Snap One Holdings Corp. - Quarter Report: 2022 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended April 1, 2022
OR
☐ | 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 001-40683
SNAP ONE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
1800 Continental Boulevard, Suite 200
Charlotte, North Carolina
(Address of principal executive offices)
82-1952221
(I.R.S. Employer Identification No.)
28273
(Zip Code)
(704) 927-7620
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, par value $.01 per share | SNPO | The Nasdaq Global Select Market | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☒ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had outstanding 75,878,413 shares of common stock as of May 11, 2022.
Table of Contents
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Unless otherwise indicated, references to the “Company,” “Snap One,” “we,” “us,” and “our” in this report refer to Snap One Holdings Corp. and its consolidated subsidiaries. References to the “Former Parent Entity” means Crackle Holdings, L.P., the entity that, until the completion of our initial public offering, held all of our outstanding equity.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements made in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements, and should be evaluated as such. The following list is not intended to be an exhaustive list of all our forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including statements relating to individual components thereof, and descriptions of our business plan, strategies, environment and the impact of COVID-19. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “project,” “forecast,” “estimates,” “targets,” “projections,” “should,” “could,” “would,” “may,” “might,” “will,” and other similar expressions. These forward-looking statements are contained throughout this report.
We base these forward-looking statements on our current expectations, plans and assumptions, which we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at this time. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. The forward-looking statements contained herein are subject to and involve risks, uncertainties and assumptions, and therefore you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results, and therefore actual results might differ materially from those expressed in the forward-looking statements and projections. Factors that might materially affect such forward-looking statements include:
•Risks Related to Our Business, Industry and Market Conditions;
•Risks Related to Our Products;
•Risks Related to Our Manufacturing and Supply Chain;
•Risks Related to Our Distribution Channels;
•Risks Related to Laws and Regulations;
•Risks Related to Cybersecurity and Privacy;
•Risks Related to Intellectual Property;
•Risks Related to Our International Operations;
•Risks Related to Our Indebtedness;
•Risks Related to Our Financial Statements;
•Risks Related to Our Common Stock; and
•the other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the annual period ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2022, as amended by the Form 10-K/A filed with the SEC on April 25, 2022 (as amended, our “Annual Report”).
The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations about future events. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the events described under the caption “Risk Factors” in our Annual Report and elsewhere in this report could have a material adverse effect on our business, results of operations and future financial performance.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels
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of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
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Part I - Financial Information
Item 1. Financial Statements
Snap One Holdings Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
| As of | |||||||||||
| April 1, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 25,055 | $ | 40,577 | |||||||
| Accounts receivable, net | 57,151 | 52,620 | |||||||||
| Inventories, net | 241,468 | 210,964 | |||||||||
| Prepaid expenses and other current assets | 34,578 | 35,114 | |||||||||
| Total current assets | 358,252 | 339,275 | |||||||||
| Long-term assets: | |||||||||||
| Property and equipment, net | 23,654 | 22,603 | |||||||||
| Goodwill | 590,166 | 580,761 | |||||||||
| Other intangible assets, net | 588,740 | 587,192 | |||||||||
| Operating lease right-of-use assets | 41,835 | — | |||||||||
| Other assets | 9,849 | 10,550 | |||||||||
| Total assets | $ | 1,612,496 | $ | 1,540,381 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ | 3,488 | $ | 3,488 | |||||||
| Accounts payable | 72,938 | 72,781 | |||||||||
| Accrued liabilities | 68,739 | 75,517 | |||||||||
| Current operating lease liability | 12,594 | — | |||||||||
| Current tax receivable agreement liability | 11,038 | — | |||||||||
| Total current liabilities | 168,797 | 151,786 | |||||||||
| Long-term liabilities: | |||||||||||
| Revolving credit facility, net | 35,571 | — | |||||||||
| Long-term debt, net of current portion | 449,638 | 449,256 | |||||||||
| Deferred income tax liabilities, net | 49,481 | 48,555 | |||||||||
| Operating lease liability, net of current portion | 32,204 | — | |||||||||
| Tax receivable agreement liability, net of current portion | 101,368 | 112,406 | |||||||||
| Other liabilities | 23,813 | 30,103 | |||||||||
| Total liabilities | 860,872 | 792,106 | |||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.01 par value, 500,000 shares authorized; 74,480 shares issued and outstanding as of April 1, 2022 and 74,427 shares issued and outstanding at December 31, 2021 | 745 | 744 | |||||||||
Preferred stock, $0.01 par value; 50,000 shares authorized, no shares issued and outstanding | — | — | |||||||||
| Additional paid-in capital | 832,316 | 826,718 | |||||||||
| Accumulated deficit | (81,656) | (79,420) | |||||||||
| Accumulated other comprehensive (loss) income | (22) | (28) | |||||||||
| Company’s stockholders’ equity | 751,383 | 748,014 | |||||||||
| Noncontrolling interest | 241 | 261 | |||||||||
| Total stockholders’ equity | 751,624 | 748,275 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,612,496 | $ | 1,540,381 | |||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Snap One Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| Net sales | $ | 277,434 | $ | 220,468 | |||||||
| Costs and expenses: | |||||||||||
| Cost of sales, exclusive of depreciation and amortization | 172,332 | 128,876 | |||||||||
| Selling, general and administrative expenses | 86,527 | 75,357 | |||||||||
| Depreciation and amortization | 14,889 | 13,712 | |||||||||
| Total costs and expenses | 273,748 | 217,945 | |||||||||
| Income from operations | 3,686 | 2,523 | |||||||||
| Other expenses (income): | |||||||||||
| Interest expense | 6,723 | 9,535 | |||||||||
| Other expense (income), net | (420) | (213) | |||||||||
| Total other expenses | 6,303 | 9,322 | |||||||||
| Loss before income taxes | (2,617) | (6,799) | |||||||||
| Income tax benefit | (361) | (763) | |||||||||
| Net loss | (2,256) | (6,036) | |||||||||
| Net loss attributable to noncontrolling interest | (20) | (22) | |||||||||
| Net loss attributable to Company | $ | (2,236) | $ | (6,014) | |||||||
| Net loss per share, basic and diluted | $ | (0.03) | $ | (0.10) | |||||||
| Weighted average shares outstanding, basic and diluted | 74,464 | 59,217 | |||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Snap One Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| Net loss | $ | (2,256) | $ | (6,036) | |||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||
| Foreign currency translation adjustments | 6 | (52) | |||||||||
| Comprehensive loss | (2,250) | (6,088) | |||||||||
| Comprehensive loss attributable to noncontrolling interest | (20) | (22) | |||||||||
| Comprehensive loss attributable to Company | $ | (2,230) | $ | (6,066) | |||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Snap One Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Accumulated Deficit | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2021 | 74,427 | $ | 744 | $ | 826,718 | $ | (79,420) | $ | (28) | $ | 261 | $ | 748,275 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (2,236) | — | (20) | (2,256) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 6 | — | 6 | ||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 5,599 | — | — | — | 5,599 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity incentive plans | 53 | 1 | (1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance - April 1, 2022 | 74,480 | $ | 745 | $ | 832,316 | $ | (81,656) | $ | (22) | $ | 241 | $ | 751,624 | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Accumulated Deficit | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Balance - December 25, 2020 | 59,217 | $ | 592 | $ | 659,093 | $ | (43,018) | $ | 756 | $ | 316 | $ | 617,739 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (6,014) | — | (22) | (6,036) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (52) | — | (52) | ||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 1,060 | — | — | — | 1,060 | ||||||||||||||||||||||||||||||||||
| Balance - March 26, 2021 | 59,217 | $ | 592 | $ | 660,153 | $ | (49,032) | $ | 704 | $ | 294 | $ | 612,711 | ||||||||||||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Snap One Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (2,256) | $ | (6,036) | |||||||
| Adjustments to reconcile net loss to net cash from operating activities: | |||||||||||
| Depreciation and amortization | 14,889 | 13,712 | |||||||||
| Amortization of debt issuance costs | 458 | 1,525 | |||||||||
| Deferred income taxes | (2,965) | (795) | |||||||||
| Loss on sale and disposal of property and equipment | — | 259 | |||||||||
| Equity-based compensation | 5,599 | 1,060 | |||||||||
| Non-cash operating lease expense | 2,985 | — | |||||||||
| Bad debt expense | 74 | 76 | |||||||||
| Fair value adjustment to contingent value rights | (2,800) | 1,310 | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (2,804) | (7,027) | |||||||||
| Inventories | (25,032) | (10,548) | |||||||||
| Prepaid expenses and other assets | 2,269 | (2,653) | |||||||||
| Accounts payable, accrued liabilities and operating lease liabilities | (13,439) | (14,750) | |||||||||
| Net cash used in operating activities | (23,022) | (23,867) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of business, net of cash acquired | (25,639) | — | |||||||||
| Purchases of property and equipment | (3,312) | (2,050) | |||||||||
| Issuance of notes receivable | (600) | — | |||||||||
| Other | 30 | (429) | |||||||||
| Net cash used in investing activities | (29,521) | (2,479) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments on long-term debt | — | (1,797) | |||||||||
| Proceeds from revolving credit facility | 37,000 | — | |||||||||
| Payment of deferred initial public offering costs | — | (349) | |||||||||
| Net cash provided by (used in) financing activities | 37,000 | (2,146) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 21 | (23) | |||||||||
| Net decrease in cash and cash equivalents | (15,522) | (28,515) | |||||||||
| Cash and cash equivalents at beginning of the period | 40,577 | 77,458 | |||||||||
| Cash and cash equivalents at end of the period | $ | 25,055 | $ | 48,943 | |||||||
| Supplementary cash flow information: | |||||||||||
| Cash paid for interest | $ | 7,710 | $ | 8,106 | |||||||
| Cash paid for taxes, net | $ | 1,018 | $ | 485 | |||||||
| Noncash investing and financing activities: | |||||||||||
| Capital expenditure in accounts payable | $ | 305 | $ | 67 | |||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
1.Organization and Description of Business
Snap One Holdings Corp. (referred to herein as “Snap One” or the “Company”) is incorporated in Delaware with its principal executive offices located in Charlotte, North Carolina and Draper, Utah. The Company provides products, services, and software to its network of professional integrators that enable them to deliver smart living experiences for their residential and small business end users. The Company’s hardware and software portfolio includes leading proprietary and third-party offerings across connected, infrastructure, and entertainment categories. Additionally, the Company provides technology-enabled workflow solutions to support the integrator throughout the project lifecycle, enhancing their operations and helping them to profitably grow their businesses.
Initial Public Offering — On July 30, 2021, the Company completed its initial public offering (“IPO”) of 13,850 shares of its common stock, and on August 18, 2021, completed the sale of 1,171 shares of additional common stock to the underwriters pursuant to their option to purchase additional shares, at an offering price of $18.00 per share. The Company raised net proceeds of $249,154 through the IPO, after deducting underwriting discounts and other offering costs of $21,219. During the three months ended March 26, 2021, the Company expensed $1,711 of IPO-related costs. There were no expenses related to the IPO during the three months ended April 1, 2022. The Company’s registration statement on Form S-1 (File No. 333-257624) relating to its IPO was declared effective by the Securities and Exchange Commission (the “SEC”) on July 27, 2021.
2.Significant Accounting Policies
Basis of Presentation — The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements. The condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The condensed consolidated financial statements include the accounts of the Company and all subsidiaries required to be consolidated. All intercompany balances and transactions have been eliminated in the condensed consolidated financial statements. The condensed consolidated balance sheet as of December 31, 2021, has been derived from the audited consolidated financial statements of the Company.
The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2021, appearing in the Company’s Annual Report on Form 10-K for the annual period ended December 31, 2021, as amended by the Form 10-K/A filed with the Securities and Exchange Commission on April 25, 2022 (as amended, the “Annual Report”).
