Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.19M
2: EX-3.3 Articles of Incorporation/Organization or Bylaws HTML 231K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
12: R1 Cover Page HTML 76K
13: R2 Consolidated Balance Sheets HTML 162K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 35K
15: R4 Consolidated Statements of Operations and HTML 134K
Comprehensive Loss
16: R5 Consolidated Statements of Equity HTML 70K
17: R6 Consolidated Statements of Cash Flows HTML 107K
18: R7 Operations and Summary of Significant Accounting HTML 48K
Policies
19: R8 Inventories HTML 29K
20: R9 Property, Plant and Equipment, Net HTML 36K
21: R10 Goodwill and Intangible Assets, Net HTML 36K
22: R11 Notes Receivable HTML 24K
23: R12 Accrued Expenses and Other HTML 42K
24: R13 Long-Term Debt HTML 70K
25: R14 Derivative Financial Instruments and Purchase HTML 30K
Commitments
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27: R16 Contingencies HTML 28K
28: R17 Accumulated Other Comprehensive Income HTML 32K
29: R18 Supplementary Cash Flow Information HTML 28K
30: R19 Income Taxes HTML 34K
31: R20 Warrants HTML 31K
32: R21 Equity HTML 31K
33: R22 Earnings (Loss) Per Share HTML 40K
34: R23 Subsequent Events HTML 25K
35: R24 Operations and Summary of Significant Accounting HTML 83K
Policies (Policies)
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37: R26 Property, Plant and Equipment, Net (Tables) HTML 35K
38: R27 Goodwill and Intangible Assets, Net (Tables) HTML 35K
39: R28 Accrued Expenses and Other (Tables) HTML 42K
40: R29 Long-Term Debt (Tables) HTML 64K
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Commitments (Tables)
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44: R33 Supplementary Cash Flow Information (Tables) HTML 27K
45: R34 Earnings (Loss) Per Share (Tables) HTML 38K
46: R35 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING HTML 35K
POLICIES - Property, Plant and Equipment (Details)
47: R36 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING HTML 24K
POLICIES - Revenue Recognition (Details)
48: R37 INVENTORIES - Schedule of Inventories (Details) HTML 29K
49: R38 PROPERTY, PLANT AND EQUIPMENT, NET - Schedule of HTML 41K
Property, Plant and Equipment (Details)
50: R39 PROPERTY, PLANT AND EQUIPMENT, NET - Additional HTML 25K
Information (Details)
51: R40 GOODWILL AND INTANGIBLE ASSETS, NET - Schedule of HTML 42K
Indefinite-Lived Intangible Assets (Details)
52: R41 GOODWILL AND INTANGIBLE ASSETS, NET - Additional HTML 30K
Information (Details)
53: R42 Notes Receivable (Details) HTML 39K
54: R43 ACCRUED EXPENSES AND OTHER - Current Accrued HTML 39K
Expenses (Details)
55: R44 ACCRUED EXPENSES AND OTHER - Noncurrent Accrued HTML 30K
Expenses (Details)
56: R45 LONG-TERM DEBT - Additional Information (Details) HTML 113K
57: R46 LONG-TERM DEBT - Schedule of Long-term Debt HTML 85K
Instruments (Details)
58: R47 LONG-TERM DEBT - Schedule of Amounts Outstanding HTML 38K
Under Notes Payable (Details)
59: R48 LONG-TERM DEBT - Schedule of Interest Expense HTML 29K
(Details)
60: R49 DERIVATIVE FINANCIAL INSTRUMENTS AND PURCHASE HTML 47K
COMMITMENTS - Additional Information (Details)
61: R50 DERIVATIVE FINANCIAL INSTRUMENTS AND PURCHASE HTML 25K
COMMITMENTS - Schedule of Reconciliation of the
Changes in the Warrant Liability (Details)
62: R51 FAIR VALUE MEASUREMENTS - Schedule of Financial HTML 67K
Assets and Liabilities Measured at Fair Value on a
Recurring Basis (Details)
63: R52 Contingencies (Details) HTML 46K
64: R53 ACCUMULATED OTHER COMPREHENSIVE INCOME - Schedule HTML 50K
of Changes to the Balance in Accumulated Other
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65: R54 SUPPLEMENTARY CASH FLOW INFORMATION - Schedule of HTML 27K
Cash Flow, Supplemental (Details)
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67: R56 Warrants (Details) HTML 34K
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Per Share, Basic and Diluted (Details)
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(Address of principal executive
offices, including zip code)
Registrant’s telephone number, including area code: (i717) i637-6644
N/A
(Former name or former address, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass
A Common Stock, par value $0.0001 per share
iUTZ
iNew York Stock Exchange
Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ⌧ No ◻
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth
company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ⌧
As of May 8, 2023, i81,088,189
Class A Common Stock, par value $0.0001 per share, and i59,349,000 shares of Class V Common Stock, par value $0.0001 per share, were issued and outstanding.
INTRODUCTORY NOTE
On August 28, 2020, Utz Brands, Inc. (formerly Collier Creek Holdings) (the "Company"), consummated a business combination (the "Business Combination") with
Utz Brands Holdings, LLC ("UBH") pursuant to the terms of the Business Combination Agreement, dated as of June 5, 2020 (the "Business Combination Agreement"), entered into by and among the Company, UBH, and Series U of UM Partners, LLC ("Series U") and Series R of UM Partners, LLC ("Series R" and together with Series U, the "Continuing Members"). Additional information about the Business Combination can be found in our Annual Report on Form 10-K for the year ended January 1, 2023.
Throughout this Quarterly Report on Form 10-Q, unless otherwise noted the "Company", "we", "us", "our", "UBI" and "Utz" refer to Utz Brands, Inc. and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. Specifically, forward-looking statements may include statements relating to:
•The financial position, capital structure, indebtedness, business strategy and plans and objectives of management for future operations;
•The
benefits of acquisitions, dispositions and similar transactions;
•The future performance of, and anticipated financial impact on, the Company;
•Expansion plans and opportunities;
•The impact of inflation and supply chain disruptions on the Company's business;
•The value of routes that collateralize the independent operator (“IO”) routes for which loans are made and for which the Company guarantees repayment;
•The
impact of plant optimization on the Company's operations, including but not limited to closing manufacturing plants; and
•Other statements preceded by, followed by or that include the words "may,""can,""should,""will,""estimate,""plan,""project,""forecast,""intend,""expect,""anticipate,""believe,""seek,""target" or similar expressions.
These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the Company management’s current expectations, forecasts
and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company’s views as of any subsequent date. The Company does not undertake any obligation to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws.
As
a result of a number of known and unknown risks and uncertainties, the Company’s results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ are described under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended January 1, 2023. There have been no material changes to our risk factors since the filing of the Annual Report on Form 10-K for the year ended January 1, 2023.
Accounts
receivable, less allowance of $i1,952 and $i1,815, respectively
i137,056
i136,985
Inventories
i123,456
i118,006
Prepaid
expenses and other assets
i33,713
i34,991
Current
portion of notes receivable
i9,081
i9,274
Total
current assets
i361,227
i372,186
Non-current
Assets
Property, plant and equipment, net
i346,976
i345,198
Goodwill
i915,295
i915,295
Intangible
assets, net
i1,089,885
i1,099,565
Non-current
portion of notes receivable
i11,395
i12,794
Other
assets
i91,261
i95,328
Total
non-current assets
i2,454,812
i2,468,180
Total
assets
$
i2,816,039
$
i2,840,366
LIABILITIES
AND EQUITY
Current Liabilities
Current portion of term debt
$
i19,207
$
i18,472
Current
portion of other notes payable
i11,893
i12,589
Accounts
payable
i111,010
i114,360
Accrued
expenses and other
i71,357
i92,012
Total
current liabilities
i213,467
i237,433
Non-current
portion of term debt and revolving credit facility
i910,083
i893,335
Non-current
portion of other notes payable
i18,362
i20,339
Non-current
accrued expenses and other
i70,366
i67,269
Non-current
warrant liability
i47,736
i45,504
Deferred
tax liability
i125,159
i124,802
Total
non-current liabilities
i1,171,706
i1,151,249
Total
liabilities
i1,385,173
i1,388,682
Commitments
and Contingencies
i
i
Equity
Shares
of Class A Common Stock, $ii0.0001/ par value; ii1,000,000,000/
shares authorized; ii81,012,868/ and ii80,882,334/
shares issued and outstanding as of April 2, 2023 and January 1, 2023, respectively.
i8
i8
Shares
of Class V Common Stock, $ii0.0001/ par value; ii61,249,000/
shares authorized; iiii59,349,000///
shares issued and outstanding as of April 2, 2023 and January 1, 2023.
i6
i6
Additional
paid-in capital
i930,964
i926,919
Accumulated
deficit
(i263,747)
(i254,564)
Accumulated
other comprehensive income
i24,819
i30,777
Total
stockholders' equity
i692,050
i703,146
Noncontrolling
interest
i738,816
i748,538
Total
equity
i1,430,866
i1,451,684
Total
liabilities and equity
$
i2,816,039
$
i2,840,366
The
accompanying notes are an integral part of these consolidated financial statements.
1
Utz Brands, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Adjustments
to reconcile net loss to net cash used in operating activities:
Impairment and other charges
i1,945
i3,319
Depreciation
and amortization
i20,094
i22,121
Loss
(gain) on remeasurement of warrant liability
i2,232
(i1,944)
Loss
(gain) on sale of assets
i508
(i367)
Share-based
compensation
i4,634
i1,379
Deferred
taxes
i357
i1,912
Deferred
financing costs
i5
i341
Changes
in assets and liabilities:
Accounts receivable, net
(i71)
(i17,044)
Inventories
(i5,450)
(i14,261)
Prepaid
expenses and other assets
(i2,123)
(i26)
Accounts
payable and accrued expenses and other
(i16,092)
i464
Net
cash used in operating activities
(i8,443)
(i36,004)
Cash
flows from investing activities
Acquisitions, net of cash acquired
—
(i75)
Purchases of property and equipment
(i13,906)
(i8,137)
Proceeds
from sale of property and equipment
i451
i1,138
Proceeds
from sale of routes
i6,127
i4,604
Proceeds
from the sale of IO notes
i867
i—
Proceeds
from insurance claims for capital investments
i—
i2,000
Notes
receivable, net
(i7,557)
(i4,633)
Net
cash used in investing activities
(i14,018)
(i5,103)
Cash
flows from financing activities
Line of credit borrowings, net
i20,000
i20,000
Borrowings
on term debt and notes payable
i2,331
i8,726
Repayments
on term debt and notes payable
(i6,244)
(i4,212)
Payments
of tax withholding requirements for employee stock awards
(i589)
(i6,217)
Dividends
(i4,663)
(i4,189)
Distribution
to noncontrolling interest
(i3,383)
i—
Net
cash provided by financing activities
i7,452
i14,108
Net
decrease in cash and cash equivalents
(i15,009)
(i26,999)
Cash
and cash equivalents at beginning of period
i72,930
i41,898
Cash
and cash equivalents at end of period
$
i57,921
$
i14,899
The
accompanying notes are an integral part of these consolidated financial statements.
