Business

Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” “us,” or “the Company”“us”) is North America’sAmerica’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements and notes have been prepared in accordance with our accounting practices described in our audited consolidated financial statements as of and for the year ended December 31, 2016.2018. In the opinion of management, the unaudited interim condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 20162018 as filed on Form 10-K.10-K (the “2018 Form 10-K”). The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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 audited financial statements. Significant accounting policies are summarized in our 20162018 Form 10-K.

Recently Issued Accounting Pronouncements

In JanuaryAugust 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The update is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350)350): Simplifying the Test for Goodwill Impairment. The updated guidance eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. The update is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently anticipate that adoption of the new standardguidance will not have a material impact toon our consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) along with subsequent amendments to the initial guidance in ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842) requiring lessees to recognize for all leases (with the exception of short-term leases) at the commencement date as:date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

We adopted Topic 842 effective January 1, 2019. The update is effective for fiscal years beginning after December 15,effects of adopting Topic 842 were the recognition of $4.2 million of operating lease right-of-use assets and $4.1 million of operating lease liabilities. We applied Topic 842 to all contracts conveying the right to control the use of identified property, plant, or equipment as of January 1, 2019, and interimwith comparative periods within fiscal years beginning after December 15, 2020. We currently anticipate that uponcontinuing to be reported under Topic 840 in accordance with the alternative transition method. In the adoption of Topic 842, we elected the new standard, ROUpackage of practical expedients allowing us to carry forward the assessment from Topic 840 of whether our contracts contain or are leases, as well as, the classification and initial direct costs for any expired or existing leases. We also elected the practical expedient allowing us to use hindsight when determining the lease term and assessing impairment of right-of-use assets. For short-term leases with an initial term of 12 months or less, we have made an accounting policy election whereby a right-of-use asset and lease liability is not recognized. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. A portion of our leases contain lease and non-lease components in the form of maintenance and utilities. We have elected to combine non-lease and lease components and treat them as a single lease component, which increases the amount of our lease assets and corresponding liabilities. We implemented a lease liabilities will bemanagement system to assist in centralizing, maintaining and accounting for all leases to ensure compliance with Topic 842 reporting and disclosure requirements. Our accounting for finance leases remains substantially unchanged. The standard does not have a significant impact on our condensed consolidated statements of operations or our condensed consolidated statements of cash flows. See “Note 3 – Leases” for further details.

Sales of Products

We earn revenue from contracts with customers, primarily through the sale of our purified, multi-gallon bottled water, self-service filtered drinking water, or through the sale of water dispensers. All revenue recognized in amountsthe current period is derived from contracts with customers. We account for these revenues under Topic 606.

In certain arrangements, depending on the nature and scope of the contract, our customer may be identified as the end consumer as we are interacting directly with the consumer via an implied contract upon the dispensing of self-service purified water. In other arrangements, our customer may be identified as the retailer, as we enter into contracts with retailers to resell purified multi-gallon bottled water or self-service filtered drinking water to the end consumer on our behalf. Our arrangements may also include standalone purchase orders from retailers to sell water dispensers. In such arrangements, the retailer is our customer.

Our performance obligations vary by business segment. Our performance obligations may include the delivery of purified water, the sale of the related bottle, or the sale of a water dispenser. In some instances, our sales arrangements may include multiple of the aforementioned performance obligations.

Our arrangements may include the shipping of products to our customers after the performance obligation related to that product has been satisfied. For such arrangements when shipping and handling activities are performed subsequent to the performance obligation being satisfied, we have elected to account for shipping and handling as activities to fulfill the promise to transfer goods. In such instances, we recognize shipping and handling costs at the same time as we recognize revenue.

We have no contractual obligation to accept returns nor do we guarantee sales. We may accept returns or issue credits for manufacturer defects or for items that were damaged in transit. We recognize revenue net of an estimated allowance for returns based on historical average return rates.

