UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011MARCH 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
_____________________
COMMISSION FILE NUMBER 001-34850
PRIMO WATER CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware 30-0278688
(State of incorporation) (I.R.S. Employer Identification No.)
 
104 Cambridge Plaza Drive, Winston-Salem, NC 27104
(Address of principal executive office)       (Zip code)
 
(336) 331-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þNo o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þNo o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o
Accelerated filer  oþ
Non-accelerated filer  þo (Do not check if smaller reporting company)
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes oNo þ
 
As of NovemberMay 4, 2011,2012, there were 23,714,05423,718,406 shares of our Common Stock, par value $0.001 per share, outstanding.
 
 
 
 
 
PRIMO WATER CORPORATION
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011MARCH 31, 2012

INDEX
 
  Page number
PART 1.   Financial Information
 
Part I. Financial Information
 
Item 1.
Financial Statements (Unaudited)
3
   
 
Condensed Consolidated Balance Sheets
3
   
 
Condensed Consolidated Statements of Operations
4
   
 
Condensed Consolidated Statements of Cash FlowsComprehensive Loss
5
   
 
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
67
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1516
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
2523
   
Item 4.
Controls and Procedures
2523
   
PartPART II.  Other Information
   
Item 1.
Legal Proceedings
2624
   
Item 1A. 
Risk Factors
24
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25
Item 3. 
Defaults Upon Senior Securities
26
Item 4.
Mine Safety Disclosures
26
Item 5.
Other Information
26
   
Item 6.
Exhibits
2728
   
Signatures2829

 
2

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

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

  March 31,  December 31, 
  2012  2011 
  (unaudited)    
ASSETS      
Current assets:      
Cash $379  $751 
Accounts receivable, net  12,744   14,118 
Inventories  7,846   8,826 
Prepaid expenses and other current assets  3,571   3,234 
Total current assets  24,540   26,929 
         
Bottles, net  3,716   3,704 
Property and equipment, net  46,616   47,101 
Intangible assets, net  20,068   20,374 
Goodwill  85,559   85,256 
Other assets  943   1,085 
Total assets $181,442  $184,449 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Accounts payable $10,577  $11,155 
Accrued expenses and other current liabilities  5,679   4,397 
Current portion of capital leases and notes payable  14   14,514 
Total current liabilities  16,270   30,066 
         
Long-term debt, capital leases and notes payable, net of current portion  14,700   44 
Other long-term liabilities  3,840   4,710 
Total liabilities  34,810   34,820 
         
Commitments and contingencies        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value - 10,000 shares authorized, none issued and outstanding  –   – 
Common stock, $0.001 par value - 70,000 shares authorized, 23,718 and 23,658 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively  24   24 
Additional paid-in capital  271,623   271,220 
Common stock warrants  7,007   7,007 
Accumulated deficit  (131,966)  (128,102)
Accumulated other comprehensive loss  (56)  (520)
Total stockholders’ equity  146,632   149,629 
Total liabilities and stockholders’ equity $181,442  $184,449 
  
September 30,
2011
  
December 31,
2010
 
  (unaudited)    
Assets      
Current assets:      
Cash $1,191  $443 
Accounts receivable, net  13,198   6,605 
Inventories  10,301   3,651 
Prepaid expenses and other current assets  2,516   1,838 
Total current assets  27,206   12,537 
         
Bottles, net  3,895   2,505 
Property and equipment, net  44,831   34,890 
Intangible assets, net  22,718   11,039 
Goodwill  82,936   77,415 
Other assets  1,331   1,225 
Total assets $182,917  $139,611 
         
Liabilities and stockholders' equity        
Current liabilities:        
Accounts payable $15,894  $4,547 
Accrued expenses and other current liabilities  8,399   2,923 
Current portion of long-term debt, capital leases and notes payable  15   11 
Total current liabilities  24,308   7,481 
         
Long-term debt, capital leases and notes payable, net of current portion  1,547   17,945 
Other long-term liabilities  1,257   748 
Total liabilities  27,112   26,174 
         
Commitments and contingencies        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value - 10,000 shares authorized, none issued and outstanding  –   – 
Common stock, $0.001 par value 70,000 shares authorized, 23,645 and 19,021 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively  24   19 
Additional paid-in capital  270,855   220,125 
Common stock warrants  6,966   6,966 
Accumulated deficit  (121,109)  (113,723)
Accumulated other comprehensive (loss) income  (931)  50 
Total stockholders’ equity  155,805   113,437 
Total liabilities and stockholders’ equity $182,917  $139,611 

The accompanying notes are an integral part of thesethe unaudited condensed consolidated financial statements.
 
 
3
 
PRIMO WATER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 
  Three months ended 
  March 31, 
  2012  2011 
       
Net sales $19,781  $17,139 
Operating costs and expenses:        
Cost of sales  14,650   12,113 
Selling, general and administrative expenses  4,971   4,059 
Non-recurring and acquisition-related costs  26   703 
Depreciation and amortization  2,567   1,901 
Total operating costs and expenses  22,214   18,776 
Loss from operations  (2,433)  (1,637)
Interest expense  904   287 
Loss before income taxes  (3,337)  (1,924)
Provision for income taxes  527   190 
Net loss $(3,864) $(2,114)
         
Basic and diluted loss per common share:        
Net loss per share $(0.16) $(0.11)
         
Basic and diluted weighted average common shares outstanding  23,675   19,115 
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2011  2010  2011  2010 
             
Net sales $24,110  $10,899  $61,950  $31,901 
Operating costs and expenses:                
Cost of sales  18,715   8,591   45,912   25,263 
Selling, general and administrative expenses  5,540   3,263   14,085   8,799 
Acquisition-related costs  249   29   1,167   307 
Depreciation and amortization  2,547   1,103   6,707   3,113 
Total operating costs and expenses  27,051   12,986   67,871   37,482 
Loss from operations  (2,941)  (2,087)  (5,921)  (5,581)
Interest expense  (190)  (936)  (957)  (2,400)
Other expense, net  –   33   1   33 
Loss before income taxes  (3,131)  (2,990)  (6,877)  (7,948)
Provision for income taxes  (166)  –   (509)  – 
Net loss  (3,297)  (2,990)  (7,386)  (7,948)
Preferred dividends  –   (2,896)  –   (4,060)
Net loss attributable to common shareholders $(3,297) $(5,886) $(7,386) $(12,008)
                 
Basic and diluted loss per common share:                
Net loss attributable to common shareholders $(0.14) $(4.04) $(0.35) $(8.25)
                 
Basic and diluted weighted average common shares outstanding  23,645   1,458   20,981   1,456 

The accompanying notes are an integral part of thesethe unaudited condensed consolidated financial statements.
 
 
4

PRIMO WATER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
  Three months ended 
  March 31, 
  2012  2011 
       
Net loss $(3,864) $(2,114)
Other comprehensive income:        
Foreign currency translation adjustments, net  464   487 
Comprehensive loss $(3,400) $(1,627)
  Nine months ended September 30, 
  2011  2010 
Cash flows from operating activities:      
Net loss $(7,386) $(7,948)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  6,707   3,113 
Stock-based compensation expense  658   394 
Non-cash interest expense  411   530 
Deferred income tax expense  509   – 
Bad debt expense  436   35 
Other  60   (33)
Changes in operating assets and liabilities:        
Accounts receivable  (6,483)  (1,552)
Inventories  (6,655)  (1,219)
Prepaid expenses and other assets  (918)  (42)
Accounts payable  10,937   3,403 
Accrued expenses and other liabilities  (268)  (36)
Net cash used in operating activities  (1,992)  (3,355)
         
Cash flows from investing activities:        
Purchases of property and equipment  (14,425)  (3,048)
Purchases of bottles, net of disposals  (1,785)  (1,085)
Proceeds from the sale of property and equipment  18   1 
Business acquisitions  (3,576)  – 
Additions to and acquisitions of intangible assets  (219)  (37)
Net cash used in investing activities  (19,987)  (4,169)
         
Cash flows from financing activities:        
Net borrowings from prior revolving line of credit  –   6,572 
Borrowings under the senior revolving credit facility  23,126   – 
Payments under the senior revolving credit facility  (39,538)  – 
Issuance of long-term debt  –   3,418 
Note payable and capital lease payments  (10)  (5)
Debt issuance costs  (517)  (150)
Net change in book overdraft  –   (113)
Proceeds from sale of common stock, net of issuance costs  39,445   – 
Prepaid equity issuance costs  –   (1,713)
Proceeds from exercise of stock options  352   65 
Dividends paid  –   (225)
Net cash provided by financing activities  22,858   7,849 
         
Net increase in cash  879   325 
Cash, beginning of year  443   – 
Effect of exchange rate changes on cash  (131)  – 
Cash, end of period $1,191  $325 

The accompanying notes are an integral part of thesethe unaudited condensed consolidated financial statements.
 
 
5

PRIMO WATER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

  Three months ended March 31, 
  2012  2011 
Cash flows from operating activities:      
Net loss $(3,864) $(2,114)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:        
Depreciation and amortization  2,567   1,901 
Stock-based compensation expense  411   188 
Non-cash interest expense  675   94 
Deferred income tax expense  527   190 
Bad debt expense  (69)  75 
Other  (8)  294 
Changes in operating assets and liabilities:        
Accounts receivable  1,490   (2,096)
Inventories  986   (1,334)
Prepaid expenses and other assets  (376)  (295)
Accounts payable  (1,603)  5,657 
Accrued expenses and other liabilities  148   (140)
Net cash provided by operating activities  884   2,420 
         
Cash flows from investing activities:        
Purchases of property and equipment  (1,041)  (2,239)
Proceeds from (purchases of) bottles, net  216   (564)
Proceeds from the sale of property and equipment  6   18 
Business acquisitions  –   (1,576)
Additions to and acquisitions of intangible assets  (47)  (108)
Net cash used in investing activities  (866)  (4,469)
         
Cash flows from financing activities:        
Borrowings under the senior revolving credit facility  500   3,972 
Payments under the senior revolving credit facility  (340)  (1,302)
Note payable and capital lease payments  (4)  (3)
Debt issuance costs  (498)  – 
Stock option and employee stock  purchase activity, net  (8)  – 
Net cash (used in) provided by financing activities  (350)  2,667 
         
Net (decrease) increase in cash  (332)  618 
Cash, beginning of year  751   443 
Effect of exchange rate changes on cash  (40)  12 
Cash, end of period $379  $1,073 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
 
PRIMO WATER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)

1.Description of Business and Significant Accounting Policies

Business

Primo Water Corporation (together with its consolidated subsidiaries, “Primo”, “we”, “our”“our,” “us”) is a rapidly growing provider of multi-gallonthree- and five-gallon purified bottled water, self-serve filtered drinking water, and water dispensers and sparkling beverage appliances sold through major retailers in the United States and Canada.

Secondary Public Offering

On June 22, 2011, we and certain of our stockholders completed a secondary public offering of a total of 6,900 shares of our common stock, consisting of 3,751 shares sold by us and 3,149 shares sold by certain selling stockholders (including Culligan International Company), at a public offering price of $11.26 per share. The net proceeds of the secondary public offering to us after deducting underwriting discounts and commissions and offering expenses were approximately $39,400. We used $29,400 of the net proceeds received by us from the secondary public offering to repay all outstanding borrowings under our revolving credit facility.  We have used the remaining proceeds received by us for working capital and general corporate purposes, including establishing new store locations for our water bottle exchange and refill vending services. We did not receive any proceeds from the sale of shares by the selling stockholders.

Initial Public Offering and Acquisition

On November 10, 2010, we completed the initial public offering (“IPO”) of 8,333 shares of our common stock at a price of $12.00 per share. In addition on November 18, 2010, we issued an additional 1,250 shares upon the exercise of the over-allotment option by the underwriters of our IPO. The net proceeds of the IPO to us after deducting underwriting discounts and commissions were approximately $106,900.

On November 10, 2010, we acquired certain assets of Culligan Store Solutions, LLC and Culligan of Canada, Ltd. (the “Refill Business” or “Refill Acquisition”) pursuant to an Asset Purchase Agreement dated June 1, 2010 (the “Asset Purchase Agreement”). The total purchase price for the Refill Business was approximately $109,095 (including the working capital adjustment), which was paid with $74,474 in proceeds from the IPO and $34,621 from the issuance of approximately 2,588 common shares at an average price of $13.38 per share on November 10, 2010.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared in accordance with our accounting practices described in our audited consolidated financial statements for the year endingended December 31, 2010,2011, and are unaudited. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2010.2011. The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) with respect to annual financial statements. In management’s opinion,Certain 2011 amounts in the accompanying interim condensed consolidated financial statements include all adjustments, which consist only of normal recurring adjustments, necessary forhave been reclassified to conform to the fair statement of our results of operations for the periods2012 presentation, with no effect on stockholders’ equity or net loss as previously presented.

