Latham Group, Inc. 10-Q

Item 1. Financial Statements Index to Condensed Consolidated Financial Statements (Unaudited) ​ ​ ​ Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Operations ​ 5 Condensed Consolidated Statements of Comprehensive Income (Loss) ​ 6 Condensed Consolidated Statements of Stockholders’ Equity ​ 7 Condensed Consolidated Statements of Cash Flows ​ 9 Notes to Condensed Consolidated Financial Statements ​ 10 ​ ​ ​ 3 Table of Contents Latham Group, Inc. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, ​ December 31, ​ ​ 2023 2022 ​ Assets ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ Cash ​ $ 43,116 ​ $ 32,626 ​ Trade receivables, net ​ 81,797 ​ 48,847 ​ Inventories, net ​ 126,518 ​ 165,220 ​ Income tax receivable ​ 3,725 ​ 2,316 ​ Prepaid expenses and other current assets ​ 6,908 ​ 5,998 ​ Total current assets ​ 262,064 ​ 255,007 ​ Property and equipment, net ​ 111,137 ​ 98,184 ​ Equity method investment ​ 25,792 ​ 25,095 ​ Deferred tax assets ​ 6,602 ​ 7,762 ​ Operating lease right-of-use assets ​ ​ 33,462 ​ ​ 38,308 ​ Goodwill ​ 131,168 ​ 131,383 ​ Intangible assets, net ​ 295,656 ​ 309,215 ​ Other assets ​ ​ 5,260 ​ ​ 4,729 ​ Total assets ​ $ 871,141 ​ $ 869,683 ​ Liabilities and Stockholders’ Equity ​ ​ ​ Current liabilities: ​ ​ ​ Accounts payable ​ $ 34,491 ​ $ 25,449 ​ Accounts payable – related party ​ 333 ​ 358 ​ Current maturities of long-term debt ​ 3,250 ​ 3,250 ​ Current operating lease liabilities ​ ​ 6,894 ​ ​ 6,923 ​ Accrued expenses and other current liabilities ​ 42,875 ​ 50,885 ​ Total current liabilities ​ 87,843 ​ 86,865 ​ Long-term debt, net of discount, debt issuance costs, and current portion ​ 308,791 ​ 309,631 ​ Deferred income tax liabilities, net ​ 50,181 ​ 50,181 ​ Liability for uncertain tax positions ​ 7,374 ​ 7,123 ​ Non-current operating lease liabilities ​ ​ 27,526 ​ ​ 32,391 ​ Other long-term liabilities ​ 3,229 ​ 702 ​ Total liabilities ​ 484,944 ​ 486,893 ​ Commitments and contingencies ​ ​ ​ Stockholders’ equity: ​ ​ ​ Preferred stock, $ 0.0001 par value; 100,000,000 shares authorized as of both July 1, 2023 and December 31, 2022; no shares issued and outstanding as of both July 1, 2023 and December 31, 2022 ​ ​ — ​ ​ — ​ Common stock, $ 0.0001 par value; 900,000,000 shares authorized as of July 1, 2023 and December 31, 2022; 114,734,756 and 114,667,975 shares issued and outstanding , as of July 1, 2023 and December 31, 2022, respectively ​ 11 ​ 11 ​ Additional paid-in capital ​ 453,413 ​ 440,880 ​ Accumulated deficit ​ ( 63,221 ) ​ ( 54,568 ) ​ Accumulated other comprehensive loss ​ ( 4,006 ) ​ ( 3,533 ) ​ Total stockholders’ equity ​ 386,197 ​ 382,790 ​ Total liabilities and stockholders’ equity ​ $ 871,141 ​ $ 869,683 ​ ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 4 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Operations (in thousands, except share and per share data) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Two Fiscal Quarters Ended ​ July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net sales ​ $ 177,128 ​ $ 206,800 ​ $ 314,847 ​ $ 398,414 Cost of sales ​ 126,895 ​ 139,193 ​ 231,244 ​ 260,153 Gross profit ​ 50,233 ​ 67,607 ​ 83,603 ​ 138,261 Selling, general, and administrative expense ​ 30,209 ​ 41,804 ​ 63,266 ​ 87,029 Underwriting fees related to offering of common stock ​ ​ — ​ ​ — ​ ​ — ​ ​ 11,437 Amortization ​ 6,635 ​ 7,156 ​ 13,267 ​ 14,348 Income from operations ​ 13,389 ​ 18,647 ​ 7,070 ​ 25,447 Other expense (income): ​ ​ ​ ​ Interest expense, net ​ 4,486 ​ 3,164 ​ 15,290 ​ 4,929 Loss on extinguishment of debt ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,465 Other (income) expense, net ​ ( 1,036 ) ​ 917 ​ ( 826 ) ​ 562 Total other expense, net ​ 3,450 ​ 4,081 ​ 14,464 ​ 8,956 Earnings from equity method investment ​ ​ 660 ​ ​ 720 ​ ​ 697 ​ ​ 1,262 Income (loss) before income taxes ​ 10,599 ​ 15,286 ​ ( 6,697 ) ​ 17,753 Income tax expense ​ 4,884 ​ 10,983 ​ 1,956 ​ 16,290 Net income (loss) ​ $ 5,715 ​ $ 4,303 ​ $ ( 8,653 ) ​ $ 1,463 Net income (loss) per share attributable to common stockholders: ​ ​ ​ ​ Basic ​ $ 0.05 ​ $ 0.04 ​ $ ( 0.08 ) ​ $ 0.01 Diluted ​ $ 0.05 ​ $ 0.04 ​ $ ( 0.08 ) ​ $ 0.01 Weighted-average common shares outstanding – basic and diluted ​ ​ ​ ​ Basic ​ 112,248,822 ​ 113,692,160 ​ 112,175,510 ​ 113,695,354 Diluted ​ 112,692,543 ​ 115,384,273 ​ 112,175,510 ​ 115,698,368 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 5 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Two Fiscal Quarters Ended ​ July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net income (loss) ​ $ 5,715 ​ $ 4,303 ​ $ ( 8,653 ) ​ $ 1,463 Other comprehensive loss, net of tax: ​ ​ ​ ​ Foreign currency translation adjustments ​ ( 329 ) ​ ( 3,917 ) ​ ( 473 ) ​ ( 2,697 ) Total other comprehensive loss, net of tax ​ ( 329 ) ​ ( 3,917 ) ​ ( 473 ) ​ ( 2,697 ) Comprehensive income (loss) ​ $ 5,386 ​ $ 386 ​ $ ( 9,126 ) ​ $ ( 1,234 ) ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 6 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ Other ​ Total ​ ​ ​ ​ ​ ​ ​ Paid-in ​ Accumulated ​ Comprehensive ​ Stockholders' ​ ​ Shares ​ Amount ​ Capital ​ Deficit ​ Income (Loss) ​ Equity Balances at December 31, 2021 119,445,611 ​ $ 12 ​ $ 401,846 ​ $ ( 48,583 ) ​ $ 370 ​ $ 353,645 Cumulative effect of adoption of new accounting standard - leases ​ — ​ ​ — ​ ​ — ​ ​ ( 291 ) ​ ​ — ​ ​ ( 291 ) Net loss — ​ — ​ — ​ ( 2,840 ) ​ — ​ ( 2,840 ) Foreign currency translation adjustments — ​ — ​ — ​ — ​ 1,220 ​ 1,220 Sale of common stock ​ 13,800,000 ​ ​ 1 ​ ​ 269,099 ​ ​ — ​ ​ — ​ ​ 269,100 Repurchase and retirement of common stock ​ ( 13,800,244 ) ​ ​ ( 1 ) ​ ​ ( 257,662 ) ​ ​ — ​ ​ — ​ ​ ( 257,663 ) Retirement of restricted stock ​ ( 53,961 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Issuance of common stock upon release of restricted stock units ​ 78,341 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense — ​ — ​ 16,925 ​ — ​ — ​ 16,925 Balances at April 2, 2022 119,469,747 ​ $ 12 ​ $ 430,208 ​ $ ( 51,714 ) ​ $ 1,590 ​ $ 380,096 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ — ​ — ​ 4,303 ​ — ​ 4,303 Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 3,917 ) ​ ( 3,917 ) Repurchase and retirement of common stock under repurchase program ( 2,026,231 ) ​ — ​ ( 15,000 ) ​ — ​ — ​ ( 15,000 ) Issuance of common stock upon release of restricted stock units ​ 104,042 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense ​ — ​ ​ — ​ ​ 16,429 ​ ​ — ​ ​ — ​ ​ 16,429 Balances at July 2, 2022 117,547,558 ​ $ 12 ​ $ 431,637 ​ $ ( 47,411 ) ​ $ ( 2,327 ) ​ $ 381,911 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 7 Table of Contents ​ Latham Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ Other ​ Total ​ ​ ​ ​ ​ ​ ​ Paid-in ​ Accumulated ​ Comprehensive ​ Stockholders' ​ ​ Shares ​ Amount ​ Capital ​ Deficit ​ Loss ​ Equity Balances at December 31, 2022 114,667,975 ​ $ 11 ​ $ 440,880 ​ $ ( 54,568 ) ​ $ ( 3,533 ) ​ $ 382,790 Net loss — ​ — ​ — ​ ( 14,368 ) ​ — ​ ( 14,368 ) Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 144 ) ​ ( 144 ) Issuance of common stock upon release of restricted stock units ​ 22,078 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense — ​ — ​ 6,769 ​ — ​ — ​ 6,769 Balances at April 1, 2023 114,690,053 ​ $ 11 ​ $ 447,649 ​ $ ( 68,936 ) ​ $ ( 3,677 ) ​ $ 375,047 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ — ​ — ​ 5,715 ​ — ​ 5,715 Foreign currency translation adjustments — ​ — ​ — ​ — ​ ( 329 ) ​ ( 329 ) Retirement of restricted stock ​ ( 54,271 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Issuance of common stock upon release of restricted stock units ​ 98,974 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense ​ — ​ ​ — ​ ​ 5,764 ​ ​ — ​ ​ — ​ ​ 5,764 Balances at July 1, 2023 114,734,756 ​ $ 11 ​ $ 453,413 ​ $ ( 63,221 ) ​ $ ( 4,006 ) ​ $ 386,197 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 8 Table of Contents Latham Group, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Two Fiscal Quarters Ended ​ ​ ​ July 1, ​ July 2, ​ ​ ​ 2023 2022 ​ Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 8,653 ) ​ $ 1,463 ​ Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: ​ ​ ​ Depreciation and amortization ​ 19,284 ​ 19,274 ​ Amortization of deferred financing costs and debt discount ​ 860 ​ 709 ​ Non-cash lease expense ​ 3,738 ​ 3,731 ​ Change in fair value of interest rate swaps ​ 2,930 ​ ( 3,889 ) ​ Stock-based compensation expense ​ 12,533 ​ 33,354 ​ Underwriting fees related to offering of common stock ​ ​ — ​ ​ 11,437 ​ Loss on extinguishment of debt ​ ​ — ​ ​ 3,465 ​ Bad debt expense ​ ​ 4,390 ​ ​ 1,191 ​ Other non-cash, net ​ ​ 1,166 ​ ​ 1,615 ​ Earnings from equity method investment ​ ​ ( 697 ) ​ ​ ( 1,262 ) ​ Changes in operating assets and liabilities: ​ ​ ​ Trade receivables ​ ( 37,276 ) ​ ( 45,696 ) ​ Inventories ​ 38,902 ​ ( 53,182 ) ​ Prepaid expenses and other current assets ​ ( 916 ) ​ 759 ​ Income tax receivable ​ ( 1,409 ) ​ ( 1,349 ) ​ Other assets ​ ​ ( 392 ) ​ ​ ( 375 ) ​ Accounts payable ​ 8,935 ​ 15,865 ​ Accrued expenses and other current liabilities ​ ( 6,882 ) ​ ( 2,428 ) ​ Other long-term liabilities ​ ( 224 ) ​ 232 ​ Net cash provided by (used in) operating activities ​ 36,289 ​ ( 15,086 ) ​ Cash flows from investing activities : ​ ​ ​ Purchases of property and equipment ​ ( 23,365 ) ​ ( 16,750 ) ​ Proceeds from the sale of property and equipment ​ — ​ 23 ​ Acquisitions of businesses, net of cash acquired ​ — ​ ( 384 ) ​ Net cash used in investing activities ​ ( 23,365 ) ​ ( 17,111 ) ​ Cash flows from financing activities : ​ ​ ​ Proceeds from long-term debt borrowings ​ — ​ 320,125 ​ Payments on long-term debt borrowings ​ ( 1,625 ) ​ ( 284,822 ) ​ Proceeds from borrowings on revolving credit facilities ​ ​ 48,000 ​ ​ 25,000 ​ Payments on revolving credit facilities ​ ​ ( 48,000 ) ​ ​ ( 25,000 ) ​ Deferred financing fees paid ​ ​ — ​ ​ ( 6,865 ) ​ Proceeds from the issuance of common stock ​ ​ — ​ ​ 257,663 ​ Repayments of finance lease obligations ​ ​ ( 259 ) ​ ​ — ​ Repurchases and retirements of common stock ​ ​ — ​ ​ ( 272,663 ) ​ Net cash (used in) provided by financing activities ​ ( 1,884 ) ​ 13,438 ​ Effect of exchange rate changes on cash ​ ( 550 ) ​ 27 ​ Net increase (decrease) in cash ​ 10,490 ​ ( 18,732 ) ​ Cash at beginning of period ​ 32,626 ​ 43,952 ​ Cash at end of period ​ $ 43,116 ​ $ 25,220 ​ Supplemental cash flow information : ​ ​ ​ Cash paid for interest ​ $ 11,247 ​ $ 5,080 ​ Income taxes paid, net ​ ​ 1,206 ​ ​ 13,353 ​ Supplemental disclosure of non-cash investing and financing activities : ​ ​ ​ ​ Purchases of property and equipment included in accounts payable and accrued expenses ​ $ 1,111 ​ $ 990 ​ Capitalized internal-use software included in accounts payable – related party ​ ​ 325 ​ ​ 900 ​ Right-of-use operating and finance lease assets obtained in exchange for lease liabilities ​ ​ 4,108 ​ ​ 39,501 ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ ​ 9 Table of Contents Notes to Condensed Consolidated Financial Statements  1. NATURE OF THE BUSINESS Latham Group, Inc. (the “Company”) wholly owns Latham Pool Products, Inc. (“Latham Pool Products”) (together, “Latham”), a designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. Latham offers a portfolio of pools and related products, including in-ground swimming pools, pool liners, and pool covers. On December 18, 2018, Latham Investment Holdings, LP (“Parent”), an investment fund managed by affiliates of Pamplona Capital Management (the “Sponsor”), Wynnchurch Capital, L.P. and management acquired all of the outstanding equity interests of Latham Topco., Inc., a newly incorporated entity in the State of Delaware. Latham Topco, Inc. changed its name to Latham Group, Inc. on March 3, 2021. ​ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Unaudited