Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.97M
2: EX-10.2 Material Contract HTML 49K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
12: R1 Cover HTML 81K
13: R2 Condensed Consolidated Balance Sheets HTML 156K
14: R3 Condensed Consolidated Balance Sheets HTML 43K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 107K
16: R5 Condensed Consolidated Statements of Comprehensive HTML 54K
(Loss) Income
17: R6 Condensed Consolidated Statements of Stockholders? HTML 111K
Equity
18: R7 Condensed Consolidated Statements of Cash Flows HTML 127K
19: R8 Organization and Description of Business HTML 30K
20: R9 Significant Accounting Policies HTML 41K
21: R10 Acquisitions HTML 87K
22: R11 Revenue and Geographic Information HTML 82K
23: R12 Inventories, Net HTML 35K
24: R13 Goodwill and Other Intangible Assets, Net HTML 59K
25: R14 Debt Agreements HTML 60K
26: R15 Fair Value Measurement HTML 53K
27: R16 Accrued Liabilities HTML 41K
28: R17 Warranties HTML 34K
29: R18 Retirement Plan HTML 32K
30: R19 Equity Agreements and Incentive Equity Plans HTML 125K
31: R20 Income Taxes HTML 31K
32: R21 Tax Receivable Agreement HTML 32K
33: R22 Commitment and Contingencies HTML 29K
34: R23 Leases HTML 57K
35: R24 Stockholders' Equity HTML 41K
36: R25 Loss Per Share HTML 54K
37: R26 Related Parties HTML 30K
38: R27 Subsequent Events HTML 30K
39: R28 Significant Accounting Policies (Policies) HTML 48K
40: R29 Acquisitions (Tables) HTML 75K
41: R30 Revenue and Geographic Information (Tables) HTML 82K
42: R31 Inventories, Net (Tables) HTML 36K
43: R32 Goodwill and Other Intangible Assets, Net (Tables) HTML 87K
44: R33 Debt Agreements (Tables) HTML 50K
45: R34 Fair Value Measurement (Tables) HTML 52K
46: R35 Accrued Liabilities (Tables) HTML 41K
47: R36 Warranties (Tables) HTML 34K
48: R37 Equity Agreements and Incentive Equity Plans HTML 119K
(Tables)
49: R38 Leases (Tables) HTML 58K
50: R39 Stockholders' Equity (Tables) HTML 33K
51: R40 Loss Per Share (Tables) HTML 55K
52: R41 Organization and Description of Business (Details) HTML 41K
53: R42 Significant Accounting Policies (Details) HTML 33K
54: R43 Acquisitions - Narrative (Details) HTML 60K
55: R44 Acquisitions - Preliminary Purchase Price HTML 99K
(Details)
56: R45 Acquisitions - Acquired Intangible Assets HTML 50K
(Details)
57: R46 Revenue and Geographic Information - Changes in HTML 36K
Deferred Revenue (Details)
58: R47 Revenue and Geographic Information - Narrative HTML 31K
(Details)
59: R48 Revenue and Geographic Information - HTML 48K
Disaggregation of Revenue (Details)
60: R49 Revenue and Geographic Information - Accounts HTML 33K
Receivable (Details)
61: R50 Inventories, Net (Details) HTML 36K
62: R51 Goodwill and Other Intangible Assets, Net - HTML 40K
Narrative (Details)
63: R52 Goodwill and Other Intangible Assets, Net - HTML 61K
Schedule of Intangible Assets (Details)
64: R53 Goodwill and Other Intangible Assets, Net - HTML 41K
Estimated Amortization Expense (Details)
65: R54 Debt Agreements - Narrative (Details) HTML 98K
66: R55 Debt Agreements - Schedule of Debt (Details) HTML 34K
67: R56 Debt Agreements - Schedule of Maturities of HTML 62K
Long-term Debt (Details)
68: R57 Debt Agreements - Schedule of Future Amortization HTML 39K
of Debt Issuance Cost (Details)
69: R58 Fair Value Measurement - Fair Value of Financial HTML 38K
Instruments (Details)
70: R59 Fair Value Measurement - Narrative (Details) HTML 38K
71: R60 Fair Value Measurement - Level 3 Measurement HTML 39K
Valuation (Details)
72: R61 Fair Value Measurement - CRV Reconciliation HTML 31K
(Details)
73: R62 Accrued Liabilities (Details) HTML 52K
74: R63 Warranties - Schedule of Product Warranty HTML 33K
Liability (Details)
75: R64 Warranties - Narrative (Details) HTML 30K
76: R65 Retirement Plan (Details) HTML 38K
77: R66 Equity Agreements and Incentive Equity Plans - HTML 91K
Narrative (Details)
78: R67 Equity Agreements and Incentive Equity Plans - HTML 72K
Summary of Restricted Stock Awards, RSUs, and PSUs
(Details)
79: R68 Equity Agreements and Incentive Equity Plans - HTML 77K
Summary of Option Activity (Details)
80: R69 Equity Agreements and Incentive Equity Plans - HTML 58K
Stock Compensation Expense (Details)
81: R70 Income Taxes (Details) HTML 32K
82: R71 Tax Receivable Agreement (Details) HTML 48K
83: R72 Leases - Narrative (Details) HTML 38K
84: R73 Leases - Components of Lease Costs (Details) HTML 34K
85: R74 Leases - Supplemental Cash Flow Information and HTML 32K
Non-cash Activity (Details)
86: R75 Leases - Weighted Average Remaining Lease Term and HTML 30K
Discount Rate (Details)
87: R76 Leases - Schedule of Future Minimum Lease Payments HTML 46K
(Details)
88: R77 Leases - Schedule of Future Minimum Rental HTML 43K
Payments for Operating Leases (Details)
89: R78 Stockholders' Equity - Narrative (Details) HTML 56K
90: R79 Stockholders' Equity - Share Repurchase Activity HTML 33K
(Details)
91: R80 Loss Per Share - Schedule of Loss Per Share HTML 56K
(Details)
92: R81 Loss Per Share - Schedule of Antidilutive HTML 45K
Securities Excluded from Computation of Net Income
(Loss) Per Share (Details)
93: R82 Related Parties (Details) HTML 36K
94: R83 Subsequent Events (Details) HTML 41K
97: XML IDEA XML File -- Filing Summary XML 179K
95: XML XBRL Instance -- snpo-20220930_htm XML 2.27M
96: EXCEL IDEA Workbook of Financial Reports XLSX 167K
8: EX-101.CAL XBRL Calculations -- snpo-20220930_cal XML 261K
9: EX-101.DEF XBRL Definitions -- snpo-20220930_def XML 611K
10: EX-101.LAB XBRL Labels -- snpo-20220930_lab XML 1.79M
11: EX-101.PRE XBRL Presentations -- snpo-20220930_pre XML 1.09M
7: EX-101.SCH XBRL Schema -- snpo-20220930 XSD 183K
98: JSON XBRL Instance as JSON Data -- MetaLinks 467± 705K
99: ZIP XBRL Zipped Folder -- 0001856430-22-000066-xbrl Zip 456K
(Exact name of registrant as specified in its charter)
iDelaware
(State or other jurisdiction of incorporation or organization)
i1800
Continental Boulevard, iSuite 200
iCharlotte, iNorth
Carolina
(Address of principal executive offices)
i82-1952221
(I.R.S. Employer Identification No.)
i28273
(Zip
Code)
(i704) i927-7620
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
iCommon stock, par value $.01 per share
iSNPO
iThe
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. iYes ☒ 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). iYes ☒ 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
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☒
Emerging growth company
i☒
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. i☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes i☐ No ☒
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
3
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.
