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

Overview

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

Our business is designed to generate recurring demand for our purified bottled water or self-serve filtered drinking water through the sale of innovative water dispensers. This business strategy is commonly referred to as "razor-razorblade" because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. We believe dispenser owners consume an average of 35 multi-gallon bottles of water annually. Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water (exchange) or they are refilled at a self-serve filtered drinking water location (refill). Each of our multi-gallon water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. As of June 30, 2012, our dispensers and water services were offered in each of the contiguous United States and in Canada at approximately 24,200 combined retail locations, including Lowe's Home Improvement, Walmart, Kroger, Safeway, Winn Dixie, H-E-B Grocery and Walgreens. In addition, the launch of Flavorstation is an extension of our overall razor/razorblade strategy, which we believe will result in the recurring demand of consumables such as flavors, CO2 cylinders, and accessories through the sale of our innovative carbonation appliances.

We provide major retailers throughout the United States and Canada with single-vendor solutions for water bottle exchange and refill vending services, addressing a market demand that we believe was previously unmet. Our solutions are easy for retailers to implement, require minimal management supervision and store-based labor, and provide centralized billing and detailed performance reports. Our exchange solution offers retailers attractive financial margins and the ability to optimize typically unused retail space with our displays. Our refill solution provides filtered water through the installation and servicing of reverse osmosis water filtration systems in the back room of the retailer's store location, which minimizes the usage of the customer's retail space. The refill vending machine, which is typically accompanied by a sales display containing empty reusable bottles, is located within the retailer customer's floor space. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic and highly predictable revenue.

Business Segments

At June 30, 2012, we had three operating segments and three reportable segments:
Primo Water ("Water"), Primo Dispensers ("Dispensers") and Primo Flavorstation ("Flavorstation"), which, prior to 2012, was reported in "Other."

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

Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major U.S. retailers and are sold primarily through a direct-import model, where we recognize revenues for the sale of the water dispensers when title is transferred to our retailer customers. We support retail sell-through with domestic inventory. We design, market and arrange for certification and inspection of our water dispensers.

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

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

Cost of sales for Water consists primarily of costs for distribution, bottles and related packaging materials for our exchange services and servicing and material costs for our refill services. Cost of sales for Dispensers and Flavorstation consist primarily of contract manufacturing, freight and duty costs.

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

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

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

Recent Transactions

Goodwill and Developed Technology Impairment

Effective June 30, 2012, we performed a step one interim impairment test of our goodwill and other identifiable intangible assets due to events and changes in circumstances that indicated impairment might have occurred. This test was performed for each of our reporting units that have goodwill: Water and Flavorstation. The factor deemed by management to have constituted a potential impairment triggering event was the sustained decrease in our stock price relative to our book value. In addition, for the Flavorstation reporting unit, delays in the development and manufacturing of the Omnifrio Single-Serve Business appliance created an indication of impairment of the related goodwill and the developed technology definite-lived intangible asset. The first step involves a comparison of the fair value of a reporting unit to its carrying value. The fair value is estimated based on a number of factors including operating results, business plans and future cash flows.

Based on the results of the step one test we determined that our Water and Flavorstation reporting units both had carrying values higher than their respective estimated fair values. For the Flavorstation reporting unit, because of delays in product development and manufacturing we determined that the Omnifrio Single-Serve Business appliance would not be available for this 2012 holiday season. The delays resulted in discounted cash flows that were substantially below the carrying value of the identifiable assets. For the Water reporting unit, the impairment was the result of lower projected growth in store locations due to capital restraints related to the Term Loan and the Senior Revolving Credit Facility.

Because of the results of the step one test, we performed the second step of impairment testing for both reporting units, which required us to compare the implied value of the reporting unit goodwill with the carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We had to determine the implied fair value of goodwill in the same manner as if it had acquired the reporting units in an arm's length transaction as of the testing date of June 30, 2012. We performed this analysis by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit from the estimated fair value of the reporting unit. Because the recorded amount of goodwill exceeded the amount of goodwill that would have been recorded under the second step as of the impairment testing date, we recorded non-cash goodwill impairment charges of $6.4 million for the Flavorstation reporting unit and $11.5 million for the Water reporting unit.

