0001558370-22-011946 | 10-Q | XBRL Viewer

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Document and Entity Information - shares	6 Months Ended
Document and Entity Information - shares	Jun. 25, 2022	Jul. 29, 2022
Document and Entity Information [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Jun. 25, 2022
Entity File Number	001-40837
Entity Registrant Name	Sovos Brands, Inc
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	81-5119352
Entity Address State Or Province	CO
Entity Address, Address Line One	168 Centennial Parkway
Entity Address, Address Line Two	Suite 200
Entity Address, City or Town	Louisville
Entity Address, Postal Zip Code	80027
City Area Code	720
Local Phone Number	316-1225
Title of 12(b) Security	Common Stock, $0.001 par value per share
Trading Symbol	SOVO
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		100,912,023
Entity Central Index Key	0001856608
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q2
Amendment Flag	false

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 25, 2022	Dec. 25, 2021
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
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

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 25, 2022	Dec. 25, 2021
Condensed Consolidated Balance Sheets
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, authorized (in shares)	10,000,000	10,000,000
Preferred stock, issued (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, authorized (in shares)	500,000,000	500,000,000
Common stock, issued (in shares)	100,912,023	100,892,547
Common stock, outstanding (in shares)	100,912,023	100,892,547

Condensed Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 25, 2022	Jun. 26, 2021	Jun. 25, 2022	Jun. 26, 2021
Condensed Consolidated Statements of Operations
Net sales	$ 197,433	$ 161,838	$ 407,366	$ 351,209
Revenue, Product and Service [Extensible Enumeration]	us-gaap:ProductMember	us-gaap:ProductMember	us-gaap:ProductMember	us-gaap:ProductMember
Cost of sales	$ 142,410	$ 112,135	$ 298,435	$ 239,764
Cost, Product and Service [Extensible Enumeration]	us-gaap:ProductMember	us-gaap:ProductMember	us-gaap:ProductMember	us-gaap:ProductMember
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	0	42,052	0
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 (in dollars per shares)	$ (0.30)	$ (0.02)	$ (0.26)	$ 0.14
Diluted (in dollars per shares)	$ (0.30)	$ (0.02)	$ (0.26)	$ 0.13
Weighted average shares outstanding:
Basic (in shares)	100,897,815	74,058,447	100,895,181	74,058,447
Diluted (in shares)	100,897,815	74,058,447	100,895,181	77,041,809

Condensed Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Stockholder's note receivable	Additional Paid-in Capital	Retained Earnings (Accumulated Deficit).	Total
Balances, at Beginning of Period at Dec. 26, 2020	$ 74	$ (6,000)	$ 654,386	$ (51,759)	$ 596,701
Balances, Beginning (in shares) at Dec. 26, 2020	74,058,447
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Proceeds from stockholder's note 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 (loss)				10,373	10,373
Balances, at End of period at Jun. 26, 2021	$ 74		255,491	(41,386)	214,179
Balances, Ending (in shares) at Jun. 26, 2021	74,058,447
Balances, at Beginning of Period at Mar. 27, 2021	$ 74		654,947	(40,047)	614,974
Balances, Beginning (in shares) at Mar. 27, 2021	74,058,447
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Equity-based compensation expense			544		544
Dividend distribution ($5.40 per share)			(400,000)		(400,000)
Net income (loss)				(1,339)	(1,339)
Balances, at End of period at Jun. 26, 2021	$ 74		255,491	(41,386)	214,179
Balances, Ending (in shares) at Jun. 26, 2021	74,058,447
Balances, at Beginning of Period at Dec. 25, 2021	$ 101		559,226	(49,840)	509,487
Balances, Beginning (in shares) at Dec. 25, 2021	100,892,547
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Equity-based compensation expense			8,634		8,634
Net income (loss)				(26,228)	(26,228)
Shares issued upon vesting of restricted stock units (in shares)	19,476
Balances, at End of period at Jun. 25, 2022	$ 101		567,860	(76,068)	491,893
Balances, Ending (in shares) at Jun. 25, 2022	100,912,023
Balances, at Beginning of Period at Mar. 26, 2022	$ 101		563,313	(45,783)	517,631
Balances, Beginning (in shares) at Mar. 26, 2022	100,892,547
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Equity-based compensation expense			4,547		4,547
Net income (loss)				(30,285)	(30,285)
Shares issued upon vesting of restricted stock units (in shares)	19,476
Balances, at End of period at Jun. 25, 2022	$ 101		$ 567,860	$ (76,068)	$ 491,893
Balances, Ending (in shares) at Jun. 25, 2022	100,912,023

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

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- Definition

Total of all stockholders' equity (deficit) items, net of receivables from officers, directors, owners, and affiliates of the entity which are attributable to the parent. The amount of the economic entity's stockholders' equity attributable to the parent excludes the amount of stockholders' equity which is allocable to that ownership interest in subsidiary equity which is not attributable to the parent (noncontrolling interest, minority interest). This excludes temporary equity and is sometimes called permanent equity.

