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brands, as well as an increase in compensation expense associated with our efforts to build out our internal sales and marketing team.
Sales and marketing expenses as a percentage of net sales increased from 11.2% for the three months ended September 30, 2015 to 13.1% for the three months ended September 30, 2016. We anticipate that sales and marketing expenses will increase in both absolute dollars and as a percentage of net sales in 2016 when compared to 2015 for the reasons discussed above.
General and Administrative Expenses
General and administrative expenses decreased approximately $0.1 million, or 0.6%, from $16.1 million for the three months ended September 30, 2015 to $16.0 million for the three months ended September 30, 2016. During the three months ended September 30, 2015, we incurred approximately $4.6 million of expense related to the compensation arrangement with the founders of SkinnyPop and approximately $6.7 million of IPO-related expenses. These decreases were offset by the following increases during the three months ended September 30, 2016. We incurred approximately $8.6 million of transaction-related expenses in connection with our acquisition of Tyrrells and Boundless Nutrition. Equity-based compensation expense increased approximately $0.8 million for the three months ended September 30, 2016, in connection with the award of restricted stock units and stock options to certain employees and one non-employee during the past 12 months. Depreciation expense increased approximately $0.4 million for the three months ended September 30, 2016, driven by our recent acquisition of Tyrrells, which has manufacturing facilities in the United Kingdom, Germany and Australia. Amortization of intangible assets increased approximately $0.2 million for the three months ended September 30, 2016, associated with estimated fair values of identifiable definite-lived intangible assets acquired from Tyrrells in September 2016 and Boundless Nutrition in April 2016. Lastly, we experienced an increase in expense associated with 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 35.0% for the three months ended September 30, 2015 and 23.5% for the three months ended September 30, 2016.

Gain on Change in Fair Value of Contingent Consideration

In addition to the base purchase price consideration paid at closing for Paqui in April 2015 and Boundless Nutrition in April 2016, the respective acquisition agreements require that we pay additional purchase price earn-out consideration contingent upon the achievement of a defined contribution margin during 2018. We established the fair value of contingent consideration based on the facts and circumstances that existed as of the respective acquisition dates. At each report date, we remeasure the fair value of contingent consideration based on current forecasts of Paqui and Boundless Nutrition operating results in 2018, which resulted in a non-cash gain of approximately $0.5 million for the three months ended September 30, 2016. Refer to Notes 2 and 3 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1 for a more detailed discussion about the Paqui and Boundless Nutrition acquisitions and the related contingent consideration.

Interest Expense

Interest expense increased approximately $2.3 million, or 70.2%, from $3.3 million for the three months ended September 30, 2015 to $5.6 million for the three months ended September 30, 2016. On September 2, 2016, we entered into a New Credit Facility, which provided for Term Loans in the aggregate principal amount of $600 million and Revolving Loans in the aggregate principal amount of $50 million. We borrowed from the Term Loans in full to finance our acquisition of Tyrrells and to pay down all outstanding indebtedness under our Prior Credit Facility. As a result of this financing activity, we incurred additional interest expense of approximately $2.2 million for the three months ended September 30, 2016, associated with a net increase in term loan borrowings of approximately $410.3 million. Refer to the Liquidity and Capital Resources section herein for additional information regarding our New Credit Facility. We anticipate interest expense will increase significantly in 2016 when compared to 2015 for the reasons described above.
Other Income
Other income for the three months ended September 30, 2016, includes a gain of approximately $3.6 million associated with the settlement of a forward currency exchange contract in September 2016, entered into in connection with our acquisition of Tyrrells. The remaining amount in other income represents gains from foreign currency transactions.


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Loss on Extinguishment of Debt
We paid off all outstanding indebtedness under our Prior Credit Facility on September 2, 2016 and recognized a loss on extinguishment of debt of approximately $1.1 million, related to the write-off of unamortized deferred financing costs incurred under the Prior Credit Facility.
Income Tax Expense
Income tax expense decreased approximately $0.3 million, or 7.6%, from $4.1 million for the three months ended September 30, 2015 to $3.8 million for the three months ended September 30, 2016. The effective tax rate was 364.7% for the three months ended September 30, 2015 and 69.8% for the three months ended September 30, 2016. The decrease to the effective tax rate was primarily due to a significant amount of IPO-related costs incurred during the three months ended September 30, 2015, which were not tax deductible, partially offset with acquisition-related costs incurred during the three months ended September 30, 2016, which were also not tax deductible. We anticipate income tax expense will increase in absolute dollars in 2016 when compared to 2015 based on our business growth expectations.

