SNAP ONE HOLDINGS CORP. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q, as well as our final Prospectus filed with theSEC onJuly 29, 2021 . The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements due to various factors, including those discussed below and elsewhere in this Form 10-Q and the Prospectus, particularly in the "Risk Factors" or in other sections of this Form 10-Q and the Prospectus. We operate on a 52-week or 53-week fiscal year ending on the last Friday of December each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Saturday and containing one 5-week period followed by two 4-week periods. When a 53-week fiscal year occurs, we report the additional week in the fourth fiscal quarter. References to fiscal year 2020 are to our 52-week fiscal year endedDecember 25, 2020 . The fiscal quarters endedSeptember 24, 2021 , andSeptember 25, 2020 were both 13-week periods.
Overview
Snap One powers smart living by enabling professional integrators to deliver seamless experiences in the connected homes and small businesses where people live, work and play. The combination of our end-to-end product ecosystem and our technology-enabled workflow solutions delivers a compelling value proposition to our loyal and growing network of professional do-it-for-me ("DIFM") integrator customers. We distribute and provide integrators with a leading, comprehensive proprietary and third-party suite of connected, infrastructure, entertainment, and software solutions so the entire smart living experience is exceptional for the end consumer. Our product and service offerings encompass all of the elements required by integrators to build integrated smart living systems that are easy to install and simple to manage, serving the needs of both integrators and end consumers. Our differentiated technology and software-enabled workflow tools have been designed to support the integrator throughout the project lifecycle, enhancing their operations and helping them to profitably grow their businesses. We are vertically integrated with the majority of ourNet Sales and Contribution Margin coming from our proprietary-branded, internally developed products that are only available to integrators directly fromSnap One . These proprietary products are manufactured on an asset-light basis through our network of contract manufacturing and joint development suppliers located primarily inAsia . In addition, we offer a curated set of leading third-party products to enhance the one-stop shop experience for integrators, driving customer stickiness and sales growth.
Recent Developments
OnJuly 30, 2021 , we completed our initial public offering ("IPO") of 13.9 million shares of our common stock, and onAugust 18, 2021 , we completed the sale of 1.2 million shares of additional common stock to the underwriters pursuant to their option to purchase additional shares, at an offering price of$18.00 per share. We raised net proceeds of$249.2 million through the IPO, after deducting underwriting discounts and other offering costs of$21.2 million . During the nine months endedSeptember 24, 2021 , we expensed$4.6 million of IPO costs related to the IPO. Our registration statement on Form S-1 (File No. 333-257624) relating to its IPO was declared effective by theSEC onJuly 27, 2021 . See Note 1 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the IPO. In conjunction with the IPO, we issued 1.7 million restricted shares of common stock to convert all outstanding and unvested incentive units under the 2017 Incentive Plan. These restricted shares are subject to similar vesting terms and conditions that applied to the incentive units under the 2017 Incentive Plan prior to the conversion. Additionally, we issued 5.4 million stock options to holders of incentive units under the 2017 Incentive Plan. The stock options allow the recipient to purchase common stock following the IPO at a strike price of$18.00 and have similar vesting terms and conditions that applied to the incentive units under the 2017 Incentive Plan. As a result of issuance of the stock options, we recorded$12.7 million of share-based compensation expense in the three months endedSeptember 24, 2021 based on the grant-date fair value of the awards. 25 -------------------------------------------------------------------------------- In connection with our IPO, we executed a TRA with certain pre-IPO owners which provides for payment by the Company to the TRA Participants of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax that is actually realized, or deemed to be realized (calculated using certain assumptions), as a result of the utilization of such tax benefits. Upon the closing of the IPO, the Company recognized a non-current liability of$112.7 million , which represented undiscounted aggregate payments that we expected to pay the TRA Participants under the TRA. Additionally, we paid$13.2 million with cash on hand to certain pre-IPO owners for their interests in lieu of their participation in the TRA. Approximately$2.8 million of the cash payments to pre-IPO owners are subject to vesting requirements and will be held in escrow. The cash payments held in escrow will be expensed over the requisite vesting period. The remaining$10.4 million of the cash payments were paid and expensed in conjunction with the closing of the IPO. See Note 14 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the TRA. OnAugust 4, 2021 , we used a portion of the net proceeds from the IPO to repay a portion of the Incremental Term Loan outstanding under the Credit Agreement totaling approximately$215.9 million , plus accrued interest of$1.0 million . We also incurred a charge of$6.6 million related to the write-off of unamortized debt issuance costs. See Note 7 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the debt prepayment.
Key Factors Affecting Our Performance
Our historical financial performance has been primarily driven by the following factors, which we also expect to be the primary drivers of our financial performance in the future.
Wallet Share Growth Drives Increased Average Spend per Integrator. Increasing wallet share with integrators depends in part on our ability to continue expanding our omni-channel coverage, extending our product suite, bolstering our support services, and creating deeper integration across our products to make it compelling for integrators to useSnap One as their one-stop shop. Average wallet share with our integrators varies across DIFM markets, with particular strength in home technology and demonstrated success in commercial and security. New DIFM Integrator Additions in Home Technology, Security, Commercial and Internationally. We are a market leader in our core domestic home technology market, and we believe that our value proposition appeals to integrators in attractive adjacent markets. We are utilizing our proven strategy of acquiring integrators in the home technology market to attract integrators in security and commercial markets, where we are less penetrated but have displayed a track record of growth. We believe that strategic investments in expanding our product portfolio and targeted sales, marketing and new integrator onboarding initiatives will allow us to grow our network of integrators across these markets. We also believe there is a meaningful opportunity to expand our existing market share in non-U.S. markets. We plan to grow in these markets by investing in sales resources, broadening our available product portfolio, and strengthening our direct-to-integrator sales approach.