Tax receivable agreement liability, net of current portion
i102,302
i112,406
Other
liabilities
i21,706
i30,103
Total
liabilities
i908,891
i792,106
Commitments
and contingencies (Note 15)
i
i
Stockholders’ equity:
Common
stock, $ii0.01/ par value, ii500,000/
shares authorized; ii74,668/ shares issued and outstanding
as of September 30, 2022 and ii74,427/
shares issued and outstanding at December 31, 2021
i747
i744
Preferred
stock, $ii0.01/ par value; ii50,000/
shares authorized, iiiino///
shares issued and outstanding
i—
i—
Additional
paid-in capital
i842,208
i826,718
Accumulated
deficit
(i83,993)
(i79,420)
Accumulated
other comprehensive loss
(i5,003)
(i28)
Company’s
stockholders’ equity
i753,959
i748,014
Noncontrolling
interest
i216
i261
Total stockholders’ equity
i754,175
i748,275
Total
liabilities and stockholders’ equity
$
i1,663,066
$
i1,540,381
See
accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
1.iOrganization
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 i13,850
shares of its common stock, and on August 18, 2021, completed the sale of i1,171 shares of additional common stock to the underwriters pursuant to their option to purchase additional shares, at an offering price of $i18.00
per share. The Company raised net proceeds of $i249,154 through the IPO, after deducting underwriting discounts and other offering costs of $i21,219.
During the three months and nine months ended September 24, 2021, the Company expensed $i1,648 and $i4,569
of IPO-related costs. There were iino/ expenses related to the
IPO during the three months and nine months ended September 30, 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.iSignificant
Accounting Policies
i
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”). There have been no changes to the Company’s critical accounting estimates and policies or application since the date of
the Annual Report except as discussed below.
iThe 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 September 30, 2022 and September 24, 2021 were 13-week periods, and the nine months ended September 30, 2022 and September 24,
2021 were 39-week periods.
iUse 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.
iRecent
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
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
requirements to contracts affected by reference rate reform. In January 2021, 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. The provisions of these updates are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. The Company’s exposure related to the expected cessation of LIBOR is limited to the interest expense and certain fees it incurs on balances outstanding under its credit facilities. The Company does not expect that there will be a material impact to its financial statements as a result of adopting these ASUs.
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 does not expect the adoption of this update to have a material impact to its financial statements.
In September 2022, the FASB issued ASU 2022-04, Liabilities- Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which requires buyers in a supplier finance program to disclose information related to the key terms of the program and the obligations the buyer has confirmed as valid to the finance provider
or intermediary. The buyers are required to disclose obligations outstanding in interim reporting periods. The amendment in this update is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company does not expect the adoption of this update to have a material impact to its financial statements.
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 $i40,906 and $i43,862
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.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
3. iAcquisitions
All
of the Company’s acquisitions have been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired companies, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the condensed consolidated financial statements from their respective dates of acquisition.
The Company records purchase price in excess of amounts allocated to identifiable assets and liabilities as goodwill. Goodwill includes, but is not limited to, the value of the workforce in place, ability to generate profits and cash flows, and an established going concern.
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.
Technology has been valued using the multi-period excess earnings method, a derivative of the income approach. The net earnings attributed to the existing technology considers items such as projected research and development costs expected to be incurred to maintain the technology.
Estimated useful life was determined based on the length and trend of projected cash flows after considering items such as the projected research and development expected to be incurred to maintain the technology.
Clare Controls, LLC. — On August 8, 2022, the Company entered into a purchase agreement pursuant to which it acquired the assets and specific liabilities of Clare Controls, LLC. (“Clare”), a provider of home automation and security products for whom Snap One has been a distributor since 2019. The Clare acquisition enables Snap One to convert Clare’s product suite into higher-margin proprietary products and drive growth with professional integrators in adjacent markets. The
Company agreed to a purchase price of $i6,300, consisting of $i4,900 cash paid and $i1,400
related to the settlement of the pre-existing note receivable from Clare owed to the Company.
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 Company allocated any excess purchase price over the fair value
of the net tangible and intangible assets acquired and liabilities assumed to goodwill.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
i
The
preliminary allocation of the purchase price for the Clare acquisition is as follows:
Total purchase consideration
$
i6,300
Prepaid
expenses
$
i263
Property and equipment, net
i26
Operating
lease right-of-use assets
i160
Identifiable intangible assets
i4,300
Total
identifiable assets acquired
i4,749
Accounts payable
i533
Accrued
liabilities
i284
Current operating lease liability
i43
Operating
lease liability, net of current portion
i117
Other liabilities
i183
Total
liabilities assumed
i1,160
Net identifiable assets acquired
i3,589
Goodwill
i2,711
Net
assets acquired
$
i6,300
/
i
The
Company recorded intangible assets related to the Clare acquisition based on estimated fair value, which consisted of the following:
Useful Lives (Years)
Acquired Value
Technology
i4
$
i3,400
Trade
name
i6
i900
Total
intangible assets
$
i4,300
/
The
Company recognized $i303 of transaction-related expenses, consisting primarily of advisory, legal, and other professional fees related to the Clare 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 Clare acquisition has not been provided as it is not material to the Company’s consolidated results of operations. The results of operations of the Clare acquisition are included in the Company’s consolidated results of operations from the date of acquisition and were not significant for the three months and nine months ended September 30, 2022.
Staub Electronics, LTD. — On January 20, 2022, the Company, through its wholly owned subsidiary, Snap One Acquisition Corp., entered
into a purchase agreement pursuant to which it acquired the issued and outstanding shares of Staub Electronics, LTD. (“Staub”), a long-time Canadian distribution partner. The Staub acquisition adds two Canadian locations to the Company’s distribution footprint. The Company agreed to a purchase price of $i26,395.
