Krispy Kreme Inc

Note 9 —Long-Term Debt

The Company’s long-term debt obligations consists of the following:

2023 Secured Credit Facility

The Company is party to a credit agreement (the “2023 Facility”) consisting of a $300.0 million senior secured revolving credit facility and a term loan with an original principal amount of $700.0 million. The 2023 Facility is secured by a first priority lien on substantially all of the Company’s personal property assets, certain real properties, and all of the Company’s domestic wholly owned subsidiaries. Loans made pursuant to the 2023 Facility may be used for general corporate purposes of the Company (including, but not limited to, financing working capital needs, capital expenditures, acquisitions, other investments, dividends, and stock repurchases) and for any other purpose not prohibited under the related loan documents.

Borrowings under the 2023 Facility are generally subject to an interest rate of adjusted term SOFR plus a credit spread adjustment of 0.10% plus (i)2.25% if the Company’s leverage ratio (as defined in the 2023 Facility) equals or exceeds 4.00 to 1.00, (ii)2.00% if the Company’s leverage ratio is less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00, or (iii)1.75% if the Company’s leverage ratio is less than 3.00 to 1.00. As of June 30, 2024 and December 31, 2023, the unhedged interest rate was 7.43% and 7.46% under the 2023 Facility, respectively. As of June 30, 2024 and December 31, 2023, $200.0 million out of the $665.0 million term loan balance and $505.0 million out of the $682.5 million term loan balance, respectively, was hedged. As of June 30, 2024 and December 31, 2023, the effective interest rate on the term loan was approximately 7.10% and 6.80%, respectively. The Company is required to make equal installments of 1.25% of the aggregate closing date principal amount of the term loan on the last day of each fiscal quarter. All remaining term loan and revolving loan balances are to be due at maturity in March 2028.

Short-Term Lines of Credit

The Company is party totwo agreements with existing lenders providing for short-term, uncommitted lines of credit up to $25.0 million. Borrowings under these short-term lines of credit are payable to the lenders on a revolving basis for tenors up to a maximum of three months and are subject to an interest rate of adjusted term SOFR plus a credit spread adjustment of 0.10% plus a margin of 1.75%.

Note 10 —Share-based Compensation

Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”)

The Company and certain of its subsidiaries issue time-vested RSUs and PSUs under their respective executive ownership plans and long-term incentive plans.

RSU and PSU activity under the Company’s various plans during the periods presented is as follows:

The Company recorded total non-cash compensation expense related to RSUs and PSUs under the plans of $6.8 million and $12.9 million for the quarter and two quarters ended June 30, 2024, respectively, and $3.9 million and $8.6 million for the quarter and two quarters ended July 2, 2023, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The unrecognized compensation cost related to the unvested RSUs and PSUs and the weighted average period over which such cost is expected to be recognized are as follows:

The estimated fair value of restricted stock is calculated using a market approach (i.e., market multiple is used for the KK U.K. and Insomnia Cookies plans and an agreed-upon EBITDA buyout multiple is used for KK Australia and KK Mexico plans).

Time-Vested Stock Options

KKI issues time-vested stock options under its Omnibus Incentive Plan. The fair value of time-vested stock options was estimated on the date of grant using the Black-Scholes option pricing model.

A summary of the status of the time-vested stock options as of December 31, 2023 and changes during the first two quarters of fiscal 2024 is presented below:

The Company recorded total non-cash compensation expense related to the time-vested stock optionsof $0.9 million and $1.8 million for the quarter and two quarters ended June 30, 2024, respectively, and$0.9 million and $1.8 million for the quarter and two quarters ended July 2, 2023, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The unrecognized compensation cost related to the stock options and the weighted average period over which such cost is expected to be recognized are as follows:

During the quarter and two quarters ended June 30, 20241.5 million time-vested stock options vested. No time-vested stock options vested during the quarter and two quarters ended July 2, 2023.