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Condensed Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - $ / shares	3 Months Ended	6 Months Ended
	Jun. 26, 2021	Jun. 26, 2021
Condensed Consolidated Statements of Changes in Stockholders' Equity
Dividend distributions (in dollar per share)	$ 5.40	$ 5.40

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 25, 2022	Jun. 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	0
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
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

Company Overview

6 Months Ended

Jun. 25, 2022

Company Overview

Company Overview

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,

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”).

Summary of Significant Accounting Policies

6 Months Ended

Jun. 25, 2022

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

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.

Revenue Recognition

6 Months Ended

Jun. 25, 2022

Revenue Recognition

Revenue Recognition

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

- Definition

The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts.

+ References

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+ Details

Inventories

6 Months Ended

Jun. 25, 2022

Inventories

Inventories

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

Goodwill

6 Months Ended

Jun. 25, 2022

Goodwill.

Goodwill

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.

Intangible Assets, Net

6 Months Ended

Jun. 25, 2022

Intangible Assets, Net

Intangible Assets, Net

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

Accrued Expenses

6 Months Ended

Jun. 25, 2022

Accrued Expenses

Accrued Expenses

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

Long-term debt

6 Months Ended

Jun. 25, 2022

Long-term debt

Long-term debt

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

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.

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.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1B
-Subparagraph (i)
-URI http://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611

+ Details

Leases

6 Months Ended

Jun. 25, 2022

Leases

Leases

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.

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 issuance costs		6,958		6,997
Total lease liabilities		$	25,977	$	27,613

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


	June 25, 2022		December 25, 2021
Weighted-average remaining lease term (in years):
Operating leases	6.7		7.1
Finance leases	34.5		34.8
Weighted-average discount rate
Operating leases	4.9	%	4.9	%
Finance leases	7.8	%	7.8	%

Future maturities of lease liabilities as of June 25, 2022, were as follows:


(In thousands)	Operating Leases		Finance Leases
Fiscal year ending:
Remainder of 2022	$	2,022	$	295
2023		4,051		609
2024		3,483		557
2025		2,972		549
2026		2,999		520
Thereafter		6,920		18,970
Total lease payments		22,447		21,500
Less: Interest		(3,518)		(14,452)
Present value of lease liabilities	$	18,929	$	7,048

As of June 25, 2022, 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:


	26 Weeks Ended
(In thousands)	June 25, 2022		June 26, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,030	$	1,891
Operating cash flows from finance leases		265		266
Financing cash flows from finance leases		47	$	33
Right-of-use assets obtained in exchange for new lease liabilities
Finance leases		—		—
Operating leases		41		—

Commitments and Contingencies

6 Months Ended

Jun. 25, 2022

Commitments and Contingencies.

Commitments and Contingencies

10. 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 (loss) 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

As of June 25, 2022, the Company had purchase commitments to third-party suppliers, primarily for materials and supplies used in the manufacture of the Company’s products, for an aggregate of $12.4 million.

See Note 16. Related Party Transactions for information about our commitments to related parties.

Fair Value of Financial Instruments

6 Months Ended

Jun. 25, 2022

Fair Value of Financial Instruments

Fair Value of Financial Instruments

11. 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, 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.

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 June 25, 2022 and December 25, 2021, based on interest rates currently available to the Company for similar borrowings.

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. Thus, the Company measures the fair value of these contracts as Level 2. The estimated fair values of the Company’s derivative instruments approximate their carrying values as of June 25, 2022. As of June 25, 2022, the Company’s derivative instruments resulted in a current liability of $0.5 million after netting. There were no derivative instruments to measure as of December 25, 2021.

Our 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.

