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Table of Contents

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 June 25, 2022

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)

Graphic

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 July 29, 2022, there were 100,912,023 shares of common stock, $0.001 par value per share outstanding.

Table of Contents

SOVOS BRANDS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 25, 2022

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 Changes in Stockholders Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

48

Item 4.

Controls and Procedures

48

PART II. Other Information

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

Defaults Upon Senior Securities

53

Item 4.

Mine Safety Disclosures

53

Item 5.

Other Information

53

Item 6

Exhibits

54

Signatures

58

2

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)

    

June 25, 2022

    

December 25, 2021

ASSETS

 

  

 

  

CURRENT ASSETS:

 

  

 

  

Cash and cash equivalents

$

72,651

$

66,154

Accounts receivable, net

 

73,907

 

70,729

Inventories

 

76,626

 

51,615

Prepaid expenses and other current assets

 

4,221

 

6,685

Total current assets

 

227,405

 

195,183

Property and equipment, net

 

66,701

 

62,671

Operating lease right-of-use assets

14,497

15,672

Goodwill

 

395,399

 

437,451

Intangible assets, net

 

451,035

 

464,655

Other long-term assets

 

2,197

 

2,299

TOTAL ASSETS

$

1,157,234

$

1,177,931

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

CURRENT LIABILITIES:

 

  

 

  

Accounts payable

$

49,720

$

37,254

Accrued expenses

 

48,002

 

51,757

Current portion of long-term debt

 

90

 

98

Current portion of long-term lease liabilities

3,208

3,216

Total current liabilities

 

101,020

 

92,325

Long-term debt, net of debt issuance costs

 

481,883

 

481,420

Deferred income taxes

 

66,275

 

76,976

Long-term operating lease liabilities

15,721

17,302

Other long-term liabilities

 

442

 

421

TOTAL LIABILITIES

 

665,341

 

668,444

COMMITMENTS AND CONTINGENCIES (Note 10)

 

  

 

  

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, 100,912,023 and 100,892,547 shares issued and outstanding as of June 25, 2022 and December 25, 2021, respectively

 

101

 

101

Additional paid-in-capital

 

567,860

 

559,226

Accumulated deficit

 

(76,068)

 

(49,840)

TOTAL STOCKHOLDERS’ EQUITY

 

491,893

 

509,487

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,157,234

$

1,177,931

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

3

Table of Contents

Sovos Brands, Inc.

Condensed Consolidated Statements of Operations

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

13 Weeks Ended

26 Weeks Ended

    

June 25, 2022

    

June 26, 2021

    

June 25, 2022

June 26, 2021

Net sales

$

197,433

$

161,838

$

407,366

$

351,209

Cost of sales

 

142,410

 

112,135

298,435

239,764

Gross profit

 

55,023

 

49,703

108,931

111,445

Operating expenses:

Selling, general and administrative

 

39,449

 

26,745

73,364

60,178

Depreciation and amortization

 

7,200

 

7,205

14,403

14,395

Impairment of goodwill

42,052

42,052

Loss on extinguishment of debt

 

 

9,717

9,717

Total operating expenses

88,701

43,667

129,819

84,290

Operating income (loss)

 

(33,678)

 

6,036

(20,888)

27,155

Interest expense

 

5,713

 

6,699

11,735

12,066

Income (loss) before income taxes

 

(39,391)

 

(663)

(32,623)

15,089

Income tax (expense) benefit

 

9,106

 

(676)

6,395

(4,716)

Net income (loss)

$

(30,285)

$

(1,339)

$

(26,228)

$

10,373

Earnings (loss) per share:

 

  

 

  

Basic

$

(0.30)

$

(0.02)

$

(0.26)

$

0.14

Diluted

$

(0.30)

$

(0.02)

$

(0.26)

$

0.13

Weighted average shares outstanding:

 

 

Basic

 

100,897,815

 

74,058,447

100,895,181

74,058,447

Diluted

 

100,897,815

 

74,058,447

100,895,181

77,041,809

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

4

Table of Contents

Sovos Brands, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited, dollars in thousands, except share data)

    

    

    

Stockholders’

    

Additional

    

Retained Earnings

    

Total

Common Stock

Notes

Paid-in

(Accumulated

Stockholders’

Shares

Amount

Receivable

Capital

Deficit)

