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Sovos Brands, Inc. - Quarter Report: 2023 April (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 001-40837

Sovos Brands, Inc.

(Exact name of registrant as specified in its charter)

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Delaware

81-5119352

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

168 Centennial Parkway, Suite 200

Louisville, CO 80027

(Address of principal executive offices) (zip code)

(720) 316-1225

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

SOVO

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

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. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Date 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). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 No

As of May 5, 2023, there were 101,226,478 shares of common stock, $0.001 par value per share outstanding.

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SOVOS BRANDS, INC.

FORM 10-Q

FOR THE QUARTER ENDED APRIL 1, 2023

INDEX

Page

PART I. Financial Information

Item 1.

Financial Statements (Unaudited):

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Comprehensive Income

5

Condensed Consolidated Statements of Changes in Stockholders Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44

Item 4.

Controls and Procedures

44

PART II. Other Information

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6

Exhibits

46

Signatures

48

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PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Sovos Brands, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, dollars in thousands, except par value and share data)

    

April 1, 2023

    

December 31, 2022

ASSETS

 

  

 

  

CURRENT ASSETS:

 

  

 

  

Cash and cash equivalents

$

153,638

$

138,654

Accounts receivable, net

 

93,447

 

87,695

Inventories, net

 

86,727

 

92,602

Prepaid expenses and other current assets

 

12,382

 

11,974

Total current assets

 

346,194

 

330,925

Property and equipment, net

 

63,275

 

64,317

Operating lease right-of-use assets

12,724

13,332

Goodwill

 

395,399

 

395,399

Intangible assets, net

 

345,941

 

351,547

Other long-term assets

 

2,485

 

3,279

TOTAL ASSETS

$

1,166,018

$

1,158,799

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

CURRENT LIABILITIES:

 

  

 

  

Accounts payable

$

55,349

$

49,264

Accrued expenses

 

57,679

 

69,571

Current portion of long-term debt

 

94

 

99

Current portion of long-term operating lease liabilities

3,365

3,308

Total current liabilities

 

116,487

 

122,242

Long-term debt, net of debt issuance costs

 

482,580

 

482,344

Deferred income taxes

 

64,269

 

63,644

Long-term operating lease liabilities

13,204

14,063

Other long-term liabilities

 

517

 

483

TOTAL LIABILITIES

 

677,057

 

682,776

COMMITMENTS AND CONTINGENCIES (Note 11)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

Preferred stock, $0.001 par value per share, 10,000,000 shares authorized, no shares issued and outstanding

Common stock, $0.001 par value per share, 500,000,000 shares authorized, 101,226,478 and 100,967,910 shares issued and outstanding as of April 1, 2023 and December 31, 2022, respectively

 

101

 

101

Additional paid-in-capital

 

583,172

 

577,664

Accumulated deficit

 

(95,445)

 

(103,291)

Accumulated other comprehensive income

1,133

1,549

TOTAL STOCKHOLDERS’ EQUITY

 

488,961

 

476,023

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,166,018

$

1,158,799

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Sovos Brands, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, dollars in thousands, except share and per share data)

13 Weeks Ended

    

April 1, 2023

    

March 26, 2022

    

Net sales

$

252,791

$

209,933

Cost of sales

 

181,979

 

156,025

Gross profit

 

70,812

 

53,908

Operating expenses:

Selling, general and administrative

 

43,414

 

33,915

Depreciation and amortization

 

5,980

 

7,203

Total operating expenses

49,394

41,118

Operating income

 

21,418

 

12,790

Interest expense, net

 

8,701

 

6,022

Income before income taxes

 

12,717

 

6,768

Income tax (expense)

 

(4,871)

 

(2,711)

Net income

$

7,846

$

4,057

Earnings per share:

 

  

 

  

Basic

$

0.08

$

0.04

Diluted

$

0.08

$

0.04

Weighted average shares outstanding:

 

 

Basic

 

101,186,223

 

100,892,547

Diluted

 

101,507,696

 

101,262,103

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Sovos Brands, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, dollars in thousands)

13 Weeks Ended

    

April 1, 2023

    

March 26, 2022

Net income

$

7,846

$

4,057

Other comprehensive income:

Change in net unrealized loss on derivative instruments

(549)

Income tax effect

133

Unrealized loss on derivative instruments, net of tax

(416)

Total comprehensive income

$

7,430

$

4,057

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Sovos Brands, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited, dollars in thousands, except share data)

    

    

    

Additional

    

Retained Earnings

    

Accumulated Other

    

Total

Common Stock

Paid-in

(Accumulated

Comprehensive

    

Stockholders’

Shares

Amount

Capital

Deficit)

Income

Equity

Balance at December 31, 2022

 

100,967,910

$

101

$

577,664

$

(103,291)

$

1,549

$

476,023

Equity-based compensation expense

5,508

5,508

Shares issued upon vesting of restricted stock units

258,568

Other comprehensive loss

(416)

(416)

Net income

 

 

 

 

7,846

 

7,846

Balance at April 1, 2023

 

101,226,478

$

101

$

583,172

$

(95,445)

$

1,133

$

488,961

    

    

    

Additional

    

Retained Earnings

    

Accumulated Other

    

Total

Common Stock

Paid-in

(Accumulated

Comprehensive

Stockholders’

Shares

Amount

Capital

Deficit)

Income

Equity

Balance at December 25, 2021

 

100,892,547

$

101

$

559,226

$

(49,840)

$

$

509,487

Equity-based compensation expense

 

 

 

4,087

 

 

4,087

Net income

 

 

 

 

4,057

 

4,057

Balance at March 26, 2022

 

100,892,547

$

101

$

563,313

$

(45,783)

$

$

517,631

See accompanying notes to the unaudited condensed consolidated financial statements.

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Sovos Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

13 Weeks Ended

    

April 1, 2023

    

March 26, 2022

Operating activities

 

  

 

  

Net income

$

7,846

$

4,057

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Depreciation and amortization

 

8,469

 

9,555

Equity-based compensation expense

 

5,508

 

4,087

Gain on foreign currency contracts

(133)

Non-cash interest expense

164

Deferred income taxes

 

758

 

306

Amortization of debt issuance costs

 

316

 

316

Non-cash operating lease expense

 

608

 

603

Provision for excess and obsolete inventory

836

484

Other

 

 

(6)

Changes in operating assets and liabilities:

 

 

  

Accounts receivable, net

 

(5,752)

 

(12,065)

Inventories, net

 

5,039

 

1,275

Prepaid expenses and other current assets

 

(4,209)

 

(1,043)

Other long-term assets

 

(45)

 

(10)

Accounts payable

 

6,437

 

4,896

Accrued expenses

 

(7,897)

 

(538)

Other long-term liabilities

 

34

 

10

Operating lease liabilities

(802)

(728)

Net cash provided by operating activities

 

17,177

 

11,199

Investing activities

 

  

 

  

Purchases of property and equipment

 

(2,173)

 

(7,180)

Net cash (used in) investing activities

 

(2,173)

 

(7,180)

Financing activities

 

  

 

  

Repayments of capital lease obligations

 

(20)

 

(24)

Net cash (used in) financing activities

 

(20)

 

(24)

Cash and cash equivalents

Net increase in cash and cash equivalents

 

14,984

 

3,995

Cash and cash equivalents at beginning of period

 

138,654

 

66,154

Cash and cash equivalents at end of period

$

153,638

$

70,149

Supplemental disclosures of cash flow information

    

  

    

  

Cash paid for interest

$

9,973

 

$

5,937

Cash proceeds from interest

(1,282)

(3)

Cash paid for taxes

 

140

 

37

Proceeds from income tax refunds

 

(43)

 

(10)

Non-cash investing and financing transactions

 

 

  

Acquisition of property and equipment not yet paid

$

146

$

467

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements

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Note 1. Company Overview

Description of Business

Sovos Brands, Inc. and its wholly-owned subsidiaries (the “Company,” “Sovos Brands,” “we,” “us,” “our”) is a growth-oriented consumer-packaged food company with a portfolio of brands aimed at bringing today’s consumers great tasting food that fits the way they live. The Company’s four wholly-owned operating subsidiaries include: Rao’s Specialty Foods, Inc. (“Rao’s”); Bottom Line Food Processors, Inc. doing business as Michael Angelo’s Gourmet Foods, Inc. (“Michael Angelo’s”); Noosa Yoghurt, LLC (“Noosa”); and Aidaca, LLC. The Company’s principal products include a variety of pasta sauces, dry pasta, soups, frozen entrées, frozen pizza and yogurts, which are primarily sold in the United States. The Company sells products marketed under the brand names Rao’s, Michael Angelo’s, and noosa which are built with authenticity at their core, providing consumers food experiences that are genuine, delicious, and unforgettable. Our products are premium and made with simple, high-quality ingredients. We are focused on continuing to build an organization with the capabilities to acquire and grow brands. We strive to empower our teams to lead with courage and tenacity, with the goal of providing them with the confidence and agility to connect with our consumers and retail partners to drive unparalleled growth. We believe our focus on “one-of-a-kind” brands, products that people love, and passion for our people makes Sovos Brands a “one-of-a-kind” company and enables us to deliver on our objective of creating a growing and sustainable food enterprise yielding financial growth ahead of industry peers.

Through the end of fiscal 2022, the Company sold products marketed under the brand name of Birch Benders, including pancake and waffle mixes, other baking mixes and frozen waffles. See Note 3. Loss on Asset Sale for additional information on the December 30, 2022 divestiture of the Birch Benders brand and certain related assets.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements are presented in U.S. dollars.

The Company maintains its accounting records on a 52/53-week fiscal year, ending on the last Saturday in December of each year. Our fiscal year ending December 31, 2022 (“fiscal 2022”) had 53 weeks.

Unaudited Interim Condensed Consolidated Financial Statements

The interim condensed consolidated financial statements and related notes of the Company and its subsidiaries are unaudited. The unaudited interim condensed consolidated financial statements reflect all adjustments and disclosures which are, in our opinion, necessary for a fair presentation of the results of operations, financial position and cash flows for the indicated periods. All such adjustments were of a normal and recurring nature. The year-end balance sheet data was derived from the audited financial statements and, in accordance with the instructions to Form 10-Q, certain information and footnote disclosures required by GAAP have been condensed or omitted. The results reported in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be reported for the entire fiscal year and should be read in conjunction with our consolidated financial statements for the fiscal year ended December 31, 2022, included in our Annual Report on Form 10-K, filed with the SEC on March 8, 2023 (“2022 Form 10-K”).

Graphic

Note 2. Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in Note 2. Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s 2022 Form 10-K, other than what is described below.

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New Accounting Pronouncements and Policies

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments of ASU No. 2020-04 apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the third quarter of fiscal 2022 the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 that postpones the sunset date of Topic 848 to December 31, 2024. The Company will continue to monitor the effects of rate reform, if any, on its contracts and the effects of adoption of these ASUs through December 31, 2024. The Company does not anticipate the amendments of this ASU to have a material impact to its consolidated financial statements upon adoption.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The Company previously adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments effective December 27, 2020, and therefore this amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments of ASU 2022-02 require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. The adoption of this ASU had no impact to the Company’s condensed consolidated financial statements.

No other new accounting pronouncements issued or effective during the quarter had or is expected to have a material impact on the Company’s consolidated financial statements.

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Note 3. Loss on Asset Sale

On December 30, 2022, the Company completed the divestiture of the Birch Benders brand and certain related assets to Hometown Food Company, a portfolio company controlled by Brynwood Partners VIII L.P. The Company is currently operating under a Transition Services Agreement with the buyer through June 30, 2023, and is in the process of winding down the remaining assets and liabilities that were not part of the sale.  

The divestiture of the Birch Benders brand and certain related assets positions the Company to focus on its core brands and drive sustainable growth.

