Utz Brands, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS Utz Brands, Inc. CONSOLIDATED BALANCE SHEETS October 2, 2022 and January 2, 2022 (In thousands) As of October 2, 2022 As of January 2, 2022 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 51,805 $ 41,898 Accounts receivable, less allowance of $ 1,826 and $ 1,391 , respectively 144,016 131,388 Inventories 107,382 79,517 Prepaid expenses and other assets 34,484 18,395 Current portion of notes receivable 9,467 6,706 Total current assets 347,154 277,904 Non-current Assets Property, plant and equipment, net 333,908 303,807 Goodwill 915,295 915,438 Intangible assets, net 1,109,802 1,142,509 Non-current portion of notes receivable 14,014 20,725 Other assets 99,261 55,963 Total non-current assets 2,472,280 2,438,442 Total assets $ 2,819,434 $ 2,716,346 LIABILITIES AND EQUITY Current Liabilities Current portion of term debt $ 15,089 $ 11,414 Current portion of other notes payable 13,617 9,957 Accounts payable 101,654 95,369 Accrued expenses and other 76,447 71,280 Total current liabilities 206,807 188,020 Non-current portion of term debt and revolving credit facility 887,270 830,548 Non-current portion of other notes payable 19,643 24,709 Non-current accrued expenses and other 64,687 55,838 Non-current warrant liability 42,192 46,224 Deferred tax liability 135,337 136,334 Total non-current liabilities 1,149,129 1,093,653 Total liabilities 1,355,936 1,281,673 Commitments and Contingencies Equity Shares of Class A Common Stock, $ 0.0001 par value; 1,000,000,000 shares authorized; 80,812,835 and 77,644,645 shares issued and outstanding as of October 2, 2022 and January 2, 2022, respectively. 8 8 Shares of Class V Common Stock, $ 0.0001 par value; 61,249,000 shares authorized; 59,349,000 shares issued and outstanding as of October 2, 2022 and January 2, 2022. 6 6 Additional paid-in capital 941,375 912,574 Accumulated deficit ( 264,845 ) ( 236,598 ) Accumulated other comprehensive income 32,620 3,715 Total stockholders' equity 709,164 679,705 Noncontrolling interest 754,334 754,968 Total equity 1,463,498 1,434,673 Total liabilities and equity $ 2,819,434 $ 2,716,346 The accompanying notes are an integral part of these consolidated financial statements. 1 Utz Brands, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021 (In thousands, except share information) (Unaudited) Thirteen weeks ended October 2, 2022 Thirteen weeks ended October 3, 2021 Thirty-nine weeks ended October 2, 2022 Thirty-nine weeks ended October 3, 2021 Net sales $ 362,818 $ 312,680 $ 1,053,732 $ 879,781 Cost of goods sold 244,545 210,053 720,123 586,353 Gross profit 118,273 102,627 333,609 293,428 Selling, distribution, and administrative expenses Selling and distribution 69,263 67,985 226,169 189,152 Administrative 33,182 30,724 110,549 89,698 Total selling, distribution, and administrative expenses 102,445 98,709 336,718 278,850 (Loss) gain on sale of assets, net ( 823 ) ( 1,043 ) 919 1,965 Income (loss) from operations 15,005 2,875 ( 2,190 ) 16,543 Other (expense) income Interest expense ( 11,648 ) ( 7,726 ) ( 31,478 ) ( 26,483 ) Other income 205 740 80 2,216 (Loss) gain on remeasurement of warrant liability ( 3,672 ) 36,288 4,032 34,155 Other (expense) income, net ( 15,115 ) 29,302 ( 27,366 ) 9,888 (Loss) income before taxes ( 110 ) 32,177 ( 29,556 ) 26,431 Income tax (benefit) expense ( 1,595 ) 827 ( 1,688 ) 2,251 Net income (loss) 1,485 31,350 ( 27,868 ) 24,180 Net (gain) loss attributable to noncontrolling interest ( 2,373 ) 1,902 12,589 4,122 Net (loss) income attributable to controlling interest $ ( 888 ) $ 33,252 $ ( 15,279 ) $ 28,302 Earnings (loss) per Class A Common stock: (in dollars) Basic $ ( 0.01 ) $ 0.43 $ ( 0.19 ) $ 0.36 Diluted $ ( 0.01 ) $ 0.40 $ ( 0.19 ) $ 0.34 Weighted-average shares of Class A Common stock outstanding Basic 80,812,835 76,713,241 79,852,137 76,380,244 Diluted 80,812,835 80,906,618 79,852,137 81,082,177 Net income (loss) $ 1,485 $ 31,350 $ ( 27,868 ) $ 24,180 Other comprehensive income: Change in fair value of interest rate swap 19,655 686 50,475 2,115 Comprehensive income 21,140 32,036 22,607 26,295 Net comprehensive (income) loss attributable to noncontrolling interest ( 10,696 ) 1,902 ( 8,981 ) 4,122 Net comprehensive income attributable to controlling interest $ 10,444 $ 33,938 $ 13,626 $ 30,417 The accompanying notes are an integral part of these consolidated financial statements. 2 Utz Brands, Inc. CONSOLIDATED STATEMENTS OF EQUITY For the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021 In thousands, except share data) (Unaudited) Class A Common Stock Class V Common Stock Additional Paid-in Capital Accumulated (Deficit) Accumulated Other Comprehensive Income Total Stockholders' Equity Non-controlling Interest Total Equity Shares Amount Shares Amount Balance at January 3, 2021 71,094,714 $ 7 60,349,000 $ 6 $ 793,461 $ ( 241,490 ) $ 924 $ 552,908 $ 831,994 $ 1,384,902 Conversion of warrants 4,976,717 — — 144,659 — — 144,659 ( 32,714 ) 111,945 Share-based compensation 498,991 1 — 6,638 — — 6,639 — 6,639 Net loss — — — ( 4,950 ) — ( 4,950 ) ( 2,220 ) ( 7,170 ) Other comprehensive income — — — — 1,429 1,429 — 1,429 Cash dividends declared ($ 0.10 per share of Class A Common Stock) — — — ( 7,645 ) — ( 7,645 ) — ( 7,645 ) Distribution to noncontrolling interest — — — — — — ( 10,829 ) ( 10,829 ) Balance at July 4, 2021 76,570,422 8 60,349,000 6 944,758 ( 254,085 ) 2,353 693,040 786,231 1,479,271 Stock-based compensation — — 2,041 — — 2,041 — 2,041 Exchange 1,000,000 — ( 1,000,000 ) — 12,949 — — 12,949 ( 12,949 ) — Net income (loss) — — — 33,252 — 33,252 ( 1,902 ) 31,350 Other comprehensive income — — — — 686 686 — 686 Cash dividends declared ($ 0.05 per share of Class A Common Stock) — — — ( 3,829 ) — ( 3,829 ) — ( 3,829 ) Distribution to noncontrolling interest — — — — — — ( 3,131 ) ( 3,131 ) Balance at October 3, 2021 77,570,422 $ 8 59,349,000 $ 6 $ 959,748 $ ( 224,662 ) $ 3,039 $ 738,139 $ 768,249 $ 1,506,388 Balance at January 2, 2022 77,644,645 $ 8 59,349,000 $ 6 $ 912,574 $ ( 236,598 ) $ 3,715 $ 679,705 $ 754,968 $ 1,434,673 Payments of tax withholding requirements for employee stock awards — — ( 6,217 ) — — ( 6,217 ) — ( 6,217 ) Share-based compensation 1,062,817 — — 5,779 — — 5,779 — 5,779 Issuance of common stock in connection with private placement sale 2,105,373 — — 28,000 — — 28,000 — 28,000 Tax impact arising from share issuance — — ( 561 ) — — ( 561 ) — ( 561 ) Net loss — — — ( 14,391 ) — ( 14,391 ) ( 14,962 ) ( 29,353 ) Other comprehensive income — — — — 17,573 17,573 13,247 30,820 Cash dividends declared ($ 0.108 per share of Class A Common Stock) — — — ( 8,604 ) — ( 8,604 ) — ( 8,604 ) Distribution to noncontrolling interest — — — — — — ( 6,410 ) ( 6,410 ) Balance at July 3, 2022 80,812,835 8 59,349,000 6 939,575 ( 259,593 ) 21,288 701,284 746,843 1,448,127 Stock-based compensation — — 1,800 — — 1,800 — 1,800 Net (loss) income — — — ( 888 ) — ( 888 ) 2,373 1,485 Other comprehensive income — — — — 11,332 11,332 8,323 19,655 Cash dividends declared ($ 0.054 per share of Class A Common Stock) — — — ( 4,364 ) — ( 4,364 ) — ( 4,364 ) Distribution to noncontrolling interest — — — — — — ( 3,205 ) ( 3,205 ) Balance at October 2, 2022 80,812,835 $ 8 59,349,000 $ 6 $ 941,375 $ ( 264,845 ) $ 32,620 $ 709,164 $ 754,334 $ 1,463,498 The accompanying notes are an integral part of these consolidated financial statements. 