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. During the measurement period, certain adjustments were recorded to increase goodwill to $i9,438 to account for updated working capital
calculations. The Company allocated any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
The allocation of the purchase price for the Staub acquisition is as follows:
Total
purchase consideration
$
i26,395
Cash and cash equivalents
$
i756
Accounts
receivable
i1,801
Inventory
i5,472
Prepaid
expenses
i1,616
Property and equipment
i451
Operating
lease right-of-use assets
i2,309
Identifiable intangible assets
i14,209
Total
identifiable assets acquired
i26,614
Accounts payable
i1,570
Accrued
liabilities
i2,206
Current operating lease liability
i343
Deferred
income tax liabilities
i3,585
Operating lease liability, net of current portion
i1,953
Total
liabilities assumed
i9,657
Net identifiable assets acquired
i16,957
Goodwill
i9,438
Net
assets acquired
$
i26,395
The Company recorded intangible assets related to the Staub acquisition based on estimated fair value, which consisted of the
following:
Useful Lives (Years)
Acquired Value
Customer relationships
i10
$
i12,684
Trade
name
i6
i1,525
Total
intangible assets
$
i14,209
The Company recognized $i328
of transaction-related expenses, consisting primarily of advisory, legal, and other professional fees related to the Staub 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 and nine months ended September 30, 2022.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
ANLA, LLC — On May 4,
2021, the Company entered into a purchase agreement pursuant to which it 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. The acquisition enhances the Company’s networking solutions for residential and commercial networks. The Company agreed to a purchase price of $i36,641,
consisting of both cash and equity, plus contingent consideration of up to $i2,000 based upon the achievement of specified financial targets. The Access Networks acquisition closed on May 28, 2021.
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. The Company allocated any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. Goodwill arising from the Access Networks acquisition primarily consists of synergies from integrating the distribution of products through the Company’s existing distribution channels.
The Company may be required to pay additional
consideration upon the achievement of a revenue-based earnout. As of the acquisition date, the fair value of the contingent consideration was $i2,000.
The allocation of the purchase price for the Access Networks acquisition is as follows:
Total
purchase consideration
$
i38,641
Cash and cash equivalents
$
i795
Accounts
receivable
i794
Inventory
i2,029
Property
and equipment
i77
Identifiable intangible assets
i17,700
Total
identifiable assets acquired
i21,395
Accounts payable
i1,266
Accrued
liabilities
i1,218
Other liabilities
i586
Deferred
income tax liabilities
i710
Total liabilities assumed
i3,780
Net
identifiable assets acquired
i17,615
Goodwill
i21,026
Net
assets acquired
$
i38,641
For income tax purposes, a carryover basis in goodwill of $i13,616
will be deductible in future periods.
The Company recorded intangible assets related to the Access Networks acquisition based on estimated fair value, which consisted of the following:
Useful Lives (Years)
Acquired Value
Customer relationships
i10
$
i14,400
Trade
name
i6
i3,300
Total
intangible assets
$
i17,700
Other liabilities assumed consisted primarily of warranty reserves and deferred revenue. The long-term warranty reserves are primarily based on historical failure rates, costs to repair or replace the product, and any necessary shipping costs, which
are considered to approximate the fair value of the remaining obligation. Deferred revenue was recorded at fair value, resulting in a cumulative balance for the Access Networks acquisition of $i883 in accrued liabilities and $i586
in other liabilities.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
The Company recognized $i197
of transaction-related expenses, consisting primarily of advisory, legal, and other professional fees related to the Access Networks 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 Access Networks acquisition has not been provided as it is not material to the Company’s consolidated results of operations. The results of operations of the Access Networks acquisition are included in the Company’s consolidated results
of operations from the date of acquisition and were not significant for the three months and nine months ended September 24, 2021.
4.iRevenue 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. iThe following table represents the changes in deferred revenue for the nine months ended September 30, 2022 and September 24,
2021:
The
Company recorded deferred revenue of $i22,121 in accrued liabilities and $i12,650 in other liabilities as of September 30,
2022. The Company recorded deferred revenue of $i20,944 in accrued liabilities and $i12,441
in other liabilities as of December 31, 2021.
Disaggregation of Revenue — iThe following table sets forth revenue by geography between the United States and all geographies outside of the United States for the three months and nine months ended September 30, 2022 and September 24, 2021:
(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, specifically Access Networks.
(b)United States other is defined as recently acquired entities, specifically Access Networks, 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.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
The following table sets forth revenue by product type between proprietary products and third-party products for the three months and nine months ended September 30, 2022 and September 24, 2021:
(a)Proprietary
products consist of products and services internally developed by Snap One and sold under one of Snap One’s proprietary brands.
(b)Third-party products consist of products that Snap One distributes but to which Snap One 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 and nine months ended September 30, 2022 and September 24, 2021:
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
6.iGoodwill and Other Intangible Assets, Net
Goodwill as of September 30,
2022 and December 31, 2021, was $i592,910 and $i580,761, respectively. Goodwill increased by $i12,149
in 2022 due to the acquisitions of Staub and Clare. During the year ended December 31, 2021, goodwill increased by $i21,026 due to the acquisition of Access Networks. See Note 3 for more information regarding Staub, Clare and Access Networks.
Total
amortization expense for intangible assets for the three months ended September 30, 2022, and September 24, 2021, was $i12,536 and $i12,293,
respectively. Total amortization expense for intangible assets for the nine months ended September 30, 2022 and September 24, 2021 was $i37,794 and $i36,260,
respectively. The weighted-average useful life remaining for amortizing definite lived intangible assets was approximately i14.6 years as of September 30, 2022.
i
As
of September 30, 2022, the estimated amortization expense for intangible assets for the next five fiscal years and thereafter are as follows:
Remainder of 2022
$
i12,467
2023
i49,705
2024
i43,204
2025
i35,588
2026
i35,233
2027
and thereafter
i315,146
Total
$
i491,343
/
7.iDebt
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
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Revolving Credit Facility. On August 1, 2019, the Borrower amended the Old Credit Agreement to borrow an additional senior secured term loan (“Old 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 i1.00% 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 $i216,902 in aggregate of the amount of the Old Incremental Term Loan outstanding under the Old Credit Agreement. The prepayment consisted of $i215,874
in principal plus accrued interest of $i1,028. In connection with the prepayment, the Company incurred a charge of $i6,645
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 condensed 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 $i465,000
in aggregate principal amount of senior secured term loans maturing in iseven years (the “New Term Loan”) and a $i100,000 senior secured revolving credit facility (which includes borrowing capacity available for
letters of credit) maturing in ifive years (the “New Revolving Credit Facility”).
In connection with the closing of the Credit Agreement, the Company repaid in full approximately $i451,400
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) i0.50%
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 i1.00%; provided that such rate is not lower than a floor of i1.50%
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 i0.50%.
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) i0.50% 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 i1.00%;
provided such rate is not lower than a floor of i1.00% 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 September 30, 2022, the weighted-average interest rate of borrowings under the Credit Agreement was i7.32%.
The
New Term Loan amortizes in fixed equal quarterly installments in an amount equal to i1.0% 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).
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
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.
