Sovos Brands, Inc. [SOVO] Filings

10-Q 1 sovos-20230401x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended April 1, 2023

OR

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

For the transition period from ________ to ________

Commission File Number: 001-40837

Sovos Brands, Inc.

(Exact name of registrant as specified in its charter)


Delaware		81-5119352
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

168 Centennial Parkway, Suite 200

Louisville, CO 80027

(Address of principal executive offices) (zip code)

(720) 316-1225

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

SOVO

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

Table of Contents

SOVOS BRANDS, INC.

FORM 10-Q

FOR THE QUARTER ENDED APRIL 1, 2023

INDEX


		Page
PART I. Financial Information
Item 1.	Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44
PART II. Other Information
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6	Exhibits	46
	Signatures	48

Table of Contents

PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Sovos Brands, Inc.

Condensed Consolidated Balance Sheets

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


	April 1, 2023		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	153,638	$	138,654
Accounts receivable, net		93,447		87,695
Inventories, net		86,727		92,602
Prepaid expenses and other current assets		12,382		11,974
Total current assets		346,194		330,925
Property and equipment, net		63,275		64,317
Operating lease right-of-use assets		12,724		13,332
Goodwill		395,399		395,399
Intangible assets, net		345,941		351,547
Other long-term assets		2,485		3,279
TOTAL ASSETS	$	1,166,018	$	1,158,799

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	55,349	$	49,264
Accrued expenses		57,679		69,571
Current portion of long-term debt		94		99
Current portion of long-term operating lease liabilities		3,365		3,308
Total current liabilities		116,487		122,242
Long-term debt, net of debt issuance costs		482,580		482,344
Deferred income taxes		64,269		63,644
Long-term operating lease liabilities		13,204		14,063
Other long-term liabilities		517		483
TOTAL LIABILITIES		677,057		682,776

COMMITMENTS AND CONTINGENCIES (Note 11)

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value per share, 10,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.001 par value per share, 500,000,000 shares authorized, 101,226,478 and 100,967,910 shares issued and outstanding as of April 1, 2023 and December 31, 2022, respectively		101		101
Additional paid-in-capital		583,172		577,664
Accumulated deficit		(95,445)		(103,291)
Accumulated other comprehensive income		1,133		1,549
TOTAL STOCKHOLDERS’ EQUITY		488,961		476,023
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,166,018	$	1,158,799

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

Table of Contents

Sovos Brands, Inc.

Condensed Consolidated Statements of Operations

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


	13 Weeks Ended
	April 1, 2023		March 26, 2022
Net sales	$	252,791	$	209,933
Cost of sales		181,979		156,025
Gross profit		70,812		53,908
Operating expenses:
Selling, general and administrative		43,414		33,915
Depreciation and amortization		5,980		7,203
Total operating expenses		49,394		41,118
Operating income		21,418		12,790
Interest expense, net		8,701		6,022
Income before income taxes		12,717		6,768
Income tax (expense)		(4,871)		(2,711)
Net income	$	7,846	$	4,057

Earnings per share:
Basic	$	0.08	$	0.04
Diluted	$	0.08	$	0.04
Weighted average shares outstanding:
Basic		101,186,223		100,892,547
Diluted		101,507,696		101,262,103

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

Table of Contents

Sovos Brands, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, dollars in thousands)


	13 Weeks Ended
	April 1, 2023		March 26, 2022
Net income	$	7,846	$	4,057
Other comprehensive income:
Change in net unrealized loss on derivative instruments		(549)		—
Income tax effect		133		—
Unrealized loss on derivative instruments, net of tax		(416)		—
Total comprehensive income	$	7,430	$	4,057

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

Table of Contents

Sovos Brands, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited, dollars in thousands, except share data)


				Additional		Retained Earnings		Accumulated Other		Total
	Common Stock			Paid-in		(Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit)		Income		Equity
Balance at December 31, 2022	100,967,910	$	101	$	577,664	$	(103,291)	$	1,549	$	476,023
Equity-based compensation expense	—		—		5,508		—		—		5,508
Shares issued upon vesting of restricted stock units	258,568		—		—		—		—		—
Other comprehensive loss	—		—		—		—		(416)		(416)
Net income	—		—		—		7,846		—		7,846
Balance at April 1, 2023	101,226,478	$	101	$	583,172	$	(95,445)	$	1,133	$	488,961


				Additional		Retained Earnings		Accumulated Other		Total
	Common Stock			Paid-in		(Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit)		Income		Equity
Balance at December 25, 2021	100,892,547	$	101	$	559,226	$	(49,840)	$	—	$	509,487
Equity-based compensation expense	—		—		4,087		—		—		4,087
Net income	—		—		—		4,057		—		4,057
Balance at March 26, 2022	100,892,547	$	101	$	563,313	$	(45,783)	$	—	$	517,631

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Sovos Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)