4
Utz Brands, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.iOPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iBasis of Presentation – The accompanying consolidated financial statements comprise the financial statements of Utz Brands, Inc. ("UBI" or the "Company", formerly Collier Creek Holdings ("CCH")) and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP")
for interim financial statements and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). They do not include all information and notes required by U.S. GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s financial statements for the year ended January 1, 2023. The balance sheet as of January 1, 2023 has been derived from the audited combined financial statements as of and for the year ended January 1, 2023. In the opinion of management, such financial information reflects all normal and recurring adjustments
necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with the U.S. GAAP. Operating results for the interim period are not necessarily indicative of the results that may be expected for any future period or for the full year. The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited combined financial statements and notes thereto for the year ended January 1, 2023.
iAll intercompany transactions and
balances have been eliminated in consolidation.
iReclassification – Certain prior year amounts have been reclassified for consistency with the current year presentation.
Operations – The Company through its subsidiary, Utz Quality Foods, LLC ("UQF"), has been a premier producer,
marketer and distributor of snack food products since 1921. The Company has steadily expanded its distribution channels to where it now sells products to supermarkets, mass merchants, club stores, dollar and discount stores, convenience stores, independent grocery stores, drug stores, food service, vending, military, and other channels in most regions of the United States through routes to market, that include direct-store-delivery, (“DSD”), direct to warehouse, and third-party distributors. The Company manufactures and distributes a full line of high-quality salty snack items, such as potato chips, tortilla chips, pretzels, cheese balls, pork skins, party mixes, and popcorn. The Company also sells dips,
crackers, dried meat products and other snack food items packaged by other manufacturers.
iCash and Cash Equivalents – The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. The majority of the Company’s cash is held in financial institutions with insurance provided
by the Federal Deposit Insurance Corporation ("FDIC") of $250,000 per depositor. At various times, account balances may exceed federally insured limits.
i
Accounts Receivables – Accounts receivable are reported at net realizable value. The net realizable value is based on Company management’s estimate of the amount of receivables that will be collected based on analysis of historical data and trends, as well as review of significant customer accounts. Accounts receivable are considered to be past due when payments are not received within the customer’s credit
terms. The Company’s methodology to measure the provision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables, and customer classes or individual customers.
The Company’s estimates are reviewed and revised periodically based on the ongoing evaluation of credit quality indicators. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates.
iInventories– Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventory write-downs are recorded for shrinkage, damaged, stale and slow-moving items.
5
iProperty, Plant and Equipment – Property, plant and equipment are stated at cost net of accumulated depreciation. Major additions and
betterments are recorded to the asset accounts, while maintenance and repairs, which do not improve or extend the lives of the assets, are charged to expense accounts as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in operations in the disposal period. Depreciation is determined utilizing the straight-line method over the estimated useful lives of the various assets, which generally range from i2 to i20
years for machinery and equipment, i3 to i10 years for transportation equipment and i8
to i40 years for buildings. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. The Company assesses for impairment on property, plant and equipment upon the occurrence of a triggering event./
i
Income
Taxes – The Company accounts for income taxes pursuant to the asset and liability method of Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires it to recognize current tax liabilities or receivables for the amount of taxes it estimates are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.
The Company follows the provisions of ASC 740-10 related to accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
The
benefit of tax positions taken or expected to be taken in the Company’s income tax returns is recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits". A liability is recognized (or the amount of net operating loss carryover or the amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. Interest costs and penalties related to unrecognized tax benefits are required to be calculated, if applicable. The
Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, distribution, and administrative expenses. As of April 2, 2023 and January 1, 2023, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next fiscal year.
i
Goodwill
and Other Identifiable Intangible Assets – The Company allocates the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different
impact to the Company’s results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets.
Finite-lived intangible assets consist of distribution/customer relationships, technology, certain master distribution rights and certain trademarks. These assets are being amortized over their estimated useful lives. Finite-lived intangible assets are tested for impairment only when management has determined that potential impairment indicators are present.
Goodwill and other indefinite-lived intangible assets (including certain trade names, certain master distribution rights and Company-owned sales routes) are not amortized
but are tested for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. The Company tests goodwill for impairment at the reporting unit level. The Company has identified the existing snack food operations as its sole reporting unit.
6
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other ("Topic 350"): Simplifying the Test for Goodwill Impairment, the
Company is required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value.
Topic 350 also permits an entity to first assess qualitative factors to determine whether it is necessary to perform quantitative impairment tests for goodwill and indefinite-lived intangibles. If an entity believes, as a result of each qualitative assessment, it is more likely than not that the fair value of goodwill or an indefinite-lived intangible asset exceeds its carrying value then a quantitative impairment test is not required.
For the latest qualitative analysis performed, which took place on the first day of the fourth quarter of 2022, we had taken into consideration all the events and circumstances listed in Topic 350, Intangibles—Goodwill and Other, in addition to other entity-specific factors that had
taken place. We have determined that there was no significant impact that affected the fair value of the reporting unit through April 2, 2023. Therefore, we have determined that it was not necessary to perform a quantitative goodwill impairment test for the reporting unit.
iFair Value of Financial Instruments – Financial instruments held by the Company include cash and cash equivalents, accounts
receivable, hedging instruments, purchase commitments on commodities, accounts payable and debt. The carrying value of all cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short-term nature. The carrying value of the debt is also estimated to approximate its fair value based upon current market conditions and interest rates. The fair value of the hedging instruments are revalued at each reporting period.
i
Revenue Recognition – The
Company’s revenues primarily consist of the sale of salty snack items to customers, including supermarkets, mass merchants, club stores, dollar and discount stores, convenience stores, independent grocery stores, drug stores, food service, vending, military, and other channels. The Company sells its products in most regions of the United States primarily through its DSD network, direct to warehouse shipments, and third-party distributors. These revenue contracts generally have a single performance obligation. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other
costs. Amounts billed and due from customers are classified as accounts receivables and require payment on a short-term basis and, therefore, the Company does not have any significant financing components.
The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as the products’ control is transferred to customers.
The Company assesses the goods promised in customer purchase orders and identifies a performance obligation for each promise to transfer a good that is distinct.
The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. The Company’s promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and
loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade customer or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. The Company has reserves in place of $i39.7 million
as of April 2, 2023, which include adjustments taken by customers of $i28.9 million that are awaiting final processing, and reserves of $i46.3 million
as of January 1, 2023, which include adjustments taken by customers of $i32.8 million that are awaiting final processing. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as actual redemptions are incurred.
/
iBusiness
Combinations – The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether
an acquisition is accounted for as a business combination or an acquisition of assets.
7
The Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the Company’s financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.
iDistributor
Buyouts - During the first fiscal quarter of 2022, the Company bought out and terminated the contracts of multiple third-party distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations and resulted in expense of $i23.0 million
for thirteen weeks ended April 3, 2022, and are included within selling and distribution expense on the Consolidated Statement of Operations and Comprehensive Loss.
iUse of Estimates – Management uses estimates and assumptions in preparing the consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Some examples, but not a comprehensive list, include sales and promotional allowances,
customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies, litigation, and inputs used to calculate deferred tax liabilities, tax valuation allowances, and tax receivable agreements. Actual results could vary materially from the estimates that were used.
iRecently Issued Accounting Standards – In June 2016,
ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments ("Topic 326") was issued. Topic 326 requires entities to measure the impairment of certain financial instruments, including accounts receivables, based on expected losses rather than incurred losses. Topic 326 is effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted, and was adopted by the Company on January 2, 2023 under the modified retrospective transition method, which resulted in no cumulative-effect adjustment to retained earnings.
Depreciation
expense was $i10.4 million and $i12.4 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. Depreciation
expense is classified in cost of goods sold, selling, distribution, and administrative expenses on the
8
Consolidated Statements of Operations and Comprehensive Loss. During the thirteen weeks ended April 2, 2023the Company recognized expense of $i1.9 million
related to the impairment of equipment.
4.iGOODWILL AND INTANGIBLE ASSETS, NET
There were no changes to goodwill during the thirteen weeks ended April 2, 2023.
i
Intangible
assets, net, consisted of the following:
Previously,
the Company was granted certain exclusive distribution rights for certain products manufactured by another manufacturer. During the first fiscal quarter of 2022, the Company shifted the relationship with that manufacturer and converted that shelf space to Company-branded products. As a result, the Company recorded impairment expense of $i2.0
million and the amortizable master distribution rights decreased by $i2.2 million during the thirteen weeks ended April 3, 2022. There were no significant changes to intangible assets during the thirteen weeks ended April 2, 2023 other than those which arise from the normal course of business of buying and selling of Company-owned route assets and amortization.
Amortization
of the distributor/customer relationships, technology, and trade names amounted to $i9.4 million and $i9.4 million for the thirteen weeks ended April
2, 2023 and April 3, 2022, respectively. The expense related to the amortization of intangibles is classified in administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.
5.iNOTES RECEIVABLE
The
Company has undertaken a program in recent years to sell Company-managed DSD distribution routes to independent operators (“IOs”). Contracts are executed between the Company and the IOs for the sale of the product distribution route, including a note in favor of the Company, in certain cases. The notes bear interest at rates ranging from i0.00%
to i10.40% with terms ranging generally from one to iten years. The notes receivable balances due from IOs at April 2, 2023 and January 1,
2023 totaled $i20.4 million and $i22.0 million, respectively, and are collateralized by the routes for which the loans are made. During the thirteen
weeks ended April 2, 2023, the loss recorded by the Company on note receivables for which the Company reclaimed the collateral due to credit losses was less than $i0.1 million. The Company has a corresponding notes payable liability, related to the IOs
notes receivables, of $i19.5 million and $i21.1 million at April 2, 2023 and January 1,
2023, respectively. The related notes payable liability is discussed in further detail within Note 7. "Long-Term Debt."