In addition to performing an interim goodwill impairment analysis during the quarter ended June 30, 2012, management also performed an undiscounted cash flow test for selected asset group with definite lives. As a result of delays in product development and manufacturing we determined that the Omnifrio Single-Serve Business appliance would not be available for this 2012 holiday season. Therefore, the developed technology intangible asset is considered impaired as the carrying value exceeds the undiscounted cash flows. We recorded a non-cash impairment charge of $7.0 million for the developed technology intangible asset.

Omnifrio Single-Serve Beverage Business

On April 11, 2011, we completed the acquisition of certain intellectual property and other assets (the "Omnifrio Single-Serve Beverage Business") from Omnifrio Beverage Company, LLC ("Omnifrio") for total consideration of up to $14.1 million, consisting of: (i) a cash payment at closing of $2.0 million; (ii) the issuance at closing of 501,080 shares of our common stock; (iii) a cash payment of $2.0 million on the 15-month anniversary of the closing date (subject to our setoff rights in the asset purchase agreement); (iv) up to $3.0 million in cash milestone payments; and (v) the assumption of certain specified liabilities relating to the Omnifrio Single-Serve Beverage Business.

On March 15, 2012, we entered into the Second Amendment to Asset Purchase Agreement (the "Second Amendment") with Omnifrio and the other parties thereto. The Second Amendment amends the Asset Purchase Agreement dated March 8, 2011, as amended on May 11, 2011, by and among the Primo, Omnifrio and the other parties thereto (the "Purchase Agreement") to revise the cash milestone payments and deferred purchase price payments payable under the Purchase Agreement.

Under the Second Amendment, we agreed to make milestone payments consisting of
(i) a cash payment of $1.0 million, subject to certain offset amounts, upon our shipment of 5,000 single-serve beverage dispensing appliances to a retail customer, (ii) a second cash payment of $1.0 million, subject to certain offset amounts, upon our shipment of the next 10,000 single-serve beverage dispensing appliances to a retail customer, and (iii) a final cash payment of $1.0 million, subject to certain offset amounts, upon our shipment of the next 10,000 single-serve beverage dispensing appliances to a retail customer. Additionally, under the Second Amendment, our deferred purchase price payments were revised as follows: (i) $1.0 million on June 11, 2012 and (ii) $1.0 million on January 4, 2013.

Delays in the development and manufacturing of the Omnifrio appliance have caused us to significantly decrease our future sales projections, which caused the reduction in the estimated fair value of the milestone payments. We currently expect to make cash milestone payments of $0.5 million in 2014. The decrease in estimated milestone payments resulted in other operating income of $2.0 million for the three and six months ended June 30, 2012.

The deferred purchase price payments are included within accrued expenses and other current liabilities on the condensed consolidated balance sheets. The Omnifrio Single-Serve Beverage Business has been accounted for as a business combination in accordance with the acquisition method.

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

Canada Exchange Business

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

Results of Operations

The following table sets forth our results of operations:

                                                   Three months ended June 30,            Six months ended June 30,
                                                    2012                 2011               2012               2011
Consolidated statements of operations data:
Net sales                                      $        24,961       $      20,701     $       44,742       $   37,840
Operating costs and expenses:
Cost of sales                                           20,595              15,085             35,245           27,197
Selling, general and administrative expenses             4,677               4,485              9,647            8,545
Other operating income                                  (2,000 )                 -             (2,000 )              -
Non-recurring and acquisition-related costs                369                 216                395              919
Depreciation and amortization                            2,906               2,259              5,474            4,160
Goodwill and developed technology impairment            24,933                   -             24,933                -
Total operating costs and expenses                      51,480              22,045             73,694           40,821
Loss from operations                                   (26,519 )            (1,344 )          (28,952 )         (2,981 )
Interest expense and other, net                          1,273                 479              2,177              766
Loss before income taxes                               (27,792 )            (1,823 )          (31,129 )         (3,747 )
Income tax (benefit) provision                          (1,487 )               153               (959 )            342
Net loss                                       $       (26,305 )     $      (1,976 )   $      (30,170 )     $   (4,089 )