For the fiscal year ended December 31, 2022, the Company recognized a pre-tax loss on the sale of Birch Benders of $51.3 million, calculated as follows:

(In thousands)

Cash received

$

40,000

Assets sold:

 

Inventory

 

(5,424)

Intangible assets, net

(85,867)

Total assets sold

 

(91,291)

Loss on asset sale

$

(51,291)

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Note 4. Revenue Recognition

Revenue disaggregated by brand is as follows:

13 Weeks Ended

(In thousands)

    

April 1, 2023

    

March 26, 2022

Rao’s

$

189,191

$

137,412

Noosa

 

45,284

 

41,851

Michael Angelo’s

 

19,102

 

20,242

Birch Benders

 

(786)

 

10,428

Total net sales

$

252,791

$

209,933

The activity for Birch Benders for the 13 weeks ended April 1, 2023 is related to winding down promotional discount activity in the period.

Note 5. Inventories, Net

Graphic

Inventories, net consisted of the following:

(In thousands)

    

April 1, 2023

    

December 31, 2022

Finished goods

$

73,205

$

76,404

Raw materials and packaging supplies

 

13,522

 

16,198

Total inventories, net

$

86,727

$

92,602

Graphic

Note 6. Goodwill

There were no changes in the carrying value or impairment charges related to goodwill during the 13 weeks ended April 1, 2023 and March 26, 2022.

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Note 7. Intangible Assets, Net

Intangible asset, net, consisted of the following:

April 1, 2023

Gross carrying

Accumulated

Net carrying

(In thousands)

amount

amortization

amount

Intangible assets - definite lives

  

    

  

    

  

Customer relationships

$

207,300

$

92,979

$

114,321

Tradename

 

101,747

 

23,127

 

78,620

309,047

116,106

192,941

Intangible assets - indefinite lives

 

 

  

 

  

Tradename

153,000

153,000

Total intangible assets

$

462,047

$

116,106

$

345,941

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December 31, 2022

Gross carrying

Accumulated

Sale of

Net carrying

(In thousands)

    

amount

    

amortization

intangible assets

    

amount

Intangible assets - definite lives

  

  

    

  

  

Customer relationships

$

213,000

$

89,201

$

5,082

$

118,717

Tradename

 

192,347

 

31,732

 

80,785

 

79,830

405,347

120,933

85,867

198,547

Intangible assets - indefinite lives

 

  

Tradename

 

153,000

153,000

Total intangible assets

$

558,347

$

120,933

$

85,867

$

351,547

In connection with the divestiture of the Birch Benders brand and certain related assets, the Company sold the net amount of definite lived tradename and customer relationships in the amounts of $80.8 million and $5.1 million, respectively, for the fiscal year ended December 31, 2022. See Note 3. Loss on Asset Sale for additional discussion. There were no sales of definite lived intangible assets for the 13 weeks ended April 1, 2023.

Amortization expense related to intangible assets during the 13 weeks ended April 1, 2023 and March 26, 2022 was $5.6 million and $6.8 million, respectively.

There were no impairment charges related to intangible assets during the 13 weeks ended April 1, 2023 and March 26, 2022.

Estimated total intangible amortization expense during the next five fiscal years and thereafter is as follows:

(In thousands)

    

Amortization  

Remainder of 2023

$

16,819

2024

 

22,425

2025

 

22,425

2026

 

22,425

2027

 

17,782

Thereafter

 

91,065

Total

$

192,941

Note 8. Accrued Expenses

Graphic

Accrued expenses consisted of the following:

(In thousands)

    

April 1, 2023

    

December 31, 2022

Accrued trade

$

30,419

$

32,337

Accrued general expense

 

17,784

 

17,911

Accrued compensation and benefits

 

8,412

 

17,328

Accrued marketing

 

1,064

 

1,995

Total accrued expenses

$

57,679

$

69,571

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Note 9. Long-Term Debt

Long-term debt consisted of the following:

April 1, 2023

Unamortized

debt issuance

(In thousands)

Principal

costs

Total debt, net

Initial First Lien Term Loan Facility

    

$

480,800

    

$

(5,123)

    

$

475,677

Finance lease liabilities

6,997

 

6,997

Total debt

$

487,797

$

(5,123)

482,674

Less: current portion of finance lease liabilities

 

94

Total long-term debt

 

  

$

482,580

December 31, 2022

    

Unamortized

debt issuance

(In thousands)

Principal

costs

Total debt, net

Initial First Lien Term Loan Facility

$

480,800

$

(5,374)

$

475,426

Finance lease liabilities

 

7,017

 

 

7,017

Total debt

$

487,817

$

(5,374)

 

482,443

Less: current portion of finance lease liabilities

 

 

  

 

99

Total long-term debt

 

  

 

  

$

482,344

Senior Debt

In June 2021, Sovos Brands Intermediate, Inc. (“Sovos Intermediate”) entered into a First Lien Credit Agreement (“First Lien Credit Agreement”) among Sovos Intermediate, Sovos Brands Holdings, Inc., Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent, and the lenders and issuing banks from time to time party thereto (“First Lien Lenders”), consisting of an initial term loan facility of $580.0 million (“Initial First Lien Term Loan Facility”), and a revolving credit facility of $125.0 million (“Revolving Facility”), including a letter of credit facility with a $45.0 million sublimit.

The Initial First Lien Term Loan Facility was issued with a discount of $1.5 million and the Company paid debt issuance costs of $6.8 million. The discounts and debt issuance costs paid on the Initial First Lien Term Loan Facility were capitalized. The debt transaction on the Revolving Facility was accounted for as a debt modification. The Company continued to amortize $0.2 million of debt issuance costs on a previous Revolving Line of Credit over the new life of the debt, and paid $1.1 million in debt issuance costs for the new Revolving Facility, which was capitalized.

In 2021, the Company prepaid $99.2 million of the outstanding principal balance under the Initial First Lien Term Loan Facility. Upon the partial prepayment of the Initial First Lien Term Loan Facility, the Company recognized a $1.4 million proportional loss on the partial extinguishment of the related unamortized issuance costs and discounts. The remaining principal balance on the Initial First Lien Term Loan Facility, after the $99.2 million prepayment, is $480.8 million. The Company has directed Credit Suisse to apply the prepayment against future scheduled principal installments, which eliminates all future principal payments for the remaining term of the loan.

The amortization of debt issuance costs and discount of $0.3 million and $0.3 million for the 13 weeks ended April 1, 2023 and March 26, 2022, respectively, is included within interest expense, net in the Condensed Consolidated Statements of Operations.

The interest rate for the Initial First Lien Term Loan Facility and Revolving Facility is London Inter-Bank Offered Rate (“LIBO Rate”) plus an applicable rate contingent on the Company’s calculated first lien leverage ratio, ranging from 400 to 425 basis points, and was subject to a 50 basis points reduction, at each level, after the consummation of its initial public offering ("IPO"). In no event shall the LIBO Rate be less than 0.75% per annum for the Initial First Lien Term Loan

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Facility or less than 0.00% per annum for the Revolving Line of Credit. The Initial First Lien Term Loan Facility matures on June 8, 2028 and the Revolving Facility matures on June 8, 2026. The Initial First Lien Term Loan Facility is collateralized by substantially all the assets of the Company. On December 30, 2022, Sovos Intermediate and Birch Benders, LLC, a Delaware limited liability company (renamed Aidaca, LLC), sold the Birch Benders brand and certain related assets to Hometown Food Company, a Delaware corporation, as permitted under the terms of the First Lien Credit Agreement.

The Company had available credit of $125.0 million under the Revolving Facility as of April 1, 2023 and December 31, 2022, respectively. There was zero outstanding on the Revolving Facility as of April 1, 2023 and December 31, 2022. As of April 1, 2023 and December 31, 2022, the effective interest rate for the Initial First Lien Term Loan Facility and Revolving Facility was 8.33% and 7.91%, respectively.

Loan Covenants

In connection with the First Lien Credit Agreement, the Company has various financial, affirmative and negative covenants that it must adhere to as specified within the loan agreements. The First Lien Credit Agreement contains a springing financial covenant, which requires the Borrower to maintain a first lien net leverage ratio of consolidated first lien net debt to consolidated EBITDA (with certain adjustments as set forth in the First Lien Credit Agreement) no greater than 6.95:1.00. Such financial covenant is tested only if outstanding revolving loans (excluding any undrawn letters of credit) minus unrestricted cash exceed 35% of the aggregate revolving credit commitments. The financial covenant is subject to customary “equity cure” rights. In addition, under the First Lien Credit Agreement, an annual excess cashflow calculation is required, to determine if any excess is required to be paid on the Initial First Lien Term Loan Facility. As of April 1, 2023, the Company had no outstanding revolving loans, so did not meet the requirement to test the financial covenant under the First Lien Credit Agreement.

See Note 10. Leases and Note 17. Related Party Transactions for additional discussion of the finance lease liabilities.

Graphic

Note 10. Leases

The Company leases real estate in the form of distribution centers, manufacturing facilities, equipment and office space. Generally, the term for real estate leases ranges from 2 to 10 years at inception of the contract. Generally, the term for equipment leases is 5 years at inception of the contract. Most manufacturing facilities and office space leases include one or more options to renew, with renewal terms that generally can extend the lease term from 2 to 30 years. The exercise of lease renewal options is at the Company’s discretion.

Operating and finance lease costs are included within Cost of sales and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Sublease income was not material for the periods presented.

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The components of lease expense were as follows:

13 Weeks Ended

(In thousands)

Statement of Operations Caption

April 1, 2023

March 26, 2022

Operating lease cost:

    

  

    

Lease cost

 

Cost of sales and Selling, general and administrative

$

811

$

840

Variable lease cost (1)

 

Cost of sales and Selling, general and administrative

 

427

363

Total operating lease cost

 

 

1,238

1,203

Short term lease cost

 

Cost of sales and Selling, general and administrative

 

35

46

Finance lease cost:

 

  

 

Amortization of right-of-use assets

 

Cost of sales and Selling, general and administrative

 

65

65

Interest on lease liabilities

 

Interest expense, net

 

132

133

Total finance lease cost

 

 

197

198

Total lease cost

$

1,470

$

1,447

(1)Variable lease cost primarily consists of common area maintenance, utilities, taxes and insurance.

The gross amount of assets and liabilities related to both operating and finance leases were as follows:

(In thousands)

Balance Sheet Caption

April 1, 2023

December 31, 2022

Assets

    

  

    

  

    

  

Operating lease right-of-use assets

 

Operating lease right-of-use assets

$

12,724

$

13,332

Finance lease right-of-use assets

 

Property and equipment, net

 

5,973

 

6,038

Total lease assets

 

$

18,697

$

19,370

Liabilities

 

  

 

  

 

  

Current:

Operating lease liabilities

Current portion of long-term operating lease liabilities

$

3,365

$

3,308

Finance lease liabilities

Current portion of long-term debt

94

99

Long-term:

Operating lease liabilities

 

Long-term operating lease liabilities

 

13,204

 

14,063

Finance lease liabilities

 

Long-term debt, net of debt issuance costs

 

6,903

 

6,918

Total lease liabilities

 

$

23,566

$

24,388

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases were as follows:

    

April 1, 2023

    

December 31, 2022

Weighted-average remaining lease term (in years):

 

Operating leases

6.3

6.4

Finance leases

34.1

34.2

Weighted-average discount rate

Operating leases

5.0

%  

4.9

%

Finance leases

 

7.9

%  

7.8

%

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Future maturities of lease liabilities as of April 1, 2023, were as follows:

(In thousands)

    

Operating Leases

    

Finance Leases

Fiscal year ending:

 

  

 

  

Remainder of 2023

$

3,058

$

457

2024

 

3,493

 

557

2025

 

2,982

 

549

2026

 

3,005

 

520

2027

 

3,064

 

525

Thereafter

 

3,856

 

18,445

Total lease payments

 

19,458

 

21,053

Less: Interest

 

(2,889)

 

(14,056)

Present value of lease liabilities

$

16,569

$

6,997

As of April 1, 2023, the Company did not have any significant additional operating or finance leases that have not yet commenced.