Typically, the transaction price of our products is fixed as agreed upon in our contracts with customers. Our arrangements may include variable consideration in the form of volume incentive agreements or coupon programs. We provide sales incentives to certain retailers in the form of a volume rebate to promote the sale of our products. Generally, the rebates are tiered, such that as sales increase, the rebate percentage increases. We estimate the expected amount of these rebates based on historical sales volume at the time of the original sale. We update our assessment of the amount of rebates that will be earned either quarterly or annually based on our best estimate of the volume levels the customer will reach during the measurement period. We also may include a redeemable coupon for the purchase of purified, multi-gallon bottled water upon the purchase of one of our products. We account for the coupons based on historical redemption rates. The customer’s right to redeem the coupon for a free purified, multi-gallon bottle of water is exercised at or near the purchase of our products such that it does not create a material timing difference in the recognition of revenue.

Our sales arrangements may involve collecting revenue directly from the end consumer. Tax on filtered water dispensed from a vended machine is exempt in several jurisdictions. For those remaining jurisdictions in which taxes are not exempt, we have analyzed our contracts with customers, concluding that we are the primary obligor to the consolidated balance sheets.respective taxing authority, and as such present sales tax charged to the end consumer utilizing the gross method.

We recognize revenue on the products we sell at a point in time. The delivery of purified water and sale of the related bottle are completed via a point-of-sale transaction at which time the customer obtains control and remits payment for the product. The shipment of a water dispenser to our customer reflects the transfer of control. We may grant credit limits and terms to customers based upon traditional practices and competitive conditions. In September 2015,such instances, the FASB issued ASU 2015-16, Simplifyingterms may vary, but payments are generally due in 30 days or less from the Accountinginvoicing date. Due to the point-of-sale nature of our products, we have not recognized revenue in the current period for Measurement-Period Adjustments (Topic 805) which eliminatesperformance obligations satisfied in previous reporting periods and have no unsatisfied performance obligations as of the requirementend of the current period.

Multiple Performance Obligations

Our sales arrangements may include multiple performance obligations. We identify each of the performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its identified relative selling price. In such arrangements, all of the performance obligations are met simultaneously as our products are concurrently delivered and have the same pattern of transfer to the customer. Thus, revenue is recognized simultaneously for each performance obligation when the customer obtains control of the product.

Presentation of Revenue

Our arrangements may involve another party selling products to our customers. We partner with retailers to place our self-service filtered water dispensing machines in their stores. We pay retailers a commission on the amount of sales generated from our products. We evaluate whether we control the products before they are transferred to the customer. In such instances where we control our products prior to transferring them to the customer, we are the principal in the transaction and record revenue at the gross amount and record commission paid to retailers as cost of sales. If we conclude that we do not control the products, we are the agent in the transaction and record revenue net of commissions paid to retailers.

Accounts Receivable Net of Allowances

Trade accounts receivable represent amounts billed to customers and not yet collected, and are presented net of allowances. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an acquireroverall aging analysis and is our best estimate of the amount of probable credit losses in a business combination accountour existing accounts receivable. Judgements are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. We also maintain an allowance for measurement-period adjustments retrospectively. Instead, an acquirer recognizes measurement period adjustments duringsales discounts, rebates and promotions based on our arrangements with customers. Account balances are charged off against the allowance in the period in which we determine that it determinesis probable the amountreceivable will not be recovered. These allowances totaled $1,888 and $1,755 at March 31, 2019 and December 31, 2018, respectively. Bad debt write-offs for the three months ended March 30, 2019 and 2018 were immaterial.

