Utz Brands Inc

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying consolidated financial statements comprise the financial statements of Utz Brands, Inc. ("UBI" or the "Company") and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial statements and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). They do not include all information and notes required by U.S. GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s financial statements for the year ended December 31, 2023. The balance sheet as of December 31, 2023 has been derived from the audited consolidated financial statements as of and for the year ended December 31, 2023. In the opinion of management, such financial information reflects all normal and recurring adjustments necessary for a fair presentation of the financial position and the results of operations for such interim periods in accordance with the U.S. GAAP. Operating results for the interim period are not necessarily indicative of the results that may be expected for any future period or for the full year. The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2023. All intercompany transactions and balances have been eliminated in consolidation.

Prior Period Revision - Consolidated Statement of Cash Flows– For the thirteen weeks ended March 31, 2024, the Company disclosed the borrowings of lines of credit and repayments of lines of credit as separate line items within the financing activities section of the Consolidated Statement of Cash Flows. The Company has corrected these line items for the thirteen weeks ended April 2, 2023 for comparability purposes and deems the change to that period to be immaterial.

Revenue Recognition – The Company’s revenues primarily consist of the sale of salty snack items to customers, including supermarkets, mass merchants, club stores, dollar and discount stores, convenience stores, independent grocery stores, drug stores, food service, vending, military, and other channels. The Company sells its products in most regions of the United States primarily through its direct-store delivery ("DSD") network, direct to warehouse shipments, and third-party distributors. These revenue contracts generally have a single performance obligation. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs, some of which are recorded in Selling and distribution. Amounts billed and due from customers are classified as accounts receivables and require payment on a short-term basis and, therefore, the Company does not have any significant financing components.

The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as the products’ control is transferred to customers. The Company assesses the goods promised in customer purchase orders and identifies a performance obligation for each promise to transfer a good that is distinct.

The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. The Company’s promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade customer or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. The Company has reserves in place of $10.8 million as of March 31, 2024, which include adjustments taken by customers of $5.1 million that are awaiting final processing and reserves of $17.4 million as of December 31, 2023, which include adjustments taken by customers of $6.2 million that are awaiting final processing. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as actual redemptions are incurred.

Recently Issued Accounting Standards – In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-09, Income Taxes: Improvements to Income Tax Disclosures, to amend existing income tax disclosure guidance, primarily requiring more detailed disclosures for income taxes paid and the effective tax rate reconciliation. The ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted and can be applied on either a prospective or retroactive basis. The Company is currently evaluating the ASU to determine its impact on the Company's income tax disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures, to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. Among other changes, the amendments will require disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the ASU to determine its impact on the Company's disclosures.

2. DIVESTITURE

On February 5, 2024, the Company sold certain assets and brands to affiliates of Our Home™, an operating company of Better-for-You brands (“Our Home”). Under the agreement, affiliates of Our Home purchased the Good Health and R.W. Garcia brands, the Lincolnton, NC, and Lititz, PA manufacturing facilities and certain related assets, and assumed the Company’s Las Vegas, NV facility lease and manufacturing operations (the "Good Health and R.W. Garcia Sale") for $167.5 million, subject to customary adjustments.

The following table summarizes the net assets and liabilities included in the Good Health and R.W. Garcia Sale:

The Company recognized a gain on the Good Health and R.W. Garcia Sale of $44.0 million. The gain on the Good Health and R.W. Garcia Sale is recognized as Gain on sale of business in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen weeks ended March 31, 2024.

The Company and Our Home will operate under a transition services agreement for 12 months. In addition, following the closing of the Good Health and R.W. Garcia Sale, the parties will operate under reciprocal co-manufacturing agreements under which Our Home will co-manufacture certain of the Company's products and the Company will co-manufacture certain Good Health products. Certain Good Health products will continue to be distributed and sold on the Company's DSD network for Our Home. The Company received approximately $15.5 million in advance from Our Home for certain terms under these agreements for which the Company will recognize through income from operations over the term of the transition services agreement and co-manufacturing agreements.

3. INVENTORIES

Inventories consisted of the following:

In connection with the Good Health and R.W. Garcia Sale in February 2024, the Company sold inventory of $6.3 million. See Note 2. Divestiture.

4. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consisted of the following:

Depreciation expense was $8.7 million and $10.4 million for the thirteen weeks ended March 31, 2024 and April 2, 2023, respectively. Depreciation expense is classified in cost of goods sold, selling, distribution, and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). During the thirteen weeks ended April 2, 2023, the Company recognized expense of $1.9 million related to the impairment of equipment.