Supplemental cash flow and other information related to leases were as follows:

    

13 Weeks Ended

(In thousands)

April 1, 2023

March 26, 2022

Cash paid for amounts included in the measurement of lease liabilities

    

  

    

  

Operating cash flows from operating leases

$

1,004

$

1,011

Operating cash flows from finance leases

 

132

 

133

Financing cash flows from finance leases

20

24

Graphic

Note 11. Commitments and Contingencies

Litigation

From time to time, we are subject to various legal actions arising in the ordinary course of our business. We cannot predict with reasonable assurance the outcome of these legal actions brought against us as they are subject to uncertainties. Accordingly, any settlement or resolution in these legal actions may occur and affect our net income in such period as the settlement or resolution. We do not believe the outcome of any existing legal actions would have a material adverse effect on our consolidated financial statements taken as a whole.

Purchase Commitments

The Company has third-party purchase obligations for raw materials, packaging, and co-manufacturing. These commitments have been entered into based on future projected needs. As of April 1, 2023, the Company had outstanding minimum purchase commitments with one supplier. The estimated annual minimum purchase commitments with the supplier are as follows:

Fiscal Year Ending

    

(In thousands)

Remainder of 2023

$

1,827

2024

 

3,500

2025

 

1,492

2026

 

2027

 

Thereafter

 

Total

$

6,819

See Note 17. Related Party Transactions for information about our commitments to related parties.

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Graphic

Note 12. Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants on the measurement date, and establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and

Level 3: inputs for the asset or liability that are based on unobservable inputs in which there is little or no market data.

Cash and cash equivalents, current assets and current liabilities

Cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses are reflected in the Condensed Consolidated Balance Sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

Borrowing instruments

The Company’s borrowing instruments are recorded at their carrying values in the Condensed Consolidated Balance Sheets, which may differ from their respective fair values. The carrying values and estimated fair values of the Company’s Initial First Lien Term Loan Facility and Revolving Facility approximate their carrying values as of April 1, 2023 and December 31, 2022, based on interest rates currently available to the Company for similar borrowings.

Derivative financial instruments

The Company uses option contracts to manage foreign currency risk and uses interest rate caps (options) to manage interest rate risk. The Company’s derivative assets and liabilities are carried at fair value as required by GAAP. The estimated fair values of the derivative assets and liabilities on the Company’s forward contracts is based on foreign currency exchange rates in active markets. The estimated fair value of the interest rate instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We have determined that the significance of the impact of the credit valuation adjustments made to our derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives held as of April 1, 2023 and December 31, 2022 were classified as Level 2 of the fair value hierarchy.

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The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis aggregated by the level in the fair value hierarchy within which those measurements fall.

As of April 1, 2023

Fair Value Measurements Using

(In thousands)

Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Balance at April 1, 2023

Assets

Derivatives not designated as hedging instruments

$

$

100

$

$

100

Derivatives in cash flow hedging relationships

$

$

2,915

$

$

2,915

Total assets

$

$

3,015

$

$

3,015

Liabilities

Derivatives not designated as hedging instruments

$

$

$

$

Total liabilities

$

$

$

$

As of December 31, 2022

Fair Value Measurements Using

(In thousands)

Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Balance at December 31, 2022

Assets

Derivatives in cash flow hedging relationships

$

$

3,628

$

$

3,628

Total assets

$

$

3,628

$

$

3,628

Liabilities

Derivatives not designated as hedging instruments

$

$

33

$

$

33

Total liabilities

$

$

33

$

$

33

The fair value estimates presented herein are based on information available to management as of April 1, 2023. These estimates are not necessarily indicative of the amounts we could ultimately realize. See Note 13. Hedging and Derivative Financial Instruments for additional information.

Non-financial assets

The Company’s non-financial assets, which primarily consist of property and equipment, right-of-use assets, goodwill and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined, as required, based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans.

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There were no transfers of financial instruments between the three levels of fair value hierarchy during the 13 weeks ended April 1, 2023 and the fiscal year ended December 31, 2022.

Graphic

Note 13. Hedging and Derivative Financial Instruments

The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as “market risks.” When deemed appropriate, the Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk and interest rate risk.

The Company uses various types of derivative instruments including, but not limited to, option contracts, collars and interest rate caps. An option contract is an agreement that conveys the purchaser the right, but not the obligation, to buy or sell a quantity of a currency or commodity at a predetermined rate or price during a period or at a time in the future. A collar is a strategy that uses a combination of options to limit the range of possible positive or negative returns on an underlying asset or liability to a specific range, or to protect expected future cash flows. To do this, an investor simultaneously buys a put option and sells (writes) a call option, or alternatively buys a call option and sells (writes) a put option. An interest rate cap involves the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. We do not enter into derivative financial instruments for trading purposes.

All derivative instruments are carried at fair value in the Condensed Consolidated Balance Sheets, primarily in the following line items, as applicable: prepaid expenses and other current assets, other long-term assets and accrued expenses. The carrying values of the derivatives reflect the impact of netting agreements. These netting agreements allow the Company to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty.

The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationships. Derivatives can be designated as fair value hedges, cash flow hedges or economic hedges. The interest rate cap derivative is designated and qualifies as a cash flow hedge. The foreign currency derivative instruments are considered an economic hedge as they do not qualify for hedge accounting treatment.

 

The Company determines the fair values of its derivatives based on quoted market prices or pricing models using current market rates. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates or foreign currency exchange rates. The Company does not view the fair values of its derivatives in isolation but rather in relation to the fair values or cash flows of the underlying hedged transactions or other exposures. Virtually all our derivatives are straightforward over-the-counter instruments with liquid markets. See Note 12. Fair Value of Financial Instruments for additional information. 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the 13 weeks ended April 1, 2023, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction

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affects earnings. Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Over the next 12 months, the Company estimates that an additional $0.9 million will be reclassified as a reduction to interest expense.

During the fiscal year ended December 31, 2022, the Company entered into a cash flow hedge to manage interest rate risk on its variable rate debt under the Initial First Lien Term Loan Facility. As of April 1, 2023, the Company had one LIBOR interest rate cap agreement (the “LIBOR Cap Agreement”) with a total hedged notional amount of $240.0 million that was designated as a cash flow hedge of interest rate risk. The LIBOR Cap Agreement has a strike price of 4.00% and a maturity date of July 31, 2024. The LIBOR Cap Agreement is designated for cash flow hedge accounting with all changes in fair value deferred into accumulated OCI.

Within the Company’s Condensed Consolidated Balance Sheets, the interest rate cap is recorded at fair value. The cash flows related to the interest rate caps are classified as operating activities in the Condensed Consolidated Statements of Cash Flows.

Foreign Currency Hedge

During the 13 weeks ended April 1, 2023, the Company entered into a foreign currency hedge to offset the earnings impact of foreign currency exchange rates through the end of fiscal 2023.

Economic (Non-Designated) Hedging Strategy

The Company uses certain derivatives as economic hedges of foreign currency. Although these derivatives did not qualify for hedge accounting, they are effective economic hedges. The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies outside of a contractually agreed upon foreign exchange rate range. The total notional values of derivatives related to our foreign currency economic hedges were $270.9 million and $145.7 million as of April 1, 2023 and December 31, 2022, respectively.

The changes in the fair values of economic hedges used to offset those monetary assets and liabilities are immediately recognized in earnings in the selling, general and administrative line item in our Condensed Consolidated Statements of Operations. Within the Company’s Condensed Consolidated Balance Sheets, the foreign currency economic hedges are recorded at fair value. The cash flows related to the foreign currency economic hedges are classified as operating activities in the Condensed Consolidated Statements of Cash Flows.

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The following table presents the fair values of the Company’s derivative instruments: 

   

April 1, 2023

December 31, 2022

(In thousands)

Location

    

Derivative
Assets

    

Derivative
Liabilities

    

Derivative
Assets

    

Derivative
Liabilities

Derivatives not designated as hedging instruments under Subtopic 815-20

Foreign currency contracts(1)

Prepaid expenses and other current assets

$

100

$

$

$

Foreign currency contracts(1)

Accrued expenses

33

Total derivatives not designated as hedging instruments

$

100

$

$

$

33

Derivatives designated as hedging instruments under Subtopic 815-20

Interest rate caps - short term

Prepaid expenses and other current assets

$

2,059

$

$

1,997

$

Interest rate caps - long term

Other long-term assets

856

1,631

Total derivatives designated as hedging instruments

$

2,915

$

$

3,628

$

Total derivatives

$

3,015

$

$

3,628

$

33

(1)Derivative instruments within this category are subject to master netting arrangements and are presented on a net basis in the Condensed Consolidated Balance Sheets in accordance with ASC 210, Balance Sheet, Subtopic 210-20. See tables below showing the effects of offsetting derivative assets and liabilities.

The following table presents the pre-tax effect of cash flow hedge accounting on accumulated OCI for the periods presented: 

(In thousands)

Amount of Gain or (Loss) Recognized in OCI

13 Weeks Ended

Derivatives in Subtopic 815-20 Hedging Relationships

    

April 1, 2023

    

March 26, 2022

Derivatives in cash flow hedging relationships

Interest rate caps

$

(294)

$

(In thousands)

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income

13 Weeks Ended

Location of Gain or (Loss) Reclassified from Accumulated OCI into Income

April 1, 2023

    

March 26, 2022

Derivatives in cash flow hedging relationships

Interest expense, net

$

254

$

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The following table presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations for the periods presented: 

Gain (Loss) Recognized

13 Weeks Ended

April 1,

March 26,

(In thousands)

    

Statement of Operations Location

    

2023

    

2022

Total amounts of expense presented in the Statements of Operations in which the derivatives not designated as hedging are recorded

Selling, general and administrative

$ 43,414

$ 33,915

The effects of derivatives not designated as hedging instruments under Subtopic 815-20:

Foreign currency contracts

Selling, general and administrative

100

Total amounts of expense presented in the Statements of Operations in which the derivatives designated as hedging are recorded

Interest expense, net

8,701

6,022

The effects of derivatives designated as hedging instruments under Subtopic 815-20:

Interest rate caps

Interest expense, net

254

The net amounts of derivative assets or liabilities in the tables below can be reconciled to the tabular disclosure of fair value which provides the location that derivative assets and liabilities are presented on the Condensed Consolidated Balance Sheets. The following tables present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of April 1, 2023 and December 31, 2022.  

Offsetting of Derivative Assets

As of April 1, 2023

Gross Amounts Not Offset in the Balance Sheet

(In thousands)

    

Gross Amounts of Recognized Assets

    

Gross Amounts Offset in the Balance Sheet

    

Net Amounts of Assets Presented in the Balance Sheet

Financial Instruments

    

Cash Collateral Posted

    

Gross Amounts of Recognized Assets

Derivatives

Foreign currency contracts

$

620

$

(520)

$

100

$

$

$

100

Total derivatives, subject to a master netting arrangement

620

(520)

100

100

Total derivatives, not subject to a master netting arrangement

2,915

2,915

2,915

Total derivatives

$

3,535

$

(520)

$

3,015

$

$

$

3,015

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Offsetting of Derivative Liabilities

As of April 1, 2023

Gross Amounts Not Offset in the Balance Sheet

(In thousands)

    

Gross Amounts of Recognized Liabilities

    

Gross Amounts Offset in the Balance Sheet

    

Net Amounts of Liabilities Presented in the Balance Sheet

'    

Financial Instruments

    

Cash Collateral Posted

    

Net Amount

Derivatives

Foreign currency contracts

$

(520)

$

520

$

$

$

$

Total derivatives, subject to a master netting arrangement

(520)

520

Total derivatives, not subject to a master netting arrangement

Total derivatives

$

(520)

$

520

$

-

$

$

$

-

Offsetting of Derivative Assets

As of December 31, 2022

Gross Amounts Not Offset in the Balance Sheet

(In thousands)

    

Gross Amounts of Recognized Assets

    

Gross Amounts Offset in the Balance Sheet

    

Net Amounts of Assets Presented in the Balance Sheet

    

Financial Instruments

    

Cash Collateral Posted

    

Gross Amounts of Recognized Assets

Derivatives

Foreign currency contracts

$

56

$

(56)

$

$

$

$

Total derivatives, subject to a master netting arrangement

56

(56)

Total derivatives, not subject to a master netting arrangement

3,628

3,628

Total derivatives

$

3,684

$

(56)

$

$

$

$

3,628

Offsetting of Derivative Liabilities

As of December 31, 2022

Gross Amounts Not Offset in the Balance Sheet

(In thousands)

    

Gross Amounts of Recognized Liabilities

    

Gross Amounts Offset in the Balance Sheet

    

Net Amounts of Liabilities Presented in the Balance Sheet

    

Financial Instruments

    

Cash Collateral Posted

    

Net Amount

Derivatives

Foreign currency contracts

$

(89)

$

56

$

(33)

$

$

$

(33)

Total derivatives, subject to a master netting arrangement

(89)

56

(33)

(33)

Total derivatives, not subject to a master netting arrangement

Total derivatives

$

(89)

$

56

$

(33)

$

$

$

(33)

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Graphic

Note 14. Stockholders’ Equity

Common Stock

Prior to the IPO, the Company had a total of 74,058,447 shares issued and outstanding.

