The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended March 31, 2012 ("fiscal 2012") included in our Annual Report on Form 10-K filed with the SEC on June 8, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,( the "Exchange Act"). These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those in our Form 10-K discussed in the section titled "Risk Factors." The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

Annie's, Inc. is a rapidly growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged foods categories. We sell premium products made from high-quality ingredients at affordable prices. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Our loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across the mainstream grocery, mass merchandiser and natural retailer channels. We offer over 125 products and are present in over 25,000 retail locations in the United States and Canada.

Our net sales are derived primarily from the sale of meals, snacks, dressings, condiments and other products under the Annie's Homegrown and Annie's Naturals brand names. We have experienced strong growth, driven by our meals and snacks categories, resulting from our focus on supporting our best-selling items and the introduction of new products in these categories. We have reduced our offerings in our dressings and condiments lines and discontinued our cereal line in the fourth quarter of fiscal 2012, which has resulted in no growth in that category. Sales are reported net of estimated sales and promotion incentives, slotting, customer discounts and spoils.

Gross profit is net of cost of sales, which consists of the costs of ingredients in the manufacture of products, contract manufacturing fees, packaging costs and in-bound freight charges. Ingredients account for the largest portion of the cost of sales followed by contract manufacturing fees and packaging.

Our selling, general and administrative expenses consist primarily of marketing and advertising expenses, freight and warehousing, wages, related payroll and employee benefit expenses, including stock-based compensation, commissions to outside sales representatives, legal and professional fees, travel expenses, other facility related costs, such as rent and depreciation, and consulting expenses. The primary components of our marketing and advertising expenses include trade advertising, samples, consumer events, sales data, consumer research and search engine and digital advertising.

Trends and Other Factors Affecting Our Business

Net sales growth continues to be driven by increased penetration of mainstream grocery and mass merchandiser channels, product innovation, increased brand awareness and greater consumer demand for natural and organic food products. In the second half of fiscal 2012 through our first quarter of the fiscal year ending March 31, 2013 ("fiscal 2013"), we experienced acceleration in consumer trends for many of our products. We also have benefited from improved placement in the mainstream grocery channel, which we believe has resulted in increased sales of our products. Our net sales growth has been primarily driven by volume; however, we have demonstrated the ability to execute price increases as needed to maintain margins, driven by our strong brand loyalty and perceived value relative to the competition.

We purchase finished products from independent contract manufacturers. We have long standing, strategic relationships with many of our contract manufacturers and suppliers of organic ingredients. We enter directly or through contract manufacturers into purchase commitments with certain suppliers for key ingredients that represent approximately half our cost of goods sold. This provides us with significant visibility into our cost structure over the next six to twelve months. Over the past 18 months, we have experienced increased costs for many of our inputs and expect these higher costs to continue throughout the remainder of fiscal 2013. We have been successful in maintaining or improving gross margins despite the increasing commodity cost environment through a combination of cost management and price increases. We actively manage our input and production costs through a combination of commodity management practices, vendor negotiation, productivity improvements and cost reductions in our supply chain. We invest significant time and effort to achieve permanent cost reductions in our supply chain. To drive these initiatives, we have begun to selectively invest capital in equipment located at our contract manufacturers to drive down costs, improve throughput and improve product quality.

Selling, general and administrative expenses have increased as a result of the investment we have made in building our organization and adding headcount to support our growth and operating as a public company. Many of our selling, general and administrative expenses are variable with volume including freight and warehouse expenses and commissions paid to our sales brokers. In addition, we continue to make investments in marketing to drive trial of our products and promote awareness of our brand and in research and development to support our robust innovation pipeline. Starting in fiscal 2012, we incurred incremental expense related to getting ready to operate as a public company. We expect to incur approximately $2 million in incremental expense annually related to being a public company.