For the 13 weeks ended June 25, 2022, the Company determined that the carrying value of the Birch Benders goodwill exceeded its 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. See Note 5. Goodwill for more information.

There were no transfers of financial instruments between the three levels of fair value hierarchy during the 26 weeks ended June 25, 2022 and the fiscal year ended December 25, 2021.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Hedging and Derivative Financial Instruments

6 Months Ended

Jun. 25, 2022

Hedging and Derivative Financial Instruments

Hedging and Derivative Financial Instruments

12. 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 risk managed by the Company through the use of derivative instruments is 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 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 foreign currency derivative instruments are considered an economic hedge as they do not qualify for hedge accounting treatment. The changes in the fair values of the foreign currency derivative instruments are recognized as selling, general and administrative operating expenses in the Consolidated Statements of Operations.

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 foreign currency exchange rates or interest 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. See Note 11. Fair Value of Financial Instruments for more information.

Economic (Non-Designated) Hedging Strategy

The Company uses certain derivatives as economic hedges of foreign currency. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effective economic hedges. The changes in the fair values of economic hedges are immediately recognized in earnings.

The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies outside of a contractually agreed upon foreign exchange rate range. The changes in the fair values of economic hedges used to offset those monetary assets and liabilities are immediately recognized in earnings in the line item selling, general and administrative in our Condensed Consolidated Statements of Operations. The total notional values of derivatives related to our foreign currency economic hedges were $297.2 million and $0 as of June 25, 2022 and December 25, 2021, respectively.

The following table presents the pretax impact that changes in the fair values of derivatives not designated as hedging instruments had on earnings (in thousands):


		Gain (Loss) Recognized
		13 Weeks Ended				26 Weeks Ended
Derivatives Not Designated as Hedging Instruments	Statement of Operations Caption	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Foreign currency contracts	Selling, general and administrative	$	(497)	$	—	$	(497)	$	—
Total		$	(497)	$	—	$	(497)	$	—

The following table presents the fair values of the Company’s derivative instruments that were not designated as hedging instruments (in thousands):


		Fair Value⁽¹⁾⁽²⁾
Derivatives Not Designated as Hedging Instruments	Balance Sheet Caption⁽¹⁾	June 25, 2022		December 25, 2021
Assets
Foreign currency contracts		$	311	$	—

Liabilities
Foreign currency contracts			808		—

Foreign currency contracts, net	Accrued expenses	$	497	$

(1)

All of the Company’s derivative instruments are carried at fair value in our Condensed Consolidated Balance Sheets after considering the impact of legally enforceable master netting agreements..

(2)

See Note 11 Fair Value of Financial Instruments for additional information related to the estimated fair value.

The Company did not have any derivative instruments in the periods presented that were designated as hedging instruments.

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

Stockholders' Equity

6 Months Ended

Jun. 25, 2022

Stockholders' Equity

Stockholders' Equity

13. Stockholders’ Equity

Dividend distribution

On June 8, 2021, the Company paid a one-time cash dividend to the Ultimate Parent. The total amount of the dividend was $400 million and was recorded against additional paid-in capital (“APIC”).

Stock split

On September 8, 2021, the Company filed a certificate of amendment to its Certificate of Incorporation (“Certificate of Amendment”) with the Secretary of State of the State of Delaware. Prior to the effective date of the Certificate of Amendment, the Company was authorized to issue 750,000 shares of common stock at $0.01 par value. As a result of the filing of the Certificate of Amendment, the Company became authorized to issue 500,000,000 shares of common stock at $0.001 par value. Pursuant to the Certificate of Amendment, on September 8, 2021 the Company effected a stock split of its common stock, at a rate of 120.8-for-1 (the “Stock Split”), accompanied by a corresponding increase in the Company's issued and outstanding shares of common stock. No fractional shares of common stock were issued upon the Stock Split. Any holder of common stock with aggregated shares totaling to fractional shares were rounded up to the nearest whole share. The accompanying consolidated financial statements and related disclosure for periods prior to the Stock Split have been retroactively restated to reflect the filing of the Certificate of Amendment, including the Stock Split.

As a result of the Stock Split, the Company had a total of 74,058,447 shares issued and outstanding as of September 8, 2021. In connection with the IPO, on September 22, 2021, the Ultimate Parent distributed its shares of Sovos Brands, Inc. common stock to its limited partners, including holders of IUs, in accordance with the applicable terms of its partnership agreement.