The following table sets forth our results of operations expressed as a percentage of net sales:

                                                   Three months ended June 30,              Six months ended June 30,
                                                    2012                  2011              2012                 2011
Consolidated statements of operations data:
Net sales                                               100.0 %              100.0 %           100.0 %              100.0 %
Operating costs and expenses:
Cost of sales                                            82.5                 72.9              78.8                 71.9
Selling, general and administrative expenses             18.7                 21.7              21.6                 22.6
Other operating income                                   (8.0 )                  -              (4.5 )                  -
Non-recurring and acquisition-related costs               1.5                  1.0               0.9                  2.4
Depreciation and amortization                            11.6                 10.9              12.2                 11.0
Goodwill and developed technology impairment             99.9                    -              55.7                    -
Total operating costs and expenses                      206.2                106.5             164.7                107.9
Loss from operations                                   (106.2 )               (6.5 )           (64.7 )               (7.9 )
Interest expense and other, net                           5.1                  2.3               4.9                  2.0
Loss before income taxes                               (111.3 )               (8.8 )           (69.6 )               (9.9 )
Income tax (benefit) provision                           (5.9 )                0.7              (2.2 )                0.9

The following table sets forth our segment net sales and segment income (loss) from operations presented on a segment basis and reconciled to our consolidated loss from operations.

                                                  Three months ended           Six months ended
                                                       June 30,                    June 30,
                                                  2012          2011          2012          2011
Segment net sales
Water                                          $   15,386     $  14,848     $  30,360     $  27,995
Dispensers                                          9,249         5,853        14,076         9,845
Flavorstation                                         326             -           307             -
Total net sales                                $   24,961     $  20,701     $  44,743     $  37,840

Segment income (loss) from operations
Water                                          $    3,754     $   3,601     $   7,787     $   7,181
Dispensers                                           (299 )         474          (781 )          56
Flavorstation                                        (942 )        (271 )      (1,499 )        (287 )
Corporate                                          (2,824 )      (2,673 )      (5,656 )      (4,852 )
Other operating income                              2,000             -         2,000             -
Non-recurring and acquisition-related costs          (369 )        (216 )        (395 )        (919 )
Depreciation and amortization                      (2,906 )      (2,259 )      (5,474 )      (4,160 )
Goodwill and developed technology impairment      (24,933 )           -       (24,933 )           -
Loss from operations                           $  (26,519 )   $  (1,344 )   $ (28,951 )   $  (2,981 )

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

Net Sales. Net sales increased 20.6%, or $4.3 million, to $25.0 million for the three months ended June 30, 2012 from $20.7 million for the three months ended June 30, 2011. The increase in net sales resulted from a $3.4 million increase in Dispenser sales, a $0.6 million increase in Water sales and from $0.3 million in Flavorstation sales.

Water. Water net sales increased 3.6% to $15.4 million, representing 61.6% of our total net sales, for the three months ended June 30, 2012. Five-gallon equivalent units for Water increased 1.7% to 6.8 million units for the second quarter of 2012 from 6.7 million units in the same period of the prior year. The increase in Water net sales was primarily due to a 10.1% increase in exchange sales, driven by a 14.2% increase in U.S. exchange sales that resulted from new location growth and same-store unit growth of 14.7% in our exchange services compared to the second quarter of 2011.

Dispensers. Dispensers net sales increased 58.0% to $9.3 million, representing 37.1% of our total net sales, for the three months ended June 30, 2012. The increase is due primarily to the increase in the number of retail locations offering our dispensers. Our dispenser unit sales to retailers increased by 37.6% for the three months ended June 30, 2012 compared to the same period in the prior year. Sales increased at a greater level than unit sales due to the increase in sales mix for higher value dispensers.

Flavorstation. Our Flavorstation segment had net sales of $0.3 million for the three months ended June 30, 2012.