The Company’s fiscal year is the 52- or 53-week period that ends on the last Friday of December. Fiscal year 2022 is a 52-week period, and fiscal year 2021 was a 53-week period. The three months ended April 1, 2022, and March 26, 2021, were 13-week periods.
Use of Accounting Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Accordingly, the actual amounts could differ from those estimates. If actual amounts differ from estimates, revisions are included in the condensed consolidated statements of operations in the period the actual amounts become known.
Recent Accounting Pronouncements Pending Adoption — In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Accounting Standards Codification 848, “ASC 848”). The amendments in this ASU were put forth in response to the market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. GAAP requires entities to evaluate whether a contract modification, such as the replacement or change of a reference rate, results in the establishment of a new contract or continuation of an existing contract. ASC 848 allows an entity to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform. The standard provides this temporary election through December 31, 2022 and cannot be applied to contract modifications that occur after December 31, 2022. In January 2021,
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Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The objective of the new reference rate reform standard is to clarify the scope of Topic 848 and provide explicit guidance to help companies applying optional expedients and exceptions. This ASU is effective immediately for all entities that have applied optional expedients and exceptions. The Company is in the process of evaluating the effect that the adoption of this standard will have on our financial position and results of operations.
In October, 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and liabilities from contracts with customers in a business combination in accordance with ASC 606 as if it had originated the contracts. The amendment in this update is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is in the process of evaluating the effect that the adoption of this standard will have on our financial position and results of operations.
Recently Adopted Accounting Pronouncements — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This new guidance requires lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. Recently, the FASB issued ASU 2020-05, which deferred the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Company adopted the new leasing standard as of January 1, 2022, using the modified retrospective approach. Therefore, results for reporting periods beginning after January 1, 2022 are presented under Topic 842, while comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. There was not a cumulative-effect adjustment to accumulated deficit at the beginning of the period of adoption. In adopting the new guidance, the Company elected the package of practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of whether existing contracts contain leases, lease classification and capitalization of initial direct costs. The Company also elected an accounting policy to not recognize assets or liabilities for leases with a term of less than 12 months, to not separate lease and non-lease components for all asset classes and not elect to use the hindsight practical expedient. The adoption of the new leasing standard resulted in the recognition of approximately $40,906 and $43,862 of right-of-use (“ROU”) assets and lease liabilities, respectively, on the Company’s condensed consolidated balance sheets for its operating lease commitments. The difference between the ROU assets and lease liabilities is primarily attributable to deferred rent and lease incentives. The adoption of the standard did not have a material impact on the Company’s condensed consolidated statements of operations or on the condensed consolidated statements of cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. The ASU sets forth a current expected credit loss (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 which deferred the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company early adopted the standard for the fiscal year beginning January 1, 2022. Adoption of the standard did not have a material impact on the condensed consolidated financial statements.
3. Acquisitions
The Company has had one acquisition in 2022 as described below, and it has been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired company, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the consolidated financial statements from the date of acquisition. There was one acquisition during the year ended December 31, 2021, when the Company acquired the issued and outstanding shares of ANLA, LLC. (“Access Networks”), an enterprise-grade networking solutions provider offering networking products, design, configuration, monitoring and support services.
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Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
On January 20, 2022, the Company, through its wholly owned subsidiary, Snap One Acquisition Corp., entered into a Purchase Agreement (“Purchase Agreement”) pursuant to which it acquired the issued and outstanding shares of Staub Electronics, LTD. (“Staub”), a long-time Canadian distribution partner. The acquisition adds two Canadian locations to the Company’s distribution footprint. The Company agreed to a purchase price of $26,395.
The Company recorded tangible and intangible assets acquired and liabilities assumed in the transaction according to the acquisition method of accounting, under ASC 805, Business Combinations. The consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of the closing date and are subject to change within the measurement period, which does not exceed twelve months after the closing date. The purchase price allocation and consideration are considered preliminary based on potential working capital adjustments. The Company allocated any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill.
Customer relationships have been valued using the multi-period excess earnings method, a derivative of the income approach. The multi-period excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Estimated useful lives were determined based on the length and trend of projected cash flows. The length of the projected cash flow period was determined based on the expected attrition of the customer relationships, which is based on the Company’s historical experience in renewing and extending similar customer relationships and future expectations for renewing and extending similar existing customer relationships. The useful life of the customer relationships intangible assets represents the number of years over which the Company expects the customer relationships to economically contribute to the business.
The trade name has been valued using the relief from royalty method under the income approach to estimate the cost savings that will accrue to the Company, which would otherwise have to pay royalties or license fees on revenue earned by using the asset. Estimated useful life was determined based on management’s estimate of the period of time the name will be in use.
The preliminary allocation of the purchase price for the acquisition is as follows:
| Total purchase consideration | $ | 26,395 | |||
| Cash and cash equivalents | $ | 756 | |||
| Accounts receivable | 1,801 | ||||
| Inventory | 5,472 | ||||
| Prepaid expenses | 1,616 | ||||
| Property and equipment | 451 | ||||
| Operating lease right-of-use assets | 2,309 | ||||
| Identifiable intangible assets | 14,209 | ||||
| Total identifiable assets acquired | 26,614 | ||||
| Accounts payable | 1,570 | ||||
| Accrued liabilities | 2,174 | ||||
| Current operating lease liability | 343 | ||||
| Deferred income tax liabilities | 3,585 | ||||
| Operating lease liability, net of current portion | 1,953 | ||||
| Total liabilities assumed | 9,625 | ||||
| Net identifiable assets acquired | 16,989 | ||||
| Goodwill | 9,406 | ||||
| Net assets acquired | $ | 26,395 | |||
12
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
The Company recorded intangible assets related to the acquisition based on estimated fair value, which consisted of the following:
| Useful Lives (Years) | Acquired Value | ||||||||||
Customer relationships | 10 | $ | 12,684 | ||||||||
Trade name | 6 | 1,525 | |||||||||
Total intangible assets | $ | 14,209 | |||||||||
The Company recognized $328 of transaction-related expenses, consisting primarily of advisory, legal, and other professional fees related to the acquisition. These transaction-related expenses were incurred by and for the benefit of the Company, and were included in selling, general, and administrative expenses in the condensed consolidated statements of operations.
Pro forma financial information related to the Staub acquisition has not been provided as it is not material to the Company’s consolidated results of operations. The results of operations of the Staub acquisition are included in the Company’s consolidated results of operations from the date of acquisition and were not significant for the three months ended April 1, 2022.
4.Revenue and Geographic Information
Contract Balances — Amounts invoiced in advance of revenue recognition are recorded as deferred revenue on the condensed consolidated balance sheets. Deferred revenue primarily relates to unspecified software updates and upgrades, hosting, technical support, marketing incentive programs, and subscription services. The following table represents the changes in deferred revenue for the three months ended April 1, 2022, and March 26, 2021:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
Deferred revenue – beginning of period | $ | 33,385 | $ | 30,466 | |||||||
Amounts billed, but not recognized | 8,531 | 6,661 | |||||||||
Recognition of revenue | (7,281) | (6,063) | |||||||||
Deferred revenue – end of period | $ | 34,635 | $ | 31,064 | |||||||
The Company recorded deferred revenue of $22,197 in accrued liabilities and $12,438 in other liabilities as of April 1, 2022. The Company recorded deferred revenue of $20,944 in accrued liabilities and $12,441 in other liabilities as of December 31, 2021.
Disaggregation of Revenue — The following table sets forth revenue by geography between the United States and all geographies outside of the United States for the three months ended April 1, 2022 and March 26, 2021:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
United States integrators(a) | $ | 225,406 | $ | 185,663 | |||||||
United States other(b) | 13,353 | 8,415 | |||||||||
International(c) | 38,675 | 26,390 | |||||||||
Total | $ | 277,434 | $ | 220,468 | |||||||
(a)United States integrators is defined as professional “do-it-for-me” integrator customers who transact with Snap One through a traditional integrator channel and excludes the impact of recently acquired businesses domestically.
(b)United States other is defined as recently acquired entities and revenue generated through managed transactions with non-integrator customers, such as national accounts.
(c)International consists of all integrators and distributors who transact with Snap One outside of the United States.
13
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
The following table sets forth revenue by product type between proprietary products and third-party products for the three months ended April 1, 2022, and March 26, 2021:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
Proprietary products(a) | $ | 187,797 | $ | 152,037 | |||||||
Third-party products(b) | 89,637 | 68,431 | |||||||||
Total | $ | 277,434 | $ | 220,468 | |||||||
(a)Proprietary products consist of product and services internally developed by Snap One and sold under one of Snap One’s proprietary brands.
(b)Third-party products consist of product that Snap One distributes but does not own the intellectual property.
Additionally, the Company’s revenue includes amounts recognized over time and at a point in time, and are as follows for the three months ended April 1, 2022, and March 26, 2021:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
Products transferred at a point in time | $ | 270,153 | $ | 214,405 | |||||||
Services transferred over time | 7,281 | 6,063 | |||||||||
Total | $ | 277,434 | $ | 220,468 | |||||||
As of April 1, 2022, and December 31, 2021, the Company’s accounts receivable, net consisted of the following:
| April 1, 2022 | December 31, 2021 | ||||||||||
Accounts receivable | $ | 59,653 | $ | 55,088 | |||||||
Allowance for doubtful accounts | (2,502) | (2,468) | |||||||||
Accounts receivable, net | $ | 57,151 | $ | 52,620 | |||||||
5.Inventories, Net
As of April 1, 2022, and December 31, 2021, the Company’s inventory consisted of the following:
| April 1, 2022 | December 31, 2021 | ||||||||||
Finished goods | $ | 238,849 | $ | 210,540 | |||||||
Raw materials | 12,825 | 10,454 | |||||||||
Work in process | 399 | 548 | |||||||||
Reserve for obsolete and slow-moving inventory | (10,605) | (10,578) | |||||||||
Total inventories, net | $ | 241,468 | $ | 210,964 | |||||||
14
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
6.Goodwill and Other Intangible Assets, Net
Goodwill as of April 1, 2022, and December 31, 2021, was $590,166 and $580,761, respectively. Goodwill increased by $9,406 in 2022 due to the acquisition of Staub. During the year ended December 31, 2021, Goodwill increased by $21,026 due to the acquisition of Access Networks. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for more information regarding Staub.
As of April 1, 2022, and December 31, 2021, other intangible assets, net, consisted of the following:
| April 1, 2022 | |||||||||||||||||||||||
| Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Customer relationships | 5 – 25 years | $ | 521,846 | $ | (103,143) | $ | 418,703 | ||||||||||||||||
| Technology | 5 – 15 years | 95,078 | (42,175) | 52,903 | |||||||||||||||||||
| Trade names – definite | 2 – 10 years | 59,185 | (18,615) | 40,570 | |||||||||||||||||||
| Trade names – indefinite | indefinite | 76,564 | — | 76,564 | |||||||||||||||||||
| Total intangible assets | $ | 752,673 | $ | (163,933) | $ | 588,740 | |||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Customer relationships | 5 – 25 years | $ | 509,162 | $ | (96,149) | $ | 413,013 | ||||||||||||||||
| Technology | 5 – 15 years | 95,078 | (38,221) | 56,857 | |||||||||||||||||||
| Trade names – definite | 2 – 10 years | 57,660 | (16,902) | 40,758 | |||||||||||||||||||
| Trade names – indefinite | indefinite | 76,564 | — | 76,564 | |||||||||||||||||||
| Total intangible assets | $ | 738,464 | $ | (151,272) | $ | 587,192 | |||||||||||||||||
Total amortization expense for intangible assets for the three months ended April 1, 2022, and March 26, 2021, was $12,661 and $11,888, respectively. The weighted-average useful life remaining for amortizing definite lived intangible assets was approximately 14.9 years as of April 1, 2022.