3 Utz Brands, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS For the thirty-nine weeks ended October 2, 2022 and October 3, 2021 (In thousands) (Unaudited) Thirty-nine weeks ended October 2, 2022 Thirty-nine weeks ended October 3, 2021 Cash flows from operating activities Net (loss) income $ ( 27,868 ) $ 24,180 Adjustments to reconcile net loss to net cash used in operating activities: Impairment and other charges 4,678 — Depreciation and amortization 66,345 59,295 Gain on remeasurement of warrant liability ( 4,032 ) ( 34,155 ) Gain on sale of assets ( 919 ) ( 1,965 ) Share-based compensation 7,579 8,680 Deferred taxes ( 1,315 ) 723 Deferred financing costs 1,047 3,498 Changes in assets and liabilities: Accounts receivable, net ( 12,628 ) ( 30,577 ) Inventories ( 27,866 ) ( 7,564 ) Prepaid expenses and other assets ( 18,308 ) ( 9,598 ) Accounts payable and accrued expenses and other 21,358 ( 8,235 ) Net cash provided by operating activities 8,071 4,282 Cash flows from investing activities Acquisitions, net of cash acquired ( 75 ) ( 66,631 ) Purchases of property and equipment ( 68,708 ) ( 17,794 ) Purchases of intangibles — ( 1,757 ) Proceeds from sale of property and equipment 4,100 1,604 Proceeds from sale of routes 16,819 8,027 Proceeds from the sale of IO notes 5,017 7,922 Proceeds from insurance claims for capital investments 3,935 — Notes receivable, net ( 14,028 ) ( 9,452 ) Net cash used in investing activities ( 52,940 ) ( 78,081 ) Cash flows from financing activities Line of credit borrowings, net 40,390 — Borrowings on term debt and notes payable 33,969 820,617 Repayments on term debt and notes payable ( 20,692 ) ( 789,662 ) Payment of debt issuance cost ( 1,471 ) ( 9,210 ) Payments of tax withholding requirements for employee stock awards ( 6,217 ) — Exercised warrants — 57,232 Proceeds from issuance of shares 28,000 — Dividends ( 12,793 ) ( 11,908 ) Distribution to noncontrolling interest ( 6,410 ) ( 14,140 ) Net cash provided by financing activities 54,776 52,929 Net increase (decrease) in cash and cash equivalents 9,907 ( 20,870 ) Cash and cash equivalents at beginning of period 41,898 46,831 Cash and cash equivalents at end of period $ 51,805 $ 25,961 The accompanying notes are an integral part of these consolidated financial statements. 4 Utz Brands, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation – The accompanying consolidated financial statements comprise the financial statements of Utz Brands, Inc. ("UBI" or the "Company", formerly Collier Creek Holdings ("CCH")) and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial statements and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). They do not include all information and notes required by U.S. GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s financial statements for the year ended January 2, 2022. The balance sheet as of January 2, 2022 has been derived from the audited combined financial statements as of and for the year ended January 2, 2022. In the opinion of management, such financial information reflects all normal and recurring adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with the U.S. GAAP. Operating results for the interim period are not necessarily indicative of the results that may be expected for any future period or for the full year. The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited combined financial statements and notes thereto for the year ended January 2, 2022. All intercompany transactions and balances have been eliminated in consolidation. Reclassification – Certain prior year amounts have been reclassified for consistency with the current year presentation. In our Consolidated Statements of Operation and Comprehensive Income and our Consolidated Statements of Cash Flows, included in our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2022, the Company began combining gain on disposal of property, plant and equipment, net and gain on sale of routes, net, into one line item as (loss) gain on sale of assets to simplify our reporting presentation. The reclassification had no impact on total operating costs, earnings from operations, net earnings, earnings per share or total equity. Operations – The Company through its subsidiary, Utz Quality Foods, LLC ("UQF"), has been a premier producer, marketer and distributor of snack food products since 1921. The Company has steadily expanded its distribution channels to where it now sells products to supermarkets, mass merchants, club stores, dollar and discount stores, convenience stores, independent grocery stores, drug stores, food service, vending, military, and other channels in most regions of the United States through routes to market, that include direct-store-delivery (“DSD”), direct to warehouse, and third-party distributors. The Company manufactures and distributes a full line of high-quality salty snack items, such as potato chips, tortilla chips, pretzels, cheese balls, pork skins, party mixes, and popcorn. The Company also sells dips, crackers, dried meat products and other snack food items packaged by other manufacturers. Cash and Cash Equivalents – The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. The majority of the Company’s cash is held in financial institutions with insurance provided by the Federal Deposit Insurance Corporation ("FDIC") of $250,000 per depositor. At various times, account balances may exceed federally insured limits. Accounts Receivables – Accounts receivable are reported at net realizable value. The net realizable value is based on Company management’s estimate of the amount of receivables that will be collected based on analysis of historical data and trends, as well as review of significant customer accounts. Accounts receivable are considered to be past due when payments are not received within the customer’s credit terms. Accounts are written off when management determines the account is uncollectible. Finance charges are not usually assessed on past-due accounts. Inventories – Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventory write-downs are recorded for shrinkage, damaged, stale and slow-moving items. 5 Property, Plant and Equipmen t – Property, plant and equipment are stated at cost net of accumulated depreciation. Major additions and betterments are recorded to the asset accounts, while maintenance and repairs, which do not improve or extend the lives of the assets, are charged to expense accounts as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in operations in the disposal period. Depreciation is determined utilizing the straight-line method over the estimated useful lives of the various assets, which generally range from 2 to 20 years for machinery and equipment, 3 to 10 years for transportation equipment and 8 to 40 years for buildings. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. The Company assesses for impairment on property, plant and equipment upon the occurrence of a triggering event. Income Taxes – The Company accounts for income taxes pursuant to the asset and liability method of Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires it to recognize current tax liabilities or receivables for the amount of taxes it estimates are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The Company follows the provisions of ASC 740-10 related to accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns is recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits". A liability is recognized (or 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 penalties related to unrecognized tax benefits are required to be calculated, if applicable. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, distribution, and administrative expenses ("SD&A"). As of October 2, 2022 and January 2, 2022, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next fiscal year. Goodwill and Other Identifiable Intangible Assets – The Company allocates the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to the Company’s results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets. Finite-lived intangible assets consist of distribution/customer relationships, technology, certain master distribution rights and certain trademarks. These assets are being amortized over their estimated useful lives. Finite-lived intangible assets are tested for impairment only when management has determined that potential impairment indicators are present. Goodwill and other indefinite-lived intangible assets (including certain trade names, certain master distribution rights and Company-owned sales routes) are not amortized but are tested for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. The Company tests goodwill for impairment at the reporting unit level. The Company has identified the existing snack food operations as its sole reporting unit. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other ("Topic 350"): Simplifying the Test for Goodwill Impairment, the Company is required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. 