Preferred Stock

On September 23, 2021, the Company filed an amended and restated certificate of incorporation (“Amended and Restated Charter”) with the Secretary of State of the State of Delaware, which was effective on September 23, 2021. As a result of the filing of the Amended and Restated Charter, the Company was authorized to issue 510,000,000 shares, divided into two classes as follows: (i) 500,000,000 shares are designated shares of common stock, par value $0.001 per share, and (ii) 10,000,000 shares are designated shares of preferred stock, par value $0.001 per share.

Organizational Transactions and IPO

On September 27, 2021, the Company closed its IPO of 23,334,000 shares of common stock, $0.001 par value per share, at an offering price of $12.00 per share, and received net proceeds from the IPO of approximately $263.2 million, net of $16.8 million in underwriting discounts and commissions.

Subsequent to the IPO, the underwriters exercised their option 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 $2.5 million in underwriting discounts and commissions.

As a result of the IPO and the exercise of the underwriters’ option to purchase additional shares, the new investors in the Company owned 26,834,100 shares of the common stock, or approximately 26.6% of the total 100,892,547 shares of common stock outstanding after the IPO.

- Definition

The entire disclosure for shareholders' equity comprised of portions attributable to the parent entity and noncontrolling interest, including other comprehensive income. Includes, but is not limited to, balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings, accumulated balance for each classification of other comprehensive income and amount of comprehensive income.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 505
-SubTopic 10
-Section 50
-Paragraph 13
-Subparagraph (b)
-URI http://asc.fasb.org/extlink&oid=123467817&loc=SL123496158-112644

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 505
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Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
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Reference 4: http://www.xbrl.org/2003/role/disclosureRef
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+ Details

Equity-Based Compensation

6 Months Ended

Jun. 25, 2022

Equity-Based Compensation.

Equity-Based Compensation

14. Equity-Based Compensation

Pre-IPO Equity

2017 Equity Incentive Plan

In 2017, the Ultimate Parent established the Sovos Brands Limited Partnership 2017 Equity Incentive Plan (“2017 Plan”), in which certain employees and nonemployees of the Company received equity-based compensation in the form of Incentive Units (“IUs”) of the Ultimate Parent, as consideration for services to the Company. The IUs, were deemed to be equity instruments subject to expense recognition under FASB ASC 718, Compensation — Stock Compensation. The estimate of fair value of the IUs granted was determined as of the grant date.

The fair value of the IUs granted in 2019 and 2020 was estimated using a two-step process. First, the enterprise value of Sovos Brands Holdings, Inc. was established using two generally accepted valuation methodologies: discounted cash flow analysis and guideline comparable public company analysis. Second, the enterprise value was allocated among the securities that comprise the capital structure of Sovos Brands Holdings, Inc. using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate.

The fair value of the IUs granted in 2021 was estimated using the Probability Weighted Expected Return Method (“PWERM”), which is a forward-looking approach that was considered to be appropriate when expected future liquidity events, such as an IPO, are reasonably certain. The PWERM analysis considered three potential liquidation time horizons, ranging from current value to three years and assigned a 33.3% probability to each scenario. The valuation of the total company enterprise and equity values was calculated for each of the three scenarios, and then applied a weighted average calculation.

Distribution of Sovos Common Stock with respect to IUs

In connection with the IPO, the Ultimate Parent distributed its shares of Sovos Brands, Inc. common stock to its limited partners, including holders of IUs, in accordance with the applicable terms of its partnership agreement.

Holders of IUs received shares of common stock and restricted common stock of Sovos Brands, Inc. in respect of their IUs. The common stock was distributed with respect to vested IUs and the restricted common stock was distributed with respect to nonvested IUs, with the vesting of such restricted common stock tracking the same vesting terms as the related nonvested IUs at the time of distribution.

The distribution of Sovos common stock with respect to IUs was calculated based on a multi-step valuation which included a comparison of the fair value of the Company based on the pricing at the Company’s IPO to the fair value of the outstanding partnership units of the Ultimate Parent, including the IUs granted under the 2017 Plan. The conversion was based on:

●

a ratio that takes into account the number of IUs held,

●

the application distribution threshold applicable to the IUs, and

●

the value of distributions that the holder would have been entitled to receive had the Ultimate Parent liquidated on the date of such replacement in accordance with the terms of the distribution “waterfall” set forth in the Ultimate Parent partnership agreement.