Disaggregation of the adjustment. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim period within those fiscal years. We adopted ASU 2015-16 on January 1, 2017, and adoption of the new standard had a material impact toRevenue

The tables below present our consolidated balance sheets as disclosed within “Note 2 – Glacier Acquisition” in the notes to the consolidated financial statements.net sales by geographic area.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes existing revenue recognition requirements in U.S. GAAP. The updated guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the guidance establishes a five-step approach for the recognition of revenue. The updates are currently effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  We will adopt the new revenue standard effective January 1, 2018. We are in the process of finalizing how the application of the new standard will impact our consolidated financial statements by comparing our current accounting policies and practices to the requirements of the new standard, and identifying potential differences that would result from applying the new standard to our contracts.  We currently anticipate using the modified retrospective method of adoption and based on our preliminary analysis to date, we do not anticipate a material effect on the timing and measurement of revenue recognition due to the nature and substance of our contracts with customers.  We are planning to finalize our analysis in November 2017. Within the notes to the consolidated financial statements after adoption of this guidance, we will disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  

On December 12, 2016, We determine if an arrangement is a lease or service contract at inception. Where an arrangement is a lease we completeddetermine if it is an operating lease or a finance lease. Subsequently, if the acquisition by merger (the “Acquisition”)arrangement is modified we reevaluate our classification. We have entered into finance lease agreements for vehicles with lease periods expiring between 2019 and 2024. We have entered into operating lease agreements primarily for buildings and equipment expiring between 2019 and 2028. Our short-term leases are typically in the form of Glacier Water Services, Inc. (“Glacier”),storage units with month-to-month terms located throughout the leading providerUnited States.

At lease commencement, we record a lease liability and corresponding right-of-use asset. Lease liabilities represent the present value of high-quality drinking water dispensedour future lease payments over the expected lease term which includes options to consumers through self-service water machines located at supermarketsextend or terminate the lease when it is reasonably certain those options will be exercised. We generally use the base, non-cancellable lease term to determine lease assets and liabilities. The interest rate implicit in our leases is not readily determinable and as such, the present value of our lease liability is determined using our incremental collateralized borrowing rate under the SunTrust Revolving Facility, which approximates the interest rate on a collateralized basis under similar terms as our underlying leased assets. Operating lease assets also include prepaid lease payments and lease incentives when present.

Operating lease right-of-use assets and liabilities are included on our Condensed Consolidated Balance Sheet beginning January 1, 2019. As of March 31, 2019 the current portion of our operating lease liabilities of $1,503 are presented within accrued expenses and other retail locations. We believe thatcurrent liabilities. As of March 31, 2019 the Acquisition will diversifylong-term portion of our retailer and financial concentration, create operational and shared services synergies and create cross-selling opportunities with retailers and consumers.operating lease liabilities of $2,325 is presented within operating leases.

Aggregate considerationFinance lease right-of-use assets are presented within property and equipment, net. As of March 31, 2019 and December 31, 2018 vehicles under finance lease with a cost basis of $8,091 and $7,408, respectively, were included in connection withproperty and equipment, net. As of March 31, 2019 the Acquisition was $200,220, consistingcurrent portion of a combinationour finance lease liabilities of cash, Primo common stock,$1,479 are presented within current portion of long-term debt and finance leases. As of March 31, 2019 the retirement or assumptionlong term portion of indebtednessour finance lease liabilities of $2,323 are presented within long-term debt and minority interests, and warrants to purchase shares of Primo common stock as outlined below. We financed the transaction through a combination of cash-on-hand and borrowings under the Goldman Credit Facility (see “Note 3 – Debt and Capital Leases,finance leases, net of Debt Issuance Costs”). Operations of the acquired entity are included in the condensed consolidated statement of operations fromcurrent portion and after the acquisition date. We incurred fees and expenses related to the Acquisition of $146 and $4,011 during the three and nine months ended September 30, 2017, respectively, as recorded within non-recurring and acquisition-relateddebt issuance costs.