Gross Margin Percentage. Our overall gross margin percentage decreased to 17.5% for the three months ended June 30, 2012 from 27.1% for the three months ended June 30, 2011. The decrease in margin was primarily a result of the negative gross margin for our Flavorstation business and a decrease in the Dispenser gross margin.

Water. Gross margin as a percentage of net sales in our Water segment decreased to 31.8% for the three months ended June 30, 2012 from 34.6% for the same period in the prior year. The decrease in gross margin percentage for the three months ended June 30, 2012 was primarily due to a greater mix of lower margin exchange net sales as well as increased costs related to the transition of service providers in our Refill services. We expect gross margin percentages for Water to improve over the remainder of 2012.

Dispensers. Gross margin as a percentage of net sales in our Dispensers segment decreased to 0.7% for the three months ended June 30, 2012 from 8.3% for the same period in the prior year. The decrease in gross margin percentage is primarily due to increased third-party manufacturing costs. In an effort to improve our margins, we initiated price increases to our customers, which went into effect late in the second quarter.

Flavorstation. Due to low sales volumes, our Flavorstation segment had a negative gross margin percentage for the three months ended June 30, 2012. Gross margins were negatively impacted by $0.5 million in inventory obsolescence charges recorded primarily due to lower than expected sales resulting from delays in the development and manufacturing of the Omnifrio appliance.

Selling, General and Administrative Expenses ("SG&A"). SG&A increased 4.3% to $4.7 million for the three months ended June 30, 2012 from $4.5 million for the three months ended June 30, 2011. As a percentage of net sales, SG&A decreased to 18.7% for the three months ended June 30, 2012 from 21.7% for the three months ended June 30, 2011. The dollar increase in SG&A is primarily the result of $0.4 million in expenses related to the Flavorstation business, which began selling in the fourth quarter of 2011. We currently expect that SG&A as a percentage of net sales for the remainder of 2012 will compare favorably with 2011 as we leverage costs with increased sales growth.

Water. SG&A for our Water segment decreased 25.8% to $1.1 million for the three months ended June 30, 2012 from $1.5 million for the three months ended June 30, 2011. Water segment SG&A as a percentage of Water segment net sales decreased to 7.4% for the three months ended June 30, 2012 compared to 10.3% for the three months ended June 30, 2011. The decrease in Water segment SG&A is primarily a result of a reduction in duplicate costs related to the refill business acquisition, which occurred in November 2010. We expect to continue to leverage costs with sales growth.

Dispensers. SG&A for our Dispensers segment increased to $0.4 million for the three months ended June 30, 2012 from $0.01 million for the three months ended June 30, 2011. SG&A as a percentage of Dispensers segment net sales increased to 3.9% for the three months ended June 30, 2012 from 0.2% for the three months ended June 30, 2011.

Flavorstation. SG&A for our Flavorstation segment was $0.4 million for the three months ended June 30, 2012. Flavorstation SG&A was primarily related to product development, marketing and consulting expenses related to the Flavorstation business that launched in the fourth quarter of 2011.

Corporate. Corporate SG&A increased 5.6% to $2.8 million for the three months ended June 30, 2012 from $2.7 million for the three months ended June 30, 2011. Corporate SG&A as a percentage of consolidated net sales decreased to 11.3% for the three months ended June 30, 2012 from 12.9% for the three months ended June 30, 2011. The increase in Corporate SG&A dollars is primarily from an increase in non-cash stock-based compensation expense. We currently expect Corporate SG&A as a percentage of consolidated net sales to decrease for the remainder of 2012 as we leverage expenses with sales growth.

Other Operating Income. Other operating income was $2.0 million for the three months ended June 30, 2012. Other operating income was related to the change in the estimated fair value of the milestone payments related to the acquisition of the Omnifrio Single-Serve Beverage Business (see Note 4 in the Notes to Condensed Consolidated Financial Statements).

Non-Recurring and Acquisition-Related Costs. Non-recurring and acquisition-related costs increased to $0.4 million for the three months ended June 30, 2012 from $0.2 million for the three months ended June 30, . . .