As of September 30, 2022, the future scheduled maturities of the above notes payable are as follows:
Remainder
of 2022
$
i1,162
2023
i4,650
2024
i3,488
2025
i4,650
2026
i61,650
2027
i5,813
Thereafter
i438,262
Total
future maturities of debt
i519,675
Unamortized debt issuance costs
(i12,374)
Total
indebtedness
i507,301
Less: Current maturities of long-term debt
i4,650
Long-term
debt and revolving credit facility
$
i502,651
/
Unamortized costs related to the issuance of the New Term Loan were $i11,097
and $i12,256 as of September 30, 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 $i1,277
as of September 30, 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 $i1,506 and were included in other assets. The costs related to debt issuances are amortized to interest expense over the life of the related debt. iAs
of September 30, 2022, the future amortization of debt issuance costs was as follows:
Remainder of 2022
$
i470
2023
i1,925
2024
i1,993
2025
i2,066
2026
i2,123
2027
i1,918
Thereafter
i1,879
Total
$
i12,374
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 September 30, 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.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
8.iFair Value Measurement
Fair Value of Financial Instruments — iThe
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:
The
fair values 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 and other current 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.
Notes Receivable — During the three months ended September 30, 2022, the Company acquired Clare, which had an outstanding unsecured loan with the Company. The Company recorded a provision for credit loss of $i5,872
on the unsecured loan from Clare during the three months ended July 1, 2022. At the acquisition date, the Company settled the notes receivable for $i1,400 as part of the transaction. See Note 3 for more information regarding the Clare acquisition.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis — 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.
The
fair value of the contingent consideration liability related to the Access Networks acquisition was based on unobservable inputs, including management estimates and assumptions about future revenues, and is, therefore, classified as Level 3. The fair value of the contingent consideration was $i2,000 as of September 30, 2022 and recorded in other current liabilities in the accompanying condensed consolidated balance sheet.
As
of September 30, 2022, the Company has recorded accrued warranty liabilities of $i11,870 in accrued liabilities and $i4,316
in other liabilities in the accompanying condensed consolidated balance sheet. As of December 31, 2021, the Company has recorded accrued warranty liabilities of $i14,549 in accrued liabilities and $i4,223
in other liabilities.
11.iRetirement Plan
The Company has a 401(k) plan that covers eligible
employees as defined by the plan agreement. The Company matches i100% of employee contributions to the plan, up to i3%
of the employees’ total compensation, and i50% of employee contributions to the plan, up to i6%
of the employees’ total compensation. Company contributions to the plan, net of forfeitures, were $i1,161 and $i1,087
for the three months ended September 30, 2022, and September 24, 2021, respectively. Company contributions to the plan, net of forfeitures, were $i3,984 and $i3,176
for the nine months ended September 30, 2022 and September 24, 2021, respectively.
12.iEquity 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 ifive-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. Prior to the modification of the Incentive Units in connection with the Company’s IPO on July 27, 2021, the Company recognized $i367
and $i2,605 of compensation expense related to the Incentive Units within selling, general and administrative expenses in the
Notes to the Unaudited Condensed Consolidated
Financial Statements
(in thousands, except per share amounts)
accompanying condensed consolidated statements of operations during the three months and nine months ended September 24, 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 2021 Plan include non-qualified and incentive stock options, restricted shares of our common stock, and 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 $i18.00
per share, based on the initial listing price of the Company’s common stock on the grant date.
i
The summary of the Company’s restricted stock awards activity is as follows:
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.
(a)
The intrinsic value represents the amount by which the fair value of the Company’s stock exceeds the option exercise price as of September 30, 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 one to ifour
years. The fair value of RSUs is based on the Company’s closing stock price on the date of grant.
i
The summary of the Company’s RSU activity is as follows:
Performance
Stock Units — During the nine months ended September 30, 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 ithree-year
service period. Total units earned for grants may vary between i0% and i200%
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
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
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.
i
The summary of the Company’s PSU activity is as follows:
Other
equity-based compensation — In connection with the Staub acquisition (see Note 3), the Company granted i69 shares of common stock with an aggregate fair value of $i1,208
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 ithree-year service period beginning on the acquisition date. The grant date fair value of the shares was determined to be $i17.42
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. iCompensation
expense for the three months and nine months ended September 30, 2022 and September 24, 2021, and unrecognized stock compensation expense and weighted average remaining expense period as of September 30, 2022 consisted of:
Weighted-Average Remaining Contractual Term (Years)
2017 Plan
Incentive Units
$
i—
$
i367
$
i—
$
i2,605
$
i—
—
2021
Plan
Restricted stock awards
i1,082
i735
i3,390
i735
i5,254
i1.33
Time-based
options
i1,672
i12,278
i5,077
i12,278
i8,891
i1.97
Market-based
options
i645
i418
i1,935
i418
i3,489
i1.35
Restricted
stock units
i1,726
i593
i5,132
i593
i20,714
i3.27
Performance
stock units
i165
i—
i1,864
i—
i3,821
i1.59
Other
equity-based compensation
i100
i—
i279
i—
i929
i2.30
Total
$
i5,390
$
i14,391
$
i17,677
$
i16,629
$
i43,098
i1.99
Employee
Stock Purchase Plan — The Company’s board of directors adopted, and its shareholders approved, the Snap One Holdings Corp. 2022 Employee Stock Purchase Plan (the “ESPP”). The ESPP initially reserves i750 shares for issuance, which is subject to increase on the first day of each fiscal year in an amount equal to the lesser of: (i) the positive difference, if any,
between (x) i1% of the outstanding common stock of the Company on the last day of the immediately preceding fiscal year and (y) the available plan reserve on the last day of the immediately preceding fiscal year and (ii) a lower number of shares of our common stock as determined by the board. The number of shares available for issuance under
the ESPP is subject to adjustment for certain changes in our capitalization. Under the ESPP, shares of common stock
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
may be purchased by eligible participants during defined purchase periods at i85%
of the lesser of the closing price of the Company’s common stock on the first day or last day of each purchase period.
The Company implemented the ESPP with the first purchase period beginning on May 23, 2022 and ending on November 22, 2022. The Company used a Black-Scholes option pricing model to value the common stock purchased as part of the Company's ESPP. The fair value estimated by the option pricing model is affected by the price of the
common stock as well as subjective variables that include assumed interest rates, our expected dividend yield, and our expected share volatility over the term of the award. Fair value inputs for the purchase period in 2022 included assumed risk-free interest rate of i1.6%, expected volatility of i45%,
and expected dividend yield of i0%. Eligible participants contributed $i805
as of September 30, 2022, which is included in accrued liabilities in the accompanying condensed consolidated balance sheet. The Company recorded compensation expense of $i180 and $i260,
which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three months and nine months ended September 30, 2022. Unrecognized compensation expense as of September 30, 2022 associated with the remaining ESPP purchase period through November 22, 2022 was $i108.
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, i2,998 shares of Control4 awards were cancelled and converted
into rights to receive cash payments (“Replacement Awards”).