As of April 1, 2022, the estimated amortization expense for intangible assets for the next five fiscal years and thereafter are as follows:
Remainder of 2022 | $ | 37,220 | |||
| 2023 | 48,756 | ||||
| 2024 | 42,255 | ||||
| 2025 | 34,638 | ||||
| 2026 | 34,638 | ||||
2027 and thereafter | 314,669 | ||||
| Total | $ | 512,176 | |||
7.Debt Agreements
On August 4, 2017, the Company’s wholly owned subsidiary, Wirepath LLC (“Borrower”) entered into a credit agreement (as amended from time to time, “Old Credit Agreement”), consisting of a senior secured term loan (“Initial Term Loan”) and a senior secured revolving credit facility (“Old Revolving Credit Facility”). On February 5, 2018, the Borrower repriced the Old Credit Agreement to reduce the margin on the Initial Term Loan and Old Revolving Credit Facility. On October 31, 2018, the Borrower repriced the Initial Term Loan facility to further reduce the margin under the Initial Term Loan, increased the aggregate amount of the Initial Term Loan, and further reduced the margin under the Old
15
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
Revolving Credit Facility. On August 1, 2019, the Borrower amended the Old Credit Agreement to borrow an additional senior secured term loan (“Incremental Term Loan” and, together with the Initial Term Loan, as amended, “Old Term Loans”) and increased the commitments under the Old Revolving Credit Facility. The Company made fixed equal quarterly installments on the Old Term Loans in an amount equal to 1.0% per annum of the total aggregate principal thereof immediately after borrowing, with balance due at maturity.
On August 4, 2021, the Company used a portion of the net proceeds from the IPO to prepay $216,902 in aggregate of the amount of the Incremental Term Loan outstanding under the Old Credit Agreement. The prepayment consisted of $215,874 in principal plus accrued interest of $1,028. In connection with the prepayment, the Company incurred a charge of $6,645 related to the write off of the proportionate amount of the unamortized debt issuance costs at the time of the prepayment which was recorded in loss on extinguishment of debt on the Company’s consolidated statement of operations. The unamortized debt issuance costs are allocated between the remaining original loan balance and the portion of the loan paid down on a pro-rata basis.
On December 8, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with various financial institutions consisting of a $465,000 in aggregate principal amount of senior secured term loans maturing in seven years (the “New Term Loan”) and a $100,000 senior secured revolving credit facility (which includes borrowing capacity available for letters of credit) maturing in five years (the “New Revolving Credit Facility”).
In connection with the closing of the Credit Agreement, the Company repaid in full approximately $451,400 of borrowings, including accrued interest, under the Old Credit Agreement. The Old Term Loans and Old Revolving Credit Facility and related agreements and documents under the Old Credit Agreement were terminated upon the effectiveness of the Credit Agreement.
Borrowings under the New Term Loan will bear interest at a rate per annum equal to, at the Company’s option, either (1) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate, (b) the prime rate and (c) the eurocurrency rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; provided that such rate is not lower than a floor of 1.50% or (2) an applicable margin plus a eurocurrency rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs; provided that such rate is not lower than a floor of 0.50%.
Borrowings under the New Revolving Credit Facility will bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid, plus, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate, (b) the prime rate and (c) the eurocurrency rate determined by reference to the cost of funds adjusted for certain additional costs, plus 1.00%; provided such rate is not lower than a floor of 1.00% or (2) a eurocurrency rate determined by reference to the applicable cost of funds for such borrowing adjusted for certain additional costs; provided such rate is not lower than a floor of zero. As of April 1, 2022, the interest rates for the New Term Loan and the New Revolving Credit Facility were 5.00%.
The New Term Loan amortizes in fixed equal quarterly installments in an amount equal to 1.0% per annum of the total aggregate principal amount thereof immediately after borrowing, with the balance due at maturity. The Company may voluntarily prepay loans or reduce commitments under the Credit Agreement, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty (subject to customary exceptions, including prepayments of the New Term Loan in connection with a repricing transaction that is consummated prior to June 8, 2022).
| Instrument | Maturity Date | 4/1/2022 | 12/31/2021 | |||||||||||||||||
| Credit Agreement | ||||||||||||||||||||
| New Term Loan | 12/8/2028 | $ | 465,000 | $ | 465,000 | |||||||||||||||
| New Revolving Credit Facility | 12/8/2026 | $ | 37,000 | $ | — | |||||||||||||||
The Company may also be required to make additional payments under the financing agreement equal to a percentage of the Company’s annual excess cash flows or net proceeds from any non-ordinary course asset sales or certain debt issuances, if any. The lender has the option to decline the prepayment.
16
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
As of April 1, 2022, the Company had $37,000 outstanding under the New Revolving Credit Facility. As of December 31, 2021, the Company had no borrowings outstanding under the New Revolving Credit Facility. As of April 1, 2022 and December 31, 2021, the Company had $4,894 of outstanding letters of credit. The amount available under the New Revolving Credit Facility was $58,106 and $95,106 as of April 1, 2022, and December 31, 2021.
As of April 1, 2022, the future scheduled maturities of the above notes payable are as follows:
Remainder of 2022 | $ | 3,488 | |||
| 2023 | 4,650 | ||||
| 2024 | 3,488 | ||||
| 2025 | 4,650 | ||||
| 2026 | 41,650 | ||||
| 2027 | 5,813 | ||||
| Thereafter | 438,262 | ||||
| Total future maturities of debt | 502,001 | ||||
| Unamortized debt issuance costs | (13,304) | ||||
| Total indebtedness | 488,697 | ||||
| Less: Current maturities of long-term debt | 3,488 | ||||
| Long-term debt and revolving credit facility | $ | 485,209 | |||
Unamortized costs related to the issuance of the New Term Loan were $11,875 and $12,256 as of April 1, 2022, and December 31, 2021, and were presented as a direct deduction from the carrying amount of long-term debt. Unamortized costs related to the issuance of the New Revolving Credit Facility were $1,429 as of April 1, 2022, and were presented as a direct deduction from the carrying amount of the revolving credit facility. As of December 31, 2021, unamortized costs related to the issuance of the New Revolving Credit Facility were $1,506 and were included in other assets. The costs related to debt issuances are amortized to interest expense over the life of the related debt. As of April 1, 2022, the future amortization of debt issuance costs was as follows:
Remainder of 2022 | $ | 1,400 | |||
| 2023 | 1,925 | ||||
| 2024 | 1,993 | ||||
| 2025 | 2,066 | ||||
| 2026 | 2,123 | ||||
| 2027 | 1,918 | ||||
| Thereafter | 1,879 | ||||
| Total | $ | 13,304 | |||
Debt Covenants and Default Provisions — There have been no changes to the debt covenants or default provisions related to the Company’s outstanding debt arrangements or other obligations during the current year. The Company was in compliance with all debt covenants as of April 1, 2022, and December 31, 2021. For additional information on the Company’s debt arrangements, debt covenants and default provisions, see Note 8 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2021, in the Annual Report.
17
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
8.Fair Value Measurement
Fair Value of Financial Instruments — The fair values and related carrying values of financial instruments that are not required to be remeasured at fair value on the condensed consolidated statements of operations were as follows:
As of April 1, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Notes receivable, net | $ | 7,228 | $ | 7,293 | $ | 6,484 | $ | 6,764 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| New Term Loan | $ | 465,000 | $ | 459,188 | $ | 465,000 | $ | 462,675 | |||||||||||||||
The fair value of notes receivable are estimated using a discounted cash flow analysis using interest rates currently offered for loans with similar credit quality which represent Level 2 inputs, and are included in other assets on the balance sheet. The fair value of long-term debt was established using current market rates for similar instruments traded in secondary markets representing Level 2 inputs. The fair value of the Revolving Credit Facility approximates carrying value as the related interest rates approximate the Company’s incremental borrowing rate for similar obligations. Additionally, cash and cash equivalents, accounts receivable, net, prepaid expenses, accounts payable, and accrued liabilities are classified as Level 1 and the carrying value of these assets and liabilities approximates the fair value due to the short-term nature of these financial instruments.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis — The fair value of the interest rate cap is determined using widely accepted valuation techniques based on its maturity and observable market-based inputs, including interest rate curves. This measurement is considered a Level 2 measurement. The interest rate cap expired on December 31, 2021 and had no value as of December 31, 2021.
The Company utilizes a Monte Carlo simulation in an option pricing framework, where a range of possible scenarios are simulated, in order to determine the fair value of the contingent value rights (“CVRs”). Any future increase in the fair value of the CVR obligations, based on an increased likelihood that the underlying milestones will be achieved, and the associated payment or payments will, therefore, become due and payable, will result in a charge to selling, general and administrative expenses in the period in which the increase is determined. Similarly, any future decrease in the fair value of the CVR obligations will result in a reduction in selling, general and administrative expenses. CVR liabilities are categorized as other liabilities in the accompanying condensed consolidated balance sheets and are classified as Level 3.
Fair value at April 1, 2022 | Valuation Technique | Unobservable Input | Volatility | ||||||||||||||||||||
| Contingent Value Rights | $6,100 | Monte Carlo | Volatility | 45 and 50% | |||||||||||||||||||
Changes in the CVRs for the three months ended April 1, 2022, and March 26, 2021 were as follows:
| April 1, 2022 | March 26, 2021 | ||||||||||
CVR fair value – beginning of period | $ | 8,900 | $ | 4,000 | |||||||
Fair value adjustments | (2,800) | 1,310 | |||||||||
CVR fair value – end of period | $ | 6,100 | $ | 5,310 | |||||||
There were no transfers into or out of Level 3 during the three months ended April 1, 2022, or March 26, 2021.
18
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
9.Accrued Liabilities
Accrued liabilities as of April 1, 2022, and December 31, 2021, consisted of the following:
| April 1, 2022 | December 31, 2021 | ||||||||||
Deferred revenue | $ | 22,197 | $ | 20,944 | |||||||
Warranty reserve | 12,218 | 14,549 | |||||||||
Payroll, vacation, and bonus accruals | 14,313 | 21,340 | |||||||||
Customer rebate program | 4,138 | 4,775 | |||||||||
Sales return allowance | 4,062 | 3,999 | |||||||||
Taxes | 2,380 | 1,774 | |||||||||
| Contingent consideration | 2,000 | — | |||||||||
Incurred but not reported self-insurance | 1,660 | 1,556 | |||||||||
Interest payable | 78 | 1,523 | |||||||||
Other accrued liabilities | 5,693 | 5,057 | |||||||||
Total accrued liabilities | $ | 68,739 | $ | 75,517 | |||||||
10.Warranties
Changes in the Company’s accrued warranty liability for the three months ended April 1, 2022, and March 26, 2021, are as follows:
| April 1, 2022 | March 26, 2021 | ||||||||||
Accrued warranty – beginning of period | $ | 18,772 | $ | 16,523 | |||||||
Warranty claims | (2,323) | (4,002) | |||||||||
Warranty provisions | 175 | 5,707 | |||||||||
Accrued warranty – end of period | $ | 16,624 | $ | 18,228 | |||||||
As of April 1, 2022, the Company has recorded accrued warranty liabilities of $12,218 in accrued liabilities and $4,406 in other liabilities in the accompanying consolidated balance sheet. As of December 31, 2021, the Company has recorded accrued warranty liabilities of $14,549 in accrued liabilities and $4,223 in other liabilities.
11.Retirement Plan
The Company has a that covers eligible employees as defined by the plan agreement. As of January 1, 2020, the Company matches 100% of employee contributions to the plan, up to 3% of the employees’ total compensation, and 50% of employee contributions to the plan, up to 6% of the employees’ total compensation. Company contributions to the plan, net of forfeitures, were $1,531 and $1,170 for the three months ended April 1, 2022, and March 26, 2021, respectively.