Restricted Common Stock

In connection with the IPO, a change in the vesting of the existing performance-based IUs and accordingly the related distributed restricted stock resulted in a modification to the grants and required the shares to be revalued as of the IPO date, resulting in a modified grant date fair value of approximately $13.0 million. The fair value of the performance-based restricted stock awards was calculated using a Monte Carlo simulation option pricing model which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate. Specifically, the model revalued the performance units based on the revised vesting condition of the 2.0x multiple of invested capital (“MOIC”) restricted stock units achieving the 2.0x MOIC based on a 30-day volume weighted average price with the remainder of the restricted stock units vesting upon the earlier of the Ultimate Parent owning 25% or less of the Company or 30 months post-IPO. On November 3, 2021, the performance condition of the 2.0x MOIC restricted common stock was met and, accordingly, 683,442 shares of restricted stock with a performance-based vesting condition vested.

On November 4, 2021, the Company and the Limited Partnership modified a portion of the existing equity-based compensation awards dated September 22, 2021 among the Company, the Limited Partnership and the holders of such restricted stock. As a result of this modification, a portion of the shares that would have vested based upon a 4.0x MOIC (including any related linear interpolation, the “Original Vesting Criteria”) instead vest on the last day of fiscal 2022 or on the last day of fiscal 2023, or upon achievement of the Original Vesting Criteria, if earlier. The fair value of the modified performance-based restricted stock awards was calculated using a Monte Carlo simulation option pricing model which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate, resulting in an incremental modified grant date fair value of approximately $6.1 million.

As of June 25, 2022, 33,065 shares of restricted common stock resulting from the distribution of common stock with respect to unvested time-based IUs vest upon fulfilling time-based service conditions and are scheduled to vest through 2024. As of June 25, 2022, the remaining 2,298,866 shares of restricted common stock resulting from the distribution with respect to unvested performance-based IUs will vest only if certain performance conditions, including exceeding various MOIC levels, are achieved. Shares of restricted common stock that do not vest are not cancelled but instead remain outstanding and are forfeited back to the Ultimate Parent.

During the 13 weeks and 26 weeks ended June 25, 2022, the Company recorded equity-based compensation expense of approximately $0.3 million and $0.6 million, respectively, related to the restricted common stock with time-based service vesting conditions. During the 13 weeks and 26 weeks ended June 26, 2021, the Company recorded equity-based compensation expense of approximately $0.5 million and $1.1 million, respectively, related to the IUs with time-based service vesting conditions.

The Company recognized approximately $1.7 million and $3.2 million of equity-based compensation expense during the 13 weeks and 26 weeks ended June 25, 2022, respectively, related to the performance-based restricted common stock and will recognize the remaining expense for these awards ratably over the applicable 30-month period. Prior to the distribution of common stock with respect to the performance-based IUs, the performance conditions for the performance-based IUs were not deemed probable of occurrence, and therefore, no compensation cost was recorded for such IUs prior to September 23, 2021.

The equity-based compensation expense prior to the IPO was considered to be a transaction with the Ultimate Parent and was classified as a component within APIC in the Company’s consolidated statements of changes in stockholder’s equity.

Post-IPO Equity

2021 Equity Incentive Plan

Effective September 21, 2021, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”) which reserves 9,739,244 shares of common stock to grant stock options, stock appreciation rights, restricted stock awards, restricted stock units or equity-based awards to eligible employees, consultants and directors.

Restricted Stock Units

In connection with the IPO and under the 2021 Plan, the Company granted 967,158 time-based restricted stock units (“RSUs”) to certain employees and independent directors. The RSUs include (i) 759,362 RSUs issued to certain employees with each award vesting 100% on the third anniversary of the grant date, subject in general to the applicable employee’s continued service through the vesting date, (ii) 191,130 RSUs issued to certain employees and independent directors with each award vesting in three equal annual installments, subject in general to the employee’s or director’s continued service through the vesting date, and (iii) 16,666 RSUs issued to certain of our independent directors that vest on the earlier of the first anniversary of the grant date and immediately prior to our first annual meeting of stockholders following the IPO, in each case subject in general to the applicable director’s continued service through the vesting date.