The Company had no compensation expense related to the Replacement Awards during the three months ended September 30, 2022. The Company recognized $i294 of compensation expense relating to the Replacement Awards
within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations during the nine months ended September 30, 2022. The Company recognized $i890 and $i3,434
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 and nine months ended September 24, 2021.
As of September 30, 2022, all Replacement Awards have vested, and the related expense has been recognized.
13.iIncome
Taxes
The effective income tax rate for the Company was a benefit of i18.9% and i14.2%
for the three months and nine months ended September 30, 2022, as compared to a benefit of i11.3% and i10.6%
for the three months and nine months ended September 24, 2021. The change in the effective tax rate for the three months and nine months ended September 30, 2022, and the difference from the U.S. federal statutory rate of 21%, were primarily the result of allocation of income between jurisdictions, a benefit from R&D tax credits, a change in the state deferred rate and an expense related to vesting of restricted stock units.
Income tax benefit was $i238
and $i762 during the three months and nine months ended September 30, 2022, compared to a benefit of $i2,729 and $i3,373
during the three months and nine months ended September 24, 2021.
14.iTax 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 i85% 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 condensed consolidated statement of operations as a component of other (expense) income, net. The Company will retain the benefit of the remaining i15%
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.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
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, 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. TRA payments are anticipated to be made 125 days after filing the federal tax return. As of September 30, 2022, the Company recognized a total liability of $i112,493,
of which $i10,191 and $i102,302 are recorded within the current and noncurrent tax receivable liability financial statement line items,
respectively. As of December 31, 2021, the Company recognized a total liability of $i112,406, which was recorded within the noncurrent tax receivable liability financial statement line item. For the three months and nine months ended September 30, 2022, the Company recognized measurement
adjustments of $ii86/,
which were recognized in other income on the condensed consolidated statements of operations.
With respect to certain pre-IPO owners that are not TRA Participants, the Company paid $i13,210 with cash on hand for their interests in lieu of their participation in the TRA. Approximately $i2,754
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 $i10,456 of the cash payments were expensed and paid or accrued in conjunction with the closing of the IPO. In total, $i10,925
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. During the three months and nine months ended September 30, 2022, the Company recorded $i279
and $i837 in compensation expense within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations. In total, $ii10,641/
was recorded as compensation expense recorded by the Company for the three months and nine months ended September 24, 2021.
15.iCommitments 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 September 30, 2022 and December 31, 2021, no significant reserves were recorded. 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.iLeases
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.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
The Company’s lease arrangements primarily consist of operating leases for offices, warehouse space, and distribution centers. The leases have remaining lease terms of i1 year to i10
years, some of which include options to extend for up to an additional i5 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.
(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:
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
As of September 30, 2022, the Company has entered into additional lease agreements for office space that have not yet commenced. Aggregate lease payments for these leases total $i4,666
on an undiscounted basis.
i
The future minimum lease payments for operating lease obligations under ASC Topic 840 as of December 31, 2021 were as follows:
2022
$
i13,168
2023
i9,255
2024
i7,558
2025
i6,357
2026
i4,510
Thereafter
i5,460
Total
future minimum lease payments
$
i46,308
/
Under ASC 840, Leases, total rental expense for the three months and nine months
ended September 24, 2021 was $i3,057 and $i8,956.
17.iStockholders’
Equity
Holders of voting common stock are entitled to ione vote per share and to receive dividends. The Company had noncontrolling interests of $i216
and $i261 as of September 30, 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 iino/
cash contributions by minority partners for the three months and nine months ended September 30, 2022 or September 24, 2021.
In July 2021, the Company amended its Amended and Restated Certificate of Incorporation which, among other things, effected a i150-for-1
stock split of its shares of common stock, increased the par value of its common stock from $i0.001 to $i0.01 per share, increased the authorized number of shares of its common stock to i500,000
and authorized i50,000 shares of preferred stock. There was iino/
preferred stock outstanding as of September 30, 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.
Share Repurchase Program — On May 12, 2022, the Company announced that its board of directors authorized a $i25,000
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.
i
Share
repurchase activity consists of the following:
We
have elected to retire shares repurchased to date. Shares retired become part of the pool of authorized but unissued shares. The purchase price of the retired shares in excess of par value, including transaction costs, are recorded as a
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
decrease to additional paid-in capital. As of September 30, 2022, $i34
of share repurchases were included in accrued liabilities in our condensed consolidated balance sheets, as these repurchase transactions had not yet settled.
18.iLoss 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. The Company was in a loss position during the three months and nine months ended September 30, 2022 and September 24, 2021, respectively. iThe following table presents the calculations of basic and diluted loss per share for the three months and nine months ended September 30,
2022 and September 24, 2021:
Weighted-average
shares outstanding - basic and diluted
iiii74,650///
iiii68,672///
ii74,567/
ii62,369/
Loss
per share - basic and diluted
$
(ii0.01/)
$
(ii0.31/)
$
(ii0.06/)
$
(ii0.46/)
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. iThe following potentially dilutive shares were excluded from the computation of
diluted net income (loss) per share attributable to common stockholders:
The Company’s controlling shareholder, Hellman & Friedman, LLC (“H&F”), owns an insurance brokerage vendor used by the Company. For the three months and nine months ended September 30, 2022, the Company incurred $i171
and $i1,107 of expenses, respectively, related to this vendor. For the three months and nine months ended September 24, 2021, the Company incurred $ii298/
expenses related to this vendor. Additionally, 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 ended September 30, 2022 and September 24, 2021, the Company incurred $i76
and $i133 of expenses, respectively, related to this vendor. For the nine months ended September 30, 2022 and September 24, 2021, the Company incurred $i242
and $i418 of expenses, respectively, related to this vendor. 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 September 30, 2022
and September 24, 2021, respectively.
20.iSubsequent Events
On October 2, 2022, the Company entered into an Incremental
Agreement (the “Incremental Agreement”) with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent (the “Administrative Agent”) to provide incremental term loans in an aggregate principal amount of $i55,000. The Incremental Agreement amended the
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Credit Agreement, dated as of December 8, 2021, among the Company, the lenders party thereto from time to time, the Administrative Agent and the other parties party thereto (as amended by the Incremental Agreement, the “Amended Credit Agreement”). The Company used the proceeds from the Amended Credit Agreement to pay down the existing revolver balance, further increasing its liquidity and allowing for additional flexibility to invest in organic or inorganic growth or use for general corporate purposes. The term
loans issued under the Incremental Agreement will mature on the third anniversary of the funding date.
On October 24, 2022, the Company announced the acquisition of the remaining outstanding interests of its majority-owned subsidiary, Remote Maintenance Systems LP, doing business as Parasol (“Parasol”), the provider of 24/7 remote support service based on OvrC, creating new opportunities for Snap One integrators. The Parasol acquisition builds on the Company’s strategic investment in Parasol announced last year.
