Utz Brands, Inc. 10-Q

Item 2. 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 unaudited combined interim consolidated financial statements as of and for the thirteen and thirty-nine weeks ended October 2, 2022, together with our audited combined consolidated financial statements for our most recently completed fiscal year set forth under Item 8 of our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K and other filings under the Exchange Act. Our fiscal year end is the Sunday closest to December 31. Our fiscal year 2021 ended January 2, 2022 and was a fifty-two-week period and our fiscal year 2022 will end January 1, 2023 and is a fifty-two-week fiscal year. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three-week fiscal periods of which the fourth quarter is comprised of fourteen weeks, and end on the thirteenth Sunday of each quarter (fourteenth Sunday of the fourth quarter, when applicable). Overview We are a leading U.S. manufacturer of branded salty snacks. We produce a broad offering of salty snacks, including potato chips, tortilla chips, pretzels, cheese snacks, pork skins, 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 U.S., where our products can be found in approximately 49% of U.S. households. We operate manufacturing facilities across the U.S. with a broad range of capabilities, and our products are distributed nationally to grocery, mass merchant, club, convenience, drug and other retailers through direct shipments, distributors, and approximately 2,100 DSD routes. Our company was founded in 1921 in Hanover, Pennsylvania, and benefits from over 100 years of brand awareness and heritage in the salty snack industry. We have historically expanded our geographic reach and product portfolio organically and through acquisitions. Based on 2021 retail sales, we are the second-largest producer of branded salty snacks in our core geographies. Key Developments and Trends Our management team monitors a number of developments and trends that could impact our revenue and profitability objectives. Long-Term Demographics, Consumer Trends, and Demand – We participate in the attractive and growing $34 billion U.S. salty snacks category, within the broader approximately $114 billion market for U.S. snack foods as of October 2, 2022. The salty snacks category has grown retail sales at an approximately 15.4% over the 52 weeks ended October 2, 2022. A recent study by IPSOS presented in June at the IPSOS Food & beverage Summit cites that 47% of consumers say that they are snacking more now than before the novel coronavirus ("COVID-19") pandemic, with the average number of snacks per day for U.S. consumers at 2.7. 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 COVID-19 pandemic which began in the U.S. in March 2020. For the thirteen weeks ended October 2, 2022, U.S. retail sales for salty snacks based on IRI data increased by 19.4% versus the comparable prior year period. In the same period, our retail sales increased 16.9% according to IRI data. For the fifty-two weeks ended October 2, 2022, U.S. retail sales for salty snacks based on IRI data increased by 15.4% versus the comparable prior year period. In the same period, our retail sales increased by 15.7% according to IRI data. 23 Competition – The salty snack industry is highly competitive and includes many diverse participants. Our products primarily compete with other salty snacks but also compete more broadly for certain eating occasions with other snack foods. We believe that the principal competitive factors in the salty snack industry include taste, convenience, product variety, product quality, price, nutrition, consumer brand awareness, media and promotional activities, in-store merchandising execution, customer service, cost-efficient distribution, and access to retailer shelf space. We believe we compete effectively with respect to each of these factors. Operating Costs – Our operating costs include raw materials, labor, manufacturing overhead, selling, distribution, and administrative expenses. We manage these expenses through annual cost saving and productivity initiatives, sourcing and hedging programs, pricing actions, refinancing and tax optimization. Additionally, we maintain ongoing efforts led by our project management office (“PMO”), to expand our profitability, including implementing significant reductions to our operating cost structure in both supply chain and overhead costs. See Commodity Trends for more information on the current trends of our Operating 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 COVID-19 outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ending before the date of enactment. We deferred $7.8 million of payroll tax deposits per the CARES Act. The deferred payroll taxes must be deposited in two installments, with the first installment of $3.9 million paid as of December 31, 2021, and the remaining $3.9 million 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. On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implemented a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The Company continues to evaluate the impact of the Inflation Reduction Act; 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 thirty-nine weeks ended October 2, 2022 was 4.3%, up from 3.5% during