Results of Operations

The following table sets forth items included in our consolidated statements of
operations in dollars and as a percentage of net sales for the periods
presented:



                                                  Thee Months Ended June 30,              % of Net Sales
                                                    2012                2011           2012           2011
                                                           (in thousands, except for percentages)
Net sales                                       $      34,293         $  28,610         100.0 %        100.0 %
Cost of sales                                          20,486            17,022          59.7 %         59.5 %

Gross profit                                           13,807            11,588          40.3 %         40.5 %
Operating expenses:
Selling, general and administrative expenses           10,211             8,303          29.8 %         29.0 %

Total operating expenses                               10,211             8,303          29.8 %         29.0 %

Income from operations                                  3,596             3,285          10.5 %         11.5 %
Interest expense                                          (40 )             (18 )        (0.1 )%        (0.1 )%
Other income (expense), net                                49              (484 )         0.1 %         (1.7 )%

Income before provision for income taxes                3,605             2,783          10.5 %          9.7 %
Provision for income taxes                              1,474               971           4.3 %          3.4 %

Net income                                      $       2,131         $   1,812           6.2 %          6.3 %

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net Sales



                                          Three Months Ended June 30,               Change                 % of Net Sales
                                           2012                 2011             $           %           2012         2011
                                                              (in thousands, except for percentages)
Meals                                 $       14,667       $       10,452     $ 4,215        40.3 %        42.8 %       36.5 %
Snacks                                        13,463               11,898       1,565        13.2 %        39.2 %       41.6 %
Dressings, condiments and other                6,163                6,260         (97 )      (1.5 )%       18.0 %       21.9 %

Net sales                             $       34,293       $       28,610     $ 5,683        19.9 %       100.0 %      100.0 %

Net sales increased $5.7 million, or 19.9%, to $34.3 million during the three months ended June 30, 2012 compared to $28.6 million during the three months ended June 30, 2011. This increase reflects an increase in net sales of meals and snacks of $4.2 million and $1.6 million, respectively, offset by a slight decrease in dressings, condiments and other of $0.1 million. The increase in meals was predominantly driven by strong growth in the macaroni and cheese product line with a modest increase from organic frozen pizza, which we first shipped in January 2012. We experienced growth across all of our snack product lines. The growth in snacks was more modest relative to prior quarters because of channel mix. The slight decrease in dressings, condiments and other was attributable to the discontinuation of cereal. Excluding cereal, the dressings, condiments and other category grew by $0.5 million. Distribution gains and our mainline placement initiatives also contributed to net sales growth, primarily in the mainstream grocery channel. The net sales increase was primarily driven by volume with slightly higher average selling prices adding modest growth.

Gross Profit



                             Three Months Ended June 30,                Change
                             2012                  2011              $          %
                                   (in thousands, except for percentages)
        Cost of sales    $      20,486         $      17,022      $ 3,464       20.4 %

        Gross profit     $      13,807         $      11,588      $ 2,219       19.1 %

        Gross margin %            40.3 %                40.5 %

Gross profit increased $2.2 million, or 19.1%, to $13.8 million for the three months ended June 30, 2012 from $11.6 million for the three months ended June 30, 2011. Gross margin decreased 0.2 percentage points to 40.3% from 40.5% during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The increase in gross profit was primarily driven by the increase in net sales. The slight decrease in gross margin resulted from higher commodity costs, which were partially offset by price increases and cost reduction initiatives.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.9 million, or 23.0%, to $10.2 million during the three months ended June 30, 2012 from $8.3 million during the three months ended June 30, 2011. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our growth and operating as a public company. In addition, during the three months ended June 30, 2012, we made additional investments in

research and development to support our innovation pipeline compared with the three months ended June 30, 2011. Additionally, public company related expenses impacted selling, general and administrative expenses during the three months ended June 30, 2012 compared with the three months ended June 30, 2011. As a percentage of net sales, selling, general and administrative expenses increased 0.8 percentage points to 29.8% during the three months ended June 30, 2012 from 29.0% during the three months ended June 30, 2011.