Equity

Balance at March 26, 2022

 

100,892,547

$

101

$

$

563,313

$

(45,783)

$

517,631

Equity-based compensation expense

4,547

4,547

Shares issued upon vesting of restricted stock units

19,476

Net loss

 

 

 

 

 

(30,285)

 

(30,285)

Balance at June 25, 2022

 

100,912,023

$

101

$

$

567,860

$

(76,068)

$

491,893

    

    

    

Stockholders’

    

Additional

    

Retained Earnings

    

Total

Common Stock

Notes

Paid-in

(Accumulated

Stockholders’

Shares

Amount

Receivable

Capital

Deficit)

Equity

Balance at December 25, 2021

 

100,892,547

$

101

$

$

559,226

$

(49,840)

$

509,487

Equity-based compensation expense

 

 

 

 

8,634

 

 

8,634

Shares issued upon vesting of restricted stock units

19,476

Net loss

(26,228)

(26,228)

Balance at June 25, 2022

 

100,912,023

$

101

$

$

567,860

$

(76,068)

$

491,893

    

    

    

Stockholders’

    

Additional

    

Retained Earnings

    

Total

Common Stock

Notes

Paid-in

(Accumulated

Stockholders’

Shares

Amount

Receivable

Capital

Deficit)

Equity

Balance at March 27, 2021

 

74,058,447

$

74

$

$

654,947

$

(40,047)

$

614,974

Equity-based compensation expense

 

 

 

 

544

 

 

544

Dividend distribution ($5.40 per share)

(400,000)

(400,000)

Net loss

 

 

 

 

 

(1,339)

 

(1,339)

Balance at June 26, 2021

 

74,058,447

$

74

$

$

255,491

$

(41,386)

$

214,179

    

    

    

Stockholders’

    

Additional

    

Retained Earnings

    

Total

Common Stock

Notes

Paid-in

(Accumulated

Stockholders’

Shares

Amount

Receivable

Capital

Deficit)

Equity

Balance at December 26, 2020

 

74,058,447

$

74

$

(6,000)

$

654,386

$

(51,759)

$

596,701

Proceeds from stockholders' notes receivable

 

 

 

6,000

 

 

 

6,000

Equity-based compensation expense

 

 

 

 

1,105

 

 

1,105

Dividend distribution ($5.40 per share)

(400,000)

(400,000)

Net income

 

 

 

 

 

10,373

 

10,373

Balance at June 26, 2021

 

74,058,447

$

74

$

$

255,491

$

(41,386)

$

214,179

See accompanying notes to the unaudited condensed consolidated financial statements.

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Sovos Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

26 Weeks Ended

    

June 25, 2022

    

June 26, 2021

Operating activities

 

  

 

  

Net income (loss)

$

(26,228)

$

10,373

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

  

Depreciation and amortization

 

19,380

 

18,808

Equity-based compensation expense

 

8,634

 

1,105

Loss on foreign currency contracts

497

Deferred income taxes

 

(10,701)

 

4,138

Amortization of debt issuance costs

 

633

 

1,058

Non-cash operating lease expense

 

1,216

 

1,095

Provision for excess and obsolete inventory

224

Loss on disposal of property and equipment

 

 

54

Impairment of goodwill

42,052

Loss on extinguishment of debt

9,717

Other

 

(6)

 

60

Changes in operating assets and liabilities:

 

 

  

Accounts receivable, net

 

(3,171)

 

388

Inventories

 

(25,234)

 

(32,915)

Prepaid expenses and other current assets

 

2,077

 

(2,732)

Other long-term assets

 

(30)

 

394

Accounts payable

 

12,405

 

17,712

Accrued expenses

 

(3,864)

 

(15,315)

Other long-term liabilities

 

20

 

8

Operating lease liabilities

(1,630)

(1,343)

Net cash provided by operating activities

 

16,274

 

12,605

Investing activities

 

  

 

  

Purchases of property and equipment

 

(9,730)

 

(2,604)

Net cash used in investing activities

 

(9,730)

 

(2,604)

Financing activities

 

  

 

  

Payments of debt issuance costs

 

 

(3,008)

Proceeds from long-term debt

 

 

769,136

Repayments of long-term debt

 

 

(374,146)

Repayments of capital lease obligations

 

(47)

 

(32)

Proceeds from stockholder's note receivable

 