the thirty-nine weeks ended October 3, 2021. We have used interest rate swaps to help manage some of our exposure to interest rate changes, which can drive cash flow variability related to our debt. Refer to Note 8. "Long-Term Debt" and Note 9. "Derivative Financial Instruments and Purchase Commitments" to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this filing for additional information on debt, derivative and purchase commitment activity. The Company has experienced the effect of increased interest rates on the portion of its debt that is not hedged and, continued rising interest rates could negatively impact our net income. LIBOR Transition – 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 the London Inter Bank Offered Rate (“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. As of October 2, 2022, we had $857.7 million in variable rate indebtedness, up from $823.2 million at January 2, 2022. During most of the third quarter of 2022, our variable rate indebtedness was tied to the Eurocurrency Rate which currently uses LIBOR as a benchmark for establishing applicable rates. As part of the Company's response to reference rate reform, in September 2022 the Company amended the asset based revolving credit facility (the “ABL facility”), Term Loan B, and our interest rate swap agreement from a LIBOR benchmark to the Term SOFR Screen Rate (‘SOFR”). As of October 2, 2022, we have entered into interest rate hedges covering $500.0 million of debt through September 30, 2026, which limits some of our exposure to changes in interest rates. See Note 9. "Derivatives Financial Instruments and Purchase Commitments" for additional details. 24 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. 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 and through the third quarter of 2022. 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 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, ("Vitner's acquisition" or "acquisition of Vitner's"), a leading brand of salty snacks in the Chicago, Illinois 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. 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 "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 certain of its subsidiaries, entered into a definitive agreement to acquire 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 "acquisition of RW Garcia"). The Company closed on this transaction on December 6, 2021, with the 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. 25 Commodity Trends We regularly monitor worldwide supply and commodity costs so we can cost-effectively secure ingredients, packaging and fuel required for production. A number of external factors such as weather, which may be impacted in unanticipated ways due to climate change, commodity market conditions, and the effects of governmental, agricultural or other programs affect the cost and availability of raw materials and agricultural materials used in our products. We address commodity costs primarily through the use of buying-forward, which locks in pricing for key materials between three and 18 months in advance. Other methods include hedging, net pricing adjustments to cover longer term cost inflation, and manufacturing and overhead cost control. Our hedging techniques, such as forward contracts, limit the impact of fluctuations in the cost of our principal raw materials; however, we may not be able to fully hedge against commodity cost changes, where there is a limited ability to hedge, and our hedging strategies may not protect us from increases in specific raw material costs. Toward the end of fiscal year 2020, we began to experience an increase in pricing in certain commodity trends that continued to rise throughout fiscal year 2021 and have continued to rise through the third fiscal quarter of 2022. We expect this trend to continue through fiscal year 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 since early in 2021 and may continue to rise which may also adversely impact net income. Taken all together, the Company expects gross input cost inflation (which includes commodities, labor, and transportation) to be in the mid to high-teens in fiscal year 2022. The Company looks to offset rising costs through increasing manufacturing and distribution efficiencies as well as through price increases to our customers, although it is unclear whether historic customer sales levels will be maintained at these higher prices. Due to competitive or market conditions, planned trade or promotional incentives, or other factors, our pricing actions may also lag commodity cost changes. While the costs of our principal raw materials fluctuate, we believe there will continue to be an adequate supply of the raw materials we use and that they will generally remain available from numerous sources. Market factors including supply and demand may result in higher costs of sourcing those materials. Independent Operator Conversions Our DSD distribution is executed via Company-owned routes operated by route sales professionals ("RSP" or "RSPs"), and third-party routes managed by IOs. We have used the IO and RSP models for more than a decade. In fiscal year 2017, we embarked on a multi-year strategy to convert all Company-owned RSP routes to the IO model. The mix between IOs and RSP was approximately 91% and 9%, respectively as of October 2, 2022 versus 85% and 15% ratio for IOs and RSPs respectively as of October 3, 2021. We anticipate completing substantially all remaining conversions by the middle of fiscal year 2023. The conversion process involves selling distribution rights of a defined route to an IO. As we convert a large number of routes in a year, there is a meaningful decrease in the selling 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 and distribution expenses and a decrease in net sales and gross profit. Conversions also impact our balance sheet resulting in cash proceeds to us as a result of selling the route to an IO, or by creating notes receivable related to the sale of the routes. 