6 Topic 350 also permits an entity to first assess qualitative factors to determine whether it is necessary to perform quantitative impairment tests for goodwill and indefinite-lived intangibles. If an entity believes, as a result of each qualitative assessment, it is more likely than not that the fair value of goodwill or an indefinite-lived intangible asset exceeds its carrying value then a quantitative impairment test is not required. For the latest qualitative analysis performed, which took place on the first day of the fourth quarter of 2021, we had 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 had taken place. We have determined that there was no significant impact that affected the fair value of the reporting unit through October 2, 2022. Therefore, we have determined that it was not necessary to perform a quantitative goodwill impairment test for the reporting unit. Fair Value of Financial Instruments – Financial instruments held by the Company include cash and cash equivalents, accounts receivable, hedging instruments, purchase commitments on commodities, accounts payable and debt. The carrying value of all cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short-term nature. The carrying value of the debt is also estimated to approximate its fair value based upon current market conditions and interest rates. The fair value of the hedging instruments are revalued at each reporting period. Revenue Recognition – The Company’s revenues primarily consist of the sale of salty snack items to customers, including supermarkets, mass merchants, club stores, dollar and discount stores, convenience stores, independent grocery stores, drug stores, food service, vending, military, and other channels. The Company sells its products in most regions of the United States primarily through its DSD network, direct to warehouse shipments, and third-party distributors. These revenue contracts generally have a single performance obligation. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from customers are classified as accounts receivables and require payment on a short-term basis and, therefore, the Company does not have any significant financing components. The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as the products’ control is transferred to customers. The Company assesses the goods promised in customer purchase orders and identifies a performance obligation for each promise to transfer a good that is distinct. The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. The Company’s promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade customer or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. The Company has reserves in place of $ 43.5 million as of October 2, 2022, which include adjustments taken by customers of $ 33.5 million that are awaiting final processing and reserves of $ 26.5 million as of January 2, 2022, which include adjustments taken by customers of $ 16.9 million that are awaiting final processing. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as actual redemptions are incurred. Business Combinations – The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is accounted for as a business combination or an acquisition of assets. The Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the Company’s financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. 7 Distributor Buyouts - During the first and second fiscal quarters of 2022, the Company bought out and terminated the contracts of multiple third-party distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations and resulted in expense of $ 23.0 million for thirty-nine weeks ended October 2, 2022 and are included within selling and distribution expense on the Consolidated Statement of Operations and Comprehensive Income. Use of Estimates – Management uses estimates and assumptions in preparing the consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Some examples, but not a comprehensive list, include sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies, litigation, and inputs used to calculate deferred tax liabilities, tax valuation allowances, and tax receivable agreements. Actual results could vary materially from the estimates that were used. Recently Issued Accounting Standards –In March 2020, the FASB issued "ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("Topic 848"). This ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate ("LIBOR") or another reference rate expected to be discontinued as a result of reference rate reform. Topic 848 is elective and effective as of March 12, 2020 through December 31, 2022. Once elected, Topic 848 must be applied prospectively for all eligible contract modifications. As part of the response to reference rate reform, in September 2022 the Company modified contracts related to the revolving credit facility, Term Loan B, and the interest rate hedge from an interest rate based upon the LIBOR benchmark to the Term SOFR Screen Rate ("SOFR"). See Note 8. "Long-Term Debt" and Note 9. "Derivative Financial Instruments and Purchase Commitments" for additional details about these changes and to the referenced instruments. Concurrent with these modifications the Company adopted Topic 848. The Company utilized optional practical expedients for contract modifications and the adoption of the standard did not have a material impact on our debt or hedge instruments. In June 2016, ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments ("Topic 326") was issued. Topic 326 requires entities to measure the impairment of certain financial instruments, including accounts receivables, based on expected losses rather than incurred losses. Topic 326 is effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted, and will be effective for the Company beginning in 2023. The Company is currently evaluating the impact of the new standard on the Company’s consolidated financial statements and related disclosures. 2. ACQUISITIONS Vitner's On January 11, 2021, the Company announced that its subsidiary, UQF, entered into a definitive agreement with Snak-King Corp. to acquire certain assets of the C.J. Vitner business ("Vitner's acquisition" or the "acquisition of Vitner's"), a leading brand of salty snacks in the Chicago, Illinois area. The Company closed this transaction on February 8, 2021 and the purchase price of approximately $ 25.2 million was funded from current cash-on-hand. The provisional fair values to which the purchase price was allocated were $ 2.9 million to trademarks, $ 0.8 million to customer relationships, $ 1.7 million to DSD routes, $ 1.9 million of other net assets, and $ 17.9 million to goodwill. The trademarks and customer relationships are being amortized over a period of 15 years. As of February 8, 2022, the purchase price allocation had been finalized. Festida Foods On May 11, 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 the "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. The customer relationships are being amortized over a period of 10 years. As of June 7, 2022, the purchase price allocation had been finalized. 8 RW Garcia On November 2, 2021, the Company announced that certain of its subsidiaries, entered into a definitive agreement to acquire the equity of R.W. Garcia Holdings, LLC and its wholly-owned subsidiary, R.W. Garcia Co., Inc. (together "RW Garcia"), an artisan maker of high-quality organic tortilla chips, crackers, and corn chips ("RW Garcia acquisition" or the “acquisition of RW Garcia”). The Company closed on this transaction on December 6, 2021, and the cash purchase price of approximately $ 57.9 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. The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the Company for the RW Garcia acquisition at the date of the acquisition: (in thousands) Purchase consideration $ 56,430 Tax consideration 1,458 Total consideration 57,888 Assets acquired: Cash 5,401 Accounts receivable 4,660 Inventory 5,674 Prepaid expenses and other assets 2,102 Property, plant and equipment 20,210 Trade name 3,100 Customer relationships 4,720 Total assets acquired: 45,867 Liabilities assumed: Accounts payable 6,017 Accrued expenses 1,838 Deferred tax liability 5,898 Total liabilities assumed: 13,753 Net identifiable assets acquired 32,114 Goodwill $ 25,774 The trade name and customer relationships are being amortized over a period of 15 years. As of October 2, 2022, the purchase price allocation has not been finalized. We expect to finalize the valuation report and complete the purchase price allocation no later than one-year from the acquisition date. 3. INVENTORIES Inventories consisted of the following: (in thousands) As of October 2, 2022 As of January 2, 2022 Finished goods $ 60,282 $ 43,533 Raw materials 39,457 29,428 Maintenance parts 7,643 6,556 Total inventories $ 107,382 $ 79,517 9 4. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net, consisted of the following: (in thousands) As of October 2, 2022 As of January 2, 2022 Land $ 29,160 $ 25,886 Buildings 124,138 98,664 Machinery and equipment 238,495 214,319 Land improvements 3,608 3,393 Building improvements 3,379 3,048 Construction-in-progress 23,865 13,745 422,645 359,055 Less: accumulated depreciation ( 88,737 ) ( 55,248 ) Property, plant and equipment, net $ 333,908 $ 303,807 On April 28, 2022, the Company purchased a brand new, recently completed snack food manufacturing facility in Kings Mountain, North Carolina from Evans Food Group Ltd. d/b/a Benestar Brands and related affiliates. The total purchase price of the facility was approximately $ 38.4 million, plus assumed liabilities of $ 1.3 million. The Company paid the full cash purchase price of $ 38.4 million at the closing and concurrently with the facility purchase, the Company sold 2.1 million shares of the Company’s Class A Common Stock for $ 28.0 million, to affiliates of Benestar in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933. Depreciation expense was $ 12.0 million and $ 11.5 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively, and $ 37.1 million and $ 31.8 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. Depreciation expense is classified in cost of goods sold, selling, distribution, and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income. During the thirty-nine weeks ended October 2, 2022, the Company recorded impairments totaling $ 2.7 million related to property and equipment damaged in one of the Company's smaller manufacturing facilities by a natural disaster. The Company has received $ 3.9 million in insurance proceeds related to a partial settlement of damaged property and equipment, resulting in a gain to date of $ 1.2 million. As a result of the damage to the facility the Company has had to shift production to other facilities as well as utilize a co-manufacturer which has resulted in additional production and distribution costs. During the thirteen weeks ended October 2, 2022 the Company also received $ 4.0 million in proceeds related to a partial settlement of business interruption insurance. The Company has recognized receipts of the business interruption insurance as a reduction of the cost of goods sold and the receipts related to the damage to property plant and equipment within the (loss) gain on sale of assets, net in the Company's Consolidated Statement of Operations and Comprehensive Income. The Company continues to negotiate future payments with its insurance provider. The Company recognizes gains from insurance proceeds, at the earliest, after receipt of insurance proceeds. 5. GOODWILL AND INTANGIBLE ASSETS, NET A rollforward of goodwill is as follows: (in thousands) Balance as of January 2, 2022 $ 915,438 RW Garcia acquisition adjustment ( 143 ) Balance as of October 2, 2022 $ 915,295 10 Intangible assets, net, consisted of the following: (in thousands) As of October 2, 2022 As of January 2, 2022 Subject to amortization: Distributor/customer relationships $ 677,930 $ 677,930 Technology — 43 Trademarks 63,850 63,850 Master distribution rights — 2,221 Amortizable assets, gross 741,780 744,044 Accumulated amortization ( 73,320 ) ( 45,224 ) Amortizable assets, net 668,460 698,820 Not subject to amortization: Trade names 434,513 434,513 Route assets 6,829 9,176 Intangible assets, net $ 1,109,802 $ 1,142,509 Previously, the Company was granted certain exclusive distribution rights for certain products manufactured by another manufacturer. During the first fiscal quarter of 2022, the Company shifted the relationship with that manufacturer and converted that shelf space to Company-branded products. As a result, the Company recorded impairment expense of $ 2.0 million and the amortizable master distribution rights decreased by $ 2.2 million. There were no other significant changes to intangible assets during the thirty-nine weeks ended October 2, 2022, other than those which arise from the normal course of business of buying and selling of Company-owned route assets and amortization. Amortization of the distributor/customer relationships, technology, and trade names amounted to $ 9.4 million and $ 8.9 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively, and $ 28.3 million and $ 27.3 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. The expense related to the amortization of intangibles is classified in administrative expenses on the Consolidated Statements of Operations and Comprehensive Income. 6. NOTES RECEIVABLE The Company has undertaken a program in recent years to sell Company-managed DSD distribution routes to independent operators ("IOs"). Contracts are executed between the Company and the IOs for the sale of the product distribution route, including a note in favor of the Company, in certain cases. The notes bear interest at rates ranging from 0.00 % to 8.55 % with terms ranging generally from one to ten years . The notes receivable balances due from IOs at October 2, 2022 and January 2, 2022 totaled $ 23.3 million and $ 27.2 million, respectively, and are collateralized by the routes for which the loans are made. The Company has a corresponding notes payable liability, related to the IOs notes receivables, of $ 22.0 million and $ 24.8 million at October 2, 2022 and January 2, 2022, respectively. The related notes payable liability is discussed in further detail within Note 8. "Long-Term Debt." Other notes receivable totaled $ 0.2 million as of each of October 2, 2022 and January 2, 2022. 11 7. ACCRUED EXPENSES AND OTHER Current accrued expenses and other consisted of the following: (in thousands) As of October 2, 2022 As of January 2, 2022 Accrued compensation and benefits $ 29,182 $ 20,081 Right-of-use liability 11,962 9,152 Accrued freight and manufacturing related costs 10,116 8,928 Insurance liabilities 7,889 8,620 Acquisition tax consideration 1,134 5,660 Accrued interest 1,120 371 Short term interest rate hedge liability — 4,548 Accrued dividends and distributions 7,569 4,189 Accrued sales tax — 1,300 Other accrued expenses 7,475 8,431 Total accrued expenses and other $ 76,447 $ 71,280 Non-current accrued expenses and other consisted of the following: (in thousands) As of October 2, 2022 As of January 2, 2022 Right-of-use liability $ 32,619 $ 23,226 Tax Receivable Agreement liability 25,446 24,443 Supplemental retirement and salary continuation plans 6,538 8,117 Other long term accrued expenses 84 52 Total accrued expenses and other $ 64,687 $ 55,838 8. LONG-TERM DEBT Revolving Credit Facility On November 21, 2017, UBH entered into an asset based revolving credit facility (as amended, the "ABL facility"), pursuant to the terms of that certain First Lien Term Loan Credit Agreement, dated November 21, 2017 (the "Credit Agreement"). On 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 further increase the credit limit up to $ 161.0 million. On September 22, 2022, the ABL facility was amended to further increase the credit limit up to $ 175.0 million and replaced the interest rate benchmark from LIBOR to SOFR. As of October 2, 2022 and January 2, 2022, $ 76.4 million and $ 36.0 million, respectively, were outstanding under this facility. Availability under the ABL facility is based on a monthly accounts receivable and inventory borrowing base certification, which is net of outstanding letters of credit. As of October 2, 2022 and January 2, 2022, $ 86.1 million and $ 96.9 million, respectively, was available for borrowing, net of letters of credit. The ABL facility is also subject to unused line fees ( 0.5 % at October 2, 2022) and other fees and expenses. Standby letters of credit in the amount of $ 12.0 million and $ 10.3 million have been issued as of October 2, 2022 and January 2, 2022, respectively. The standby letters of credit are primarily issued for insurance purposes. Term Loans On December 14, 2020, the Company entered into a Bridge Credit Agreement with a syndicate of banks, led by Bank of America, N.A. (the "Bridge Credit Agreement"). The proceeds of the Bridge Credit Agreement were used to fund the Company’s acquisition of Truco and the IP Purchase (as defined below) from OTB Acquisition, LLC, in which the Company withdrew $ 490.0 million to finance the acquisition of Truco Holdco Inc. ("Truco" and such acquisition, the "Truco Acquisition") and certain intellectual property from OTB Acquisition, LLC (the "IP Purchase"). The Bridge Credit Agreement bears interest at an annual rate based on 4.25 % plus 1 month LIBOR with scheduled incremental increases to the base rate, as defined in the Bridge Credit Agreement. The loan converts into an Extended Term Loan if the Loan remains open 365 days after the closing date. 