During the thirteen weeks ended March 31, 2024, in connection with the Good Health and R.W. Garcia Sale as described in Note 2. Divestiture, the Company sold its Lincolnton, NC, and Lititz, PA manufacturing facilities and certain related assets having a book value of $27.5 million. The Company also sold its manufacturing facility in Birmingham, AL for proceeds of $6.0 million. The Birmingham, AL manufacturing facility was classified as Assets held for sale on the Consolidated Balance Sheet at December 31, 2023.

5. GOODWILL AND INTANGIBLE ASSETS, NET

A rollforward of goodwill is as follows:

Intangible assets, net, consisted of the following:

The Company sold customer relationships and trademarks in the amount of $26.0 million and $18.3 million, respectively, related to the Good Health and R.W. Garcia Sale. See Note 2. Divestiture for further discussion. There were no other significant changes to intangible assets during the thirteen weeks ended March 31, 2024 and April 2, 2023 other than those which arise from the normal course of business from buying and selling of Company-owned route assets and amortization.

Amortization of the distributor/customer relationships, technology, and trade names amounted to $9.2 million and $9.4 million for the thirteen weeks ended March 31, 2024 and April 2, 2023, respectively. The expense related to the amortization of intangibles is classified in administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

6. NOTES RECEIVABLE

Contracts are executed between the Company and IOs for the sale of the product distribution routes, including a note in favor of the Company, in certain cases. The notes bear interest at rates ranging from 4.50% to 10.31% with terms ranging generally fromtwo toten years. The notes receivable balances due from IOs at March 31, 2024 and December 31, 2023 totaled $16.4 million and $17.6 million, respectively, and are collateralized by the routes for which the loans are made. The Company also sold certain of these notes to Bank of America andone other bank. The Company has a corresponding notes payable liability, related to these sold IOs notes receivables. See Note 10. Contingencies.

7. ACCRUED EXPENSES AND OTHER

Current accrued expenses and other consisted of the following:

(a) See Note 2. Divestiture, for further discussion.

Non-current accrued expenses and other consisted of the following:

8. TERM DEBT, REVOLVING CREDIT FACILITY AND OTHER NOTES PAYABLE

Term Debt and Revolving Credit Facility

Term debt and revolving credit facilities consists of the following:

(1) Loan by City National Bank which is secured by a majority of the real estate assets of the Company ("Real Estate Term Loan").

(2) Equipment loans have varying maturities from November 2024 to September 2028.

(3) Asset-based revolving credit facility ("ABL facility").

In connection with the Good Health and R.W. Garcia Sale as described in Note 2. Divestiture, the Company made a $141.0 million payment on its Term Loan B and $8.5 million payment on its Real Estate Term Loan during thirteen weeks ended March 31, 2024.

Other Notes Payable and Capital Leases

Amounts outstanding under notes payable consisted of the following:

Interest Expense

Interest expense consisted of the following:

9. DERIVATIVE FINANCIAL INSTRUMENTS, PURCHASE COMMITMENTS, WARRANTS AND FAIR VALUE

Derivative Financial Instruments

The Company uses interest rate swaps to manage its interest rate exposure on its Term Loan B and its Real Estate Term Loan. The interest rate swaps are recorded on the Company’s Consolidated Balance Sheets at fair value. See Note 8. Term Debt, Revolving Credit Facility, and Other Notes Payable.

In conjunction with Real Estate Term Loan pay downs during the thirteen weeks ended March 31, 2024 discussed within Note 8. Term Debt, Revolving Credit Facility, and Other Notes Payable and estimated future pay downs, the Company determined that $36.7 million of hedged forecasted transactions were not probable of occurring. As such, effective February 1, 2024, the Company de-designated its interest rate hedge accounting on its Real Estate Term Loan and re-designated a new interest hedging relationship totaling $47.0 million. As a result, the Company immediately reclassified $0.3 million of accumulated other comprehensive income to earnings which is reflected as a decrease to interest expense within the Consolidated Statements of Operations and Comprehensive Income (Loss). As of March 31, 2024, $36.7 million of the remaining notional of the Company's interest rate swap will be recorded at fair value with mark-to-market adjustments recorded immediately in earnings.

As of and for the thirteen weeks ended March 31, 2024, there were no changes to the hedge accounting related to Term Loan B.