On September 27, 2021, the Company closed its IPO of 23,334,000 shares of common stock, $0.001 par value per share, at an offering price of $12.00 per share, and received net proceeds from the IPO of approximately $263.2 million, net of $16.8 million in underwriting discounts and commissions.

Subsequent to the IPO, the underwriters exercised their option to purchase an additional 3,500,100 shares of common stock. The Company closed its sale of such additional shares on October 5, 2021, resulting in net proceeds of approximately $39.5 million, net of $2.5 million in underwriting discounts and commissions.

On August 10, 2022, the Company completed a secondary offering, in which certain of its stockholders (the “Selling Stockholders”) sold 8,500,000 shares of common stock in an underwritten public offering at an offering price of $14.00 per share, with all proceeds going to the Selling Stockholders. Subsequent to the secondary offering, the underwriters exercised their option to purchase an additional 1,275,000 shares of common stock, and the sale of such additional shares closed on August 22, 2022, with all proceeds going to the Selling Stockholders.

Preferred Stock

On September 23, 2021, the Company filed an amended and restated certificate of incorporation (“Amended and Restated Charter”) with the Secretary of State of the State of Delaware, which was effective on September 23, 2021. As a result of the filing of the Amended and Restated Charter, the Company was authorized to issue 510,000,000 shares, divided into two classes as follows: (i) 500,000,000 shares are designated shares of common stock, par value $0.001 per share, and (ii) 10,000,000 shares are designated shares of preferred stock, par value $0.001 per share. There were no shares of preferred stock issued and outstanding as of April 1, 2023 and December 31, 2022.

Graphic

Note 15. Equity-Based Compensation

2017 Equity Incentive Plan

In 2017, the Sovos Brands Limited Partnership (the “Limited Partnership”) 2017 Equity Incentive Plan (“2017 Plan”) was established providing certain employees and nonemployees of the Company equity-based compensation in the form of Incentive Units (“IUs”) of the Limited Partnership, as consideration for services to the Company. The IUs, were deemed to be equity instruments subject to expense recognition under FASB ASC 718, Compensation — Stock Compensation. The estimate of fair value of the IUs granted was determined as of the grant date.

In connection with the IPO, the Limited Partnership distributed its shares of Sovos Brands, Inc. common stock to its limited partners, including holders of IUs, in accordance with the applicable terms of its partnership agreement.

Holders of IUs received shares of common stock and restricted common stock of Sovos Brands, Inc. in respect of their IUs. The common stock was distributed with respect to vested IUs and the restricted common stock was distributed with respect to nonvested IUs, with the vesting of such restricted common stock tracking the same vesting terms as the related nonvested IUs at the time of distribution.

Restricted Common Stock

In connection with the IPO, a change in the vesting of the existing performance-based IUs and accordingly the related distributed restricted stock resulted in a modification to the grants and required the shares to be revalued as of the IPO

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date, resulting in a modified grant date fair value of approximately $13.0 million. The fair value of the performance-based restricted stock awards was calculated using a Monte Carlo simulation option pricing model which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate. Specifically, the model revalued the performance units based on the revised vesting condition of the 2.0x multiple of invested capital (“MOIC”) restricted stock units achieving the 2.0x MOIC based on a 30-day volume weighted average price with the remainder of the restricted stock units vesting upon the earlier of the Limited Partnership owning 25% or less of the Company or 30 months post-IPO. On November 3, 2021, the performance condition of the 2.0x MOIC restricted common stock was met and, accordingly, 683,442 shares of restricted stock with a performance-based vesting condition vested.

On November 4, 2021, the Company and the Limited Partnership modified a portion of the existing equity-based compensation awards dated September 22, 2021 among the Company, the Limited Partnership and the holders of such restricted stock. As a result of this modification, a portion of the shares that would have vested based upon a 4.0x MOIC (including any related linear interpolation, the “Original Vesting Criteria”) instead vest on the last day of fiscal 2022 or on the last day of fiscal 2023, or upon achievement of the Original Vesting Criteria, if earlier. The fair value of the modified performance-based restricted stock awards was calculated using a Monte Carlo simulation option pricing model which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate, resulting in an incremental modified grant date fair value of approximately $6.1 million.

On February 10, 2023, the Company and the Limited Partnership modified a portion of the existing equity-based compensation awards dated September 22, 2021 among the Company, Limited Partnership and the holders of such restricted stock. As a result of these modifications, a portion of the shares that would have vested based upon a 3.0 MOIC or a 4.0 MOIC (including any related linear interpolation, the “Original Vesting Criteria”) instead vest 50% on September 23, 2024 and 50% on September 23, 2025, or upon achievement of the Original Vesting Criteria, if earlier. The fair value of the modified performance-based restricted stock awards was calculated using a Monte Carlo simulation option pricing model which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate, resulting in an incremental modified grant date fair value of approximately $5.5 million.

As of April 1, 2023, 5,563 shares of restricted common stock resulting from the distribution of common stock with respect to nonvested time-based IUs vest upon fulfilling time-based service conditions and are scheduled to vest through 2024. As of April 1, 2023, there were 2,348,879 shares of restricted common stock resulting from the distribution with respect to nonvested performance-based IUs, of which 169,698 shares will vest on the earlier of December 30, 2023 or when the original performance condition is achieved, 509,210 shares will vest on the earlier of when the original performance condition is achieved or 50% on September 23, 2024 and 50% on September 23, 2025 and the remaining 1,669,971 shares will vest only if certain performance conditions, including exceeding various MOIC levels, are achieved. Shares of restricted common stock that do not vest are not cancelled but instead remain outstanding and are forfeited back to the Limited Partnership.

2021 Equity Incentive Plan

Effective September 21, 2021, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”) which reserves 9,739,244 shares of common stock to grant stock options, stock appreciation rights, restricted stock awards, restricted stock units or equity-based awards to eligible employees, consultants and directors.

Restricted Stock Units

During the 13 weeks ended March 26, 2022, the Company granted 561,355 RSUs to certain employees. The RSUs included (i) 485,316 RSUs issued with each award vesting in two equal annual installments, and (ii) 76,039 RSUs issued to an employee vesting in three equal annual installments, all of which are subject in general to the employee’s continued service through the vesting date.

During the 13 weeks ended April 1, 2023, the Company granted 418,136 RSUs to certain employees. The RSUs included (i) 323,172 RSUs issued to employees with each award vesting in two equal annual installments and (ii) 94,964

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RSUs issued to an employee vesting in three equal annual installments, all of which are subject in general to the employee’s continued service through the vesting date.

Performance-based Restricted Stock Units

In connection with the IPO and under the 2021 Plan, the Company granted 687,690 performance-based restricted stock units (“PSUs”) to certain employees with each award vesting subject in general to the achievement of the performance condition and subject in general to the employee’s continued service through the vesting date. The fair value of the PSUs was estimated using a Monte Carlo simulation option pricing model, which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate.

On February 10, 2023, the Company modified the IPO PSUs dated September 23, 2021. As a result of this modification, the shares that would have vested based upon the achievement of a performance condition that measures the Total Shareholder Return (“TSR”) (the “Original Vesting Criteria”) instead vest 50% on September 23, 2024 and 50% on September 23, 2025, or upon achievement of the Original Vesting Criteria, if earlier. The fair value of the modified PSUs was calculated using a Monte Carlo simulation option pricing model which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate, resulting in an incremental modified grant date fair value of approximately $4.3 million.

During the 13 weeks ended April 1, 2023 and March 26, 2022, the Company granted 429,082 PSUs and 343,800 PSUs, respectively, to employees with each award vesting subject in general to the achievement of a performance condition that measures the TSR relative to the TSR of the constituents of a custom peer group (“relative TSR”). The number of shares that may be earned ranges from 0% to 200%, with 100% vesting upon achievement of target performance, with straight-line interpolation applied and subject in general to the employee’s continued service through the vesting date. The fair value of the PSUs granted during the 13 weeks ended April 1, 2023 was estimated using a Monte Carlo simulation option pricing model, which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate.

As of April 1, 2023, there was an aggregate of 6,286,912 shares of common stock available for future equity awards under the 2021 Plan (treating PSUs that vest based on relative TSR at the 100% target level).

Equity-based Compensation Expense

The Company grants equity-based compensation awards to certain employees, officers and non-employee directors as long-term incentive compensation and recognizes the related expense for these awards ratably over the applicable vesting period. Such expense is recognized as a selling, general and administrative expense in the Condensed Consolidated Statements of Operations. The following table summarizes the equity-based compensation expense recognized for the Company’s equity plans:

    

Fiscal Year Ended

(In thousands)

April 1, 2023

March 26, 2022

Equity awards under the 2017 Plan (Pre-IPO)

    

  

    

  

RSAs

$

138

$

356

PSAs

 

1,607

 

1,561

Total equity-based compensation expense for the 2017 Plan

1,745

1,917

Equity awards under the 2021 Plan (Post-IPO)

RSUs

2,886

1,480

PSUs

877

690

Total equity-based compensation expense for the 2021 Plan

3,763

2,170

Total equity-based compensation expense

$

5,508

$

4,087

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The Company expects to record equity-based compensation expense of approximately $43.8 million through the first quarter of 2026 resulting from the issuance of the RSAs and PSAs under the 2017 Plan and RSUs and PSUs under the 2021 Plan.

Graphic

Note 16. Income Taxes

The income tax (expense) and the effective tax rate resulting from operations were as follows:

13 Weeks Ended

 

(In thousands)

April 1, 2023

March 26, 2022

 

Income before income taxes

    

$

12,717

    

$

6,768

Effective income tax (expense)

$

(4,871)

$

(2,711)

Effective tax rate

 

38.3

%  

 

40.0

%

The effective tax rates for the 13 weeks ended April 1, 2023 and March 26, 2022 differ from the U.S. federal statutory income tax rate of 21% primarily due to changes in earnings, permanent items including limitation on the deduction of executive compensation for public companies and nondeductible equity-based compensation, state taxes and various discrete items.

Graphic

Note 17. Related Party Transactions

The Company has two related party leases for a manufacturing facility and land. The facility and land are leased from Morning Fresh Dairy (“Morning Fresh”), a related party entity owned and controlled by a board member and equity holder of the Company. The facility lease and land lease are classified as a finance lease and operating lease, respectively, based on the original lease term and reasonably certain renewal options. As of April 1, 2023, the facility has a lease liability balance of $6.8 million which is primarily recognized as long-term debt in our Condensed Consolidated Balance Sheets. As of April 1, 2023, the land lease has a liability balance of $0.5 million which is primarily recognized as long-term operating lease liabilities in our Condensed Consolidated Balance Sheets.

The facility and land lease contained total payments of approximately $145 thousand and $142 thousand for the 13 weeks ended April 1, 2023 and March 26, 2022, respectively. In addition, $45 thousand and $46 thousand was paid for the 13 weeks ended April 1, 2023 and March 26, 2022, respectively, for a proportionate share of utilities, taxes and insurance.