Income from Operations



                                                  Three Months Ended June 30,               Change
                                                   2012                 2011             $          %
                                                        (in thousands, except for percentages)
Income from operations                         $      3,596         $      3,285       $ 311        9.5 %

Income from operations as a percentage of
net sales                                              10.5 %               11.5 %

As a result of the factors above, income from operations increased $0.3 million, or 9.5%, to $3.6 million during the three months ended June 30, 2012, from $3.3 million during the three months ended June 30, 2011. Income from operations as a percentage of net sales decreased 1.0 percentage point to 10.5% in the three months ended June 30, 2012, from 11.5% in the three months ended June 30, 2011.

Interest Expense

Interest expense increased slightly during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 due to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012.

Other Income (Expense), Net

Other income (expense), net during the three months ended June 30, 2012 primarily reflects royalty income partially offset by non-cash charge related to the increase in the fair value of the convertible preferred stock warrant on April 2, 2012, prior to its conversion into a common stock warrant. Other income (expense), net during the three month ended June 30, 2011 primarily reflects a non-recurring, non-cash out-of-period charge of $0.5 million related to the increase in the fair value of our convertible preferred stock warrant liability offset by royalty income.

Provision for income taxes

                                      Three Months Ended June 30,             Change
                                       2012                 2011            $        %
                                          (in thousands, except for percentages)
      Provision for income taxes   $       1,474         $       971      $ 503       nm

      Effective tax rate                    40.9 %              34.9 %

Our estimated effective tax rate was 40.9% for the three months ended June 30, 2012, compared to 34.9% in the same period last year. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the three months ended June 30, 2012 was higher than the effective tax rate for the three months ended June 30, 2011 largely due to a tax benefit recorded during the three months ended June 30, 2011 related to an increase in the tax rate applied for deferred tax assets due to an increase in the federal and state tax rates.

In addition, during the three months ended June 30, 2012, we recognized $11.8 million of tax deductions associated with stock option exercises. As of June 30, 2012, $11.4 million of these tax deductions are considered "excess" stock compensation related deductions, resulting in a reduction in taxes payable of $1.3 million, recording a tax refund receivable of $2.9 million, with a corresponding increase in additional paid in capital of $4.2 million. We will recognize the remaining $0.4 million of stock compensation related deductions as a reduction in taxes payable in future periods as we generate state taxable income.

Net income

Three Months Ended June 30, Change 2012 2011 $ %

As a result of the factors above, net income increased $0.3 million, or 17.6%, to $2.1 million for the three months ended June 30, 2012 from $1.8 million for the three months ended June 30, 2011.

Seasonality

Historically, we have experienced greater net sales in the second and fourth fiscal quarters than in the first and third fiscal quarters due to our customers' merchandising and promotional activities around the back-to-school and spring seasons. Concurrently, inventory levels and working capital requirements increase during the first and third fiscal quarters of each fiscal year to support higher levels of net sales in the subsequent quarters. We anticipate that this seasonal impact on our net sales and working capital is likely to continue. Accordingly, our results of operations for any particular quarter are not indicative of the results we expect for the full year.

Liquidity and Capital Resources



                                                            June 30,          March 31,
                                                              2012              2012
                                                                   (in thousands)
Cash                                                        $   5,102        $       562
Accounts receivable, net                                        7,388             11,870
Accounts payable, related-party payable and accrued
liabilities                                                     5,489              9,618
Working capital(1)                                             28,066             16,427

(1) Working capital consists of total current assets less total current liabilities

The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by (used in) operating, investing and financing activities and our ending balance of cash:

                                                          June 30,       June 30,
                                                            2012           2011
                                                              (in thousands)
   Cash at beginning of period                           $      562      $   7,333
   Net cash provided (used in) by operating activities          950         (6,675 )
   Net cash used in investing activities                       (735 )         (380 )
   Net cash used in financing activities                      4,325          2,822

   Cash at end of period                                 $    5,102      $   3,100

Cash Flows from Operating Activities.