Note 11 —Income Taxes

For interim tax reporting, the Company estimates a worldwide annual effective tax rate and applies that rate to the year-to-date ordinary (loss)/income. The tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

The Company’s effective income tax rates were 42.3% and -5.9% for the quarter and two quarters ended June 30, 2024, respectively, and 101.1% and 131.3% for the quarter and two quarters ended July 2, 2023, respectively. The Company’s effective income tax rate for the quarter and two quarters ended June 30, 2024 differed from the respective statutory rates primarily due to disallowed executive compensation expense, the mix of income and taxes attributable to foreign jurisdictions, and noncontrolling interest in domestic joint ventures. The Company’s effective income tax rate for the quarter and two quarters ended July 2, 2023 differed from the respective statutory rates primarily due to the mix of income and taxes attributable to foreign jurisdictions, the recognition of previously unrecognized tax benefits, disallowed executive compensation expense, noncontrolling interest in domestic joint ventures, and a discrete tax benefit unrelated to ongoing operations.

Note 12 —Commitments and Contingencies

Pending Litigation

In March 2023, an employee filed a lawsuit on behalf of himself and all others similarly situated against the Company, alleging violations of the Illinois Biometric Information Privacy Act. In May 2023, the Company moved for a stay pending resolution of a similar case before the Illinois Supreme Court. The Company believes that it has meritorious defenses to the complaint and will vigorously defend against these claims. The Company has accrued an immaterial amount and management does not believe that this matter will have a material adverse effect on the Company’s financial results.

Other Legal Matters

The Company also is engaged in various legal proceedings arising in the normal course of business. The Company maintains insurance policies against certain kinds of such claims and suits, including insurance policies for workers’ compensation and personal injury, all of which are subject to deductibles. While the ultimate outcome of these matters could differ from management’s expectations, management currently does not believe their resolution will have a material adverse effect on the Company’s Condensed Consolidated Financial Statements.

Other Commitments and Contingencies

The Company’s primary banks issued letters of credit on its behalf totaling $15.4 million and $15.4 million as of June 30, 2024 and December 31, 2023, respectively, a majority of which secure the Company’s reimbursement obligations to insurers under its self-insurance arrangements.

Note 13 —Related Party Transactions

As of June 30, 2024 the Company held an equity ownership infive franchisees, KremeWorks USA, LLC (20% ownership), KremeWorks Canada, L.P. (25% ownership), Krispy Kreme Doughnuts France SAS (“KK France”) (33% ownership), KK Brazil (45% ownership), and KK Spain (25% ownership), with an aggregate carrying value of $5.6 million. As of December 31, 2023 the Company held an equity ownership in three franchisees, KremeWorks USA, LLC (20% ownership), KremeWorks Canada, L.P. (25% ownership), and KK France (33% ownership) with an aggregate carrying value of $2.8 million.

Note 14 —Revenue Recognition

Disaggregation of Revenues

Revenues are disaggregated as follows:

Other revenues include advertising fund contributions from franchisees, rental income, development and franchise fees, and licensing royalties from customers for use of the Krispy Kreme brand, such as Keurig coffee cups.

Contract Balances

Deferred revenue and related receivables are as follows:

Trade receivables relate primarily to payments due for royalties, franchise fees, advertising fees, sale of products, and licensing fees. Deferred revenue primarily represents the Company’s remaining performance obligations under gift cards and franchise and development agreements for which consideration has been received or is receivable and is generally recognized on a straight-line basis over the remaining term of the related agreement. The noncurrent portion of deferred revenue primarily relates to the remaining performance obligations in the franchise and development agreements.

Note 15 —Net (Loss)/Earnings per Share

The following table presents the calculations of basic and diluted EPS:

Potential dilutive shares consist of unvested RSUs and PSUs, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes certain unvested RSUs granted under certain subsidiaries’ executive ownership plans and long-term incentive plans, because their inclusion would have been antidilutive.