Revenue Recognition

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

6
 Our  Revenue is recognized for the sale of our water dispensers are sold primarily through a direct-import model, where we recognize revenueand Flavorstation products when title is transferred to our retail customers. We have no contractual obligation to accept returns of water dispensers nor do we guarantee water dispenser sales. However, we will at times accept returns or issue credits for water dispensers that haveproducts with manufacturer defects or that were damaged in transit. Revenues of water dispensers are recognized net of an estimated allowance for returns using an average return rate based upon historical experience.

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

Accounts Receivable

All trade accounts receivable are due from customers located within the United States and Canada. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Accounts receivable, net includes allowances for doubtful accounts of $661$364 and $244$471 at September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively.  The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates.

Inventories

Our inventories consist primarily of finished goods and are valued at the lower of cost or realizable value, with cost determined using the first-in, first-out (FIFO) method. Miscellaneous selling supplies such as labels are expensed when incurred.

Goodwill and Intangible Assets

We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives.
7
 
We test intangible assets determined to have indefinite useful lives, including trademarks and goodwill, for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired. We perform these annual impairment reviews as of the first day of our fourth quarter. We have assigned goodwill to two reporting units – Water and Flavorstation.  In evaluating reporting units, we first consider our operating segments and related components in accordance with U.S. GAAP.  The goodwill impairment test consists of a two-step process, if necessary. The first step involves a comparison of the fair value of a reporting unit to its carrying value. The fair value is estimated based on a number of factors including operating results, business plans and future cash flows. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process is performed which compares the implied value of the reporting unit goodwill with the carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For indefinite-lived intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess.

For the three months ended September 30, 2011, we performed an interim impairment test of our goodwill and other identifiable intangible assets due to events and changes in circumstances that indicated impairment might have occurred. The factor deemed by management to have constituted a potential impairment triggering event was the decrease in our stock price relative to our book value. We had assigned the goodwill acquired in the acquisitions described in Note 2 to two reporting units – Water and Products. In evaluating reporting units, we first consider our operating segments and related components in accordance with U.S. GAAP. We determineddetermine the fair value of our reporting units based on a combination of the income approach, using a discounted cash flow model.model, and a market approach, which considers comparable companies and transactions. Under thisthe income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values wereare discounted using a rate which reflectedreflects our best estimate of the weighted average cost of capital of a market participant, and wasis adjusted for appropriate risk factors. We performedperform sensitivity tests with respect to growth rates and discount rates used in the income approach.

7
Under the market approach, valuation multiples are derived based on a selection of comparable companies and acquisition transactions, and applied to projected operating data for each reporting unit to arrive at an indication of fair value.
 
As of December 31, 2011, we performed an interim impairment test of our goodwill and other identifiable intangible assets due to events and changes in circumstances that indicated an impairment might have occurred. The factor deemed by management to have constituted a potential impairment triggering event was the decrease in our stock price relative to our book value. The analysis indicated that as of the last day of our third fiscal quarter, the fair values of each of our reporting units exceeded their respective carrying values. WeAt that time, we also compared the aggregate estimated fair values of our reporting units from the impairment analysis to our overall market capitalization with appropriate consideration of a control premium.  Based on these analyses, we have concluded that goodwill was not impaired and we were not required to perform step two of the goodwill impairment testing methodology. We also concluded that no impairment to other identifiable intangible assets has occurred as of the interim test date.

Fair Value Measurements

Effective January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, forvalue rules currently apply to all financial assets and liabilities. ASC 820 definesliabilities and for certain nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value. For this purpose, fair value establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
ASC 820 defines fair valueis defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants onat the measurement date. ASC 820 also describes three levels of inputs that may beValuation techniques used to measure fair value:value must maximize the use of observable inputs and minimize the use of unobservable inputs.
U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

●
Level 1 — quoted prices in active markets for identical assets and liabilities.
 
●
Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.
 
●
Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

During the three months ended March 31, 2012, there were no changes in the $2,559 fair value of the Omnifrio milestone payments (see Note 3 – Omnifrio Single-Serve Beverage Business for more details), which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3 inputs).
8

The carrying amounts of our financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, and other accrued expenses, approximate their fair values due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of long-term debt, capital leases and notes payable approximates fair value.

Concentrations of Risk

Our principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents, trade receivables, accounts payable and accrued expenses. We invest our funds in a highly rated institution and believe the financial risks associated with cash and cash equivalents are minimal.

We perform ongoing credit evaluations of our customers’ financial condition and maintain allowances for doubtful accounts that we believe are sufficient to provide for losses that may be sustained on realization of accounts receivable.

Basic and Diluted Net Lossloss Per Share

Net loss per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted amounts per share include the dilutive impact, if any, of our outstanding potential common shares, such as options and warrants and convertible preferred stock. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net loss per common share.

8
StockFor the three months ended March 31, 2012 and 2011, stock options, unvested shares of restricted stock, restricted stock units and warrants equivalentwith respect to 1,465an aggregate of 605 and 1,078355 shares as well as 0 and 4,301 shares of convertible preferred stock, werehave been excluded from the calculationcomputation of the number of shares used in the diluted earnings per share, for the three months ended September 30, 2011 and 2010, respectively.  Stock options, unvested shares of restricted stock and warrants equivalent to 1,364 and 1,064 shares, as well as 0 and 4,301 shares of convertible preferred stock, were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2011 and 2010, respectively.  These shares have been excluded because we incurred a net loss for each of these periods and their inclusion would be anti-dilutive.

Cumulative Translation Adjustment and Foreign Currency Transactions

The local currency of our operations in Canada is considered to be the functional currency. Assets and liabilities of the Canada subsidiary are translated into U. S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U. S. dollars are accumulated as the cumulative translation adjustment included in accumulated other comprehensive income (loss) in the statement of stockholders’ equity. With the exception of transaction gains and losses on certain intercompany balances which we have determined are of a long-term investment nature, realized gains and losses on foreign currency transactions are included in the statement of operations. At March 31, 2012 and December 31, 2011, accumulated other comprehensive loss balances of ($56) and ($520), respectively, were related to unrealized foreign currency translation adjustments and transaction gains and losses on certain intercompany balances.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended itsissued guidance onto amend the presentation of comprehensive income in financial statements to improveallow an entity the comparability, consistency and transparency of financial reporting andoption to increasepresent the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report componentstotal of comprehensive income, the components of net income, and the components of other comprehensive income either in either (1) a single continuous statement of comprehensive income or (2)in two separate but consecutive statements.  In both instances, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.  In December 2011, the FASB issued guidance to indefinitely defer provisions requiring reclassification adjustments out of this new guidance were originally goingother comprehensive income to be presented on the face of the financial statements. The other portions of the original guidance remain unchanged.  These standards are effective for fiscal years,interim and interimannual periods within those years, beginning after December 15, 2011, however that effective date has been delayed and no new date has been announced as of the date ofare to be applied retrospectively.  We have included such disclosures within this filing. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

On September 15, 2011, the FASB issued updated guidance concerning the testing of goodwill for impairment.  This guidance modifies goodwill impairment testing by allowing the inclusion of qualitative factors in the assessment of whether a two-step goodwill impairment test is necessary. Thus, entities are no longer required to calculate the fair value of a reporting unit unless they conclude through an assessment of qualitative factors that it is more likely than not that the unit's carrying value is greater than its fair value. When an entity's qualitative assessment reveals that goodwill impairment is more likely than not, the entity must perform the two-step goodwill impairment test. The provisions of this guidance will become effective for fiscal years beginning after December 15, 2011.  The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

2.Acquisitions

Refill Business

On November 10, 2010, we acquired certain assets of the Refill Business pursuant to an Asset Purchase Agreement dated June 1, 2010. The Refill Business provided us with an established platform to expand into the self-serve filtered drinking water vending business (refill services). The refill services are complementary to our exchange services from both a product and operational perspective. The total purchase price for the Refill Business was approximately $109,095 (including the working capital adjustment), which was paid with $74,474 in proceeds from the IPO and $34,621 from the issuance of approximately 2,588 of our common shares valued at $13.38 per share. The Refill Acquisition has been accounted for as a business combination in accordance with the acquisition method.

Assets acquired and liabilities assumed in the business combination are recorded at fair value in accordance with ASC 805 based upon appraisals obtained from an unrelated third party valuation specialist. The purchase price exceeded the fair value of the net assets acquired resulting in goodwill of approximately $77,452, which is amortizable for tax purposes. The identifiable intangible assets consist primarily of customer lists and will be amortized over 15 years. Operations of the acquired entity are included in the consolidated statement of operations from the acquisition date. Fees and expenses associated with the acquisition of the Refill Business were approximately $2,101.quarterly report.
 
 
9

 The purchase price has been allocated to the assets
2.Long-Term Debt, Capital Leases and Notes Payable

Long-term debt, capital leases and liabilitiesnotes payable are summarized as follows:
 
Aggregate purchase price:   
Cash consideration $74,474 
Common stock issued  34,621 
Purchase price $109,095 
     
Purchase price allocation:    
Net assets acquired    
Net current assets $3,728 
Property and equipment  18,984 
Identifiable intangible assets  10,300 
Goodwill  77,452 
Liabilities assumed  (1,369)
Aggregate purchase price $109,095 
  March 31,  December 31, 
  2012  2011 
       
Senior revolving credit facility $14,660  $14,500 
Notes payable and capital leases  54   58 
   14,714   14,558 
Less current portion  (14)  (14,514)
Long-term debt, notes payable and capital leases, net of current portion $14,700  $44 
 
We entered into a senior revolving credit facility in November 2010 that was amended in April 2011, September 2011, November 2011 and March 2012 (“Prior Senior Revolving Credit Facility”). At March 31, 2012, our outstanding balance under our Prior Senior Revolving Credit Facility was $14,660 and we had no additional availability.  For the quarter ended March 31, 2012, we were not in compliance with our financial covenants.  The unaudited pro forma net salesPrior Senior Revolving Credit Facility matured on April 30, 2012 and net loss presented below are based uponwas repaid in full in connection with the purchase price allocation and do not reflect any anticipated operating efficiencies or cost savings from the integrationclosing of the Refill BusinessSenior Revolving Credit Facility (as defined below) and the Term Loan (as defined below).

Interest expense related to deferred loan costs amortization was $670 for the three months ended March 31, 2012.  We amortized the remaining amount of $576 in deferred loan costs related to the Prior Senior Revolving Credit Facility in April 2012.

We entered into a senior revolving credit facility (the “Senior Revolving Credit Facility”) on April 30, 2012 that provides for total borrowing availability of up to $20,000 subject to borrowing base requirements related to our business. Pro forma adjustments have been made as if the acquisition had occurred aseligible accounts receivable and inventory and subject to a $2,000 reserve requirement. The Senior Revolving Credit Facility has a three and one-half year term and is secured either on a first priority or second priority basis by substantially all of January 1, 2010.our assets. The amounts have been calculated after applying our accounting policies and adjusting the resultsterm of the Refill BusinessSenior Revolving Credit Facility may be extended up to reflectApril 30, 2017 so long as the maturity of the Term Loan is extended to at least October 30, 2017. As of April 30, 2012, we had approximately $2,200 in outstanding borrowings with approximately $5,300 in additional availability under the Senior Revolving Credit Facility after giving effect to the borrowing base requirements.

Interest on outstanding borrowings under the Senior Revolving Credit Facility is payable at our option at either a floating base rate or a one-, two- or three-month LIBOR rate. We are also required to pay a commitment fee on the unused amount of the commitment under the Senior Revolving Credit Facility. The Senior Revolving Credit Facility does not contain any financial covenants, but it does cross default to the Term Loan. Total costs associated with the Senior Revolving Credit Facility are approximately $700, which will be capitalized and amortized on a straight-line basis as part of interest expense over the term of the debt.

We entered into a credit and security agreement on April 30, 2012, pursuant to which a $15,150 term loan (the “Term Loan”) was provided.  Interest on outstanding amounts owed under the Term Loan is payable at the rate of 14% per annum in cash plus 2% per annum which will be paid by increasing the outstanding principal balance owed rather than being paid in cash on a current basis. Interest on outstanding amounts owed will be adjusted to 13% per annum (all payable in cash) if and when our adjusted earnings before interest, taxes, depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been as of January 1, 2010.

  
Three months ended
September 30, 2010
  
Nine months ended
September 30, 2010
 
Net sales $18,015  $51,586 
         
Pro forma net loss $(926) $(3,858)
         
Basic and diluted loss per common share:        
Net loss attributable to common shareholders $(0.05) $(0.20)

Canada Exchange Business

On March 8, 2011, we completed the acquisition of certain assets of Culligan of Canada Ltd., related to its bulk water exchange business (the “Canada Exchange Business”(“EBITDA”).  The consideration given is $10,000 or greater for the Canada Exchange Business was $4,796, which consisted of a cash payment of $1,576, the issuance of 307 shares of our common stock and the assumption of certain specified liabilities. The Canada Exchange Business provides refill and delivery of water in 18-liter containers to commercial retailers in Canada for resale to consumers.  The acquisition of the Canada Exchange Business expands our existing exchange service offering and provides us with an immediate network of regional operators and major retailers in Canada with approximately 780 retail locations. Operations of the acquired entity are included in the consolidated statement of operations from the acquisition date.trailing 12-month period.