Interim Financial Information The unaudited condensed consolidated balance sheet at December 31, 2022 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of July 1, 2023 and for the fiscal and two fiscal quarters ended July 1, 2023 and July 2, 2022 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with Latham Group, Inc.’s audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2022 included in the Company’s 2022 Annual Report on Form 10-K, filed with the SEC on March 7, 2023 (the “Annual Report”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of these condensed consolidated financial statements, have been included. The Company’s results of operations for the fiscal quarter and two fiscal quarters ended July 1, 2023 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending December 31, 2023. Use of Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience, known trends, and other market-specific relevant factors that it believes to be reasonable under the circumstances. Estimates are evaluated on an ongoing basis and revised as there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Reclassifications Certain prior period balances have been reclassified to conform to the current period presentation in the condensed consolidated financial statements and the accompanying notes. 10 Table of Contents Seasonality Although the Company generally has demand for its products throughout the fiscal year, its business is seasonal and weather is one of the principal external factors affecting the business. Historically, net sales and net income are highest during the second and third fiscal quarters, representing the peak months of swimming pool use, pool installation, and remodeling and repair activities. Severe weather may also affect net sales in all periods. Significant Accounting Policies Refer to the Annual Report for a discussion of the Company’s significant accounting policies, as updated below. Recently Issued Accounting Pronouncements The Company qualifies as “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected to “opt in” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies. In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses , which narrowed the scope and changed the effective date for nonpublic entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are SEC filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s condensed consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which amends ASC 805 by requiring acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in a business combination. For public entities, ASU 2021-08 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. For all other entities, ASU 2021-08 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s condensed consolidated financial statements. ​ ​ ​ 3. FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value. Level 1 — Quoted prices in active markets for identical assets or liabilities. 11 Table of Contents Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. Level 3 — Unobservable inputs that reflect the Company’s own assumptions incorporated into valuation techniques. These valuations require significant judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When there is more than one input at different levels within the hierarchy, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessment of the significance of a particular input to the fair value measurement in its entirety requires substantial judgment and consideration of factors specific to the asset or liability. Level 3 inputs are inherently difficult to estimate. Changes to these inputs can have significant impact on fair value measurements. Assets and liabilities measured at fair value using Level 3 inputs are based on one or more of the following valuation techniques: market approach, income approach or cost approach. There were no transfers between fair value measurement levels during the two fiscal quarters ended July 1, 2023 or July 2, 2022. Assets and liabilities measured at fair value on a nonrecurring basis The Company’s non-financial assets such as goodwill, intangible assets, and property and equipment are measured at fair value upon acquisition and remeasured to fair value when an impairment charge is recognized. Such fair value measurements are based predominantly on Level 2 and Level 3 inputs. Fair value of financial instruments The Company considers the carrying amounts of cash, trade receivables, prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities to approximate fair value because of the short-term maturities of these instruments. Term loan The Company’s term loan (see Note 6) is carried at amortized cost; however, the Company estimates the fair value of the term loan for disclosure purposes. The fair value of the term loan is determined using inputs based on observable market data of a non-public exchange, which are classified as Level 2 inputs. The following table sets forth the carrying amount and fair value of its term loan (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, 2023 ​ December 31, 2022 ​ ​ ​ Carrying ​ Estimated ​ Carrying ​ Estimated ​ ​ Value Fair Value Value Fair Value ​ Term Loan ​ $ 312,041 ​ $ 297,999 ​ $ 312,881 ​ $ 290,979 ​ ​ Interest rate swaps The Company estimates the fair value of interest rate swaps (see Note 6) on a fiscal quarterly basis using Level 2 inputs, including the forward SOFR curve. The fair value is estimated by comparing (i) the present value of all future monthly fixed rate payments versus (ii) the variable payments based on the forward SOFR curve. As of July 1, 2023 and December 31, 2022, the net fair value of the Company’s interest rate swaps was an asset balance of $ 0.6 million and $ 3.5 million, respectively, which were recorded within other assets on the condensed consolidated balance sheets. 4. GOODWILL AND INTANGIBLE ASSETS, NET Goodwill The carrying amount of goodwill as of July 1, 2023 and as of December 31, 2022 was $ 131.2 million and $ 131.4 million, respectively. The change in the carrying value during the two fiscal quarters ended July 1, 2023 was solely because of fluctuations in foreign currency exchange rates. 12 Table of Contents ​ Intangible Assets Intangible assets, net as of July 1, 2023 consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, 2023 ​ ​ Gross ​ Foreign ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Currency ​ Accumulated ​ Net ​ Amount Translation Amortization Amount Trade names and trademarks ​ $ 148,100 ​ $ ( 334 ) ​ $ 26,281 ​ $ 121,485 Patented technology ​ 16,126 ​ 84 ​ 7,835 ​ 8,375 Technology ​ ​ 13,000 ​ ​ — ​ ​ 1,372 ​ ​ 11,628 Pool designs ​ 13,628 ​ ( 92 ) ​ 2,504 ​ 11,032 Franchise relationships ​ 1,187 ​ 106 ​ 1,212 ​ 81 Dealer relationships ​ 197,376 ​ 28 ​ 54,578 ​ 142,826 Order backlog ​ ​ 1,600 ​ ​ — ​ ​ 1,600 ​ ​ — Non-competition agreements ​ 2,476 ​ — ​ 2,247 ​ 229 ​ ​ $ 393,493 ​ $ ( 208 ) ​ $ 97,629 ​ $ 295,656 ​ The Company recognized $ 6.6 million and $ 13.3 million of amortization expense related to intangible assets during the fiscal quarter and two fiscal quarters ended July 1, 2023. The Company recognized $ 7.2 million and $ 14.3 million of amortization expense related to intangible assets during the fiscal quarter and two fiscal quarters ended July 2, 2022. Intangible assets, net as of December 31, 2022 consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ Gross ​ Foreign ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Currency ​ Accumulated ​ Net ​ Amount Translation Amortization Amount Trade names and trademarks ​ $ 148,100 ​ $ ( 84 ) ​ $ 22,982 ​ $ 125,034 Patented technology ​ 16,126 ​ 37 ​ 6,959 ​ 9,204 Technology ​ ​ 13,000 ​ ​ — ​ ​ 939 ​ ​ 12,061 Pool designs ​ 13,628 ​ ( 10 ) ​ 2,037 ​ 11,581 Franchise relationships ​ 1,187 ​ 45 ​ 1,064 ​ 168 Dealer relationships ​ 197,376 ​ 13 ​ 46,699 ​ 150,690 Order backlog ​ ​ 1,600 ​ ​ — ​ ​ 1,600 ​ ​ — Non-competition agreements ​ 2,476 ​ — ​ 1,999 ​ 477 ​ ​ $ 393,493 ​ $ 1 ​ $ 84,279 ​ $ 309,215 ​ The Company estimates that amortization expense related to definite-lived intangible assets will be as follows in each of the next five years and thereafter (in thousands): ​ ​ ​ ​ ​ ​ ​ Estimated Future ​ ​ Amortization Year Ended Expense Remainder of fiscal 2023 ​ $ 13,264 2024 ​ 25,708 2025 ​ 25,550 2026 ​ 25,550 2027 ​ 25,550 Thereafter ​ 180,034 ​ ​ $ 295,656 ​ ​ ​ ​ 13 Table of Contents 5. INVENTORIES, NET Inventories, net consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, 2023 December 31, 2022 ​ Raw materials ​ $ 74,047 ​ $ 95,388 ​ Finished goods ​ 52,471 ​ 69,832 ​ ​ ​ $ 126,518 ​ $ 165,220 ​ ​ ​ ​ 6. LONG-TERM DEBT The components of the Company’s outstanding long-term debt obligations consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, 2023 December 31, 2022 ​ Term Loan ​ $ 320,938 ​ $ 322,562 ​ Less: Unamortized discount and debt issuance costs ​ ( 8,897 ) ​ ( 9,681 ) ​ Total debt ​ 312,041 ​ 312,881 ​ Less: Current portion of long-term debt ​ ( 3,250 ) ​ ( 3,250 ) ​ Total long-term debt ​ $ 308,791 ​ $ 309,631 ​ ​ On February 23, 2022, Latham Pool Products entered into an agreement (the “Credit Agreement”) with Barclays Bank PLC, which provides a senior secured multicurrency revolving line of credit (the “Revolving Credit Facility”) in an initial principal amount of $ 75.0 million and a U.S. Dollar senior secured term loan facility (the “Term Loan”) in an initial principal amount of $ 325.0 million. On such date, proceeds under the Credit Agreement were used to terminate the previous credit agreement by repayment of $ 294.0 million of outstanding debt thereunder and for general corporate purposes. Revolving Credit Facility The Revolving Credit Facility may be utilized to finance ongoing general corporate and working capital needs and permits Latham Pools Products to borrow loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The Revolving Credit Facility matures on February 23, 2027. Loans outstanding under the Revolving Credit Facility denominated in U.S. Dollars and Canadian Dollars bear interest, at the borrower’s option, at a rate per annum based on Term SOFR or CDO (each, as defined in the Credit Agreement), as applicable, plus a margin of 3.50 %, or at a rate per annum based on the Base Rate or the Canadian Prime Rate (each, as defined in the Credit Agreement), plus a margin of 2.50 %. Loans outstanding under the Revolving Credit Facility denominated in Euros or Australian Dollars bear interest based on EURIBOR or the AUD Rate (each, as defined in the Credit Agreement), respectively, plus a margin of 3.50 %. A commitment fee accrues on any unused portion of the commitments under the Revolving Credit Facility. The commitment fee is due and payable quarterly in arrears and is, initially, 0.375 % per annum and will, thereafter, accrue at a rate per annum ranging from 0.25 % to 0.50 %, depending on the First Lien Net Leverage Ratio (as defined in the Credit Agreement, the “First Lien Net Leverage Ratio”). Borrowings under the Revolving Credit Facility are due at maturity. The Company incurred debt issuance costs of $ 0.8 million related to the Revolving Credit Facility. The debt issuance costs were recorded within other assets on the condensed consolidated balance sheet as of the applicable period and are being amortized over the life of the Revolving Credit Facility. The Company is required to meet certain financial covenants, including maintaining specific liquidity measurements. There are also negative covenants, including certain restrictions on the Company’s and its subsidiaries’ ability to incur additional indebtedness, create liens, make investments, consolidate, or merge with other entities, enter into transactions with affiliates, make prepayments with respect to certain indebtedness, make dividend payments, loans, or advances to the Company, declare dividends and make restricted payments and other distributions. As of July 1, 2023, there were no outstanding borrowings on the Revolving Credit Facility and $ 75.0 million was available for future borrowing. 14 Table of Contents Term Loan The Term Loan matures on February 23, 2029. Loans outstanding under the Term Loan bear interest, at the borrower’s option, at a rate per annum based on Term SOFR (as defined in the Credit Agreement), plus a margin ranging from 3.75 % to 4.00 %, depending on the First Lien Net Leverage Ratio, or based on the Base Rate (as defined in the Credit Agreement), plus a margin ranging from 2.75 % to 3.00 %, depending on the First Lien Net Leverage Ratio. Loans under the Term Loan are subject to scheduled quarterly amortization payments of $ 812,500 , equal to 0.25 % of the initial principal amount of the Term Loan. The Credit Agreement contains customary mandatory prepayment provisions, including requirements to make mandatory prepayments with 50 % of any excess cash flow and with 100 % of the net cash proceeds from the incurrence of indebtedness not otherwise permitted to be incurred by the covenants, asset sales, and casualty and condemnation events, in each case, subject to customary exceptions. The Company recorded $ 6.1 million of debt issuance costs and $ 4.9 million of debt discount related to the Term Loan as a direct reduction to the carrying amount of long-term debt on the condensed consolidated balance sheet as of the applicable period. Outstanding borrowings as of July 1, 2023 were $ 312.0 million, net of discount and debt issuance costs of $ 8.9 million. In connection with the Term Loan, the Company is subject to various negative, reporting, financial, and other covenants, including maintaining specific liquidity measurements. As of July 1, 2023, the unamortized debt issuance costs and discount on the Term Loan were $ 5.0 million and $ 3.9 million, respectively. The effective interest rate was 10.23 % at July 1, 2023, including the impact of the Company’s interest rate swaps. As of July 1, 2023, the Company was in compliance with all financial covenants under the Credit Agreement. Interest Rate Risk Interest rate risk associated with the Credit Agreement is mitigated partially through interest rate swaps. ​ The Company executed an interest rate swap on April 30, 2020. The swap had an effective date of May 18, 2020 and a termination date of May 18, 2023. In February of 2022, the Company amended its interest rate swap to change the index rate from LIBOR to SOFR in connection with the entry into the Credit Agreement. Under the terms of the amended swap, the Company fixed its SOFR borrowing rate at 0.496 % on a notional amount of $ 200.0 million. The interest rate swap was not designated as a hedging instrument for accounting purposes (see Note 3). ​ Additionally, the Company entered into an interest rate swap that was executed on March 10, 2023. The swap has an effective date of May 18, 2023 and a termination date of May 18, 2026. Under the terms of the swap, the Company fixed its SOFR borrowing rate at 4.3725 % on a notional amount of $ 161.0 million. The interest rate swap is not designated as a hedging instrument for accounting purposes (see Note 3). ​ Debt Maturities Principal payments due on the outstanding debt, excluding the Revolving Credit Facility, in the next five fiscal years, excluding any potential payments based on excess cash flow levels, are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Term Loan Remainder of fiscal 2023 $ 1,625 2024 ​ 3,250 2025 ​ 3,250 2026 ​ 3,250 2027 ​ ​ 3,250 Thereafter ​ 306,313 ​ ​ $ 320,938 ​ The obligations under the Credit Agreement are guaranteed by certain wholly owned subsidiaries (the “Guarantors”) of the Company as defined in the security agreement. The obligations under the Credit Agreement are secured by substantially all of the 15 Table of Contents Guarantors’ tangible and intangible assets, including their accounts receivables, equipment, intellectual property, inventory, cash and cash equivalents, deposit accounts, and security accounts. The Credit Agreement also restricts payments and other distributions unless certain conditions are met, which could restrict the Company’s ability to pay dividends. 7. PRODUCT WARRANTIES The warranty reserve activity consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Two Fiscal Quarters Ended ​ ​ July 1, 2023 July 2, 2022 ​ Balance at the beginning of the fiscal year ​ $ 3,990 ​ $ 4,909 ​ Adjustments to reserve ​ 2,280 ​ 4,110 ​ Less: Settlements made (in cash or in kind) ​ ( 2,871 ) ​ ( 3,534 ) ​ Balance at the end of the fiscal quarter ​ $ 3,399 ​ $ 5,485 ​ ​ ​ 8. LEASES On January 1, 2022, the Company adopted ASU 2016-02, “Leases (Topic 842),” and the related amendments. The optional transition method of adoption was used, in which the cumulative effect of initially applying the new standard to existing leases was $ 0.3 million to record the operating lease right-of-use assets and the related liabilities as of January 1, 2022. Under this method of adoption, the comparative information has not been revised and continues to be reported under the previously applicable lease accounting guidance. For leases with initial terms greater than 12 months, the Company considers these right-of-use assets and records the related asset and obligation at the present value of lease payments over the term. For leases with initial terms equal to or less than 12 months, the Company does not consider them as right-of-use assets and instead considers them short-term lease costs that are recognized on a straight-line basis over the lease term. The Company’s leases may include escalation clauses, renewal options, and/or termination options that are factored into the Company’s determination of lease term and lease payments when it is reasonably certain the option will be exercised. The Company elected to take the practical expedient and not separate lease and non-lease components of contracts. The Company estimates an incremental borrowing rate to discount the lease payments based on information available at lease commencement because the implicit rate of the lease is generally not known. The Company leases manufacturing facilities, office space, land, and certain vehicles and equipment under operating leases. The Company also leases certain vehicles and equipment under finance leases. The Company determines if an arrangement is a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The components of lease expense for the fiscal quarters ended July 1, 2023 and July 2, 2022 were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Two Fiscal Quarters Ended ​ ​ July 1, 2023 July 2, 2022 ​ July 1, 2023 July 2, 2022 ​ Operating lease expense ​ $ 2,317 ​ $ 2,366 ​ $ 4,668 ​ $ 4,504 ​ Finance lease amortization of assets ​ ​ 156 ​ ​ 5 ​ ​ 265 ​ ​ 7 ​ Finance lease interest on lease liabilities ​ ​ 68 ​ ​ 2 ​ ​ 120 ​ ​ 3 ​ Short-term lease expense ​ 96 ​ 12 ​ 150 ​ 32 ​ Variable lease expense ​ 268 ​ 126 ​ 595 ​ 304 ​ Total lease expense ​ $ 2,905 ​ $ 2,511 ​ $ 5,798 ​ $ 4,850 ​ ​ ​ 16 Table of Contents Operating and finance lease right-of-use assets and lease-related liabilities as of July 1, 2023 and December 31, 2022 were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, 2023 ​ December 31, 2022 ​ Classification ​ ​ ​ ​ ​ ​ ​ ​ ​ Lease right-of-use assets: ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ $ 33,462 ​ $ 38,308 ​ Operating lease right-of-use assets Finance leases ​ ​ 3,459 ​ ​ 316 ​ Other assets Total lease right-of-use assets ​ $ 36,921 ​ $ 38,624 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Lease-related liabilities ​ ​ ​ ​ ​ ​ ​ ​ Current ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ $ 6,894 ​ $ 6,923 ​ Current operating lease liabilities Finance leases ​ ​ 586 ​ ​ 105 ​ Accrued expenses and other current liabilities Non-current ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ ​ 27,526 ​ ​ 32,391 ​ Non-current operating lease liabilities Finance leases ​ ​ 2,944 ​ ​ 193 ​ Other long-term liabilities Total lease liabilities ​ $ 37,950 ​ $ 39,612 ​ ​ ​ ​ The table below presents supplemental information related to leases as of July 1, 2023 and December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 1, 2023 ​ December 31, 2022 Weighted-average remaining lease term (years) ​ ​ ​ ​ ​ ​ ​ ​ Finance leases ​ ​ 5.6 ​ ​ ​ 2.8 ​ Operating leases ​ ​ 6.0 ​ ​ ​ 6.5 ​ Weighted-average discount rate ​ ​ ​ ​ ​ ​ ​ ​ Finance leases ​ ​ 8.1 % ​ ​ 5.4 % Operating leases ​ ​ 4.9 % ​ ​ 4.9 % ​ The table below presents supplemental information related to the cash flows for operating leases recorded on the condensed consolidated statements of cash flows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Two Fiscal Quarters Ended ​ ​ July 1, 2023 July 2, 2022 ​ Cash paid for amounts included in the measurement of lease liabilities: ​ ​ ​ ​ ​ ​ ​ Operating cash flows for operating leases ​ $ 3,781 ​ $ 3,526 ​ ​ The following table summarizes maturities of operating lease liabilities as of July 1, 2023 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating Leases ​ Finance Leases ​ Total Remainder of fiscal 2023 ​ $ 4,341 ​ $ 425 ​ $ 4,766 2024 ​ ​ 7,953 ​ ​ 849 ​ ​ 8,802 2025 ​ ​ 7,183 ​ ​ 795 ​ ​ 7,978 2026 ​ ​ 5,687 ​ ​ 703 ​ ​ 6,390 2027 ​ ​ 4,042 ​ ​ 688 ​ ​ 4,730 Thereafter ​ ​ 10,740 ​ ​ 934 ​ ​ 11,674 Total lease payments ​ ​ 39,946 ​ ​ 4,394 ​ ​ 44,340 Less: Interest ​ ​ ( 5,526 ) ​ ​ ( 864 ) ​ ​ ( 6,390 ) Present value of lease liability ​ $ 34,420 ​ $ 3,530 ​ $ 37,950 ​ ​ ​ 17 Table of Contents 9. NET SALES The following table sets forth the Company’s disaggregation of net sales by product line (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Two Fiscal Quarters Ended ​ ​ July 1, 2023 July 2, 2022 ​ July 1, 2023 July 2, 2022 ​ In-ground Swimming Pools ​ $ 90,534 ​ $ 112,153 ​ $ 169,146 ​ $ 223,956 ​ Covers ​ 28,755 ​ 38,389 ​ 61,500 ​ 70,914 ​ Liners ​ 57,839 ​ 56,258 ​ 84,201 ​ 103,544 ​ ​ ​ $ 177,128 ​ $ 206,800 ​ $ 314,847 ​ $ 398,414 ​ ​ ​ ​ ​ ​ 10. INCOME TAXES The effective income tax rate for the fiscal and two fiscal quarters ended July 1, 2023 was 46.1 % and ( 29.2 )%, respectively, compared to 71.9 % and 91.8 % for the fiscal and two fiscal quarters ended July 2, 2022, respectively. The differences between the U.S. federal statutory income tax rate and the Company’s effective income tax rates for the fiscal quarter ended July 1, 2023 and the fiscal quarter ended July 2, 2022 were primarily attributable to the discrete impacts of stock-based compensation expense for which there is no associated tax benefit. The Inflation Reduction Act ("IRA") is effective beginning in 2023. Key provisions from the IRA include the implementation of a 15% corporate alternative minimum tax for corporations with book income in excess of $1 billion, an excise tax on the fair market value of stock buybacks (offset by the fair market value of stock issued in the same tax year), and significant tax incentives for energy and climate initiatives. Enactment of the new law has not impacted the Company’s financial condition, results of operations or cash flows for the period ended July 1, 2023 and the Company does not expect a material impact on our future results at this time. The Company will continue to monitor any impacts of further guidance on the IRA as released and assess any impacts as applicable. 11. STOCKHOLDERS’ EQUITY Offering of Common Stock On January 11, 2022, the Company completed an offering of 13,800,000 shares of common stock, par value $ 0.0001 per share, including the exercise in full by the underwriters of their option to purchase up to 1,800,000 additional shares of common stock, at a public offering price of $ 19.50 per share. The Company received proceeds of $ 257.7 million from this offering, net of $ 11.4 million of underwriting fees. The proceeds of $ 257.7 million were used to purchase 13,800,000 shares of common stock from certain of the Company’s stockholders, primarily investment funds managed by the Sponsor and Wynnchurch Capital, L.P., and also a small percentage of shares of common stock owned by some of the Company’s directors and executive officers. Repurchase Program On May 10, 2022, the Company approved a stock repurchase program (the “Repurchase Program”), which authorized the Company to repurchase up to $ 100 million of the Company’s shares of common stock over the next three years . The Company may effect these repurchases in open market transactions, privately negotiated purchases, or other acquisitions. The Company is not obligated to repurchase any of its shares of its common stock under the Repurchase Program and the timing and amount of any repurchases will depend on market conditions, the Company’s stock price, alternative uses of capital, the terms of the Company’s debt instruments, and other factors. As of July 1, 2023, approximately $ 77.0 million remained available for share repurchases pursuant to the Repurchase Program. The Company did not repurchase any shares of its common stock during the fiscal quarter ended July 1, 2023. The Company accounts for the excess of the repurchase price over the par value of shares acquired as a reduction to additional paid-in capital. ​ 18 Table of Contents 12. STOCK-BASED COMPENSATION On April 12, 2021, the Company’s stockholders approved the 2021 Omnibus Equity Incentive Plan (the “2021 Omnibus Equity Plan”), which became effective on April 22, 2021, upon pricing of its initial public offering. The Omnibus Equity Plan provides for the issuance of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based and cash-based awards. The maximum grant date fair value of cash and equity awards that may be awarded to a non-employee director under the Omnibus Equity Plan during any one fiscal year, together with any cash fees paid to such non-employee director during such fiscal year, is $ 750,000 . On May 2, 2023, at the 2023 annual meeting of stockholders the Company, the stockholders approved the first amendment (the “First Amendment”) to the Latham Group, Inc. 2021 Omnibus Equity Plan, which was previously approved by the Board of Directors of the Company. The First Amendment became effective upon stockholder approval, and provides for (i) an increase by 8,000,000 shares of the share pool, i.e. the maximum number of shares of the Company’s common stock that may be issued pursuant to awards granted under the 2021 Omnibus Equity Plan, (ii) a prohibition on recycling of shares withheld or remitted to pay taxes for all awards, (iii) a minimum vesting period of one year for all awards, with an exception for shares representing 5% of the share pool, and (iv) a prohibition on the transfer of stock options and stock appreciation rights for value or to third-party financial institutions without stockholder approval. Except as amended by the First Amendment, the other terms of the 2021 Omnibus Equity Plan remain in full force and effect. Subsequent to the First Amendment, the maximum aggregate number of shares reserved for issuance under the Omnibus Equity Plan is 21,170,212 shares. The following table summarizes the Company’s stock-based compensation expense (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Two Fiscal Quarters Ended ​ ​ ​ July 1, 2023 July 2, 2022 ​ July 1, 2023 July 2, 2022 ​ ​ Cost of sales ​ $ ( 626 ) ​ $ 1,140 ​ $ ( 200 ) ​ $ 2,316 ​ ​ Selling, general, and administrative ​ 6,390 ​ 15,289 ​ 12,733 ​ 31,038 ​ ​ ​ ​ $ 5,764 ​ $ 16,429 ​ $ 12,533 ​ $ 33,354 ​ ​ ​ As of July 1, 2023, total unrecognized stock-based compensation expense related to all unvested stock-based awards was $ 14.4 million, which is expected to be recognized over a weighted-average period of 1.5 years. ​ The following table sets forth the significant assumptions used in the Black-Scholes option-pricing model on a weighted-average basis to determine the fair value of stock option awards granted: ​ ​ ​ ​ ​ ​ ​ Two Fiscal Quarters Ended ​ ​ ​ July 2, 2022 Risk-free interest rate 1.82 % Expected volatility 39.77 % Expected term (in years) 6.25 ​ Expected dividend yield 0.00 % ​ No stock options were granted under this plan during the fiscal quarter ended July 1, 2023. The following table sets forth the significant assumptions used in the Black-Scholes option-pricing model on a weighted-average basis to determine the fair value of stock appreciation rights awards granted: ​ ​ ​ ​ ​ ​ Two Fiscal Quarters Ended ​ ​ July 1, 2023 Risk-free interest rate ​ 3.45 % Expected volatility ​ 40.29 % Expected term (in years) ​ 6.25 ​ Expected dividend yield ​ 0.00 % 19 Table of Contents ​ Restricted Stock Awards The following table represents the Company’s restricted stock awards activity during the two fiscal quarters ended July 1, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Average Grant- ​ Shares Date Fair Value Outstanding at January 1, 2023 2,576,219 ​ $ 19.00 Granted — ​ — Vested ( 1,239,520 ) ​ 19.00 Forfeited ( 54,271 ) ​ 19.00 Outstanding at July 1, 2023 1,282,428 ​ $ 19.00 ​ Restricted Stock Units The following table represents the Company’s restricted stock units activity during the two fiscal quarters ended July 1, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Average Grant- ​ ​ Shares ​ Date Fair Value Outstanding at January 1, 2023 617,941 ​ $ 8.37 Granted 2,018,828 ​ 3.15 Vested ( 121,052 ) ​ 16.59 Forfeited ( 111,084 ) ​ 4.81 Outstanding at July 1, 2023 2,404,633 ​ $ 3.74 ​ Stock Options The following table represents the Company’s stock option activity during the two fiscal quarters ended July 1, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- Weighted- ​ ​ ​ ​ ​ ​ ​ Average ​ Average ​ ​ ​ ​ ​ ​ ​ Exercise Price ​ Remaining ​ Aggregate ​ Shares per Share Contract Term Intrinsic Value ​ ​ ​ ​ ​ (in years) ​ (in thousands) Outstanding at January 1, 2023 1,914,670 ​ $ 14.85 ​ ​ ​ ​ Granted — ​ ​ — ​ Exercised — ​ — ​ Forfeited ( 198,894 ) ​ 8.51 ​ Outstanding at July 1, 2023 1,715,776 ​ $ 15.58 8.31 ​ $ — Vested and expected to vest at July 1, 2023 1,715,776 ​ $ 15.58 8.31 ​ $ — Options exercisable at July 1, 2023 546,107 ​ $ 17.58 7.92 ​ $ — ​ The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock . Stock Appreciation Rights During the fiscal quarter ended April 1, 2023, as a portion of the annual equity award grants to the Company’s executive officers, the Compensation Committee of the Board of Directors approved stock appreciation rights for an aggregate of 790,181 shares of the Company’s common stock, with a strike price of $ 3.24 per share (the “Contingent Grants”). At the time of such approval, the Company did not have enough shares of the Company’s common stock in the share pool under the Omnibus Equity Plan to support such grant. As of April 1, 2023, the Contingent Grants remained subject to stockholder approval of the First Amendment. On May 2, 20 Table of Contents 2023, following stockholder approval of the First Amendment, the foregoing stock appreciation right awards became effective without condition. The following table represents the Company’s stock appreciation rights activity during the two fiscal quarters ended July 1, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- Weighted- ​ ​ ​ ​ ​ ​ ​ Average ​ Average ​ ​ ​ ​ ​ ​ ​ Exercise Price ​ Remaining ​ Aggregate ​ Shares per Share Contract Term Intrinsic Value ​ ​ ​ ​ ​ (in years) ​ (in thousands) Outstanding at January 1, 2023 — ​ $ — ​ ​ ​ ​ Granted 790,181 ​ ​ 3.24 ​ Exercised — ​ — ​ Forfeited — ​ — ​ Outstanding at July 1, 2023 790,181 ​ $ 3.24 9.84 ​ $ 371 Vested and expected to vest at July 1, 2023 790,181 ​ $ 3.24 9.84 ​ $ 371 Stock appreciation rights exercisable at July 1, 2023 — ​ $ — — ​ $ — ​ The aggregate intrinsic value of stock appreciation rights is calculated as the difference between the strike price of the stock appreciation rights and the fair value of the Company’s common stock for those stock appreciation rights that had strike prices lower than the fair value of the Company’s common stock. ​ ​ ​ 13. NET INCOME (LOSS) PER SHARE Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended ​ Two Fiscal Quarters Ended ​ ​ July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 ​ Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) attributable to common stockholders ​ $ 5,715 ​ $ 4,303 ​ $ ( 8,653 ) ​ $ 1,463 ​ Denominator: ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 112,248,822 ​ ​ 113,692,160 ​ ​ 112,175,510 ​ ​ 113,695,354 ​ Diluted ​ ​ 112,692,543 ​ ​ 115,384,273 ​ ​ 112,175,510 ​ ​ 115,698,368 ​ Net income (loss) per share attributable to common stockholders: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.05 ​ $ 0.04 ​ $ ( 0.08 ) ​ $ 0.01 ​ Diluted ​ $ 0.05 ​ $ 0.04 ​ $ ( 0.08 ) ​ $ 0.01 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 21 Table of Contents As of July 1, 2023 and December 31, 2022, 113,452,328 and 112,091,756 shares of common stock were issued and outstanding for accounting purposes, respectively. ​ The following table includes the number of shares that may be dilutive common shares in the future that were not included in the computation of diluted net income (loss) per share because the effect was anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal Quarter Ended Two Fiscal Quarters Ended ​ July 1, 2023 July 2, 2022 ​ July 1, 2023 July 2, 2022 Restricted stock awards ​ 87,576 — 1,331,897 — Restricted stock units ​ 102,129 102,108 301,440 56,764 Stock options ​ 1,730,204 1,809,704 1,808,350 1,501,528 Stock appreciation awards ​ 529,681 ​ — ​ 264,841 ​ — ​ ​ 14. RELATED PARTY TRANSACTIONS BrightAI Services Starting in 2020, BrightAI has rendered services to the Company, for which the cost was capitalized as internal-use software. A co-founder of BrightAI Services has served on the Company’s board of directors since December 9, 2020. In December 2022, the Company executed an additional agreement with BrightAI for the provision of hardware that will run the technology developed by BrightAI and the Company. During the two fiscal quarters ended July 1, 2023 and the fiscal year ended December 31, 2022, the Company incurred $ 0.8 million and $ 0.2 million, respectively, associated with services performed by BrightAI, which is recorded as construction in progress within property and equipment, net on the condensed consolidated balance sheet as of July 1, 2023. As of July 1, 2023 and December 31, 2022, the Company had accounts payable related to BrightAI of $ 0.3 million and $ 0.4 million, respectively. Expense Reimbursement The Company entered into a Stockholders’ Agreement with the Sponsor and Wynnchurch Capital, L.P. on April 27, 2021. The Stockholders’ Agreement requires the Company to reimburse the Sponsor and Wynnchurch Capital, L.P. the reasonable out-of-pocket costs and expenses in connection with monitoring and overseeing their investment in the Company. The Company recognized less than $ 0.1 million and $ 0.2 million for the reimbursement of out-of-pocket costs and expenses to Wynnchurch Capital, L.P. and no amounts for the reimbursement of out-of-pocket costs and expenses to the Sponsor during the fiscal quarter and two fiscal quarters ended July 1, 2023, respectively. The Company did not reimburse any out-of-pocket costs or expenses to the Sponsor and Wynnchurch Capital, L.P. during the fiscal quarter and the two fiscal quarters ended July 2, 2022. As of both July 1, 2023 and December 31, 2022, there was less than $ 0.1 million outstanding amounts payable to the Sponsor and no outstanding amounts payable to Wynnchurch Capital, L.P. ​ ​ ​ ​ 22 Table of Contents