A summaryComponents of the consideration paid isoperating lease expense were as follows:

As of March 31, 2019, our operating leases had a weighted average remaining lease term of 3.6 years and a weighted average discount rate of 4.76%. Future lease payments under operating leases as of March 31, 2019 were as follows:

Supplemental information related to operating leases was as follows:

During the nine monthsquarter ended September 30, 2017,2018, we obtained additional information regardingconcluded that a sale of certain assets of our Refill segment (the “Ice Assets”) was probable to take place within one year, which meets the criteria for assets held-for-sale treatment in accordance with FASB ASC Topic 360, Property, Plant, and Equipment. There have been no changes to the estimated fair value of certain acquired property and equipment, capital leases, and accrued expenses based on facts that existed at the date of acquisition. We have recast theIce Assets since December 31, 2018. The Ice Assets fair value of certain acquired property and equipment, and accrued expenses via a measurement period adjustmentless costs to sell at March 31, 2019 was as follows:

The estimated fair values are subject to refinement during the measurement period (which is no longer than one year after the closing datevalue of the acquisition), as additional information regarding closing date fair value becomes available. During the measurement period, the causes of any changes in cash flow estimates are considered to determine whether the change results from circumstances that existed at the acquisition date or if the change results from an event that occurred after the date of acquisition.

Unaudited pro forma results of operations are presented below for the three and nine months ended September 30, 2017 and 2016, assuming that the Acquisition occurred on January 1, 2016. The pro forma informationassets held-for-sale does not necessarily reflectinclude accounts receivable for which we anticipate retaining the results of operations that would have occurred had we acquired Glacier at the beginning of 2016 as cost saving synergies are not reflected in the unaudited pro forma amounts.rights. 

DebtDebt and capitalfinance leases, net of debt issuance costs are summarized as follows:

GoldmanSunTrust Credit Facility

On December 12, 2016,June 22, 2018, we entered into the Goldmana senior secured credit facility (the “SunTrust Credit FacilityFacility”) that provides for a $186,000$190,000 senior term loan facility (the “Term Loan”) and a $10,000$30,000 senior revolving loan facility (the “Revolving Facility”). SunTrust Bank serves as the Administrative Agent, Swingline Lender and Issuing Bank under the SunTrust Credit Facility. The GoldmanSunTrust Credit Facility matures on December 12, 2021.June 22, 2023. The Term Loan requires annual principal payments (payable in quarterly installments beginning March 31, 2017)installments) equal to 1%5% per annum, or $1,860,$9,500, with the remaining indebtedness due at maturity. The GoldmanSunTrust Credit Facility is secured onby a first priority basis bysecurity interest in and lien on substantially all of our assets but no more than 65%assets. The SunTrust Credit Facility and related obligations are guaranteed by certain of the voting equity of non-U.S.our domestic subsidiaries.

Interest on outstanding borrowings under the GoldmanSunTrust Credit Facility will beis calculated at our option at either (1) a base rate (which may beis derived from the Administrative Agent’s prime lending rate, the federal funds effective rate)rate plus 0.5%, or a London Interbank Offered Rate (“LIBOR”), subject to floors of 4.0% for the base rate and plus 1.0% per annum for) or (2) LIBOR respectively, plus, in each case of the foregoing (1) and (2), a margin, initially set at 5.50%2.50% per annum with respect to LIBOR loans and 4.50%1.50% per annum for base rate loans. Interest rate margins for the loans will step down upon the achievement of consolidated leverage ratios. A commitment fee, of 0.50%initially set at 0.30% per annum, will beranging from 0.15% to 0.30% per annum, is payable quarterly on the average undrawn portion of the Revolving Facility. The margins and commitment fee fluctuate based on our consolidated leverage ratio as specified in the SunTrust Credit Facility. Total issuance costs associated with the GoldmanSunTrust Credit Facility were $4,303,$1,700, which have been presented either as a direct deduction from the carrying amount of the debt within long-term debt and capitalfinance leases, net of current portion and debt issuance costs, with respect to costs attributable to the Term Loan, or within other assets, with respect to costs attributable to the Revolving Facility. The costs are being amortized as part of interest expense over the term of the GoldmanSunTrust Credit Facility. As of September 30, 2017,March 31, 2019, we had no$13,600 outstanding borrowings and our$16,400 of availability was $10,000 under the Revolving Facility.