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 exercise 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 was expended in the thirteen weeks ended April 4, 2021. In connection with Amendment No. 2 (as defined below), and a $ 12.0 million repayment in the first quarter of 2021, the outstanding balance of $ 370.0 million was repaid in full. 12 On January 20, 2021, the Company entered into Amendment No. 2 to the Bridge Credit Agreement ("Amendment No. 2") which provided additional operating flexibility and revisions to certain restrictive covenants. Pursuant to the terms of Amendment No. 2, the Company raised $ 720 million in aggregate principal of Term Loan B ("Term Loan B") which bore interest at LIBOR plus 3.00 % and extended the maturity of the Bridge Credit Agreement to January 20, 2028. The proceeds were used, together with cash on hand and proceeds from our exercised warrants, to redeem the outstanding principal amount of 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 Bridge Credit Agreement ("Amendment No. 3"). Pursuant to the terms of Amendment No. 3, the Company increased the principal balance of Term Loan B by $ 75.0 million to bring the aggregated balance of Term Loan B proceeds to $ 795.0 million. The Company incurred additional debt issuance costs and original issuance discounts of $ 0.7 million related to the incremental funding. 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 and liabilities of the Company. The credit agreements contain certain affirmative and negative covenants as to operations and the financial condition of the Company. The Company was in compliance with its financial covenant as of October 2, 2022. Subsequent to the end of the third fiscal quarter of 2022, as further discussed in Note 18. "Subsequent events," the Company entered into a loan agreement in the amount of $ 88.1 million, which was secured by the majority of the Company's real estate assets. The Company used part of these proceeds to pay off the ABL facility. Debt (in thousands) Issue Date Principal Balance Maturity Date October 2, 2022 January 2, 2022 Term Loan B (1) June-21 $ 795,000 January-28 $ 781,273 $ 787,236 Equipment loans (2) Various 53,068 26,655 ABL facility (3) 76,390 36,000 Net impact of debt issuance costs and original issue discounts ( 8,372 ) ( 7,929 ) Total long-term debt 902,359 841,962 Less: current portion ( 15,089 ) ( 11,414 ) Long term portion of term debt and financing obligations $ 887,270 $ 830,548 (1) On September 22, 2022, the Company entered into Amendment No. 4 to the Bridge Credit Agreement ("Amendment No. 4"), which replaced the interest rate benchmark from LIBOR to SOFR. The weighted average interest rate on the Term Loan B debt for the thirteen weeks ended October 2, 2022 was 5.26 %. (2) In July 2021, the Company entered into two separate finance lease obligations with Banc of America Leasing & Capital, LLC, which have been treated as secured borrowing. The Company has made a series of draws upon these agreements throughout fiscal year 2021 and has drawn a total of $ 29.9 million in fiscal year 2022. These draws bear interest ranging from 3.26 % through 5.77 % and have varying maturities up through 2028. (3) The facility bore interest at an annual rate based on LIBOR plus an applicable margin of 1.75 % (ranging from 1.50 % to 2.00 % based on availability) or the prime rate plus an applicable margin of 0.75 % (ranging from 0.50 % to 1.00 %). The Company generally utilizes the prime rate for amounts that the Company expects to pay down within 30 days, the interest rate on the facility as of October 2, 2022 and October 3, 2021, was 7.00 % and 4.00 %, respectively, under the prime rate. The Company elects to use the LIBOR, prior to the amendment on September 22, 2022 which changed the reference rate to SOFR as described above, for balances that are expected to be carried longer than 30 days, the interest rate on the ABL facility as of October 2, 2022 was 4.82 %. Other Notes Payable and Capital Leases During the first fiscal quarter of 2022, the Company bought out and terminated the contracts of multiple distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations and resulted in expense of $ 23.0 million for the thirty-nine weeks ended October 2, 2022. The outstanding balance of these transactions was $ 0.5 million as of October 2, 2022. 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 October 2, 2022 and January 2, 2022. 13 During the first fiscal quarter of 2020, the Company purchased intellectual property that include a deferred purchase price of $ 0.5 million, of which $ 0.3 million and $ 0.4 million was outstanding as of October 2, 2022 and January 2, 2022, respectively. Amounts outstanding under notes payable consisted of the following: (in thousands) As of October 2, 2022 As of January 2, 2022 Note payable – IO notes $ 22,011 $ 24,822 Capital lease 9,203 8,166 Other 2,046 1,678 Total notes payable 33,260 34,666 Less: current portion ( 13,617 ) ( 9,957 ) Long term portion of notes payable $ 19,643 $ 24,709 During fiscal year 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 year 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. During fiscal year 2022, the Company sold an additional $ 5.0 million of notes receivable from IOs on its books for $ 5.0 million to a financial institution. Due to the structure of these transactions, they did not qualify for sale accounting treatment and the Company has recorded the notes payable obligation owed by the IOs to the financial institution on its books; the corresponding notes receivable also remained on the Company’s books. The Company services the loans for the financial institution by collecting principal and interest from the IOs and passing it through to the institution. The underlying notes have various maturity dates through June 2032. The Company partially guarantees the outstanding loans, as discussed in further detail within Note 11. "Contingencies." These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. Interest Expense Interest expense consisted of the following: (in thousands) Thirteen weeks ended October 2, 2022 Thirteen weeks ended October 3, 2021 Thirty-nine weeks ended October 2, 2022 Thirty-nine weeks ended October 3, 2021 Company’s ABL facility and other long-term debt $ 10,916 $ 6,995 $ 29,320 $ 21,823 Amortization of deferred financing fees 344 331 1,028 3,499 IO loans 388 400 1,130 1,161 Total interest $ 11,648 $ 7,726 $ 31,478 $ 26,483 14 9. DERIVATIVE FINANCIAL INSTRUMENTS AND PURCHASE COMMITMENTS 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 were based on a notional amount of $ 250 million and have fully accreted to $ 500 million and mature on September 30, 2026. The Company entered into this 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. On September 30, 2022, the Company amended the interest rate swap, entered into on December 21, 2021, to adjust the payments to be based on the 1 month USD-Secured Overnight Financing Rate CME term ("1 mo. SOFR") instead of the LIBOR, and adjusted the fixed interest rate of the series of payments to be 1.4080 % and receive a series of payments based on the greater of 1 mo. SOFR or 0.00 %. The Company amended this contract to match the index change from LIBOR to SOFR that was made to Term loan B as described in Note 8. "Long-Term Debt" as part of the Company's response to reference rate reform. For the thirteen weeks ended October 2, 2022, the effective fixed interest rate on the long-term debt hedged by these contracts was 4.69 %. For further treatment of the Company’s interest rate swap, refer to Note 10. "Fair Value Measurements" and Note 12. "Accumulated Other Comprehensive Income." Warrant Liabilities The Company has outstanding warrants which are accounted for as derivative liabilities pursuant to ASC 815-40. See Note 15. "Warrants" for additional information on our warrant liabilities. A reconciliation of the changes in the warrant liability during the thirty-nine weeks ended October 2, 2022 is as follows: (in thousands) Fair value of warrant liabilities as of January 2, 2022 $ 46,224 Gain on remeasurement of warrant liability ( 7,704 ) Fair value of warrant liabilities as of July 3, 2022 38,520 Loss on remeasurement of warrant liability 3,672 Fair value of warrant liabilities as of October 2, 2022 $ 42,192 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 $ 65.7 million as of October 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 gains (losses) totaling $ 1.0 million and $ 0.1 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively, and $ 0.0 million and $( 0.1 ) million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. 