12.Equity Agreements and Incentive Equity Plans
Former Parent Incentive Plan — In October 2017, the Former Parent Entity approved the Class B Unit Incentive Plan (the “2017 Plan”) pursuant to the Company’s partnership agreement. Class B-1 Incentive Units (“B-1 Units”) issued under the 2017 Plan vest in installments over a five-year period, subject to the grantee’s continued employment or service. Class B-2 Incentive Units (“B-2 Units” and collectively with the B-1 Units, “Incentive Units”) issued under the 2017 Plan contain both service conditions consistent with the B-1 Units and market-based vesting conditions that require the achievement of a specified return hurdle to the controlling shareholders in order to vest. The Company recognized $1,060 of compensation expense within selling, general and administrative expenses related to Incentive Units for the three months ended March 26, 2021.
2021 Incentive Plan — On July 16, 2021, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”) in order to provide a means through which to attract, retain, and motivate key personnel. Awards available for grant under the
19
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
2021 Plan include non-qualified and incentive stock options, restricted shares of our common stock, other equity-based awards tied to the value of our common stock and cash-based awards.
Equity Award Conversion — During the year ended December 31, 2021, and in connection with the IPO, all outstanding unvested Incentive Units were replaced with newly issued shares of our restricted common stock. Vested Incentive Units were exchanged into shares of our common stock using the same formula as unvested Incentive Units (together, the “Equity Award Conversion”). The restricted shares of common stock that the holders received in exchange for their unvested B-1 Units are subject to the same vesting terms that applied to the B-1 Units prior to the Equity Award Conversion.
The restricted stock awards issued to replace B-2 Units vest based upon achievement of one or more hurdles, which are substantially the same as the previous market-condition vesting criteria of the B-2 Units. Although the restricted stock awards that replace the B-2 Units do not contain an explicit service condition, the vesting is subject to continued employment, resulting in a derived service period. For additional information on the Equity Award Conversion, see Note 13 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2021, in the Annual Report.
Restricted Stock Awards
In connection with the IPO, the Company issued restricted common stock to holders of unvested B-1 Units and B-2 Units. The grant date fair value of restricted stock awards was determined to be $18.00 per share, based on the initial listing price of the Company’s common stock on the grant date.
The summary of the Company’s restricted stock awards activity is as follows:
| Restricted Stock Awards | |||||||||||||||||||||||
| B-1 Incentive Units | B-2 Incentive Units | ||||||||||||||||||||||
| Number of Units | Weighted- Average Grant-Date Fair Value | Number of Units | Weighted- Average Grant-Date Fair Value | ||||||||||||||||||||
| Outstanding at December 31, 2021 | 633 | $ | 18.00 | 807 | $ | 18.00 | |||||||||||||||||
| Granted | — | — | — | — | |||||||||||||||||||
| Vested | 53 | 18.00 | — | — | |||||||||||||||||||
| Forfeited | 7 | 18.00 | — | — | |||||||||||||||||||
| Outstanding at April 1, 2022 | 573 | $ | 18.00 | 807 | $ | 18.00 | |||||||||||||||||
Stock Options
In connection with the IPO, the Company granted options to holders of B-1 Units (“Time-based Options”) and options to holders of B-2 Units (“Market-based Options” and collectively with the Time-based Options, “Leverage Replacement Options”), as further discussed in Note 13 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2021, in the Annual Report.
20
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
The summary of the Company’s option activity is as follows:
| Time-based Options | Market-based Options | ||||||||||||||||||||||||||||||||||
| Number of Units | Weighted- Average Grant-Date Fair Value | Aggregate Intrinsic Value (a) | Number of Units | Weighted- Average Grant-Date Fair Value | Aggregate Intrinsic Value (a) | ||||||||||||||||||||||||||||||
| Outstanding at December 31, 2021 | 4,393 | $ | 6.49 | $ | 13,532 | 1,155 | $ | 5.66 | $ | 3,558 | |||||||||||||||||||||||||
| Granted | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Exercised | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Forfeited | 52 | 6.82 | — | — | — | — | |||||||||||||||||||||||||||||
| Outstanding at April 1, 2022 | 4,341 | $ | 6.48 | $ | — | 1,155 | $ | 5.66 | $ | — | |||||||||||||||||||||||||
| Options exercisable at April 1, 2022 | 2,501 | $ | 6.09 | $ | — | — | $ | — | $ | — | |||||||||||||||||||||||||
(a) The intrinsic value represents the amount by which the fair value of the Company’s stock exceeds the option exercise price as of April 1, 2022.
Restricted Stock Units — The Company grants restricted stock units (“RSUs”) with time-based vesting requirements under the 2021 Plan. These RSUs typically have an initial annual cliff vest and then vest quarterly over the remaining service period, which is generally to four years. The fair value of RSUs is based on the Company’s closing stock price on the date of grant.
The summary of the Company’s RSU activity is as follows:
| Restricted Stock Units | |||||||||||
| Number of Units | Weighted-Average Grant-Date Fair Value | ||||||||||
| Outstanding at December 31, 2021 | 390 | $ | 18.22 | ||||||||
| Granted | 803 | 20.42 | |||||||||
| Vested | — | — | |||||||||
| Forfeited | 13 | 19.95 | |||||||||
| Outstanding at April 1, 2022 | 1,180 | $ | 19.70 | ||||||||
Performance Stock Units — During the three months ended April 1, 2022, the Company granted performance-based restricted stock units (“PSUs”) to certain employees under the 2021 Plan. The fair value of PSUs granted is based on the Company’s closing stock price on the date of grant. Each PSU grant vests in annual tranches over a three-year service period. Total units earned for grants may vary between 0% and 200% of the units granted based on the attainment of net sales and company-specific adjusted EBITDA targets during the performance period (generally the fiscal year of the date of the grant) and upon continued service. Compensation expense for PSUs is recognized on a graded-vesting basis if it is probable that the performance conditions will be achieved. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. PSUs will vest with continued service and upon achievement of the relevant performance targets.
21
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
The summary of the Company’s PSU activity is as follows:
| Performance Stock Units | |||||||||||
| Number of Units | Weighted-Average Grant-Date Fair Value | ||||||||||
| Outstanding at December 31, 2021 | — | $ | — | ||||||||
| Granted | 368 | 20.46 | |||||||||
| Exercised | — | — | |||||||||
| Forfeited | — | — | |||||||||
| Outstanding at April 1, 2022 | 368 | $ | 20.46 | ||||||||
Other equity-based compensation — In connection with the Staub acquisition (see Note 3), the Company granted 69 shares of common stock with an aggregate fair value of $1,208 to a key executive. The shares are accounted for as equity-based compensation because the shares are subject to forfeiture based on post-acquisition time-based service vesting. The shares vest annually in equal installments over a three-year service period beginning on the acquisition date. The grant date fair value of the shares was determined to be $17.42 per share based on the Company’s closing stock price on the date of the grant.
Total equity-based compensation expense — Equity-based compensation expense is included within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. For all equity-based compensation awards, the Company recognizes forfeitures as they occur. Compensation expense for the three months ended April 1, 2022 and unrecognized stock compensation expense and weighted average remaining expense period as of April 1, 2022 consisted of:
| Compensation Expense | As of April 1, 2022 | ||||||||||||||||
| Three months ended April 1, 2022 | Unrecognized Compensation Expense | Weighted-Average Remaining Contractual Term (Years) | |||||||||||||||
| 2021 Plan | |||||||||||||||||
| Restricted stock awards | $ | 1,145 | $ | 7,581 | 1.75 | ||||||||||||
| Time-based options | 1,729 | 12,366 | 2.29 | ||||||||||||||
| Market-based options | 645 | 4,780 | 1.84 | ||||||||||||||
| Restricted stock units | 1,436 | 20,155 | 3.20 | ||||||||||||||
| Performance stock units | 565 | 6,965 | 1.89 | ||||||||||||||
| Other equity-based compensation | 79 | 1,129 | 2.80 | ||||||||||||||
| Total | $ | 5,599 | $ | 52,976 | 2.27 | ||||||||||||
Control4 Equity Awards — In connection with the acquisition of Control4 Corporation (“Control4”) in 2019, the Company agreed to a settlement of Control4 equity awards that were outstanding immediately prior to the acquisition date, consisting of stock options and restricted stock units. As of the acquisition date, 2,998 shares of Control4 awards were cancelled and converted into rights to receive cash payments (“Replacement Awards”).
The Company recognized $283 and $1,726 of compensation expense relating to the Replacement Awards within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations during the three months ended April 1, 2022 and March 26, 2021, respectively.
The unrecognized compensation expense related to the unvested Replacement Awards, which is expected to be recognized subsequent to April 1, 2022, is not significant.
22
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
13.Income Taxes
The effective income tax rate for the Company was a benefit of 13.8% for the three months ended April 1, 2022, as compared to 11.3% for the three months ended March 26, 2021. The change in the effective tax rate for the three months ended April 1, 2022, and the difference from the U.S. federal statutory rate of 21%, was primarily the result of allocation of income between jurisdictions, low pretax book income as compared to tax expense and a change in the state deferred rate.
Income tax benefit was $361 during the three months ended April 1, 2022, compared to a benefit of $763 during the three months ended March 26, 2021.
14.Tax Receivable Agreement
On July 29, 2021, the Company executed a tax receivable agreement (“TRA”) with certain pre-IPO owners (“TRA Participants”). The TRA provides for payment by the Company to the TRA Participants of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company utilizes in the future from net operating losses and certain other tax benefits that arose prior to the IPO. The Company recognizes this contingent liability in its condensed consolidated financial statements when incurrence of the liability becomes probable and amounts are reasonably estimable. Subsequent changes to the measurement of the TRA liability are recognized in the statements of income as a component of other (expense) income, net. The Company will retain the benefit of the remaining 15% of these cash tax savings.
Payments under the TRA will not begin until after the filing of the Company’s 2021 federal tax return. If the Company does not have taxable income (before considering deductions that are subject to the TRA), it is not required (absent circumstances requiring an early termination payment, other acceleration of its obligations under the TRA or a change of control) to make payments under the TRA for that taxable year because no cash tax savings will have been realized. However, unutilized deductions that do not result in realized benefits in a given tax year as a result of insufficient taxable income may be applied to taxable income in future years and accordingly would impact the amount of cash tax savings in such future years and the amount of corresponding payments under the TRA in such future years.
Upon the closing of the IPO, the Company recognized a non-current liability of $112,681, which represented undiscounted aggregate payments that it expects to pay the TRA Participants under the TRA, with an offset to additional paid-in capital. Subsequent changes in the measurement of the liability will be adjusted through the condensed consolidated statement of operations. The TRA liability is an estimate and estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount, character and timing of the Company’s income. As of April 1, 2022, the Company recognized a total liability of $112,406, of which $11,038 and $101,368 are recorded within the current and noncurrent tax receivable liability financial statement line items, respectively. TRA payments are anticipated to be made 125 days after filing the federal tax return. No measurement changes to the liability were recognized for the three months ended April 1, 2022. As of December 31, 2021, the Company recognized a total liability of $112,406, which was recorded within the noncurrent tax receivable liability financial statement line item.