 

6,000

Contingent earn out consideration paid

(5,000)

Dividends paid

(400,000)

Net cash used in financing activities

 

(47)

 

(7,050)

Cash and cash equivalents

Net increase in cash and cash equivalents

 

6,497

 

2,951

Cash and cash equivalents at beginning of period

 

66,154

 

37,026

Cash and cash equivalents at end of period

$

72,651

$

39,977

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26 Weeks Ended

June 25, 2022

June 26, 2021

Supplemental disclosures of cash flow information

    

  

    

  

Cash paid for interest

$

11,350

 

$

11,753

Cash paid for taxes

 

3,670

 

1,953

Proceeds from income tax refunds

 

(11)

 

(44)

Non-cash investing and financing transactions

 

 

  

Lease liabilities arising from operating lease right-of-use assets recognized at ASU No. 2016-02 transition

$

$

21,711

Lease liabilities arising from operating lease right-of-use assets recognized after ASU No. 2016-02 transition

41

Acquisition of property and equipment not yet paid

 

100

 

99

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

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Notes to Unaudited Condensed Consolidated Financial Statements

1. Company Overview

Sovos Brands, Inc. and its subsidiaries (the “Company,” “we,” “our”) is a consumer-packaged food company that creates value for its stockholders through acquisition and executive management of brands in the food industry. On September 22, 2021, Sovos Brands, Inc. priced its initial public offering (the “IPO”) of 23,334,000 shares of its common stock, $0.001 par value per share, which excluded the underwriters’ option to purchase up to an additional 3,500,100 shares of common stock, at an offering price of $12.00 per share. In conjunction with the IPO, the Company became actively traded on the Nasdaq Global Select Market (“NASDAQ”) listed under the trade symbol of “SOVO.” Upon the closing of the IPO on September 27, 2021, the Company issued 23,334,000 shares of its common stock and received approximately $263.2 million, net of underwriting discounts and commissions. Subsequent to the IPO, the underwriters exercised their options to purchase an additional 3,500,100 shares of common stock. The Company closed its sale of such additional shares on October 5, 2021, resulting in net proceeds of approximately $39.5 million, net of underwriting discounts and commissions. See Note 13. Stockholders’ Equity for more information.

Prior to the IPO, Sovos Brands Limited Partnership (the “Ultimate Parent” or the “Limited Partnership”) owned 100% of Sovos Brands, Inc., which owns 100% of Sovos Brands Holdings, Inc., which owns 100% of Sovos Brands Intermediate, Inc. (“Sovos Intermediate”). Sovos Intermediate has four wholly-owned operating subsidiaries: 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 Birch Benders, LLC (“Birch Benders”). Through its wholly-owned operating subsidiaries, the Company produces and distributes food products in various locations throughout the United States. The Company was founded on January 17, 2017 and has its executive headquarters in Louisville, Colorado.

The unaudited condensed consolidated financial statements include the accounts of Sovos Brands, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context otherwise requires, “we,” “us,” “our,” “Sovos Brands” and the “Company” refer to Sovos Brands, Inc. and its subsidiaries.

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”) will have 53 weeks.

Description of Business

Sovos Brands, Inc. is a consumer-packaged food company that is focused on acquiring and building disruptive growth brands that bring today’s consumers great tasting food that fits the way they live. The Company’s principal products include a variety of pasta sauces, dry pasta, soups, frozen entrees, yogurts, gelato, pancake and waffle mixes, other baking mixes and frozen waffles, which are primarily sold in the United States. The Company sells products marketed under the brand names Rao’s, Michael Angelo’s, noosa and Birch Benders which are built with authenticity at their core, providing consumers food experiences that are genuine, delicious, and unforgettable. Our premium products are made with simple, high-quality ingredients. We are focused on continuing to build an organization with the capabilities to acquire, integrate and grow brands as we continue to scale. 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 and products that people love and our passion for our people make 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.

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 have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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,

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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 25, 2021, included in our Annual Report on Form 10-K, as amended, filed with the SEC on March 15, 2022 (“2021 Form 10-K”).

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 2021 Form 10-K, other than what is described below.

Hedging and Derivative Financial Instruments

We are exposed to certain risks relating to our ongoing business operations. From time to time, we use derivative financial instruments, principally option contracts, collars and interest rate caps, to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes.