10. FAIR VALUE MEASUREMENTS The Company follows the guidance relating to fair value measurements and disclosures with respect to financial assets and liabilities that are re-measured and reported at fair value each reporting period, and with respect to non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I) and the lowest priority to unobservable pricing inputs (Level III). A financial asset or liability’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below: Level I - Valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities; 15 Level II - Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active. Financial asset or liabilities which are included in this category are securities where all significant inputs are observable, either directly or indirectly; and Level III - Prices or valuations that are unobservable and where there is little, if any, market activity for these financial assets or liabilities. The inputs into the determination of fair value inputs for these investments require significant management judgment or estimation. The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors. To the extent that valuation is based on inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. The fair values of the Company’s Level 2 derivative instruments were determined using valuation models that use market observable inputs including interest rate curves and both forward and spot prices for commodities. Derivative assets and liabilities included in Level 2 primarily represent commodity and interest rate swap contracts. The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of October 2, 2022: (in thousands) Level I Level II Level III Total Assets: Cash and cash equivalents $ 51,805 $ — $ — $ 51,805 Interest rate swaps — 48,135 — 48,135 Total assets $ 51,805 $ 48,135 $ — $ 99,940 Liabilities: Commodity contracts $ — $ 558 $ — $ 558 Private placement warrants — 42,192 — 42,192 Debt — 902,359 — 902,359 Total liabilities $ — $ 945,109 $ — $ 945,109 The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of January 2, 2022: (in thousands) Level I Level II Level III Total Assets: Cash and cash equivalents $ 41,898 $ — $ — $ 41,898 Interest rate swaps — 2,208 — 2,208 Total assets $ 41,898 $ 2,208 $ — $ 44,106 Liabilities: Commodity contracts $ — $ 54 $ — $ 54 Interest rate swaps — 4,600 — 4,600 Private placement warrants — 46,224 — 46,224 Debt — 841,962 — 841,962 Total liabilities $ — $ 892,840 $ — $ 892,840 11. CONTINGENCIES Litigation Matters The Company is involved in litigation and other matters incidental to the conduct of its business, the results of which, in the opinion of management, are not likely to be material to the Company’s financial condition, results of operations or cash flows. Tax Matters The Company received an assessment from the Commonwealth of Pennsylvania pursuant to a sales and use tax audit for the period from January 1, 2014 through December 31, 2016. As of January 2, 2022, the Company had a reserve of $ 1.3 million to cover the assessment. On January 7, 2022, the Company settled the audit with the Commonwealth of Pennsylvania for $ 0.9 million. 16 Guarantees The Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was $ 1.6 million and $ 2.2 million at October 2, 2022 and January 2, 2022, respectively, all of which was recorded by the Company as off balance sheet arrangements. The maximum amount of future payments the Company could be required to make under the guarantees equates to 25 % of the outstanding loan balance up to $ 2.0 million. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. The Company partially guarantees loans made to IOs by Bank of America for the purchase of routes. The outstanding balance of loans guaranteed that were issued by Bank of America was $ 31.4 million and $ 18.6 million at October 2, 2022 and January 2, 2022, respectively, which are off balance sheet. As discussed in Note 8. "Long-Term Debt", the Company also sold notes receivable on its books to Bank of America during fiscal year 2019, fiscal year 2021, and fiscal year 2022, which the Company partially guarantees. The outstanding balance of notes purchased by Bank of America at October 2, 2022 and January 2, 2022 was $ 18.4 million and $ 19.7 million, respectively. Due to the structure of the transactions, the sale did not qualify for sale accounting treatment, and as such the Company records the notes payable obligation owed by the IOs to the financial institution on its Consolidated Balance Sheets; the corresponding note receivable also remained on the Company’s Consolidated Balance Sheets. The maximum amount of future payments the Company could be required to make under these guarantees equates to 25 % of the outstanding loan balance on the first day of each calendar year plus 25 % of the amount of any new loans issued during such calendar year. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. The Company guarantees loans made to IOs by M&T Bank for the purchase of routes. The agreement with M&T Bank was amended in January 2020 so that the Company guaranteed up to 25 % of the greater of the aggregate principal amount of loans outstanding on the payment date or January 1 st of the subject year. The outstanding balance of loans guaranteed was $ 3.8 million and $ 4.9 million at October 2, 2022 and January 2, 2022, respectively, all of which were included in the Company's Consolidated Balance Sheets. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. 12. ACCUMULATED OTHER COMPREHENSIVE INCOME Total accumulated other comprehensive income was $ 54.2 million as of October 2, 2022 and $ 3.7 million as of January 2, 2022. Total accumulated other comprehensive income consists solely of unrealized gains from the Company’s derivative financial instruments accounted for as cash flow hedges. Changes to the balance in accumulated other comprehensive income were as follows: (in thousands) Gain on Cash Flow Hedges Balance as of January 3, 2021 $ 924 Unrealized gain on cash flow hedges 1,429 Balance as of July 4, 2021 2,353 Unrealized gain on cash flow hedges 686 Balance as of October 3, 2021 $ 3,039 Balance as of January 2, 2022 $ 3,715 Unrealized gain on cash flow hedges 30,820 Balance as of July 3, 2022 34,535 Unrealized gain on cash flow hedges 19,655 Balance as of October 2, 2022 $ 54,190 Less balance attributable to noncontrolling interest as of October 2, 2022 21,570 Balance attributable to controlling interest as of October 2, 2022 $ 32,620 17 13. SUPPLEMENTARY CASH FLOW INFORMATION (in thousands) Thirty-nine weeks ended October 2, 2022 Thirty-nine weeks ended October 3, 2021 Cash paid for interest $ 29,682 $ 23,519 Refunds related to income taxes $ 4,630 $ 182 Payments for income taxes $ 5,463 $ 3,332 14. INCOME TAXES The Company is subject to federal and state income taxes with respect to our allocable share of any taxable income or loss of UBH, as well as any standalone income or loss the Company generates. UBH is treated as a partnership for federal income tax purposes, and for most applicable state and local income tax purposes, and generally does not pay income taxes in most jurisdictions. Instead, UBH taxable income or loss is passed through to its members, including the Company. Despite its partnership treatment, UBH is liable for income taxes in those states not recognizing its pass-through status and for certain