With respect to certain pre-IPO owners that are not TRA Participants, the Company paid $13,210 with cash on hand for their interests in lieu of their participation in the TRA. Approximately $2,754 of the cash payments to pre-IPO owners are subject to vesting requirements and are held in escrow until vested. The cash payments held in escrow are included in the condensed consolidated balance sheet in prepaid expenses and other current assets and are expensed over the requisite service period. The remaining $10,456 of the cash payments were expensed and paid or accrued in conjunction with the closing of the IPO. In total, $10,925 was recorded as compensation expense within selling, general and administrative expenses as disclosed in the consolidated statement of operations included in the Annual Report for the year ended December 31, 2021. As of April 1, 2022, the Company recorded $279 in compensation expense within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
15.Commitments and Contingencies
Legal Proceedings — During the normal course of business, the Company is occasionally involved with various claims and litigation. Reserves are established in connection with such matters when a loss is probable, and the amount of such loss can be reasonably estimated. As of April 1, 2022, and December 31, 2021, no significant reserves were recorded.
23
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
The determination of probability and the estimation of the actual amount of any such loss are inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. However, the Company does not expect the outcome of the matters currently pending will have a material adverse effect on the condensed consolidated financial statements.
16.Leases
The Company determines if an arrangement is a lease or contains a lease at inception. For all leases with a term longer than 12 months, operating leases are recorded under the noncurrent asset operating lease financial statement line item and the current and noncurrent operating lease liability financial statement line items on our condensed consolidated balance sheets. The Company has lease agreements with lease and non-lease components, which the Company has elected to account for as a single lease component for all asset classes. Lease expense is recognized on a straight-line basis over the lease term.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Since most of the Company’s leases do not provide an implicit rate, the Company uses its own incremental borrowing rate (“IBR”) on a collateralized basis in determining the present value of lease payments. The Company utilizes a market-based approach to estimate the IBR.
The Company’s lease arrangements primarily consist of operating leases for offices, warehouse space, and distribution centers. The leases have remaining lease terms of 1 year to 10 years, some of which include options to extend for up to an additional 5 years, and some of which include options to terminate prior to completion of the contractual lease term with or without penalties. The Company’s lease term only includes periods covered by options if those options are reasonably certain of being exercised (or not reasonably certain of being exercised as it relates to termination options). Variable lease payments that depend on an index or rate (such as the Consumer Price Index or a market interest rate) are included in the measurement of ROU assets and lease liabilities using the index or rate at the commencement date. Variable payments, other than those dependent upon an index or rate, are excluded from the measurement of the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. The variable lease cost primarily represents variable payments related to common area maintenance and utilities. The Company’s leases do not contain any material residual value guarantees.
The components of the Company’s lease costs are:
| Three Months Ended April 1, 2022 | |||||
Operating lease cost (a) | $ | 3,539 | |||
| Variable lease cost | 1,056 | ||||
| Short-term lease cost | 110 | ||||
| Total lease cost | $ | 4,705 | |||
(a)Included in cost of sales, exclusive of depreciation and amortization, and selling, general and administrative expenses in the Company’s unaudited condensed consolidated statement of operations.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows:
| Three Months Ended April 1, 2022 | |||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 3,405 | |||
| Non-cash activity: | |||||
| Right-of-use assets obtained in exchange for lease obligations | $ | 44,055 | |||
24
Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows:
| As of April 1, 2022 | |||||
| Weighted-average remaining lease term | 4.75 years | ||||
| Weighted-average discount rate | 4.33 | % | |||
As of April 1, 2022, future lease payments under non-cancelable lease commitments for the next five fiscal years and thereafter were as follows:
Remainder of 2022 | $ | 10,666 | |||
| 2023 | 10,541 | ||||
| 2024 | 8,823 | ||||
| 2025 | 7,562 | ||||
| 2026 | 5,469 | ||||
| Thereafter | 7,078 | ||||
Total lease payments | 50,139 | ||||
Less: Imputed interest | 5,341 | ||||
Present value of lease liabilities | $ | 44,798 | |||
As of April 1, 2022, the Company has entered into additional lease agreements for office space that have not yet commenced. Aggregate lease payments for these leases total $38,372 on an undiscounted basis.
The future minimum lease payments for operating lease obligations under ASC Topic 840 as of December 31, 2021 were as follows:
| 2022 | $ | 13,168 | |||
| 2023 | 9,255 | ||||
| 2024 | 7,558 | ||||
| 2025 | 6,357 | ||||
| 2026 | 4,510 | ||||
| Thereafter | 5,460 | ||||
| Total future minimum lease payments | $ | 46,308 | |||
Under ASC 840, Leases, total rental expense for the three months ended March 26, 2021 was $3,128.
17.Stockholders’ Equity
Holders of voting common stock are entitled to one vote per share and to receive dividends. The Company had noncontrolling interests of $241 and $261 as of April 1, 2022, and December 31, 2021, respectively.
Changes in noncontrolling interests each period include net income attributable to noncontrolling interests and cash contributions by minority partners to the Company’s consolidated subsidiaries. There were no cash contributions by minority partners for the three months ended April 1, 2022, or March 26, 2021.
In July 2021, the Company amended its Amended and Restated Certificate of Incorporation which, among other things, effected a 150-for-1 stock split of its shares of common stock, increased the par value of its common stock from $0.001 to $0.01 per share, increased the authorized number of shares of its common stock to 500,000 and authorized 50,000 shares of preferred stock. There was no preferred stock outstanding as of April 1, 2022, and December 31, 2021. All references to share and per share amounts in the Company’s condensed consolidated financial statements have been retrospectively revised to reflect the stock split, the increase in par value and the increase in authorized shares.
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Snap One Holdings Corp. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(Unaudited)
18.Loss Per Share
Basic loss per share represents net loss divided by the weighted-average shares outstanding. Diluted loss per share is the same as basic income or loss per share, as the Company had no potentially dilutive securities during the three months ended March 26, 2021, and was in a loss position during the three months ended April 1, 2022. The following table presents the calculations of basic and diluted loss per share for the three months ended April 1, 2022, and March 26, 2021:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| Net loss attributable to Company | $ | (2,236) | $ | (6,014) | |||||||
| Weighted-average shares outstanding - basic and diluted | 74,464 | 59,217 | |||||||||
| Loss per share - basic and diluted | $ | (0.03) | $ | (0.10) | |||||||
The Company’s restricted stock awards, stock options, restricted stock units and performance stock units were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive. Awards with performance and market-based vesting conditions are excluded from the calculation of dilutive potential common shares until the conditions have been satisfied. The following potentially dilutive shares were excluded from the computation of diluted net income (loss) per share attributable to common stockholders:
| Three Months Ended April 1, 2022 | |||||
| Restricted stock awards | 1,412 | ||||
| Time-based options | 4,368 | ||||
| Market-based options | 1,155 | ||||
| Restricted stock units | 787 | ||||
| Performance stock units | 186 | ||||
| Other equity-based compensation | 56 | ||||
| Total | 7,964 | ||||
19.Related Parties
The Company’s controlling shareholder, H&F, has an ownership interest in a human capital management, payroll, HR service and workforce management vendor used by the Company. For the three months months ended April 1, 2022 and March 26, 2021, the Company incurred $113 and $186 of expenses, respectively. These expenses are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Amounts owed by the Company in connection with the expenses described above were not material as of April 1, 2022 and March 26, 2021, respectively.
20.Subsequent Events
On May 12, 2022 the Company announced that its board of directors authorized a $25,000 share repurchase program to capitalize on attractive buying opportunities. Under the share repurchase program, Snap One may purchase shares of common stock on a discretionary basis from time to time through open market repurchases, privately negotiated transactions or other means, including through Rule 10b5-1 trading plans or through the use of other techniques such as accelerated share repurchases. The timing and number of shares repurchased will depend on a variety of factors, including stock price, trading volume, and general business and market conditions. The repurchase program expires at the end of 2023, does not obligate the Company to acquire a specified number of shares and may be modified, suspended or discontinued at any time at the board of directors discretion.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q, as well as our Annual Report. The statements in this discussion contain forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management and involve risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements due to various factors, including those discussed below and elsewhere in this Form 10-Q and our Annual Report, particularly in the “Risk Factors” but also in other sections of this Form 10-Q and our Annual Report.
We operate on a 52-week or 53-week fiscal year ending on the last Friday of December each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Saturday and containing one 5-week period followed by two 4-week periods. When a 53-week fiscal year occurs, we report the additional week in the fourth fiscal quarter. References to fiscal year 2021 are to our 53-week fiscal year ended December 31, 2021. The fiscal quarters ended April 1, 2022, and March 26, 2021 were both 13-week periods.
Overview
Snap One powers smart living by enabling professional integrators to deliver seamless experiences in the connected homes and small businesses where people live, work and play. Our end-to-end product ecosystem delivered through our powerful distribution network and further bolstered by our technology-enabled workflow solutions delivers a compelling value proposition to our loyal and growing network of professional do-it-for-me (“DIFM”) integrator customers. We distribute and provide integrators with a leading, comprehensive proprietary and third-party suite of connected, infrastructure, entertainment, and software solutions so the entire smart living experience is exceptional for the end consumer. Our product and service offerings encompass all of the elements required by integrators to build integrated smart living systems that are easy to install and simple to manage, serving the needs of both integrators and end consumers. Our differentiated technology and software-enabled workflow tools have been designed to support the integrator throughout the project lifecycle, enhancing their operations and helping them to profitably grow their businesses.
We are vertically integrated with the majority of our Net Sales and Contribution Margin coming from our proprietary-branded, internally developed products that are only available to integrators directly from Snap One. These proprietary products are manufactured on an asset-light basis through our network of contract manufacturing and joint development suppliers located primarily in Asia. In addition, we offer a curated set of leading third-party products to enhance the one-stop shop experience for integrators, driving customer stickiness and sales growth.
Recent Developments
On January 20, 2022, we announced the acquisition of Staub, a long-time Canadian distribution partner. The acquisition brings together two long-time business partners to provide more product choice, faster fulfillment, and superior support for professional integrators across Canada. The acquisition adds two Canadian locations to our distribution footprint. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the acquisition.
As of April 1, 2022, we had $37.0 million outstanding under the New Revolving Credit Facility, which we used to fund the Staub acquisition as well as for general corporate expenses.
Key Factors Affecting Our Performance
Our historical financial performance has been primarily driven by the following factors, which we also expect to be the primary drivers of our financial performance in the future.
Wallet Share Growth Drives Increased Average Spend per Integrator. Increasing wallet share with integrators depends in part on our ability to continue expanding our omni-channel coverage, extending our product suite, bolstering our support services, and creating deeper integration across our products to make it compelling for integrators to use Snap One as their one-stop shop. Average wallet share with our integrators varies across DIFM markets, with particular strength in home technology and demonstrated success in commercial and security.
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New DIFM Integrator Additions in Home Technology, Security, Commercial and Internationally. We are a market leader in our core domestic home technology market, and we believe that our value proposition appeals to integrators in attractive adjacent markets. We are utilizing our proven strategy of acquiring integrators in the home technology market to attract integrators in security and commercial markets, where we are less penetrated but have displayed a track record of growth. We believe that strategic investments in expanding our product portfolio and targeted sales, marketing and new integrator onboarding initiatives will allow us to grow our network of integrators across these markets. We also believe there is a meaningful opportunity to expand our existing market share in non-U.S. markets. We plan to grow in these markets by investing in sales resources, broadening our available product portfolio, and strengthening our direct-to-integrator sales approach.
Investments in Our Integrated Platform. Our end-to-end product and software ecosystem and technology-enabled workflow solutions create an integrated platform of leading offerings, which we believe drive significant value for our integrators and personalized, immersive experiences for end consumers.
Omni-Channel Strategy Expansion. Our business model is built around an e-commerce centric, omni-channel go-to-market strategy. We provide a comprehensive e-commerce portal, which allows integrators to easily research products, design projects, receive training and certifications, order products, and solicit ongoing support. Our e-commerce portal is complemented by a growing network of 31 domestic local branches, two Canadian local branches, and seven distribution centers as of April 1, 2022. The local branch presence is an important part of our strategy as it allows us to better serve integrators locally by providing same-day product availability when necessary, creating a site for relationship building with our support team and for training and product demonstration sessions. We believe integrators value the relationships and support we can deliver at the local level, and this further increases their loyalty to our business across channels.