Investments in Our Integrated Platform. Our end-to-end product and software ecosystem and technology-enabled workflow solutions create an integrated platform of leading offerings, which we believe drive significant value for our integrators and personalized, immersive experiences for end consumers.
Omni-Channel Strategy Expansion. Our business model is built around an
e-commerce centric, omni-channel go-to-market strategy. We provide a
comprehensive e-commerce portal, which allows integrators to easily research
products, design projects, receive training and certifications, order products,
and solicit ongoing support. Our e-commerce portal is complemented by a growing
network of 30 local branches and seven distribution centers. The local branch
presence is an important part of our strategy as it allows us to better serve
integrators locally by providing same-day product availability when necessary,
creating a site for relationship building with our support team and for training
and product demonstration sessions. We believe integrators value the
relationships and support we can deliver at the local level, and this further
increases their loyalty with our business across channels.
Strategic Acquisitions. In addition to our organic growth, we continue to grow
our business through strategic acquisitions such as our acquisition of Access
Networks to better serve existing and new integrators, broaden our product
categories, and extend the geographic reach of our omni-channel capabilities. We
will continue to pursue disciplined, accretive acquisitions that enhance our
products, software and workflow solutions and expand into adjacent markets that
allow us to serve our integrator base.
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--------------------------------------------------------------------------------Impact of the COVID-19 Pandemic
In aggregate, the connected home market has fared well throughout the COVID-19 pandemic, as market data indicates that beginning in the third quarter of 2020, there has been an increase in the percentage of disposable income being spent on home-related goods and services as more of the working population has been staying at home. Furthermore, integration companies were deemed "essential workers" bythe United States federal government, allowing a majority of integrators to remain open throughout the COVID-19 pandemic. Throughout the pandemic, we have supported professional integrators with their challenges, including staff considerations and the dynamic of practicing social distancing with their customers, to allow them to continue to provide their customers the infrastructure and connectivity needed to create personalized experiences for individuals and families who are spending more time at home. Following initial demand declines for our products and services in March andApril 2020 , sales recovered as professional integrators' services became increasingly important for homeowners working and seeking entertainment from home. Our favorable liquidity position, disciplined supply chain execution and inventory availability drove strong performance. This resulted in accelerated growth in our business and reinforced that we provide a mission-critical function to our integrators. More recently, COVID-19 has affected our supply chain, including component sourcing and shipping and logistics challenges consistent with its effect across many industries. When combined with the demand for our products, these supply chain impacts have resulted in delayed product availability in some cases. We expect these impacts, including potential delayed product availability, to continue for as long as the global supply chain is experiencing these challenges. We continue to invest in supply chain initiatives to meet integrator demand, and while the situation caused by COVID-19 is dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to "Risk Factors" in our final Prospectus.
Key Metrics and Reconciliation of Non-GAAP Financial Data
In addition to the measures presented in our consolidated financial statements, we use the following additional key business metrics to help us monitor the performance of our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions:
Adjusted EBITDA and Adjusted Net Income
We define Adjusted EBITDA as net loss, plus interest expense, net, income tax benefit, depreciation and amortization, further adjusted to exclude equity-based compensation, acquisition-related and integration-related costs, IPO costs and certain other non-recurring, non-core, infrequent or unusual charges as described below.
We define Adjusted Net Income as net loss, plus amortization, further adjusted to exclude equity-based compensation, acquisition-related and integration-related costs, IPO costs and certain non-recurring, non-core, infrequent or unusual charges, including the estimated tax impacts of these adjustments.
Adjusted EBITDA and Adjusted Net Income are key measures used by management to
understand and evaluate our financial performance, trends and generate future
operating plans. Management uses these key measures to make strategic decisions
regarding the allocation of capital and analyze investments in initiatives that
are focused on cultivating new markets for our products and services. We believe
Adjusted EBITDA and Adjusted Net Income are useful measurements for analysts,
investors and other interested parties to evaluate companies in our markets as
they help identify underlying trends that could otherwise be masked by certain
expenses that we do not consider indicative of our ongoing performance.
Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools.
These measures are not calculated in accordance with GAAP and should not be
considered in isolation from, or as a substitute for, financial information
prepared in accordance with GAAP. In addition, Adjusted EBITDA and Adjusted Net
Income may not be comparable to similarly titled metrics of other companies due
to differences among the methods of calculation.