Other notes receivable totaled $i0.1 million and $i0.1
million as of April 2, 2023 and January 1, 2023, respectively.
9
6.iACCRUED EXPENSES AND OTHER
i
Current
accrued expenses and other consisted of the following:
Supplemental
retirement and salary continuation plans
i6,372
i6,512
Long
term hedge
i3,176
i—
Total
accrued expenses and other
$
i70,366
$
i67,269
/
7.iLONG-TERM
DEBT
Revolving Credit Facility
On November 21, 2017, UBH entered into an asset based revolving credit facility (as amended, the "ABL facility"), pursuant to the terms of that certain First Lien Term Loan Credit Agreement, dated November 21, 2017 (the "Credit Agreement"). On September 22, 2022, the ABL facility was amended to further increase the credit limit up to $i175.0 million
and replaced the interest rate benchmark from LIBOR to SOFR. As of April 2, 2023 and January 1, 2023, $i20.0 million and $i0.0 million, respectively,
were outstanding under this facility. Availability under the ABL facility is based on a monthly accounts receivable and inventory borrowing base certification, which is net of outstanding letters of credit. As of April 2, 2023 and January 1, 2023, $i140.8 million and $i163.0
million, respectively, was available for borrowing, net of letters of credit. The ABL facility is also subject to unused line fees (i0.5% at April 2, 2023) and other fees and expenses.
Standby letters of credit in the amount of $ii12.0/
million have been issued as of April 2, 2023 and January 1, 2023. The standby letters of credit are primarily issued for insurance purposes.
Term Loans
On December 14, 2020, the Company entered into a Bridge Credit Agreement with a syndicate of banks, led by Bank of America, N.A. (the "Bridge Credit Agreement"). The proceeds of the Bridge Credit Agreement were used to fund the Company’s acquisition of Truco and the IP Purchase (each as defined below) from OTB Acquisition, LLC, in which the
Company withdrew $i490.0 million to finance the acquisition of Truco Holdco Inc. ("Truco" and such acquisition, the "Truco Acquisition") and certain intellectual property from OTB Acquisition, LLC (the "IP Purchase"). The Bridge Credit Agreement bears interest at an annual rate based on i4.25%
plus 1 month LIBOR with scheduled incremental increases to the base rate, as defined in the Bridge Credit Agreement.
On January 20, 2021, the Company entered into Amendment No. 2 to the Bridge Credit Agreement ("Amendment No. 2") which provided additional operating flexibility and revisions to certain restrictive covenants. Pursuant to the terms of Amendment No. 2, the Company raised $i720 million
in aggregate principal of Term Loan B ("Term Loan B") which bore interest at LIBOR plus i3.00%, and extended the maturity of the Bridge Credit Agreement to January 20, 2028. The proceeds were used, together with cash on hand and proceeds from our exercised warrants, to redeem the outstanding principal amount of Term Loan B and Bridge Credit Agreement of $i410 million
and $i358 million, respectively. The refinancing was accounted for as an extinguishment. The Company incurred debt issuance costs and original issuance discounts of $i8.4 million.
10
On
June 22, 2021, the Company entered into Amendment No. 3 to the Bridge Credit Agreement ("Amendment No. 3"). Pursuant to the terms of Amendment No. 3, the Company increased the principal balance of Term Loan B by $i75.0 million to bring the aggregated balance of Term Loan B proceeds to $i795.0 million.
The Company incurred additional debt issuance costs and original issuance discounts of $i0.7 million related to the incremental funding.
On October 12, 2022, the Company, through its subsidiaries UQF, Kennedy
and Condor Snack Foods, LLC (together with UQF and Kennedy, the “Real Estate Financing Borrowers”), entered into a loan agreement (the “Real Estate Term Loan”) with City National Bank which was secured by a majority of the Real Estate Financing Borrowers’ real estate assets. The Real Estate Term Loan holds a principal balance of $i88.1 million, with net proceeds of approximately $i85.0 million
after transaction fees and expenses. The Real Estate Term Loan has a iten-year maturity and amortizes approximately $i3.5 million in principal annually, with a balloon payment due at maturity. The
Company used a portion of the proceeds from the Real Estate Term Loan to pay off the ABL facility. The Real Estate Term Loan contains a single financial maintenance covenant consisting of a fixed charge coverage ratio that is tested quarterly only during a covenant trigger period consistent with the existing ABL facility. Concurrent with the closing of the Real Estate Term Loan, UQF entered into an interest rate swap transaction to fix the effective interest rate at approximately i5.929%, as discussed in further detail within "Note 8. Derivative Financial Instruments
and Purchase Commitments”.
The Term Loan B and the ABL facility are collateralized by substantially all of the assets and liabilities of UBH and its subsidiaries excluding the real estate assets secured by the Real Estate Term Loan, including equity interests in certain of UBH’s subsidiaries. The credit agreements contain certain affirmative and negative covenants as to operations and the financial condition of UBH and its subsidiaries. UBH and its subsidiaries were in compliance with its financial covenants as of iApril 2,
2023.
Net
impact of debt issuance costs and original issue discounts
(i9,667)
(i9,672)
Total
long-term debt
i929,290
i911,807
Less:
current portion
(i19,207)
(i18,472)
Long
term portion of term debt and financing obligations
$
i910,083
$
i893,335
(1)
On September 22, 2022, the Company entered into Amendment No. 4 to the Bridge Credit Agreement ("Amendment No. 4"), which replaced the interest rate benchmark from LIBOR to SOFR. The weighted average interest rate on the Term Loan B debt for the thirteen weeks ended April 2, 2023 was i7.61%.
(2) In July 2021, the
Company entered into itwo separate finance lease obligations with Banc of America Leasing & Capital, LLC, which have been treated as secured borrowing. The Company made a series of draws upon these agreements throughout fiscal year 2021 totaling $i26.5 million
and has drawn a total of $i32.4 million in fiscal year 2022 and $i2.3 million in fiscal year 2023. These draws bear interest
ranging from i3.26% through i6.73% and have varying maturities up through 2028.
(3) The facility bore interest at an annual
rate based on LIBOR, or SOFR plus a i0.10% credit spread adjustment after the amendment on September 22, 2022, plus an applicable margin of i1.50%
(ranging from i1.50% to i2.00% based on availability) or the prime rate plus an applicable margin of i0.50%
(ranging from i0.50% to i1.00%). The Company generally utilizes the prime
rate for amounts that the Company expects to pay down within 30 days. The interest rate on the facility as of April 2, 2023 was ii8.50/%,
under the prime rate. The Company elects to use the LIBOR, prior to the amendment on September 22, 2022 which changed the reference rate to SOFR as described above, for balances that are expected to be carried longer than i30 days. The interest rate on the ABL facility as of April 2, 2023 was i6.26%.
Other
Notes Payable and Capital Leases
During the first fiscal quarter of 2022, the Company bought out and terminated the contracts of multiple distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations and resulted in expense of $i23.0 million
for the thirteen weeks ended April 3, 2022. The outstanding balance of these transactions was $i0.5 million as of January 1, 2023, and was paid off during the thirteen weeks ended April 2, 2023.
11
During the first fiscal quarter of 2020, the
Company purchased intellectual property that include a deferred purchase price of $i0.5 million, of which $i0.2 million
and $i0.3 million was outstanding as of April 2, 2023 and January 1, 2023, respectively.
i
Amounts
outstanding under notes payable consisted of the following:
From
time to time, the Company sells notes receivable from IOs to a financial institution. During the thirteen weeks ended April 2, 2023, the Company sold an additional $i1.0 million of notes receivable from IOs on its books for $i0.9 million
to a financial institution. Due to the structure of these transactions, they did not qualify for sale accounting treatment and the Company has recorded the notes payable obligation owed by the IOs to the financial institution on its books; the corresponding notes receivable also remained on the Company’s books. The Company services the loans for the financial institution by collecting principal and interest from the IOs and passing it through to the institution. The underlying notes have various maturity dates through June 2032. The Company partially guarantees the outstanding loans, as discussed in further detail within Note
10. "Contingencies." These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon any event of default.
Company’s term loans, ABL facility, and other long-term debt
$
i14,142
$
i8,331
Amortization
of deferred financing fees
i5
i341
IO
loans
i231
i431
Total interest
$
i14,378
$
i9,103
/
8.iDERIVATIVE
FINANCIAL INSTRUMENTS AND PURCHASE COMMITMENTS
Derivative Financial Instruments
To reduce the effect of interest rate fluctuations, the Company entered into a ithree-year interest rate swap contract on September 6, 2019, with an effective date of September 30, 2019, with
a counter-party to make a series of payments based on a fixed interest rate of i1.339% and receive a series of payments based on the greater of LIBOR or i0.00%. Both the fixed and floating payment streams were based on a notional amount of $i250
million. On December 21, 2021, with an effective date of December 31, 2021, the Company entered into an accreting interest rate swap contract with a counter-party to make a series of payments based on a fixed interest rate of i1.3885% and receive a series of payments based on the greater of LIBOR or i0.00%.
Both the fixed and floating payment streams were based on a notional amount of $i250 million and have accreted to $i500 million, and mature on September 30, 2026.
Effective on September 30, 2022the Company amended the swap contract to reference the 1-month SOFR plus a credit spread adjustment (“CSA”) of i11.448 basis points, as well as setting the new fixed rate to i1.408%;
under this amended swap agreement the Company will receive a series of payments based on the greater of SOFR plus CSA, or i0.00%.
12
On October 12, 2022 and effective on November 1, 2022,
the Company entered into a i10-year swap contract, with an effective date of November 1, 2022, with a counter-party to make a series of payments based on a fixed interest rate of i3.83%
and receive a series of payments based on the greater of the 1-month SOFR or i0.00%. The agreement covers $i87.3 million as of April 2, 2023. This swap effectively fixes
the rate of the Real Estate Term Loan to i5.93%. The balance that the hedge covers is designed to abate as principal payments on the Real Estate Term Loan are made. The Company entered into these transactions to reduce its exposure to changes in cash flows associated with the Real Estate Term Loan and has designated this derivative as a cash flow hedge.