Strategic Acquisitions. In addition to our organic growth, we continue to grow our business through strategic acquisitions such as our acquisitions of ANLA, LLC (“Access Networks”) and Staub to better serve existing and new integrators, broaden our product categories, and extend the geographic reach of our omni-channel capabilities. We will continue to pursue disciplined, accretive acquisitions that enhance our products, software and workflow solutions and expand into adjacent markets that allow us to serve our integrator base.
Impact of the COVID-19 Pandemic
Throughout the pandemic, we have supported professional integrators with their challenges, including staff considerations and the dynamic of practicing social distancing with their customers, to allow them to continue to provide their customers the infrastructure and connectivity needed to create personalized experiences for individuals and families who are spending more time at home.
Following initial demand declines for our products and services in March and April 2020, sales recovered in 2021 as professional integrators’ services became increasingly important for homeowners working and seeking entertainment from home. This resulted in accelerated growth in our business and reinforced that we provide a mission-critical function to our integrators. More recently, COVID-19 has affected our supply chain, including component sourcing and shipping and logistics challenges resulting in cost inflation, consistent with its effect across many industries. When combined with the demand for our products, these supply chain impacts have resulted in delayed product availability in some cases. We expect these impacts, including potential delayed product availability, to continue for as long as the global supply chain is experiencing these challenges. We continue to invest in supply chain initiatives to meet integrator demand and manage cost inflation, and while the situation caused by COVID-19 is dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to “Risk Factors” in our Annual Report.
Key Metrics and Reconciliation of Non-GAAP Financial Data
In addition to the measures presented in our consolidated financial statements, we present the following key business metrics on a fiscal year basis to help us monitor the performance of our business, identify trends affecting our business and assist us in making strategic decisions:
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Domestic Integrator Net Sales, Transacting Domestic Integrators, Spend per Transacting Domestic Integrator
We define Domestic Integrator Net Sales as sales in the fiscal year period from professional do-it-for-me integrator customers who transact with Snap One through a traditional integrator channel and excludes the impact of recently acquired businesses. Domestic Integrator Net Sales is presented as a component of our revenue disaggregation.
We define Transacting Domestic Integrators as a unique integrator business that transacted with Snap One domestically in a fiscal year period.
We calculate Spend per Transacting Domestic Integrator as Domestic Integrator Net Sales divided by Transacting Domestic Integrators.
We believe these metrics are useful measures for evaluating our performance on a fiscal year basis.
The following table presents a reconciliation of Domestic Integrator Net Sales, Transacting Domestic Integrators, and Spend per Transacting Domestic Integrator for the periods presented:
| Fiscal years ended | |||||||||||
| December 31, 2021 | December 25, 2020 | ||||||||||
| ($ in thousands) | |||||||||||
Domestic integrator(a) net sales | $ | 829,845 | $ | 684,980 | |||||||
| Divided by: | |||||||||||
| Transacting domestic integrators (in thousands) | 20.0 | 17.9 | |||||||||
| Spend per domestic integrator | $ | 41.5 | $ | 38.3 | |||||||
| Year over year growth % | |||||||||||
| Transacting domestic integrators | 11.7 | % | |||||||||
| Spend per domestic integrator | 8.4 | % | |||||||||
(a)Domestic integrator, or as it is defined in Note 4 of the Notes to the Condensed Consolidated Financial Statements, United States integrator, is defined as professional “do-it-for-me” integrator customers who transact with Snap One through a traditional integrator channel and excludes the impact of recently acquired businesses domestically.
Adjusted EBITDA and Adjusted Net Income
We define Adjusted EBITDA as net loss, plus interest expense, net, income tax benefit, depreciation and amortization, further adjusted to exclude equity-based compensation, acquisition-related and integration-related costs, IPO costs and certain other non-recurring, non-core, infrequent or unusual charges as described below.
We define Adjusted Net Income as net loss, plus amortization, further adjusted to exclude equity-based compensation, acquisition-related and integration-related costs, IPO costs and certain non-recurring, non-core, infrequent or unusual charges, including the estimated tax impacts of these adjustments.
Adjusted EBITDA and Adjusted Net Income are key measures used by management to understand and evaluate our financial performance, trends and generate future operating plans. Management uses these key measures to make strategic decisions regarding the allocation of capital and analyze investments in initiatives that are focused on cultivating new markets for our products and services. We believe Adjusted EBITDA and Adjusted Net Income are useful measurements for analysts, investors and other interested parties to evaluate companies in our markets as they help identify underlying trends that could otherwise be masked by certain expenses that we do not consider indicative of our ongoing performance.
Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools. These measures are not calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, Adjusted EBITDA and Adjusted Net Income may not be comparable to similarly titled metrics of other companies due to differences among the methods of calculation.
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The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for the periods presented:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net loss | $ | (2,256) | $ | (6,036) | |||||||
| Interest expense | 6,723 | 9,535 | |||||||||
| Income tax expense (benefit) | (361) | (763) | |||||||||
| Depreciation and amortization | 14,889 | 13,712 | |||||||||
| Other expense (income), net | (420) | (213) | |||||||||
| Equity-based compensation | 5,599 | 1,060 | |||||||||
Compensation expense for payouts in lieu of TRA participation(a) | 279 | — | |||||||||
Initial public offering costs(b) | — | 1,711 | |||||||||
Fair value adjustment to contingent value rights(c) | (2,800) | 1,310 | |||||||||
Deferred acquisition payments(d) | 703 | 2,152 | |||||||||
Deferred revenue purchase accounting adjustment(e) | 97 | 148 | |||||||||
Acquisition and integration related costs(f) | 214 | 14 | |||||||||
Other professional services costs(g) | 837 | — | |||||||||
Other(h) | 87 | 712 | |||||||||
| Adjusted EBITDA | $ | 23,591 | $ | 23,342 | |||||||
The following table presents a reconciliation of net (loss) income to Adjusted Net Income for the periods presented:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net loss | $ | (2,256) | $ | (6,036) | |||||||
| Amortization | 12,661 | 11,888 | |||||||||
| Equity-based compensation | 5,599 | 1,060 | |||||||||
| Foreign currency gains | (179) | (48) | |||||||||
Compensation expense for payouts in lieu of TRA participation(a) | 279 | — | |||||||||
Initial public offering costs(b) | — | 1,711 | |||||||||
Fair value adjustment to contingent value rights(c) | (2,800) | 1,310 | |||||||||
Deferred acquisition payments(d) | 703 | 2,152 | |||||||||
Deferred revenue purchase accounting adjustment(e) | 97 | 148 | |||||||||
Acquisition and integration related costs(f) | 214 | 14 | |||||||||
Other professional services costs(g) | 837 | — | |||||||||
Other(h) | 19 | 690 | |||||||||
Income tax effect of adjustments(i) | (4,457) | (3,855) | |||||||||
Adjusted Net Income | $ | 10,717 | $ | 9,034 | |||||||
(a)Represents non-recurring expense related to payments to certain pre-IPO owners in lieu of their participation in the TRA. Management does not believe such costs are indicative of our ongoing operations as they are one-time awards specific to the establishment of the TRA.
(b)Represents expenses related to professional fees in connection with preparation for our IPO.
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(c)Represents noncash gains and losses recorded from fair value adjustments related to contingent value right liabilities. CVR liabilities represent potential obligations to the prior sellers in conjunction with the acquisition of the Company by investment funds managed by Hellman & Friedman in August 2017 and are based on estimates of expected cash payments to the prior sellers based on specified targets for the return on the original capital investment.
(d)Represents expenses incurred related to deferred payments to employees associated with our Control4 acquisition and other historical acquisitions. The deferred payments are cash retention awards for key personnel from the acquired companies and are expected to be paid to employees through 2023. Management does not believe such costs are indicative of our ongoing operations as they are one-time awards specific to acquisitions and are incremental to our typical compensation costs incurred and we do not expect such costs to be reflective of future increases in base compensation expense.
(e)Represents an adjustment related to the fair value of deferred revenue related to the Control4 acquisition.
(f)Represents costs directly associated with acquisitions and acquisition-related integration activities. These costs also include certain restructuring costs (e.g., severance) and other third-party transaction advisory fees associated with the acquisitions.
(g)Represents professional service fees associated with the preparation for Sarbanes-Oxley compliance, the implementation of new accounting standards and accounting for non-recurring transactions.
(h)Represents non-recurring expenses related to consulting, restructuring, and other expenses which management believes are not representative of our operating performance.
(i)Represents the tax impacts with respect to each adjustment noted above after taking into account the impact of permanent differences using the statutory tax rate related to the applicable federal and foreign jurisdictions and the blended state tax rate.
Contribution Margin
We define Contribution Margin for a particular period as net sales, less cost of sales, exclusive of depreciation and amortization, divided by net sales. Management uses this key measure to understand and evaluate our financial performance, trends and generate future operating plans, make strategic decisions regarding the allocation of capital, and analyze investments in initiatives that are focused on cultivating new markets for our products and services. We believe Contribution Margin is a useful measurement for analysts, investors, and other interested parties to evaluate companies in our markets as they help identify underlying trends that could otherwise be masked by certain expenses that we do not consider indicative of our ongoing performance.
Contribution Margin has limitations as an analytical tool. This measure is not calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, Contribution Margin may not be comparable to similarly titled metrics of other companies due to differences among the methods of calculation.
The following table presents the calculation of Contribution Margin:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| (in thousands) | |||||||||||
Net sales | $ | 277,434 | $ | 220,468 | |||||||
Cost of sales, exclusive of depreciation and amortization(a) | 172,332 | 128,876 | |||||||||
Net sales less cost of sales, exclusive of depreciation and amortization | $ | 105,102 | $ | 91,592 | |||||||
Contribution Margin | 37.9 | % | 41.5 | % | |||||||
(a)Cost of sales for the three months ended April 1, 2022 and March 26, 2021 excludes depreciation and amortization of $14,889 and $13,712, respectively.
Free Cash Flow
We define Free Cash Flow as net cash (used in) provided by operating activities less capital expenditures (which consist of purchases of property and equipment as well as purchases of information technology, software development and leasehold improvements). We believe it is useful to exclude capital expenditures from our Free Cash Flow in order to
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measure the amount of cash we generate because the timing of such capital investments made may not directly correlate to the underlying financial performance of our business operations. Free Cash Flow is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for financial information prepared in accordance with GAAP. In addition, Free Cash Flow may not be comparable to similarly titled metrics of other companies due to differences among methods of calculation. Free Cash Flow provides useful information to investors and others in understanding and evaluating our ability to generate additional cash from our business in the same manner as our management and board of directors. Free Cash Flow may be affected in the near to medium term by the timing of capital investments (such as purchases of information technology and other equipment and leasehold improvements), fluctuations in our growth and the effect of such fluctuations on working capital and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.
The following table presents a reconciliation of net cash used in operating activities to Free Cash Flow for the periods presented:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| (in thousands) | |||||||||||
Net cash (used in) provided by operating activities | $ | (23,022) | $ | (23,867) | |||||||
Purchases of property and equipment | (3,312) | (2,050) | |||||||||
Free Cash Flow | $ | (26,334) | $ | (25,917) | |||||||
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Basis of Presentation and Key Components of Results of Operations
Net Sales
We generate net sales by selling hardware products to our integrators both with and without embedded software, which are then resold to end consumers, typically in the installation of an audio/video, IT, smart-home, or surveillance-related package. We act both as a principal in selling proprietary products, and as an agent in selling certain third-party products through strategic partnerships with outside suppliers. In addition, we generate a small but growing percentage of our revenue through recurring revenue from subscription services associated with product sales including hosting services, technical support, and access to unspecified software updates and upgrades. Revenue is recognized when the integrator obtains control of the product, which occurs upon shipment, in an amount that reflects the consideration expected to be received in exchange for those products net of estimated discounts, rebates, returns, allowances and any taxes collected and remitted to government authorities. Revenue allocated to subscription services is recognized over time as services are provided. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates and Policies — Revenue Recognition” in the Annual Report.