During the 26 weeks ended June 25, 2022, the Company granted 673,415 RSUs to certain employees and independent directors. The RSUs include (i) 576,688 RSUs issued to employees with each award vesting in two equal annual installments, (ii) 76,039 RSUs issued to an employee with each award vesting in three equal annual installments, and (iii) 20,688 RSUs issued to independent directors that vest on the earlier of the first anniversary of the grant and immediately prior to our 2023 annual meeting of stockholders, all of which are subject in general to the employee’s and independent director’s continued service through the vesting date.

Performance-based Restricted Stock Units

In connection with the IPO and under the 2021 Plan, the Company granted 687,690 performance-based restricted stock units (“PSUs) to certain employees with each award vesting subject in general to the achievement of the performance condition and subject in general to the employee’s continued service through the vesting date. The fair value of the PSUs was estimated using a Monte Carlo simulation option pricing model, which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate.

During the 26 weeks ended June 25, 2022, the Company granted 343,800 PSUs to employees with each award vesting subject in general to the achievement of a performance condition that measures the total shareholder return (“TSR”) relative to the TSR of the constituents of a custom peer group (“relative TSR”). The number of shares that may be earned ranges from 0% to 200% with straight-line interpolation applied and subject in general to the employee’s continued service through the vesting date. The fair value of the PSUs granted during the 26 weeks ended June 25, 2022 was estimated using a Monte Carlo simulation option pricing model, which requires the Company to make estimates and assumptions, such as expected volatility, expected term and expected risk-free interest rate.

The Company recognized approximately $2.6 million and $4.8 million in equity-based compensation expense for the 13 weeks and 26 weeks ended June 25, 2022, respectively, resulting from the issuance of RSUs and PSUs under the 2021

Plan, and expects to record equity-based compensation expense of approximately $22.4 million through the first quarter of 2025.

As of June 25, 2022, there was an aggregate of 7,379,639 shares of common stock available for future equity awards under the 2021 Plan.

Income Taxes

6 Months Ended

Jun. 25, 2022

Income Taxes

Income Taxes

15. Income Taxes

The tax (expense) benefit and the effective tax rate resulting from operations were as follows:


	13 Weeks Ended						26 Weeks Ended
(In thousands)	June 25, 2022			June 26, 2021			June 25, 2022			June 26, 2021
Income before income taxes	$	(39,391)		$	(663)		$	(32,623)		$	15,089
Effective income tax (expense) benefit	$	9,106		$	(676)		$	6,395		$	(4,716)
Effective tax rate		23.1	%		(102.0)	%		19.6	%		31.3	%

The effective tax rates for the 13 weeks and 26 weeks ended June 25, 2022 and June 26, 2021 differ from the U.S. federal statutory income tax rate of 21% primarily due to changes in earnings, nondeductible equity-based compensation, limitation on the deduction of executive compensation for public companies, various discrete items including the impairment of goodwill and state taxes.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 21
-URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section S99
-Paragraph 2
-Subparagraph (SAB Topic 11.C)
-URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817

Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 17
-Subparagraph (b)
-URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319

Reference 4: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SAB TOPIC 6.I.5.Q1)
-URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817

Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 14
-URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 270
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-URI http://asc.fasb.org/topic&trid=2144680

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 30
-Section 50
-Paragraph 2
-Subparagraph (a)
-URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08(h)(2))
-URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690

+ Details

Related Party Transactions

6 Months Ended

Jun. 25, 2022

Related Party Transactions

Related Party Transactions

16. Related Party Transactions

The Company has two related party leases for a manufacturing facility and land. The facility and land are leased from Morning Fresh Dairy (“Morning Fresh”), a related party entity owned and controlled by an employee, board member of the Company and major equity holder of the Ultimate Parent. The facility lease and land lease are classified as a finance lease and operating lease, respectively, based on the original lease term and reasonably certain renewal options. As of June 25, 2022, the facility has a lease liability balance of $6.8 million which is primarily recognized as long-term debt in our Condensed Consolidated Balance Sheets. As of June 25, 2022, the land lease has a liability balance of $0.5 million which is primarily recognized as long-term operating lease liabilities in our Condensed Consolidated Balance Sheets.

The facility and land lease contained total payments of approximately $143 thousand and $124 thousand for the 13 weeks ended June 25, 2022 and June 26, 2021, respectively, and $285 thousand and $248 thousand for the 26 weeks ended June 25, 2022 and June 26, 2021, respectively. In addition, $45 thousand and $53 thousand was paid for the 13 weeks ended June 25, 2022 and June 26, 2021, respectively, and $91 thousand and $95 thousand was paid for the 26 weeks ended June 25, 2022 and June 26, 2021, respectively, for a proportionate share of utilities, taxes and insurance.