Warrant Liabilities

As of each of March 31, 2024 and December 31, 2023, there were 7,200,000 private placement warrants outstanding which are accounted for as derivative liabilities pursuant to ASC 815-40. A reconciliation of the changes in the warrant liability during the thirteen weeks ended March 31, 2024 is as follows:

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 $97.1 million as of March 31, 2024 and $66.7 million as of December 31, 2023. 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 $0.8 million for the thirteen weeks ended March 31, 2024 and $(2.7) million for the thirteen weeks ended April 2, 2023, respectively.

Fair Value

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 31, 2024:

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of December 31, 2023:

10. CONTINGENCIES

Litigation Matters

The Company is involved in litigation and other matters incidental to the conduct of its business, the results of which, in the opinion of management, are not likely to be material to the Company’s financial condition, results of operations or cash flows.

Guarantees

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 $56.3 million and $52.8 million at March 31, 2024 and December 31, 2023, respectively, which are accounted for as an off balance sheet arrangement. As discussed in Note 8. Term Debt, Revolving Credit Facility, and Other Notes Payable, the Company also sold notes receivable on its books to Bank of America during fiscal years 2023, and 2024, which the Company partially guarantees. The outstanding balance of notes purchased by Bank of America at March 31, 2024 and December 31, 2023 was $14.0 million and $14.8 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.

Additionally, the Company guarantees loans for the purchase of routes made bytwo other banks. The outstanding balances of these loans were $2.5 million and $2.9 million at March 31, 2024 and December 31, 2023, respectively, of which $2.0 million and $2.2 million was included in the Company's Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, respectively. The maximum amount of future payments the Company could be required to make under the guarantees equates to 25% of the outstanding loan balance.

All of the above IO 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.

11. SUPPLEMENTARY CASH FLOW INFORMATION

12. INCOME TAXES

The Company is subject to federal and state income taxes with respect to our allocable share of any taxable income or loss of UBH, as well as any standalone income or loss the Company generates. UBH is treated as a partnership for federal income tax purposes, and for most applicable state and local income tax purposes, and generally does not pay income taxes in most jurisdictions. Instead, UBH taxable income or loss is passed through to its members, including the Company. Despite its partnership treatment, UBH is liable for income taxes in those states not recognizing its pass-through status and for certain of its subsidiaries not taxed as pass-through entities. The Company has acquired various domestic entities taxed as corporations, which are now wholly-owned by us or our subsidiaries. Where required or allowed, these subsidiaries also file and pay tax as a consolidated group for federal and state income tax purposes. The Company anticipates this structure to remain in existence for the foreseeable future.

The Company recorded income tax expense of $26.5 million and benefit of $2.6 million for the thirteen weeks ended March 31, 2024 and April 2, 2023, respectively. The effective tax rates for the thirteen weeks ended March 31, 2024 and April 2, 2023 were 91.7% and 15.3%, respectively. The Company’s effective tax rates differ from the federal statutory rate of 21% primarily due to the impact of UBH, which is a partnership, is not taxed at the Company level, and is required to allocate some of its taxable results to the Continuing Members, as well as state taxes and the fair value impact of warrant liabilities. The Company’s effective tax rate for the thirteen weeks ended March 31, 2024 was 1.7% before consideration of any discrete items. During the thirteen weeks ended March 31, 2024, the effective tax rate was impacted by the sale certain assets and brands to affiliates of Our Home™ and statutory state tax rate changes which resulted in a discrete tax expense of $26.1 million and $0.5 million, respectively.

The Company regularly evaluates valuation allowances established for deferred tax assets (“DTA's”) for which future realization is uncertain. The Company assessed the available positive and negative evidence to estimate whether future taxable income would be generated to permit use of the existing DTA's. As of March 31, 2024, a significant piece of objective negative evidence evaluated was the twelve-quarter cumulative loss before taxes. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. The Company determined that there is uncertainty regarding the utilization of certain DTA's such as the investment in UBH, federal operating losses subject to annual limitations due to “change in ownership” provisions, and state net operating losses where the Company does not expect to continue to have nexus. Therefore, a valuation allowance has been recorded against the DTA's for which it is more likely than not they will not be realized. The Company has DTA’s related to its investment in the partnership that are expected to be realized in the ordinary course of operations or generate future net operating losses for which a portion will have an indefinite carryforward period. Additionally, the Company has deferred tax liabilities (“DTL’s”) related to its investment in the partnership that will not reverse in the ordinary course of business and will only reverse when the partnership is sold or liquidated. The Company has no intention of disposing of or liquidating the partnership and therefore has not considered the indefinite lived DTL as a source of income to offset other DTA’s. In weighing positive and negative evidence, both objective and subjective, including its twelve-quarter cumulative loss, the Company has recorded a valuation allowance against its DTA’s related to net operating losses and deductible book/tax differences and recorded a DTL primarily related to the book over tax basis in the investment in the partnership that will not reverse in the ordinary course of business. The Company considered that an indefinite lived DTL may be considered as a source of taxable income for an indefinite lived DTA; however, given our indefinite lived DTL will only reverse upon sale or liquidation, the Company determined that it was more appropriate to record a valuation allowance against a portion of its DTA’s. The amount of DTA considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.