Results of Operations

Comparison of Nine Months Ended September 30, 2016 and September 30, 2015

The following table compares our results of operations, including as a percentage of net sales, for the nine months ended September 30, 2016 and 2015. Amounts are in thousands except percentage information.

 
Nine Months Ended 
 September 30, 2016
 
% of
Net
Sales
 
Nine Months Ended 
 September 30, 2015
 
% of
Net
Sales
Net sales
$
182,193

 
100.0
 %
 
$
137,543

 
100.0
%
Cost of goods sold
88,891

 
48.8
 %
 
60,787

 
44.2
%
Gross profit
93,302

 
51.2
 %
 
76,756

 
55.8
%
Sales & marketing expenses
22,551

 
12.4
 %
 
13,780

 
10.0
%
General & administrative expenses
27,688

 
15.2
 %
 
37,085

 
27.0
%
Gain on change in fair value of contingent consideration
(505
)
 
(0.3
)%
 
—

 
—
%
Total operating expenses
49,734

 
27.3
 %
 
50,865

 
37.0
%
Operating income
43,568

 
23.9
 %
 
25,891

 
18.8
%
Interest expense
11,788

 
6.5
 %
 
9,324

 
6.8
%
Other income
(4,221
)
 
(2.3
)%
 
—

 
—
%
Loss on extinguishment of debt
1,100

 
0.6
 %
 
—

 
—
%
Income before income taxes
34,901

 
19.1
 %
 
16,567

 
12.0
%
Income tax expense
16,086

 
8.8
 %
 
11,092

 
8.1
%
Net income
$
18,815

 
10.3
 %
 
$
5,475

 
3.9
%

Net Sales

Net sales increased approximately $44.7 million, or 32.5%, from $137.5 million for the nine months ended September 30, 2015 to $182.2 million for the nine months ended September 30, 2016. Our increase in net sales was primarily due to volume increases of the SkinnyPop brand driven by increased distribution and additional trade promotional support, along with the national launch of our Paqui brand in 2016 and the acquisitions of the Oatmega brand in April 2016 and the Tyrrells' international portfolio of brands on September 2, 2016. Our acquisition of the Tyrrells' international portfolio of brands contributed net sales of approximately $8.6 million for the nine months ended September 30, 2016.
 

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Cost of Goods Sold/Gross Profit

Gross profit increased approximately $16.5 million, or 21.6%, from $76.8 million for the nine months ended September 30, 2015 to $93.3 million for the nine months ended September 30, 2016. This increase was primarily related to the increase in net sales discussed above. Gross profit as a percentage of net sales decreased 460 basis points, from 55.8% for the nine months ended September 30, 2015 to 51.2% for the nine months ended September 30, 2016. The decrease in gross profit as a percentage of net sales was due primarily to our acquisition of the Tyrrells' international portfolio of brands in September 2016 and increased contribution of the Paqui and Oatmega brands, which have lower gross margin profiles than our SkinnyPop brand. We also experienced a higher level of trade promotional activity for the nine months ended September 30, 2016. These decreases were slightly offset by improved rates on materials and ingredients.
 
Sales and Marketing Expenses
Sales and marketing expenses increased approximately $8.8 million, or 63.7%, from $13.8 million for the nine months ended September 30, 2015 to $22.6 million for the nine months ended September 30, 2016. The increase was due primarily to an increase in consumer marketing expenses to drive brand awareness and trial, as well as an increase in compensation expense associated with our efforts to build out our internal sales and marketing team. Sales and marketing expenses as a percentage of net sales increased from 10.0% for the nine months ended September 30, 2015 to 12.4% for the nine months ended September 30, 2016.