At April 2,
2023, the effective fixed interest rate on the long-term debt hedged by these contracts was i5.56%. For further treatment of the Company’s interest rate swap, refer to "Note 9. Fair Value Measurements” and "Note 11. Accumulated Other Comprehensive (Loss) Income.”
Warrant Liabilities
The
Company has outstanding warrants which are accounted for as derivative liabilities pursuant to ASC 815-40. See Note 14. "Warrants" for additional information on our warrant liabilities. iA reconciliation of the changes in the warrant liability during the thirteen weeks ended April 2, 2023 is as follows:
Fair
value of warrant liabilities as of as of April 2, 2023
$
i47,736
Purchase Commitments
The Company has outstanding purchase commitments for specific quantities at fixed prices
for certain key ingredients to economically hedge commodity input prices. These purchase commitments totaled $i73.1 million as of April 2, 2023. The Company accrues for losses on firm purchase commitments in a loss position at the end of each reporting period to the extent that there is an active observable market. The
Company has recorded purchase commitment (losses) gains totaling $(i2.7) million for the thirteen weeks ended April 2, 2023 and $i0.0 million for the thirteen
weeks ended April 3, 2022, respectively.
9.iFAIR VALUE MEASUREMENTS
The Company follows the guidance relating to fair value measurements and disclosures with respect to financial assets and liabilities that are re-measured
and reported at fair value each reporting period, and with respect to non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I) and the lowest priority to unobservable pricing inputs (Level III). A financial asset or liability’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:
Level I - Valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities;
Level
II - Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active. Financial asset or liabilities which are included in this category are securities where all significant inputs are observable, either directly or indirectly; and
Level III - Prices or valuations that are unobservable and where there is little, if any, market activity for these financial assets or liabilities. The inputs into the determination of fair value inputs for these investments require significant management judgment or estimation. The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors. To the extent that valuation is based on inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
The
fair values of the Company’s Level 2 derivative instruments were determined using valuation models that use market observable inputs including interest rate curves and both forward and spot prices for commodities. Derivative assets and liabilities included in Level 2 primarily represent commodity and interest rate swap contracts.
13
i
The
following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of April 2, 2023:
The
following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of January 1, 2023:
The Company is involved in litigation and other matters incidental to the conduct of its business, the results of which, in the opinion of management, are not likely to be material to the Company’s financial condition, results of operations or cash flows.
The Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was $i1.1 million and $i1.5
million at April 2, 2023 and January 1, 2023, respectively, all of which was recorded by the Company as off balance sheet arrangements. The maximum amount of future payments the Company could be required to make under the guarantees equates to i25% of the outstanding loan balance up to $i2.0 million.
These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default.
The Company partially guarantees loans made to IOs by Bank of America for the purchase of routes. The outstanding balance of loans guaranteed that were issued by Bank of America was $i40.2
million and $i36.0 million at April 2, 2023 and January 1, 2023, respectively, which are off balance sheet arrangements. As discussed in Note 7. "Long-Term Debt", the Company also sold notes receivable on its books to Bank of America during fiscal years 2019, 2021, and 2022, which the
Company partially
14
guarantees. The outstanding balance of notes purchased by Bank of America at April 2, 2023 and January 1, 2023 was $i16.8 million and $i17.9
million, respectively. Due to the structure of the transactions, the sale did not qualify for sale accounting treatment, and as such the Company records the notes payable obligation owed by the IOs to the financial institution on its Consolidated Balance Sheets; the corresponding note receivable also remained on the Company’s Consolidated Balance Sheets. The maximum amount of future payments the Company could be required to make under these guarantees equates to i25%
of the outstanding loan balance on the first day of each calendar year plus i25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default.
The Company guarantees loans made
to IOs by M&T Bank for the purchase of routes. The agreement with M&T Bank was amended in January 2020 so that the Company guaranteed up to i25% of the greater of the aggregate principal amount of loans outstanding on the payment date or January 1st of the subject year. The outstanding balance of loans guaranteed was $i3.1
million and $i3.4 million at April 2, 2023 and January 1, 2023, respectively, all of which were included in the Company's Consolidated Balance Sheets. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover
substantially all of the outstanding loan value upon default.
11.iACCUMULATED OTHER COMPREHENSIVE INCOME
Total accumulated other comprehensive income was $i40.7
million as of April 2, 2023 and $i51.0 million as of January 1, 2023. Total accumulated other comprehensive income consists solely of unrealized gains from the Company’s derivative financial instruments accounted for as cash flow hedges.
i
Changes
to the balance in accumulated other comprehensive income were as follows:
The Company is subject to federal and state income taxes with respect to our allocable share of any taxable income or loss of UBH, as well as any standalone income or loss the Company generates. UBH is treated as a partnership for federal income tax purposes, and for most applicable state and local income tax purposes, and generally does not pay income taxes in most jurisdictions. Instead, UBH's taxable income or loss is passed through to its members, including the Company. Despite its partnership treatment, UBH is liable for income taxes in those states not recognizing its pass-through status and for certain of its subsidiaries
not taxed as pass-through entities. The Company has acquired various domestic entities taxed as corporations, which are now wholly-owned by us or our subsidiaries. Where required or allowed, these subsidiaries also file and pay tax as a consolidated group for federal and state income tax purposes. The Company anticipates this structure to remain in existence for the foreseeable future.
The Company recorded income tax benefit of $i2.6 million
and expense of $i2.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. The effective tax rates for the thirteen weeks ended April 2, 2023 and April 3, 2022 were i15.3%
and (i9.5)%, respectively. The Company’s effective tax rates differ from the federal statutory rate of 21% primarily due to the impact of UBH, which is a partnership, is not taxed at the Company level, and is required to allocate some of its taxable results to the Continuing Members, as well as state taxes and the fair value impact of warrant liabilities. The
Company’s effective tax rate for the thirteen weeks ended April 2, 2023 was i17.8% before consideration of any discrete items. During the thirteen weeks ended April 2, 2023, the effective tax rate was impacted by statutory state tax rate changes which resulted in a nominal discrete tax expense.
The
Company regularly evaluates valuation allowances established for deferred tax assets (“DTA's”) for which future realization is uncertain. The Company assessed the available positive and negative evidence to estimate whether future taxable income would be generated to permit use of the existing DTA's. As of April 2, 2023, a significant piece of objective negative evidence evaluated was the twelve-quarter cumulative loss before taxes. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. The Company determined that there is uncertainty regarding the utilization of certain DTA's such as the investment in UBH, federal operating losses subject to annual limitations due to “change
in ownership” provisions, and state net operating losses where the Company does not expect to continue to have nexus. Therefore, a valuation allowance has been recorded against the DTA's for which it is more likely than not they will not be realized. The Company has DTA’s related to its investment in the partnership that are expected to be realized in the ordinary course of operations or generate future net operating losses for which a portion will have an indefinite carryforward period. Additionally, the Company has deferred tax liabilities (“DTL’s”) related to its investment in the partnership that will not reverse in the ordinary course of business and will only reverse when the partnership is sold
or liquidated. The Company has no intention of disposing of or liquidating the partnership and therefore has not considered the indefinite lived DTL as a source of income to offset other DTA’s. In weighing positive and negative evidence, both objective and subjective, including its twelve-quarter cumulative loss, the Company has recorded a valuation allowance against its DTA’s related to net operating losses and deductible book/tax differences and recorded a DTL primarily related to the book over tax basis in the investment in the partnership that will not reverse in the ordinary course of business. The Company considered that an indefinite lived DTL may be considered as a source of taxable income for an indefinite
lived DTA; however, given our indefinite lived DTL will only reverse upon sale or liquidation, the Company determined that it was more appropriate to record a valuation allowance against a portion of its DTA’s. The amount of DTA considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.
As of April 2, 2023, tax years 2019 through 2023 remain open and subject to examination by the Internal Revenue Service and in the majority of the states where the
Company has nexus, and tax years 2018 through 2023 remain open and subject to examination in selected states that have a longer statute of limitations.
Upon audit, tax authorities may challenge all or part of a tax position. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision for income taxes in the period in which a final determination is made. The Company did not maintain any unrecognized tax benefits as of April 2, 2023 and January 1, 2023.
16
Tax
receivable agreement liability
Pursuant to an election under section 754 of the Internal Revenue Code, the Company obtained an increase in its share of the tax basis in the net assets of UBH when it was deemed to purchase UBH units from third party members and purchased UBH units from the Continuing Members per the Business Combination. Following the Business Combination, the Continuing Members may exchange UBH units along with the forfeiture of a corresponding number of Class V Common Stock of the Company for Class A Common Stock of the Company. The Company
intends to treat any such exchanges as direct purchases for U.S. federal income tax purposes, which is expected to further increase its share of the tax basis in the net assets of UBH. The increases in tax basis may reduce the amounts the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
Pursuant to the Business Combination Agreement, the Company entered into the Tax Receivable Agreement in connection with the Business Combination (the “TRA”) , which provides for the payment by the
Company of 85% of the amount of any tax benefits realized as a result of (i) increases in the share of the tax basis in the net assets of UBH resulting from the Business Combination and any future exchanges by the Continuing Members of UBH units for UBI common stock; (ii) tax basis increases attributable to payments made under the TRA; and (iii) tax amortization deductions attributable to the acquisition of Kennedy Endeavors, LLC and the election to treat the transaction as an asset deal for tax purposes. The rights of each party under the TRA other than the Company are assignable, subject to certain restrictions. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each
year, as well as the tax rate then applicable, among other factors.
As of April 2, 2023 and January 1, 2023, the Company had a liability of $i24.2 million and $i25.4 million,
respectively, related to its projected obligations under the TRA, which is reflected as non-current accrued expenses in the Consolidated Balance Sheets.