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The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for the periods presented:
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 2021 2020
(in thousands)
Net (loss) income $ (21,540) $ 1,403 $ (28,632) $ (20,844)
Interest expense 7,511 11,330 26,589 35,875
Income tax benefit (2,729) (694) (3,373) (6,025)
Depreciation and amortization 14,287 14,368 42,197 43,351
Other expense (income), net 6,931 (224) 6,422 (1,558)
Equity-based compensation 14,391 1,025 16,629 3,572
Compensation expense for payouts in lieu
of TRA participation(a) 10,641 - 10,641 -
Initial public offering costs(b) 1,648 - 4,569 -
Fair value adjustment to contingent value
rights(c) (1,640) 1,300 1,200 300
Deferred acquisition payments(d) 1,568 2,038 5,148 8,273
Deferred revenue purchase accounting
adjustment(e) 129 193 418 843
Acquisition- and integration-related
costs(f) 58 640 294 5,017
Other(g) 886 2 2,693 48
Adjusted EBITDA $ 32,141 $ 31,381 $ 84,795 $ 68,852 The following table presents a reconciliation of net (loss) income to Adjusted Net Income for the periods presented:
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 2021 2020
(in thousands)
Net income (loss) $ (21,540) $ 1,403 $ (28,632) $ (20,844)
Amortization 12,293 11,872 36,260 35,619
Equity-based compensation 14,391 1,025 16,629 3,572
Foreign currency (gains) loss 469 (55) 278 102
Gain on sale of business - - - (979)
Write-off of unamortized debt issuance
costs 6,645 - 6,645 -
Compensation expense for payouts in lieu
of TRA participation(a) 10,641 - 10,641 -
Initial public offering costs(b) 1,648 - 4,569 -
Fair value adjustment to contingent (1,640) 1,300 1,200 300
value rights(c)
Deferred acquisition payments(d) 1,568 2,038 5,148 8,273
Deferred revenue purchase accounting 129 193 418 843
adjustment(e)
Acquisition and integration related 58 640 294 5,017
costs(f)
Other(g) 830 2 2,587 (106)
Income tax effect of adjustments(h) (8,761) (3,603) (16,406) (12,029)
Adjusted Net Income $ 16,731 $ 14,815 $ 39,631 $ 19,768
(a)Represents non-recurring expense related to payments to certain pre-IPO
owners in lieu of their participation in the TRA. Management does not believe
such costs are indicative of our ongoing operations as they are one-time awards
specific to the establishment of the TRA.
(b)Represents expenses related to professional fees in connection with
preparation for our IPO.
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(c)Represents noncash gains and losses recorded from fair value adjustments
related to contingent value right liabilities. Contingent value right ("CVR")
liabilities represent potential obligations to the prior sellers in conjunction
with the acquisition of the Company by investment funds managed by Hellman &
Friedman in August 2017 and are based on estimates of expected cash payments to
the prior sellers based on specified targets for the return on the original
capital investment.
(d)Represents expenses incurred related to deferred payments to employees
associated with our Control4 acquisition and other historical acquisitions. The
deferred payments are cash retention awards for key personnel from the acquired
companies and are expected to be paid to employees through 2023. Management does
not believe such costs are indicative of our ongoing operations as they are
one-time awards specific to acquisitions and are incremental to our typical
compensation costs incurred and we do not expect such costs to be reflective of
future increases in base compensation expense.
(e)Represents an adjustment related to the fair value of deferred revenue
related to the
(f)Represents costs directly associated with acquisitions and acquisition-related integration activities. For the three months and nine months endedSeptember 25, 2020 , the costs relate primarily to third-party consultant and information technology integration costs directly related to the Company's acquisition ofControl4 inAugust 2019 . These costs also include certain restructuring costs (e.g., severance) and other third-party transaction advisory fees associated with the acquisitions. (g)Represents non-recurring expenses related to consulting, restructuring, and other expenses which management believes are not representative of our operating performance. (h)Represents the tax impacts with respect to each adjustment noted above after taking into account the impact of permanent differences using the statutory tax rate related to the applicable federal and foreign jurisdictions and the blended state tax rate. Contribution Margin We define Contribution Margin for a particular period as net sales, less cost of sales, exclusive of depreciation and amortization, divided by net sales. Management uses this key measure to understand and evaluate our financial performance, trends and generate future operating plans, make strategic decisions regarding the allocation of capital, and analyze investments in initiatives that are focused on cultivating new markets for our products and services. We believe Contribution Margin is a useful measurement for analysts, investors, and other interested parties to evaluate companies in our markets as they help identify underlying trends that could otherwise be masked by certain expenses that we do not consider indicative of our ongoing performance. Contribution Margin has limitations as an analytical tool. This measure is not calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, Contribution Margin may not be comparable to similarly titled metrics of other companies due to differences among the methods of calculation.
The following table presents the calculation of Contribution Margin:
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 2021 2020
(in thousands)
Net sales $ 260,746 $
226,276
151,281 133,131 432,297 342,764
Net sales less cost of sales, exclusive
of depreciation and amortization
42.0 % 41.2 % 41.1 % 41.7 %
(a)Cost of sales, exclusive of depreciation and amortization for the three
months ended September 24, 2021 and September 25, 2020 excludes depreciation and
amortization of $14,287 and $14,368 , respectively. Cost of sales, exclusive of
depreciation and amortization, for the nine months ended September 24, 2021 and
September 25, 2020 excludes depreciation and amortization of $42,197 and
$43,351 , respectively.
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--------------------------------------------------------------------------------Free Cash Flow
We define Free Cash Flow as net cash (used in) provided by operating activities less capital expenditures (which consist of purchases of property and equipment as well as purchases of information technology, software development and leasehold improvements). We believe it is useful to exclude capital expenditures from our Free Cash Flow in order to measure the amount of cash we generate because the timing of such capital investments made may not directly correlate to the underlying financial performance of our business operations. Free Cash Flow is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for financial information prepared in accordance with GAAP. In addition, Free Cash Flow may not be comparable to similarly titled metrics of other companies due to differences among methods of calculation. Free Cash Flow provides useful information to investors and others in understanding and evaluating our ability to generate additional cash from our business in the same manner as our management and board of directors. Free Cash Flow may be affected in the near to medium term by the timing of capital investments (such as purchases of information technology and other equipment and leasehold improvements), fluctuations in our growth and the effect of such fluctuations on working capital and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.