The Canada Exchange Business has been accounted for asoutstanding balance of the Term Loan is due and payable in a single installment on April 30, 2016, subject to prepayment in specified circumstances, including sales or dispositions of assets outside the ordinary course of business combination in accordance with the acquisition method.  Assets acquired and liabilities assumed in the business combination are recorded at fair value in accordance with ASC 805 based upon appraisals obtained from an unrelated third party valuation specialist.sales of equity or debt securities by Primo. The purchase price has been preliminarily allocated to theTerm Loan is secured by substantially all of our assets and liabilities as follows:  $252 of tangible assets and $3,008 in identifiable intangible assets, resulting in goodwill of approximately $1,536, which is amortizable for tax purposes.on either a first priority or second priority basis. The identifiable intangiblefirst priority assets consist of customer listssubstantially all of the assets related to our refill services business (See Note 8 – Segments). The security interest in all of our other assets is subordinate to the security interest securing the Senior Revolving Credit Facility.

The Term Loan contains the following financial covenants: (i) a limit on capital expenditures of $5,500 for the year ended December 31, 2012 and trade names$12,000 for each year thereafter; (ii) an increasing minimum EBITDA threshold that is measured at the end of each quarter, (iii) a decreasing total debt to EBITDA ratio that is measured at the end of each quarter, and (iv) a requirement that the gross profit of our refill services business for the trailing 12-month period measured at the end of each quarter be no less than $10,500. Total costs associated with estimated livesthe Term Loan are approximately $800, which will be capitalized and amortized as part of 15 years and 3 years, respectively.interest expense over the term of the debt.

 
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Concurrently with the closing of the Term Loan, five of our current directors or stockholders (the “Insider Participants”) purchased an aggregate of $1,150 in non-recourse, non-voting, last-out participation interests from the bank providing the Term Loan. These participation interests allow each holder to participate to the extent of such holder’s percentage share in the Term Loan and such participations are secured by the same assets as the Term Loan. The Insider Participants include Billy D. Prim, Malcolm McQuilkin and Jack C. Kilgore, all three of whom are current directors of Primo. Mr. Prim is also our Chairman, Chief Executive Officer and President. Mr. Prim, Mr. McQuilkin and Mr. Kilgore purchased $250, $500 and $50 in participation interests, respectively.

The Term Loan was accompanied by a detachable warrant to purchase 1,731 shares of our common stock, including detachable warrants to purchase 131 shares of our common stock received by the Insider Participants. The warrant is immediately exercisable at an exercise price of $2.30 per share and expires April 30, 2020. The terms of the warrants issued to the Insider Participants are identical to the terms of the warrant described above. Mr. Prim, Mr. McQuilkin and Mr. Kilgore were issued warrants to purchase 29, 57 and 6 shares of our common stock, respectively.  The estimated fair value of the warrants will result in an original issue discount on the Term Loan that will be amortized into interest expense through the maturity of the Term Loan.

3.Acquisitions

Omnifrio Single-Serve Beverage Business

On April 11, 2011, we completed the acquisition of certain intellectual property and other assets (the “Omnifrio Single-Serve Beverage Business”) from Omnifrio Beverage Company, LLC (“Omnifrio”) for total consideration of up to $14,060, consisting of:  (i) a cash payment at closing of $2,000; (ii) the issuance at closing of 501 shares of our common stock; (iii) a cash payment of $2,000 on the 15-month anniversary of the closing date (subject to our setoff rights in the asset purchase agreement); (iv) up to $3,000 in cash milestone payments; and (v) the assumption of certain specified liabilities relating to the Omnifrio Single-Serve Beverage Business.  WeThe milestone conditions have been renegotiated and we currently expect to make cash milestone payments forof $559 and $2,000 during 2012 and 2013, respectively, and deferred purchase price payments of $1,000 and $1,000 during 2012 and 2013, respectively.  At March 31, 2012, $2,000 of the full $3,000 overdeferred purchase price and $559 of the remainder of 2011.  At September 30, 2011, both the $2,000 cash payment on the fifteen-month anniversary of closing and the $3,000 cash milestone payments were included within accrued expenses and other current liabilities on the condensed consolidated balance sheets.sheets and $2,000 of the milestone payments were included within other long-term liabilities.

The Omnifrio Single-Serve Beverage Business primarily consistsconsisted of technology related to single-serve cold carbonated beverage appliances and consumable flavor cups and CO2CO2 cylinders used with the appliances to make a variety of cold beverages. The acquisition of the Omnifrio Single-Serve Beverage Business servesserved as an entry point into the U.S. market for carbonated beverages and the rapidly growing self-carbonating appliance and single-serve beverage segments.

The Omnifrio Single-Serve Beverage Business has been accounted for as a business combination in accordance with the acquisition method. Assets acquired and liabilities assumed in the business combination are recorded at fair value in accordance with ASC 805U.S. GAAP based upon appraisals obtained from an unrelated third party valuation specialist. The purchase price has been preliminarilywas allocated primarily to the assets and liabilities as follows:  $9,857 in identifiable intangible assets of $7,627, resulting in goodwill of $4,203,$6,433, which is amortizable for tax purposes. The identifiable intangible assets consist of developed technology patents with estimated lives of 15 years.

3.Goodwill
Canada Exchange Business

On March 8, 2011, we completed the acquisition of certain assets of Culligan of Canada Ltd., related to its bulk water exchange business (the “Canada Exchange Business”).  The changesconsideration given for the Canada Exchange Business was $4,796, which consisted of a cash payment of $1,576, the issuance of 307 shares of our common stock and the assumption of certain specified liabilities. The Canada Exchange Business provides refill and delivery of water in 18.9-liter containers to commercial retailers in Canada for resale to consumers.  The acquisition of the Canada Exchange Business expanded our existing exchange service offering and provided us with an immediate network of regional operators and major retailers in Canada with approximately 780 retail locations. Operations of the acquired entity are included in the carrying amountconsolidated statement of goodwilloperations from the acquisition date.
The Canada Exchange Business has been accounted for as summarizeda business combination in accordance with the acquisition method.  Assets acquired and liabilities assumed in the business combination are recorded at fair value in accordance with U.S. GAAP based upon appraisals obtained from an unrelated third party valuation specialist. The purchase price was allocated to the assets and liabilities as follows:  $252 of tangible assets and $3,008 in identifiable intangible assets, resulting in goodwill of $1,536, which is amortizable for tax purposes. The identifiable intangible assets consist of customer lists and trade names with estimated lives of 15 years and 3 years, respectively.
 
Balance at December 31, 2010 $77,415 
Acquisition of Canada Bulk Water Exchange Business  1,536 
Acquisition of Omnifrio Single-Serve Beverage Business  4,203 
Effect of foreign currency translation  (474)
Other  256 
Balance at September 30, 2011 $82,936 
 
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4.Long-Term Debt, Capital LeasesGoodwill and Notes PayableIntangible Assets

Long-term debt, capital leases and notes payableThe changes in the carrying amount of goodwill are summarized as follows:

  
September 30,
2011
  
December 31,
2010
 
       
Senior revolving credit facility $1,500  $17,912 
Notes payable and capital leases  62   44 
   1,562   17,956 
Less current portion  (15)  (11)
Long-term debt, notes payable and capital leases, net of current portion $1,547  $17,945 
Balance at December 31, 2011 $85,256 
Effect of foreign currency translation  303 
Balance at March 31, 2012 $85,559 
 
We entered into a senior revolving credit facility in November 2010 that was amended in April 2011 and September 2011 (“Senior Revolving Credit Facility”) that replaced our previous loan agreement. Our Senior Revolving Credit Facility provided for availability of uphave recorded no impairment losses related to $40,000 subject to borrowing base limits. The Senior Revolving Credit Facility matures in November 2013 and is secured by substantially all of our assets.

Interest on the outstanding borrowings under the Senior Revolving Credit Facility is payable at our option at either a floating base rate plus an interest rate spread or a floating rate of LIBOR plus an interest rate spread. Both the interest rate spreads and the commitment fee rate are determined from a pricing grid based on our total leverage ratio. The Senior Revolving Credit Facility also provides for letters of credit issued to our vendors, which reduce the amount available for cash borrowings. We are required to pay a commitment fee on the unused amounts of the commitments under the Senior Revolving Credit Facility.

The amended Senior Revolving Credit Facility contains various restrictive covenants and the following financial covenants: (i) a maximum total leverage ratio that for the quarter ended September 30, 2011 was set at 2.75 to 1.0 and steps down to 2.5 to 1.0 thereafter; (ii) a minimum EBITDA (as defined in our Senior Revolving Credit Facility and measured on a trailing four-quarter basis) threshold that was $5,600 for the twelve-month period ended September 30, 2011; (iii) a minimum consolidated interest coverage ratio of 3.0 to 1.0 (measured on a trailing four-quarter basis); and (iv) a maximum amount of capital expenditures of $25,000 for the year ending December 31, 2011.

For the quarter ended June 30, 2011, we were not in compliance with our minimum EBITDA covenant and we received a waiver for our failure to comply with that covenant that also limited the availability to $10,000 until the covenant is amended.  In September 2011, we entered into a second amendment to the credit agreement that waived our failure to comply with the consolidated interest coverage ratio for the quarter ended September 30, 2011, stipulated that the waiver would remain in effect through November 30, 2011 and continued the $10,000 limit on availability through the waiver period.  We are currently negotiating an amended credit facility that would have availability of up to $25,000.  We believe this amended credit facility will close before November 30, 2011.

At September 30, 2011, we had $1,500 base rate borrowings outstanding and $1,240 outstanding letters of credit under the Senior Revolving Credit Facility. Including $62 of capital lease obligations, the availability under the Senior Revolving Credit Facility was $7,198, based upon the $10,000 limit in place at September 30, 2011.goodwill.

5.Stock-Based Compensation

ForWe recorded non-cash expense related to our stock-based compensation plans of $411 and $188 for the three months ended September 30,March 31, 2012 and 2011, and 2010, stock-based compensation expense was $231 and $113, respectively, and for the nine months ended September 30, 2011 and 2010, stock-based compensation expense was $658 and $394, respectively.  Stock-based compensationall of which is included in selling, general and administrative expenses.

6.Commitments and Contingencies
SDS Agreement

We entered into a strategic alliance agreement as well as cross licensing and distribution agreements (collectively “SDS Agreements”) with Sparkling Drink System Innovation Center S.r.l, its owner and RBAS Ltd Israel (collectively “SDS”) in November 2011 that was amended in January 2012.  The SDS Agreements provide that SDS will advise us on the strategic direction of our carbonated beverage business.  SDS manufactures carbonated beverage products, including appliances and accessories.  The SDS Agreements provide for the cross licensing and distribution of carbonated beverage products in certain territories.  SDS will market and distribute our Flavorstation products in certain countries within Europe and Africa over an initial term of two years, while we will market and distribute SDS products in North America over an initial term of five years.  The SDS Agreements include automatic one year extensions past the initial term.  The SDS Agreements contain minimum annual purchase commitments.  For each twelve month period following the date that the SDS products are available, which is estimated to be mid-2012, we must purchase at least $10,000 of SDS products.  During the same twelve month periods SDS must purchase at least $10,000 of our Flavorstation products.

In addition, as compensation for the advisory services SDS will receive cash compensation as well as a common stock purchase warrant (“SDS Warrant”), which we have already issued to SDS.  The SDS Warrant entitles SDS to purchase up to 100 shares of our common stock for a purchase price of $2.93 per share.  The shares issuable under the SDS Warrant vest as follows:  25% upon the signing of the SDS Agreements, with the remaining shares vesting contingently upon achievement of certain milestones based on net sales of carbonated beverage products within certain time periods, as set forth in the SDS Warrant, over the next three years.  The fair value of the unvested portion of the SDS Warrant will be determined at the time the milestones are achieved and such portion of the SDS Warrant vests.

Class Action Suit

On December 2, 2011, Primo, certain members of our board of directors, certain members of management, certain shareholders and company advisors were named as defendants in a purported class-action lawsuit filed in the United States District Court for the Middle District of North Carolina.  The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  The complaint asserts claims on behalf of a class of persons who acquired our common stock in or traceable to our initial public offering and our secondary offering as well as purchasers of our common stock between November 4, 2010 and August 10, 2011.  The complaint alleges that defendants violated the federal securities laws by, among other things, making misrepresentations about our projected financial results and business operations in order to artificially inflate the price of our stock.  The complaint requests unspecified damages and costs.  We do not believe the lawsuit has merit and plan to vigorously contest and defend against it.  We are insured for potential losses subject to limits.  We are required to indemnify each of the named defendants that are party to the lawsuit against losses and expenses they incur in connection with the litigation.
 