The GoldmanSunTrust Credit Facility contains a number of affirmative and negative covenants that use consolidated adjusted EBITDA (“Adjusted EBITDA”). Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as net income (loss) from continuing operations before depreciation and amortization; interest expense,, net; income taxes; change in fair value of warrant liability; non-cash stock-based compensation expense; non-recurring and acquisition-related costs; and loss (gain) on disposal and impairment of property and equipment and other assets, and other.

The primary operational covenants included in the GoldmanSunTrust Credit Facility are as follows: (i) a minimum consolidated fixed charge coverage ratio of 1.20:1.10:1.00, beginning with the fiscal quarter ended June 30, 2018 and (ii) a maximum totalconsolidated leverage ratio of 4.25:4.50:1.00 declining to 4.00:1.00 on December 31, 2017, and (iii) a minimum consolidated liquidity of $3,500,beginning with the fiscal quarter ended June 30, 2018 with the financial ratios tested as of the last day of each fiscal quarter. The leverage ratio steps down to 4.25:1.00 with respect to each fiscal quarter ending after June 30, 2019 and the minimum liquidity required at all times. The required financial ratios will step down furtheron or prior to lower levels in future periods as provided in the Goldman Credit Facility.June 30, 2020 and to 4.00:1.00 with respect to each fiscal quarter ending after June 30, 2020. At September 30, 2017March 31, 2019, we were in compliance with all operational covenants, including (i) a consolidated fixed charge coverage ratio of 1.25:1.12:1.00 and (ii) a totalconsolidated leverage ratio of 3.54:3.80:1.00.

Junior Subordinated DebenturesFinance Leases

In connection with the Acquisition, we assumed $89,529As of Junior Subordinated Debentures (the “Subordinated Debentures”) issued to Glacier Water Trust I, March 31, 2019, our finance leases had a wholly owned subsidiaryweighted average remaining lease term of Primo. Interest on the Subordinated Debentures accrues at an annual3.0 years and a weighted average discount rate of 9.0625% payable monthly in arrears. The Subordinated Debentures mature on January 31, 2028, but may be redeemed at our option at any time at 100% of the principal amount plus any accrued but unpaid interest.

On December 12, 2016, we issued warrants to purchase 2,000 shares of our common stock in connection with the Acquisition (the “Glacier Warrants”)4.76%. The Glacier Warrants are exercisable as follows: 33% became exercisable on and after June 10, 2017, an additional 33% became exercisable on and after September 8, 2017 and the final 34% become exercisable on and after December 12, 2017. The Glacier Warrants are exercisable at an exercise price of $11.88 per share of Primo common stock and expire on December 12, 2021.

The Glacier Warrants’ fair value at the date of issuance of $8,420 was recorded as a liability on our condensed consolidated balance sheets as part of consideration for the Acquisition.

On March 13, 2017, we entered into Amendment No. 1 to the Glacier Warrant Agreement (the “Amendment”). The Amendment provides, among other things, that under no circumstances may a Glacier Warrant holder exercise any Glacier Warrants and receive a cash payment as a net cash settlement. Thus, effective March 13, 2017, the Glacier Warrants were no longer reported as a liability on the condensed consolidated balance sheet with changes in the fair value of the warrant liability reported within the condensed consolidated statements of operations. Instead, the Glacier Warrants were reported as equity instruments on the consolidated statements of stockholders’ equity. The change in the estimated fair value of the warrant liability for the period of January 1, 2017 through March 13, 2017 resulted in non-cash expense of $3,220 as presented on the condensed consolidated statements of operations for the nine months ended September 30, 2017. The Glacier Warrants’ estimated fair value as recorded on our condensed consolidated balance sheet was $0 and $8,180Future finance lease obligations as of September 30, 2017 and DecemberMarch 31, 2016, respectively.

The estimated fair value of these Warrants was determined using Level 3 inputs and assumptions within the Black- Scholes pricing model. The key assumptions used in the Black-Scholes model2019 were as follows:

The risk-free interest rate was based on the U.S. Treasury rate for the expected remaining life of common stock warrants. Our expected volatility was based on the average long-term historical volatilities of peer companies. The dividend yield assumption was based on our current intent not to issue dividends.