The following table presents a reconciliation of net cash (used in) provided by operating activities to Free Cash Flow for the periods presented:
Nine Months Ended
September 24 , September 25,
2021 2020
(in thousands)
Net cash (used in) provided by operating activities
42,642
Purchases of property and equipment (6,819) (7,103) Free Cash Flow$ (18,058) $ 35,539 30
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Basis of Presentation and Key Components of Results of Operations
We generate net sales by selling to our integrators hardware products both with and without embedded software, which are then resold to end consumers, typically in the installation of an audio/video, IT, smart-home, or surveillance-related package. We act both as a principal in selling proprietary products, and as an agent in selling certain third-party products through strategic partnerships with outside suppliers. In addition, we generate a small but growing percentage of our revenue through recurring revenue from subscription services associated with product sales including hosting services, technical support, and access to unspecified software updates and upgrades. Revenue is recognized when the integrator obtains control of the product, which occurs upon shipment, in an amount that reflects the consideration expected to be received in exchange for those products net of estimated discounts, rebates, returns, allowances and any taxes collected and remitted to government authorities. Revenue allocated to subscription services is recognized over time as services are provided. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Policies - Revenue Recognition" in the Prospectus.
Cost of sales, exclusive of depreciation and amortization
Cost of sales, exclusive of depreciation and amortization, includes expenses related to production of proprietary finished goods, including raw materials and inbound freight, purchase costs for third-party products produced by strategic partners and sold bySnap One , rebates, inventory reserve adjustments and employee costs related to assembly services. The components of our cost of sales, exclusive of depreciation and amortization may not be comparable to our peers. The changes in our cost of sales, exclusive of depreciation and amortization generally correspond with the changes in net sales and may be impacted by any significant fluctuations in the components of our cost of sales, exclusive of depreciation and amortization.
Selling, general and administrative expenses
Selling, general and administrative costs include payroll and related costs, occupancy costs, costs related to warehousing, distribution, outbound shipping to integrators, credit card processing fees, warranty, purchasing, advertising, research and development, non-income-based taxes, equity-based compensation, acquisition-related expenses, TRA related costs and other corporate overhead costs. We expect that our selling, general and administrative expenses will increase at a growth rate below net sales growth when adjusted for one-time expenses, in future periods as we continue to grow, and due to additional legal, accounting, insurance and other expenses that we expect to incur as a result of being a public company, including compliance with the Sarbanes-Oxley Act.
Depreciation and amortization
Depreciation expense is related to investments in property and equipment. Amortization expense consists of amortization of intangible assets originating from our acquisitions. Acquired intangible assets include developed technology, customer relationships, trademarks and trade names. We expect in the future that depreciation and amortization may increase based on acquisition activity, development of our platform and capitalized expenditures.
Interest expense
Interest expense includes interest expense on debt, including the Revolving Credit Facility, the Initial Term Loan, and the Incremental Term Loan (each of which is described in more detail below under "- Liquidity and Capital Resources - Debt Obligations"), as well as the non-cash amortization of deferred financing costs.
Other (expense) income, net
Other (expense) income, net includes interest income, foreign currency remeasurement and transaction gains and losses, and costs related to the write-off of unamortized debt issuance costs.
Income tax expense (benefit)
We are subject toU.S. federal, state and local income taxes as well as foreign income taxes based on enacted tax rates in each jurisdiction, as adjusted for allowable credits and deductions. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. 31 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our results of operations and results of operations data expressed as a percentage of net sales for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended Nine Months Ended
September 24, % of September 25, % of September 24, % of September 25, % of
2021 Net sales 2020 Net sales 2021 Net sales 2020 Net sales
($ in thousands)
Net Sales $ 260,746 100.0 % $ 226,276 100.0 % $ 734,519 100.0 % $ 588,006 100.0 %Costs and expenses: Cost of sales, exclusive of depreciation and amortization. . 151,281 58.0 % 133,131 58.8 % 432,297 58.9 % 342,764 58.3 % Selling, general and administrative expenses 105,005 40.3 % 66,962 29.6 % 259,019 35.3 % 194,443 33.1 % Depreciation and amortization 14,287 5.5 % 14,368 6.3 % 42,197 5.7 % 43,351 7.4 % Total costs and expenses 270,573 103.8 % 214,461 94.8 % 733,513 99.9 % 580,558 98.7 % (Loss) income from operations (9,827) (3.8) % 11,815 5.2 % 1,006 0.1 % 7,448 1.3 % Other expenses (income): Interest expense 7,511 2.9 % 11,330 5.0 % 26,589 3.6 % 35,875 6.1 % Other expense (income), net 6,931 2.7 % (224) (0.1) % 6,422 0.9 % (1,558) (0.3) % Total other expenses 14,442 5.5 % 11,106 4.9 % 33,011 4.5 % 34,317 5.8 % (Loss) income before income taxes (24,269) (9.3) % 709 0.3 % (32,005) (4.4) % (26,869) (4.6) % Income tax benefit (2,729) -1.0 % (694) (0.3) % (3,373) (0.5) % (6,025) (1.0) % Net (loss) income (21,540) (8.3) % 1,403 0.6 % (28,632) (3.9) % (20,844) (3.5) % Net loss attributable to noncontrolling interest (11) 0.0 % (14) 0.0 % (45) 0.0 % (54) 0.0 % Net (loss) income attributable to Company$ (21,529) (8.3) %$ 1,417 0.6 %$ (28,587) (3.9) %$ (20,790) (3.5) %
Three Months and Nine Months Ended
Net Sales Three Months Ended Nine Months Ended September 24, September 25, September 24, September 25, 2021 2020 $ Change % Change 2021 2020 $ Change % Change ($ in thousands) Net Sales$ 260,746 $ 226,276 $ 34,470 15.2 %$ 734,519 $ 588,006 $ 146,513 24.9 % Net sales increased by$34.5 million , or 15.2%, in the three months endedSeptember 24, 2021 , compared to the three months endedSeptember 25, 2020 . The growth during the quarter was driven by strong overall demand across geographies, markets and product categories, with year-over-year increases in transacting integrators and spend per integrator. Growth was also driven by the benefit of the first full quarter of ownership of Access Networks and the cumulative ramp of eight new local branches opened since the end of the third quarter 2020, including three new local branches opened in the most recent quarter, bringing our total local branch count to 30. Additionally, we had the benefit of a price increase enacted across our proprietary product portfolio inAugust 2021 . While supply chain challenges represented a headwind in the quarter, we were able to avoid significant disruption of our business through navigation of these issues. 32 -------------------------------------------------------------------------------- Net sales increased by$146.5 million , or 24.9%, in the nine months endedSeptember 24, 2021 , compared to the nine months endedSeptember 25, 2020 . Growth was strong across geographies, markets and product categories as we added new integrators, increased spend per integrator and lapped the demand impacts from COVID-19 in the prior year.