 
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6.CommitmentsElectrotemp

In December 2011, we filed a complaint against Electrotemp Technologies China, Inc. ("Electrotemp") alleging breach of contract and violation of warranty.  Electrotemp formerly manufactured and supplied us with water dispensers under a contract that provided a 100% warranty against defectives.  We are seeking damages of $3,100, which consists primarily of claims for defective water dispensers manufactured by Electrotemp of approximately $2,900 that are included in prepaid and other current assets on the condensed consolidated balance sheets.

Sales Tax

We routinely purchase equipment for use in operations from various vendors.  These purchases are subject to sales tax depending on the equipment type and local sales tax regulations, however, we believe certain vendors have not assessed the appropriate sales tax.  For purchases that are subject to sales tax in which we believe the vendor did not assess the appropriate amount, we accrue an estimate of the sales tax liability we ultimately expect to pay.

Other Contingencies

From time to time, we are involved in various claims and legal actions that arise in the normal course of business. Management believes that the outcome of such legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.

7.Income Taxes

We have incurred operating losses since inception. For the three and nine months ended September 30,March 31, 2012 and 2011, there was an income tax provision of $166$527 and $509,$190, respectively, resulting from recognition of a deferred tax liability related to tax deductible goodwill.  There was no income tax provision (benefit) for prior periods.

Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We believe our prior ownership changes have created an annual limit, imposed by Section 382, on the amount of net operating loss we can utilize in a given year, however, we believe the annual limit is such that we will be able to utilize our net operating loss carryforwards during their respective carryforward periods.

8.Segments

At September 30, 2011,March 31, 2012, we had twothree operating segments and twothree reportable segments: Primo Water (“Water”), Primo Dispensers (“Dispensers”) and Primo ProductsFlavorsation (“Products”). The Water segment includes our historical business of bottled water exchange services (“Exchange”Flavorstation”), the Refill Business (“Refill”) acquiredwhich was previously reported in November 2010, the Canada Exchange Business acquired in March 2011 and the operations of a unit that previously was an operating segment, but did not meet quantitative threshold for reporting purposes.  Historically, we have disclosed Exchange, Refill and Products as reportable segments.  However in 2011, we integrated the Exchange and Refill operations to take advantage of synergies and to eliminate duplicate operations and costs.  In integrating the businesses we have changed our internal management and reporting structure such that Exchange and Refill no longer meet the requirements of operating segments on a stand-alone basis.“Other.”

Our Water segment sales consist of the sale of multi-gallon purified bottled water (exchange services), which includes the Canada Exchange Business acquired in March 2011, and our self-serve filtered drinking water vending service (refill services) through retailers in each of the contiguous United States and Canada. Our Water services are offered through point of purchase display racks or self-serve filtered water vending displays and recycling centers that are prominently located at major retailers in space that is often underutilized.  As of September 30, 2011, we offered our Water services at approximately 16,400 locations.

Our ProductsDispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. The Products segment will include future appliance sales related to the Omnifrio Single-Serve Beverage Business acquired in April 2011. Our ProductsDispensers sales are primarily generated through major U.S. retailers and are available in approximately 6,200 retailers as of September 30, 2011. Our water dispensers are sold primarily through a direct-import model, where we recognize revenues for the sale of the water dispensers when title is transferred to our retailer customers. We support retail sell-through with domestic inventory. We design, market and arrange for certification and inspection of our products.
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In 2011, we added the Flavorstation segment, which includes the Omnifrio Single-Serve Beverage Business acquired in April 2011. This segment consists of sales of our Flavorstation products, which include home beverage appliances, flavor concentrates, CO2 cylinders and accessories.  Flavorstation financial activity began in the fourth quarter of 2011.  Our Flavorstation appliances were only sold to U.S. retailers in 2011, but we do expect international sales in 2012.  We recognize revenues for the sale of Flavorstation products when title is transferred to our retailer customers.

We evaluate the financial results of these segments focusing primarily on segment net sales and segment income (loss) from operations before depreciation and amortization (“segment income (loss) from operations”). We utilize segment net sales and segment income (loss) from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.

Cost of sales for Water consists of costs for bottlingdistribution, bottles and related packaging materials and distribution costs for our bottled water for our exchange services and servicing and material costs for our refill services. Cost of sales for ProductsDispensers consists of contract manufacturing, freight and duties and warehousing costs offor our water dispensers.  Cost of sales for Flavorstation primarily consists of contract manufacturing, freight and duties for our carbonating beverage appliances.

Selling, general and administrative expenses for all segments consist primarily of personnel costs for sales, marketing, operations support and customer service, as well as other supporting costs for operating each segment.

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Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems, and human resources and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.

The following table presents segment information for the three and nine months ended September 30:
  Three months ended September 30,  Nine months ended September 30, 
  2011  2010  2011  2010 
Segment net sales            
Water $16,793  $7,514  $44,788  $20,338 
Products  7,317   3,385   17,162   11,563 
Total net sales $24,110  $10,899  $61,950  $31,901 
                 
Segment income (loss) from operations             
Water $3,449  $1,075  $10,153  $2,866 
Products  (1,103)  (394)  (1,430)  (367)
Corporate  (2,492)  (1,636)  (6,770)  (4,660)
Acquisition-related costs  (249)  (29)  (1,167)  (307)
Depreciation and amortization  (2,548)  (1,103)  (6,707)  (3,113)
Loss from operations $(2,943) $(2,087) $(5,921) $(5,581)
                 
Depreciation and amortization expense:             
Water $2,132  $972  $5,780  $2,701 
Products  303   34   602   102 
Corporate  113   97   325   310 
  $2,548  $1,103  $6,707  $3,113 
                 
Capital expenditures:                
Water         $15,301  $3,870 
Products          718   13 
Corporate          191   250 
          $16,210  $4,133 
Identifiable assets: 
At September 30,
2011
 
Water $161,620 
Products  18,945 
Corporate  2,352 
  $182,917 
     
     
Goodwill:    
Water $78,733 
Products  4,203 
  $82,936 
 
 
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The following table presents segment information for the following periods:

  Three months ended March 31, 
  2012  2011 
Segment net sales      
Water $14,974  $13,146 
Dispensers  4,826   3,993 
Flavorstation  (19)  – 
Total net sales $19,781  $17,139 
         
Segment income (loss) from operations        
Water $4,032  $3,580 
Dispensers  (482)  (418)
Flavorstation  (558)  (16)
Corporate  (2,832)  (2,179)
Non-recurring and acquisition-related costs  (26)  (703)
Depreciation and amortization  (2,567)  (1,901)
Loss from operations $(2,433) $(1,637)
         
Depreciation and amortization expense:        
Water $2,144  $1,703 
Dispensers  107   93 
Flavorstation  172   – 
Corporate  144   105 
  $2,567  $1,901 
         
Capital expenditures:        
Water $660  $2,698 
Dispensers  153   93 
Flavorstation  –   – 
Corporate  12   12 
  $825  $2,803 
  At March 31,  At December 31, 
Identifiable assets:  2012   2011 
Water $72,112  $72,709 
Dispensers  10,669   12,419 
Flavorstation  10,528   11,200 
Corporate  2,574   2,865 
  $95,883  $99,193 
         
         
Goodwill:        
Water $79,126  $78,823 
Dispensers  –   – 
Flavorstation  6,433   6,433 
  $85,559  $85,256 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2010.2011. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” in this Item 2 and in “Risk Factors” in Item 1A of Part II below as well as in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.

Overview

Primo Water Corporation (together with its consolidated subsidiaries, “Primo”, “we”, “our,” “us”) is a rapidly growing provider of multi-gallonthree- and five-gallon purified bottled water, self-serve filtered drinking water, and water dispensers and sparkling beverage appliances sold through major retailers in the United States and Canada. We believe the market for purified water is growing due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and filtered water.

Our business is designed to generate recurring demand for Primoour purified bottled water or self-serve filtered drinking water through the sale of innovative water dispensers. This business strategy is commonly referred to as “razor-razorblade” because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. We believe dispenser owners consume an average of 35 multi-gallon bottles of water annually. Once our bottled water is consumed using a water dispenser, empty bottles are either exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water (exchange services),(exchange) or they can beare refilled at a self-serve filtered drinking water vending location (refill services)(refill). Each of our multi-gallon water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. As of March 31, 2012, our dispensers and water services were offered in each of the contiguous United States and in Canada at approximately 24,100 combined retail locations, including Lowe’s Home Improvement, Walmart, Kroger, Safeway, Albertsons, Winn Dixie, H-E-B Grocery and Walgreens.  In addition, the launch of Flavorsation is an extension of our overall razor/razorblade strategy, which we believe will result in the recurring demand of consumables such as flavors, CO2 cylinders, and accessories through the sale of our innovative carbonation appliances.

We provide major retailers throughout the United States and Canada with single-vendor solutions for water bottle exchange services and refill services.vending services, addressing a market demand that we believe was previously unmet. Our solutions are easy for retailers to implement, require minimal customer management supervision and store-based labor, and provide centralized billing and detailed performance reports. AsOur exchange solution offers retailers attractive financial margins and the ability to optimize typically unused retail space with our displays.  Our refill solution provides filtered water through the installation and servicing of September 30, 2011, ourreverse osmosis water services were offeredfiltration systems in eachthe back room of the contiguous United Statesretailer’s store location, which minimizes the usage of the customer’s retail space. The refill vending machine, which is typically accompanied by a sales display containing empty reusable bottles, is located within the retailer customer’s floor space. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic and Canada at approximately 16,400 retail locations, including Lowe’s Home Improvement, Wal-Mart, Kroger, Safeway, Albertsons and Walgreens.highly predictable revenue.

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, when we refer to “same-store unit growth” for our Water segment, we are comparing retail locations at which our exchange services have been available for at least 12 months at the beginning of the relevant period.  In addition, “gross margin percentage” is defined as net sales less cost of sales, as a percentage of net sales.

Business Segments

At September 30, 2011,March 31, 2012, we had twothree operating segments and twothree reportable segments: Primo Water (“Water”), Primo Dispensers (“Dispensers”) and Primo ProductsFlavorstation (“Products”). The Water segment includes our historical business of bottled water exchange services (“Exchange”Flavorstation”), the Refill Business (“Refill”) acquiredwhich was previously reported in November 2010, the Canada Exchange Business acquired in March 2011 and the operations of a unit that previously was an operating segment, but did not meet quantitative threshold for reporting purposes. Historically, we have disclosed Exchange, Refill and Products as reportable segments. However in 2011, we integrated the Exchange and Refill operations to take advantage of synergies and to eliminate duplicate operations and costs. In integrating the businesses we have changed our internal management and reporting structure such that Exchange and Refill no longer meet the requirements of operating segments on a stand-alone basis.“Other.”

Our Water segment sales consist of the sale of multi-gallon purified bottled water (exchange services), which includes the Canada Exchange Business acquired in March 2011, and our self-serve filtered drinking water vending service (refill services) through retailers in each of the contiguous United States and Canada. Our Water services are offered through point of purchase display racks or self-serve filtered water vending displays and recycling centers that are prominently located at major retailers in space that is often underutilized. As of September 30, 2011, we offered our Water services at approximately 16,400 locations.

Our ProductsDispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. The Products segment will include future appliance sales related to the Omnifrio Single-Serve Beverage Business acquired in April 2011. Our ProductsDispensers sales are primarily generated through major U.S. retailers. Our water dispensersretailers and are sold primarily through a direct-import model, where we recognize revenues for the sale of the water dispensers when title is transferred to our retailer customers. We support retail sell-through with domestic inventory. We design, market and arrange for certification and inspection of our products.

 
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In 2011, we added the Flavorstation segment, which includes the Omnifrio Single-Serve Beverage Business acquired in April 2011. This segment consists of sales of our Flavorstation products, which include home beverage appliances, flavor concentrates, CO2 cylinders and accessories.  Flavorstation financial activity began in the fourth quarter of 2011.  Our Flavorstation appliances were only sold to U.S. retailers in 2011, but we do expect international sales in 2012.  We recognize revenues for the sale of Flavorstation products when title is transferred to our retailer customers.

We evaluate the financial results of these segments focusing primarily on segment net sales and segment income (loss) from operations before depreciation and amortization (“segment income (loss) from operations”). We utilize segment net sales and segment income (loss) from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.

Cost of sales for Water consists primarily of costs for bottlingdistribution, bottles and related packaging materials and distribution costs for our bottled water for our exchange services and servicing and material costs for our refill services. Cost of sales for Products consistsDispensers and Flavorstation consist primarily of contract manufacturing, freight duties and warehousing costs of our water dispensers.duty costs.

Selling, general and administrative expenses for all segments consist primarily of personnel costs for sales, marketing, operations support and customer service, research and development, as well as other supporting costs for operating each segment.

Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems, sales, marketing, and human resources and administration. Corporate expenses also include certain professional fees and expenses and compensation forof our Board of Directors.