Cost of sales, exclusive of depreciation and amortization
Cost of sales, exclusive of depreciation and amortization, includes expenses related to production of proprietary finished goods, including raw materials and inbound freight, purchase costs for third-party products produced by strategic partners and sold by Snap One, rebates, inventory reserve adjustments and employee costs related to assembly services. The components of our cost of sales, exclusive of depreciation and amortization may not be comparable to our peers. The changes in our cost of sales, exclusive of depreciation and amortization generally correspond with the changes in net sales and may be impacted by any significant fluctuations in the components of our cost of sales, exclusive of depreciation and amortization.
Selling, general and administrative expenses
Selling, general and administrative costs include payroll and related costs, occupancy costs, costs related to warehousing, distribution, outbound shipping to integrators, credit card processing fees, warranty, purchasing, advertising, research and development, non-income-based taxes, equity-based compensation, acquisition-related expenses, compensation expense for payouts in lieu of TRA participation and other corporate overhead costs. We expect that our selling, general and administrative expenses will increase at a growth rate below net sales growth when adjusted for one-time expenses, in future periods as we continue to grow, and due to additional legal, accounting, insurance and other expenses that we are incurring as a public company, including compliance with the Sarbanes-Oxley Act.
Depreciation and amortization
Depreciation expense is related to investments in property and equipment. Amortization expense consists of amortization of intangible assets originating from our acquisitions. Acquired intangible assets include developed technology, customer relationships, trademarks and trade names. We expect in the future that depreciation and amortization may increase based on acquisition activity, development of our platform and capitalized expenditures.
Interest expense
Interest expense includes interest expense on debt, including term loans and revolving credit facilities (each of which is described in more detail below under “— Liquidity and Capital Resources — Debt Obligations”), as well as the non-cash amortization of deferred financing costs.
Other (expense) income, net
Other (expense) income, net includes interest income, foreign currency remeasurement, TRA liability adjustments and transaction gains and losses.
Income tax expense (benefit)
We are subject to U.S. federal, state and local income taxes as well as foreign income taxes based on enacted tax rates in each jurisdiction, as adjusted for allowable credits and deductions. During the ordinary course of business, there are
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many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due.
Results of Operations
The following table sets forth our results of operations and results of operations data expressed as a percentage of net sales for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | % of Net sales | March 26, 2021 | % of Net sales | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Net Sales | $ | 277,434 | 100.0 | % | $ | 220,468 | 100.0 | % | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | 172,332 | 62.1 | % | 128,876 | 58.5 | % | |||||||||||||||||
| Selling, general and administrative expenses | 86,527 | 31.2 | % | 75,357 | 34.2 | % | |||||||||||||||||
| Depreciation and amortization | 14,889 | 5.4 | % | 13,712 | 6.2 | % | |||||||||||||||||
| Total costs and expenses | 273,748 | 98.7 | % | 217,945 | 98.9 | % | |||||||||||||||||
| Income from operations | 3,686 | 1.3 | % | 2,523 | 1.1 | % | |||||||||||||||||
| Other expenses (income): | |||||||||||||||||||||||
| Interest expense | 6,723 | 2.4 | % | 9,535 | 4.3 | % | |||||||||||||||||
| Other expense (income), net | (420) | (0.2) | % | (213) | (0.1) | % | |||||||||||||||||
| Total other expenses | 6,303 | 2.3 | % | 9,322 | 4.2 | % | |||||||||||||||||
| Loss before income taxes | (2,617) | (0.9) | % | (6,799) | (3.1) | % | |||||||||||||||||
| Income tax benefit | (361) | (0.1) | % | (763) | (0.3) | % | |||||||||||||||||
| Net loss | (2,256) | (0.8) | % | (6,036) | (2.7) | % | |||||||||||||||||
| Net loss attributable to noncontrolling interest | (20) | 0.0 | % | (22) | 0.0 | % | |||||||||||||||||
| Net loss attributable to Company | $ | (2,236) | (0.8) | % | $ | (6,014) | (2.7) | % | |||||||||||||||
Three Months Ended April 1, 2022, Compared to the Three Months Ended March 26, 2021
Net Sales
| Three Months Ended | ||||||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | |||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||
| Net Sales | $ | 277,434 | $ | 220,468 | $ | 56,966 | 25.8 | % | ||||||||||||||||||
Net sales increased by $57.0 million, or 25.8%, in the three months ended April 1, 2022, compared to the three months ended March 26, 2021. Growth was strong across geographies, markets and product categories as we added new integrators and increased spend per integrator. Approximately 5% of net sales growth was attributed to the benefit of ownership of Access Networks and Staub for the full and partial quarter period, respectively. Additionally, we benefited from the continued ramp up of local branches, and the cumulative impact of price increases enacted across our proprietary product portfolio since the first quarter last year. While supply chain challenges represented a headwind in the quarter, we took proactive measures to mitigate and deliver for our integrators.
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Cost of Sales, exclusive of depreciation and amortization
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 172,332 | $ | 128,876 | $ | 43,456 | 33.7 | % | |||||||||||||||
| As a percentage of net sales | 62.1 | % | 58.5 | % | |||||||||||||||||||
Cost of sales, exclusive of depreciation and amortization, increased $43.5 million, or 33.7%, in the three months ended April 1, 2022, compared to the three months ended March 26, 2021, primarily driven by higher sales volumes. As a percentage of net sales, cost of sales, exclusive of depreciation and amortization, increased to 62.1% in the current period from 58.5% in the prior period. The increase in cost of sales, exclusive of depreciation and amortization, as a percentage of net sales was primarily due to growth in third-party product sales outpacing growth of proprietary product sales as we further execute our omni-channel strategy by opening local branches, which typically sell more third-party product than proprietary product. Additionally, supplier costs and inbound freight costs increased due to ongoing supply chain pressures. This increase in cost of sales, exclusive of depreciation and amortization, as a percentage of net sales resulted in a lower Contribution Margin of 37.9% for the three months ended April 1, 2022, compared to 41.5% for the three months ended March 26, 2021.
Selling, General and Administrative (“SG&A”) Expenses
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 86,527 | $ | 75,357 | $ | 11,170 | 14.8 | % | |||||||||||||||
| As a percentage of net sales | 31.2 | % | 34.2 | % | |||||||||||||||||||
Selling, general and administrative expenses increased $11.2 million, or 14.8%, in the three months ended April 1, 2022 compared to the three months ended March 26, 2021. The increase in selling, general, administrative expenses was partially due to an increase in equity-based compensation expense of $4.5 million and increases in certain variable operating expenses (including outbound shipping and credit card processing fees), driven by higher sales volumes. The remaining increase in selling, general and administrative expenses was due to increased costs associated with becoming and operating as a public company, ongoing investments to support strategic growth initiatives and absorbing the costs associated with recently acquired business.
Depreciation and Amortization
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Depreciation and amortization | $ | 14,889 | $ | 13,712 | $ | 1,177 | 8.6 | % | |||||||||||||||
| As a percentage of net sales | 5.4 | % | 6.2 | % | |||||||||||||||||||
Depreciation and amortization expenses increased by $1.2 million, or 8.6%, in the three months ended April 1, 2022 compared to the three months ended March 26, 2021. Amortization expense associated with intangible assets acquired increased between periods due to the acquisitions of Access Networks and Staub. Depreciation expense increased primarily due to the acquisitions of Access Networks and Staub, as well as the opening of new local branches between periods.
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Interest Expense
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Interest expense | $ | 6,723 | $ | 9,535 | $ | (2,812) | (29.5) | % | |||||||||||||||
| As a percentage of net sales | 2.4 | % | 4.3 | % | |||||||||||||||||||
Interest expense decreased by $2.8 million, or 29.5%, in the three months ended April 1, 2022 compared to the three months ended March 26, 2021. The decrease was primarily driven by a lower average outstanding balance on our long-term debt in the first fiscal quarter of 2022 as compared to the first fiscal quarter of 2021.
Other Expense (Income), net
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Other expense (income) | $ | (420) | $ | (213) | $ | (207) | 97.2 | % | |||||||||||||||
| As a percentage of net sales | (0.2) | % | (0.1) | % | |||||||||||||||||||
Other income increased by $0.2 million, or 97.2%, in the three months ended April 1, 2022, compared to the three months ended March 26, 2021 due to foreign currency gains resulting from favorable foreign currency movements, primarily related to the Canadian dollar.
Income Tax Benefit
| Three Months Ended | |||||||||||||||||||||||
| April 1, 2022 | March 26, 2021 | $ Change | % Change | ||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Income tax benefit | $ | (361) | $ | (763) | $ | 402 | (52.7) | % | |||||||||||||||
| As a percentage of net sales | (0.1) | % | (0.3) | % | |||||||||||||||||||
Income tax benefit decreased by $0.4 million, or 52.7%, in the three months ended April 1, 2022 compared to the three months ended March 26, 2021. The effective tax rate for the three months ended April 1, 2022, was a benefit of 13.8% compared to a benefit of 11.3% for the three months ended March 26, 2021. The change in the effective tax rate for the three months ended April 1, 2022, and the difference from the U.S. federal statutory rate of 21%, was primarily the result of allocation of income between jurisdictions, low pretax book income as compared to tax expense and a change in the state deferred rate.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are net cash provided by operating activities and availability under our Credit Agreement. We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. Our expected primary uses on a short-term and long-term basis are for working capital requirements, capital expenditures, geographic or service offering expansion, acquisitions, debt service requirements and other general corporate purposes. Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements (joint design and manufacturing tooling), expenditures related to our distributions centers, and new local branch openings.
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We have historically funded our operations and acquisitions primarily through internally generated cash on hand and our Credit Facilities, except for the acquisition of Control4 which was partially funded by a capital contribution from the Former Parent Entity. Most recently, we completed our IPO of 13.9 million shares of our common stock, and on August 18, 2021, we completed the sale of 1.2 million shares of additional common stock to the underwriters pursuant to their option to purchase additional shares, at an offering price of $18.00 per share. We raised net proceeds of $249.2 million through the IPO, after deducting underwriting discounts and other offering costs of $21.2 million.
Working Capital, Excluding Deferred Revenue
The following table summarizes our cash, cash equivalents, accounts receivable and working capital, which we define as current assets minus current liabilities excluding deferred revenue, for the periods indicated:
| As of | |||||||||||
| April 1, 2022 | December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Cash and cash equivalents | $ | 25,055 | $ | 40,577 | |||||||
Accounts receivable, net | $ | 57,151 | $ | 52,620 | |||||||
Working capital, excluding deferred revenue | $ | 211,652 | $ | 208,433 | |||||||
Our cash and cash equivalents as of April 1, 2022, are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short term, highly liquid investments that reduce the risk of principal loss; therefore, our cash and cash equivalents are held in demand deposit accounts that generate very low returns.
We believe that our existing cash and cash equivalents, together with expected cash flow from operating activities, will be sufficient to fund our operations and capital expenditure requirements for the next 12 months. Beyond the next 12 months, our primary capital requirements primarily consist of required principal and interest payments on long-term debt and lease payments under non-cancelable lease commitments as further described in Notes 8 and 14 to our consolidated financial statements included in our Annual Report. If cash provided by operating activities and borrowings under our Credit Agreement are not sufficient or available to meet our short and long-term capital requirements, then we may consider additional equity or debt financing in the future. There can be no assurance debt or equity financing will be available to us if we need it or, if available, the terms will be satisfactory to us. Our sources of liquidity could be affected by factors described under “Risk Factors” in our Annual Report.