Cost of Sales, exclusive of depreciation and amortization
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
($ in thousands)
Cost of sales,
exclusive of
depreciation and
amortization $ 151,281 $ 133,131 $ 18,150 13.6 % $ 432,297 $ 342,764 $ 89,533 26.1 %
As a percentage of
net sales 58.0 % 58.8 % 58.9 % 58.3 %
Cost of sales, exclusive of depreciation and amortization, increased $18.2
million , or 13.6%, in the three months ended September 24, 2021 , compared to the
three months ended September 25, 2020 , primarily driven by higher sales volumes.
As a percentage of net sales, cost of sales, exclusive of depreciation and
amortization, decreased to 58.0% in the current period from 58.8% in the prior
period. The decrease in cost of sales, exclusive of depreciation and
amortization, as a percentage of net sales was due to favorable proprietary
product sales mix in the quarter. This decrease in cost of sales, exclusive of
depreciation and amortization, as a percentage of net sales resulted in a higher
Contribution Margin of 42.0% for the three months ended September 24, 2021 ,
compared to 41.2% for the three months ended September 25, 2020 .
Cost of sales, exclusive of depreciation and amortization, increased $89.5
million , or 26.1%, in the nine months ended September 24, 2021 , compared to the
nine months ended September 25, 2020 , primarily driven by higher sales volumes.
As a percentage of net sales, cost of sales, exclusive of depreciation and
amortization, increased to 58.9% in the current period from 58.3% in the prior
period. The increase in cost of sales, exclusive of depreciation and
amortization, as a percentage of net sales was primarily due to growth in
third-party product sales mix as we further execute our omni-channel strategy by
opening local branches which typically sell more third-party product than
proprietary product, as well as increasing costs from suppliers and higher
inbound freight costs given ongoing supply chain pressures. This increase in
cost of sales, exclusive of depreciation and amortization, as a percentage of
net sales resulted in a lower Contribution Margin of 41.1% for the nine months
ended September 24, 2021 , compared to 41.7% for the nine months ended September
25, 2020 .
Selling, General and Administrative ("SG&A") Expenses
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
($ in thousands)
Selling, general and
administrative
expenses $ 105,005 $ 66,962 $ 38,043 56.8 % $ 259,019 $ 194,443 $ 64,576 33.2 %
As a percentage of
net sales 40.3 % 29.6 % 35.3 % 33.1 %
Selling, general and administrative expenses increased $38.0 million , or 56.8%,
in the three months ended September 24, 2021 , compared to the three months ended
September 25, 2020 . The increase in selling, general and administrative expenses
was primarily due to the recognition of $14.4 million in equity-based
compensation expenses and $10.6 million in compensation costs paid to certain
pre-IPO owners for their interests in lieu of their participation in the TRA
entered into in connection with the IPO. The remaining increases in selling,
general and administrative expenses was due to increases in variable operating
expenses (including outbound shipping, credit card processing fees and
warranty), driven by higher sales volumes, increased costs associated with
becoming and operating as a public company, ongoing investments to support
strategic growth initiatives, and a return to normalized spending levels when
compared to cost reduction actions taken to mitigate the impacts of COVID-19 in
2020.
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Selling, general and administrative expenses increased $64.6 million , or 33.2%,
in the nine months ended September 24, 2021 compared to the nine months ended
September 25, 2020 . The increase in selling, general, administrative expenses
was due to equity-based compensation expense and compensation costs paid to
certain pre-IPO owners for their interests in lieu of their participation in the
TRA entered into in connection with the IPO. The remaining increase in selling,
general and administrative expenses was due to increases in variable operating
expenses (including outbound shipping, credit card processing fees and
warranty), driven by higher sales volumes, increased costs associated with
becoming and operating as a public company, ongoing investments to support
strategic growth initiatives, and a return to normalized spending levels when
compared to cost reduction actions taken to mitigate the impacts of COVID-19 in
2020.
Depreciation and Amortization
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
($ in thousands)
Depreciation and
amortization
(0.6) % $ 42,197 $ 43,351 $ (1,154) (2.7) %
As a percentage of
net sales 5.5 % 6.3 % 5.7 % 7.4 %
Depreciation and amortization expenses decreased by $0.1 million , or 0.6%, in
the three months ended September 24, 2021 compared to the three months ended
September 25, 2020 , and by $1.2 million , or 2.7%, in the nine months ended
September 24, 2021 compared to the nine months ended September 25, 2020 .