14.iWARRANTS
Prior to the Business Combination, CCH issued i15,833,332
warrants that were initially sold by CCH in its initial public offering of securities (the "Public Warrants"), including i1,166,666 warrants issued pursuant to those certain Forward Purchase Agreements entered into by CCH, CCH's Sponsor (the "Sponsor"), and the independent directors of CCH (the "Forward Purchase Agreements") that were issued at the closing of the Business Combination as part of the Forward Purchase Agreement (the "Forward Purchase Warrants"), and i7,200,000
warrants initially sold to the Sponsor simultaneously with the closing of its initial public offering (the "Private Placement Warrants," collectively, with the Public Warrants and Forward Purchase Warrants, the "Warrants"). As a result of the Business Combination, the Company assumed the CCH warrants and such warrants are now exercisable for shares of UBI Class A Common Stock instead of Class A ordinary shares of CCH. All other features of the warrants remain unchanged. On December 14, 2020, the Company provided notice to the holders of the Public Warrants and Forward Purchase Warrants that their warrants would be redeemed in accordance with the original terms on January 14, 2021. As
of April 2, 2023 and January 1, 2023, there were ii7,200,000/
Private Placement Warrants outstanding and all Public Warrants and Forward Purchase Warrants have been exercised (except for the Public Warrants that were redeemed by the Company on January 14, 2021).
The Private Placement Warrants and the shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants were not transferable, assignable or salable until after the completion of the Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable by the Company so long as they are held by the initial purchasers or their
permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Warrants are accounted for as derivative liabilities in accordance with ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity ("ASC 815-40"), due to certain settlement provisions in the corresponding warrant agreement that do not meet the criteria to be classified in stockholders’ equity. Pursuant to ASC 815-40, the Warrants are now classified as a liability at fair value on the
Company’s Consolidated Balance Sheet, and the change in the fair value of such liability in each period is recognized as a non-cash gain or loss in the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Warrants are deemed equity instruments for income tax purposes, and accordingly, there is no tax accounting relating to changes in the fair value of the Warrants recognized.
17
The remeasurement of the warrant liability resulted in a gain (loss) of $(i2.2) million
and $i1.9 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.
15.EQUITY
Class A Common Stock
The
Company is authorized to issue i1,000,000,000 shares of Class A Common Stock, par value $i0.0001 per share, of which ii81,012,868/
and ii80,882,334/ shares of UBI were issued and outstanding
on April 2, 2023 and January 1, 2023, respectively.
Class V Common Stock
The Company is also authorized to issue i61,249,000 shares of Class V Common Stock, par value of $i0.0001
all of which were issued to the Continuing Members in connection with the closing of the Business Combination. Each of the Continuing Members' common limited liability company units of UBH along with a share of Class V Common Stock may be exchanged for ione share of Class A Common Stock of the Company upon certain restrictions being satisfied. As of April 2, 2023 and January 1, 2023, there
were ii59,349,000/ shares of Class V Common
Stock outstanding.
16.iEARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted average number of shares of Class A Common Stock issued and outstanding during the periods. Diluted earnings (loss) per share is based on the weighted average number shares of Class A Common Stock
issued and outstanding and the effect of all dilutive common stock equivalents and potentially dilutive share-based awards outstanding during the periods.
i
The following table reconciles the numerators and denominators used in the computations of both basic and diluted earnings per share:
Weighted
average Class A Common Stock shares, basic
i80,978,008
i78,572,404
Basic
and diluted earnings (loss) per share
$
(ii0.11/)
$
(ii0.22/)
Anti-dilutive
securities excluded from diluted earnings per share calculation:
Warrants
i2,196,193
i1,901,376
RSUs
i180,908
i57,914
PSUs
i104,102
i40,545
Stock
options
i1,601
i—
Total
i2,482,804
i1,999,835
Class
V Common Stock not subject to earnings per share calculation
i59,349,000
i59,349,000
Net
loss attributable to noncontrolling interest
$
(i5,355)
$
(i14,328)
/
The
diluted earnings (loss) per share computation excludes the effect of certain restricted stock units ("RSUs"), performance stock units ("PSUs"), and stock options granted to directors and management which convert to Class A Common Stock upon vesting or being exercised, as their inclusion would have been anti-dilutive.
Shares of the Company’s Class V Common Stock do not participate in earnings or losses of the Company and, therefore, are not participating securities. The PSUs and RSUs, were not considered participating securities in the Successor period despite the holders of these stock-based compensation awards being entitled to participate in dividends declared on Class A Common Stock, if and when declared,
on a ione-to-one per-share basis, because the dividends are only payable upon full vesting of the
18
awards, and as such, the dividend is forfeitable. As of April 2, 2023 and January 1, 2023, the Continuing Members held all iiii59,349,000///
shares of Class V Common Stock issued and outstanding and also held an equal number of common limited liability company units of UBH, which comprise the noncontrolling interest.
17.iSUBSEQUENT EVENTS
On April 24, 2023, as announced in the Form 8-K filed with the SEC on April
26, 2023, the Company made the decision to permanently cease operations at the Company’s manufacturing facility located in Birmingham, Alabama (the “Birmingham Facility”) effective on or around July 3, 2023 (the “Manufacturing Closure”). Golden Flake® and other products currently being produced at the Birmingham Facility will continue to be produced at other manufacturing facilities following the ceasing of manufacturing operations at the Birmingham Facility. The Birmingham Facility employs approximately i275
individuals. While manufacturing at the Birmingham Facility is being permanently ceased, approximately i100 employees will continue to be employed by the Company and continue working in Birmingham in the Company’s distribution center.
The
Company currently expects to incur pre-tax cash charges of approximately $i3.0 million to $i5.0 million in connection
with the Manufacturing Closure in fiscal year 2023, which is expected to include $i1.5 million in severance costs and $i1.5 million
to $i3.5 million in closing and transfer of production costs. The Company also expects to incur non-cash charges of approximately $i8.5 million
to $i11.0 million in asset impairments. The estimates of the charges and expenditures that the Company expects to incur in connection, and the timing thereof, are subject to a number of assumptions, including local law requirements, and actual amounts may differ materially from estimates. In addition, the Company may incur other charges or cash expenditures not currently contemplated due to unanticipated
events that may occur, including in connection with this decision to permanently cease manufacturing at the Birmingham Facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management's discussion and analysis of our financial condition and results of operations ("MD&A") should be read in conjunction with our unaudited combined interim consolidated financial statements as of and for the thirteen weeks ended April 2, 2023, together with our audited combined consolidated financial statements for our most recently completed fiscal year set forth under Item 8 of our Annual Report on Form 10-K for the
year ended January 1, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended January 1, 2023 and other filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Our fiscal year end is the Sunday closest to December 31. Our fiscal year 2022 ended January 1, 2023 and was a fifty-two-week fiscal year, our fiscal year 2023 will end on December 31,
2023 and is a fifty-two-week fiscal year. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three-week fiscal years for which the fourth quarter is comprised of fourteen weeks, and end on the thirteenth Sunday of each quarter (fourteenth Sunday of the fourth quarter, when applicable).
Overview
We are a leading U.S. manufacturer of branded salty snacks. We produce a broad offering of salty snacks, including potato chips, tortilla chips, pretzels, cheese snacks, pork skins, pub/party mixes, and other snacks. Our iconic portfolio of authentic, craft, and "better for you" brands, which includes Utz®, ON THE BORDER®, Zapp’s®, Golden Flake®, Good Health®, Boulder Canyon®, Hawaiian® Brand, and TORTIYAHS!®, among others, enjoys strong household penetration in the U.S., where our products can be found in approximately
48% of U.S. households. We operate 16 manufacturing facilities across the U.S. with a broad range of capabilities, and our products are distributed nationally to grocery, mass merchant, club, convenience, drug and other retailers through direct shipments, distributors, and approximately 2,200 DSD routes. Our company was founded in 1921 in Hanover, Pennsylvania, and benefits from over 100 years of brand awareness and heritage in the salty snack industry. We have historically expanded our geographic reach and product portfolio organically and through acquisitions. Based on 2022 retail sales, we are the second-largest producer of branded salty snacks in our core geographies.
Key Developments and Trends
Our management team monitors a number of developments and trends that could impact our revenue and
profitability objectives.
Long-Term Demographics, Consumer Trends, and Demand – We participate in the attractive and growing $36 billion U.S. salty snacks category, within the broader approximately $121 billion market for U.S. snack foods as of April 2, 2023. Retail sales of
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the salty snacks category has grown 14.8% over the thirteen weeks ended April 2, 2023. A recent study from Circana cites that 54% of consumers eat snacks to add excitement to their daily diet, up two points versus two years ago and that 49% of consumers snack three or more times per day, up four points versus two years ago. Additionally,
the salty snacks category has historically benefited from favorable competitive dynamics, including low private label penetration and category leaders competing primarily through marketing and innovation. We expect these consumer trends to continue to drive consistent retail sales growth for salty snacks for the foreseeable future.
For the thirteen weeks ended April 2, 2023, U.S. retail sales for salty snacks based on Circana data increased by 14.8% versus the comparable prior year period. In the same period, our retail sales increased 9.4% over the thirteen weeks ended April 2, 2023.
Competition – The salty snack industry is highly competitive and includes many diverse participants. Our products
primarily compete with other salty snacks but also compete more broadly for certain eating occasions with other snack foods. We believe that the principal competitive factors in the salty snack industry include taste, convenience, product variety, product quality, price, nutrition, consumer brand awareness, media and promotional activities, in-store merchandising execution, customer service, cost-efficient distribution, and access to retailer shelf space. We believe we compete effectively with respect to each of these factors.
Operating Costs – Our operating costs include raw materials, labor, manufacturing overhead, selling, distribution, and administrative expenses. We manage these expenses through annual cost saving and productivity initiatives, sourcing and hedging programs, pricing actions, refinancing and tax optimization. Additionally, we maintain ongoing efforts led by our project management office,
to expand our profitability, including implementing significant reductions to our operating cost structure in both supply chain and overhead costs.
Taxes – On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted which included various tax provisions with retroactive effect. The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ending before the date of enactment. We deferred $7.8 million of payroll tax deposits per the CARES Act. The deferred payroll taxes must be deposited in two installments, with the first installment of $3.9 million paid as
of December 31, 2021, and the remaining $3.9 million was paid at the start of fiscal year 2023. We continue to evaluate the impact of the CARES Act; however, we believe it is unlikely to have a material effect on our consolidated financial position, results of operations, and cash flow.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implemented a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The Company continues to evaluate the impact of the Inflation Reduction Act of 2022; however, we believe it is unlikely to have a material effect on our consolidated
financial position, results of operations, and cash flow.