26 Results of Operations Overview The following tables present selected unaudited financial data for the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021. 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 Thirteen weeks ended October 2, 2022 versus thirteen weeks ended October 3, 2021 Net sales Net sales was $362.8 million and $312.7 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively. The net sales increase of $50.1 million or 16.0%, for the thirteen weeks ended October 2, 2022, over the comparable period in 2021, and was primarily related to favorable price/mix of 14.7%, which was largely driven by pricing actions in the second half of fiscal year 2021 and throughout fiscal year 2022 as a response to inflationary pressures. The Company experienced a 2.1% decline in volume as the Company rationalized certain SKUs, primarily in private label and certain partner brands, and lapped strong promotional features in the third fiscal quarter of 2021. In addition, the 2021 acquisition of R.W. Garcia, and distribution gains at national customers and in key geographies also contributed to the year-over-year revenue growth. IO discounts increased to $41.2 million for the thirteen weeks ended October 2, 2022 from $31.6 million for the corresponding thirteen weeks ended October 3, 2021. Excluding the impacts of acquisitions and increased IO discounts related to RSP to IO conversion, organic net sales increased 12.6% for the thirteen weeks ended October 2, 2022 versus the corresponding period in 2021. 27 Net sales are evaluated based on classification as Power and Foundation brands. Power brands include our iconic heritage Utz brand and iconic ON THE BORDER® brand; craft brands such as Zapp’s ®, Golden Flake ® Pork Skins, TORTIYAHS!, and Hawaiian ®; "better for you" brands such as Good Health ® and Boulder Canyon ®; and 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®, as well as other partner and private label brands. For the thirteen weeks ended October 2, 2022, excluding brands acquired through our R. W. Garcia acquisitions, Power brand sales increased by approximately 17.6%, while Foundation brand sales increased by approximately 5.7% from the thirteen weeks ended October 2, 2022. The increase in Power brand sales is due primarily to favorable pricing actions and distribution gains, offset by continued IO conversions. Foundation brand sales increase was primarily driven by favorable pricing actions, offset by IO conversions, and SKU rationalization. Cost of goods sold and Gross profit Gross profit was $118.3 million and $102.6 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively. The increase in gross profit for thirteen weeks ended October 2, 2022 was driven by organic net sales growth, distribution gains, the gross profit contributions related to the acquisition of R.W. Garcia, and the benefits of leveraging our existing infrastructure and available capacity while also improving efficiencies through productivity initiatives. In addition, pricing initiatives were put in place to help reduce the impact of continued commodity, transportation, and wage inflation. The thirteen weeks ended October 2, 2022 was benefited by $4.0 million recorded as a reduction of cost of goods sold related to proceeds received from a partial settlement of business interruption insurance, which reimbursed the Company for some expenses as the Company had to shift production to other facilities, including co-manufacturers, due to a natural disaster that affected one of the Company's smaller manufacturing facilities. Gross profit margin was 32.6% for the thirteen weeks ended October 2, 2022 versus 32.8% for the thirteen weeks ended October 3, 2021. The decline in gross profit margin was primarily driven by commodity and wage inflation, higher depreciation costs due to the acquired assets of the R.W. Garcia businesses, offset by our pricing and productivity actions. Additionally, IO discounts increased to $41.2 million for the thirteen weeks ended October 2, 2022 from $31.6 million for the thirteen weeks ended October 3, 2021, reducing gross profit by $9.6 million. The increase in IO discounts was driven by increased sales due primarily to pricing actions, and continued conversions of DSD routes from RSP to IO. The growth of IO discounts related to the conversion of DSD routes to IOs is offset by lower selling and distribution expense. Selling, distribution, and administrative expense Selling, distribution, and administrative expenses were $102.4 million and $98.7 