Depreciation expense decreased primarily due to certain software assets that
became fully depreciated during fiscal year 2020. Amortization expense
associated with intangible assets acquired remained consistent between periods.
Interest Expense
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
($ in thousands)
Interest expense
(33.7) %$ 26,589 $ 35,875 $ (9,286) (25.9) % As a percentage of net sales 2.9 % 5.0 % 3.6 % 6.1 % Interest expense decreased by$3.8 million , or 33.7%, in the three months endedSeptember 24, 2021 compared to the three months endedSeptember 25, 2020 , and by$9.3 million , or 25.9%, in the nine months endedSeptember 24, 2021 compared to the nine months endedSeptember 25, 2020 . The decrease was primarily driven by lower average borrowing rates on our debt and a lower average outstanding balance on our revolving credit facility and term loan in the current period, due in part to a portion of the term loan being repaid from the net proceeds of the IPO. Other Expense (Income), net Three Months Ended Nine Months Ended September 24, September 25, September 24, September 25, 2021 2020 $ Change % Change 2021 2020 $ Change % Change ($ in thousands)
Other expense (income)
(3194.2) % $ 6,422 $ (1,558) $ 7,980 (512.2) %
As a percentage of net
sales 2.7 % (0.1) % 0.9 % (0.3) %
Other expense increased by $7.2 million , or 3194.2%, in the three months ended
September 24, 2021 , compared to the three months ended September 25, 2020 , and
by $8.0 million , or 512.2%, in the nine months ended September 24, 2021 ,
compared to the nine months ended September 25, 2020 , primarily related to the
write-off of unamortized debt issuance costs.
34
--------------------------------------------------------------------------------Income Tax Benefit
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
($ in thousands)
Income tax benefit
293.2 %$ (3,373) $ (6,025) $ 2,652 (44.0) % As a percentage of net sales (1.0) % (0.3) % (0.5) % (1.0) % The Company recognized income tax benefit of$2.7 million for the three months endedSeptember 24, 2021 , compared to a benefit of$0.7 million for the three months endedSeptember 25, 2020 . The effective tax rate for the three months endedSeptember 24, 2021 was a benefit of 11.3%, and a benefit of 97.9% for the three months endedSeptember 25, 2020 . The change in the effective tax rate in the three months endedSeptember 24, 2021 and the difference from the statutory rate, was primarily the result of discrete items recognized related to one-time transaction costs and a payment to pre-IPO owners in lieu of TRA participation along with the adjustment of deferred tax liabilities and the benefit of certain tax credits. Income tax benefit decreased by$2.7 million , or 44.0%, in the nine months endedSeptember 24, 2021 compared to the nine months endedSeptember 25, 2020 . The effective tax rate for the nine months endedSeptember 24, 2021 , was a benefit of 10.6% compared to a benefit of 22.42% for the nine months endedSeptember 25, 2020 . The change in the effective tax rate for the nine months endedSeptember 24, 2021 , and the difference from theU.S. federal statutory rate of 21%, was primarily the result of discrete items recognized related to one-time transaction costs and a payment to pre-IPO owners in lieu of TRA participation along with the adjustment of deferred tax liabilities and the benefit of certain tax credits.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are net cash provided by operating activities and availability under our Credit Agreement. We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. Our expected primary uses on a short-term and long-term basis are for working capital requirements, capital expenditures, geographic or service offering expansion, acquisitions, debt service requirements and other general corporate purposes. Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements (joint design and manufacturing tooling), expenditures related to our distributions centers, and new local branch openings. We expect to fund capital expenditures from net cash provided by operating activities. We have historically funded our operations and acquisitions primarily through internally generated cash on hand and our Credit Facilities, except for the acquisition ofControl4 which was partially funded by a capital contribution from the Parent. Most recently, we completed our IPO of 13.9 million shares of our common stock, and onAugust 18, 2021 , we completed the sale of 1.2 million shares of additional common stock to the underwriters pursuant to their option to purchase additional shares, at an offering price of$18.00 per share. We raised net proceeds of$249.2 million through the IPO, after deducting underwriting discounts and other offering costs of$21.2 million . OnAugust 4 , 2021,we used a portion of the net proceeds from the IPO to repay a portion of the Incremental Term Loan outstanding under the Credit Agreement totaling$215.9 million in principal, plus accrued interest of$1.0 million . We also incurred a charge of$6.6 million related to the write-off of unamortized debt issuance costs. 35
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Working Capital, Excluding Deferred Revenue
The following table summarizes our cash, cash equivalents, accounts receivable
and working capital, which we define as current assets minus current liabilities
excluding deferred revenue, for the periods indicated:
As of
September 24, December 25,
2021 2020
(in thousands)
Cash and cash equivalents $ 60,591 $ 77,458
Accounts receivable, net 54,119 49,363
Working capital, excluding deferred revenue 191,176 141,476
Our cash and cash equivalents as ofSeptember 24, 2021 , are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short term, highly liquid investments that reduce the risk of principal loss; therefore, our cash and cash equivalents are held in demand deposit accounts that generate very low returns. We believe that our existing cash and cash equivalents, together with expected cash flow from operating activities, will be sufficient to fund our operations and capital expenditure requirements for the next 12 months. Beyond the next 12 months, our primary capital requirements primarily consist of required principal and interest payments on long-term debt and lease payments under non-cancelable lease commitments as further described in Notes 8 and 14 to our consolidated financial statements included in our Prospectus. If cash provided by operating activities and borrowings under our Credit Agreement are not sufficient or available to meet our short and long-term capital requirements, then we may consider additional equity or debt financing in the future. There can be no assurance debt or equity financing will be available to us if we need it or, if available, the terms will be satisfactory to us. Our sources of liquidity could be affected by factors described under "Risk Factors" in our Prospectus.