 Recent TransactionsIn this Management’s Discussion and Analysis of Financial Condition and Results of Operations, when we refer to “same-store unit growth” for our Water segment, we are comparing retail locations at which our services have been available for at least 12 months at the beginning of the relevant period.  In addition, “gross margin percentage” is defined as net sales less cost of sales, as a percentage of net sales.

Secondary Public Offering

On June 22, 2011, we and certain of our stockholders completed a secondary public offering of a total of 6.9 million shares of our common stock, consisting of 3.8 million shares sold by us and 3.1 million shares sold by certain selling stockholders (including Culligan International Company), at a public offering price of $11.26 per share. The net proceeds of the secondary public offering to us after deducting underwriting discounts and commissions and offering expenses were approximately $39.4 million. We used $29.4 million of the net proceeds received by us from the secondary public offering to repay all outstanding borrowings under our revolving credit facility.  We have used the remaining proceeds received by us for working capital and general corporate purposes, including establishing new store locations for our water bottle exchange and refill vending services. We did not receive any proceeds from the sale of shares by the selling stockholders.Recent Transactions

Omnifrio Single-Serve Beverage Business

On April 11, 2011, we completed the acquisition of certain intellectual property and other assets (the “Omnifrio Single-Serve Beverage Business”) from Omnifrio Beverage Company, LLC (“Omnifrio”) for total consideration of up to approximately $14.1 million, consisting of:  (i) a cash payment at closing of $2.0 million; (ii) the issuance at closing of 501,080 shares of our common stock; (iii) a cash payment of $2.0 million on the 15-month anniversary of the closing date (subject to our setoff rights in the asset purchase agreement); (iv) up to $3.0 million in cash milestone payments; and (v) the assumption of certain specified liabilities relating to the Omnifrio Single-Serve Beverage Business.  The milestone conditions have been renegotiated and we currently expect to make cash milestone payments of $0.6 million and $2.0 million during 2012 and 2013, respectively, and deferred purchase price payments of $1.0 million and $1.0 million during 2012 and 2013, respectively.  The Omnifrio Single-Serve Beverage Business has been accounted for as a business combination in accordance with the acquisition method. We expect to make cash milestone payments for the full $3.0 million over the remainder of 2011.

The Omnifrio Single-Serve Beverage Business primarily consistsconsisted of technology related to single-serve cold carbonated beverage appliances and consumable flavor cups and CO2 cylinders used with the appliances to make a variety of cold beverages. The acquisition of the Omnifrio Single-Serve Beverage Business servesserved as an entry point into the U.S. market for carbonated beverages and the rapidly growing self-carbonating appliance and single-serve beverage segments.

Canada Exchange Business

On March 8, 2011, we completed the acquisition of certain assets of Culligan of Canada Ltd., related to its bulk water exchange business (the “Canada Exchange Business”).  The consideration paid for the Canada Exchange Business was approximately $4.8 million, which consisted of a cash payment of approximately $1.6 million, the issuance of 307,217 shares of our common stock and the assumption of certain specified liabilities. The Canada Exchange Business provides refill and delivery of water in 18-liter containers to commercial retailers in Canada for resale to consumers.  The acquisition of the Canada Exchange Business expandsexpanded our existing exchange service offering and providesprovided us with an immediate network of regional operators and major retailers in Canada with approximately 780 retail locations.  The Canada Exchange Business has been accounted for as a business combination in accordance with the acquisition method.

 
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Results of Operations

The following table sets forth our results of operations for the periods indicated (in thousands):operations:

 
Three months ended
September 30,
  
Nine months ended
September 30,
  Three months ended 
 2011  2010  2011  2010  March 31, 
 2012  2011 
Consolidated statements of operations data:      
Net sales $24,110  $10,899  $61,950  $31,901  $19,781  $17,139 
Operating costs and expenses:                        
Cost of sales  18,715   8,591   45,912   25,263   14,650   12,113 
Selling, general and administrative expenses  5,540   3,263   14,085   8,799   4,971   4,059 
Acquisition-related costs  249   29   1,167   307 
Non-recurring and acquisition-related costs  26   703 
Depreciation and amortization  2,547   1,103   6,707   3,113   2,567   1,901 
Total operating costs and expenses  27,051   12,986   67,871   37,482   22,214   18,776 
Loss from operations  (2,941)  (2,087)  (5,921)  (5,581)  (2,433)  (1,637)
Interest expense  (190)  (936)  (957)  (2,400)
Other income, net  –   33   1   33 
Interest expense and other, net  904   287 
Loss before income taxes  (3,131)  (2,990)  (6,877)  (7,948)  (3,337)  (1,924)
Provision for income taxes  (166)  –   (509)  –   527   190 
Net loss $(3,297) $(2,990) $(7,386) $(7,948) $(3,864) $(2,114)
 
The following table sets forth our results of operations expressed as a percentage of net sales:

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2011  2010  2011  2010 
Net sales  100.0%  100.0%  100.0%  100.0%
Operating costs and expenses:                
Cost of sales  77.6   78.8   74.1   79.2 
Selling, general and administrative expenses  23.0   29.9   22.7   27.6 
Acquisition-related costs  1.0   0.3   1.9   1.0 
Depreciation and amortization  10.6   10.1   10.9   9.7 
Total operating costs and expenses  112.2   119.1   109.6   117.5 
Loss from operations  (12.2)  (19.1)  (9.6)  (17.5)
Interest expense  (0.8)  (8.6)  (1.5)  (7.5)
Other income, net  –   0.3   –   0.1 
Loss before income taxes  (13.0)  (27.4)  (11.1)  (24.9)
Provision for income taxes  (0.7)  –   (0.8)  – 
Net loss  (13.7%)  (27.4%)  (11.9%)  (24.9%)
  Three months ended March 31, 
  2012  2011 
Consolidated statements of operations data:      
Net sales  100.0%  100.0%
Operating costs and expenses:        
Cost of sales  74.1   70.7 
Selling, general and administrative expenses  25.1   23.7 
Non-recurring and acquisition-related costs  0.1   4.1 
Depreciation and amortization  13.0   11.1 
Total operating costs and expenses  112.3   109.6 
Loss from operations  (12.3)  (9.6)
Interest expense and other, net  4.6   1.6 
Loss before income taxes  (16.9)  (11.2)
Provision for income taxes  2.6   1.1 
Net loss  (19.5%)  (12.3%)
 
 
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The following table sets forth our segment net sales and segment lossincome (loss) from operations presented on a segment basis and reconciled to our consolidated loss from operations (in thousands):operations.

 
Three months ended
September 30,
  
Nine months ended
September 30,
  Three months ended March 31, 
 2011  2010  2011  2010  2012  2011 
Segment net sales                  
Water $16,793  $7,514  $44,788  $20,338  $14,974  $13,146 
Products  7,317   3,385   17,162   11,563 
Dispensers  4,826   3,993 
Flavorstation  (19)  – 
Total net sales $24,110  $10,899  $61,950  $31,901  $19,781  $17,139 
                        
Segment income (loss) from operations                Segment income (loss) from operations     
Water $3,449  $1,075  $10,153  $2,866  $4,032  $3,580 
Products  (1,103)  (394)  (1,430)  (367)
Dispensers  (482)  (418)
Flavorstation  (558)  (16)
Corporate  (2,492)  (1,636)  (6,770)  (4,660)  (2,832)  (2,179)
Acquistion-related costs  (249)  (29)  (1,167)  (307)
Non-recurring and acquisition-related costs  (26)  (703)
Depreciation and amortization  (2,548)  (1,103)  (6,707)  (3,113)  (2,567)  (1,901)
Loss from operations $(2,943) $(2,087) $(5,921) $(5,581) $(2,433) $(1,637)

Three Months Ended September 30, 2011March 31, 2012 Compared to Three Months Ended September 30, 2010March 31, 2011

Net Sales.  Net sales increased 121.2%15.4%, or $13.2$2.7 million, to $24.1$19.8 million for the three months ended September 30, 2011March 31, 2012 from $10.9$17.1 million for the three months ended September 30, 2010.March 31, 2011.  The increase in net sales resulted from a $9.3$1.9 million increase in Water sales and a $3.9$0.8 million increase in ProductsDispensers sales.

Water.Water net sales increased 123.6%13.9% to $16.8$15.0 million, representing 69.7% of our total net sales for the three months ending September 30, 2011.  Water net sales for the three months ended September 30, 2011, included $7.2 million in net sales, or 5.8 million five-gallon equivalent units, attributable to the Refill Business that we acquired in November 2010. In addition, the increase in Water net sales was also due to a 28.8% increase in net sales of exchange services, driven by a 45.4% increase in five-gallon equivalent units sold to 1.7 million units, and 3.4% same-store unit growth compared to the third quarter of 2010.  Of the above increase in net sales of exchange services, $0.8 million in net sales, or 0.2 million five-gallon equivalent units, was attributable to the Canada Exchange Business.

Products. Products net sales increased 115.9% to $7.3 million, representing 30.3%75.7% of our total net sales, for the three months ended September 30,March 31, 2012. Five-gallon equivalent units for Water increased 8.5% to 6.6 million units for the first quarter of 2011 from 6.1 million units in the same period of the prior year.  The increase in Water net sales was primarily due to a 31.1% increase in exchange sales, driven by a 22.7% increase in U.S. exchange sales that resulted from the new location growth and same-store unit growth of 5% in our exchange services for the first quarter of 2012 compared to the first quarter of 2011.
Water net sales included $0.8 million and $0.2 million in net sales and 214,000 and 57,000 five-gallon equivalent units attributable to the Canada Exchange Business, which was acquired in March 2011, for the three months ended March 31, 2012 and 2011, respectively.

Dispensers. Dispensers net sales increased 20.9% to $4.8 million, representing 24.4% of our total net sales, for the three months ended March 31, 2012. The increase is due primarily to the increase in the number of retail locations offering our dispensers.  Our dispenser unit sales to retailers increased by approximately 147.0%24.1% for the three months ended September 30, 2011March 31, 2012 compared to the same period ofin the prior year.  Because of short-term, reduced promotional pricing for a major customer and, to a lesser extent, increased sales to a lower-margin customer, our unit sales increase was greater than the dollar value of the net sales increase.  We believe that sales of dispensers at retail to end consumers increased approximately 31.0% with an increase of approximately 12.7% in selling locations to 6,200 at September 30, 2011 compared to 5,500 at September 30, 2010.

Gross Margin PercentagePercentage. . Our overall gross margin percentage increaseddecreased to 22.4%25.9% for the three months ended September 30, 2011,March 31, 2012 from 21.2%29.3% for the three months ended September 30, 2010.  The improvement in gross margin percentage is primarily the result of an increased mix of higher margin Water segment sales, which were 69.7% of sales in 2011 compared to 68.9% in 2010.March 31, 2011.

Water. Gross margin as a percentage of net sales in our Water segment increaseddecreased to 31.9%34.9% for the three months ended September 30, 2011,March 31, 2012 from 30.0%36.6% for the same period in the prior year. The decrease in gross margin percentage for the three months ended September 30, 2010. The increase in gross margin percentage during the third quarter of 2011March 31, 2012 was primarily due to the impactincrease in sales mix for lower-margin exchange services compared to refill services.  We currently anticipate that Water segment gross margin percentages will be between 34% and 37% for the remainder of 2012, exceeding the Refill Business acquisition which has higher margins than our exchange services.full-year 2011 gross margin percentage of 32.5%.

Products.Dispensers. Gross margin as a percentage of net sales in our ProductsDispensers segment decreased to 0.5%1.0% for the three months ended September 30, 2011March 31, 2012 from 1.5%5.3% for the three months ended September 30, 2010.same period in the prior year.  The decrease in gross margin percentage is primarily due to short-term, reduced promotional pricing forincreased sales to a majorlower-margin customer during the current period and, to a lesser extent, increased sales to a lower-margin customer.  We continue to focus on selling our water dispensers at minimal margin in order to increase home penetration, which we believe will lead to increased recurring revenue and higher margin Water sales.manufacturing costs for certain models.

 
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Flavorstation. Our Flavorstation segment had a negative gross margin percentage for the three months ended March 31, 2012 as we had negligible net sales and $0.1 million of costs of sales primarily related to freight.  This is a non-seasonal period for Flavorstation and we expect a more significant level of sales for the second half of 2012.
 
Selling, General and Administrative Expenses (“SG&A”). SG&A increased 69.8%22.4% to $5.5$5.0 million for the three months ended September 30, 2011,March 31, 2012 from $3.3$4.1 million for the three months ended September 30, 2010.  However,March 31, 2011. As a percentage of net sales, SG&A increased to 25.1% for the three months ended March 31, 2012 from 23.7% for the three months ended March 31, 2011.  The dollar increase in SG&A is primarily the result of increased compensation expense, including a $0.2 million increase in non-cash stock-based compensation expense, and $0.4 million in expenses related to the Flavorstation business, which began selling in the fourth quarter of 2011.  We currently expect that SG&A as a percentage of net sales decreased to 23.0% for the three months ended September 30,remainder of 2012 will compare favorably with 2011 from 29.9% for the three months ended September 30, 2010.  The dollar increase in SG&A is the result of increased headcount necessary to operate as a public company, the costs of operating duplicate back-office operations related to acquisitions, and marketing and research and development costs related to new carbonation appliances.  We expect that the trend of decreased SG&A as a percentage of net sales will continue as we leverage costs with increased overall sales growth.