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively resulting in an increase of $3.7 million or 3.8%, over the corresponding period in fiscal year 2021. The increase in expenses for the thirteen weeks ended October 2, 2022 was driven by distribution gains, and the acquired operations of the R.W. Garcia businesses, as well as, higher accruals for incentive compensation resulting from improved fiscal 2022 performance as compared to fiscal 2021, and increased investments in our people, brands, selling infrastructure, and planning capabilities to support growth.. These incremental costs were offset by the reductions of selling costs related to the continued conversion of Company-owned DSD routes from RSP to IO. (Loss) gain on sale of assets Loss on sale of assets was $0.8 million and $1.0 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively. The Company has continued to convert Company-owned routes to IO routes during the third fiscal quarter of 2022, offsetting the sales price by the respective route intangible asset. Other (expense) income, net Other (expense) income, net was expense of $(15.1) million compared to income of $29.3 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively. The greater expense for the thirteen weeks ended October 2, 2022 compared to the prior comparable period income was primarily due to a $3.7 million loss from the remeasurement of warrant liability for the thirteen weeks ended October 2, 2022 versus a gain of $36.3 million for the thirteen weeks ended October 3, 2021. Also significant was interest expense of $11.6 million for the thirteen weeks ended October 2, 2022 compared to $7.7 million for the thirteen weeks ended October 3, 2021. The additional increase in interest expense is primarily attributable to the additional equipment loan and ABL facility draws, which were used in connection with the acquistion of R.W. Garcia, the buyout of multiple distributors, which were accounted for as contract terminations, and financing related to the Kings Mountian, North Carolina facility purchase. Another significant driver increasing interest expense relates to an uptick in interest rates, which impacted the portion of debt that the Company has not hedged. 28 Income taxes Income tax (benefit)/expense was $(1.6) million and $0.8 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively. Thirty-nine weeks ended October 2, 2022 versus thirty-nine weeks ended October 3, 2021 Net sales Net sales was $1.054 billion and $879.8 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. Net sales for the thirty-nine weeks ended October 2, 2022 increased $174.0 million or 19.8% over the comparable period in fiscal year 2021. The increase in net sales for the thirty-nine weeks ended October 2, 2022 was primarily related to favorable price/mix of 12.5%, which was largely driven by pricing actions in the second half of fiscal year 2021 and throughout fiscal year 2022 as a response to inflationary pressures, as well as organic volume growth, distribution gains, and the acquisitions of Vitner's, Festida Foods, and R.W. Garcia IO discounts increased to $114.6 million for the thirty-nine weeks ended October 2, 2022 from $88.6 million for the corresponding thirty-nine weeks ended October 3, 2021. Excluding the impacts of acquisitions and increased IO discounts related to RSP to IO conversion, organic net sales increased 15.4% for the thirty-nine weeks ended October 2, 2022 versus the corresponding period in 2021. Net sales are evaluated based on classification as Power and Foundation brands. Power brands include our iconic heritage Utz brand and iconic ON THE BORDER® brand; craft brands such as Zapp’s ®, Golden Flake ® Pork Skins, TORTIYAHS!, and Hawaiian ®; "better for you" brands such as Good Health ® and Boulder Canyon ®; and 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®, as well as other partner and private label brands. For the thirty-nine weeks ended October 2, 2022, excluding brands acquired through our Vitner's, Festida Foods, and R. W. Garcia acquisitions, Power brand sales increased by approximately 20.4%, while Foundation brand sales increased approximately 3.6% from the thirty-nine weeks ended October 3, 2021. The increase in Power brand sales is due primarily to favorable pricing actions, organic volume growth, and distribution gains, offset by continued IO conversions. Foundation brand sales increase was primarily driven by favorable pricing actions, offset by continued IO conversion and SKU rationalization. Cost of goods sold and Gross profit Gross profit was $333.6 million and $293.4 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. The increase in gross profit for thirty-nine weeks ended October 2, 2022 was driven by organic volume growth, distribution gains, the gross profit contributions related to the acquisitions of Vitner's, Festida Foods, and R.W. Garcia, and the benefits of leveraging our existing infrastructure and available capacity while also improving efficiencies through productivity initiatives. In addition, pricing initiatives were put in place to help reduce the impact of continued commodity, transportation, and wage inflation. The thirty-nine weeks ended October 2, 2022 was benefited by $4.0 million recorded as a reduction of cost of goods sold related to proceeds received