Debt Obligations
OnAugust 4, 2017 , our wholly owned subsidiary,Wirepath LLC ("Borrower") entered into a Credit Agreement ("Credit Agreement") with various financial institutions consisting of a Revolving Credit Facility that provided for borrowings of up to$50.0 million , and an Initial Term Loan in the amount of$265.0 million . The Revolving Credit Facility matures onAugust 4, 2022 , and the Initial Term Loan matures onAugust 4, 2024 . We can elect that loans under the Revolving Credit Facility and Initial Term Loan be alternate base rate loans or LIBOR-based loans, each at the published interest rates, plus the applicable margin as further discussed below. We have elected LIBOR-based loans in each instance. OnFebruary 5, 2018 , the Credit Agreement was amended to reduce the applicable interest rate margin on the Revolving Credit Facility and Initial Term Loan by 0.75 percentage points each. OnOctober 31, 2018 , the Credit Agreement was amended for a second time to increase the Initial Term Loan principal to$292.4 million , with a reduction of 0.50 percentage points to the applicable interest rate margin on the Revolving Credit Facility and Initial Term Loan. OnAugust 1, 2019 , the Credit Agreement was amended for a third time to provide an Incremental Term Loan in the amount of$390.0 million and increase commitments under the Revolving Credit Facility to$60.0 million . Borrowings under the Revolving Credit Facility and term loans bear interest at a variable rate, at the Borrower's option, of either: (i) a eurodollar rate based on LIBOR for a specific interest period plus an applicable margin, subject to a eurodollar rate floor of 0.00%, or (ii) an alternate base rate plus an applicable margin, subject to a base rate floor of 0.00%. Interest on the Revolving Credit Facility and the term loans is payable quarterly in arrears with respect to alternate base rate loans and payable on the last day of each applicable interest period (or, in the case of an interest period in excess of three months, on three-month intervals of the first day of such interest period) with respect to eurodollar rate loans. The margins for the Revolving Credit Facility range from 3.50% to 4.00% per annum for eurodollar rate loans and 2.50% to 3.00% per annum for alternate base rate loans, depending on the applicable first lien secured leverage ratio. The margins for the Initial Term Loan are fixed at 4.00% per annum for eurodollar rate loans and 3.00% per annum for alternate base rate loans. The margins for the Incremental Term Loan are fixed at 4.75% per annum for eurodollar rate loans and 3.75% per annum for alternate base rate loans. Unused commitments under the Revolving Credit Facility are subject to a commitment fee ranging from 0.25% to 0.50% depending on the applicable first lien secured net leverage ratio. The LIBOR-based rate for the Revolving Credit Facility and the Initial Term Loan is LIBOR (0.15% and 0.22% as ofSeptember 24, 2021 , andDecember 25, 2020 , respectively), plus the applicable margin (4.00% as ofSeptember 24, 2021 , andDecember 25, 2020 ), amounting to an effective rate of 4.15% as ofSeptember 24, 2021 , and 4.22% as of December 36 -------------------------------------------------------------------------------- 25, 2020. The LIBOR-based rate for the Incremental Term Loan is LIBOR (0.15% and 0.22% as ofSeptember 24, 2021 , andDecember 25, 2020 , respectively), plus the applicable margin (4.75% as ofSeptember 24, 2021 , andDecember 25, 2020 ), amounting to an effective rate of 4.90% as ofSeptember 24, 2021 , and 4.97% as ofDecember 25, 2020 . OnDecember 31, 2018 , we purchased an interest rate cap to guard against unexpected increases in LIBOR to which our debt instruments are tied. Pursuant to the agreements, we have capped LIBOR at 3.55% with respect to the aggregate notional amount of$189.6 million , decreasing by scheduled principal payments on the Initial Term Loan through the expiration of the agreements inDecember 2021 . In the event LIBOR exceeds 3.55%, we will pay interest at the capped rate plus the applicable margin. In the event LIBOR is less than 3.55%, we will pay interest at the prevailing LIBOR rate plus the applicable margin. The asset is recorded at fair value. The term loans amortize in fixed equal quarterly installments in an amount equal to 1.0% per annum of the total aggregate principal amount thereof immediately after borrowing, with the balance due at maturity. We may voluntarily prepay loans or reduce commitments under the Credit Agreement, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty (subject to customary exceptions). We may be required, with certain exceptions, to make mandatory payments under the Credit Agreement using a percentage of our annual excess cash flows or net proceeds from any non-ordinary course asset sales or certain debt issuances, if any. The Borrower's obligations under the Credit Agreement are guaranteed by its direct parent company, our wholly owned subsidiaryCrackle Purchaser LLC (formerly known asCrackle Purchaser Corp. ) and each of the Borrower's current and future direct and indirect subsidiaries other than: (i) foreign subsidiaries, (ii) unrestricted subsidiaries, (iii) non-wholly owned subsidiaries, (iv) immaterial subsidiaries and (v) certain holding companies of foreign subsidiaries, and are secured by a first lien on substantially all of their assets, including the capital stock of subsidiaries (subject to certain exceptions). The Credit Agreement contains various customary affirmative and negative covenants. The financial covenants we are measured against are consolidated earnings before interest, taxes, depreciation and amortization, adjusted for allowable add-backs specified in the Credit Agreement ("consolidated EBITDA"), and associated ratios, as defined in the Credit Agreement. We were in compliance with such covenants as ofSeptember 24, 2021 andDecember 25, 2020 . In addition, the Revolving Credit Facility is subject to a first lien secured net leverage ratio of 8.15 to 1:00, tested quarterly if, and only if, the aggregate principal amount from the revolving facility loans, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of$5.0 million and the stated face amount of letters of credit outstanding on the initial closing date of the Credit Agreement) and swingline loans outstanding and/or issued, as applicable, exceeds 35.0% of the total amount of the Revolving Credit Facility commitments. As ofSeptember 24, 2021 , we had no borrowings under the Revolving Credit Facility,$284.3 million outstanding under the Initial Term Loan and$167.3 million outstanding under the Incremental Term Loan. As ofDecember 25, 2020 , the Company had no borrowings under the Revolving Credit Facility,$286.5 million outstanding under the Initial Term Loan and$386.1 million outstanding under the Incremental Term Loan. OnAugust 4, 2021 , we used a portion of the net proceeds from the IPO to repay a portion of the Incremental Term Loan outstanding under the Credit Agreement totaling$215.9 million , plus accrued interest of$1.0 million . The Company incurred a charge of$6.6 million related to the write-off of unamortized debt issuance costs.