General and Administrative Expenses

General and administrative expenses decreased approximately $9.4 million, or 25.3%, from $37.1 million for the nine months ended September 30, 2015 to $27.7 million for the nine months ended September 30, 2016. The decrease is primarily due to the contingent compensation arrangement with the founders of the SkinnyPop brand being fully accrued as of December 31, 2015 and the incurrence of costs related to our IPO which closed in August 2015. During the nine months ended September 30, 2015, the Company recognized approximately $13.8 million of expense related to the compensation arrangement with the founders of SkinnyPop and approximately $9.4 million of IPO-related expenses. These decreases were partially offset by approximately $9.1 million in transaction-related costs incurred in connection with our acquisition of Tyrrells and Boundless Nutrition and approximately $0.6 million of costs incurred related to our secondary public equity offering, which closed in May 2016. We also experienced an increase in equity-based compensation expense of approximately $1.5 million for the nine months ended September 30, 2016, in connection with the award of restricted stock units and stock options to certain employees and one non-employee during the past 12 months. Depreciation expense increased approximately $0.6 million for the nine months ended September 30, 2016, driven by our recent acquisition of Tyrrells, which has manufacturing facilities in the United Kingdom, Germany and Australia. Amortization of intangible assets increased approximately $0.3 million for the nine months ended September 30, 2016, associated with estimated fair values of identifiable definite-lived intangible assets acquired from Tyrrells in September 2016 and Boundless Nutrition in April 2016. Lastly, we experienced an increase in expense associated with 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 27.0% for the nine months ended September 30, 2015 and 15.2% for the nine months ended September 30, 2016. We expect our general and administrative expenses to decrease significantly in both absolute dollars and as a percentage of net sales in 2016 when compared to 2015 for the reasons discussed above.

Gain on Change in Fair Value of Contingent Consideration

At each report date, we remeasure the fair value of contingent consideration based on current forecasts of Paqui and Boundless Nutrition operating results in 2018, which resulted in a non-cash gain of approximately $0.5 million for the nine months ended September 30, 2016. Refer to Notes 2 and 3 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1 for a more detailed discussion about the Paqui and Boundless Nutrition acquisitions and the related contingent consideration.

Interest Expense

Interest expense increased approximately $2.5 million, or 26.4%, from $9.3 million for the nine months ended September 30, 2015 to $11.8 million for the nine months ended September 30, 2016. On September 2, 2016, we entered into a

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New Credit Facility which provided for Term Loans in the aggregate of $600 million and Revolving Loans in the aggregate principal amount of $50 million. We borrowed from the Term Loans in full to finance our acquisition of Tyrrells and to pay off all outstanding indebtedness under our Prior Credit Facility. As a result of this financing activity, we incurred additional interest expense of approximately $2.0 million for the nine months ended September 30, 2016, associated with a net increase in term loan borrowings of approximately $410.3 million. We also incurred additional interest expense of approximately $0.1 million related to an increase in borrowings outstanding under our revolving credit facilities during the comparable nine month periods. Lastly, we incurred additional interest expense of approximately $0.1 million associated with the issuance of notes payable to the sellers of Boundless Nutrition and Paqui in April 2016 and April 2015, respectively, and additional interest expense of approximately $0.1 million related to the first annual payment due under the Tax Receivable Agreement ("TRA").
Other Income
Other income for the nine months ended September 30, 2016, includes a gain of approximately $3.6 million associated with settlement of a forward currency exchange contract in September 2016, entered into in connection with our acquisition of Tyrrells. The remaining amount in other income represents gains from foreign currency transactions.

Loss on Extinguishment of Debt
We paid off all outstanding indebtedness under our Prior Credit Facility on September 2, 2016 and recognized a loss on extinguishment of debt of approximately $1.1 million, related to the write-off of unamortized deferred financing costs incurred under the Prior Credit Facility.
Income Tax Expense
Income tax expense increased approximately $5.0 million, or 45.0%, from $11.1 million for the nine months ended September 30, 2015 to $16.1 million for the nine months ended September 30, 2016. The effective tax rate was 66.9% for the nine months ended September 30, 2015 and 46.1% for the nine months ended September 30, 2016. The decrease to the effective tax rate was primarily due to IPO-related costs incurred during the nine months ended September 30, 2015, which were not tax deductible, slightly offset by secondary public offering costs and acquisition-related costs incurred during the nine months ended September 30, 2016, which were also not tax deductible.