Overview

Total non-cash stock-based compensation expense by award type for all of our plans, all of which is included in selling, general and administrative expenses on our condensed consolidated statements of operations, was as follows:

Value Creation Plan

On May 7, 2012, we established the Value Creation Plan (the “VCP”), which was subsequently amended on May 14, 2013 and amended and restated on March 3, 2016. The VCP provided awards comprised of cash or equity grants for eligible employees as determined by the Compensation Committee, based on the attainment of certain performance-based targets. The VCP provided for the issuance of up to three separate awards to eligible employees based on our attainment of financial targets of at least $15,000, $24,000 and $28,000 in Adjusted EBITDA for any fiscal year between 2014 and 2019. On December 22, 2016, the Compensation Committee of our Board of Directors approved the termination of the VCP, effective December 31, 2016, eliminating the third award related to the $28,000 Adjusted EBITDA target.

The award pool for the second issuance based on the achievement of the $24,000 Adjusted EBITDA target equaled 17.5% of the market capital appreciation of our stock from March 11, 2016 to March 20, 2017, the market close on the third full trading day after public announcement of financial results for 2016. On March 20, 2017, 1,370 shares were issued or deferred into the Primo Water Corporation Executive Deferred Compensation Plan (the “Deferred Compensation Plan”) as a result of the achievement of the $24,000 Adjusted EBITDA target. The deferral of certain shares did not alter the existing vesting conditions, number of awards vested or the form of the awards issued under the VCP.

Long-Term Performance Plan

On February 28, 2017, we established the Long-Term Performance Plan (the “LTPP”). The LTPP provides equity grants for eligible employees based on the attainment of certain performance-based targets. Our intention is that all awards under the LTPP will be in the form of equity grants. The

On March 20, 2017, we granted performance based equity awards under the LTPP provides for the issuance of awardswith vesting terms based on our attainment of certain financial targets for the period of January 1, 2017 through December 31, 2019. Awards earned2019 (the “March 2017 Grant”). The number of shares earnable under the March 2017 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2017 through 2019.

On March 9, 2018, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2018 through December 31, 2020 (the “March 2018 Grant”). The number of shares earnable under the March 2018 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2018 through 2020.

On March 8, 2019, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2019 through December 31, 2021 (the “March 2019 Grant”). The number of shares earnable under the March 2019 Grant awards vary based on achievement of the established financial targets of net sales and free cash flow on a cumulative basis for fiscal years 2019 through 2021.

Restricted Stock under the Plans

A summary of restricted stock activity is presented below:

We have incurred expenses that either we do not believe to be indicative of our core operations, or we believe are significant to our current operating results warranting separate classification. As such, we have separately classified these expenses as special items. The components of special items are as follows:

Omnifrio Single-Serve Beverage Business

Deferred purchase price payments totaling $1,901 were included within accrued expenses and other current liabilities on the condensed consolidated balance sheets as of December 31, 2016. These payments were related to the April 11, 2011 acquisition of certain intellectual property and other assets from the seller, Omnifrio Beverage Company LLC (“Omnifrio”).

On March 31, 2017, we entered into a settlement and release agreement with Omnifrio in which we agreed to a cash payment of $710 to Omnifrio and to transfer all intellectual property and other assets purchased from Omnifrio in April 2011 back to Omnifrio. The settlement resulted in a gain of $1,191, reported within non-recurring and acquisition-related costs on the condensed consolidated statement of operations for the nine months ended September 30, 2017.

Texas Regional Operator Litigation/Arbitration

On August 8, 2014, a lawsuit was commenced against us by our regional operators Artesia Springs, LLC, HOD Enterprises, L.P., and BBB Water, Inc. (the “ROs”) in the State of Texas. DS Services of America, Inc. was also named as a defendant in the lawsuit. The claims alleged against us in the lawsuit were breach of contract, conspiracy and fraud, and the ROs sought unspecified monetary damages as well as injunctive relief. On April 10, 2015, the ROs initiated an arbitration proceeding with the American Arbitration Association - (the “AAA”). We resolved the claims asserted by BBB Water, Inc. as of December 31, 2015, and BBB Water, Inc. is no longer a party to the arbitration proceedings.