from a partial settlement of business interruption insurance, which reimbursed the Company for some expenses as the Company had to shift production to other facilities, including co-manufacturers, due to a natural disaster that affected one of the Company's smaller manufacturing facilities. Gross profit margin was 31.7% for the thirty-nine weeks ended October 2, 2022 versus 33.4% for the thirty-nine weeks ended October 3, 2021. The decline in gross profit margin was primarily driven by commodity and wage inflation, and higher depreciation costs due to the acquired assets of Festida Foods and R.W. Garcia businesses, offset by pricing and productivity actions. Additionally, IO discounts increased to $114.6 million for the thirty-nine weeks ended October 2, 2022 from $88.6 million for the thirty-nine weeks ended October 3, 2021, reducing gross profit by $26.0 million. The increase in IO discounts was driven by increased sales due to volume growth and pricing actions, and continued conversions of DSD routes from RSP to IO. The growth of IO discounts related to the conversion of DSD routes to IOs is offset by lower selling and distribution expense. 29 Selling, distribution, and administrative expense Selling, distribution, and administrative expenses were $336.7 million and $278.9 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively, resulting in an increase of $57.9 million, or 20.8%, over the corresponding period in fiscal year 2021. The increase in expenses for the thirty-nine weeks ended October 2, 2022 was driven by higher Acquisition and Integration costs related to the buyout of multiple distributors, which were accounted for as contract terminations, and resulted in expense of $23.0 million. In addition, other contract termination expense and related impairments totaled a combined $2.6 million. Excluding these items selling, distribution, and administrative expenses increased by 11.6% for the thirty-nine weeks ended October 2, 2022 compared to the corresponding period in fiscal year 2021. We believe that these actions will help drive increased future profitability and allow us to better serve our customers. Other significant contributors to the increase in expense can be attributed to higher delivery costs by $9.8 million and the addition of operational costs related to the acquired operations of Vitner's, Festida, and R.W. Garcia businesses, distribution gains, and organic volume growth, as well as, higher accruals for incentive compensation resulting from improved fiscal 2022 performance as compared to fiscal 2021, and increased investments in our people, brands, selling infrastructure, and planning capabilities to support growth. These incremental costs were partially offset by the reductions of selling costs related to the continued conversion out of Company-owned RSP to IO routes. (Loss) gain on sale of assets Gain on sale of assets was $0.9 million and $2.0 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectivel y. Th e Company has continued to convert Company-owned routes to IO routes during the first three fiscal quarters of 2022, offsetting the sales price by the respective route intangible asset. Other (expense) income, net Other (expense) income, net was $(27.4) million and $9.9 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. The greater expense for the thirty-nine weeks ended October 2, 2022 compared to the income in the prior comparable period was primarily due to a $4.0 million gain from the remeasurement of warrant liability for the thirty-nine weeks ended October 2, 2022 versus a gain of $34.2 million for the thirty-nine weeks ended October 3, 2021. Also significant was interest expense of $31.5 million for the thirty-nine weeks ended October 2, 2022 compared to $26.5 million for the thirty-nine weeks ended October 3, 2021. The additional increase in interest expense is primarily attributable to the additional equipment loans and ABL facility draws, which were used in connection with the acquisition of Festida Foods, the acquisition of R.W. Garcia, the buyout of multiple distributors, which were accounted for as contract terminations, and financing related to the Kings Mountian, North Carolina facility purchase. Another significant driver increasing interest expense relates to an uptick in interest rates, which impacted the portion of debt that the Company has not hedged. Income taxes Inco me tax (benefit) expense was $(1.7) million and $2.3 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. Non-GAAP Financial Measures We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, 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. 30 EBITDA and Adjusted EBITDA We define EBITDA as Net Income before Interest, Income Taxes, and Depreciation and Amortization. We define Adjusted EBITDA as EBITDA further adjusted to exclude certain non-cash items, such as accruals for long-term incentive programs, hedging and purchase commitments adjustments, remeasurement of warrant liabilities, and asset impairments; Acquisition and Integration Costs; Business Transformation Initiatives; and Financing-Related Costs. Adjusted EBITDA is one of the key performance indicators we use in evaluating our operating performance and in making financial, operating, and planning decisions. We believe EBITDA and Adjusted EBITDA are useful to investors in the evaluation of our operating performance compared to other companies in the salty snack industry, as similar measures are commonly used by companies in this industry. 