Operating activities provided $1.0 million of cash during the three months ended June 30, 2012, primarily due to our net income of $2.1 million, which included net non-cash charges of $0.5 million. Changes in operating asset and liability accounts provided an additional $2.5 million of net cash, which was comprised of a $4.5 million decrease in accounts receivable, a $3.5 million increase in accrued expenses offset by a $4.3 million increase in inventory and a $1.3 million decrease in related-party payable, resulting from the termination of our advisory services agreement with Solera effective upon the consummation of our IPO. This increase in cash was offset by the excess tax benefit from stock-based compensation of $4.2 million.

Operating activities used $6.7 million of cash during the three months ended June 30, 2011, primarily due to our net income of $1.8 million, which included net non-cash benefit of $0.2 million. Changes in operating asset and liability accounts used $8.3 million of net cash during the three months ended June 30, 2011.

Cash Flows from Investing Activities.

Cash used in investing activities related to purchases of property and equipment during the three months ended June 30, 2012 and 2011 was $0.7 million and $0.4 million, respectively.

Cash Flows from Financing Activities.

Cash provided by financing activities totaled $4.3 million during the three months ended June 30, 2012, comprised of:

• net proceeds of $11.1 million received from common shares issued in the IPO, net of issuance costs;

• excess tax benefit from stock-based compensation of $4.2 million;

• proceeds of $1.8 million received from exercises of stock options; and

• pay down of the outstanding balance of $12.8 million of our credit facility.

Cash provided by financing activities totaled $2.8 million during the three months ended June 30, 2011 including net proceeds of $3.4 million received from borrowings under our credit facility offset by payments of $0.6 million to repurchase certain stock options.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30, 2012:



                                                                 Payments Due by Period
                                                      Less Than                                      More  than
                                         Total        One Year        1-3 Years      3-5 Years       Five Years
                                                                     (in thousands)
Rent obligations(1)                     $  1,964     $       524     $     1,440     $       -      $         -
Equipment lease obligations(2)                44              25              19             -                -

Total operating lease obligations          2,008             549           1,459             -                -
Purchase commitments(3)                   13,064          12,792             272             -                -
Warehousing overheads obligations(4)         600             200             400

Total                                   $ 15,672     $    13,541     $     2,131     $       -      $         -

(1) We lease approximately 33,500 square feet of space that houses our corporate headquarters and a sample warehouse at 1610 Fifth Street, Berkeley, California pursuant to a lease agreement that expires in February 2016. Our lease has escalating rent provisions over the initial term and set rental rates for two option terms through February 2021 based on a percentage of the then fair market rental rate. We are working on reconfiguring approximately 6,500 square feet from the sample storage area to additional office space to accommodate our growth.

(2) We lease equipment under non-cancelable operating leases. These leases expire at various dates through 2016, excluding extensions at our option, and contain provisions for rental adjustments.

(3) We have non-cancelable purchase commitments, directly or through contract manufacturers, to purchase ingredients to be used in the future to manufacture products.

(4) We have an agreement with our contract warehousing company to pay minimum overhead fees through June 2015.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements or any holdings in variable interest entities.

Out-of-period Adjustment

During the first quarter of the prior fiscal year, we corrected an error in the measurement of our convertible preferred stock warrant liability. The correction increased the fair value of the convertible preferred stock warrant liability by $0.9 million and decreased additional paid-in capital by $0.4 million with a corresponding increase in expense of $0.5 million, which was recorded in other income (expense), net in the statement of operations during the three months ended June 30, 2011. The correction was an accumulation of an error that should have been recorded in prior periods and would have increased net loss for fiscal 2009 by $44,000, increased net income by $79,000 for fiscal 2010 and decreased net income by $0.6 million for fiscal 2011. Management had assessed the impact of this error and did not believe that it was material, either individually or in the aggregate, to any prior period financial statements or to the financial statements for the year ended March 31, 2012.