Derivative instruments are classified in the Condensed Consolidated Balance Sheets based on the contractual maturity of the instrument or the timing of the underlying cash flows. The fair value of derivative instruments is reflected in prepaid expenses and other current assets or accrued expenses. On the Condensed Consolidated Statements of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. 

Derivative instruments that have not been designated in an effective hedging relationship are considered economic hedges, and their change in fair value is recognized in the Condensed Consolidated Statements of Operations in selling, general and administrative. 

See Note 12. Hedging and Derivative Financial Instruments for further discussion.

New Accounting Pronouncements and Policies

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 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, 2022. 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 Company expects the impact of this amendment to be administrative and does not anticipate any material impact to the consolidated financial statements.

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3. Revenue Recognition

Revenue disaggregated by brand is as follows:

13 Weeks Ended

26 Weeks Ended

(In thousands)

    

June 25, 2022

    

June 26, 2021

    

June 25, 2022

    

June 26, 2021

Rao’s

$

119,798

$

83,444

$

257,210

$

198,514

Noosa

 

47,548

 

43,716

 

89,399

 

82,586

Michael Angelo’s

 

19,740

 

18,594

 

39,982

 

37,597

Birch Benders

 

10,347

 

16,084

 

20,775

 

32,512

Total net sales

$

197,433

$

161,838

$

407,366

$

351,209

4. Inventories

Inventories consisted of the following:

(In thousands)

    

June 25, 2022

    

December 25, 2021

Finished goods

$

61,885

$

38,715

Raw materials and packaging supplies

 

14,741

 

12,900

Total inventories

$

76,626

$

51,615

5. Goodwill

Changes in the carrying value of Goodwill during the 26 weeks ended June 25, 2022 were as follows:

(In thousands)

Goodwill

Balance as of December 25, 2021

437,451

Impairment

 

(42,052)

Balance as of June 25, 2022

$

395,399

For the 13 weeks ended June 25, 2022, the Company identified the underperformance of the Birch Benders reporting unit as an indicator that required a quantitative assessment to be performed. The Company compared the estimated fair value of the Birch Benders reporting unit to the carrying value of its assets and liabilities, including goodwill. The fair value was established using generally accepted valuation methodologies, including discounted cash flow analysis and comparable public company analysis, both methods weighted equally. It was determined that the carrying value of the goodwill exceeded the Company’s estimate of the implied fair value of goodwill. As a result, the Company recorded an impairment charge for the full amount of goodwill, $42.1 million, for the 13 weeks ended June 25, 2022.

There were no impairment charges related to goodwill during the 13 weeks or 26 weeks ended June 26, 2021.

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6. Intangible Assets, Net

Intangible asset, net, consisted of the following:

June 25, 2022

Gross carrying

Accumulated

Net carrying

(In thousands)

amount

amortization

amount

Intangible assets - definite lives

  

    

  

    

  

Customer relationships

$

213,000

$

80,265

$

132,735

Tradename

 

192,347

 

27,047

 

165,300

405,347

107,312

298,035

Intangible assets - indefinite lives

 

 

  

 

  

Tradename

153,000

153,000

Total intangible assets

$

558,347

$

107,312

$

451,035

December 25, 2021

Gross carrying

Accumulated

Net carrying

(In thousands)

    

amount

    

amortization

    

amount

Intangible assets - definite lives

  

  

  

Customer relationships

$

213,000

$

71,330

$

141,670

Tradename

 

192,347

 

22,362

 

169,985

405,347

93,692

311,655

Intangible assets - indefinite lives

Tradename

 

153,000

153,000

Total intangible assets

$

558,347

$

93,692

$

464,655

Amortization expense related to intangible assets during the 13 weeks ended June 25, 2022 and June 26, 2021 was $6.8 million and $6.8 million, respectively. Amortization expense related to intangible assets during the 26 weeks ended June 25, 2022 and June 26, 2021 was $13.6 million and $13.6 million, respectively.

Intangible assets with definite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. In the second quarter of 2022, the Company identified underperformance of the Birch Benders reporting unit and accordingly, performed a recoverability test to determine if the carrying amounts of the Birch Benders Customer relationships and Tradename intangible assets with definite useful lives are recoverable and whether the carrying amount exceeds its fair value. The results of the recoverability test using an undiscounted cash flow model indicated that the fair value exceeded the carrying value, and therefore no impairment was recorded.