On October 26, 2022,
the Company entered into an interest rate cap agreement, on the LIBOR component of interest, with Bank of America as the counterparty. The interest rate cap is effective December 31, 2022. The Company will pay a premium of $i6,573 at the maturity date of December 31, 2025. The notional amount of the interest
rate cap is $i350,000 and has a strike rate of i5.00%, which effectively caps the LIBOR rate on $i350,000
of the floating rate debt at i5.00%.
32
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 September 30, 2022 and September 24, 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 August 8, 2022, we acquired Clare Controls, LLC (“Clare”), a provider of home automation and security products for whom Snap One has been the distributor since 2019. The Clare acquisition will enable Snap One to convert Clare’s product suite into higher-margin proprietary products, and drive growth with professional integrators in adjacent markets.
On October 2, 2022, we entered into an Incremental Agreement (the “Incremental Agreement”) with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent (the “Administrative Agent”) that provides for incremental term loans in an aggregate principal of $55.0 million. The Incremental Agreement amended
the Credit Agreement, dated as of December 8, 2021, among the Company, the lenders party thereto from time to time, the Administrative Agent and the other parties party thereto (as amended by the Incremental Agreement, the “Amended Credit Agreement”). We used the proceeds from the Amended Credit Agreement to pay down our existing revolver balance, further increasing our liquidity and allowing for additional flexibility to invest in organic or inorganic growth, or use for general corporate purposes.
On October 24, 2022, we announced the acquisition of Remote Maintenance Systems LP, doing business as Parasol (“Parasol”), a powerful 24/7 remote support service based on OvrC, creating new opportunities
for Snap One integrators to focus on running their business while increasing profitability, productivity and service levels to their customers. The acquisition builds on Snap One’s strategic investment in Parasol announced last year and affirms its commitment to supporting integrators across the entire project lifecycle.
33
On October 26, 2022, we entered into an interest rate cap agreement, on the LIBOR component of interest, with Bank of America as the counterparty. The interest rate cap is effective December 31, 2022. We will pay a premium of $6.6 million at the maturity date of December
31, 2025. The notional amount of the interest rate cap is $350.0 million and has a strike rate of 5.00%, which effectively caps the LIBOR rate on $350.0 million of our floating rate debt at 5.00%.
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.
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 33 domestic local branches, two Canadian local branches, and seven distribution centers as of September 30, 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 Access Networks, Staub, Clare and Parasol 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.
COVID-19 and Other Macroeconomic Factors
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
34
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 COVID-19 and the lingering effects of 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.
In February 2022, Russian military forces launched
a military action in Ukraine and sustained conflict and disruption in the region is likely. Although the length, impact and outcome of the ongoing military action is highly unpredictable, this conflict could lead to significant market and other disruptions, including volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in government agency budgets and funding preferences as well as increases in cyberattacks and cyber and corporate espionage. To date we have not experienced any material interruptions in our infrastructure, supplies, technology systems or networks needed to support our operations. We are actively monitoring the situation and potential impacts on the Company.
35
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:
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:
(a)Domestic integrator, or as it is defined in Note 4 of the Notes to the Unaudited 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, specifically Access Networks.
Adjusted EBITDA and Adjusted Net Income
We define Adjusted EBITDA as net loss, plus interest expense, income tax benefit, depreciation and amortization, other expense (income), net, 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.
36
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.
The following table presents a reconciliation of net loss to Adjusted EBITDA for the periods presented:
Fair value adjustment to contingent value rights(e)
(125)
(1,640)
(6,200)
1,200
Deferred
acquisition payments(f)
(23)
1,568
1,007
5,148
Provision for credit losses on notes receivable(g)
—
—
5,872
—
Initial
public offering costs(h)
—
1,648
—
4,569
Other professional services costs(i)
610
—
1,823
—
Other(j)
976
830
1,028
2,587
Income
tax effect of adjustments(k)
(4,619)
(8,761)
(14,492)
(16,406)
Adjusted Net Income
$
14,889
$
16,731
$
42,106
$
39,631
(a)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.
(b)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.
(c)Represents costs associated with the development, implementation, and transition to enterprise resource planning systems, customer resource management systems, and business intelligence systems. We believe these costs are discrete and non-ordinary course expenses
incurred in the initiative to modernize our IT infrastructure, and therefore are not representative of the day-to-day operating performance of our business.
(d)Represents an adjustment related to the fair value of deferred revenue related to the Control4 acquisition.
(e)Represents noncash gains and losses recorded from fair value adjustments related to contingent value right (“CVR”) liabilities. Fair value adjustments related to CVR liabilities represent potential obligations to the prior sellers in conjunction with the acquisition of the Company by investment funds managed by Hellman & Friedman, LLC (“H&F”) 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.
(f)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.
38
(g)Represents
provision for credit losses on notes receivable related to the Company’s unsecured loan to Clare.
(h)Represents expenses related to professional fees in connection with preparation for our IPO.
(i)Represents professional service fees associated with the preparation for Sarbanes-Oxley compliance, the implementation of new accounting standards and accounting for non-recurring transactions.
(j)Represents non-recurring expenses related to consulting, restructuring, and other expenses which management believes are not representative of our operating performance.
(k)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:
Cost
of sales, exclusive of depreciation and amortization(a)
167,435
151,281
520,162
432,297
Net sales less cost of sales, exclusive of depreciation and amortization
$
113,799
$
109,465
$
335,411
$
302,222
Contribution
Margin
40.5
%
42.0
%
39.2
%
41.1
%
(a)Cost of sales for the three months ended September 30, 2022 and September 24, 2021, excludes depreciation and amortization of $14,812 and $14,287, respectively. Cost of sales for the nine months ended September 30,
2022 and September 24, 2021, excludes depreciation and amortization of $44,667 and $42,197, 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 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
39
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:
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 the Tax Receivable Agreement (“TRA”) participation, provision for credit losses 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.
40
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 and transaction gains and losses, TRA liability adjustments and costs related to the write-off of unamortized debt issuance costs.
Income Tax (Benefit) Expense
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 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.
Net
sales increased by $20.5 million, or 7.9%, in the three months ended September 30, 2022, compared to the three months ended September 24, 2021. Approximately 6.1% of net sales growth was driven by organic growth, including the continued ramp of local branches opened in the past year, the cumulative impact of proprietary product price adjustments taken in the past year, offset by a modest foreign currency headwind and a decline in volume. Approximately 1.8% of net sales growth was attributed to the full quarter benefit of the recent acquisition of Staub.
Net sales increased by $121.1 million, or 16.5%, in the nine months ended September 30, 2022, compared to the nine months ended September 24,
2021. Approximately 13.2% of net sales growth was driven by organic growth, including the continued ramp of local branches opened in the past year, and the cumulative impact of proprietary product price adjustments taken in the past year, offset by supply chain and foreign currency headwinds. Approximately 3.3% of net sales growth was attributed to the year-to-date benefit of recent acquisitions of Access Networks and Staub.