Liquidity and Capital Resources
Liquidity represents our ability to generate sufficient cash from operating activities to satisfy obligations, as well as our ability to obtain appropriate financing. Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives. Currently, our liquidity needs arise mainly from working capital requirements and general corporate purposes, including capital expenditures and debt service. We believe our cash on hand and cash to be provided from our operations, in addition to borrowings available under our Revolving Loans, will be sufficient to fund our contractual commitments, including with respect to the Founders Contingent Compensation and the TRA repay our obligations as required and meet our operational requirements for at least the next 12 months. Under the terms of the New Credit Facility, the Company is permitted to raise additional Revolving and Term Loans with existing and new lenders. As of September 30, 2016, $44.5 million was available for borrowing under our Revolving Loans and we had $17.2 million of cash and cash equivalents on hand.
During the nine months ended September 30, 2016, we used $23.0 million of cash on hand to pay down the Founder Contingent Compensation liability. The remaining obligation after this payment totaled $2.2 million, which we satisfied with a final payment in October 2016, after we finalized our tax savings associated with the deductibility of these payments.
In October 2016, we made the first annual payment of approximately $6.6 million under the TRA, and we expect the remaining annual payments to be significant over the next fourteen years.

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Historical Cash Flow
    
Comparison of Nine Months Ended September 30, 2016 and September 30, 2015
The following table summarizes our cash flows from operating, investing and financing activities:
 
Nine Months Ended September 30,
 
 
(In thousands)
2016
 
2015
 
Change
Cash flows (used in) provided by:
 
 
 
 
 
Operating activities
$
(2,319
)
 
$
30,935

 
$
(33,254
)
Investing activities
(385,117
)
 
(8,456
)
 
(376,661
)
Financing activities
386,090

 
(21,194
)
 
407,284

Effect of exchange rate changes on cash and cash equivalents
(218
)
 
—

 
(218
)
Net (decrease) increase in cash
$
(1,564
)
 
$
1,285

 
$
(2,849
)
Operating Activities
Net cash provided by operating activities was approximately $30.9 million for the nine months ended September 30, 2015 compared to net cash used in operating activities of approximately $2.3 million for the nine months ended September 30, 2016, resulting in a decrease in cash provided by operating activities of approximately $33.3 million for the comparable nine month periods. The decrease in cash provided by operating activities was primarily driven by a $23.0 million payment in March 2016 to our founders, related to their employment agreements entered into in connection with our acquisition of SkinnyPop Popcorn LLC, in July 2014. Refer to Notes 2 and 10 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1 for a more detailed discussion regarding this obligation. We also experienced a decrease in cash provided by operating activities associated with an increase in general corporate cash needs required to build out our internal sales, marketing and finance teams and operate effectively as a public company. Lastly, we experienced a decrease in cash provided by operating activities associated with our recent acquisitions of Tyrrells in September 2016 and Boundless Nutrition in April 2016, which both have brands with lower gross margin profiles than our SkinnyPop brand.
Investing Activities
Net cash used in investing activities increased approximately $376.7 million from approximately $8.5 million for the nine months ended September 30, 2015 to approximately $385.1 million for the nine months ended September 30, 2016.
During the nine months ended September 30, 2016, we used approximately $365.6 million to acquire Tyrrells and approximately $16.5 million to acquire Boundless Nutrition, net of cash acquired, and made capital expenditures of approximately $3.0 million. During the nine months ended September 30, 2015, we used approximately $7.8 million to acquire Paqui, net of cash acquired, and made capital expenditures of approximately $0.6 million.
Financing Activities
Net cash used in financing activities was approximately $21.2 million for the nine months ended September 30, 2015 compared to net cash provided by financing activities of approximately $386.1 million for the nine months ended September 30, 2016, resulting in an increase in cash provided by financing activities of approximately $407.3 million for the comparable nine month periods.
Net cash used in financing activities for the nine months ended September 30, 2015 included $22.3 million of distributions paid to members of TA Topco 1, LLC ("Topco"), the former parent entity of the Company, in May 2015, $7.6 million of scheduled principal payments toward the outstanding balance on our term loan and $13.5 million in pay downs on our revolving credit facility. These cash outflows were partially offset by borrowings of $22.5 million from our term loan and revolving credit facility which we used to fund the aforementioned distributions paid to members of Topco in May 2015.
During the nine months ended September 30, 2016, we borrowed from Term Loans in full under our New Credit Facility to finance our acquisition of Tyrrells and to pay off all outstanding indebtedness under our Prior Credit Facility. We received $593.4 million in proceeds from the Term Loans, net of an original issue discount ("OID") of $6.6 million, and paid lender and legal fees of approximately $15.5 million in connection with the issuance of our New Credit Facility.