	13 Weeks Ended
	April 1, 2023		March 26, 2022
Operating activities
Net income	$	7,846	$	4,057
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,469		9,555
Equity-based compensation expense		5,508		4,087
Gain on foreign currency contracts		(133)		—
Non-cash interest expense		164		—
Deferred income taxes		758		306
Amortization of debt issuance costs		316		316
Non-cash operating lease expense		608		603
Provision for excess and obsolete inventory		836		484
Other		—		(6)
Changes in operating assets and liabilities:
Accounts receivable, net		(5,752)		(12,065)
Inventories, net		5,039		1,275
Prepaid expenses and other current assets		(4,209)		(1,043)
Other long-term assets		(45)		(10)
Accounts payable		6,437		4,896
Accrued expenses		(7,897)		(538)
Other long-term liabilities		34		10
Operating lease liabilities		(802)		(728)
Net cash provided by operating activities		17,177		11,199
Investing activities
Purchases of property and equipment		(2,173)		(7,180)
Net cash (used in) investing activities		(2,173)		(7,180)
Financing activities
Repayments of capital lease obligations		(20)		(24)
Net cash (used in) financing activities		(20)		(24)
Cash and cash equivalents
Net increase in cash and cash equivalents		14,984		3,995
Cash and cash equivalents at beginning of period		138,654		66,154
Cash and cash equivalents at end of period	$	153,638	$	70,149


Supplemental disclosures of cash flow information
Cash paid for interest	$	9,973	$	5,937
Cash proceeds from interest		(1,282)		(3)
Cash paid for taxes		140		37
Proceeds from income tax refunds		(43)		(10)
Non-cash investing and financing transactions
Acquisition of property and equipment not yet paid	$	146	$	467

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

Table of Contents

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Company Overview

Description of Business

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

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

Basis of Presentation

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

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

Unaudited Interim Condensed Consolidated Financial Statements

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

Note 2. Summary of Significant Accounting Policies

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

Table of Contents

New Accounting Pronouncements and Policies

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

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

Note 3. Loss on Asset Sale

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

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

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


(In thousands)
Cash received	$	40,000
Assets sold:
Inventory		(5,424)
Intangible assets, net		(85,867)
Total assets sold		(91,291)
Loss on asset sale	$	(51,291)

Table of Contents

Note 4. Revenue Recognition

Revenue disaggregated by brand is as follows:


	13 Weeks Ended
(In thousands)	April 1, 2023		March 26, 2022
Rao’s	$	189,191	$	137,412
Noosa		45,284		41,851
Michael Angelo’s		19,102		20,242
Birch Benders		(786)		10,428
Total net sales	$	252,791	$	209,933

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

Note 5. Inventories, Net

Inventories, net consisted of the following:


(In thousands)	April 1, 2023		December 31, 2022
Finished goods	$	73,205	$	76,404
Raw materials and packaging supplies		13,522		16,198
Total inventories, net	$	86,727	$	92,602

Note 6. Goodwill

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

Note 7. Intangible Assets, Net

Intangible asset, net, consisted of the following:


	April 1, 2023
	Gross carrying		Accumulated		Net carrying
(In thousands)	amount		amortization		amount
Intangible assets - definite lives
Customer relationships	$	207,300	$	92,979	$	114,321
Tradename		101,747		23,127		78,620
		309,047		116,106		192,941
Intangible assets - indefinite lives
Tradename		153,000		—		153,000
Total intangible assets	$	462,047	$	116,106	$	345,941

Table of Contents


	December 31, 2022
	Gross carrying		Accumulated		Sale of		Net carrying
(In thousands)	amount		amortization		intangible assets		amount
Intangible assets - definite lives
Customer relationships	$	213,000	$	89,201	$	5,082	$	118,717
Tradename		192,347		31,732		80,785		79,830
		405,347		120,933		85,867		198,547
Intangible assets - indefinite lives
Tradename		153,000		—		—		153,000
Total intangible assets	$	558,347	$	120,933	$	85,867	$	351,547

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

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

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

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


(In thousands)	Amortization
Remainder of 2023	$	16,819
2024		22,425
2025		22,425
2026		22,425
2027		17,782
Thereafter		91,065
Total	$	192,941

Note 8. Accrued Expenses

Accrued expenses consisted of the following:


(In thousands)	April 1, 2023		December 31, 2022
Accrued trade	$	30,419	$	32,337
Accrued general expense		17,784		17,911
Accrued compensation and benefits		8,412		17,328
Accrued marketing		1,064		1,995
Total accrued expenses	$	57,679	$	69,571

Table of Contents

Note 9. Long-Term Debt

Long-term debt consisted of the following:


	April 1, 2023
			Unamortized
			debt issuance
(In thousands)	Principal		costs		Total debt, net
Initial First Lien Term Loan Facility	$	480,800	$	(5,123)	$	475,677
Finance lease liabilities		6,997		—		6,997
Total debt	$	487,797	$	(5,123)		482,674
Less: current portion of finance lease liabilities						94
Total long-term debt					$	482,580


	December 31, 2022
			Unamortized
			debt issuance
(In thousands)	Principal		costs		Total debt, net
Initial First Lien Term Loan Facility	$	480,800	$	(5,374)	$	475,426
Finance lease liabilities		7,017		—		7,017
Total debt	$	487,817	$	(5,374)		482,443
Less: current portion of finance lease liabilities						99
Total long-term debt					$	482,344

Senior Debt

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

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

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

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

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

Table of Contents

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

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

Loan Covenants

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

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

Note 10. Leases

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

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

Table of Contents

The components of lease expense were as follows:


		13 Weeks Ended
(In thousands)	Statement of Operations Caption	April 1, 2023		March 26, 2022
Operating lease cost:
Lease cost	Cost of sales and Selling, general and administrative	$	811	$	840
Variable lease cost ⁽¹⁾	Cost of sales and Selling, general and administrative		427		363
Total operating lease cost			1,238		1,203

Short term lease cost	Cost of sales and Selling, general and administrative		35		46

Finance lease cost:
Amortization of right-of-use assets	Cost of sales and Selling, general and administrative		65		65
Interest on lease liabilities	Interest expense, net		132		133
Total finance lease cost			197		198

Total lease cost		$	1,470	$	1,447

(1)

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

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


(In thousands)	Balance Sheet Caption	April 1, 2023		December 31, 2022
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	12,724	$	13,332
Finance lease right-of-use assets	Property and equipment, net		5,973		6,038
Total lease assets		$	18,697	$	19,370

Liabilities
Current:
Operating lease liabilities	Current portion of long-term operating lease liabilities	$	3,365	$	3,308
Finance lease liabilities	Current portion of long-term debt		94		99
Long-term:
Operating lease liabilities	Long-term operating lease liabilities		13,204		14,063
Finance lease liabilities	Long-term debt, net of debt issuance costs		6,903		6,918
Total lease liabilities		$	23,566	$	24,388

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


	April 1, 2023		December 31, 2022
Weighted-average remaining lease term (in years):
Operating leases	6.3		6.4
Finance leases	34.1		34.2
Weighted-average discount rate
Operating leases	5.0	%	4.9	%
Finance leases	7.9	%	7.8	%

Table of Contents

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


(In thousands)	Operating Leases		Finance Leases
Fiscal year ending:
Remainder of 2023	$	3,058	$	457
2024		3,493		557
2025		2,982		549
2026		3,005		520
2027		3,064		525
Thereafter		3,856		18,445
Total lease payments		19,458		21,053
Less: Interest		(2,889)		(14,056)
Present value of lease liabilities	$	16,569	$	6,997

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

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


	13 Weeks Ended
(In thousands)	April 1, 2023		March 26, 2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,004	$	1,011
Operating cash flows from finance leases		132		133
Financing cash flows from finance leases		20		24

Note 11. Commitments and Contingencies

Litigation

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

Purchase Commitments

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


Fiscal Year Ending	(In thousands)
Remainder of 2023	$	1,827
2024		3,500
2025		1,492
2026		—
2027		—
Thereafter		—
Total	$	6,819

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

Table of Contents

Note 12. Fair Value of Financial Instruments

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

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

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

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

Cash and cash equivalents, current assets and current liabilities

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

Borrowing instruments

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

Derivative financial instruments

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

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

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

Table of Contents

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


As of April 1, 2023	Fair Value Measurements Using
(In thousands)	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at April 1, 2023
Assets
Derivatives not designated as hedging instruments	$	—	$	100	$	—	$	100
Derivatives in cash flow hedging relationships	$	—	$	2,915	$	—	$	2,915
Total assets	$	—	$	3,015	$	—	$	3,015

Liabilities
Derivatives not designated as hedging instruments	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—


As of December 31, 2022	Fair Value Measurements Using
(In thousands)	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2022
Assets
Derivatives in cash flow hedging relationships	$	—	$	3,628	$	—	$	3,628
Total assets	$	—	$	3,628	$	—	$	3,628

Liabilities
Derivatives not designated as hedging instruments	$	—	$	33	$	—	$	33
Total liabilities	$	—	$	33	$	—	$	33

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

Non-financial assets

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

Table of Contents

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

Note 13. Hedging and Derivative Financial Instruments

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

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

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

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

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

Sovos Brands, Inc. [SOVO] Filings
10-Q	[2023-05-10]
10-K	[2023-03-08]
10-Q	[2022-11-02]
S-1	[2022-08-08]
10-Q	[2022-08-03]
10-Q	[2022-05-04]
10-K	[2022-03-15]
10-Q	[2021-11-09]
S-1	[2021-08-27]