of its subsidiaries not taxed as pass-through entities. The Company has acquired various domestic entities taxed as corporations, which are now wholly-owned by us or our subsidiaries. Where required or allowed, these subsidiaries also file and pay tax as a consolidated group for federal and state income tax purposes. The Company anticipates this structure to remain in existence for the foreseeable future. The Company recorded income tax (benefit) for the thirteen and thirty-nine weeks ended October 2, 2022 of $( 1.6 ) million and $( 1.7 ) million, respectively. Comparably, the Company recorded income tax expense for the thirteen and thirty-nine weeks ended October 3, 2021 of $ 0.8 million and $ 2.3 million, respectively. The effective tax rates for the thirteen and thirty-nine weeks ended October 2, 2022 were 1450.0 % and 5.7 %, respectively. Comparably, the effective tax rates for the thirteen and thirty-nine weeks ended October 3, 2021 were 2.6 % and 8.5 %, respectively. The Company’s effective tax rates differ from the federal statutory rate of 21% primarily due to the impact of UBH, which is a partnership, is not taxed at the Company level, and is required to allocate some of its taxable results to the Continuing Members, as well as state taxes and the fair value impact of warrant liabilities. The Company’s effective tax rates for the thirteen and thirty-nine weeks ended October 2, 2022 are ( 83.2 )% and 0.8 %, respectively, before consideration of any discrete items. During the thirteen and thirty-nine weeks ended October 2, 2022, the effective tax rate was impacted by return to provision items and updated state nexus and apportionment estimates in response to the R.W. Garcia Co., Inc. and Truco Holdco., Inc. business integrations which resulted in a discrete tax expense and (benefit) of $ 0.5 million and $( 1.4 ) million, respectively. The Company regularly evaluates valuation allowances established for deferred tax assets (“DTA's”) for which future realization is uncertain. The Company assessed the available positive and negative evidence to estimate whether future taxable income would be generated to permit use of the existing DTA's. As of October 2, 2022, a significant piece of objective negative evidence evaluated was the twelve-quarter cumulative loss before taxes. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. The Company determined that there is uncertainty regarding the utilization of certain DTA's such as the investment in UBH, federal operating losses subject to annual limitations due to “change in ownership” provisions, and state net operating losses where the Company does not expect to continue to have nexus. Therefore, a valuation allowance has been recorded against the DTA's for which it is more-likely-than-not they will not be realized. The Company has DTA’s related to its investment in partnership that are expected to be realized in the ordinary course of operations or generate future net operating losses for which a portion will have an indefinite carryforward period. Additionally, the Company has deferred tax liabilities (“DTL’s”) related to its investment in the partnership that will not reverse in the ordinary course of business and will only reverse when the partnership is sold or liquidated. The Company has no intention of disposing of or liquidating the partnership and therefore has not considered the indefinite lived DTL as a source of income to offset other DTA’s. In weighing positive and negative evidence, both objective and subjective, including its twelve-quarter cumulative loss, the Company has recorded a valuation allowance against its DTA’s related to net operating losses and deductible book/tax differences and recorded a DTL primarily related to the book over tax basis in the investment in the partnership that will not reverse in the ordinary course of operations. The Company considered that an indefinite lived DTL may be considered as a source of taxable income for an indefinite lived DTA; however, given our indefinite lived DTL will only reverse upon sale or liquidation, the Company determined that it was more appropriate to record a valuation allowance against its DTA’s. The amount of DTA considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth. As of October 2, 2022, tax years 2018 through 2022 remain open and subject to examination by the Internal Revenue Service and the majority of the states where the Company has nexus, and tax years 2017 through 2022 remain open and subject to examination in selected states that have a longer statute of limitations. 18 Upon audit, tax authorities may challenge all or part of a tax position. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision for income taxes in the period in which a final determination is made. The Company did not maintain any unrecognized tax benefits as of October 2, 2022 and January 2, 2022. Tax receivable agreement liability Pursuant to an election under section 754 of the Internal Revenue Code, the Company obtained an increase in its share of the tax basis in the net assets of UBH when it was deemed to purchase UBH units from third party members and purchased UBH units from the Continuing Members per the Business Combination. Following the Business Combination, the Continuing Members may exchange UBH units along with the forfeiture of a corresponding number of Class V Common Stock of the Company for Class A Common Stock of the Company. The Company intends to treat any such exchanges as direct purchases for U.S. federal income tax purposes, which is expected to further increase its share of the tax basis in the net assets of UBH. The increases in tax basis may reduce the amounts the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. Pursuant to the Business Combination Agreement, the Company entered into the Tax Receivable Agreement in connection with the Business Combination (the “Tax Receivable Agreement” or “TRA”) , which provides for the payment by the Company of 85% of the amount of any tax benefits realized as a result of (i) increases in the share of the tax basis in the net assets of UBH resulting from the Business Combination and any future exchanges by the Continuing Members of UBH units for UBI common stock; (ii) tax basis increases attributable to payments made under the TRA; and (iii) tax amortization deductions attributable to the acquisition of Kennedy Endeavors, LLC and the election to treat the transaction as an asset deal for tax purposes. The rights of each party under the TRA other than the Company are assignable, subject to certain restrictions. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors. As of October 2, 2022 and January 2, 2022, the Company had a liability of $ 25.4 million and $ 24.6 million, respectively, related to its projected obligations under the TRA, which is reflected as current and non-current accrued expenses in the Consolidated Balance Sheets. 15. WARRANTS Prior to the Business Combination, CCH issued 15,833,332 warrants that were initially sold by CCH in its initial public offering of securities (the "Public Warrants"), including 1,166,666 warrants issued pursuant to those certain Forward Purchase Agreements entered into by CCH, CCH's Sponsor (the "Sponsor"), and the independent directors of CCH (the "Forward Purchase Agreements") that were issued at the closing of the Business Combination as part of the Forward Purchase Agreement discussed below (the "Forward Purchase Warrants"), and 7,200,000 warrants initially sold to the Sponsor simultaneously with the closing of its initial public offering (the "Private Placement Warrants," collectively, with the Public Warrants and Forward Purchase Warrants, the "Warrants"). As a result of the Business Combination, the Company assumed the CCH warrants and such warrants are now exercisable for shares of UBI Class A Common Stock instead of Class A ordinary shares of CCH. All other features of the warrants remain unchanged. On December 14, 2020, the Company provided notice to the holders of the Public Warrants and Forward Purchase Warrants that their warrants would be redeemed in accordance with the original terms on January 14, 2021. As of October 2, 2022 and January 2, 2022, there were 7,200,000 Private Placement Warrants outstanding. The Private Placement Warrants and the shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants were not transferable, assignable or salable until after the completion of the Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable by the Company so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. The Warrants are accounted for as derivative liabilities in accordance with ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity ("ASC 815-40"), due to certain settlement provisions in the corresponding warrant agreement that do not meet the criteria to be classified in stockholders’ equity. Pursuant to ASC 815-40, the Warrants are now classified as a liability at fair value on the Company’s Consolidated Balance Sheet, and the change in the fair value of such liability in each period is recognized as a non-cash gain or loss in the Company’s Consolidated Statements of Operations and Comprehensive Income. The Warrants are deemed equity instruments for income tax purposes, and accordingly, there is no tax accounting relating to changes in the fair value of the Warrants recognized. 