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We used $195.7 million in proceeds from Term Loans under our New Credit Facility to pay off outstanding indebtedness under the Prior Credit Facility.
Tax Receivable Agreement
Immediately prior to the consummation of the IPO in August 2015, we entered into the TRA, with the former holders of units in Topco.  In December 2015, all of the former holders of units in Topco collectively assigned their interests to a new counterparty. The TRA generally provides for payment by us to the counterparty 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 investment funds affiliated with TA Associates in July 2014. We will retain approximately 15% of the U.S. federal, state and local tax benefits realized from the utilization of such tax attributes. We expect the payments we are required to make under the TRA will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect to be required to pay the counterparty approximately $96.1 million through 2030. We made the first annual payment of approximately $6.6 million under the TRA in October 2016. Refer to Note 10 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1 for additional details regarding the TRA obligation.

Indebtedness

New Credit Facility

In connection with the acquisition of Tyrrells, we entered into the New Credit Facility on September 2, 2016, which provided for Term Loans in the aggregate principal amount of $600 million and Revolving Loans in the aggregate principal amount of $50 million. We borrowed from the Term Loans in full to finance the acquisition of Tyrrells and pay down all outstanding indebtedness under the Prior Credit Facility.
We must repay the Term Loans in installments of $1.5 million per quarter due on the last day of each quarter beginning with the quarter ending December 31, 2016, with the remaining balance due at maturity in a final installment of $559.5 million. The Term Loans and Revolving Loans mature on September 2, 2023 and September 2, 2021, respectively.
In addition to the installment payments described above, the New Credit Facility includes an annual mandatory prepayment of the Term Loans from 50% of our excess cash flow as measured on annual basis, with step-downs to 25% and 0% of our excess cash flow if our Total Leverage Ratio (as defined in the New Credit Facility), tested as of the last day of our fiscal year, is less than 4.50 to 1.00 but greater than 3.75 to 1.00, and less than or equal to 3.75 to 1.00, respectively. Excess cash flow is generally defined as our Consolidated Net Income (as defined in the New Credit Facility) less debt service costs, unfinanced capital expenditures, unfinanced acquisition expenditures, and certain restricted payments, as adjusted for changes in our working capital and less other customary items.
In addition, the New Credit Facility requires mandatory prepayment of the Term Loans from the net cash proceeds of (i) certain debt issuances and (ii) certain asset sales outside the ordinary course of business and from proceeds of property insurance and condemnation events, in each case of this clause (ii) subject to our right in some circumstances to reinvest such proceeds in the business. Any voluntary prepayment as part of a repricing transaction shall be accompanied by a prepayment premium equal to 1.0% of the principal amount of such prepayment, if such prepayment is made on or prior to the date that is twelve months after September 2, 2016.
 
Interest

The Term Loans bear interest, at our option, at either the Eurodollar rate plus a margin of 5.50% or the prime rate plus a margin of 4.50%, with step-downs to 5.00% and 4.00%, respectively, if our First Lien Leverage Ratio (as defined in the New Credit Facility) is less than or equal to 4.50 to 1.00. The Eurodollar rate is subject to no floor with respect to the Revolving Loans and an annual 1.00% floor with respect to the Term Loans and the prime rate is subject to a 1.00% floor with respect to the Revolving Loans and a 2.00% floor with respect to the Term Loans. The interest rate on the outstanding balance of our Term Loans and Revolving Loans was 6.50% and 6.36% per annum, respectively, at September 30, 2016.

We are also required to pay a commitment fee on the unused commitments under the Revolving Loans at a rate equal to 0.50% per annum with a step-down to 0.375% per annum, if our First Lien Leverage Ratio is less than or equal to 3.25 to 1.00.