There were no impairment charges related to intangible assets during the 13 weeks or 26 weeks ended June 26, 2021.

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

(In thousands)

    

Amortization  

Remainder of 2022

$

13,620

2023

 

27,240

2024

 

27,240

2025

 

27,240

2026

 

27,240

2027 and thereafter

 

175,455

Total

$

298,035

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7. Accrued Expenses

Accrued expenses consisted of the following:

(In thousands)

    

June 25, 2022

    

December 25, 2021

Accrued trade

$

21,886

$

23,122

Accrued general expense

 

13,607

 

15,327

Accrued compensation and benefits

 

10,588

 

10,478

Accrued marketing

 

1,921

 

2,830

Total accrued expenses

$

48,002

$

51,757

8. Long-Term Debt

Long-term debt consisted of the following:

June 25, 2022

Unamortized

debt issuance

(In thousands)

Principal

costs

Total debt, net

Initial First Lien Term Loan Facility

    

$

480,800

    

$

(5,875)

    

$

474,925

Finance lease liabilities

7,048

7,048

Total debt

$

487,848

$

(5,875)

 

481,973

Less: current portion of finance lease liabilities

 

 

  

 

90

Total long-term debt

 

  

$

481,883

December 25, 2021

Unamortized

debt issuance

(In thousands)

Principal

costs

Total debt, net

Initial First Lien Term Loan Facility

    

$

480,800

    

$

(6,377)

    

$

474,423

Finance lease liabilities

 

7,095

 

 

7,095

Total debt

$

487,895

$

(6,377)

 

481,518

Less: current portion of finance lease liabilities

 

 

  

 

98

Total long-term debt

 

  

$

481,420

Senior Debt

In November 2018, in conjunction with the acquisition of Noosa, Sovos Intermediate (“Borrower”) entered into a Credit Facility Agreement with Credit Suisse, Citizens Bank N.A. (“Citizens”), Deutsche Bank and Aresbank, S.A. (“Credit Agreement”) with a term loan of $280 million (“2018 Term Loan”) and a revolving line of credit of $45 million (“Revolving Line of Credit”). In accordance with the Credit Agreement, the Company repaid the outstanding 2017 term loan of $158.4 million with Citizens as well as the amount outstanding under the revolving line of credit of $7.0 million.

In October 2020, the Company entered into an amendment to its Credit Agreement (“Amended Credit Agreement”). The Amended Credit Agreement provided, among other things, for an additional $100.0 million term loan (the “Incremental Term Loan”) which was part of the same class and had the same terms as the 2018 Term Loan. The Company analyzed the amendment and determined the Incremental Term Loan was not considered a debt modification because the existing 2018 Term Loan was not paid off. The Company paid debt issuance costs related to the Incremental Term Loan of $3.2 million, which were all capitalized.

In June 2021, 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

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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. Also in June 2021, Sovos Intermediate entered into a Second Lien Credit Agreement (“Second Lien Credit Agreement”) among Sovos Intermediate, Sovos Brands Holdings, Inc., Owl Rock Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto (“Second Lien Lenders”), consisting of an initial term loan facility of $200.0 million (“Initial Second Lien Facility”). In accordance with the First Lien Credit Agreement and Second Lien Credit Agreement, the Company repaid the outstanding 2018 Term Loan and Incremental Term Loan of $373.2 million to Credit Suisse and made a restricted payment for the purpose of paying a dividend in the amount of $400.0 million to the direct or indirect equity holders of the Ultimate Parent. See Note 13. Stockholders’ Equity for further information on the dividend payment.

As the June 2021 debt transaction on the Initial First Lien Term Loan Facility and Initial Second Lien Facility was accounted for as an extinguishment of the old debt, the Company wrote off $9.4 million of the existing 2018 Term Loan and Incremental Term Loan debt issuance costs to expense. The Initial First Lien Term Loan Facility and Initial Second Lien Facility were issued with discounts of $1.5 million and $4.0 million respectively, and the Company paid debt issuance costs of $6.8 million and $0.5 million respectively. The discounts and debt issuance costs paid on the Initial First Lien Term Loan Facility and Initial Second Lien 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 the existing Revolving Line of Credit debt issuance costs over the new life of the debt, wrote off $0.3 million of the existing Revolving Line of Credit debt issuance costs to expense, and paid $1.1 million in debt issuance costs for the new Revolving Facility, which was capitalized.