Morning Fresh regularly purchases finished goods inventory from the Company for sale to its customers. Additionally, Morning Fresh regularly supplies milk used in the Company’s manufacturing process.

Sales to and purchases from Morning Fresh were as follows:

13 Weeks Ended

(In thousands)

April 1, 2023

March 26, 2022

Sales

$

113

$

117

Purchases

$

1,920

$

1,970

Amounts outstanding in respect to Morning Fresh transactions were as follows:

(In thousands)

    

April 1, 2023

    

December 31, 2022

Receivables

$

21

$

29

Payables

$

$

870

The Company has a milk supply agreement with Morning Fresh (“Milk Supply Agreement”) for a base term ending December 31, 2027, with the option available for extension for a total of fifteen additional 2-year periods to December 31, 2057. Four years’ advance written notice is required to terminate the agreement. Milk will be priced on a month-to-month basis by USDA Central Federal Order No. 32 for Class II milk, plus surcharges and premiums, provided that the final price

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of the milk shall be 23.24 cents per hundred weight less than the published Dairy Farmers of America bill for that month. The Company will accept up to 3,650,000 gallons as determined by Morning Fresh in 2020, and for each year of the term thereafter. As of April 1, 2023, the Company has future commitments to purchase approximately $37.8 million of milk from Morning Fresh, approximated at current market price. In addition, under the Milk Supply Agreement, the Company has agreed to pay an additional $33 thousand monthly through December 31, 2027 to cover the landowner’s incremental costs relating to capital improvements necessary to support increased milk production required by the Company over the term of this agreement. If the agreement is terminated before December 1, 2027, the Company will be required to pay an early termination penalty, which declines from $3.0 million at the inception of the agreement to $0 over the ten-year term, based on an amortization table outlined in the agreement.

As of April 1, 2023, the estimated annual minimum purchase commitments with Morning Fresh are as follows:

Fiscal Year Ending

    

(In thousands)

Remainder of 2023

$

6,228

2024

8,375

2025

8,375

2026

8,375

2027

8,375

Thereafter

Total

$

39,728

Advent International Corporation (“Advent”) is a private equity firm which has invested funds in our common stock. Although no individual fund owns a controlling interest in us, together the funds represent our current majority owners.

Advent and its affiliates have ownership interests in a broad range of companies. We have entered and may in the future enter into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services.

The Company pays legal expenses and tax compliance fees on behalf of the Limited Partnership and carries a balance within other long-term assets that reflects the amount due from the Limited Partnership. As of April 1, 2023 and December 31, 2022, the receivable balance was $0.1 million and $0.1 million, respectively.

Graphic

Note 18. Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income for the period by the weighted-average number of common shares outstanding for the period without consideration of potential common shares. Diluted EPS is calculated using the weighted average number of common shares outstanding including the dilutive effect of equity awards as determined under the treasury stock method. In periods when the Company has a net loss, equity awards are excluded from

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the calculation of diluted EPS as their inclusion would have an anti-dilutive effect. The following table presents the computation of EPS for the 13 weeks ended April 1, 2023 and March 26, 2022.

13 Weeks Ended

(In thousands, except share and per share amounts)

    

April 1, 2023

    

March 26, 2022

Net income

$

7,846

$

4,057

 

 

  

Weighted average basic common shares outstanding

 

101,186,223

100,892,547

Effect of dilutive securities:

Restricted stock units

 

190,602

 

369,556

Performance stock units

 

130,871

Total

321,473

369,556

Weighted average and potential dilutive common shares outstanding

101,507,696

101,262,103

Earnings per share

Basic

$

0.08

$

0.04

Diluted

$

0.08

$

0.04

For the 13 weeks ended April 1, 2023, 429,082 PSUs were outstanding, but were excluded in the computation of diluted EPS because these PSUs were considered to be anti-dilutive based on the result of the treasury stock method calculation for incremental shares. For the 13 weeks ended March 26, 2022, there were no anti-dilutive shares excluded from the computation of diluted EPS.

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Graphic

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements. Forward-looking statements can be identified by words, such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance, such as those contained in this section.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:

adverse consequences of the actions of the major retailers, wholesalers, distributors and mass merchants on which we rely, including if they give higher priority to other brands or products, take steps to maintain or improve their margins by, among other things, raising the on-shelf prices of our products or imposing surcharges on us, or if they perform poorly or declare bankruptcy;
our dependence on third-party distributors and third-party co-packers, including one co-packer for the substantial majority of our Rao’s Homemade sauce products;
inflation, including our vulnerability to decreases in the supply of and increases in the price of raw materials, packaging, fuel, labor, manufacturing, distribution and other costs, and our inability to offset increasing costs through cost savings initiatives or pricing;
supply disruptions, including increased costs and potential adverse impacts on distribution and consumption;
our inability to expand household penetration and successfully market our products;
competition in the packaged food industry and our product categories;
consolidation within the retail environment may allow our customers to demand lower pricing, increased promotional programs and increased deductions and allowances, among other items;
our inability to successfully introduce new products or failure of recently launched products to meet expectations or remain on-shelf;
our inability to accurately forecast pricing elasticities and the resulting impact on volume growth and/or distribution gains;
failure by us or third-party co-packers or suppliers of raw materials to comply with labeling, food safety, environmental or other laws or regulations, or new laws or regulations;
our vulnerability to the impact of severe weather conditions, natural disasters and other natural events such as herd, flock and crop diseases on our manufacturing facilities, co-packers or raw material suppliers;
our inability to effectively manage our growth;
geopolitical tensions, including relating to Ukraine;
the COVID-19 pandemic and associated effects;
our inability to maintain our workforce;
our inability to identify, consummate or integrate new acquisitions or realize the projected benefits of acquisitions;
erosion of the reputation of one or more of our brands;
our inability to protect ourselves from cyberattacks;
failure to protect, or litigation involving, our tradenames or trademarks and other rights;
fluctuations in currency exchange rates could adversely affect our results of operations and cash flows;
our ability to effectively manage interest rate risk, including through the use of hedges and other strategies or financial products;
the effects of climate change and adherence to environmental, social and governance demands;
a change in assumptions used to value our goodwill or our intangible assets, or the impairment of our goodwill or intangible assets;

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our level of indebtedness under our First Lien Credit Agreement (as defined herein), which as of April 1, 2023 was $480.8 million, and our duty to comply with covenants under our First Lien Credit Agreement;
the interests of our majority stockholder may differ from those of public stockholders.

See Part I. Item IA. “Risk Factors” in our 2022 Form 10-K for a further description of these and other factors. For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report. Any forward-looking statement made by us in this report speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to Sovos Brands, Inc. and its subsidiaries. The Company’s fiscal year ends on the last Saturday in December of each year and as a result, a 53rd week is added approximately every sixth year. Our fiscal year ended December 25, 2021 (“fiscal 2021”) had 52 weeks. Our fiscal year ended December 31, 2022 (“fiscal 2022”) had 53 weeks. Our fiscal year ending December 30, 2023 (“fiscal 2023”) will have 52 weeks. Our fiscal quarters are comprised of 13 weeks each, ending on the 13th Saturday of each quarter, except for the 53-week fiscal years for which the fourth quarter is comprised of 14 weeks, ending on the 14th Saturday of such fourth quarter. The information for the 13 weeks ended April 1, 2023 and March 26, 2022 are derived from the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report.

Overview

We are one of the fastest growing food companies of scale in the United States over the past two years, focused on growth of disruptive growth brands that bring today’s consumers great tasting food that fits the way they live. Our current brands, Rao’s, Michael Angelo’s and noosa are built with authenticity at their core, providing consumers food experiences that are genuine, delicious and unforgettable. Our premium products are made with simple, high-quality ingredients. We are focused on continuing to build an organization with the capabilities to acquire, integrate, and grow brands. We strive to empower our teams to lead with courage and tenacity, with the goal of providing them with the confidence and agility to connect with our consumers and retail partners to drive unparalleled growth. We believe our focus on “one-of-a-kind” brands and products that people love and our passion for our people make Sovos Brands a “one-of-a-kind” company and enables us to deliver on our objective of creating a growing and sustainable food enterprise yielding financial growth ahead of industry peers.

In September 2021, we completed our initial public offering (the “IPO”) and became actively traded on the Nasdaq Global Select Market (“Nasdaq”) listed under the trade symbol of “SOVO.”

On December 30, 2022, we completed our divestiture of Birch Benders which included the sale of the brand and certain related assets to Hometown Food Company, a portfolio company controlled by Brynwood Partners VIII L.P.

Emerging Growth Status

As a company with less than $1.235 billion in gross revenue during our last fiscal year, we qualify as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements for up to five years that are otherwise applicable generally to public companies. These provisions include, among other matters:

exemption from the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

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exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;
an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and
reduced disclosure about executive compensation arrangements.

We will remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement, which was September 22, 2021, unless, prior to that time, (i) we have more than $1.235 billion in annual gross revenue, (ii) have a market value for our common stock held by non-affiliates of more than $700 million as of the last day of our second fiscal quarter of the fiscal year and a determination is made that we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or (iii) issue more than $1.0 billion of non-convertible debt over a three-year period, whether or not issued in a registered offering. We have availed ourselves of the reduced reporting obligations with respect to audited financial statements and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and executive compensation disclosure and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

Market Trends

We continue to actively monitor the macroeconomic inflationary environment and the ongoing impacts to the global economy, including market disruptions, supply chain challenges and elevated costs, and the level of consumer mobility, which includes the rate at which consumers return to working outside the home. Consistent with the consumer-packaged food industry, we are seeing certain cost increases across ingredients, packaging materials and labor, putting pressure on our profit margins, while other costs are flat or lower than the prior year. Specific cost increases for the 13 weeks ended April 1, 2023 include, but are not limited to, glass, cardboard and fruit while other costs such as milk and resin have decreased from the comparable period in fiscal 2022. In addition, the year over year cost of distribution for the 13 weeks ended April 1, 2023 has remained relatively flat, while in first half of fiscal 2022 ongoing logistical issues at major ports, intermodal and trucking delays and capacity constraints for ocean freight cargo resulted in increased distribution costs. In fiscal 2023, labor-related disruptions, including labor shortages and absenteeism, have been less challenging within our operations and among our third-party logistics and other business partners, compared to the prior year where we experienced elevated downtime in our plants, but remain challenging when compared to pre-pandemic levels.

During the 13 weeks ended April 1, 2023, we experienced decreased cost of sales, as a percentage of net sales, driven by price increases in recent quarters across all products, changes in product mix, as well as productivity savings, all of which were partially offset by higher inflationary costs described above. We have recently announced inflation-justified list price increases to our customers, including for yogurt and frozen entrees that were implemented in February 2023.We also continue to execute various productivity and cost savings initiatives within our manufacturing and logistics network, including further automation of our own production facilities, optimization of our co-manufacturing network, product and packaging value engineering, competitive procurement actions, and optimization of our logistics network.  We continue to proactively manage cost inflation risk through forward purchase agreements, where possible, as well as through leveraging our scale and enhancing our relationships with our third-party manufacturing partners to lower the all-in costs to manufacture our products.  Collectively, we expect the pricing actions, productivity initiatives and value engineering that we have implemented to date to mitigate the ongoing increases in costs.

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We expect year-over-year inflationary pressures to continue through the remainder of fiscal 2023, and that they will be relatively consistent throughout the full fiscal year 2023. As a result, we have and will continue to closely monitor our pricing.

Based on the information available to us as of the date of this Report, we believe that we will be able to deliver products at acceptable levels to fulfill customer orders on a timely basis. Therefore, we expect our products will continue to be available for purchase to meet consumer needs. We will continue to monitor customer and consumer demand along with our supply chain and logistics capabilities and intend to adapt our plans as needed to continue to drive our business and meet our obligations.