As of March 31, 2024, tax years 2020 through 2024 remain open and subject to examination by the Internal Revenue Service and the majority of the states where the Company has nexus, and tax years 2019 through 2024 remain open and subject to examination in selected states that have a four year statute of limitations.

Upon audit, tax authorities may challenge all or part of a tax position. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision for income taxes in the period in which a final determination is made. The Company did not maintain any unrecognized tax benefits as of March 31, 2024 and December 31, 2023.

Tax receivable agreement liability

Pursuant to an election under section 754 of the Internal Revenue Code, the Company obtained an increase in its share of the tax basis in the net assets of UBH when it was deemed to purchase UBH units from a third party then holding common and preferred interest of the Continuing Members and purchased UBH units from the Continuing Members per the Business Combination Agreement. The Continuing Members have the option to exchange UBH units along with the forfeiture of a corresponding number of Class V Common Stock of the Company for UBI common stock post-Business Combination. The Company intends to treat any such exchanges as direct purchases for U.S. federal income tax purposes, which is expected to further increase its share of the tax basis in the net assets of UBH. The increases in tax basis may reduce the amounts the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

Pursuant to the Business Combination Agreement, the Company entered into the Tax Receivable Agreement in connection with the Business Combination (the “Tax Receivable Agreement” or "TRA") , which provides for the payment by the Company of 85% of the amount of any tax benefits realized as a result of (i) increases in the share of the tax basis in the net assets of UBH resulting from the Business Combination and any future exchanges by the Continuing Members of UBH units for UBI common stock; (ii) tax basis increases attributable to payments made under the TRA; and (iii) tax amortization deductions attributable to the acquisition of Kennedy and the election to treat the transaction as an asset deal for tax purposes (the "TRA Payments"). The rights of each party under the TRA other than the Company are assignable, subject to certain restrictions. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors.

As of March 31, 2024 and December 31, 2023, the Company had a liability of $24.2 million and $24.3 million, respectively, related to its projected obligations under the TRA, which is reflected as current and non-current accrued expenses in the Consolidated Balance Sheets.

13. LOSS PER SHARE

Basic loss per share is based on the weighted average number of shares of Class A Common Stock issued and outstanding during the periods. Diluted loss per share is based on the weighted average number of shares of Class A Common Stock issued and outstanding and the effect of all dilutive common stock equivalents and potentially dilutive share-based awards outstanding during the periods.

The following table reconciles the numerators and denominators used in the computations of both basic and diluted loss per share:

The diluted loss per share computation excludes the effect of certain warrants, restricted stock units ("RSUs"), performance stock units ("PSUs"), and stock options granted to directors and management which convert to Class A Common Stock upon vesting or being exercised, as their inclusion would have been anti-dilutive. Anti-dilutive securities excluded from diluted earnings per share calculation are as follows:

Shares of the Company’s Class V Common Stock do not participate in earnings or losses of the Company and, therefore, are not participating securities. The PSUs and RSUs, were not considered participating securities despite the holders of these stock-based compensation awards being entitled to participate in dividends declared on Class A Common Stock, if and when declared, on aone-to-one per-share basis, because the dividends are only payable upon full vesting of the awards, and as such, the dividend is forfeitable. As of each of March 31, 2024 and December 31, 2023, the Continuing Members held all 59,349,000 shares of Class V Common Stock issued and outstanding and also held an equal number of common limited liability company units of UBH, which comprise the noncontrolling interest. The net income (loss) attributable to the noncontrolling interest was $6.4 million and $(5.4) million for the thirteen weeks ended March 31, 2024 and April 2, 2023, respectively.

14. SUBSEQUENT EVENTS

In April 2024, the Company sold its Berlin, PA and Fitchburg, MA manufacturing facilities and certain related assets for $18.5 million.

On April 17, 2024, the Company amended its Term Loan B to refinance in full all of the $630.0 million outstanding term loans and reduce the interest rate from the Secured Overnight Financing Rate ("SOFR") rate plus a credit spread adjustment plus 3.00% to the SOFR rate plus 2.75%, as well as certain other changes. Other material terms of the Term Loan B, including the January 2028 maturity date, remain unchanged.