Water. SG&A for our Water segment increased 60.3% to $1.9decreased slightly and was unchanged on a rounded basis at $1.2 million for both the three months ended September 30,March 31, 2012 and 2011, from $1.2 million for the three months ended September 30, 2010.  However,respectively.  Water segment SG&A as a percentage of Water segment net sales decreased to 11.3%8.0% for the three months ended September 30, 2011,March 31, 2012 compared to 15.7%9.4% for the three months ended September 30, 2010.March 31, 2011.  The dollar increasedecrease in Water segment SG&A is primarily a result of costs of operating duplicate back-office operations following the acquisitions, as selling, general and administrative expenses for the three months ended September 30, 2011 included $0.7 million related to the Refill Business. We expect the trend of decreased Water segment SG&A as a percentage of Water segment net sales will continue as we reducereduction in duplicate costs related to the Refill Businessrefill business acquisition, andwhich occurred in November 2010. We expect to continue to leverage costs with increased sales growth.

Products.Dispensers. SG&A for our ProductsDispensers segment increased 158.7%decreased 15.6% to $1.1 million for the three months ended September 30, 2011, from $0.5 million for the three months ended September 30, 2010.March 31, 2012 from $0.6 million for the three months ended March 31, 2011.  SG&A as a percentage of ProductsDispensers segment net sales increaseddecreased to 11.0% for the three months ended March 31, 2012 from 15.7% for the three months ended September 30, 2011, from 13.1%March 31, 2011.
Flavorstation. SG&A for our Flavorstation segment was $0.4 million for the three months ended September 30, 2010.  This increase in Products segmentMarch 31, 2012.  Flavorstation SG&A was primarily related to product development, marketing and research and development costsconsulting expenses related to new carbonation appliancesthe Flavorstation business that have not begun generating revenues.launched in the fourth quarter of 2011.

Corporate. Corporate SG&A increased 52.4%30.0% to $2.5$2.8 million for the three months ended September 30, 2011,March 31, 2012 from $1.6$2.2 million for the three months ended September 30, 2010.  However,March 31, 2011.  Corporate SG&A as a percentage of consolidated net sales decreasedincreased to 10.3%14.3% for the three months ended September 30, 2011,March 31, 2012 from 15.0%12.7% for the three months ended September 30, 2010.March 31, 2011.  The increase in Corporate SG&A dollars is primarily from an increase in salariescompensation and related payroll costs from additional employees as well as an increase in professional fees and related expenses necessary to operate as a public company.  While we continue to expect to incur additional costs to operate as a public company related to compliance, reporting and insurance, wecompensation-related expenses.  We currently expect Corporate SG&A as a percentage of consolidated net sales to continue to decrease for the remainder of 2012 as we leverage these expenses with increased sales growth.

Non-Recurring and Acquisition-Related Costs. Acquisition-relatedNon-recurring and acquisition-related costs were $0.2decreased to $26,000 for the three months ended March 31, 2012 from $0.7 million for the three months ended September 30,March 31, 2011.  Non-recurring and acquisition-related costs during 2011 compared to $29,000 for the three months ended September 30, 2010.   Acquisition-relatedconsisted primarily of costs are associated with the acquisitions of the Refill Business,refill business, the Canada Exchange Business and the Omnifrio Single-Serve Beverage Business.  These acquisition-related costs consist primarily of professional fees and related expenses. We expect to continue to incur non-recurring and acquisition-related costs ranging from $0.6 to $0.7of approximately $0.4 million for the fourthsecond quarter of 2011.2012.  This anticipated increase in non-recurring and acquisition-related costs over the three months ended SeptemberJune 30, 20112012 is primarily related to employee severance costs associated with the elimination of duplicate management roles related to the closing of our Refill Business manufacturing, warehouse and back-office facilitiesrefill services business and the associated costsrestructuring and consolidation of that closure, primarily relatedWater operations.  We expect these changes to future lease costs and employee severance.result in annual savings of approximately $2.0 million.

Depreciation and Amortization. Depreciation and amortization increased 130.9%35.1% to $2.5$2.6 million for the three months ended September 30, 2011,March 31, 2012 from $1.1$1.9 million for the three months ended September 30, 2010.March 31, 2011.  The increase is primarily due to depreciation on additional property and equipment and amortization for identifiable intangible assets, both related to our recent2011 business acquisitions.

Interest Expense. Interest expense decreasedincreased to $0.2 million for the three months ended September 30, 2011, from $0.9 million for the three months ended September 30, 2010. The decrease is a result of our recapitalization and application of the proceedsMarch 31, 2012 from our IPO in November 2010, which allowed us to refinance our subordinated debt with traditional bank debt at significantly lower interest rates.  In addition, in June 2011 we completed a secondary public offering in which $29.4 million of the net proceeds were used to repay all outstanding borrowings under our revolving credit facility.

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Preferred Dividends. Preferred dividends were eliminated upon the completion of our IPO in November 2010 in which 50% of the Series B preferred stock was redeemed along with all unpaid and accrued dividends.  The remaining 50% of the Series B preferred stock was converted into shares of common stock.  We do not expect to incur charges for dividends in the future.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Net Sales. Net sales for the nine months ended September 30, 2011 increased 94.2%, or $30.1 million, to $62.0 million from $31.9$0.3 million for the ninethree months ended September 30, 2010. The increase in net sales resulted from a $24.5 million increase in Water sales and a $5.6 million increase in Product sales.

Water. Water net sales increased 120.3% to $44.8 million, representing 72.3% of our total net sales, for the nine months ended September 30, 2011. Water net sales for the nine months ended September 30, 2011, included $20.1 million in net sales, or 16.0 million five-gallon equivalent units, attributable to the Refill Business. In addition, the increase in Water net sales was partially due to a 22.9% increase in net sales of exchange services, driven by a 35.3% increase in five-gallon equivalent units sold to 4.3 million units, and 3.6% same-store unit growth compared to the first nine months of 2010.  Of the above increase in net sales of exchange services, $1.9 million in net sales, or 0.5 million five-gallon equivalents, was attributable to the Canada Exchange Business.

Products. Products net sales increased 48.4% to $17.2 million, representing 27.7% of our total net sales, for the nine months ended September 30,March 31, 2011.  The increase is primarily due primarily to increased amortization of deferred loan costs as a result of the additionaccelerated maturity of several new water dispenser models, which began shipping in the fourth quarter of 2010.  Our dispenser unit salesour Senior Revolving Credit Facility.  Interest expense related to retailersdeferred loan costs amortization increased by approximately 66%to $0.7 for the ninethree months ended September 30, 2011 compared toMarch 31, 2012 from $0.1 million for the same period of the prior year.  Because of short-term, reduced promotional pricing for a major customer and, to a lesser extent, increased sales to a lower-margin customer, our unit sales increase was greater than the dollar value of the net sales increase.  We believe that sales of dispensers at retail to end consumers increased approximately 16.0% with an increase of approximately 12.7% in selling locations at September 30, 2011 compared to September 30, 2010.
Gross Margin Percentage. Our overall gross margin percentage increased to 25.9% for the nine months ended September 30, 2011 from 20.8% for the nine months ended September 30, 2010. The improvement in gross margin percentage is primarily the result of an increased mix of higher margin Water segment sales, which increased to 72.3% from 63.8% of sales in the prior year.

Water. Gross margin as a percentage of net sales in our Water segment increased to 34.2% for the nine months ended September 30, 2011 from 29.4% for the nine months ended September 30, 2010. The gross margin percentage during 2011 benefited from the impact of the Refill Business and the higher margin refill services.

Products. Gross margin as a percentage of net sales in our Products segment decreased to 4.3% for the nine months ended September 30, 2011 from 5.7% for the nine months ended September 30, 2010. The decrease in gross margin percentage is primarily due to short-term, reduced promotional pricing for a major customer and, to a lesser extent, increased sales to a lower-margin customer during the three months ended September 30, 2011.

Selling, General and Administrative Expenses (“SG&A”). SG&A increased 60.1% to $14.1 million for the nine months ended September 30, 2011, from $8.8 million for the nine months ended September 30, 2010. However, as a percentage of net sales, SG&A decreased to 22.7% for the nine months ended September 30, 2011 from 27.6% for the nine months ended September 30, 2010. The dollar increase in SG&A is the result of increased headcount necessary to operate as a public company, the costs of operating duplicate back-office operations related to acquisitions and research and development costs.  We expect that the trend of decreased SG&A as a percentage of net sales will continue as we leverage costs with increased sales growth.

 
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Water. SG&A for our Water segment increased 65.1% to $5.1 million for nine months ended September 30, 2011, from $3.1 million for the nine months ended September 30, 2010. However, Water segment SG&A as a percentage of Water segment net sales decreased to 11.5% for the nine months ended September 30, 2011, compared to 15.3% for the nine months ended September 30, 2010.  The dollar  increase in Water segment SG&A is primarily a result of costs of operating duplicate back-office operations following the acquisitions, as selling, general and administrative expenses for the nine months ended September 30, 2011 included $1.9 million related to the Refill Business. We expect that this trend of decreased Water segment SG&A as a percentage of Water segment net sales to continue as we reduce duplicate costs related to the Refill Business acquisition and leverage costs with increased sales growth.

Products. SG&A for our Products segment increased 112.0% to $2.2 million for the nine months ended September 30, 2011, from $1.0 million for the nine months ended September 30, 2010. SG&A as a percentage of Products segment net sales increased to 12.7% for the nine months ended September 30, 2011 from 8.9% for the nine months ended September 30, 2010. The increase is a primarily a result of expenses related to product development, marketing samples and promotional materials related to our new dispenser line and product development, marketing and branding efforts associated with our new carbonating appliances.

Corporate. Corporate SG&A increased 45.3% to $6.8 million for the nine months ended September 30, 2011, from $4.7 million for the nine months ended September 30, 2010. However, Corporate SG&A as a percentage of consolidated net sales decreased to 10.9% for the nine months ended September 30, 2011, from 14.6% for the nine months ended September 30, 2010.  The increase in Corporate SG&A is primarily from an increase in salaries and related payroll costs from additional employees as well as an increase in professional fees and related expenses necessary to operate as a public company.  While we continue to expect to incur additional costs to operate as a public company related to compliance, reporting and insurance, we expect Corporate SG&A as a percentage of consolidated net sales to continue to decrease as we leverage these expenses with increased sales growth.

Acquisition-Related Costs. Acquisition-related costs increased to $1.2 million for the nine months ended September 30, 2011, from $0.3 million for the nine months ended September 30, 2010.  Acquisition-related costs are associated with the acquisitions of the Refill Business, the Canada Exchange Business and the Omnifrio Single-Serve Beverage Business. These acquisition-related costs consist primarily of professional fees and related expenses.

Depreciation and Amortization. Depreciation and amortization increased 115.5% to $6.7 million for the nine months ended September 30, 2011, from $3.1 million for the nine months ended September 30, 2010. The increase is due to depreciation on additional property and equipment and amortization for identifiable intangible assets, both related to our recent business acquisitions.

Interest Expense. Interest expense decreased 60.1% to $1.0 million for the nine months ended September 30, 2011, from $2.4 million for the nine months ended September 30, 2010.  The decrease is a result of our recapitalization and application of the proceeds from our IPO in November 2010, which allowed us to refinance our subordinated debt with traditional bank debt at significantly lower interest rates.  In addition, in June 2011 we completed a secondary public offering in which $29.4 million of the net proceeds were used to repay all outstanding borrowings under our revolving credit facility.

Preferred Dividends. Preferred dividends were eliminated upon the completion of our IPO in November 2010 in which the 50% of the Series B preferred stock was redeemed along with all unpaid and accrued dividends.  The remaining 50% of the Series B preferred stock was converted into shares of common stock.  We do not expect to incur charges for dividends in the future.

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Liquidity and Capital Resources

Adequacy of Capital Resources

Since our inception, we have financed our operations primarily through the sale of stock, the issuance of debt and borrowings under credit facilities. In November 2010,While we completedhad no material commitments for capital expenditures as of March 31, 2012, we do anticipate capital expenditures to range between $4.0 million and $5.0 million for the remainder of 2012. Anticipated capital expenditures are related to our IPOexpected growth in Water locations and issued 9.6 million sharesnew Dispenser product lines and the continued development of our common stock at a price of $12.00 per share. The net proceeds of the IPO after deducting underwriting discounts and commissions were approximately $106.9 million.Flavorstation product lines. In addition, in June 2011connection with the acquisition the Omnifrio Single-Serve Beverage Business, we completedcurrently expect to make cash milestone payments of $0.6 million and $2.0 million during 2012 and 2013, respectively, and deferred purchase price payments of $1.0 million and $1.0 million during 2012 and 2013, respectively.