Financing Costs and Exposure to Interest Rate Changes – As of April 2, 2023, we had $884.6 million in variable rate indebtedness, up from $867.4 million at January 1, 2023. As of April 2, 2023 our variable rate indebtedness is benchmarked to the Term SOFR Screen Rate (‘SOFR”).As of April 2, 2023, we have entered into interest rate hedges covering $587.3 million of debt, of which, $500.0 million is covered through September 30, 2026 and a hedge that covers the outstanding principal balance of the Real Estate Term Loan through
September 2032. Our interest rate hedge strategy has limited some of our exposure to changes in interest rates. We regularly evaluate our variable and fixed-rate debt. We continue to use low-cost, short- and long-term debt to finance our ongoing working capital, capital expenditures and other investments and dividends. Our weighted average interest rate for the thirteen weeks ended April 2, 2023 was 5.6%, up from 3.9% during the thirteen weeks ended April 3, 2022. We have used interest rate swaps to help manage some of our exposure to interest rate changes, which can drive cash flow variability related to our debt. Refer to Note 7. "Long-Term Debt" and Note 8. "Derivative Financial Instruments and Purchase Commitments" to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this filing for additional information on debt,
derivative and purchase commitment activity. The Company has experienced the effect of increased interest rates on the portion of its debt that is not hedged and, continued rising interest rates could negatively impact our net income.
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Recent Developments and Significant Items Affecting Comparability
Commodity Trends
We regularly monitor worldwide supply and commodity costs so we can cost-effectively secure ingredients, packaging and fuel required for production. A number of external factors such as weather, which may be
impacted in unanticipated ways due to climate change, commodity market conditions, and the effects of governmental, agricultural or other programs affect the cost and availability of raw materials and agricultural materials used in our products. We address commodity costs primarily through the use of buying-forward, which locks in pricing for key materials between three and 18 months in advance. Other methods include hedging, net pricing adjustments to cover longer term cost inflation, and manufacturing and overhead cost control. Our hedging techniques, such as forward contracts, limit the impact of fluctuations in the cost of our principal raw materials; however, we may not be able to fully hedge against commodity cost changes, where there is a limited ability to hedge, and our hedging strategies may not protect us from increases in specific raw material costs. Toward the
end of fiscal year 2020, we began to experience an increase in pricing in certain commodity costs that continued to rise throughout fiscal years 2021 and 2022, and have continued to rise in the first quarter of 2023. Continued commodity cost increases may adversely impact our net income. Additionally, the Company has experienced rising costs related to fuel and freight rates as well as rising labor costs which have negatively impacted profitability. Transportation costs have been on the rise since early in 2021 and may continue to rise which may also adversely impact net income. The Company looks to offset rising costs through increasing manufacturing and distribution efficiencies as well as through price increases to our customers, although it is unclear whether historic customer sales levels will
be maintained at these higher prices. Due to competitive or market conditions, planned trade or promotional incentives, or other factors, our pricing actions may also lag commodity cost changes.
While the costs of our principal raw materials fluctuate, we believe there will continue to be an adequate supply of the raw materials we use and that they will generally remain available from numerous sources. Market factors including supply and demand may result in higher costs of sourcing those materials.
Independent Operator Conversions
Our DSD distribution is executed via Company-owned routes operated by route sales professionals ("RSP" or "RSPs"), and third-party routes managed by IOs. We have used the IO and RSP models for more than a decade. In fiscal year 2017, we embarked on a multi-year
strategy to convert all company-owned RSP routes to the IO model. The mix between IOs and RSPs was approximately 96% and 4%, respectively, as of April 2, 2023 versus 89% and 11% ratio for IOs and RSPs, respectively, as of April 3, 2022. We anticipate continuing to work to complete substantially all remaining RSPs conversions during fiscal year 2023. The conversion process involves selling distribution rights of a defined route to an IO. As we convert a large number of routes in a year, there is a meaningful decrease in the selling, distribution administrative costs that we previously incurred on RSPs and a corresponding increase in discounts paid to IOs to cover their costs to distribute our product. The net impact is a reduction in selling and distribution expenses and a decrease in net sales and gross profit. Conversions also impact our balance sheet resulting in cash
proceeds to us as a result of selling the route to an IO, or by creating notes receivable related to the sale of the routes.
21
Results of Operations
Overview
The following tables present selected unaudited financial data for the thirteen weeks ended April 2, 2023 and April 3, 2022.
Net sales was $351.4 million and $340.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. Net sales for the thirteen weeks ended April 2, 2023 increased $10.7 million or 3.1% over the comparable period in 2022. The increase in net sales for the thirteen weeks ended April 2, 2023 was primarily related to the flow through of pricing action that were taken in 2022 in response to inflationary pressures accounted for a 9.7% increase in
net sales, offset by volume/mix decline of 5.7%, as well as 0.9% decline in net sales related to continued IO conversions.
IO discounts increased to $42.2 million for the thirteen weeks ended April 2, 2023 from $34.2 million for the corresponding thirteen weeks ended April 3, 2022. Excluding the impacts of increased IO discounts related to RSP to IO conversion, organic net sales increased 4.0% for the thirteen weeks ended April 2, 2023 versus the corresponding period in 2022.
22
Net sales are evaluated based on classification as Power and Foundation brands. Power brands include our
iconic heritage Utz brand and iconic ON THE BORDER® brand;craft brands such as Zapp’s®, Golden Flake® Pork Skins, TORTIYAHS!, and Hawaiian®; "better for you" brands such as Good Health® and Boulder Canyon®; and select licensed brands such as TGI Fridays®. Our Foundation brands are comprised of several regional brands, including Bachman®, Golden Flake® Chips and Cheese, Tim’s Cascade® Snacks,
Snyder of Berlin®, and "Dirty" Potato Chips®, R.W. Garcia®, as well as other partner and private label brands.
For the thirteen weeks ended April 2, 2023 Power brand sales increased by approximately 8.7%, while Foundation brand sales decreased by approximately 4.9% from the thirteen weeks ended April 3, 2022. The increase in Power brand sales is due primarily to favorable pricing action, offset by volume decline and continued IO conversions. Foundation brand sales decrease was primarily driven by volume decline and continued IO conversion, offset by certain pricing initiatives. The Company's volume
declined for the thirteen weeks ended April 2, 2023 compared to the lapping of a very strong thirteen weeks ended April 3, 2022. In addition, volume was also impacted by weight outs and price pack architecture, as well as SKU rationalization focused on a reduction in private label and partner brand products.
Cost of goods sold and Gross profit
Gross profit was $104.5 million and $103.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. The increase in gross profit for thirteen weeks ended April 2, 2023 was driven by pricing initiatives which were put in place to help
reduce the impact of continued commodity, transportation, and wage inflation which hindered gross profit partially offset by volume decline.
Our gross profit margin was 29.7% for the thirteen weeks ended April 2, 2023 versus 30.5% for the thirteen weeks ended April 3, 2022. The decline in gross profit margin was primarily driven by commodity and wage inflation and lower fixed overhead absorption, offset by the impact of productivity initiatives. Additionally, IO discounts increased to $42.2 million for the thirteen weeks ended April 2, 2023 from $34.2 million for the thirteen weeks ended April 3, 2022. IO conversions contributed to a gross profit decline of $3.0 million, or a gross profit margin of 0.9%, and the remaining IO discount
growth was driven pricing actions. Apart from the IO discount impact growth the Company's margins over the thirteen weeks ended April 2, 2023 was comparable to margins for the thirteen weeks ended April 3, 2022.
Selling, distribution, and administrative expense
Selling, distribution, and administrative expenses were $106.1 million and $126.7 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively resulting in a decrease of $(20.6) million or (16.2)% over the corresponding period in fiscal year 2022. The decrease in expenses for the thirteen weeks ended April
2, 2023 compared to the thirteen weeks ended April 3, 2022 was primarily attributable to the comparable period having higher acquisition and integration costs related to the buyout of multiple distributors, which were accounted for as contract terminations, and resulted in expense of $23.0 million during the thirteen weeks ended April 3, 2022. The thirteen weeks ended April 2, 2023 included impairments of $1.9 million related to the impairment of fixed assets that were damaged in a natural disaster. The thirteen weeks ended April 3, 2022 included other contract termination expense and related
impairments which totaled $2.6 million. Excluding these items selling, distribution, and administrative expenses increased by 3.1% for the thirteen weeks ended April 2, 2023 compared to the corresponding period in fiscal year 2022. We believe that the distributor buyouts will help drive increased future profitability and allow us to better serve our customers. Rising labor and higher stock based compensation costs were partially offset by the reductions of selling costs related to the continued conversion out of Company owned RSP to IO routes.
(Loss) gain on sale of assets
(Loss) gain on sale of assets was $(0.5) million and $0.4 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.
The Company has continued to convert company-owned routes to IO routes during the first fiscal quarter of 2022, offsetting the sales price by the respective route intangible asset. The loss during the thirteen weeks ended April 2, 2023 was primarily related to some small distributor buyouts where a buyout premium was allocated to an asset purchase and sold.
23
Other expense, net
Other expense, net was $15.0 million and $6.6 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. The decrease in expense for the thirteen weeks ended
April 2, 2023 was primarily due to a $2.2 million loss from the remeasurement of warrant liability for the thirteen weeks ended April 2, 2023 versus a gain of $1.9 million for the thirteen weeks ended April 3, 2022. Also significant was interest expense of $14.4 million for the thirteen weeks ended April 2, 2023 compared to $9.1 million for the thirteen weeks ended April 3, 2022. The additional increase in interest expense is primarily attributable to the additional equipment loan and the Real Estate Loan. Another significant driver increasing interest expense relates to an increase in interest rates, which impacted the portion of debtthat the
Company has not hedged.
Income taxes
Income tax (benefit) expense was $(2.6) million and $2.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.
Non-GAAP Financial Measures
We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identifies trends in our underlying operating results and provides additional insight and transparency on how we evaluate the business. We use non-GAAP financial measures to budget, make operating and strategic decisions, and evaluate our performance. We have
detailed the non-GAAP adjustments that we make in our non-GAAP definitions below. The adjustments generally fall within the categories of non-cash items, acquisition and integration costs, business transformation initiatives, and financing-related costs. We believe the non-GAAP measures should always be considered along with the related U.S. GAAP financial measures. We have provided the reconciliations between the U.S. GAAP and non-GAAP financial measures below, and we also discuss our underlying U.S. GAAP results throughout this MD&A section.
Our primary non-GAAP financial measures are listed below and reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change. When the definitions change, we will provide the updated definitions and present the related non-GAAP historical results on a comparable basis.