Cost of Sales, Exclusive of Depreciation and Amortization
Cost of sales, exclusive of depreciation and amortization
$
167,435
$
151,281
$
16,154
10.7
%
$
520,162
$
432,297
$
87,865
20.3
%
As
a percentage of net sales
59.5
%
58.0
%
60.8
%
58.9
%
Cost of sales, exclusive of depreciation and amortization, increased $16.2 million, or 10.7%, in the three
months ended September 30, 2022, compared to the three months ended September 24, 2021, primarily driven by an increase in net sales. As a percentage of net sales, cost of sales, exclusive of depreciation and amortization, increased to 59.5% in the current period from 58.0% 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. The accelerated growth in third-party product sales resulted in a third-party product mix of 31.7% compared to 29.2% in the comparable year ago period. 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 40.5% for the three months ended September 30, 2022, compared to 42.0% for the three months ended September 24, 2021.
Cost of sales, exclusive of depreciation and amortization, increased $87.9 million, or 20.3%, in the nine months ended September 30, 2022, compared to the nine months ended September 24, 2021, primarily driven by an increase in net sales. As a percentage of net sales, cost of sales, exclusive of depreciation and amortization, increased to 60.8% in the current period from 58.9% 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. The accelerated growth in third-party product sales resulted in a third-party product mix of 31.3% compared to 29.6% in the comparable year ago period. Additionally, supplier costs and inbound freight costs
42
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 39.2% for the nine months ended September
30, 2022, compared to 41.1% for the nine months ended September 24, 2021.
Selling, General and Administrative (“SG&A”) Expenses
Selling, general and administrative expenses decreased $15.6 million, or 14.9%, in the three months ended
September 30, 2022 compared to the three months ended September 24, 2021. The decrease in selling, general, and administrative expenses was due in part to the prior year period including several one-time items related to the IPO. The prior year period included the recognition of $14.4 million in equity-based compensation expenses and $10.6 million in compensation costs paid to certain pre-IPO owners for their interests in lieu of their participation in the TRA entered into in connection with the IPO.
Selling, general and administrative expenses increased $12.3 million, or 4.7%, in the nine months ended September 30, 2022 compared to the nine months ended September 24, 2021. The increase
in selling, general, and administrative expenses was due in part to increased costs associated with becoming and operating as a public company, ongoing investments to support strategic growth initiatives, wage inflation and absorbing the costs associated with recently acquired businesses. Included in selling, general and administrative expenses in the nine-month periods ended September 30, 2022 and September 24, 2021 are several non-recurring, non-core, infrequent or unusual charges as outlined in the Adjusted EBITDA and Adjusted Net Income reconciliations. These items in aggregate impact the year over year trend and include changes in provision for credit losses on notes receivable, fair value adjustment to contingent value rights, deferred acquisition payments, compensation expense for payouts in lieu of TRA participation, and initial public offering costs.
Depreciation and amortization expenses increased by $0.5 million, or 3.7%, in the three months ended September
30, 2022 compared to the three months ended September 24, 2021. Amortization expense associated with intangible assets acquired increased between periods due to the acquisitions of Staub and Clare. Depreciation expense increased primarily due to the acquisition of Staub, as well as the opening of new local branches between periods.
Depreciation and amortization expenses increased by $2.5 million, or 5.9%, in the nine months ended September 30, 2022 compared to the nine months ended September 24, 2021. Amortization expense associated with intangible assets acquired increased between periods due to the acquisitions of Access Networks, Staub, and Clare. Depreciation expense increased primarily due to the acquisitions of Access Networks and Staub,
as well as the opening of new local branches between periods.
Interest expense increased by $2.7 million, or 36.4%, in the three months ended September
30, 2022 compared to the three months ended September 24, 2021. The increase was primarily driven by a higher average interest rate on the outstanding balance on our long-term debt in the three months ended September 30, 2022 compared to the three months ended September 24, 2021, and due to a portion of long-term debt being repaid from the net proceeds of the IPO in the prior period.
Interest expense decreased by $1.9 million, or 7.2%, in the nine months ended September 30, 2022 compared to the nine months ended September 24, 2021. The decrease was primarily driven by a lower average outstanding balance on our long-term debt in the nine months ended
September 30, 2022 compared to the nine months ended September 24, 2021.
Other expense decreased by $6.3 million, or 91.1%, in the three months ended September
30, 2022, compared to the three months ended September 24, 2021, and by $6.3 million, or 97.9%, in the nine months ended September 30, 2022 compared to the nine months ended September 24, 2021, primarily related to the write-off of unamortized debt issuance costs in the prior period.
Income tax benefit decreased by $2.5 million, or 91.3%, in the three months ended September
30, 2022, compared to the three months ended September 24, 2021. The effective tax rate for the three months ended September 30, 2022, was a benefit of 18.9% compared to 11.3% for the three months ended September 24, 2021. The change in the effective tax rate for the three months ended September 30, 2022, and the difference from the U.S. federal statutory rate of 21%, were primarily the result of allocation of income between jurisdictions, a benefit from R&D tax credits, a change in the state deferred rate and an expense related to vesting of restricted stock units.
Income tax benefit decreased by $2.6 million, or 77.4%, in the nine months ended September
30, 2022 compared to the nine months ended September 24, 2021. The effective tax rate for the nine months ended September 30, 2022, was a benefit of 14.2% compared to a benefit of 10.6% for the nine months ended September 24, 2021. The change in the
44
effective tax rate for the nine months ended September 30, 2022, and the difference from the U.S. federal statutory rate of 21%, were primarily the result of allocation of income between jurisdictions, a benefit from R&D tax credits, a change in the state deferred rate and an expense related to vesting of restricted stock units.
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.
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:
Our cash and cash equivalents as of September 30, 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, lease payments under non-cancelable lease commitments and TRA payments as further described in Notes 7, 14 and 16 of the Notes to the Unaudited Condensed Consolidated Financial Statements. 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 a credit agreement (the “Credit Agreement”) with various financial institutions consisting of a $465.0 million aggregate principal amount of senior secured term notes (the “New Term Loan”) maturing in
45
seven years and a $100.0 million senior secured revolving credit facility (the “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 prior notice but without premium or penalty (subject to customary exceptions). 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 September 30, 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 senior secured term loan outstanding under a credit agreement, dated August
4, 2017, between the Company’s wholly owned subsidiary, Wirepath, LLC, and the lenders thereunder (as amended, 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 September 30,
2022, we had $57.0 million 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 September 30, 2022 and December 31, 2021, we had $5.1 million and $4.9 million of outstanding letters of credit. The amount available under the New Revolving Credit Facility was $37.9 million and $95.1 million as of September 30, 2022, and December 31, 2021, respectively.