19 The remeasurement of the warrant liability resulted in a gain (loss) of $( 3.7 ) million and $ 36.3 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively, and of $ 4.0 million and $ 34.2 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. 16. EQUITY Class A Common Stock The Company is authorized to issue 1,000,000,000 shares of Class A Common Stock, par value $ 0.0001 per share, of which 80,812,835 and 77,644,645 shares of UBI were issued and outstanding on October 2, 2022 and January 2, 2022, respectively. Upon the closing of the Business Combination, all shares of CCH Class A ordinary shares, including 3,500,000 Forward Purchase Class A Ordinary Shares of CCH that were issued at the closing of the Business Combination as part of the Forward Purchase Agreements discussed above and below, and Class B ordinary shares, less shareholder redemptions, were converted on a one -for-one basis into shares of Class A Common Stock, including 2,000,000 shares of Class B Common Stock initially issued to the Sponsor, which immediately vested upon the closing of the Business Combination and converted into shares of Class A Common Stock of the Company. Class V Common Stock The Company is also authorized to issue 61,249,000 shares of Class V Common Stock, par value of $ 0.0001 all of which were issued to the Continuing Members in connection with the closing of the Business Combination. Each of the Continuing Members' common limited liability company units of UBH along with a share of Class V Common Stock may be exchanged for one share of Class A Common Stock of the Company upon certain restrictions being satisfied. As of October 2, 2022 and January 2, 2022, there were 59,349,000 shares of Class V Common Stock outstanding. Forward Purchases In connection with the closing of the Business Combination and pursuant to the Forward Purchase Agreements entered into between CCH, CCH’s sponsor, and CCH’s independent directors, CCH consummated the sale and issuance of 3,500,000 shares issued pursuant to the Forward Purchase Agreements and Forward Purchase Warrants to acquire up to 1,166,666 Class A ordinary shares of CCH at $ 11.50 per share, for aggregate proceeds of $ 35,000,000 that were used to fund the Business Combination. 17. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is based on the weighted average number of shares of Class A Common Stock issued and outstanding during the periods. Diluted earnings (loss) per share is based on the weighted average number shares of Class A Common Stock issued and outstanding and the effect of all dilutive common stock equivalents and potentially dilutive share-based awards outstanding during the periods. 20 The following tables reconciles the numerators and denominators used in the computations of both basic and diluted earnings per share: (in thousands, except share data) Thirteen weeks ended October 2, 2022 Thirty-nine weeks ended October 2, 2022 Basic and diluted earnings per share: Numerator: Net loss attributable to controlling interest $ ( 888 ) $ ( 15,279 ) Dividends related to participating stock-based compensation awards ( 47 ) ( 168 ) Net loss attributable to common stockholders $ ( 935 ) $ ( 15,447 ) Denominator: Weighted average Class A Common Stock shares, basic 80,812,835 79,852,137 Basic and diluted earnings (loss) per share $ ( 0.01 ) $ ( 0.19 ) Anti-dilutive securities excluded from diluted earnings per share calculation: Warrants 2,093,271 1,772,271 RSUs 168,081 61,946 PSUs 75,866 53,290 Stock options — — Total 2,337,218 1,887,507 Class V Common Stock not subject to earnings per share calculation 59,349,000 59,349,000 Net income (loss) attributable to noncontrolling interest $ 2,373 $ ( 12,589 ) The diluted earnings (loss) per share computation excludes the effect of certain restricted stock units ("RSUs"), performance stock units ("PSUs"), and stock options granted to Directors and Management which convert to Class A Common Stock upon vesting, as their inclusion would have been anti-dilutive if the Company had positive earnings. 21 (in thousands, except share data) Thirteen weeks ended October 3, 2021 Thirty-nine weeks ended October 3, 2021 Basic earnings per share: Numerator: Net income attributable to controlling interest $ 33,252 $ 28,302 Dividends and income related to participating stock-based compensation awards ( 601 ) ( 525 ) Net income attributable to common stockholders $ 32,651 $ 27,777 Denominator: Weighted average Class A Common Stock shares, basic and diluted 76,713,241 76,380,244 Basic earnings per share $ 0.43 $ 0.36 Diluted earnings per share: Numerator: Net income attributable to common stockholders $ 33,252 $ 28,302 Dividends and income related to participating stock-based compensation awards ( 601 ) ( 525 ) Net income attributable to common stockholders $ 32,651 $ 27,777 Denominator: Weighted average Class A Common Stock shares, basic 76,713,241 76,380,244 Dilutive securities included in diluted earnings per share calculation: Warrants 3,100,280 3,618,794 RSUs 1,058,087 1,024,192 PSUs 33,605 34,247 Stock options 1,405 24,700 Total diluted weighted average shares 80,906,618 81,082,177 Diluted earnings per share $ 0.40 $ 0.34 Class V Common Stock not subject to earnings per share calculation 60,206,143 60,301,381 Net loss attributable to noncontrolling interest $ 1,902 $ 4,122 Shares of the Company’s Class V Common Stock do not participate in earnings or losses of the Company and, therefore, are not participating securities. The PSUs, RSUs, and 2020 LTIP RSUs were participating securities in the periods because the holders of these stock-based compensation awards are entitled to participate in dividends declared on Class A Common Stock, if and when declared, on a one -to-one per-share basis. As such, earnings per share calculations were completed under the two-class method. As of October 2, 2022 and January 2, 2022, the Continuing Members held 59,349,000 shares of Class V Common Stock issued and outstanding and also held an equal number of common limited liability company units of UBH, which comprise the noncontrolling interest. 18. SUBSEQUENT EVENTS Real estate secured financing On October 12, 2022, the Company, through its subsidiaries UQF, Kennedy Endeavors, LLC (“Kennedy”) and Condor Snack Foods, LLC (together with UQF and Kennedy, the “Real Estate Financing Borrowers”), entered into a loan agreement (the “Real Estate Term Loan”) with City National Bank which was secured by a majority of the Real Estate Financing Borrowers’ real estate assets. The Real Estate Term Loan holds a principle balance of $ 88.1 million, with net proceeds of approximately $ 85.0 million after transaction fees and expenses. The Real Estate Term Loan has a ten-year maturity and amortizes approximately $ 3.5 million in principal annually, with a balloon payment due at maturity. The Company used a portion of the proceeds from the Real Estate Term Loan to pay off the ABL facility. The Real Estate Term Loan contains a single financial maintenance covenant consisting of a fixed charge coverage ratio that is tested quarterly only during a covenant trigger period consistent with the existing ABL facility. Concurrent with the closing of the Real Estate Term Loan, UQF entered into an interest rate swap transaction to fix the effective interest rate at approximately 6 %. 22