Key Performance Indicators

We regularly review a number of metrics to evaluate our business, measure our progress and make strategic decisions. EBITDA, Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income, and diluted earnings per share from adjusted net income (the “non-GAAP financial measures”), which are non-GAAP financial measures, are currently utilized by management and may be used by our competitors to assess performance. We believe these measures assist our investors in gaining a meaningful understanding of our performance. Because not all companies use identical calculations, our presentation of these measures may not be comparable to other similarly titled measures of other companies. See “—Non-GAAP Financial Measures” for definitions and a reconciliation of net income to EBITDA and Adjusted EBITDA, gross profit to adjusted gross profit, total operating expenses to adjusted operating expenses, operating income to adjusted operating income, reported income tax (expense) to adjusted income tax expense, reported effective tax rate to adjusted effective tax rate, net income to adjusted net income and diluted earnings per share to diluted earnings per share from adjusted net income.

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Results of Operations

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the 13 weeks ended April 1, 2023 and March 26, 2022.

Comparison of Unaudited Results for the 13 weeks ended April 1, 2023 and March 26, 2022

The following unaudited table presents, for the periods indicated, selected information from our Condensed Consolidated Statements of Operations, including information presented as a percentage of net sales:

13 Weeks Ended

13 Weeks Ended

Increase / (Decrease)

 

(In thousands, except share and per share data)

April 1, 2023

% of Net Sales

March 26, 2022

% of Net Sales

$ Change

% Change

 

 

Net sales

$

252,791

    

100.0

%  

$

209,933

    

100.0

%  

$

42,858

    

20.4

%  

Cost of sales

 

181,979

 

72.0

%  

 

156,025

 

74.3

%  

 

25,954

 

16.6

%  

Gross profit

 

70,812

 

28.0

%  

 

53,908

 

25.7

%  

 

16,904

 

31.4

%  

Operating expenses:

 

 

 

 

 

  

 

  

Selling, general and administrative

 

43,414

 

17.2

%  

 

33,915

 

16.2

%  

 

9,499

 

28.0

%  

Depreciation and amortization

 

5,980

 

2.4

%  

 

7,203

 

3.4

%  

 

(1,223)

 

(17.0)

%  

Total operating expenses

 

49,394

 

19.6

%  

 

41,118

 

19.6

%  

 

8,276

 

20.1

%  

Operating income

 

21,418

 

8.4

%  

 

12,790

 

6.1

%  

 

8,628

 

67.5

%  

Interest expense, net

 

8,701

 

3.4

%  

 

6,022

 

2.9

%  

 

2,679

 

44.5

%  

Income before income taxes

 

12,717

 

5.0

%  

 

6,768

 

3.2

%  

 

5,949

 

87.9

%  

Income tax (expense)

 

(4,871)

 

(1.9)

%  

 

(2,711)

 

(1.3)

%  

 

(2,160)

 

79.7

%  

Net income

$

7,846

 

3.1

%  

$

4,057

 

1.9

%  

$

3,789

 

93.4

%  

Diluted earnings per share

$

0.08

$

0.04

$

0.04

100.0

%  

Diluted weighted average shares outstanding

101,507,696

101,262,103

245,593

0.2

%  

Other financial data: (1)

 

 

 

 

 

  

 

  

EBITDA

$

29,887

 

11.8

%  

$

22,345

 

10.6

%  

$

7,542

 

33.8

%  

Adjusted EBITDA

$

35,955

 

14.2

%  

$

27,621

 

13.2

%  

$

8,334

 

30.2

%  

Adjusted gross profit

$

71,090

28.1

%  

$

54,500

26.0

%  

$

16,590

30.4

%  

Adjusted operating expenses(2)

$

37,998

15.0

%  

$

29,625

14.1

%  

$

8,373

28.3

%  

Adjusted operating income

$

33,092

13.1

%  

$

24,875

11.8

%  

$

8,217

33.0

%  

Adjusted income tax (expense)

$

(6,269)

(2.5)

%  

$

(5,071)

(2.4)

%  

$

(1,198)

23.6

%  

Adjusted net income

$

18,122

7.2

%  

$

13,782

6.6

%  

$

4,340

 

31.5

%  

Diluted earnings per share from adjusted net income

$

0.18

$

0.14

$

0.04

28.6

%  

(1)Other financial data includes non-GAAP financial metrics. See “Non-GAAP Financial Measures” for definitions and a reconciliation of our net income to EBITDA and Adjusted EBITDA, net income to adjusted net income, total operating expenses to adjusted operating expenses, reported income tax (expense) to adjusted income tax (expense) and reported effective tax rate to adjusted effective tax rate.
(2)The adjusted operating expenses for the 13 weeks ended March 26, 2022 include a non-GAAP reconciling item of $6.8 million for acquisition amortization, previously only reported as a non-GAAP reconciling item to adjusted net income.

Net Sales

Net sales consist primarily of product sales to our customers less cost of trade promotions such as consumer incentives, coupon redemptions, other in-store merchandising activities and allowances for unsalable product.

Net sales of $252.8 million represented an increase of $42.9 million, or 20.4%, for the 13 weeks ended April 1, 2023, as compared to the 13 weeks ended March 26, 2022. The increase was driven by 15.6% volume growth and 11.1% price and mix of our Rao’s, noosa and Michael Angelo’s brands combined. These increases were partially offset by a 6.3% decrease in net sales for Birch Benders due to the divestiture of the brand and certain related assets on December 30, 2022. Net sales growth from a brand perspective was led by Rao’s up 37.7% as a result of higher sales across the entire brand, most notably sauce. Additionally, noosa grew 8.2% while Michael Angelo’s declined 5.6%.

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Cost of Sales

Cost of sales represents costs directly related to the manufacturing and distribution of products. Such costs include raw materials, labor and overhead required to produce the products, co-manufacturing, packaging, warehousing, shipping and handling, third-party distribution, and depreciation of equipment and leasehold improvements. We manufacture our products in our Austin, Texas and Bellvue, Colorado manufacturing locations. We also use third-party contract manufacturers in the United States, Canada and the European Union. We procure selected elements of raw materials and packaging and receive finished goods. We incur tolling charges related to our contract manufacturing arrangements.

Cost of sales of $182.0 million represented an increase of $26.0 million, or 16.6%, for the 13 weeks ended April 1, 2023 as compared to the 13 weeks ended March 26, 2022. The increase was primarily attributable to volume growth, increased costs associated with third party manufacturing, as well as costs for ingredients and packaging materials predominantly related to tomatoes, fruit and cartons. These increases were partially offset by productivity savings, mostly within our manufacturing network.

Cost of sales as a percentage of net sales decreased from 74.3% for the 13 weeks ended March 26, 2022, to 72.0% for the 13 weeks ended April 1, 2023. The decrease in cost of sales as a percentage of net sales was driven by the contribution to net sales from higher pricing and mix, as well as productivity savings, all of which were partially offset by higher inflationary costs as described above.

Gross Profit

Gross profit of $70.8 million represented an increase of $16.9 million, or 31.4%, for the 13 weeks ended April 1, 2023, as compared to the 13 weeks ended March 26, 2022. Gross profit as a percentage of net sales, or gross margin, increased from 25.7% for the 13 weeks ended March 26, 2022 to 28.0% for the 13 weeks ended April 1, 2023, and was a result of the items discussed above.

Operating Expenses

Operating expenses of $49.4 million represented an increase of $8.3 million, or 20.1%, for the 13 weeks ended April 1, 2023 compared to the 13 weeks ended March 26, 2022 due to the following:

Selling, General and Administrative expenses: Selling, general and administrative expenses include sales and marketing costs and general and administrative expenses, including expenses for employee salaries and benefits. Selling and marketing costs also include advertising and marketing costs, broker commissions and research and development expenses. General and administrative expenses are also comprised of expenses associated with our corporate and administrative functions that support our business, including equity-based compensation expense, professional services, including legal, audit and tax compliance fees and third-party consultancy fees, insurance and other corporate expenses.

Selling, general and administrative expenses of $43.4 million represented an increase of $9.5 million, or 28.0%, for the 13 weeks ended April 1, 2023 compared to the 13 weeks ended March 26, 2022. The increase was primarily driven by: (a) increased employee-related expenses of $5.0 million, primarily due to increased headcount, higher incentive compensation accruals and increased meeting and travel-related expenses; (b) increased spending to support marketing, research and development and selling expenses, including professional fees, of $3.0 million; and (c) higher equity-based compensation expense of $1.4 million.

The higher selling, marketing, and research and development expenses are primarily due to our increased investment in our marketing and product development activities to support our key sauce and yoghurt products, including new and recent product launches, of our Michael Angelos sauce and Raos frozen pizza, as well as increased selling costs driven by the increase in sales volumes. The increase in equity-based compensation expense is due to recognizing expense for new equity awards and equity modifications made during the 13 weeks ended April 1, 2023.

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Depreciation and Amortization expenses: Depreciation and amortization expense consists of the depreciation of non-production property and equipment, including leasehold improvements, equipment, capitalized leases and the amortization of customer relationships and finite-lived trademarks.

Depreciation and amortization expenses of $6.0 million represented a decrease of $1.2 million, or 17.0%, for the 13 weeks ended April 1, 2023, compared to the 13 weeks ended March 26, 2022. The decrease was primarily related to a reduction in amortization expense for the 13 weeks ended April 1, 2023 due to the sale of the Birch Benders intangible assets in conjunction with the divestiture in December 2022.

Interest Expense, Net

Interest expense, net primarily consists of interest and fees on our Credit Facilities (as defined herein) and amortization of deferred financing costs, offset by investment income. We have incurred, and may incur additional, indebtedness to fund acquisitions, and we may choose to prepay on our Credit Facilities to reduce indebtedness.

Interest expense, net of $8.7 million represented an increase of $2.7 million, or 44.5%, for the 13 weeks ended April 1, 2023 compared to the 13 weeks ended March 26, 2022. The increase in interest expense is primarily due to an increase in variable interest rates on our Credit Facilities. The weighted average rate for the 13 weeks ended April 1, 2023 was 8.28% compared to a weighted average rate of 4.25% for the 13 weeks ended March 26, 2022.  Interest expense was offset by higher realized investment interest income in the 13 weeks ended April 1, 2023, due to a higher cash balance available to invest, along with higher interest rates on investments.

Income Tax (Expense)

Income tax (expense) consists of federal and various state taxes. Income tax (expense) of $4.9 million represented an increase of $2.2 million for the 13 weeks ended April 1, 2023 compared to the 13 weeks ended March 26, 2022. The increase was primarily driven by higher taxable net income before income taxes, permanent items including executive compensation limitation and higher state taxes.

Net Income

Net income for the 13 weeks ended April 1, 2023was $7.8 million compared to net income of $4.1 million for the 13 weeks ended March 26, 2022. The increase in net income was attributable to the items described above.

Other Financial Data

See “—Non-GAAP Financial Measures” for discussions of:

EBITDA and Adjusted EBITDA and a reconciliation of our net income to EBITDA and Adjusted EBITDA;
adjusted gross profit and a reconciliation of our gross profit to adjusted gross profit;
adjusted operating expenses and a reconciliation of our total operating expenses to adjusted operating expenses;
adjusted operating income and a reconciliation of our total operating income to adjusted operating income;
adjusted income tax (expense) and a reconciliation of our reported income tax (expense) to adjusted income tax (expense);
adjusted effective tax rate and a reconciliation of reported effective tax rates to adjusted effective tax rate;
adjusted net income and a reconciliation of our net income to adjusted net income and;
diluted earnings per share from adjusted net income and a reconciliation of our net income and the associated diluted loss per share to adjusted net income and the associated diluted earnings per share.