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. The following table provides a reconciliation from net income (loss) to EBITDA and Adjusted EBITDA for the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021: (dollars in millions) 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 income (loss) $ 1.5 $ 31.4 $ (27.9) $ 24.2 Plus non-GAAP adjustments: Income Tax (Benefit) Expense (1.6) 0.8 (1.7) 2.3 Depreciation and Amortization 21.8 20.7 66.3 59.3 Interest Expense, Net 11.6 7.7 31.5 26.5 Interest Income (IO loans) (1) (0.4) (0.6) (1.3) (2.0) EBITDA 32.9 60.0 66.9 110.3 Certain Non-Cash Adjustments (2) 0.9 2.0 9.2 9.0 Acquisition and Integration (3) 4.8 11.0 40.8 19.0 Business Transformation Initiatives (4) 5.4 8.0 13.3 13.7 Financing-Related Costs (5) — 0.1 0.2 0.7 Loss (Gain) on Remeasurement of Warrant Liability (6) 3.7 (36.3) (4.0) (34.2) Adjusted EBITDA $ 47.7 $ 44.8 $ 126.4 $ 118.5 Net income (loss) as a % of Net Sales 0.4 % 10.0 % (2.6) % 2.8 % Adjusted EBITDA as a % of Net Sales 13.1 % 14.3 % 12.0 % 13.5 % (1) Interest Income from IO loans refers to Interest Income that we earn from IO notes receivable that have resulted from our initiatives to transition from RSP distribution to IO distribution ("Business Transformation Initiatives") . There is a notes payable recorded that mirrors most of the IO notes receivable, and the interest expense associated with the notes payable is part of the Interest Expense, Net adjustment. (2) Certain Non-Cash Adjustments are comprised primarily of the following: Incentive programs and other non-cash adjustments – For the thirteen weeks ended October 2, 2022 and October 3, 2021, the Company incurred $1.9 million and $2.1 million, respectively, of share-based compensation and compensation expense associated with the employee stock purchase plan. The share-based compensation and compensation expense associated with the employee stock purchase plan for the thirty-nine weeks ended October 2, 2022 and October 3, 2021 was $6.7 million and $7.8 million, respectively. The thirteen weeks ended October 2, 2022 also included a $1.0 million gain related to unrealized purchase commitment adjustments and thirty-nine weeks ended October 2, 2022 includes a $0.5 million of unrealized purchase commitment losses. During the thirty-nine weeks ended October 2, 2022, the Company recorded an impairment of $2.0 million related to the termination of distribution agreements. (3) Adjustment for Acquisition and Integration Costs – This is comprised of consulting, transaction services, and legal fees incurred for acquisitions and certain potential acquisitions, in addition to expenses associated with integrating recent 31 acquisitions. The majority of charges are related to the buyout of multiple distributors, which was accounted for as a contract termination resulting in expense of $23.0 million for the thirty-nine weeks ended October 2, 2022 as well as other integration costs. During the thirteen and thirty-nine weeks ended October 2, 2022, we incurred incremental costs of $4.8 million and $16.4 million, respectively, for the integration of Truco, R.W. Garcia, Kings Mountain, and costs to evaluate other potential acquisitions, as well as $1.0 million for the incremental Tax Receivable Agreement Liability associated with the Business Combination included in the thirty-nine weeks ended October 2, 2022. Acquisition and Integration costs incurred primarily for the Vitner's acquisition, the Truco acquisition, and related integration expenditures were $5.6 million and $9.6 million for the thirteen and thirty-nine weeks ended October 3, 2021, respectively, as well as $4.1 million and $9.4 million related to distributor buyouts which was accounted for as contract terminations for the thirteen and thirty-nine weeks ended October 3, 2021, respectively. (4) Business Transformation Initiatives Adjustment – This adjustment is related to consultancy, professional, and legal fees incurred for specific initiatives and structural changes to the business that do not reflect the cost of normal business operations. In addition, gains and losses realized from the sale of distribution rights to IOs and the subsequent disposal of trucks, severance costs associated with the elimination of RSP positions, and ERP transition costs, fall into this category. The Company incurred such costs of $5.4 million and $8.0 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively, and $13.3 million and $13.7 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively. (5) Financing-Related Costs – These costs include adjustments for various items related to raising debt and equity capital or debt extinguishment costs. (6) Gains and losses related to the changes in the remeasurement of warrant liabilities are not expected to be settled in cash, and when exercised would result in a cash inflow to the Company with the Warrants converting to Class A Common Stock with the liability being extinguished and the fair value of the Warrants at the time of exercise being recorded as an increase to equity. Liquidity