At March 31, 2012, our cash totaled $0.4 million and we had no availability under our prior senior revolving credit facility.  On April 30, 2012, we entered into a secondary public offering with net proceeds$20.0 million senior revolving credit facility (the “Senior Revolving Credit Facility”) and a $15.2 million term loan (the “Term Loan”) that replaced our prior senior credit facility.  At that date, we had $2.2 million in borrowings and approximately $5.3 million in additional availability under the Senior Revolving Credit Facility. This availability is subject to us of $39.4 million.borrowing base requirements related to our eligible accounts receivable and inventory.

Our future capital requirements may vary materially from those now anticipated and will depend on many factors, including acquisitions of other businesses, the rate of growth in new locations and related display and rack costs, cost to develop new water dispensers and carbonating appliances, sales and marketing resources needed to further penetrate our markets, the expansion of our operations in the United States and Canada as well as the response of competitors to our solutions and products. Historically, we have experienced increases in our capital expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business.

While we had no material commitments forOur ability to satisfy our obligations or to fund planned capital expenditures as of September 30, 2011, we do anticipate capital expenditureswill depend on our future performance, which to range between $2.0 milliona certain extent is subject to general economic, financial, competitive, legislative, regulatory and $4.0 million over the remainder of 2011 and to range between $15.0 million and $20.0 million for fiscal 2012. For both periods, anticipated capital expenditures are related toother factors beyond our expected growth in Water locations and new Product lines.control.  We anticipate that we may incur additional expenses related to the integration of the acquisition of the Canada Exchange Business and the Omnifrio Single-Serve Beverage Business.  In addition, in connection with the acquisition the Omnifrio Single-Serve Beverage Business, we expect to make cash milestone payments of $3.0 million during the fourth quarter of 2011.

At September 30, 2011, our availability under our Senior Revolving Credit Facility (as defined below) was $7.2 million (after giving effect to the outstanding balance of $1.5 million and the $1.2 million of outstanding standby letters of credit and including $0.1 million of capital lease obligations). Wealso believe that these funds available under our Senior Revolving Credit Facility along with our cash of $1.2 million and future cash flows from our operations will be sufficient to meet our currently anticipated working capital and capital expenditure requirements for at least the next twelve months.  Whileif we are not currently in compliance with all of the financial covenants in our Senior Revolving Credit Facility, we anticipate amending this credit facility before November 30, 2011.  If we are unable to amend our Senior Revolving Credit Facility, we may need to replace it with alternative sources of debt or equity financing that may be on terms that are less favorable to us.  If we are unable to secure such sources of debt or equity financing, we may be forced to reduce our capital expenditures and delay our growth plans.

During the last three years, trends and conditions in the retail environment and credit markets, inflation and changing prices have not had apursue any material effect on our business and we do not expect that these trends and conditions, inflation or changing prices will materially affect our businessacquisitions in the foreseeable future.future we will need to finance this activity through additional equity or debt financing.

At September 30, 2011, our principal sources of liquidity were accounts receivable of $13.2 million, cash of $1.2 million and borrowing availability under our senior revolving credit facility of $7.2 million (after giving effect to the outstanding balance of $1.5 million and the $1.2 million of outstanding standby letters of credit and including $0.1 million of capital lease obligations).

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Changes in Cash Flows

The following table shows the components of our cash flows for the periods presented (in millions):

  
Three Months Ended
March 31,
 
  2012  2011 
Net cash provided operating activities $0.9  $2.4 
Net cash used in investing activities $(0.9) $(4.5)
Net cash provided by financing activities $(0.3) $2.7 
  
Nine Months Ended
June 30,
 
  2011  2010 
Net cash used in operating activities $(2.0) $(3.4)
Net cash used in investing activities $(20.0) $(4.2)
Net cash provided by financing activities $22.9  $7.9 
Net Cash Flows from Operating Activities

Net cash used in operationsprovided by operating activities decreased to $2.0$0.9 million for the ninethree months ended September 30, 2011,March 31, 2012 from $3.4$2.4 million for the ninethree months ended September 30, 2010.March 31, 2011.   The decrease in cash used inprovided by operations was primarily related to an increase in non-cash depreciation, partially offset bya $1.1 million increase in cash used for working capital items,items.  In addition, the decrease in cash provided by operations was caused by an increase in our net loss, which was primarily related to a $5.4 million increase in cash used for inventory compared to the prior year.  Inventory increased due to anticipated new locations for our Products segments as well as dispenser inventory related to upcoming promotions.partially offset by non-cash adjustments.

Net Cash Flows from Investing Activities

Net cash used in investing activities increaseddecreased to $20.0$0.9 million for the ninethree months ended September 30, 2011March 31, 2012 from $4.2$4.5 million for the ninethree months ended September 30, 2010. March 31, 2011, caused by decreases in cash used for business acquisitions and cash used for capital expenditures. During the first quarter of 2011, we completed the acquisition of the Canada Bulk Water Exchange Business, which included a cash payment of $1.6 million.
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Our primary investing activities are typically capital expenditures for business acquisitions, property, equipment and bottles. Our capital expenditures are primarily for the installation of our recycle centers, display racks and reverse osmosis filtration systems at new Water locations. We also invest in the technology infrastructure needed to manage our national network. The increase

Net Cash Flows from Financing Activities

Net cash used in financing activities was $0.3 million for the three months ended March 31, 2012 compared to cash provided by financing activities of $2.7 million for the three months ended March 31, 2011. For the three months ended March 31, 2012, cash used in investing activities iswas primarily the result of capital expenditures relatingrelated to installations of new Water locations during the first nine months of 2011.  In addition, we completed the acquisitions of the Canada Exchange Business in March 2011 and the Omnifrio Single-Serve Beverage Business in April 2011, which included cash payments of $1.6 million and $2.0 million, respectively.

Net cash provided by financing activities increased to $22.9 million for the nine months ended September 30, 2011 from $7.9 million for the nine months ended September 30, 2010.debt issuance costs.  During the first ninethree months of 2011, cash provided by financing activities was primarily from our issuance of common stock in connection with our secondary public offering. The proceeds to us from the secondary public offering, net of underwriting discounts, commissions and issuance costs were $39.4 million. We used $29.4 million of the proceeds to us of our secondary public offering to repay all outstanding borrowings under our revolving credit facility.  During the first nine months of 2010, cash provided by financing activities was primarily from borrowings under our prior senior revolving credit facility of $6.6 million and issuance of subordinated debt of $3.4 million offset by dividends paid of $0.2 million and equity issuance costs of $1.7 million.$2.7 million.

Senior Revolving Credit Facility

We entered into a senior revolving credit facility in November 2010 that was amended in April 2011 and September 2011 (“Senior Revolving Credit Facility”) that replaced our previous loan agreement. Ourthe Senior Revolving Credit Facility providedon April 30, 2012 that replaced our prior senior credit facility.  The Senior Revolving Credit Facility provides for total borrowing availability of up to $40.0$20.0 million subject to borrowing base limits.requirements related to our eligible accounts receivable and inventory and subject to a $2.0 million reserve requirement. The Senior Revolving Credit Facility matureshas a three and one-half year term and is secured either on a first priority or second priority basis by substantially all of our assets. The term of the Senior Revolving Credit Facility may be extended up to April 30, 2017 so long as the maturity of the Term Loan (as defined below) is extended to at least October 30, 2017. At March 31, 2012, our outstanding balance under our prior senior revolving credit facility was $14.7 million and we had no additional availability.  At April 30, 2012, after our prior senior credit facility was paid in November 2013full, our outstanding balance under our Senior Revolving Credit Facility was $2.2 million and we had approximately $5.3 million in additional availability. The Senior Revolving Credit Facility does not contain any financial covenants, but it does cross default to the Term Loan.

Term Loan

We entered into a credit and security agreement on April 30, 2012, pursuant to which the $15.2 million Term Loan was provided.  The outstanding balance of the Term Loan is due and payable in a single installment on April 30, 2016, subject to prepayment in specified circumstances, including sales or dispositions of assets outside the ordinary course of business and sales of equity or debt securities by Primo. The Term Loan is secured by substantially all of our assets.

Interestassets on the outstanding borrowings under the Senior Revolving Credit Facility is payable at our option at either a floating base rate plus an interest rate spreadfirst priority or a floating ratesecond priority basis. The first priority assets consist of LIBOR plus an interest rate spread. Bothsubstantially all of the interest rate spreads and the commitment fee rate are determined from a pricing grid based on our total leverage ratio. The Senior Revolving Credit Facility also provides for letters of credit issuedassets related to our vendors, which reducerefill services business. The security interest in all of our other assets is subordinate to the amount available for cash borrowings. We are required to pay a commitment fee on the unused amounts of the commitments undersecurity interest securing the Senior Revolving Credit Facility.

The amended Senior Revolving Credit FacilityTerm Loan contains various restrictive covenants and the following financial covenants: (i) a maximum total leverage ratio that for the quarter ended September 30, 2011 was set at 2.75 to 1.0 and steps down to 2.5 to 1.0 thereafter; (ii) a minimum EBITDA (as defined in our Senior Revolving Credit Facility and measuredlimit on a trailing four-quarter basis) threshold that was $5.6 million for the twelve-month period ended September 30, 2011; (iii) a minimum consolidated interest coverage ratio of 3.0 to 1.0 (measured on a trailing four-quarter basis); and (iv) a maximum amount of capital expenditures of $25.0$5.5 million for the year endingended December 31, 2011.

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For the quarter ended June 30, 2011, we were not in compliance with our2012 and $12.0 million for each year thereafter; (ii) an increasing minimum EBITDA covenantthreshold that is measured at the end of each quarter, (iii) a decreasing total debt to EBITDA ratio that is measured at the end of each quarter, and we received(iv) a waiver forrequirement that the gross profit of our failure to comply with that covenant that also limited the availability to $10.0 million until the covenant is amended.  In September 2011, we entered into a second amendment to the credit agreement that waived our failure to comply with the consolidated interest coverage ratiorefill services business for the trailing 12-month period measured at the end of each quarter ended September 30, 2011, stipulated that the waiver would remain in effect through November 30, 2011 and continued the $10.0 million limit on availability through the waiver period.  We are currently negotiating an amended credit facility that would have availability of up to $25.0be no less than $10.5 million.  We believe this amended credit facility will close before November 30, 2011.

Legal Proceedings

From time to time, we are involved in various claims and legal actions that arise in the normal course of business. Management believes that the outcome of such legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

Inflation

During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Seasonality; Fluctuations of Results

We have experienced and expect to continue to experience seasonal fluctuations in our sales and operating income. Our sales and operating income have been highest in the spring and summer and lowest in the fall and winter. Our Water segment, which generally enjoys higher margins than our ProductsDispensers segment, experiences higher sales and operating income in the spring and summer. Our ProductsDispensers segment had historically experienced higher sales and operating income in spring and summer; however, we believe the seasonality of this segment will be more dependent on retailer inventory management and purchasing cycles and not correlated to weather. Sustained periods of poor weather, particularly in the spring and summer, can negatively impact our sales in our higher margin Water segment. Accordingly, our results of operations in any quarter will not necessarily be indicative of the results that we may achieve for a year or any future quarter.
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Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2010.2011.

Recent Accounting Pronouncements

See Note 1, “DescriptionPresentation of Business and Significant Accounting Policies,” to our Notes to Condensed Consolidated Financial Statements (Unaudited) in Item 1 of this Quarterly Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.Comprehensive Income

Cautionary Note Regarding Forward-Looking StatementsIn June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both instances, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.  In December 2011, the FASB issued guidance to indefinitely defer provisions requiring reclassification adjustments out of other comprehensive income to be presented on the face of the financial statements. The other portions of the original guidance remain unchanged.  These standards are effective for interim and annual periods beginning after December 15, 2011, and are to be applied retrospectively.  We have included such disclosures within this quarterly report.

This document includes and other information we make public from time to time may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include statements about our estimates, expectations, projections, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements.  Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the factors set forth below in Part II, Item 1A “Risk Factors” as well as those set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.

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Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management only as of the time such statements are made.  Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Item 3.  Quantitative and Qualitative DisclosuresDisclosure About Market Risk

For quantitative and qualitative disclosures about our market risks, see Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.2011.  Through March 31, 2012, there have been no material changes to our market risk since our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures asAs of the end of the period covered by this report, werean evaluation was performed under the supervision and with the participation of our management, including the chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective to providefor the purpose of providing reasonable assurance that the information we are required to disclosebe disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC’s rules and forms and that such information(ii) is accumulated and communicated to our management, including our chief executive officerCEO and chief financial officer,CFO, as appropriate to allow timely decisions regarding required disclosure.disclosures.