On October 2, 2022, the Company entered into the Incremental
Agreement, which (i) provides for incremental term loans (the “Incremental Term Loans”) under the Amended Credit Agreement, which amends the Credit Agreement (the”Amended Credit Agreement”), in an aggregate principal amount of $55.0 million, which Incremental Term Loans will bear interest at a rate per annum equal to, at the Company’s option, either (1) an applicable margin of 5.75% plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate (as defined in the Amended Credit Agreement), (b) the prime rate (as defined in the Amended Credit Agreement) and (c) the forward-looking term rate based on the Secured Overnight Financing Rate (“SOFR”) for an interest period of one month, plus 1.00%;
46
provided
that such rate is not lower than a floor of 1.00% or (2) an applicable margin of 6.75% plus the forward-looking term rate based on SOFR for the interest period relevant to such borrowing; provided that such rate is not lower than a floor of 0.50% and (ii) makes certain other corresponding technical changes to the Credit Agreement to facilitate the incurrence of the Incremental Term Loans. The Incremental Term Loans mature on the third anniversary of the funding date of the Incremental Term Loans.
On October 26, 2022, we entered into an interest rate cap agreement, on the LIBOR component of interest, with Bank of America as the counterparty. The interest rate cap is effective December 31, 2022. We will pay a premium of $6.6 million at the maturity date of December
31, 2025. The notional amount of the interest rate cap is $350.0 million and has a strike rate of 5.00%, which effectively caps the LIBOR rate on $350.0 million of our floating rate debt at 5.00%.
Other than in connection with the Incremental Term Loans under the Amended Credit Agreement and interest rate cap, 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 September 30, 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, and for additional information on the Company’s Incremental Agreement, see Note 20 to the Notes to the Unaudited Condensed Consolidated Financial Statements.
Net cash used in operating activities was $15.4 million in the nine months ended September 30, 2022, compared to $11.2 million in the nine months ended September 24, 2021, an increase of cash used of $4.2 million. The increase in net cash used in operating activities during the nine months ended September 30, 2022 was due to a $28.2 million net increase in cash used for operating assets and liabilities. Net cash used was primarily driven by an increase in inventory to protect against supply chain uncertainty. The increase in cash used for operating assets and liabilities was partially offset by a $24.0 million decrease in net loss in the current period.
Investing
Activities
Net cash used in investing activities was $41.1 million in the nine months ended September 30, 2022, compared to $33.3 million in the nine months ended September 24, 2021, an increase of $7.8 million. The increase in net cash used in investing activities for the nine months ended September 30, 2022, was primarily due to the acquisitions of Staub and Clare in the current period, as well as a $3.2 million increase in cash used to purchase property and equipment. Investing activities in the prior period included cash used to acquire Access Networks in the nine months ended September 24, 2021.
Financing Activities
Net
cash provided by financing activities was $52.3 million for the nine months ended September 30, 2022, compared to $28.2 million in the nine months ended September 24, 2021, an increase of $24.1 million. The increase in net cash provided by financing activities for the nine months ended September 30, 2022, was due to $57.0 million in borrowings on our New Revolving Credit Facility to help fund the acquisitions of Staub and Clare and general corporate purchases. The increase was partially offset by $2.4 million of company stock repurchases as part of the share repurchase program. Financing activities for the prior period included proceeds from our IPO, offset by payments on our long-term debt in the nine months ended September 24, 2021.
47
Off-Balance
Sheet Arrangements
As of September 30, 2022 and December 31, 2021, we had off-balance sheet arrangements totaling $5.1 million and $4.9 million related to our outstanding letters of credit. We have not entered into any other off-balance sheet arrangements, except as disclosed herein.
Contractual Obligations
We have contractual obligations comprised of payments of debt and interest, lease commitments, TRA and CVRs.
As of September 30,
2022, we had $57.0 million outstanding under the New Revolving Credit Facility, which we used to fund the Staub and Clare acquisitions as well as for general corporate expenses.
Except for the leases described in Note 16 of the Notes to the Unaudited Condensed Consolidated Financial Statements and the debt agreement as described herein, as of September 30, 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.
As disclosed in Note 20 of the Notes to the Unaudited Condensed Consolidated Financial Statements,
on October 2, 2022, the Company entered into an $55 million Incremental Agreement (the “Incremental Agreement”) that amended the Credit Agreement, dated as of December 8, 2021, which was used to pay down the existing revolver balance, further increasing liquidity and providing additional flexibility to invest in growth or use for general corporate purposes.
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 Unaudited Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Emerging Growth Company and Smaller Reporting 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 $1.235 billion, or we issue more than
48
$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.
We are also a “smaller reporting company,” because the market value of our shares held by non-affiliates was less than $200 million as of the end of our most recently completed second fiscal quarter. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.
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 September 30, 2022, we had $462.7 million outstanding under the New Term Loan portion of the Credit Agreement and $57.0 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 September 30, 2022 would increase annual cash interest in the aggregate by approximately $1.4 million.
Foreign Currency Exchange Risk
Changes in the exchange rates for the functional currencies of our international subsidiaries may positively or negatively impact our sales, operating expenses and earnings. Historically, we have not hedged our currency exposure and fluctuations in exchange rates have not materially affected our operating results. While our international operations, including Canada, the United Kingdom, and Australia, accounted for only 12.8% and 13.5% of total net revenue during the three and nine months ended September 30,
2022, our exposure to currency rate fluctuations could be material in the remainder of 2022 and future years, to the extent that either currency rate changes are significant or that our international operations comprise a larger percentage of our consolidated results.
Inflation Risk
Inflationary factors may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, the current high rate of inflation may have an adverse effect on our ability to maintain current levels of expenses as a percentage of revenue if our revenue does not correspondingly increase with inflation.
49
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 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.
50
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 Unaudited 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
Subsequent to the end of our third fiscal quarter, on October 24, 2022, in connection with our acquisition of the remaining outstanding equity interests in our majority owned subsidiary, Parasol,
we agreed to issue 106,894 shares of our common stock (the “Parasol Transaction Equity”) to the three founders in full satisfaction of the $1.1 million purchase price for such remaining outstanding interests. Fifty percent of the Parasol Transaction is subject to a contractual lock-up period that will end on the 12-month anniversary of its issuance. Subsequent to this transaction, Parasol is owned 100% by the Company.
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.
Stock Repurchase Program
On
May 12, 2022, the Company announced that its board of directors authorized a $25.0 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. As of September 30, 2022, we had approximately $22.6 million remaining under the repurchase program.
The following table is a summary of our repurchases of common shares during the three months ended September 30, 2022.
Total
Number of Shares Repurchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares That May Yet Be Purchased under the Plans or Programs (In thousands)
July 2- August 5
83,473
$
10.72
83,473
$
23,057
August
6- September 2
16,647
$
12.14
16,647
$
22,855
September 3-September 30
27,863
$
10.72
27,863
$
22,556
127,983
$
10.91
127,983
All
repurchases were made pursuant to the Company’s repurchase program announced on May 12, 2022 as described in this section above.
51
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not
applicable.
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.
(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.
The
following financial information from Snap One Holdings Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 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 Unaudited Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
+
Indicates a management contract or compensatory plan or arrangement.
** 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.
53
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.