and Capital Resources The following table presents net cash provided by operating activities, investing activities and financing activities for the thirty-nine weeks ended October 2, 2022 and October 3, 2021. (in thousands) Thirty-nine weeks ended October 2, 2022 Thirty-nine weeks ended October 3, 2021 Net cash provided by operating activities $ 8,071 $ 4,282 Net cash used in investing activities $ (52,940) $ (78,081) Net cash provided by financing activities $ 54,776 $ 52,929 32 For the thirty-nine weeks ended October 2, 2022, our consolidated cash balance, including cash equivalents, was $51.8 million or $9.9 million higher than at January 2, 2022. Net cash used in operating activities for the thirty-nine weeks ended October 2, 2022 was $8.1 million compared to $4.3 million for the thirty-nine weeks ended October 3, 2021, with the difference largely driven by improved net working capital management of vendor payments offset by the payment of $22.9 million related to the buyout of multiple distributors, which were accounted for as contract terminations. The thirty-nine weeks ended October 2, 2022 also included a larger cash outflow related to the building of inventory compared to the prior year comparable period. This inventory build was the result of increased volume, which was driven by organic sales growth as well as growth related to acquisitions. Other factors that contributed to the inventory growth were higher commodity and overhead costs, as well as production and logistics shifts in the business. Working capital also benefited by faster collections of accounts receivable as we work with customers and implement programs to speed up cash collections. Cash used in investing activities for the thirty-nine weeks ended October 2, 2022 was $52.9 million driven by purchases of property and equipment, which includes $38.4 million to the purchase of 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, offset by proceeds from the sale of assets and receipt of an insurance claim, versus cash used in investing activity of $78.1 million for the thirty-nine weeks ended October 3, 2021, which was primarily driven by the acquisitions of Vitner's and Festida Foods. Net cash provided by financing activities was $54.8 million for the thirty-nine weeks ended October 2, 2022, driven by an increase in the line of credit of $40.4 million, borrowings on the equipment term loans and other notes payable of $34.0 million, and proceeds from the issuance of shares of $28.0 million, offset by cash payments on net settled stock-based compensation, the payment of dividends and distribution, and repayments on term debt and notes payable, versus net cash used in financing activities of $52.9 million for the thirty-nine weeks ended October 3, 2021, which was primarily a result of the payoffs of the First Term Loan and the Bridge Credit Agreement, payments of dividends and distributions, offset by the borrowings under Term Loan B and proceeds from the 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"), 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 the Term SOFR Screen Rate ("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. 33 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 averaged 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, respectively. 34 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 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 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 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 $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. 35 IO Guarantees-Off-Balance Sheet The Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was $1.6 million and $2.2 million at October 2, 2022 and January 2, 2022, 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 $31.4 million and $18.6 million at October 2, 2022 and January 2, 2022, respectively, which are off balance sheet arrangements. 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 and fiscal year 2021, 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 1st 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 was 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. New Accounting Pronouncements See Note 1. "Operations and Summary of Significant Accounting Policies," to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. Application of Critical Accounting Policies and Estimates General Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). While the majority of our revenue, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions. Management regularly reviews the estimates and assumptions used in the preparation of our financial statements for reasonableness and adequacy. Our significant accounting policies are discussed in Note 1. "Operations and Summary of Significant Accounting Policies", of the unaudited Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q; however, the following discussion pertains to accounting policies we believe are most critical to the portrayal of our financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our financial condition, results of operations and cash flows to those of other companies. Revenue Recognition Our revenues primarily consist of the sale of salty snack items that are sold through DSD and direct-to-warehouse distribution methods, either directly to retailers or via distributors. We sell to supermarkets, mass merchandisers, club warehouses, convenience stores and other large-scale retailers, merchants, distributors, brokers, wholesalers, and IOs (which are third party businesses). These revenue contracts generally have a single performance obligation. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components. 36 We recognize revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as products’ control is transferred to customers. We assess the goods promised in customers’ purchase orders and identify a performance obligation for each promise to transfer a good that is distinct. We offer various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. In 2019, we implemented a system that improves our ability to analyze and estimate the reserve for unpaid costs relating to our promotional activities. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as the actual redemption incurred. Distribution Route Purchase and Sale Transactions We purchase and sell distribution routes as a part of our maintenance of our DSD network. As new IOs are identified, we either sell our existing routes to the IOs or sell routes that were previously purchased by us to the IOs. Gain/loss from the sale of a distribution route is recorded upon the completion of the sale transaction and signing of the relevant documents and is calculated based on the difference between the sale price of the distribution route and the asset carrying value of the distribution route as of the date of sale. We record intangible assets for distribution routes that we purchase based on the payment that we make to acquire the route and record the purchased distribution routes as indefinite-lived intangible assets under Financial Accounting Standards Board ASC 350, Intangibles – Goodwill and Other. The indefinite lived intangible assets are subject to annual impairment testing. Goodwill and Indefinite-Lived Intangibles We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets. Finite-lived intangible assets consist of distribution/customer relationships, technology, trademarks and non-compete agreements. These assets are being amortized over their estimated useful lives. Finite-lived intangible assets are tested for impairment only when management has determined that potential impairment indicators are present. Goodwill and other indefinite-lived intangible assets (including trade names, master distribution rights and Company-owned routes) are not amortized but are tested for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. We test goodwill for impairment at the reporting unit level. As we have early adopted Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment, we will record an impairment charge based on the excess of a reporting unit’s carrying amount over our fair value. ASC 350, Goodwill and Other Intangible Assets also permits an entity to first assess qualitative factors to determine whether it is necessary to perform quantitative impairment tests for goodwill and indefinite-lived intangibles. If an entity believes, as a result of each qualitative assessment, it is more likely than not that goodwill or an indefinite-lived intangible asset is not impaired, a quantitative impairment test is not required. 37 We have identified the existing snack food operations as our sole reporting unit. For the qualitative analysis performed, which took place on the first day of the fourth quarter of 2021, we have taken into consideration all the events and circumstances listed in FASB ASC 350, Intangibles—Goodwill and Other, in addition to other entity-specific factors that have taken place. We have determined that there was no significant impact that affected the fair value of the reporting unit through October 2, 2022 . T herefore, we have determined that it was not necessary to perform a quantitative goodwill impairment test for the reporting unit. Income Taxes We account for income taxes pursuant to the asset and liability method of ASC 740, Income Taxes, which require us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. We follow the provisions of ASC 740-10 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The benefit of tax positions taken or expected to be taken in our income tax returns is recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits." A liability is recognized (or amount of net operating loss carryover or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. Interest costs and related penalties related to unrecognized tax benefits are required to be calculated, if applicable. Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling and administrative expenses. As of October 2, 2022 and January 2, 2022, no liability for unrecognized tax benefits was required to be reported. We do not expect any significant changes in our unrecognized tax benefits in the next year. Business Combinations We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is accounted for as a business combination or an acquisition of assets. We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures about market risk, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended January 2, 2022. Our exposures to market risk have not changed materially since January 2, 2022. 38