Debt Obligations
On December 8, 2021, we entered into the Credit Agreement with various financial institutions consisting of a $465.0 million aggregate principal amount New Term Loan maturing in seven years and a $100.0 million New Revolving Credit Facility (which includes borrowing capacity available for letters of credit) maturing in five years.
Borrowings under the New Term Loan will bear interest at a rate per annum equal to, at the Company’s option, either (1) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate, (b) the prime rate and (c) the eurocurrency rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; provided that such rate is not lower than a floor of 1.50% or (2) an applicable margin plus a eurocurrency rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs; provided that such rate is not lower than a floor of 0.50%.
Borrowings under the New Revolving Credit Facility will bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid, plus, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate, (b) the prime rate and (c) the eurocurrency rate determined by reference to the cost of funds adjusted for certain additional costs, plus 1.00%; provided such rate is not lower than a floor of 1.00% or (2) a eurocurrency rate determined by reference to the applicable cost of funds for such borrowing adjusted for certain additional costs; provided such rate is not lower than a floor of zero.
The New Term Loan amortizes in fixed equal quarterly installments in an amount equal to 1.0% per annum of the total aggregate principal amount thereof immediately after borrowing, with the balance due at maturity. We may voluntarily prepay loans or reduce commitments under the Credit Agreement, in whole or in part, subject to minimum amounts, with
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prior notice but without premium or penalty (subject to customary exceptions, including prepayments of the New Term Loan in connection with a repricing transaction that is consummated prior to June 8, 2022). We may be required, with certain exceptions, to make mandatory payments under the Credit Agreement using a percentage of our annual excess cash flows or net proceeds from any non-ordinary course asset sales or certain debt issuances, if any.
The Credit Agreement contains various customary affirmative and negative covenants. We were in compliance with such covenants as of April 1, 2022.
In addition, the New Revolving Credit Facility is subject to a first lien secured net leverage ratio of 7.50 to 1.00, tested quarterly commencing with the fiscal quarter ending on or about June 30, 2022, if, and only if, the aggregate principal amount from the revolving facility loans, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of $10.0 million and the stated face amount of letters of credit outstanding on the initial closing date of the Credit Agreement) and swingline loans outstanding and/or issued, as applicable, exceeds 35.0% of the total amount of the New Revolving Credit Facility commitments.
On August 4, 2021, we used a portion of the net proceeds from the IPO to repay a portion of the Incremental Term Loan outstanding under the Old Credit Agreement totaling $215.9 million in principal, plus accrued interest of $1.0 million. We also incurred a charge of $6.6 million related to the write-off of unamortized debt issuance costs.
In connection with the closing of the Credit Agreement, we repaid in full approximately $451.4 million of borrowings, including accrued interest, under the Old Credit Agreement. The term loan and revolving credit facilities and related agreements and documents under the Old Credit Agreement were terminated upon the effectiveness of the Credit Agreement.
As of April 1, 2022, we had $37,000 outstanding under the New Revolving Credit Facility. As of December 31, 2021, we had no borrowings outstanding under the New Revolving Credit Facility. As of April 1, 2022 and December 31, 2021, we had $4,894 of outstanding letters of credit. The amount available under the New Revolving Credit Facility was $58,106 and $95,106 as of April 1, 2022, and December 31, 2021, respectively.
Historical Cash Flows
The following table sets forth our cash flows for the three months ended April 1, 2022 and March 26, 2021:
| Three Months Ended | |||||||||||
| April 1, 2022 | March 26, 2021 | ||||||||||
| (in thousands) | |||||||||||
Net cash used in operating activities | $ | (23,022) | $ | (23,867) | |||||||
Net cash used in investing activities | $ | (29,521) | $ | (2,479) | |||||||
Net cash provided by (used in) financing activities | $ | 37,000 | $ | (2,146) | |||||||
Operating Activities
Net cash used in operating activities was $23.0 million in the three months ended April 1, 2022, as compared to $23.9 million in the three months ended March 26, 2021, a decrease of $0.9 million. The net cash used in operating activities during the three months ended April 1, 2022 was driven primarily by a net increase in cash used for operating assets and liabilities, including an increase in inventory to protect against supply chain uncertainty.
Investing Activities
Net cash used in investing activities was $29.5 million in the three months ended April 1, 2022, as compared to $2.5 million in three months ended March 26, 2021, an increase of $27.0 million. The increase in net cash used in investing activities for the three months ended April 1, 2022, was primarily due to the acquisition of Staub in the current period.
Financing Activities
Net cash provided by financing activities was $37.0 million for the three months ended April 1, 2022, compared to net cash used in financing activities of $2.1 million in the three months ended March 26, 2021, an increase of $39.1 million. The increase in net cash provided by financing activities for the three months ended April 1, 2022, was due to borrowings on our New Revolving Credit Facility to help fund the acquisition of Staub.
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Off-Balance Sheet Arrangements
As of April 1, 2022 and December 31, 2021, we had off-balance sheet arrangements totaling $4.9 million related to our outstanding letters of credit. We have not entered into any other off-balance sheet arrangements, except as disclosed above.
Contractual Obligations
We have contractual obligations comprised of payments of debt and interest, lease commitments, TRA and CVRs.
As of April 1, 2022, we had $37.0 million outstanding under the New Revolving Credit Facility, which we used to fund the Staub acquisition as well as for general corporate expenses.
Except as described herein, as of April 1, 2022, there have been no material changes in our contractual obligations and commitments other than in the ordinary course of business from the contractual obligations and commitments for the year ended December 31, 2021, as previously disclosed in our Annual Report.
Critical Accounting Estimates and Policies
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates and Policies” and our consolidated financial statements and related notes disclosed in our Annual Report for accounting policies and related estimates we believe are the most critical to understanding our consolidated financial statements, financial condition and results of operations and which require complex management judgment and assumptions or involve uncertainties. These critical accounting estimates and policies include revenue recognition; share-based compensation; income taxes; business combinations; inventories, net; goodwill and intangible assets; warranties; and CVRs. Effective January 1, 2022, we changed our approach to lease accounting in conjunction with our adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). There have been no other changes to our critical accounting estimates and policies or their application since the date of our Annual Report.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Emerging Growth Company Status
We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies. These provisions include, but are not limited to:
•not being required to comply with the auditor attestation requirements on the effectiveness of our internal controls over financial reporting;
•reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, proxy statements and registration statements; and
•exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of our IPO occurs (which will be our 2026 fiscal year). However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of nonconvertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. We currently intend to take advantage of this exemption.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates and market concentration risk.
Interest Rate Risk
We are subject to interest rate risk in connection with our Credit Agreement. As of April 1, 2022, we had $465.0 million outstanding under the New Term Loan portion of the Credit Agreement and $37.0 million outstanding under the New Revolving Credit Facility. The term loans and revolver bear interest at variable rates. Each quarter point increase in the variable rates on the amounts outstanding under the Credit Agreement and Revolving Credit Facility as of April 1, 2022 would increase annual cash interest in the aggregate by approximately $1.4 million.
Foreign Currency Exchange Risk
The majority of our net sales and operating expenses are currently denominated in U.S. dollars. An immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies in the foreign jurisdictions in which we operate would not have a material effect on our operating results.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that, as per the Exchange Act, information required to be disclosed by us in the reports that we file or submit under such Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our CEO and CFO.
Previously Reported Material Weakness in Internal Control Over Financial Reporting
As disclosed in the section entitled “Risk Factors” in our Annual Report, we previously identified a material weakness in our internal control over financial reporting. Specifically, we did not design or maintain an effective control environment over certain information technology general controls or information systems and applications that are relevant to the preparation of our consolidated financial statements. We have taken and intend to continue to take steps to remediate the material weakness described above through additional measures that include hiring additional personnel with public company experience, and further evolving our accounting and business processes related to internal controls over financial reporting, including a plan for future system enhancements. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time.
Changes in Internal Control over Financial Reporting
Other than certain controls implemented in connection with adoption of the lease accounting standard (Topic 842), there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) under the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or would be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error. Additionally, controls can be circumvented by individual acts, collusion of two or more people, or by management override. The design of any system of controls is also based in part upon assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate due to changed conditions, or because the degree of compliance with policies or procedures may deteriorate. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and go undetected.
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Part II - Other Information
Item 1. Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of our business. Management believes that we do not have any pending or threatened litigation which, individually or in the aggregate, would have a material adverse effect on our business, results of operations, financial condition or cash flows.
For additional information, see Note 15 of the Notes to the Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
On January 20, 2022, in connection with our acquisition of Staub, we agreed to issue 0.07 million shares of common stock to an entity controlled by one of the former owners of Staub (the “Staub Transaction Equity”). The Staub Transaction equity will be issued in three equal tranches over the next three years.
The foregoing transaction did not involve any underwriters or any public offering. The issuance of the above securities was made in reliance on Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as a transaction by an issuer not involving any public offering.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Disaggregation of revenue
The information presented below is disclosed to supplement the retrospective presentation of our disaggregated revenue for the fiscal years ended December 31, 2021, December 25, 2020 and December 27, 2019, giving effect to the reclassifications mentioned below. Such reclassifications were made to conform to the current period presentation in the Disaggregation of Revenue disclosure included in Note 4 “Revenue and Geographic information” included in Item 1 of this Form 10-Q.
Disaggregation of revenues now includes United States other, a new revenue disaggregation beginning in the first quarter of 2022. Prior period revenues attributable to customers with whom the Company transacted domestically through recently acquired businesses and non-integrator channels, were reclassified from United States integrators to United States other. This reclassification did not affect total revenues. The table below presents the results as if the change had been in effect for the periods presented.
| For the Fiscal Years Ended | |||||||||||||||||
| December 31, 2021 | December 25, 2020 | December 27, 2019 | |||||||||||||||
| (in thousands) | |||||||||||||||||
United States integrators(a) | $ | 829,845 | $ | 684,980 | $ | 486,327 | |||||||||||
United States other(b) | 59,155 | 34,449 | 42,307 | ||||||||||||||
International(c) | 119,013 | 94,684 | 62,208 | ||||||||||||||
Total | $ | 1,008,013 | $ | 814,113 | $ | 590,842 | |||||||||||
(a)United States integrators is defined as professional “do-it-for-me” integrator customers who transact with Snap One through a traditional integrator channel and excludes the impact of recently acquired businesses domestically.
(b)United States other is defined as recently acquired entities and revenue generated through managed transactions with non-integrator customers, such as national accounts.
(c)International consists of all integrators and distributors who transact with Snap One outside of the United States.
Share repurchase program
On May 12, 2022 the Company announced that its board of directors authorized a $25 million share repurchase program. Under the share repurchase program, Snap One may purchase shares of common stock on a discretionary basis from time to time through open market repurchases, privately negotiated transactions or other means, including through Rule 10b5-1 trading plans or through the use of other techniques such as accelerated share repurchases. The timing and number of shares repurchased will depend on a variety of factors, including stock price, trading volume, and general business and market conditions. The repurchase program expires at the end of 2023, does not obligate the Company to acquire a specified number of shares and may be modified, suspended or discontinued at any time at the board of directors discretion.
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Item 6. Exhibits
Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101 | The following financial information from Snap One Holdings Corp.’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2022 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Changes in Stockholders Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
** Furnished herewith. The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Snap One Holdings Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Snap One Holdings Corp. | ||||||||
| May 13, 2022 | By: | /s/ John Heyman | ||||||
| Name: John Heyman | ||||||||
| Title: Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| May 13, 2022 | By: | /s/ Michael Carlet | ||||||
| Name: Michael Carlet | ||||||||
| Title: Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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