EBITDA
and Adjusted EBITDA
We define EBITDA as Net Income before Interest, Income Taxes, and Depreciation and Amortization.
We define Adjusted EBITDA as EBITDA further adjusted to exclude certain non-cash items, such as accruals for long-term incentive programs, hedging and purchase commitments adjustments, remeasurement of warrant liabilities, and asset impairments; acquisition and integration costs; business transformation initiatives; and financing-related costs.
Adjusted EBITDA is one of the key performance indicators we use in evaluating our operating performance and in making financial, operating, and planning decisions. We believe EBITDA and Adjusted EBITDA are useful to investors in the evaluation of our operating performance compared to other companies in the salty snack industry, as similar measures are commonly used by companies in this
industry, however, we caution that other companies may use different definitions from us and such figures may not be directly comparable to our figures. We have also historically reported an Adjusted EBITDA metric to investors and lenders for covenant compliance. We also report Adjusted EBITDA as a percentage of Net Sales as an additional measure for investors to evaluate our Adjusted EBITDA margins on Net Sales.
24
The following table provides a reconciliation from net (loss) to EBITDA and Adjusted EBITDA for the thirteen weeks ended April 2, 2023 and April 3, 2022:
Loss (Gain) on Remeasurement of Warrant Liability(6)
2.2
(1.9)
Adjusted EBITDA
$
40.4
$
36.5
Adjusted
EBITDA as a % of Net Sales
11.5
%
10.7
%
(1)Interest Income from IO loans refers to Interest Income that we earn from IO notes receivable that have resulted from our initiatives to transition from RSP distribution to IO distribution ("Business Transformation Initiatives"). There is a notes payable recorded that mirrors most of the IO notes receivable, and the interest expense associated with the notes payable is part of the Interest Expense, Net adjustment.
(2)Certain Non-Cash Adjustments are comprised primarily of the following:
Incentive
programs – The Company incurred $4.6 million and $1.4 million of share-based compensation expense, that was awarded to associates and directors, and compensation expense associated with the employee stock purchase plan for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.
Asset Impairments and Write-Offs — For the thirteen weeks ended April 2, 2023, the Company recorded an adjustment for an impairment of $1.9 million related to fixed assets. During the thirteen weeks ended April 3, 2022, the
Company recorded an impairment of $2.0 million related to the termination of distribution agreements.
Purchase Commitments and Other Adjustments – We have purchase commitments for specific quantities at fixed prices for certain of our products’ key ingredients. To facilitate comparisons of our underlying operating results, this adjustment was made to remove the volatility of purchase commitment related unrealized gains and losses. The adjustment related to Purchase Commitment and Other non-cash adjustments were $2.7 million and $0.1 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.
(3)Adjustment for Acquisition and Integration Costs – This is comprised of consulting, transaction services, and legal fees incurred for acquisitions
and certain potential acquisitions, in addition to expenses associated with integrating recent acquisitions. Such expenses were $4.9 million for the thirteen weeks ended April 2, 2023, as well as $1.2 million of income for the reduction of the Tax Receivable Agreement Liability associated with the Business Combination. Charges related to the buyout of multiple distributors, which was accounted for as a contract termination resulting in expense of $23.0 million for the thirteen weeks ended April 3, 2022, along with other acquisitions an integration cost of $5.8 million.
(4)Business Transformation Initiatives Adjustment – This adjustment is related to consultancy, professional, and legal fees incurred for specific
initiatives and structural changes to the business that do not reflect the cost of normal business operations. In addition, gains and losses realized from the sale of distribution rights to IOs and the subsequent disposal of trucks, severance costs associated with the elimination of RSP positions, and ERP transition costs, fall into this category. The Company incurred such costs of $8.2 million and $4.4 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.
25
(5)Financing-Related Costs – These costs include adjustments for various items
related to raising debt and equity capital or debt extinguishment costs.
(6)Gains and losses related to the changes in the remeasurement of warrant liabilities are not expected to be settled in cash, and when exercised would result in a cash inflow to the Company with the Warrants converting to Class A Common Stock with the liability being extinguished and the fair value of the Warrants at the time of exercise being recorded as an increase to equity.
Liquidity and Capital Resources
The following table presents net cash provided by operating activities, investing activities and financing activities for the thirteen weeks ended April 2, 2023 and April 3,
2022.
For the thirteen weeks ended April 2, 2023, our consolidated cash balance, including cash equivalents, was $57.9 million or $15.0 million lower than at January 1,
2023. Net cash used in operating activities for the thirteen weeks ended April 2, 2023 was $8.4 million compared to $36.0 million thirteen weeks ended April 3, 2022, with the difference largely driven by the payment of $20.2 million in the first quarter of 2022 related to the buyout of multiple distributors, which were accounted for as contract terminations. The thirteen weeks ended April 2, 2023 also included a larger cash outflow related to the building of inventory compared to the prior year comparable period. Cash used in investing activities for the thirteen weeks ended April 2, 2023 was $14.0 million driven by purchases of property and equipment, versus cash used in investing
activity of $5.1 million for the thirteen weeks ended April 3, 2022. Net cash provided by financing activities was $7.5 million for the thirteen weeks ended April 2, 2023, driven by a draw on the line of credit of $20.0 million, offset by the payment of dividends and distribution, and repayments on term debt and notes payable, versus net cash used in financing activities of $14.1 million for the thirteen weeks ended April 3, 2022, which was primarily a result of a draw on the line of credit of $20.0 million and other borrowings offset by payments of dividends and distributions.
Financing Arrangements
The
primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use short-term debt as management determines is reasonable, principally to finance ongoing operations, including our seasonal requirements for working capital (generally accounts receivable, inventory, and prepaid expenses and other current assets, less accounts payable, accrued payroll, and other accrued liabilities), and a combination of equity and long-term debt to finance both our base working capital needs and our non-current assets.
Revolving Credit Facility
On November 21, 2017, UBH entered into an asset based revolving credit facility (as amended, the "ABL facility"), pursuant to the terms of that certain First Lien Term Loan Credit Agreement, dated November
21, 2017 (the "Credit Agreement"). On September 22, 2022, the ABL facility was amended to further increase the credit limit up to $175.0 million and replaced the interest rate benchmark from LIBOR to SOFR. As of April 2, 2023 and January 1, 2023, $20.0 million and $0.0 million, respectively, were outstanding under this facility. Availability under the ABL facility is based on a monthly accounts receivable and inventory borrowing base certification, which is net of outstanding letters of credit. As of April 2, 2023 and January 1, 2023, $140.8 million and $163.0 million, respectively, was available for borrowing, net of letters of credit. The ABL facility is also subject to unused line fees (0.5% at April 2,
2023) and other fees and expenses.
Standby letters of credit in the amount of $12.0 million have been issued as of April 2, 2023 and January 1, 2023. The standby letters of credit are primarily issued for insurance purposes.
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Term Loans
On December 14, 2020, the Company entered into a Bridge Credit Agreement with a syndicate of banks, led by Bank of America, N.A. (the "Bridge Credit Agreement"). The
proceeds of the Bridge Credit Agreement were used to fund the Company’s acquisition of Truco and the IP Purchase (each as defined below) from OTB Acquisition, LLC, in which the Company withdrew $490.0 million to finance the acquisition of Truco Holdco Inc. ("Truco" and such acquisition, the "Truco Acquisition") and certain intellectual property from OTB Acquisition, LLC (the "IP Purchase"). The Bridge Credit Agreement bears interest at an annual rate based on 4.25% plus 1 month LIBOR with scheduled incremental increases to the base rate, as defined in the Bridge Credit Agreement.
On January 20, 2021, the
Company entered into Amendment No. 2 to the Bridge Credit Agreement ("Amendment No. 2") which provided additional operating flexibility and revisions to certain restrictive covenants. Pursuant to the terms of Amendment No. 2, the Company raised $720 million in aggregate principal of Term Loan B ("Term Loan B") which bore interest at LIBOR plus 3.00%, and extended the maturity of the Bridge Credit Agreement to January 20, 2028. The proceeds were used, together with cash on hand and proceeds from our exercised warrants, to redeem the outstanding principal amount of Term Loan B and Bridge Credit Agreement of $410 million and $358 million, respectively. The refinancing was accounted for as an extinguishment. The Company incurred debt
issuance costs and original issuance discounts of $8.4 million.
On June 22, 2021, the Company entered into Amendment No. 3 to the Bridge Credit Agreement ("Amendment No. 3"). Pursuant to the terms of Amendment No. 3, the Company increased the principal balance of Term Loan B by $75.0 million to bring the aggregated balance of Term Loan B proceeds to $795.0 million. The Company incurred additional debt issuance costs and original issuance discounts of $0.7 million related to the incremental funding.
On October 12, 2022,
the Company, through its subsidiaries UQF, Kennedy and Condor Snack Foods, LLC (together with UQF and Kennedy, the “Real Estate Financing Borrowers”), entered into a loan agreement (the “Real Estate Term Loan”) with City National Bank which was secured by a majority of the Real Estate Financing Borrowers’ real estate assets. The Real Estate Term Loan holds a principal balance of $88.1 million, with net proceeds of approximately $85.0 million after transaction fees and expenses. The Real Estate Term Loan has a ten-year maturity and amortizes approximately $3.5 million in principal annually, with a balloon payment due at maturity. The Company used a portion of the proceeds from the Real Estate
Term Loan to pay off the ABL facility. The Real Estate Term Loan contains a single financial maintenance covenant consisting of a fixed charge coverage ratio that is tested quarterly only during a covenant trigger period consistent with the existing ABL facility. Concurrent with the closing of the Real Estate Term Loan, UQF entered into an interest rate swap transaction to fix the effective interest rate at approximately 5.93%, as discussed in further detail within "Note 8. Derivative Financial Instruments and Purchase Commitments”.
The Term Loan B and the ABL facility are collateralized by substantially all of the assets and liabilities of UBH and its subsidiaries excluding the real estate assets secured by the Real Estate Term Loan, including equity interests in certain of UBH’s subsidiaries.
The credit agreements contain certain affirmative and negative covenants as to operations and the financial condition of UBH and its subsidiaries. UBH and its subsidiaries were in compliance with its financial covenants as of April 2, 2023.