We entered into a settlement and mutual release agreement with Artesia Springs, LLC and HOD Enterprises, L.P. on April 5, 2017, pursuant to which we agreed to make payments including interest in April, July and September 2017 totaling $3,783. The settlement resulted in other expense of $3,701, reported within non-recurring and acquisition-related costs on the condensed consolidated statement of operations for the nine months ended September 30, 2017. The settlement also resulted in interest expense of $21 and $82 for the three and nine months ended September 30, 2017, respectively.

Prism Arbitration

On August 5, 2014, Primo Distribution, LLC (also known as Prism Distribution) initiated an arbitration proceeding against us, claiming less than $1,000 in damages for alleged breach of contract.  The arbitration was filed with the AAA, and was amended on December 19, 2014 to include additional claims for conversion, unfair and deceptive trade practices, fraud, and unjust enrichment. 

On July 24, 2017, we entered into a settlement and mutual release agreement with Prism Distribution pursuant to which we agreed to make a payment to Prism of $825. A liability of $825 was recorded within accrued expenses and other liabilities on the condensed consolidated balance sheet as of September 30, 2017. The settlement resulted in expense of $825, reported within non-recurring and acquisition-related costs on the condensed consolidated statement of operations for the nine months ended September 30, 2017.

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 claims and legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.

WeFor the three months ended March 31, 2019 there was $0 income tax expense recognized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income and tax planning strategies in making this assessment. Accordingly, we have establishedprovided a full valuation allowance to offset the net deferred tax assets that are not expected to be realized. realized as of March 31, 2019.

For the three months ended September 30,March 31, 2018, we recorded an income tax benefit of $1,725 primarily due to the 2017 Tax Cuts and 2016, thereJobs Act. We recorded an income tax benefit of $2,074 related to the federal net operating loss, which was $451 and $0partially offset by income tax expense recognized, respectively, and for the nine months ended September 30, 2017 and 2016, there was $823 and $0 income tax expense recognized respectively,of $349 related to goodwill and intangibles.intangible assets.

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.year.  Realization of the loss carryforwards is dependent upon generating sufficient taxable income prior to the expiration of the loss carryforwards, subject to the Section 382 limitation.

We have no unrecognized tax benefits and there are no uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will increase within the next 12 months. Substantially all tax years remain open by federal, state and foreign tax jurisdictions.

Fair value rules currently apply to all financial assets and liabilities and for certain nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value. For this purpose, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair 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:

At September 30, 2017March 31, 2019 and December 31, 2016,2018, we held financial assets and liabilities that are required to be measured at fair value on a recurring basis. The financial assets and liabilities held by the Companyus and the fair value hierarchy used to determine their fair values are as follows:

The carrying amounts of cash and cash equivalents, accounts receivable, net, operating lease right-of-use assets and corresponding operating lease liabilities, accounts payable, and accrued expenses and other current liabilities, approximate their fair values due to their short maturities.  Liabilities of the Disposal Group classified as held for sale and reported within accrued expenses and other current liabilities, and other Other long-term liabilities on our condensed consolidated balance sheets are presented at their carrying value, which approximates their fair value.  Based on borrowing rates currently available to us for loans with similar terms and the variable interest rate for borrowings under our GoldmanSunTrust Credit Facility, and the fact that the Junior Subordinated Debentures were recorded at fair value at the time of the Acquisition, the carrying value of debt and capitalfinance leases approximates fair value. There have been no changes in the recurring fair value measurements of assets or liabilities from December 31, 2018 to March 31, 2019.

The following table provides a rollforward of the Company’s Level 3There were no material nonrecurring fair value measurements:measurements recorded in the three months ended March 31, 2019 and 2018, respectively.

The following table sets forth the calculations of basic and diluted earnings per share: