Utz Brands, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A “Risk Factors” of this Annual Report on Form 10-K. Our fiscal year end is the Sunday closest to December 31. Our fiscal year 2019 ended December 29, 2019 and was a fifty-two-week period, our fiscal year 2020 ended January 3, 2021 and was a fifty-three-week fiscal year, and our fiscal year 2021 ended January 2, 2022 and was a fifty-two-week fiscal year. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three-week fiscal periods for the which the fourth quarter is comprised of fourteen weeks, and end on the thirteenth Sunday of each quarter (fourteenth Sunday of the fourth quarter, when applicable). Overview We are a leading United States manufacturer of branded salty snacks. We produce a broad offering of salty snacks, including potato chips, tortilla chips, pretzels, cheese snacks, veggie snacks, pork skins, veggie snacks, pub/party mixes, and other snacks. Our iconic portfolio of authentic, craft, and “better for you” brands, which includes Utz®, ON THE BORDER® , Zapp’s®, Golden Flake®, Good Health®, Boulder Canyon®, Hawaiian® Brand, and TORTIYAHS!®, among others, enjoys strong household penetration in the United States, where our products can be found in approximately 49% of U.S. households. We operate 17 manufacturing facilities with a broad range of capabilities, and our products are distributed nationally to grocery, mass merchant, club, convenience, drug and other retailers through direct shipments, distributors, and approximately 1,850 direct-store-delivery (“DSD”) routes. Our company was founded in 1921 in Hanover, Pennsylvania, and benefits from 100 years of brand awareness and heritage in the salty snack industry. We have historically expanded our geographic reach and product portfolio organically and through acquisitions. Based on 2021 retail sales, we are second-largest producer of branded salty snacks in our Core geographies, where we have acquired strong regional brands and distribution capabilities in recent years. Business Combination On August 28, 2020, CCH domesticated into a Delaware corporation and changed its name to "Utz Brands, Inc." (the “Domestication”) and consummated the acquisition of certain limited liability company units of UBH, the parent of Utz Quality Foods, LLC (“UQF”), as a result of a new issuance by UBH and purchases from UBH’s existing equity holders pursuant to a Business Combination Agreement, dated as of June 5, 2020 (the “Business Combination Agreement”) among CCH, UBH and Series U of UM Partners, LLC (“Series U”) and Series R of UM Partners, LLC (“Series R” and together with Series U, the “Continuing Members”), following the approval at the extraordinary general meeting of the shareholders of CCH held on August 27, 2020. UBI was determined to be the accounting acquirer and UBH was determined to be the accounting acquiree, in accordance with ASC 810, as the Company is considered to be the primary beneficiary of UBH after the Business Combination. Under the ASC 805, Business Combinations, acquisition method of accounting, purchase price allocation of assets acquired and liabilities assumed of UBH are presented based on their estimated fair values as of the closing of the Business Combination. As a result of the Business Combination, UBI’s financial statement presentation distinguishes UBH as the “Predecessor” for periods prior to the closing of the Business Combination. UBI, which includes consolidation of UBH subsequent to the Business Combination, is the “Successor” for periods after the closing of the Business Combination. As a result of the application of the acquisition method of accounting in the Successor period, the financial statements for the Successor period are presented on a full step-up basis as a result of the Business Combination, and are therefore not comparable to the financial statements of the Predecessor period that are not presented on the same full step-up basis due to the Business Combination. 43 Key Developments and Trends Our management team monitors a number of developments and trends that could impact our revenue and profitability objectives. Long-Term Demographics, Consumer Trends, and Demand – We participate in the attractive and growing $30 billion U.S. salty snacks category, within the broader $105 billion market for U.S. snack foods as of January 2, 2022. The salty snacks category has grown retail sales at an approximately 6.4% compound annual growth rate (“CAGR”) from 2017 through 2021 with a major spike in 2020 driven by COVID-19 consumption. In the last few years snacking occasions have been on the rise as consumers increasingly seek out convenient, delicious snacks for both on-the-go and at-home lifestyles. According to data from the Hartman Group, The Consumer Goods Forum, and IRI as of January 2, 2022, approximately 50% of U.S. eating occasions are snacks, with 95% of the U.S. population snacking daily and the average American snacking 2.6 times per day based upon the latest available IRI data. Additionally, the salty snacks category has historically benefited from favorable competitive dynamics, including low private label penetration and category leaders competing primarily through marketing and innovation. We expect these consumer and category trends to continue to drive strong retail sales growth for salty snacks. As a staple food product with resilient consumer demand and a predominantly domestic supply chain, the salty snack category is well positioned to navigate periods of economic disruption or other unforeseen global events. The U.S. salty snack category has demonstrated strong performance through economic downturns historically, growing at a 4% CAGR from 2007 to 2010 during the last recession. More recently, the U.S. salty snack category demonstrated strong performance during the novel coronavirus (“COVID-19”) pandemic which began in March 2020 in the U.S. For the 52 weeks ended January 2, 2022, U.S. retail sales for salty snacks based on IRI data increased by 6.8% versus the comparable prior year period while our retail sales increased by 1.7% in the same period. The 2 year CAGR from 2020 to 2021 was 8.1% for U.S.retail sales of salty snacks, during which time our retail sales increased by 8.3%. Competition – The salty snack industry is highly competitive and includes many diverse participants. Our products primarily compete with other salty snacks but also compete more broadly for certain eating occasions with other snack foods. We believe that the principal competitive factors in the salty snack industry include taste, convenience, product variety, product quality, price, nutrition, consumer brand awareness, media and promotional activities, in-store merchandising execution, customer service, cost-efficient distribution, and access to retailer shelf space. We believe we compete effectively with respect to each of these factors. Operating Costs – Our operating costs include raw materials, labor, manufacturing overhead, selling, distribution, general and administrative expenses. We manage these expenses through annual cost saving and productivity initiatives, sourcing and hedging programs, pricing actions, refinancing and tax optimization. Additionally, we maintain ongoing efforts led by our project management office, or PMO, to expand our profitability, including implementing significant reductions to our operating cost structure in both supply chain and overhead costs. Taxes – On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted which includes various tax provisions with retroactive effect. The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ending before the date of enactment. We deferred $7.8 million of payroll tax deposits per the CARES Act. The deferred payroll taxes must be deposited in two installments, with the first installment of $3.9 million paid as of December 31, 2021, and the remaining $3.9 million due on December 31, 2022. We continue to evaluate the impact of the CARES Act; however, we believe it is unlikely to have a material effect on our consolidated financial position, results of operations, and cash flow. Financing Costs – We regularly evaluate our variable and fixed-rate debt. We continue to use low-cost, short- and long-term debt to finance our ongoing working capital, capital expenditures and other investments and dividends. Our weighted average interest rate for the fiscal year ended January 2, 2022 was 3.5%, down from 4.9% during the same timeframe in fiscal 2020. We have begun to use interest rate swaps to manage our exposure to interest rate changes, which can drive cash flow variability related to our debt. Refer to Note 8. "Long-Term Debt" and Note 9. "Derivative Financial Instruments and Purchase Commitments" to our audited consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K (our "Audited Financial Statements") for additional information on debt, derivative and purchase commitment activity. 44 LIBOR Transition – As of January 2, 2022, we had $823.2 million in variable rate indebtedness, up from $780.0 million at January 3, 2021, all or a portion of which uses London Inter Bank Offered Rate ("LIBOR") as a benchmark for establishing applicable rates. As announced in July 2017, LIBOR was phased out on December 31, 2021 for new contracts. On November 30, 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation issued a public statement that the administrator of LIBOR announced it will consult on an extension of publication of certain U.S. Dollar LIBOR tenors until June 30, 2023, which would allow additional legacy USD LIBOR contracts to mature before the succession of LIBOR. The administrator has not yet announced the results of its consultation. Although many of our LIBOR-based obligations provide for alternative methods of calculating the interest rate payable if LIBOR is not reported, the extent and manner of any future changes with respect to methods of calculating LIBOR or replacing LIBOR with another benchmark are unknown and impossible to predict at this time and, as such, may result in interest rates that are materially higher than current interest rates. If interest rates applicable to our variable interest indebtedness increase, our interest expense will also increase, which could make it difficult for us to make interest payments and fund other fixed costs and, in turn, adversely impact our cash flow available for general corporate purposes. COVID-19 – In March 2020, the World Health Organization declared that COVID-19 constituted a “Public Health Emergency of International Concern” and later characterized it as a “pandemic”. In response, we have taken necessary preventive actions and continue to implement safety measures to protect our employees who are working on and off site. The same time period, March 2020, also marked the beginning of COVID-19’s impact on the consumption, distribution and production of our products. Demand for product increased significantly for several weeks in late March and into April 2020 as customers “pantry-loaded” in response to “shelter-in-place” measures that were enacted in many markets. Following that initial spike, in the weeks that followed, demand for product continued to out-pace prior year rates as families have favored “at-home” dining at a greater rate than pre-pandemic levels. We have serviced that demand by increasing production and distribution activities. Our strategic manufacturing capabilities and DSD distribution network have allowed us to effectively service the increased demand and be responsive to evolving market dynamics driven by changes in consumer behavior. During this time we picked up a significant number of new customers and have experienced a high level of repeat customers within fiscal year 2021. We will continue to monitor customer and consumer activity and adapt our plans as necessary to best service the business. Recent Developments and Significant Items Affecting Comparability Acquisitions On October 21, 2019, we closed on our acquisition of Kennedy Endeavors, LLC (“Kennedy”) from Conagra Brands Inc. The Company paid the aggregate purchase price of approximately $138.1 million. Kennedy consists of Tim’s Cascade Snacks and Snyder of Berlin, which are snack food manufacturers. We acquired this business to expand our national footprint and our DSD snacks business as well as capture significant synergies. The acquisition provided us with the second largest DSD network for branded salty snacks in the Pacific Northwest, a leased, regional production facility outside of Seattle, Washington, and increased scale with retailers in the Western United States. We also acquired regional DSD routes and a production facility in Berlin, Pennsylvania, which are highly complementary with our existing business in that region. On November 11, 2020 the Company caused its subsidiaries, UQF and Heron, to enter into a Stock Purchase Agreement (the "Truco Acquisition") among UQF, Heron, Truco Holdco Inc. (“Truco”) and Truco Holdings LLC ("Truco Seller"). On December 14, 2020, pursuant to the Stock Purchase Agreement, the Company caused its subsidiary, Heron, to purchase and acquire from Truco Holdings LLC all of the issued and outstanding shares of common stock of Truco (the “Truco Acquisition”). Upon completion of the Truco Acquisition, Truco became a wholly owned subsidiary of Heron. At the closing of the Truco Acquisition, the Company paid the aggregate cash purchase price of approximately $405.1 million to Truco Holdings LLC, including payments of approximately $3.0 million for cash on hand at Truco at the closing of the Truco Acquisition, less estimated working capital adjustments, subject to customary post-closing adjustments. In addition, on December 14, 2020, UQF purchased and acquired from OTB Acquisition, LLC certain intellectual property (“OTB IP”) assets (“IP Purchase”) pursuant to an Asset Purchase Agreement, dated November 11, 2020, among UQF, Truco Seller and OTB Acquisition, LLC. The IP Purchase was determined to be an asset acquisition under the provisions of ASC Subtopic 805-50. The IP Purchase is accounted for separately from the Truco Acquisition, as Truco and the OTB IP were acquired from two different selling parties that were not under common control and are two separate transactions. The OTB IP was initially recognized and measured by the Company based on its purchase price of $79.0 million since it was acquired in asset purchase and is treated as an indefinite lived intangible assets. On February 8, 2021, the Company closed on a definitive agreement with Snak-King Corp. to acquire certain assets of the C.J. Vitner's business, a leading brand of salty snacks in the Chicago, IL area. The acquisition increases our distribution in the Chicago area and Midwest Region and expands our product offering. The Company paid the aggregate cash purchase price of approximately $25.2 million which was funded from current cash-on-hand. 45 On May 10, 2021, the Company announced that its subsidiary, UQF entered into a definitive agreement with Great Lakes Festida Holdings, Inc. to acquire all assets including real estate located in Grand Rapids, Michigan related to the operations of Festida Foods ("Festida Foods acquisition" or "acquisition of Festida Foods"), a manufacturer of tortilla chips, corn chips, and pellet snacks, and the largest manufacturer of tortilla chips for the Company's ON THE BORDER® brand. The Company closed this transaction on June 7, 2021 and the purchase price of approximately $40.3 million was funded in part from incremental financing on an existing term loan. On November 2, 2021, the Company announced that its subsidiaries, entered into a definitive agreement to acquire R.W. Garcia Holdings, LLC and its' wholly-owned subsidiary R.W. Garcia Co., Inc. ("RW Garcia") to acquire the equity of RW Garcia., an artisan maker of high-quality organic tortilla chips, crackers, and corn chips (RW Garcia acquisition"). The Company closed on this transaction on December 6, 2021, with the purchase price of approximately $58.3 million funded in part from a draw on the Company's line of credit and cash on hand. In addition to this acquisition on December 6, 2021, the Company closed on an acquisition of a manufacturing facility of which RW Garcia was a tenant. The cost of the manufacturing facility was approximately $6.0 million. Commodity Trends We regularly monitor worldwide supply and commodity costs so we can cost-effectively secure ingredients, packaging and fuel required for production. A number of external factors such as weather conditions, commodity market conditions, and the effects of governmental, agricultural or other programs affect the cost and availability of raw materials and agricultural materials used in our products. We address commodity costs primarily through the use of buying-forward, which locks in pricing for key materials between three and 18 months in advance. Other methods include hedging, net pricing adjustments to cover longer term cost inflation, and manufacturing and overhead cost control. Our hedging techniques, such as forward contracts, limit the impact of fluctuations in the cost of our principal raw materials; however, we may not be able to fully hedge against commodity cost changes, where there is a limited ability to hedge, and our hedging strategies may not protect us from increases in specific raw material costs. Toward the end of 2020, we began to experience an increase in pricing in certain commodity trends that continued to rise over 2021. We expect this trend to continue through early 2022 and this may adversely impact our net income. Additionally, the Company has experienced rising costs related to fuel and freight rates as well as rising labor costs which have negatively impacted profitability. Transportation costs have been on the rise for the last few months and may continue to rise which may adversely impact net income. The Company looks to offset rising costs through increasing manufacturing and distribution efficiencies as well as through price increases to our customers, although it is unclear whether historic customer sales levels will be maintained at these higher prices. Due to competitive or market conditions, planned trade or promotional incentives, or other factors, our pricing actions may also lag commodity cost changes. While the costs of our principal raw materials fluctuate, we believe there will continue to be an adequate supply of the raw materials we use and that they will generally remain available from numerous sources. Market factors including supply and demand may result in higher costs of sourcing those materials. Independent Operator Conversions Our DSD distribution is executed via company-owned routes operated by RSPs, and third-party routes managed by IOs. We have used the IO and RSP models for more than a decade. In fiscal year 2017, we embarked on a multi-year strategy to convert all company owned RSP routes to the IO model. The mix between IOs and RSP was approximately 88% and 12%, respectively, as of January 2, 2022 versus a 79% and 21% ratio for IOs and RSPs, respectively, as of January 3, 2021. We anticipate completing substantially all remaining conversions during fiscal year 2022. The conversion process involves selling distribution rights to a defined route to an IO. As we convert a large number of routes in a year, there is a meaningful decrease in the selling, general and administrative costs that we previously incurred on RSPs and a corresponding increase in discounts paid to IOs to cover their costs to distribute our product. The net impact is a reduction in selling expenses and a decrease in net sales and gross profit. Conversions also impact our balance sheet resulting in cash proceeds to us as a result of selling the route to an IO, or by creating notes receivable related to the sale of the routes. 46 Controls and Procedures Prior to the consummation of the Business Combination, we were not required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act and were therefore not required in connection with periods ended prior to the consummation of the Business Combination to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Since the consummation of the Business Combination, we are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which require our management to certify financial and other information in our quarterly and annual reports. We are required to provide an annual management report on the effectiveness of our internal control over financial reporting beginning with our annual report for the fiscal year ending January 3, 2021. Beginning with the fiscal year ended January 2, 2022 our independent registered public accounting firm is required to assess and attest to the effectiveness of our internal control over financial reporting. Results of Operations Overview The following tables present selected financial data for the year ended January 2, 2022, fiscal periods ended January 3, 2021 and August 28, 2020, and year ended December 29, 2019. We have prepared our discussion of the results of operations by comparing the results for the year ended January 2, 2022, the combined successor fiscal period from August 29, 2020 through January 3, 2021 and the Predecessor period from December 30, 2019 through August 28, 2020, and the year ended December 29, 2019. We believe this approach provides the most meaningful basis of comparison and is more useful in identifying current business trends for the periods presented. The combined results of operations included in our discussion below are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations, and may not reflect the actual results we would have achieved had the Business Combination occurred at the beginning of fiscal 2019, and should not be viewed as a substitute for the results of operations of the Predecessor and Successor periods presented in accordance with U.S. GAAP. 47 Successor Predecessor For the year ended January 2, 2022 From August 29, 2020 through January 3, 2021 From December 30, 2019 through August 28, 2020 For the year ended December 29, 2019 Net sales $ 1,180,713 $ 325,648 $ 638,662 $ 768,228 Cost of goods sold 796,804 219,977 411,595 514,430 Gross profit 383,909 105,671 227,067 253,798 Selling, general and administrative expenses Selling 249,352 63,616 131,579 163,589 General and administrative 125,855 43,871 64,050 64,723 Total selling, general and administrative expenses 375,207 107,487 195,629 228,312 Gain on sale of assets Gain on disposal of property, plant and equipment, net 1,133 109 79 6,028 Gain on sale of routes, net 731 749 1,264 7,232 Total gain on sale of assets 1,864 858 1,343 13,260 Income (loss) from operations 10,566 (958) 32,781 38,746 Other income (expense) Interest expense (34,708) (13,301) (26,659) (48,388) Other income (expense) 3,551 (2,058) 1,271 (576) Gain (loss) on remeasurement of warrant liability 36,675 (91,851) — — Other income (expense), net 5,518 (107,210) (25,388) (48,964) Income (loss) before income taxes 16,084 (108,168) 7,393 (10,218) Income tax expense (benefit) 8,086 (267) 3,973 3,146 Net income (loss) 7,998 (107,901) 3,420 (13,364) Net loss (income) attributable to noncontrolling interest 12,557 7,971 — (2,808) Net income (loss) attributable to controlling interest $ 20,555 $ (99,930) $ 3,420 $ (16,172) 48 Successor Predecessor Non-GAAP Combined (in thousands) From August 29, 2020 through January 3, 2021 From December 30, 2019 through August 28, 2020 For the year ended January 3, 2021 Net sales $ 325,648 $ 638,662 $ 964,310 Cost of goods sold 219,977 411,595 631,572 Gross profit 105,671 227,067 332,738 Selling, general and administrative expenses Selling 63,616 131,579 195,195 General and administrative 43,871 64,050 107,921 Total selling, general and administrative expenses 107,487 195,629 303,116 Gain on sale of assets Gain on disposal of property, plant and equipment 109 79 188 Gain on sale of routes, net 749 1,264 2,013 Total gain on sale of assets 858 1,343 2,201 (Loss) income from operations (958) 32,781 31,823 Other (expense) income Interest expense (13,301) (26,659) (39,960) Other (expense) income (2,058) 1,271 (787) Loss on remeasurement of warrant liabilities (91,851) — (91,851) Other (expense) income, net (107,210) (25,388) (132,598) (Loss) income before taxes (108,168) 7,393 (100,775) Income tax (benefit) expense (267) 3,973 3,706 Net (loss) income (107,901) 3,420 (104,481) Net loss attributable to noncontrolling interest 7,971 — 7,971 Net (loss) income attributable to controlling interest $ (99,930) $ 3,420 $ (96,510) 49 Successor Non-GAAP Combined Predecessor (in thousands) For the year ended January 2, 2022 For the year ended January 3, 2021 For the year ended December 29, 2019 Net sales $ 1,180,713 $ 964,310 $ 768,228 Cost of goods sold 796,804 631,572 514,430 Gross profit 383,909 332,738 253,798 Selling, general and administrative expenses Selling 249,352 195,195 163,589 General and administrative 125,855 107,921 64,723 Total selling, general and administrative expenses 375,207 303,116 228,312 Gain on sale of assets Gain on disposal of property, plant and equipment 1,133 188 6,028 Gain on sale of routes, net 731 2,013 7,232 Total gain on sale of assets 1,864 2,201 13,260 Income from operations 10,566 31,823 38,746 Other income (expense) Interest expense (34,708) (39,960) (48,388) Other (expense) income 3,551 (787) (576) Loss on remeasurement of warrant liability 36,675 (91,851) — Other income (expense), net 5,518 (132,598) (48,964) Income (loss) before taxes 16,084 (100,775) (10,218) Income tax expense 8,086 3,706 3,146 Net income (loss) 7,998 (104,481) (13,364) Net loss (income) attributable to noncontrolling interest 12,557 7,971 (2,808) Net income (loss) attributable to controlling interest $ 20,555 $ (96,510) $ (16,172) 52 week Year Ended January 2, 2022 (Successor) versus 53 week Year Ended January 3, 2021 (Successor and Predecessor) Net sales Net sales were $1,180.7 million for the year ended January 2, 2022 and $325.6 million for the Successor period August 29, 2020 through January 3, 2021 and $638.7 million for the Predecessor period December 30, 2019 through August 28, 2020. Net sales for the year ended January 2, 2022 increased $216.4 million or 22.4% over the combined fiscal year 2020. The increase in net sales for the 52 weeks ended January 2, 2022 was related to the acquisitions of H.K. Anderson, Festida, Vitner's, RW Garcia and Truco, along with increased sales across customers and geographies resulting from customer programs and pricing actions put in place to help offset inflation pressures on higher input and supply chain costs in fiscal year 2021, partially offset by an extra week of sales in fiscal 2020, which represented $15.9 million. The Company lapped higher sales that were heightened by increased in-home consumption of salty snacks due to COVID-19 and has kept a high rate of repeat customers. IO discounts increased from $96.7 million for the combined year ended January 3, 2021 to $109.7 million for the corresponding year ended January 2, 2022. Excluding the impacts of acquisitions and changes to IO discounts, total net sales increased 0.8% for the year ended January 2, 2022 versus the corresponding period in 2020. 50 Net sales are evaluated based on classification as Power and Foundation brands. Power brands include our iconic heritage Utz brand and iconic ON THE BORDER®; craft brands such as Zapp’s ®, Golden Flake ® Pork Skins, TORTIYAHS!, and Hawaiian ®; “better for you” brands such as Good Health ® and Boulder Canyon ®; and selected licensed brands such as TGI Fridays ®. Our Foundation brands are comprised of several regional brands, including Bachman ®, Golden Flake ® Chips and Cheese, Tim’s Cascade ® Snacks , Snyder of Berlin ®, and “ Dirty ” Potato Chips®, R.W. Garcia® and selected licensed brands such as Herdez ® as well as other partner and private label brands. For the year ended January 2, 2022, excluding the impact of higher IO discounts and brands acquired through our H.K. Anderson, Vitner's, Truco, Festida, and R.W. Garcia acquisitions, Power Brand sales increased by approximately 3%, while Foundation Brand sales decreased approximately 3% from 2020. Growth in Power Brands was led by Utz®, Zapp’s®, TORTIYAHS!® and Golden Flake Pork® Skins brands, with strong increases across Core, Expansion and Emerging Geographies. The decline in Foundation Brands reflects our strategy to focus on our Power Brands . Cost of goods sold and Gross profit Gross profit was $383.9 million for the year ended January 2, 2022, $105.7 million for the Successor period August 29, 2020 through January 3, 2021, and $227.1 million from for the Predecessor period December 30, 2019 through August 28, 2020. Gross profit for the year ended January 2, 2022 increased $51.2 million or 15.4% over the comparable period in 2020. The increase in gross profit for fiscal year 2021 was driven by higher sales, contributions from the acquisitions of H.K. Anderson, Festida, Vitner's, RW Garcia and Truco, leveraging our existing infrastructure and available capacity, as well as the ramp-up of productivity initiatives driving improvement in manufacturing capability. Our gross profit margin was 32.5% for the fiscal year 2021 versus 34.5% for the combined fiscal year ended 2020. IO discounts increased from $96.7 million in fiscal 2020 to $109.7 million in fiscal 2021 primarily as the result of continued route conversions to independent operators, accounting for about 1.1% of the decline in gross profit margin. The remaining reduction of gross profit margin was primarily driven by labor, freight and commodity inflation. In response to these inflationary pressures the Company initiated pricing actions, which due to timing, did not fully cover the incremental costs in fiscal 2021. Selling, general and administrative expenses Selling, general and administrative expenses were $375.2 million for the year ended January 2, 2022 with $107.5 million for the Successor period August 29, 2020 through January 3, 2021, and $195.6 million for the Predecessor period December 30, 2019 through August 28, 2020. Selling, general and administrative expenses for the year ended January 2, 2022 increased $72.1 million or 23.8% over the comparable period in 2020. The increased expenses in fiscal year 2021 resulted mostly from higher operational costs related to H.K. Anderson, Festida, Vitner's, RW Garcia and Truco acquisitions, along with inflationary pressures and higher supply chain costs largely driven by higher freight costs, partially offset by an extra week in fiscal year 2020 and by savings due to the transition of Company owned DSD routes to independent operators. Gain on sale of assets Gain on sale of assets was $1.9 million for the year ended January 2, 2022, $0.9 million for the Successor period August 29, 2020 through January 3, 2021 and $1.3 million for the Predecessor period December 30, 2019 through August 28, 2020. The decrease in the gain on sale of assets of $0.2 million was primarily the result of a lower route conversions in 2021 offset by gains on disposals of equipment. Other income (expense), net Other income (expense), net was $5.5 million for the year ended January 2, 2022, $(107.2) million for the Successor period August 29, 2020 through January 3, 2021, and $(25.4) million for the Predecessor period December 30, 2019 through August 28, 2020. The primary change was driven by the evaluation of the company's warrants. In fiscal year 2021, the warrants resulted in a gain of $36.7 million versus a loss of $91.9 million for fiscal year 2020. Also significant was interest expense of $(34.7) million for the year ended January 2, 2022 compared to $(13.3) million for the Successor period August 29, 2020 through January 3, 2021 and $(26.7) million for the Predecessor period December 30, 2019 through August 28, 2020. Income taxes Income taxes were an expense of $8.1 million for the year ended January 2, 2022, a benefit of $(0.3) million for the Successor period August 29, 2020 through January 3, 2021, and an expense of $4.0 million for the Predecessor period December 30, 2019 through August 28, 2020 . 51 53 week Year Ended January 3, 2021 (Successor and Predecessor) versus 52 week Year Ended December 29, 2019 (Predecessor) Net sales Net sales were $325.6 million for the Successor period, $638.7 million from December 30, 2019 through August 28, 2020, and $768.2 million for the year ended December 29, 2019. Net sales for the combined year ended January 3, 2021 increased $196.1 million or 25.5% over the comparable period in 2019. The increase in net sales for the 53 weeks ended January 3, 2021 was related to the acquisitions of Kennedy, Kitchen Cooked, H.K. Anderson and Truco, increased sales across customers and geographies that were heightened by increased in-home consumption of salty snacks due to COVID-19, as well as a 53rd week. The 53rd week represents an increase of approximately $15.9 million. IO discounts increased from $77.2 million for the year ended December 29, 2019 to $96.7 million for the corresponding combined year ended January 3, 2021. Excluding the impacts of acquisitions and changes to IO discounts, total net sales grew 16.7% for the combined year ended January 3, 2021 versus the corresponding period in 2019. Net sales are evaluated based on classification as Power and Foundation brands. Power brands include our iconic heritage Utz brand and iconic ON THE BORDER®; craft brands such as Zapp’s ®, Golden Flake ® Pork Skins, and Hawaiian ®; “better for you” brands such as Good Health ® and Boulder Canyon ®; and selected licensed brands such as TGI Fridays ®. Our Foundation brands are comprised of several regional brands, including Bachman ®, Golden Flake ® Chips and Cheese, Tim’s Cascade ® Snacks , Snyder of Berlin ®, “ Dirty ” Potato Chips®, and selected licensed brands Herdez ® as well as other partner and private label brands. For the combined year ended January 3, 2021, excluding the impact of higher IO discounts and brands acquired through our Kennedy, Kitchen Cooked, H.K. Anderson and Truco acquisitions, Power Brand sales increased by approximately 14%, while Foundation Brand sales decreased approximately 1% from 2019. Growth in Power Brands was led by Utz®, Zapp’s®, TORTIYAHS!® and Golden Flake Pork® Skins brands, with strong increases across Core, Expansion and Emerging Geographies. The decline in Foundation Brands reflects our strategy to focus on our Power Brands and continued softness in food service, up-and-down-the-street customers, and the convenience channel due to COVID-19. Conversely, our Power Brands have a stronger presence in large format channels, which have performed well during this time period. Cost of goods sold and Gross profit Gross profit was $105.7 million for the Successor period, $227.1 million from December 30, 2019 through August 28, 2020, and $253.8 million for the year ended December 29, 2019. Gross profit for the combined year ended January 3, 2021 increased $78.9 million or 31.1% over the comparable period in 2019. The increase in gross profit for fiscal year 2020 was driven by higher sales, contributions from the acquisition of Kennedy, Kitchen Cooked, H.K. Anderson and Truco, leveraging our existing infrastructure and available capacity, as well as lower per unit costs for materials and overhead driven by productivity initiatives, and lower commodity costs, which were partially offset by the amortization of acquired inventory of $5.8 million. Our gross profit margin was 34.5% for the combined fiscal year 2020 versus 33.0% for the fiscal year ended 2019. Excluding the amortization of acquired inventory, the improvement in gross profit margin was primarily driven by the sales volume leverage on controllable overhead costs and productivity savings. IO discounts increased from $77.2 million in fiscal 2019 to $96.5 million in fiscal 2020, reducing gross profit by $19.3 million. Selling, general and administrative expenses Selling, general and administrative expenses were $107.5 million for the Successor period, $195.6 million from December 30, 2019 through August 28, 2020, and $228.3 million for the year ended December 29, 2019. Selling, general and administrative expenses for the combined year ended January 3, 2021 increased $74.8 million or 33% over fiscal 2019. The increased expenses in fiscal 2020 were driven by higher transaction-related service provider fees, higher operational costs related to incremental sales volume, operating expense of the acquired Kennedy, Kitchen Cooked, H.K. Anderson and Truco businesses, higher incentive compensation expense and an additional 53rd week. Gain on sale of assets Gain on sale of assets was $0.9 million for the Successor period, $1.3 million from December 30, 2019 through August 28, 2020, and $13.3 million for the year ended December 29, 2019. Gain on sale of assets was primarily driven by a reduction in the number of conversions of RSP routes to IO routes, which resulted in lower proceeds from the sale of routes in fiscal year 2020 compared to the same time period in fiscal year 2019. Additionally, Company owned routes were recorded at fair value as a result of the Business Combination, which resulted in increasing the IO route asset by $10.5 million. 52 Other (expense) income, net Other expense, net was $107.2 million for the Successor period, $25.4 million from December 30, 2019 through August 28, 2020, and $49.0 million for the year ended December 29, 2019. During the Successor period the Company recognized an expense of $91.9 million due to the remeasurement of the warrant liability. The Warrants were not part of the Predecessor and therefore no such expense is shown in the Predecessor periods. In addition, the Company incurred $2.5 million of expenses in connection with the repayment of the Senior Secured First Lien Note and incremental interest of $1.1 million and deferred financing fees that were expensed of $4.7 million related to the bridge loan in connection with the acquisition of Truco during the Successor period. Interest expense decreased $8.4 million for the combined year ended January 3, 2021, versus the fiscal year 2019. The lower interest expense was driven by a reduction in the comparative average LIBOR rate and payoff of the existing second lien term loan and subsequent origination of a new term loan with a lower fixed rate component in the fiscal fourth quarter of 2019, which favorably impacted the fiscal year 2020. Income taxes Inco me taxes were a benefit of $0.3 million for the Successor period, expense of $4.0 million for December 30, 2019 through August 28, 2020, and expense of $3.1 million for the year ended December 29, 2019 . Non-GAAP Financial Measures We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in our underlying operating results and provides additional insight and transparency on how we evaluate the business. We use non-GAAP financial measures to budget, make operating and strategic decisions, and evaluate our performance. We have detailed the non-GAAP adjustments that we make in our non-GAAP definitions below. The adjustments generally fall within the categories of non-cash items, acquisition and integration costs, business transformation initiatives, and financing-related costs. We believe the non-GAAP measures should always be considered along with the related U.S. GAAP financial measures. We have provided the reconciliations between the U.S. GAAP and non-GAAP financial measures below, and we also discuss our underlying U.S. GAAP results throughout this MD&A section. Our primary non-GAAP financial measures are listed below and reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change. When the definitions change, we will provide the updated definitions and present the related non-GAAP historical results on a comparable basis. EBITDA, Adjusted EBITDA, and Further Adjusted EBITDA We define EBITDA as Net Income before Interest, Income Taxes, and Depreciation and Amortization. We define Adjusted EBITDA as EBITDA further adjusted to exclude certain non-cash items, such as accruals for long-term incentive programs, hedging and purchase commitments adjustments, and asset impairments; Acquisition and Integration Costs; Business Transformation Initiatives; and Financing-Related Costs. We define Further Adjusted EBITDA as Adjusted EBITDA after giving effect to pre-acquisition EBITDA of Kennedy, pre-acquisition Adjusted EBITDA of Kitchen Cooked, and pre-acquisition EBITDA of Collier Creek Holdings. We also report Further Adjusted EBITDA as a percentage of Pro Forma Net Sales as an additional measure to evaluate our Further Adjusted EBITDA margins on Pro Forma Net Sales. Adjusted EBITDA is one of the key performance indicators we use in evaluating our operating performance and in making financial, operating, and planning decisions. We believe EBITDA, Adjusted EBITDA, and Further Adjusted EBITDA are useful to investors in the evaluation of Utz’s operating performance compared to other companies in the salty snack industry, as similar measures are commonly used by companies in this industry. We have also historically reported an Adjusted EBITDA metric to investors and banks for covenant compliance. We also report Adjusted EBITDA as a percentage of Net Sales as an additional measure for investors to evaluate our Adjusted EBITDA margins on Net Sales. 53 The following table provides a reconciliation from Net (Loss) Income for the Successor period from August 29,2020 through January 3, 2021 and the Predecessor period from December 30, 2019 through August 28, 2020 and for the year ended January 3, 2021 (Combined). Successor Predecessor Combined (dollars in millions) From August 29, 2020 through January 3, 2021 From December 30, 2019 through August 28, 2020 For the year ended January 3, 2021 Net (Loss) Income $ (107.9) $ 3.4 $ (104.5) The following table provides a reconciliation from Net Income (Loss) to EBITDA and Adjusted EBITDA the year ended January 2, 2022, combined period ended January 3, 2021, and year ended December 29, 2019: Successor Non-GAAP Combined Predecessor (dollars in millions) For the year ended January 2, 2022 For the year ended January 3, 2021 For the year ended December 29, 2019 Net income (loss) $ 8.0 $ (104.5) $ (13.4) Plus non-GAAP adjustments: Income Tax Expense 8.1 3.7 3.2 Depreciation and Amortization 80.7 50.5 29.3 Interest Expense, Net 34.7 40.0 48.3 Interest Income (IO loans) (1) (2.4) (2.4) (3.4) EBITDA 129.1 (12.7) 64.0 Certain Non-Cash Adjustments (2) 11.6 3.2 9.4 Acquisition and Integration (3) 27.0 40.0 3.3 Business Transformation Initiatives (4) 24.5 8.8 5.1 Financing-Related Costs (5) 0.7 2.7 4.7 (Gain) loss on remeasurement of warrant liability (6) (36.7) 91.9 — Adjusted EBITDA 156.2 133.9 86.5 Adjusted EBITDA as a % of Net Sales 13.2 % 13.9 % 11.3 % Adjustment to remove 53rd week — (3.1) — Conagra DSD Snacks (Kennedy) Pre-Acquisition EBITDA (7) — — 9.9 Kitchen Cooked Pre-Acquisition Adjusted EBITDA (7) — — 0.5 HKA Pre-Acquisition Adjusted EBITDA (7) — 1.1 1.6 Vitner's Pre-Acquisition Adjusted EBITDA (7) — 2.0 2.0 Truco Pre-Acquisition Adjusted EBITDA (7) — 47.5 31.1 Festida Pre-Acquisition Adjusted EBITDA (7) 2.6 5.9 4.1 R.W. Garcia Pre-Acquisition Adjusted EBITDA (7) 5.4 5.4 5.0 Further Adjusted EBITDA $ 164.2 $ 192.7 $ 140.7 (1) Interest Income from IO Loans refers to Interest Income that we earn from IO notes receivable that have resulted from our initiatives to transition from RSP distribution to IO distribution. (“Business Transformation Initiatives”) . There is a Notes Payable recorded that mirrors the IO notes receivable, and the interest expense associated with the Notes Payable is part of the Interest Expense, Net adjustment. 54 (2) Certain Non-Cash Adjustments are comprised primarily of the following: Incentive programs – Utz Quality Foods, LLC, our wholly-owned subsidiary, established the 2018 Long-Term Incentive Plan (the “2018 LTIP”) for employees in February 2018. The Company recorded income of $3.0 million for the Predecessor period from December 30, 2019 to August 28, 2020. The income was the result of the conversion rate of the 2018 LTIP Phantom Units into the 2020 LTIP RSUs. The Company recorded expenses of $6.5 million in 2019. Expenses incurred for the 2018 LTIP are non-operational in nature and are expected to decline upon the vesting of the remaining phantom units from fiscal year 2018 and fiscal year 2019 at the end of fiscal year 2021. The phantom units under the 2018 LTIP were converted into the 2020 LTIP RSUs as part of the Business Combination. Additionally, the Company incurred $13.0 million and $10.6 million of share-based compensation for the Successor period from August 29, 2020 to January 3, 2021 and for fiscal 2021, respectively. Purchase Commitments and Other Adjustments – We have purchased commitments for specific quantities at fixed prices for certain of our products’ key ingredients. To facilitate comparisons of our underlying operating results, this adjustment was made to remove the volatility of purchase commitment related unrealized gains and losses. Asset Impairments and Write-Offs — There were no adjustments for impairments recorded in 2021 or 2020. However, we did record an impairment on certain trade name intangible brand assets in fiscal year 2019 totaling $3.8 million. The impairment recorded in fiscal year 2019 was for a brand acquired from Inventure. (3) Adjustment for Acquisition and Integration Costs – This is primarily comprised of the following: (i) consulting, transaction services, and legal fees incurred for acquisitions and certain potential acquisitions; (ii) integration and restructuring costs related to recently completed acquisitions; and (iii) costs associated with reclaiming distribution rights from distributors. In 2021, acquisition related costs included $9.5 million of expense related to reclaiming distribution rights through purchases and terminations, in addition to $7.1 million of expense for the three acquired entities and the evaluation of other potential acquisition targets. Additionally in 2021, we incurred $10.2 million of expenses related to restructuring and integration costs related to recent acquisitions. In 2020, the majority of charges are related to costs incurred for the Business Combination, the HK Anderson acquisition, and the Truco acquisition, and related integration expenditures where we incurred costs of $40.0 million. In 2019, we incurred net expenses of $3.3 million related to acquisition expenses, which was partly offset by a $4.6 million gain from the sale of a manufacturing plant in Denver, CO previously written down as part of the Inventure Foods acquisition. (4) Business Transformation Initiatives – This adjustment is related to consultancy, professional, and legal fees incurred for specific initiatives and structural changes to the business that do not reflect the cost of normal business operations. In addition, certain pre-Business Combination Rice/Lissette family-related costs incurred but not part of normal business operations, and gains realized from the sale of distribution rights to IOs and the subsequent disposal of trucks, offset by severance costs associated with the elimination of RSP positions, fall into this category. Additionally, in 2021, we incurred certain one-time costs of $3.3 million associated with the damage of a manufacturing facility, net of expected proceeds from insurance policies, and one-time expenses as a result of COVID-19 of $1.9 million. In 2021, total net cost was $24.5 million compared to $8.8 million and $5.1 million net cost for the 2020 and 2019, respectively. The increase in fiscal 2021 costs is primarily a result of increased IO conversions, enhancements in our supply chain capabilities and costs associated with our transition of IT systems, including a new ERP. (5) Financing-Related Costs – These costs include adjustments for various items related to raising debt and preferred equity capital. In 2021, we incurred $0.7 million of expense compared to fiscal 2020, and 2019 expenses of $2.7 million and $4.7 million, respectively. In 2020 we incurred $2.5 million of expenses related to a prepayment penalty for the pay-down of debt and in 2019, these costs include expenses related to the sale of preferred and common units by Series U, Series R, and SRS to an outside investor, the repayment of the Second Lien Term Loan, and the issuance of the Secured First Lien Note to finance the Kennedy Acquisition. (6) (Gain) or loss related to the changes in the remeasurement of warrant liabilities are not expected to be settled in cash, and when exercised would result in a cash inflow to the Company with the Warrants converting to Class A Common Stock with the liability being extinguished and the fair value of the Warrants at the time of exercise being recorded as an increase to equity. (7) Pre-Acquisition Adjusted EBITDA- This adjustment represents the adjusted EBITDA of acquired companies prior to the acquisition date. 55 Liquidity and Capital Resources The following table presents net cash provided by operating activities, investing activities and financing activities for the year ended January 2, 2022, fiscal periods ended January 3, 2021 and August 28, 2020, and year ended December 29, 2019. Successor Predecessor (in thousands) For the year ended January 2, 2022 From August 29, 2020 through January 3, 2021 From December 30, 2019 through August 28, 2020 For the year ended December 29, 2019 Net cash provided by (used in) operating activities $ 48,387 $ (932) $ 30,627 $ 27,992 Net cash used in investing activities (136,098) (681,882) (21,516) (115,882) Net cash provided by (used in) financing activities 82,778 241,973 (10,451) 96,029 For the period ended January 2, 2022, our consolidated cash balance, including cash equivalents, was $41.9 million or $4.9 million lower than at January 3, 2021. Net cash provided by operating activities for the fifty-two weeks ended January 2, 2022 was $48.4 million compared to $29.7 million for the combined fiscal year ended January 3, 2021, with the difference largely driven by the increase in the non-cash expenses of depreciation and amortization, driven largely by the fair value adjustments to Property, Plant and Equipment and Intangibles as part of the Business Combination. Cash used in investing activities for the fiscal year ended January 2, 2022 was $136.1 million mostly driven by the acquisitions of Vitner's, Festida, and R.W. Garcia and capital expenditures of $31.7 million, versus cash used in investing activity of $703.4 million for the combined fiscal year ended January 3, 2021, which was largely driven by the Business Combination, acquisition of Truco and IP purchase of the On the Border tradename. Net cash provided by financing activities was $82.8 million for the fiscal year ended January 2, 2022, which was primarily a result of an increase in term and equipment loans and exercise of warrants, versus net cash provided by financing activities of $231.5 million for the combined fiscal year ended January 3, 2021, which was primarily a result of the bridge credit agreement for the acquisition of Truco and exercise of warrants. Financing Arrangements The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use short-term debt as management determines is reasonable, principally to finance ongoing operations, including our seasonal requirements for working capital (generally accounts receivable, inventory, and prepaid expenses and other current assets, less accounts payable, accrued payroll, and other accrued liabilities), and a combination of equity and long-term debt to finance both our base working capital needs and our non-current assets. Revolving Credit Facility On November 21, 2017, UBH entered into an asset based revolving credit facility (as amended, the “ABL facility”) in an initial aggregate principal amount of $100.0 million. The ABL facility was set to expire on the fifth anniversary of closing, or November 21, 2022. On April 1, 2020, the ABL facility was amended to increase the credit limit up to $116.0 million and to extend the maturity through August 22, 2024. On December 18, 2020, the ABL facility was amended to increase the credit limit up to $161.0 million. As of January 2, 2022 and January 3, 2021, $36.0 million and $0.0 million were outstanding under this facility. Availability under the ABL facility is based on a monthly accounts receivable and inventory borrowing base certification, which is net of outstanding letters of credit and amounts borrowed. As of January 2, 2022 and January 3, 2021, $96.9 million and $106.4 million, respectively, was available for borrowing, net of letters of credit. The facility bears interest at an annual rate based on LIBOR plus an applicable margin of 1.50% (ranging from 1.50% to 2.00% based on availability) or the prime rate plus an applicable margin of 0.50% (ranging from 0.50% to 1.00%). Had the Company elected to use the Prime rate, the interest rate on the facility as of January 2, 2022 and January 3, 2021 would have been 3.75%. The Company elected to use the LIBOR rate, the interest rate on the ABL facility as of January 2, 2022 was 1.58%. Had there been outstanding balances and the Company elected to use the LIBOR rate, the interest rate on the ABL facility as of January 2, 2022 and January 3, 2021 would have been 1.60% and 1.64%, respectively. The ABL facility is also subject to unused line fees (0.5% at January 2, 2022) and other fees and expenses. Standby letters of credit in the amount of $10.3 million and $14.1 million have been issued as of January 2, 2022 and January 3, 2021, respectively. The standby letters of credit are primarily issued for insurance purposes. 56 Term debt and financing obligations On November 21, 2017, the Company entered into a First Lien Term Loan Credit Agreement (the “First Lien Term Loan”) in a principal amount of $535.0 million and a Second Lien Term Loan Credit Agreement (the “Second Lien Term Loan”, and collectively with the First Lien Term Loan, the “Term Loans”) in a principal amount of $125.0 million. The proceeds of the Term Loans were used to refinance the Company’s January 2017 credit facility and fund the acquisition of Inventure Foods and the repurchase of the predecessor membership units held by a minority investor. The First Lien Term Loan requires quarterly principal payments of $1.3 million beginning March 2018, with a balloon payment due for any remaining balance on the seventh anniversary of closing, or November 21, 2024. On August 28, 2020, as part of the Business Combination (as described in Note 1. " Operations and Summary of Significant Accounting Policies" and Note 2. "Acquisitions") an advance payment of principal was made on the First Lien Term Loan of $111.6 million, as such no principal payments are due until November 21, 2024. The Company incurred closing and other costs associated with the Term Loans, which were allocated to each loan on a specific identification basis based on original principal amounts. Finance fees allocated to the First Lien Term Loan and the Second Lien Term Loan were $10.7 million and $4.1 million, respectively, which are presented net within “non-current portion of debt” on the consolidated balance sheets for the Predecessor periods. Deferred fees are amortized ratably over the respective lives of each term loan. Deferred fees associated with the term loans under the January 2017 credit agreement were fully expensed during 2017 and other deferred financing fees were derecognized as a result of the Business Combination as described in the Note 1 " Operations and Summary of Significant Accounting Policies" and Note 2. "Acquisitions". On October 1, 2019, the Company repaid the Second Lien Term Loan with the proceeds of the sale of preferred and common units by Series U, Series R, and SRS. The Company accounted for the repayment of the Second Lien Term Loan as a debt extinguishment as the investors who purchased the preferred units and common units were not parties to the Second Lien Term Loan. The total repayment was $126.3 million, and resulted in a loss on early extinguishment of approximately $4.3 million. Separately, on October 21, 2019, the Company entered into a Senior Secured First Lien Floating Rate Note (the “Secured First Lien Note”) in a principal amount of $125.0 million. Proceeds from the Secured First Lien Note were used primarily to finance the Kennedy Acquisition. The Secured First Lien Note requires quarterly interest payments, with a repayment of principal on the maturity date of November 21, 2024. On December 14, 2020, the Company entered into a Bridge Credit Agreement with a syndicate of banks, led by Bank of America, N.A. (the “Bridge Credit Agreement”). The proceeds of the Bridge Credit Agreement were used to fund the Company’s acquisition of Truco and the IP Purchase from OTB Acquisition, LLC, in which the Company withdrew $490.0 million to finance the Truco Acquisition and IP Purchase. As of January 3, 2021, the outstanding balance of the Bridge Credit Agreement was $370.0 million, with $120.0 million being repaid from the redemption of the Company's warrants. Commitment fees and deferred financing costs on the Bridge Credit Agreement totaled $7.2 million, of which $2.6 million remained on the books as of January 3, 2021. On January 20, 2021, the Bridge Credit Agreement was repaid in full by the refinancing of term debt. In connection with Amendment No. 2 to the Credit Agreement, and a $12.0 million repayment in the first quarter of 2021, the outstanding balance of $370.0 million was repaid in full and the Bridge Credit Agreement was terminated. On January 20, 2021, the Company entered into Amendment No. 2 to the Credit Agreement ("Amendment No. 2") which provided additional operating flexibility and revisions to certain restrictive covenants. Pursuant to the terms of Amendment No. 2, the Company raised $720 million in aggregate principal of Term Loan B ("Term Loan B") which bears interest at LIBOR plus 3.00%, and extended the maturity of the Credit Agreement to January 20, 2028. The proceeds were used, together with cash on hand and proceeds from our exercised warrants, to redeem the outstanding principal amount of existing Term Loan B and Bridge Credit Agreement of $410 million and $358 million, respectively. The refinancing was accounted for as an extinguishment. The Company incurred debt issuance costs and original issuance discounts of $8.4 million. On June 22, 2021, the Company entered into Amendment No. 3 to the Credit Agreement ("Amendment No. 3"). Pursuant to the terms of Amendment No. 3, the Company increased the principal balance of Term Loan B by $75.0 million to bring the aggregated balance of Term Loan B proceeds to $795.0 million, of which $787.2 million remains outstanding as of January 2, 2022. The Company incurred additional debt issuance costs and original issuance discounts of $0.7 million related to the incremental funding. The First Lien Term Loan, the Secured First Lien Note, Term Loan B, and the ABL facility are collateralized by substantially all of the assets of UBH and its subsidiaries, including equity interests in certain of UBH’s subsidiaries. The credit agreements contain certain affirmative and negative covenants as to operations and the financial condition of UBH and its subsidiaries. UBH and its subsidiaries were in compliance with its financial covenant as of January 2, 2022. 57 In July 2021, the Company entered into two separate finance lease obligations with Banc of America Leasing & Capital, LLC. In the first agreement, we agreed to sell and lease-back certain manufacturing equipment and warehouse/distribution equipment for $13.0 million with an interest rate of 3.26%. In the second agreement, we drew $9.8 million related to certain manufacturing equipment and warehouse/distribution equipment. Only interest is due on these loans until the capital projects are completed. In November 2021, we entered into an additional two agreements for $1.5 million with an interest rate of 3.97% and $2.2 million with an interest rate of 3.98%. Derivative Financial Instruments To reduce the effect of interest rate fluctuations, the Company entered into a three year interest rate swap contract on September 6, 2019, with an effective date of September 30, 2019, with a counter party to make a series of payments based on a fixed interest rate of 1.339% and receive a series of payments based on the greater of LIBOR or 0.00%. Both the fixed and floating payment streams are based on a notional amount of $250 million. On December 21, 2021, with an effective date of December 31, 2021, the Company entered into an accreting interest rate swap contract with a counter party to make a series of payments based on a fixed interest rate of 1.3885% and receive a series of payments based on the greater of LIBOR or 0.00%. Both the fixed and floating payment streams are based on a notional amount of $250 million, accreting to $500 million and maturing on September 30, 2026. The Company entered into these transaction to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated this derivative as a cash flow hedge. At January 2, 2022, the effective fixed interest rate on the long-term debt hedged by these contract was 3.5%. For further treatment of the Company’s interest rate swap, refer to “Note 10. Fair Value Measurements” and “Note 13. Accumulated Other Comprehensive (Loss) Income.” IO Loan Commitments During fiscal 2019, the Company sold $33.2 million of notes receivable from IOs on its books for $34.1 million in a series of transactions to a financial institution. During fiscal 2021, the Company sold an additional $11.8 million of notes receivable from IOs on its books for $12.5 million in a series of transactions to a financial institution. Due to the structure of the transactions, they did not qualify for sale accounting treatment and the Company has recorded the notes payable obligation owed by the IOs to the financial institution on its books; the corresponding notes receivable also remained on the Company’s books. The Company services the loans for the financial institution by collecting principal and interest from the IOs and passing it through to the institution. The underlying notes have various maturity dates through April 2030. The outstanding balance of notes purchased by Bank of America at January 2, 2022 and January 3, 2021 was $19.7 million and $16.5 million, respectively. The Company partially guarantees the outstanding loans, as discussed in further detail within “Note 12. Contingencies”. The maximum amount of future payments the Company could be required to make under these guarantees equates to 25% of the outstanding loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. The Company guarantees loans made to IOs by M&T Bank for the purchase of routes. The agreement with M&T Bank was amended in January 2020 so that the Company guaranteed up to 25% of the greater of the aggregate principal amount of loans outstanding on the payment date or January 1st of the subject year. The outstanding balance of loans guaranteed was $4.9 million and $6.6 million at January 2, 2022 and January 3, 2021, respectively, all of which was on balance sheet. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. Other Notes Payable and Finance Leases During the first fiscal quarter of 2020, the Company closed on the acquisition of Kitchen Cooked, and the acquisition included a deferred purchase price of $2.0 million, of which $1.0 million was still outstanding as of January 3, 2021 and the remaining balance was repaid in fiscal year 2021. Additionally, during the first fiscal quarter of 2020, the Company purchased intellectual property that include a deferred purchase price of $0.5 million, of which $0.4 million and $0.5 million was outstanding as of January 2, 2022 and January 3, 2021, respectively. During the third quarter of 2021, the Company recorded liabilities related primarily to reclaiming distribution rights from distributors, of which $1.3 million was outstanding as of January 2, 2022. 58 Amounts outstanding under notes payable consisted of the following: (in thousands) As of January 2, 2022 As of January 3, 2021 Note payable – IO notes $ 24,822 $ 23,106 Finance lease obligations 8,166 8,967 Other 1,678 1,509 Total notes payable 34,666 33,582 Less: current portion (9,957) (9,018) Long term portion of notes payable $ 24,709 $ 24,564 Interest expense consisted of the following: Successor Predecessor (in thousands) Year Ended January 2, 2022 From August 29, 2020 through January 3, 2021 From December 30, 2019 through August 28, 2020 Year Ended December 29, 2019 Company’s ABL facility and other long-term debt $ 29,270 $ 7,911 $ 23,350 $ 43,688 Amortization of deferred financing fees 3,847 4,721 1,743 2,101 IO loans 1,591 669 1,566 2,599 Total interest $ 34,708 $ 13,301 $ 26,659 $ 48,388 Off-Balance Sheet Arrangements Purchase Commitments The Company has outstanding purchase commitments for specific quantities at fixed prices for certain key ingredients to economically hedge commodity input prices. These purchase commitments totaled $34.7 million as of January 2, 2022. The Company accrues for losses on firm purchase commitments in a loss position at the end of each reporting period to the extent that there is an active observable market. The Company has recorded purchase commitment gain (losses) totaling $2.8 million for the year ended January 2, 2022, $0.9 million and $(0.7) million for the Successor period from August 29, 2020 to January 3, 2021 and for the Predecessor period from December 30, 2019 to August 28, 2020, respectively, and $0.9 million for the year ended December 29, 2019, respectively. IO Guarantees Off Balance Sheet The Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was $2.2 million and $4.1 million at January 2, 2022 and January 3, 2021, respectively, all of which was recorded by the Company as an off balance sheet arrangement. The maximum amount of future payments the Company could be required to make under the guarantees equates to 25% of the outstanding loan balance up to $2.0 million. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. The Company partially guarantees loans made to IOs by Bank of America for the purchase of routes. The outstanding balance of loans guaranteed that were issued by Bank of America was $18.6 million and $7.1 million at January 2, 2022 and January 3, 2021, respectively, which are off balance sheet. New Accounting Pronouncements See Note 1. "Operations and Summary of Significant Accounting Policies," to the audited condensed consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K. 59 Application of Critical Accounting Policies and Estimates General Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. While the majority of our revenue, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions. Management regularly reviews the estimates and assumptions used in the preparation of our financial statements for reasonableness and adequacy. Our significant accounting policies are discussed in Note 1. "Operations and Summary of Significant Accounting Policies", of the Audited Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K; however, the following discussion pertains to accounting policies we believe are most critical to the portrayal of our financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our financial condition, results of operations and cash flows to those of other companies. Revenue Recognition Our revenues primarily consist of the sale of salty snack items that are sold through DSD and Direct-To-Warehouse distribution methods, either directly to retailers or via distributors. We sell to supermarkets, mass merchandisers, club warehouses, convenience stores and other large-scale retailers, merchants, distributors, brokers, wholesalers, and IOs (which are third party businesses). These revenue contracts generally have a single performance obligation. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components. We recognize revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as products’ control is transferred to customers. We assess the goods promised in customers’ purchase orders and identify a performance obligation for each promise to transfer a good that is distinct. We offer various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade customer or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. In 2019, we implemented a system that improves our ability to analyze and estimate the reserve for unpaid costs relating to our promotional activities. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as the actual redemption is incurred. Distribution Route Purchase and Sale Transactions We purchase and sell distribution routes as a part of our maintenance of our DSD network. As new IOs are identified, we either sell our existing routes to the IOs or sell routes that were previously purchased by us to the IOs. Gain/loss from the sale of a distribution route is recorded upon the completion of the sale transaction and signing of the relevant documents and is calculated based on the difference between the sale price of the distribution route and the asset carrying value of the distribution route as of the date of sale. We record intangible assets for distribution routes that we purchase based on the payment that we make to acquire the route and record the purchased distribution routes as indefinite-lived intangible assets under Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other. The indefinite lived intangible assets are subject to annual impairment testing. 60 Goodwill and Indefinite-Lived Intangibles We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets. Finite-lived intangible assets consist of distribution/customer relationships, technology, trademarks and non-compete agreements. These assets are being amortized over their estimated useful lives. Finite-lived intangible assets are tested for impairment only when management has determined that potential impairment indicators are present. Goodwill and other indefinite-lived intangible assets (including trade names, master distribution rights and Company owned routes) are not amortized but are tested for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. We test goodwill for impairment at the reporting unit level. As we have early adopted Accounting Standards Update 2017-04, simplifying the Test for Goodwill Impairment, we will record an impairment charge based on the excess of a reporting unit’s carrying amount over our fair value. ASC 350, Goodwill and Other Intangible Assets also permits an entity to first assess qualitative factors to determine whether it is necessary to perform quantitative impairment tests for goodwill and indefinite-lived intangibles. If an entity believes, as a result of each qualitative assessment, it is more likely than not that goodwill or an indefinite-lived intangible asset is not impaired, a quantitative impairment test is not required. For the qualitative analysis performed, which took place on the first day of the fourth quarter, we have taken into consideration all the events and circumstances listed in FASB ASC 350, Intangibles—Goodwill and Other, in addition to other entity-specific factors that have taken place from the period of the business combination, which assessed goodwill, on August 28, 2020. Our fiscal year 2021 qualitative analysis concluded that Goodwill and all but one of our intangible assets is not more likely than not to be impaired. We performed a quantitative impairment test on the intangible asset during which we compared the fair value of the intangible, using a relief from royalty method, to the carrying value of the asset and determined that the intangible asset was not impaired. Income Taxes We account for income taxes pursuant to the asset and liability method of ASC 740, Income Taxes, which require us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. Under the terms of the TRA as part of the Business Combination Agreement, the Company generally will be required to pay to the Continuing Members 85% of the applicable cash savings, if any, in U.S. federal and state income tax based on its ownership in UBH that the Company is deemed to realize in certain circumstances as a result of the increases in tax basis and certain tax attributes resulting from the Business Combination. This is accounted for in conjunction with the methods used to record income tax described above. We follow the provisions of ASC 740-10 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. 61 The benefit of tax positions taken or expected to be taken in our income tax returns is recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized (or amount of net operating loss carryover or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. Interest costs and related penalties related to unrecognized tax benefits are required to be calculated, if applicable. Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses. As of January 2, 2022, and January 3, 2021, no liability for unrecognized tax benefits was required to be reported. We do not expect any significant changes in our unrecognized tax benefits in the next year. Business Combinations We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets. We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.