Historical Cash Flows
The following table sets forth our cash flows for the nine months ended
Nine Months Ended
September 24, 2021 September 25, 2020
(in thousands) Net cash (used in) provided by operating activities $ (11,239) $
42,642
Net cash used in investing activities (33,325) (6,455)
Net cash provided by financing activities 28,163 6,790
Operating Activities
Net cash used in operating activities was $11.2 million in the nine months ended
September 24, 2021 , as compared to net cash provided of $42.6 million in the
nine months ended September 25, 2020 , a decrease of $53.9 million . The decrease
was driven primarily by a net increase in cash used for operating assets and
liabilities, including an increase in inventory and prepaid vendor deposits to
protect against supply chain uncertainty. In the prior year, we managed our
working capital position in light of the COVID-19 pandemic by increasing focus
on collections of accounts receivable, managing inventory
37
--------------------------------------------------------------------------------levels, and negotiating extended payment terms with vendors, resulting in increased cash flow from operations in fiscal year 2020.
Investing Activities
Net cash used in investing activities was$33.3 million in the nine months endedSeptember 24, 2021 , as compared to$6.5 million in nine months endedSeptember 25, 2020 , an increase of$26.9 million . The increase in net cash used in investing activities for the nine months endedSeptember 24, 2021 , was primarily due to the acquisition of Access Networks in the current period.
Financing Activities
Net cash provided by financing activities was$28.2 million for the nine months endedSeptember 24, 2021 , compared to$6.8 million in the nine months endedSeptember 25, 2020 , an increase of$21.4 million . The increase in net cash provided by financing activities for the nine months endedSeptember 24, 2021 , was due to net proceeds from our IPO, a portion of which we used to pay down long-term debt.
Off-Balance Sheet Arrangements
As of
Contractual Obligations
We have contractual obligations comprised of payments of debt and interest,
lease commitments, and CVRs. As of
OnJuly 29, 2021 , the Company executed the TRA with the TRA Participants. The TRA provides for the payment by the Company to the TRA Participants of 85% of the amount of cash savings, if any, inU.S. federal, state, and local income tax that we actually realize, or are deemed to realize (calculated using certain assumptions), as a result of the utilization of such tax benefits, including certain tax benefits attributable to payments under the TRA. See Note 14 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the TRA. OnAugust 4, 2021 , the Company used a portion of the net proceeds from the IPO to repay a portion of the Incremental Term Loan outstanding under the Credit Agreement totaling$215.9 million , plus accrued interest of$1.0 million . See Note 7 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the repayment. Except as described herein, as ofSeptember 24, 2021 , there have been no material changes in our contractual obligations and commitments other than in the ordinary course of business from the contractual obligations and commitments for the year endedDecember 25, 2020 , as previously disclosed in our Prospectus.
Critical Accounting Estimates and Policies
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Policies" and our consolidated financial statements and related notes disclosed in our Prospectus for accounting policies and related estimates we believe are the most critical to understanding our consolidated financial statements, financial condition and results of operations and which require complex management judgment and assumptions or involve uncertainties. These critical accounting estimates and policies include revenue recognition; share-based compensation; income taxes; business combinations; inventories, net; goodwill and intangible assets; warranties; and contingent valuation rights. Except as discussed in Note 14 of the Notes to the Condensed Consolidated Financial Statements related to the TRA, there have been no changes to our critical accounting estimates and policies or their application since the date of the Prospectus.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
38
--------------------------------------------------------------------------------Emerging Growth Company Status
We qualify as an "emerging growth company" as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies. These provisions include, but are not limited to: •being permitted to present only two years of audited financial statements and only two years of related "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Prospectus;
•not being required to comply with the auditor attestation requirements on the effectiveness of our internal controls over financial reporting;
•reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, proxy statements and registration statements, including in our Prospectus; and •exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of our IPO occurs (which will be our 2026 fiscal year). However, if certain events occur prior to the end of such five-year period, including if we become a "large accelerated filer," our annual gross revenues exceed$1.07 billion , or we issue more than$1.0 billion of nonconvertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. We currently intend to take advantage of this exemption. 39
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