Changes in Internal Control over Financial Reporting

There werewas no changeschange in our internal control over financial reporting (as definedidentified in Rules 13a-15(f) or 15d-15(f) underconnection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act)Act that occurred during the period covered by this report that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are involvedClass Action Suit

On December 2, 2011, Primo, certain members of our board of directors, certain members of management, certain shareholders and company advisors were named as defendants in various claims and legal actions that arisea purported class-action lawsuit filed in the normal courseUnited States District Court for the Middle District of business. Management believesNorth Carolina.  The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  The complaint asserts claims on behalf of a class of persons who acquired our common stock in or traceable to our initial public offering and our secondary offering as well as purchasers of our common stock between November 4, 2010 and August 10, 2011.  The complaint alleges that defendants violated the federal securities laws by, among other things, making misrepresentations about our projected financial results and business operations in order to artificially inflate the price of our stock.  The complaint requests unspecified damages and costs.  We do not believe the lawsuit has merit and plan to vigorously contest and defend against it.  We are insured for potential losses subject to limits.  We are required to indemnify each of the named defendants that are party to the lawsuit against losses and expenses they incur in connection with the litigation.

Electrotemp

On October 14, 2011, Primo, through a wholly-owned subsidiary, filed a complaint against Electrotemp Technologies China, Inc. ("Electrotemp") in Mecklenburg County (North Carolina) Superior Court, alleging breach of contract, quantum meruit/unjust enrichment, and violation of the North Carolina Products Liability Act/breach of implied warranty. Our claims arise out of Electrotemp's failure to credit us for defective water coolers manufactured by Electrotemp and sold by us which were returned by unsatisfied customers.  We are seeking approximately $3.1 million in damages from Electrotemp.  Electrotemp removed the action to the United States District Court for the Western District of North Carolina based on diversity of citizenship.  The parties filed a Joint Motion to Stay litigation so that they could proceed with mediation and arbitration pursuant to the dispute resolution clause in their agreement.  On May 1, 2012, the Court ordered that the outcome of such legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.litigation would be stayed once the parties formally enter into arbitration.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, as supplemented and updated by the discussion below. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

We mayOur results of operations could be adversely affected as a result of the impairment of goodwill or other intangibles.

When we acquire a business, we record an asset called “goodwill” equal to the excess amount we pay for the business, including liabilities assumed, over the fair value of the tangible and intangible assets of the business we acquire. In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we must identify and value intangible assets that we acquire in business combinations, such as customer arrangements, customer relationships and non-compete agreements, that arise from contractual or other legal rights or that are capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. The fair value of identified intangible assets is based upon an estimate of the future economic benefits expected to result from ownership, which represents the amount at which the assets could be bought or sold in a current transaction between willing parties, other than in a forced or liquidation sale.

U.S. GAAP provides that goodwill and other intangible assets that have indefinite useful lives not be successful selling products relatedamortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. U.S. GAAP also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. U.S. GAAP requires management to make certain estimates and assumptions to allocate goodwill to reporting units and to determine the fair value of reporting unit net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Absent any impairment indicators, we perform our Flavorstation 100 carbonating beverage appliance, other carbonated beverage appliances we introduce in the future or products related to those appliances.
We are introducing our new Flavorstation carbonating beverage appliance to retail locationsimpairment tests annually during the fourth quarter of 2011.  This appliance will use our flavors and CO2 cylinders.  We may not experience success selling this or other carbonating beverage appliances or products related to these appliances to consumers as we have not previously participated in the carbonated beverage segment of the nonalcoholic beverage industry, which could put our products at a disadvantage compared to those sold by our competitors, many of which are leading consumer products companies with substantially greater financial and other resources than we have and many of which have established a strong brand presence with consumers.quarter.

Our introduction of this and future products into the market may also be adversely affected by certain factors that are out of our control, including the willingness of market participants to try new products, the emergence of newer technologies and the cost competitiveness of our products. In addition, our efforts to introduce these products will cause us to incur costs, including significant advertising and marketing expenses, before we generate any revenues and may cause a diversion of management time and attention. If the Flavorstation products do not achieve market acceptance, this could have a material adverse effect on our business, result of operations and financial condition.

 
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We review our intangible assets with definite lives for impairment when events or changes in business conditions indicate the carrying value of the assets may not be recoverable, as required by U.S. GAAP. An impairment of intangible assets with definite lives exists if the sum of the undiscounted estimated future cash flows expected is less than the carrying value of the assets. If this measurement indicates a possible impairment, we compare the estimated fair value of the asset to the net book value to measure the impairment charge, if any.

As of December 31, 2011, we performed an interim impairment test of our goodwill and other identifiable intangible assets due to events and changes in circumstances that indicated an impairment might have occurred. The factor deemed by management to have constituted a potential impairment triggering event was the decrease in our stock price relative to our book value. The analysis indicated that the fair values of each of our reporting units exceeded their respective carrying values. At that time, we also compared the aggregate estimated fair values of our reporting units from the impairment analysis to our overall market capitalization with appropriate consideration of a control premium.  Based on these analyses, we concluded that goodwill was not impaired.

We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and other intangible assets that totaled $105.6 million at March 31, 2012. Such events include our stock price continuing at a low price relative to our book value as well as strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in our relationships with material customers and other parties breaching their contractual obligations under non-compete agreements. Future impairments, if any, will be recognized as operating expenses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

The following table provides information about repurchases of our common stock during the three months ended March 31, 2012:
Period  
Total
Number of
Shares and
Units
Purchased
(1)
  
Average
Price Paid
Per Share
and Unit
($)
  
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Program
  
Approximate
Dollar Value of
Shares that
May Yet be
Purchased
under the
Program
 
January 1, 2012 through January 31, 2012  –   –   –   – 
February 1, 2012 through February 29, 2012  1,073  $2.88   –   – 
March 1, 2012 through March 31, 2012  2,530  $1.93   –   – 
Total shares purchased for the three months ended March 31, 2012  3,603             

(1)Represents shares of common stock withheld for income tax purposes in connection with the vesting of shares of restricted stock and restricted stock units issued to certain employees.
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Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information
Separation Agreement

On May 9, 2012, we entered into a Separation Agreement (the “Separation Agreement”) with Michael S. Gunter, our Senior Vice President, Operations.  The Separation Agreement is effective May 15, 2012 (the “Departure Date”).

The Separation Agreement provides that for a period of nine months following the Departure Date (the “Severance Period”), Mr. Gunter will be eligible to receive severance payments per pay period equal to his prior base salary, less applicable taxes, withholdings and deductions.  The Separation Agreement provides that all of Mr. Gunter’s unvested restricted stock and unvested restricted stock unit awards will vest in full on the effective date of the Separation Agreement.  Any unvested portions of stock option awards will expire immediately and any vested portion of such awards will remain exercisable for 30 days following the effective date of the Separation Agreement.  In addition, Mr. Gunter will be eligible for (i) continued health insurance coverage or (ii) reimbursement for COBRA health care continuation premiums until the earlier of the date that Mr. Gunter becomes eligible for coverage under another group health plan or February 28, 2013.

These severance benefits are being paid or provided in exchange for Mr. Gunter’s agreement that he will provide transition support during the Severance period and his executing a release of claims against Primo.  Mr. Gunter will continue to receive the severance benefits only if he complies with certain restrictive covenants, including, without limitation, a covenant not to compete with Primo, covenants not to solicit Primo’s customers, clients, or employees, and a covenant protecting Primo’s confidential information.  Mr. Gunter has the unilateral right to terminate and revoke the Separation Agreement within 21 days of the signing date upon notice to Primo, which termination would render the Separation Agreement unenforceable, null and void.

The foregoing description of the Separation Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Separation Agreement, which is attached as Exhibit 10.6 to this Form 10-Q and is incorporated herein by reference in its entirety.
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2012 Executive Incentive Plan

On May 7, 2012, we established a 2012 Executive Incentive Plan, which includes an opportunity for an award comprised of cash and/or equity for our officers at the level of vice president or above.  The 2012 Executive Incentive Plan provides for awards as follows:

·Award issuance would be based on company and employee specific performance, as recommended by the CEO and as finally determined and approved by Compensation Committee in its sole discretion.  Company performance is based on achievement of $14.9 million in Adjusted EBITDA.

oTarget award levels are based on a percentage of base salary and position and achievement of the Adjusted EBITDA target as follows:

Target Adjusted
EBITDA:  $14.9M
 
90% of
Target
Adjusted
EBITDA
  
100% of
Target
Adjusted
EBITDA
  
110% of
Target
Adjusted
EBITDA
  
120% of
Target
Adjusted
EBITDA
 
VP  10%  20%  30%  40%
SVP  20%  40%  60%  80%
CEO  30%  60%  100%  150%

·Awards may be paid in cash, restricted stock/restricted stock units and/or options, in the discretion of the Compensation Committee.  Options would be valued using a Black-Scholes model.

·“Adjusted EBITDA” for purposes of the 2012 Executive Incentive Plan will have the same definition as in our credit agreements.

·Equity awards may be subject to additional conditions or vesting requirements, including continued periods of service beyond the performance period, in the discretion of the Compensation Committee.

oWe anticipate that equity awards would vest over three years.

2012 Value Creation Plan

On May 7, 2012, we established a Value Creation Plan, which includes an opportunity for awards comprised of cash and/or equity for our officers at the level of vice president or above, based on our hitting Adjusted EBITDA targets for fiscal 2013 and 2014. The Value Creation Plan provides for awards as follows:

·Award issuance would be based on our achieving targets of $20.0 million in Adjusted EBITDA for fiscal 2013 and/or $25 million in Adjusted EBITDA for fiscal 2014.

oIf we achieve $20 million in Adjusted EBITDA for fiscal 2013 and $25 million in Adjusted EBITDA for fiscal 2014, an award would be paid for each year.

·“Adjusted EBITDA” for purposes of the Value Creation Plan will have the same definition as in our credit agreements.

·Achievement of an Adjusted EBITDA target would result in the creation of an incentive award bonus pool equal to 2.5% of our total market cap appreciation (excluding additional share issuances) measured from May 11, 2012 through the second trading day following public announcement of our financial results for the year for which the award is being made.
·Allocation of the incentive award bonus pool among participants would be recommended by the CEO and determined and approved by the Compensation Committee in its sole discretion.

·Awards may be paid in cash or restricted stock, at the discretion of the Compensation Committee.
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Item 6.  Exhibits

EXHIBIT INDEX
Exhibit
Number
Description
  
3.1
Sixth Amended and Restated Certificate of Incorporation of Primo Water Corporation (the “Company”) (incorporated(incorporated by reference to Exhibit 3.1 to Amendment No. 2 to ourthe Registrant’s Registration Statement on Form S-1 (RegistrationS-1/A (File No. 333-173554) filed on May 31, 2011)
3.2Amended and Restated Bylaws of the CompanyPrimo Water Corporation (incorporated by reference to Exhibit 3.1 to ourthe Company’s Form 8-K filed November 16, 2010)
10.1
Second Amendment to CreditLoan and Security Agreement and Waiver dated as of September 29, 2011April 30, 2012 by and among the Company, certain subsidiaries of the Company party thereto, the lenderlenders party thereto and Wells FargoTD Bank, National Association,N.A., as administrativearranger and syndication agent and bookrunner for the lenderlenders thereunder (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed May 2, 2012)
10.2Credit and Security Agreement dated as of April 30, 2012 by and among the Company, certain subsidiaries of the Company party thereto and Comvest Capital II, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed May 2, 2012)
10.3Term Note dated as of April 30, 2012 by and among the Company, certain subsidiaries of the Company party thereto and Comvest Capital II, L.P. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed May 2, 2012)
10.4Form of Warrant to Purchase Common Stock dated as of April 30, 2012 (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed May 2, 2012)
10.5Registration Rights Agreement dated as of April 30, 2012 by and among the Company and certain holders of warrants issued by the Company on April 30, 2012 (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed May 2, 2012)
10.6
Separation Agreement dated as of May 9, 2012 by and between the Company and Michael S. Gunter (filed herewith)
10.72012 Executive Incentive Plan dated as of May 9, 2012 (filed herewith)
10.82012 Value Creation Plan dated as of May 9, 2012 (filed herewith)
31.1
Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2
Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 101.INS101.INS**
XBRL Instance Document (1, 2)
Exhibit 101.SCH101.SCH**
XBRL Taxonomy Extension Schema Document (1, 2)
Exhibit 101.CAL101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document (1, 2)
Exhibit 101.LAB101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document (1, 2)
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document (1, 2)
Exhibit 101.PRE101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document (1, 2)

(1) Included herewith
 
(2) These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
 
 
2728
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 PRIMO WATER CORPORATION
 (Registrant)
��
   
Date:  NovemberMay 10, 20112012By:/s/ Billy D. Prim
  Billy D. Prim
  Chairman, Chief Executive Officer and President
   
Date:  NovemberMay 10, 20112012By:/s/ Mark Castaneda
  Mark Castaneda
  Chief Financial Officer
 
 
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