In September 2021, using net proceeds of the IPO, the Company paid the full outstanding principal balance on the Initial Second Lien Facility of $200.0 million plus accrued interest of approximately $2.9 million. Upon the full prepayment of the Initial Second Lien Facility, the Company recognized a loss on the loan extinguishment resulting in a write-off of $4.3 million of the related unamortized issuance costs and discounts. Additionally, in September 2021 and October 2021, the Company prepaid $59.7 million and $39.5 million, respectively, of the outstanding principal balance under the Initial First Lien Term Loan Facility, plus total accrued interest of approximately $0.9 million. 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 $59.7 million and $39.5 million prepayments, is $480.8 million. The Company has directed Credit Suisse to apply the prepayments 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 $0.5 million for the 13 weeks ended June 25, 2022 and June 26, 2021, respectively, and $0.6 million and $1.1 million for the 26 weeks ended June 25, 2022 and June 26, 2021, respectively, is included within interest expense 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 is subject to a 50 basis points reduction, at each level, after the consummation of an initial public offering (as used in this paragraph, an "IPO"). In no event shall the LIBO Rate be less than 0.75% per annum for the Initial First Lien Term Loan 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 of the assets of the Company.

The interest rate for the Initial Second Lien Facility was LIBO Rate plus 8.00% per annum and was subject to a 25 basis points reduction after the consummation of an IPO. In no event could the LIBO Rate be less than 0.75% per annum. The Initial Second Lien Facility was originally scheduled to mature on June 8, 2029 and was collateralized by substantially all of the assets of the Company. As described above, in September 2021, the Initial Second Lien Facility was paid in full.

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As of September 27, 2021, the closing date of the IPO, the interest rate on the Initial First Lien Term Loan Facility and Revolving Facility decreased 50 basis points. As of June 25, 2022 and December 25, 2021, the effective interest rate for the Initial First Lien Term Loan Facility and Revolving Facility was 4.25% and 4.50%, respectively.

In July 2022, the Company entered into an interest rate hedge. See Note 18. Subsequent Events for additional discussion.

As of June 25, 2022 and December 25, 2021, the Company had available credit of $125 million under the Revolving Facility. There was zero outstanding on the Revolving Facility as of June 25, 2022 and December 25, 2021.

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 June 25, 2022, 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 9. Leases and Note 16. Related Party Transactions for additional discussion of the finance lease liabilities.

9. 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.

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The components of lease expense were as follows:

13 Weeks Ended

26 Weeks Ended

(In thousands)

Statement of Operations Caption

June 25, 2022

June 26, 2021

June 25, 2022

June 26, 2021

Operating lease cost:

    

  

    

  

    

  

Lease cost

 

Cost of sales and Selling, general and administrative

$

839

$

808

$

1,679

$

1,585

Variable lease cost (1)

 

Cost of sales and Selling, general and administrative

 

357

317

 

720

 

656

Total operating lease cost

 

 

1,196

1,125

 

2,399

 

2,241

Short term lease cost

 

Cost of sales and Selling, general and administrative

 

50

31

 

96

 

111

Finance lease cost:

 

  

 

 

 

  

Amortization of right-of-use assets

 

Cost of sales and Selling, general and administrative

 

65

65

 

130

 

130

Interest on lease liabilities

 

Interest expense

 

132

133

 

265

 

266

Total finance lease cost

 

 

197

198

 

395

 

396

Total lease cost

$

1,443

$

1,354

$

2,890

$

2,748

(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

June 25, 2022

December 25, 2021

Assets

    

  

    

  

    

  

Operating lease right-of-use assets

 

Operating lease right-of-use assets

$

14,497

$

15,672

Finance lease right-of-use assets

 

Property and equipment, net

 

6,168

 

6,299

Total lease assets

 

$

20,665

$

21,971

Liabilities

 

  

 

  

 

  

Current:

Operating lease liabilities

Current portion of long-term operating lease liabilities

$

3,208

$

3,216

Finance lease liabilities

Current portion of long-term debt

90

98

Long-term:

Operating lease liabilities

 

Long-term operating lease liabilities

 

15,721

 

17,302

Finance lease liabilities

 

Long-term debt, net of debt is