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Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. To supplement this information, we also use EBITDA, Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income, and diluted earnings per share from adjusted net income, non-GAAP financial measures, in this report. We define EBITDA as net income (loss) before net interest expense, income tax (expense) benefit, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted for non-cash equity-based compensation costs, non-recurring costs, gain (loss) on foreign currency contracts, supply chain optimization costs, impairment of goodwill, transaction and integration costs and IPO readiness costs. EBITDA margin is determined by calculating the percentage EBITDA is of net sales. Adjusted EBITDA margin is determined by calculating the percentage Adjusted EBITDA is of net sales. Adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted income tax (expense) and adjusted effective tax rate, and adjusted net income consists of gross profit, total operating expenses, operating income (loss), reported income tax (expense) benefit, reported effective tax rate, and net income (loss) before non-cash equity-based compensation costs, non-recurring costs, gain (loss) on foreign currency contracts, supply chain optimization costs, impairment of goodwill, transaction and integration costs, IPO readiness costs, acquisition amortization and tax-related adjustments that we do not consider in our evaluation of our ongoing operating performance from period to period as discussed further below. Diluted earnings per share from adjusted net income is determined by dividing adjusted net income by the weighted average diluted shares outstanding. Non-GAAP financial measures are included in this report because they are key metrics used by management to assess our operating performance. Management believes that non-GAAP financial measures are helpful in highlighting performance trends because non-GAAP financial measures eliminate non-recurring and unusual items and non-cash expenses, which we do not consider indicative of ongoing operational performance. Our presentation of non-GAAP financial measures should not be construed to imply that our future results will be unaffected by these items. By providing these non-GAAP financial measures, management believes we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.

EBITDA, Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income are not defined under GAAP. Our use of the terms EBITDA, Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income may not be comparable to similarly titled measures of other companies in our industry and are not measures of performance calculated in accordance with GAAP. Our presentation of non-GAAP financial measures is intended to provide supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Non-GAAP financial measures should not be considered as alternatives to operating income (loss), net income (loss), earnings (loss) per share, net sales or any other performance measures derived in accordance with GAAP, or as measures of operating cash flows or liquidity.

Non-GAAP financial measures have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

EBITDA, Adjusted EBITDA, EBITDA margin and Adjusted EBITDA margin do not reflect any charges for the assets being depreciated and amortized that may need to be replaced in the future;
Adjusted operating income, adjusted income tax (expense), adjusted effective tax rate and adjusted net income do not reflect any charges for acquisition amortization;
EBITDA, Adjusted EBITDA, EBITDA margin and Adjusted EBITDA margin do not reflect the significant interest expense or the cash requirements necessary to service interest or, if any, principal payments on our debt;
EBITDA, Adjusted EBITDA, EBITDA margin and Adjusted EBITDA margin do not reflect our income tax (expense) benefit or the cash requirements to pay our income taxes;

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Adjusted EBITDA, Adjusted EBITDA margin, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not reflect the impact of non-cash equity-based compensation upon our results of operations;
Adjusted EBITDA, Adjusted EBITDA margin, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not include certain expenses that are non-recurring, infrequent and unusual in nature, costs related to loss on extinguishment of debt, professional fees related to organizational optimization, costs for capital markets-related activities and enterprise resource planning (ERP) conversion costs related to integrating acquisitions;
Adjusted EBITDA, Adjusted EBITDA margin, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not reflect the impact of unrealized gain (loss) on foreign currency contracts;
Adjusted EBITDA, Adjusted EBITDA margin, adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not reflect the impact of supply chain initiatives associated with packaging optimization and a strategic initiative to move co-packaging production from an international supplier to a domestic supplier;
Adjusted EBITDA, Adjusted EBITDA margin, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not reflect the impact of impairments of goodwill;
Adjusted EBITDA, Adjusted EBITDA margin, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not reflect the impact of transaction and integration costs associated with acquisitions and divestitures and costs associated with potential or uncompleted transactions; and
Adjusted EBITDA, Adjusted EBITDA margin, adjusted operating expenses, adjusted operating income, adjusted income tax (expense), adjusted effective tax rate, adjusted net income and diluted earnings per share from adjusted net income do not reflect costs associated with public company readiness and other professional fees associated with building the organizational infrastructure to support a public company environment.

In the future we may incur expenses similar to those eliminated in this presentation of non-GAAP financial measures.

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The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income, their most directly comparable GAAP measure, for each of the periods presented:

13 Weeks Ended

(In thousands)

    

April 1, 2023

% of Net sales

    

March 26, 2022

% of Net sales

Net income(1)

$

7,846

3.1

%

$

4,057

1.9

%

Interest expense, net

8,701

3.4

6,022

2.9

Income tax (expense)

(4,871)

(1.9)

(2,711)

(1.3)

Depreciation and amortization

8,469

3.4

9,555

4.6

EBITDA(1)

29,887

11.8

22,345

10.6

Non-cash equity-based compensation(2)

5,508

2.2

4,087

1.9

Non-recurring costs(3)

227

0.1

377

0.2

Gain on foreign currency contracts(4)

(133)

(0.1)

0.0

Supply chain optimization(5)

128

0.1

592

0.3

Transaction and integration costs(6)

338

0.1

0.0

Initial public offering readiness(7)

0.0

220

0.1

Adjusted EBITDA(1)

$

35,955

14.2

%

$

27,621

13.2

%

(1)Net income as a percentage of net sales is also referred to as net income margin. EBITDA and Adjusted EBITDA as a percentage of net sales are also referred to as EBITDA margin and Adjusted EBITDA margin.
(2)Consists of non-cash equity-based compensation expense associated with the grant of equity-based compensation provided to officers, directors and employees.
(3)Consists of costs for professional fees related to organizational optimization and capital markets activities.
(4)Consists of unrealized gain on foreign currency contracts.
(5)Consists of write-downs associated with packaging optimization and a strategic initiative to move co-packaging production from an international supplier to a domestic supplier.
(6)Consists of costs associated with the divestiture of the Birch Benders brand and certain related assets, and costs associated with a potential transaction.
(7)Consists of costs associated with building the organizational infrastructure to support a public company environment.

The following tables provide a reconciliation of adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted interest expense, net, adjusted income tax (expense) and adjusted net income to their most directly comparable GAAP measure, for each of the periods presented:

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13 Weeks Ended

(In thousands, except share and per share data)

April 1, 2023

  

Gross profit

  

Operating expenses

  

Operating income

  

Interest expense, net

  

Income tax (expense)

  

Net income

  

As reported (GAAP)

$

70,812

$

49,394

$

21,418

$

8,701

$

(4,871)

$

7,846

Adjustments:

Non-cash equity-based compensation(1)

 

(5,508)

5,508

 

5,508

Non-recurring costs(2)

 

(227)

227

 

227

Gain on foreign currency contracts(3)

133

(133)

(133)

Supply chain optimization(4)

 

128

128

 

128

Transaction and integration costs(5)

 

150

(188)

338

 

338

Acquisition amortization(7)

(5,606)

5,606

5,606

Tax effect of adjustments(8)

 

(1,377)

 

(1,377)

One-time tax (expense) items(9)

(21)

(21)

As adjusted

$

71,090

$

37,998

$

33,092

$

8,701

$

(6,269)

$

18,122

As adjusted (% of net sales)

28.1

%  

15.0

%  

13.1

%  

 

3.4

%  

(2.5)

%  

 

7.2

%  

Earnings per share:

Diluted

 

0.08

Adjusted diluted

 

0.18

Weighted average shares outstanding:

Diluted for net income

101,507,696

Diluted for adjusted net income

101,507,696

13 Weeks Ended

(In thousands, except share and per share data)

March 26, 2022

  

Gross profit

  

Operating expenses

  

Operating income

  

Interest expense, net

  

Income tax (expense)

  

Net income

  

As reported (GAAP)

$

53,908

$

41,118

$

12,790

$

6,022

$

(2,711)

$

4,057

Adjustments:

Non-cash equity-based compensation(1)

 

(4,087)

4,087

 

4,087

Non-recurring costs(2)

 

(377)

377

 

377

Supply chain optimization(4)

 

592

592

 

592

Initial public offering readiness(6)

 

(220)

220

 

220

Acquisition amortization(7)

(6,809)

6,809

6,809

Tax effect of adjustments(8)

 

-

(2,360)

 

(2,360)

As adjusted

$

54,500

$

29,625

$

24,875

$

6,022

$

(5,071)

$

13,782

As adjusted (% of net sales)

26.0

%  

14.1

%  

11.8

%  

 

2.9

%  

(2.4)

%  

 

6.6

%  

Earnings per share:

Diluted

 

0.04

Adjusted diluted

 

0.14

Weighted average shares outstanding:

Diluted for net income

101,262,103

Diluted for adjusted net income

101,262,103

(1)Consists of non-cash equity-based compensation expense associated with the grant of equity-based compensation provided to officers, directors and employees.
(2)Consists of costs for professional fees related to organizational optimization and capital markets activities.
(3)Consists of unrealized gain on foreign currency contracts.
(4)Consists of write-downs associated with packaging optimization and a strategic initiative to move co-packaging production from an international supplier to a domestic supplier.

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(5)Consists of costs associated with the divestiture of the Birch Benders brand and certain related assets and costs associated with a potential transaction.
(6)Consists of costs associated with building the organizational infrastructure to support a public company environment.
(7)Amortization costs associated with acquired trade names and customer lists.
(8)Tax effect was calculated using the Company's adjusted annual effective tax rate.
(9) Represents the removal of the tax effect of impairment of goodwill, removal for remeasurement of deferred taxes related to intangibles for changes in deferred rate, the removal of the tax effect of non-deductible transaction costs and the removal of the excess tax benefits related to equity-based compensation vesting.

We adjust the GAAP financial measures for reported income tax (expense) and reported effective tax rate to exclude the effect of non-cash equity-based compensation costs, other non-recurring costs, loss on foreign currency contracts, supply chain optimization costs, impairment of goodwill, transaction and integration costs, IPO readiness costs, and acquisition amortization impacting comparability. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective tax rate and other impacts to tax expense. This non-GAAP financial measure is intended to provide a meaningful comparison of the Company’s effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP financial measure to monitor the effectiveness of adjustments on our tax rate.

The following table provides reconciliations of reported income tax (expense) to adjusted income tax (expense) and reported effective tax rate to adjusted effective tax rate for the 13 weeks ended April 1, 2023 and March 26, 2022:

13 Weeks Ended

(In thousands)

April 1, 2023

March 26, 2022

    

Reported income tax (expense)

$

(4,871)

$

(2,711)

Non-recurring costs

(55)

Supply chain optimization

(31)

Transaction and integration costs

(416)

Initial public offering readiness

(349)

Acquisition amortization

(1,312)

(1,595)

Adjusted income tax (expense)(1)

$

(6,269)

$

(5,071)

Reported effective tax rate

38.3

%

40.0

%

Non-recurring costs

(0.5)

Supply chain optimization

(0.3)

Transaction and integration costs

(2.3)

Initial public offering readiness

(1.9)

Acquisition amortization

(11.8)

(8.9)

Adjusted effective tax rate(1)

25.7

%

26.9

%

(1)The adjustments to reported income tax (expense) and reported effective tax rate represent the tax effect of the reconciling items included in the reconciliation tables above for adjusted gross profit, adjusted operating expenses, adjusted operating income, adjusted interest expense, net, adjusted income tax (expense) and adjusted net income to their most directly comparable GAAP measure. See “—Non-GAAP Financial Measures” for definitions of our reported income tax (expense) to adjusted income tax (expense) and reported effective tax rate to adjusted effective tax rate.

Liquidity and Capital Resources

Our primary sources of liquidity include cash flow from operations, cash and cash equivalents and credit capacity under our Credit Facilities. As of April 1, 2023, we had cash and equivalents of $153.6 million and availability under our Credit Facilities of $125.0 million.

We expect to use cash primarily for working capital, capital expenditures, purchase commitments, lease obligations, interest payments on our debt and potential acquisitions. We estimate that our capital expenditures will be approximately $13 million to $15 million in fiscal 2023, which we plan to fund with cash generated from our operating activities. The principal balance on our Initial First Lien Term Loan Facility was $480.8 million as of April 1, 2023, with no obligation to pay principal payments over the remaining term. At a minimum, we are required to make quarterly interest payments

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and estimate our interest payments to be approximately $38 million to $40 million over the next 12 months. Our total lease obligations were $23.6 million as of April 1, 2023, with $3.5 million due over the next 12 months. We have purchase commitments of approximately $3.5 million and $8.4 million to third-party and related-party manufacturers and suppliers, respectively, over the next 12 months, primarily for materials and supplies used in the manufacture of our products.