The following table summarizes the gross number of potential dilutive unvested RSUs and PSUs excluded due to antidilution (unadjusted for the treasury stock method):

For the quarter and two quarters ended June 30, 2024 and July 2, 2023, all 2.9 million and 3.0 million time-vested stock options, respectively, were excluded from the computation of diluted weighted average common shares outstanding based on application of the treasury stock method.

Note 16 —Segment Reporting

The Company conducts business through thethree reportable segments: U.S., International, and Market Development. Unallocated corporate costs are excluded from the Company’s measurement of segment performance. These costs include general corporate expenses.

As discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, effective January 1, 2024, the Company realigned its segment reporting structure such that the Company-owned Canada and Japan businesses have moved from the Market Development reportable operating segment to the International reportable operating segment. All segment information has been restated to be consistent with current presentation.

The reportable segment results are as follows:

(1)Primarily foreign translation gains and losses in each period.

(2)The quarter and two quarters ended June 30, 2024 consist primarily of costs associated with global transformation, exploring strategic alternatives for the Insomnia Cookies business, and preparing for the McDonald’s U.S. expansion (with these three specific initiatives aggregating to approximately $3.9 million and $8.5 million for the quarter and two quarters ended June 30, 2024, respectively). The quarter and two quarters ended July 2, 2023 consists primarily of costs associated with the decision to exit the Branded Sweet Treats business, including property, plant and equipment impairments, inventory write-offs, employee severance, and other related costs.

(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, and advisory fees incurred in connection with acquisition and integration-related activities for the applicable period.

(4)Consists of start-up costs associated with entry into new countries for which the Company’s brands have not previously operated, including Brazil, Spain, and the Insomnia Cookies brand entering Canada and the U.K.

(5)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment.

(6)The quarter and two quarters ended July 2, 2023 consist primarily of costs associated with restructuring of the global executive team.

(7)The quarter and two quarters ended June 30, 2024 consist primarily of a gain from insurance proceeds received related to a shop in the U.S. that was destroyed and subsequently rebuilt. The quarter and two quarters ended July 2, 2023 consist primarily of legal and other regulatory expenses incurred outside the ordinary course of business.

Note 17 —Subsequent Events

The Company evaluated subsequent events and transactions for potential recognition or disclosure in the Condensed Consolidated Financial Statements through August 8, 2024, the date the Condensed Consolidated Financial Statements were available to be issued. All subsequent events requiring recognition and disclosure have been incorporated into these Condensed Consolidated Financial Statements.

On July 15, 2024, the Company acquired the business and operating assets ofnine franchise shops in the U.S. (located in Washington, Oregon, and Hawaii) andone franchise shop in Canada (located in Vancouver). The Company was a minority investor in the shops via its equity method investments in KremeWorks USA, LLC and KremeWorks Canada, L.P. prior to the acquisition. The Company paid consideration of approximately $31.6 million, consisting of $26.8 million of cash (exclusive of $6.7 million proceeds for the Company’s equity method investments), $2.1 million of consideration payable to the sellers, and $2.7 million settlement of amounts related to pre-existing relationships, to acquire substantially all of the shops’ assets. The acquisition provides the opportunity to expand the Company’s omni-channel strategy in the U.S. and Canada, and will be accounted for as a business combination. The results of the acquired franchise business were reported within the Market Development segment through the quarter ended June 30, 2024 and will be reported within the U.S. segment for thenine U.S. shops and the International segment for theone Canada shop following the acquisition date. As of the date of issuance of this Quarterly Report on Form 10-Q, the Company has not completed the initial accounting for this business combination.

On July 17, 2024, the Company entered into an agreement to sell shares in Insomnia Cookies in exchange for cash proceeds of approximately $127.4 million. On August 1, 2024 the Company received additional cash of approximately $45 million from Insomnia Cookies related to the settlement of an intercompany loan. The Company intends to use these proceeds to further strengthen its fresh doughnut business and expand availability, as well as pay down debt. Following the redemption, the Company owns approximately 34% of Insomnia Cookies. As of the date of issuance of this Quarterly Report on Form 10-Q, the Company has not completed the initial accounting for this transaction.