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Guarantees

The New Credit Facility is secured by liens on substantially all of our assets, including a pledge of 100% of the equity interests in our domestic subsidiaries and a pledge of 65% of the voting equity interests and 100% of the non-voting equity interests in our direct foreign subsidiaries. All obligations under the New Credit Facility are unconditionally guaranteed by substantially all of our direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of the guarantors, with certain exclusions.
Covenants
As of the last day of any fiscal quarter, the terms of the New Credit Facility require us (on a consolidated basis and subject to certain customary exceptions) to maintain a maximum First Lien Leverage Ratio of not more than 8.50 to 1.0, initially, and decreasing to 6.25 to 1.0 over the term of the New Credit Facility. As of September 30, 2016, we were in compliance with our financial covenants.
The New Credit Facility contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the parties, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The New Credit Facility contains customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity interests in the Company, entering into affiliate transactions and asset sales. The New Credit Facility also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults.

Other
Certain of the lenders under the New Credit Facility (or their affiliates) may provide, certain commercial banking, financial advisory and investment banking services in the ordinary course of business for us and our subsidiaries, for which they receive customary fees and commissions.
Notes Payable
In connection with our acquisition of Boundless Nutrition in April 2016 and Paqui in April 2015, we issued approximately $4.0 million and $3.9 million, respectively, in unsecured notes payable to the respective sellers. The notes issued to the sellers of Boundless Nutrition bear interest at a rate per annum of 0.67% with principal and interest due at varying maturity dates between April 29, 2017 and December 31, 2018. The notes issued to the sellers of Paqui bear interest at a rate per annum of 1.5% with principal and interest due at maturity on March 31, 2018. We recorded acquisition-date fair value discounts totaling approximately $0.4 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.
Contractual Obligations and Other Commitments

Except as discussed in Notes 8, 10 and 11 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1, there were no material changes in our commitments under contractual obligations, as disclosed in our audited consolidated financial statements for the year ended December 31, 2015.

Off Balance Sheet Arrangements

At September 30, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP"). In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past

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experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting polices and estimates. The application of each of these critical accounting policies and estimates was discussed in "Critical Accounting Policies and Estimates" included in our 2015 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies and estimates from those discussed in our 2015 Annual Report on Form 10-K.

Non-GAAP Financial Measures
We include Adjusted EBITDA, which we refer to as a non-GAAP metric, in this report because it is an important measure upon which our management assesses our operating performance. We use Adjusted EBITDA as a key performance metric because we believe it facilitates operating performance comparisons from period-to-period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and intangible assets and the impact of equity-based compensation expense. In addition, our Credit Agreement contains financial maintenance covenants, including a total funded debt ratio and a minimum fixed charged ratio, that use Adjusted EBITDA as one of their inputs. Because this non-GAAP metric facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use it for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe this non-GAAP metric and similar measures are widely used by investors, securities analysts, ratings agencies and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

Our use of this non-GAAP metric has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•
Adjusted EBITDA metric does not reflect our cash expenditures for capital equipment or other contractual commitments;
•
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;
•
Adjusted EBITDA metrics may not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and
•
Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
In evaluating this non-GAAP metric, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of any non-GAAP metric should not be construed as an inference that our future results will be unaffected by these expenses or any other expenses, whether or not they are unusual or non-recurring items. When evaluating our performance, you should consider this non-GAAP metric alongside other financial performance measures, including our net income and other GAAP results.
Adjusted EBITDA
Adjusted EBITDA is a financial performance measure that is not calculated in accordance with GAAP. We define Adjusted EBITDA as net income adjusted to exclude, when appropriate, interest expense, income tax expense, depreciation, amortization of intangible assets, Founder Contingent Compensation expense, equity-based compensation expenses and other non-operational items. Below, we have provided a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we calculate the measure.


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The following tables present a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, for each of the periods indicated (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
1,645

 
$
(2,989
)
 
$
18,815

 
$
5,475

Non-GAAP adjustments:
 
 
 
 
 
 
 
Interest expense
5,636

 
3,311

 
11,788

 
9,324

Income tax expense
3,807

 
4,118

 
16,086

 
11,092

Depreciation
539

 
98

 
814

 
206

Amortization of intangible assets
1,279

 
1,064

 
3,433

 
3,165

Equity-based compensation expense
1,803

 
997

 
3,972

 
2,435

Loss on extinguishment of debt
1,100

 
—

 
1,100

 
—

Gain on change in fair value of contingent consideration
(505
)
 
—

 
(505
)
 
—

Other income (1)
(4,221
)
 
—

 
(4,221
)
 
—

Founder contingent compensation
—

 
4,602

 
—

 
13,805

Transaction-related expenses:
 
 
 
 
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