We also have long-term cash requirements related to our purchase commitments, lease obligations and principal payments on our debt. See Note 9. Long-Term Debt, Note 10. Leases, Note 11. Commitments and Contingencies and Note 17. Related Party Transactions for additional discussion related to the expected timing and amount of payments related to our contractual obligations.

We believe that our cash flow from operations, availability under our Revolving Facility (as defined herein) and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the issuance of equity, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available from additional indebtedness or otherwise to meet our liquidity needs. We may incur additional debt or sell additional equity to finance future acquisitions, which would result in additional expenses or dilution.

Credit Facilities and Unused Borrowing Capacity

In June 2021, Sovos Intermediate (the “Borrower”) entered into (i) the First Lien Credit Agreement, pursuant to which the First Lien Lenders agreed to provide senior secured credit facilities, consisting of (a) an initial first lien term loan facility in an original principal amount of $580.0 million (the “Initial First Lien Term Loan Facility” and the loans thereunder, the “Initial First Lien Term Loans”) and (b) a revolving facility in an original principal amount of $125.0 million (the “Revolving Facility” and the loans thereunder, the “Initial Revolving Loans”), including a letter of credit facility with a $45.0 million sublimit (the Initial First Lien Term Loans and the Initial Revolving Loans, collectively, the “Credit Facilities”).

In 2021, we prepaid $99.2 million of the outstanding principal balance under the Initial First Lien Term Loans. As a result of the prepayment on the Initial First Lien Term Loans, all future principal payments have been eliminated for the remaining term of the loan.

The interest rate for the Initial First Lien Term Loans and the Initial Revolving Loans is (at the Borrower's option) either (a) LIBO Rate (as defined in the First Lien Credit Agreement) plus the applicable LIBO Rate spread or (b) Alternate Base Rate (as defined in the First Lien Credit Agreement) plus the applicable Alternate Base Rate spread. The Initial First Lien Term Loans mature on June 8, 2028 and the Initial Revolving Loans mature on June 8, 2026.

The interest rate for the Initial Second Lien Loans was (at the Borrower’s option) either (a) the LIBO Rate (as defined in the Second Lien Credit Agreement) plus 8.00% per annum or (b) the Alternate Base Rate (as defined in the Second Lien Credit Agreement) plus 7.00% per annum.  The Initial Second Lien Loans were originally scheduled to mature on June 8, 2029.  As described above, in September 2021, the Initial Second Lien Loans were paid in full.

As of April 1, 2023, we have available credit of $125.0 million under the Revolving Facility. No revolving loans were outstanding as of April 1, 2023. As of April 1, 2023 and December 31, 2022, the effective interest rate for the Initial First Lien Term Loans and Revolving Facility was 8.33% and 7.91%, respectively.  

The First Lien Credit Agreement contains various financial, affirmative and negative covenants that we must adhere to. Under the First Lien Credit Agreement, the Borrower is required to comply with a springing financial covenant, which requires the Borrower to maintain a first lien net leverage ratio of consolidated first lien net debt to consolidated EBITDA (with certain adjustments as set forth in the First Lien Credit Agreement) of no greater than 6.95:1.00. Such financial covenant is tested only if outstanding revolving loans (excluding any undrawn letters of credit) minus unrestricted cash

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exceeds 35% of the aggregate revolving credit commitments. The financial covenant is subject to customary “equity cure” rights. In addition, under the First Lien Credit Agreement, an annual excess cashflow calculation is required, to determine if any excess is required to be paid on the Initial First Lien Term Loan Facility. As of April 1, 2023, the Company had no outstanding revolving loans, so did not meet the requirement to test the financial covenant under the First Lien Credit Agreement.

Statement of Cash Flows

The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods presented:

13 Weeks Ended

(In thousands)

April 1, 2023

    

March 26, 2022

Cash provided by (used in):

    

  

    

  

Operating activities

$

17,177

$

11,199

Investing activities

 

(2,173)

 

(7,180)

Financing activities

 

(20)

 

(24)

Change in cash and cash equivalents

$

14,984

$

3,995

Cash Provided by Operating Activities

Cash provided by operating activities was $17.2 million for the 13 weeks ended April 1, 2023, an increase of $6.0 million from $11.2 million for the 13 weeks ended March 26, 2022. The increase was primarily due to an increase in net income of $3.8 million and an increase in adjustments to reconcile net income to net cash provided by operating activities of $1.2 million, plus an increase in cash provided by changes in operating assets and liabilities of $1.0 million. The increase in adjustments to reconcile net income to net cash provided by operating activities of $1.2 million was primarily related to an increase in equity-based compensation related to new equity awards and equity modifications made during the 13 weeks ended April 1, 2023.    

The increase in cash provided by operating assets and liabilities for the 13 weeks ended April 1, 2023 was primarily due to an increase in cash of $6.3 million from accounts receivable resulting from an increase in cash provided by inventories of $3.8 million due to lower inventory levels driven by strong sales volumes, and increased cash of $1.5 million from accounts payable resulting from increased days payable outstanding. The increase in cash provided by operating assets and liabilities for the 13 weeks ended April 1, 2023 was offset by an increase in the use of cash for accrued expenses of $7.4 million related primarily due to the timing of the annual incentive payout, trade promotion activity and an increase in the use of cash for prepaid expenses of $3.2 million primarily related to vendor prepayments and prepaid trade.

Cash Used in Investing Activities

Cash used in investing activities was $2.2 million for the 13 weeks ended April 1, 2023, a decrease of $5.0 million from $7.2 million for the 13 weeks ended March 26, 2022. The decrease was related to decreased cash used for capital expenditures, primarily due to prior year payments for production equipment at a co-packing manufacturing facility.

Cash Used in Financing Activities

Cash used in financing activities was $20 thousand for the 13 weeks ended April 1, 2023, a decrease of $4 thousand from $24 thousand for the 13 weeks ended March 26, 2022. Financing activities consisted of repayments of capital lease obligations.

Off-Balance Sheet Arrangements

As of April 1, 2023, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Critical Accounting Estimates

For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our audited consolidated financial statements as of December 31, 2022 included in our Annual Report on Form 10-K, filed with the SEC on our 2022 Form 10-K.

Recently Issued Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies, to the condensed consolidated financial statements included in this Form 10-Q for a discussion of recently issued accounting pronouncements.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the following market risks:

Commodity and Packaging Prices and Inflation

In the 13 weeks ended April 1, 2023, we experienced decreased cost of sales, as a percentage of net sales, driven by price increases in recent quarters across all products, changes in product mix, as well as productivity savings, all of which were partially offset by higher inflationary costs. Consistent with the consumer-packaged food industry, we are seeing cost increases in several raw materials and packaging while other costs are flat or lower than the prior year. Specific cost increases for the 13 weeks ended April 1, 2023 include, but are not limited to, glass, cardboard, and fruit, while other costs such as milk and resin have decreased from the comparable period in fiscal 2022. In addition, the year over year cost of distribution for the 13 weeks ended April 1, 2023 has remained relatively flat, while in first half of fiscal 2022 logistical issues at major ports, intermodal and trucking delays and capacity constraints for ocean freight cargo resulted in increased distribution costs.  

Interest Rate Risk

We are exposed to interest rate risk through fluctuations in interest rates on our debt obligations. Interest rate changes do not affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. As of April 1, 2023, we had $480.8 million of variable rate debt outstanding under our Credit Facilities. See “Liquidity and Capital Resources — Credit Facilities and Unused Borrowing Capacity” above. As of July 2022, we entered into a cash flow hedge to manage interest rate risk on $240.0 million of the $480.8 million variable rate debt. Based upon our principal amount of long-term debt outstanding at April 1, 2023, a hypothetical 1% increase in average interest rates over a LIBOR base of 4.83% would impact our annual interest expense in the next year by approximately $2 million, and a hypothetical 1% decrease in average interest rates below a LIBOR base of 4.83% would impact our annual interest expense in the next year by approximately $3 million.

Foreign Currency Exchange Risk

The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk. Fluctuations in foreign currency exchange rates could result in, among other things, our paying higher prices for certain imported products and services, and realizing lower net income, on a U.S. dollar basis, from our international purchases. For additional information regarding our foreign currency exchange risk refer to Note 13. Hedging and Derivative Financial Instruments, to the consolidated financial statements in this Form 10-Q.

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Item 4.Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures.

Management, including the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation (pursuant to Rule 13a-15(b) under the Exchange Act) of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of April 1, 2023, the Company’s disclosure controls and procedures were effective.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the 13 weeks ended April 1, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. Other Information

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Item 1. Legal Proceedings

From time to time, we may become involved in actions, claims, suits and other legal proceedings arising in the ordinary course of our business, including lawsuits or claims relating to product labelling or related disclaimers, product recalls and product liability as well as the marketing of our products, intellectual property, contracts, employment matters, environmental matters or other aspects of our business. We are not currently a party to any actions the outcome of which would, individually or in the aggregate, have a material adverse effect on our business, financial condition and results of operations if determined adversely to us.

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Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties. There were no material changes from the risk factors discussed in Part I, Item 1A., “Risk Factors” in our 2022 Form 10-K.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

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Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not Applicable.

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Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit

No.

    

Document

*†10.1

Incentive Unit Grant Agreement, dated as of June 4, 2018, between Sovos Brands Limited Partnership and Kirk A. Jensen.

*†10.2

Incentive Unit Grant Agreement, dated as of May 1, 2019, between Sovos Brands Limited Partnership and Kirk A. Jensen.

*†10.3

Restricted Stock Agreement, dated as of September 22, 2021 among Sovos Brands, Inc., Sovos Brands Limited Partnership and Kirk A. Jensen.

*†10.4

Notice of Modification of Vesting Terms of Restricted Stock Agreement, dated as of September 22, 2021, among Sovos Brands, Inc., Sovos Brands Limited Partnership and Kirk A. Jensen.

*†10.5

February 2023 Form of Notice of Modification of Vesting Terms of Restricted Stock Agreement among Sovos Brands, Inc., Sovos Brands Limited Partnership and certain of its officers and a director.

*†10.6

February 2023 Notice of Modification of Vesting Terms of Restricted Stock Agreement, dated as of September 22, 2021, among Sovos Brands, Inc., Sovos Brands Limited Partnership, Todd R. Lachman, and Christine R. Lachman and The St. Louis Trust Company, as trustees of the Todd Lachman 2021 Family Trust.

*†10.7

February 2023 Notice of Modification of Vesting Terms of Restricted Stock Agreement, dated as of September 22, 2021, among Sovos Brands, Inc., Sovos Brands Limited Partnership and Kirk A. Jensen.

*†10.8

February 2023 Notice of Modification of Vesting Terms of Restricted Stock Agreement, dated as of September 22, 2021, among Sovos Brands, Inc., Sovos Brands Limited Partnership and William R. Johnson.

*†10.9

February 2023 Form of Notice of Modification of Vesting Eligibility re: Performance-Based Restricted Stock Units granted by Sovos Brands, Inc. to its officers under the Sovos Brands, Inc. 2021 Equity Incentive Plan.

*†10.10

Offer Letter, dated as of April 29, 2018, between Sovos Brands and Kirk A. Jensen.

*†10.11

Offer Letter, dated as of September 26, 2022, between Sovos Brands, Inc. and E. Yuri Hermida.

*†10.12

Sovos Brands, Inc. Severance Plan for Executives.

*31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

*31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

*32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act.

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

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104

Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).

*   Filed herewith.

 

† Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Sovos Brands, Inc.

By:

/s/ Christopher W. Hall

Date:   May 10, 2023

Name:

Christopher W. Hall

Title:

Chief Financial Officer

(Principal Financial Officer and Authorized Officer)

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