Net impact of debt issuance costs and original issue discounts
(9,667)
(9,672)
Total
long-term debt
929,290
911,807
Less: current portion
(19,207)
(18,472)
Long term portion
of term debt and financing obligations
$
910,083
$
893,335
(1) On September 22, 2022, the Company entered into Amendment No. 4 to the Bridge Credit Agreement ("Amendment No. 4"), which replaced the interest rate benchmark from LIBOR to SOFR. The weighted average interest rate on the Term Loan B debt for the thirteen weeks ended
April 2, 2023 was 7.61%.
27
(2) In July 2021, the Company entered into two separate finance lease obligations with Banc of America Leasing & Capital, LLC, which have been treated as secured borrowing. The Company made a series of draws upon these agreements throughout fiscal year 2021 totaling $26.5 million and has drawn a total of $32.4 million in fiscal year 2022 and $2.3 million in fiscal year 2023. These draws bear interest ranging from 3.26% through 6.73% and have varying maturities up through 2028.
(3)
The facility bore interest at an annual rate based on LIBOR, or SOFR plus a 0.10% credit spread adjustment after the amendment on September 22, 2022, plus an applicable margin of 1.50% (ranging from 1.50% to 2.00% based on availability) or the prime rate plus an applicable margin of 0.50% (ranging from 0.50% to 1.00%). The Company generally utilizes the prime rate for amounts that the Company expects to pay down within 30 days. The interest rate on the facility as of April 2, 2023 was 8.50%, under the prime rate. The Company elects to use the LIBOR, prior to the amendment on September
22, 2022 which changed the reference rate to SOFR as described above, for balances that are expected to be carried longer than 30 days. The interest rate on the ABL facility as of April 2, 2023 was 6.26%.
Other Notes Payable and Capital Leases
During the first fiscal quarter of 2022, the Company bought out and terminated the contracts of multiple distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations
and resulted in expense of $23.0 million for the thirteen weeks ended April 3, 2022. The outstanding balance of these transactions was $0.5 million as of January 1, 2023, and was paid off during the thirteen weeks ended April 2, 2023.
During the first fiscal quarter of 2020, the Company purchased intellectual property that include a deferred purchase price of $0.5 million, of which $0.2 million and $0.3 million was outstanding as of April 2, 2023 and January 1, 2023, respectively.
Amounts outstanding under notes payable consisted of the following:
From time to time, the
Company sells notes receivable from IOs to a financial institution. During the thirteen weeks ended April 2, 2023, the Company sold an additional $1.0 million of notes receivable from IOs on its books for $0.9 million to a financial institution. Due to the structure of these transactions, they did not qualify for sale accounting treatment and the Company has recorded the notes payable obligation owed by the IOs to the financial institution on its books; the corresponding notes receivable also remained on the Company’s books. The Company services the loans for the financial
institution by collecting principal and interest from the IOs and passing it through to the institution. The underlying notes have various maturity dates through June 2032. The Company partially guarantees the outstanding loans, as discussed in further detail within Note 10. "Contingencies." These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon any event of default.
Company’s term loans, ABL facility, and other long-term debt
$
14,142
$
8,331
Amortization of deferred financing fees
5
341
IO
loans
231
431
Total interest
$
14,378
$
9,103
Off-Balance Sheet Arrangements
Purchase Commitments
The Company has outstanding purchase commitments for specific quantities
at fixed prices for certain key ingredients to economically hedge commodity input prices. These purchase commitments totaled $73.1 million as of April 2, 2023. The Company accrues for losses on firm purchase commitments in a loss position at the end of each reporting period to the extent that there is an active observable market. The Company has recorded purchase commitment (losses) gains totaling $(2.7) million for the thirteen weeks ended April 2, 2023 and $0.0 million for the thirteen weeks ended April 3, 2022, respectively.
IO Guarantees-Off-Balance Sheet
The
Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was $1.1 million and $1.5 million at April 2, 2023 and January 1, 2023, respectively, all of which was recorded by the Company as off balance sheet arrangements. The maximum amount of future payments the Company could be required to make under the guarantees equates to 25% of the outstanding loan balance up to $2.0 million. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding
loan value upon default.
The Company partially guarantees loans made to IOs by Bank of America for the purchase of routes. The outstanding balance of loans guaranteed that were issued by Bank of America was $40.2 million and $36.0 million at April 2, 2023 and January 1, 2023, respectively, which are off balance sheet arrangements. As discussed in Note 7. "Long-Term Debt", the Company also sold notes receivable on its books to Bank of America during fiscal years 2019, 2021, and 2022, which the Company partially guarantees. The outstanding balance of notes purchased
by Bank of America at April 2, 2023 and January 1, 2023 was $16.8 million and $17.9 million, respectively. Due to the structure of the transactions, the sale did not qualify for sale accounting treatment, and as such the Company records the notes payable obligation owed by the IOs to the financial institution on its Consolidated Balance Sheets; the corresponding note receivable also remained on the Company’s Consolidated Balance Sheets. The maximum amount of future payments the Company could be required to make under these guarantees equates to 25% of the outstanding loan balance on the first day of each calendar
year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default.
The Company guarantees loans made to IOs by M&T Bank for the purchase of routes. The agreement with M&T Bank was amended in January 2020 so that the Company guaranteed up to 25% of the greater of the aggregate principal amount of loans outstanding on the payment date or January 1st of the subject year. The outstanding balance of loans guaranteed was $3.1
million and $3.4 million at April 2, 2023 and January 1, 2023, respectively, all of which were included in the Company's Consolidated Balance Sheets. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default.
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New Accounting Pronouncements
See Note 1. "Operations and Summary of Significant Accounting Policies," to the unaudited
condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Application of Critical Accounting Policies and Estimates
General
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. While the majority of our revenue, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions. Management regularly reviews the estimates and assumptions used in the preparation of our financial statements
for reasonableness and adequacy. Our significant accounting policies are discussed in Note 1. "Operations and Summary of Significant Accounting Policies", of the unaudited Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q; however, the following discussion pertains to accounting policies we believe are most critical to the portrayal of our financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our financial condition, results of operations and cash flows to those of other companies.
Revenue Recognition
Our revenues primarily consist of the sale of salty snack items that are sold through DSD and direct-to-warehouse distribution
methods, either directly to retailers or via distributors. We sell to supermarkets, mass merchandisers, club warehouses, convenience stores and other large-scale retailers, merchants, distributors, brokers, wholesalers, and IOs (which are third party businesses). These revenue contracts generally have a single performance obligation. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components.
We recognize revenue when (or as) performance
obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as products’ control is transferred to customers. We assess the goods promised in customers’ purchase orders and identify a performance obligation for each promise to transfer a good that is distinct.
We offer various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted
either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. In 2019, we implemented a system that improves our ability to analyze and estimate the reserve for unpaid costs relating to our promotional activities. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as the actual redemption incurred.
30
Distribution
Route Purchase and Sale Transactions
We purchase and sell distribution routes as a part of our maintenance of our DSD network. As new IOs are identified, we either sell our existing routes to the IOs or sell routes that were previously purchased by us to the IOs. Gain/loss from the sale of a distribution route is recorded upon the completion of the sale transaction and signing of the relevant documents and is calculated based on the difference between the sale price of the distribution route and the asset carrying value of the distribution route as of the date of sale. We record intangible assets for distribution routes that we purchase based on the payment that we make to acquire the route and record the purchased distribution routes as indefinite-lived intangible assets under Financial Accounting Standards Board ASC 350, Intangibles – Goodwill and Other. The indefinite lived intangible assets are subject to annual impairment
testing.
Goodwill and Indefinite-Lived Intangibles
We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result
in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets.
Finite-lived intangible assets consist of distribution/customer relationships, technology, trademarks and non-compete agreements. These assets are being amortized over their estimated useful lives. Finite-lived intangible assets are tested for impairment only when management has determined that potential impairment indicators are present.
Goodwill and other indefinite-lived intangible assets (including trade names, master distribution rights and Company-owned routes) are not amortized but are tested for impairment at least annually and whenever events or circumstances change that indicate impairment may have
occurred. We test goodwill for impairment at the reporting unit level.
As we have early adopted Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment, we will record an impairment charge based on the excess of a reporting unit’s carrying amount over our fair value.
ASC 350, Goodwill and Other Intangible Assets also permits an entity to first assess qualitative factors to determine whether it is necessary to perform quantitative impairment tests for goodwill and indefinite-lived intangibles. If an entity believes, as a result of each qualitative assessment, it is more likely than not that goodwill or an indefinite-lived intangible asset is not impaired, a quantitative impairment test is not required.
We have identified the existing snack food operations as our sole
reporting unit. For the qualitative analysis performed, which took place on the first day of the fourth quarter of 2022, we have taken into consideration all the events and circumstances listed in FASB ASC 350, Intangibles—Goodwill and Other, in addition to other entity-specific factors that have taken place. We have determined that there was no significant impact that affected the fair value of the reporting unit through April 2, 2023. Therefore, we have determined that it was not necessary to perform a quantitative goodwill impairment test for the reporting unit.
Income Taxes
We account for income taxes pursuant to the asset and liability method of ASC 740, Income Taxes, which require us to recognize current tax liabilities or receivables
for the amount of taxes we estimate are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax
liabilities during the period in which related temporary differences become deductible.
31
We follow the provisions of ASC 740-10 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
The benefit of tax positions taken or expected to be taken in our income tax returns is recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken
in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits." A liability is recognized (or amount of net operating loss carryover or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. Interest costs and related penalties related to unrecognized tax benefits are required to be calculated, if applicable. Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling and administrative expenses. As of April 2, 2023 and January 1, 2023, no liability for unrecognized tax benefits was required to be reported. We do not expect any significant changes
in our unrecognized tax benefits in the next year.
Business Combinations
We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is accounted for as a business combination or an
acquisition of assets.
We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk"
of our Annual Report on Form 10-K for the year ended January 1, 2023. Our exposures to market risk have not changed materially since January 1, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective at a level of reasonable assurance.
Changes in Internal Control over Financial Reporting
There was no other change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act) during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
32
From time to time we are named as a defendant in legal actions arising from our normal business activities. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations
and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.
Item 1A. Risk Factors
Our risk factors are set forth under the "Risk Factors" section of our Annual Report on Form 10-K filed on March 2, 2023. There have been no material changes to our risk factors since the filing of the Annual Report on Form 10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The exhibits listed in the following exhibit index are furnished as part of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