Morning Fresh regularly purchases finished goods inventory from the Company for sale to its customers. Additionally, Morning Fresh regularly supplies milk used in the Company’s manufacturing process.

Sales to and purchases from Morning Fresh were as follows:


	13 Weeks Ended				26 Weeks Ended
(In thousands)	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Sales	$	124	$	123	$	241	$	235
Purchases	$	2,296	$	1,530	$	4,266	$	2,841

Amounts outstanding in respect to Morning Fresh transactions were as follows:


(In thousands)	June 25, 2022		December 25, 2021
Receivables	$	9	$	26
Payables	$	2,622	$	354

The Company has a milk supply agreement with Morning Fresh for a base term ending December 31, 2027, with the option available for extension for a total of fifteen additional 2-year periods to December 31, 2057. Four years’ advance written notice is required to terminate the agreement. Milk will be priced on a month-to-month basis by USDA Central Federal Order No. 32 for Class II milk, plus surcharges and premiums, provided that the final price of the milk shall be 23.24 cents per hundred weight less than the published Dairy Farmers of America bill for that month. The Company will accept up to 3,650,000 gallons as determined by Morning Fresh in 2020, and for each year of the term thereafter. As of June 25, 2022, the Company has future commitments to purchase approximately $42.6 million of milk from Morning Fresh, approximated at current market price. In addition, the Company has agreed to pay an additional $33 thousand monthly through December 31, 2027 to cover the landowner’s incremental costs relating to capital improvements necessary to support increased milk production required by the Company over the term of this agreement. If the agreement is terminated before December 1, 2027, the Company will be required to pay an early termination penalty, which declines from $3.0 million at the inception of the agreement to $0 over the ten-year term, based on an amortization table outlined in the agreement.

In January 2019, the Company entered into an agreement with a stockholder, to sell and issue 5,217 Class A units in exchange for a $6 million stockholder note receivable, which was recorded within stockholders’ equity. In accordance with the agreement, interest on the note accrued and compounded quarterly at a rate equal to the long-term applicable federal rate per annum on date of issuance on the unpaid principal amount of the note. The federal rate used on the date of issuance was the January 2019 long-term applicable federal rates for purposes of IRC 1274(d), which was 3.12%. On February 26, 2021, the stockholder note receivable plus accrued and unpaid interest was paid in full in the amount of $6.4 million.

Advent International Corporation (“Advent”) is a private equity firm which has invested funds in our common stock. Although no individual fund owns a controlling interest in us, together the funds represent our current majority owners.

Advent and its affiliates have ownership interests in a broad range of companies. We have entered and may in the future enter into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services.

The Company pays legal expenses and tax preparation fees on behalf of the Limited Partnership and carries balances within other long-term assets that reflects the amount due from the Limited Partnership. As of June 25, 2022 and December 25, 2021, the receivable balance was $0.5 million and $0.4 million, respectively.

Earnings Per Share

6 Months Ended

Jun. 25, 2022

Earnings Per Share

Earnings Per Share

17. Earnings Per Share

Basic and diluted earnings per share (“EPS”) were as follows:


	13 Weeks Ended				26 Weeks Ended
(In thousands, except share and per share amounts)	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Net income (loss)	$	(30,285)	$	(1,339)	$	(26,228)	$	10,373
Basic
Weighted average basic common shares outstanding		100,897,815		74,058,447		100,895,181		74,058,447
Basic earnings (loss) per share	$	(0.30)	$	(0.02)	$	(0.26)	$	0.14
Diluted
Weighted average diluted common shares outstanding		100,897,815		74,058,447		100,895,181		77,041,809
Diluted earnings (loss) per share	$	(0.30)	$	(0.02)	$	(0.26)	$	0.13

There were no anti-dilutive shares for the diluted EPS calculations for the 13 weeks and 26 weeks ended June 25, 2022 and June 26, 2021.

EPS calculations for the 13 weeks ended June 25, 2022 and June 26, 2021 excluded 0.4 million shares and 3.0 million shares, respectively, underlying stock options issuable upon exercise that would have been anti-dilutive due to the net loss for the period. EPS calculations for the 26 weeks ended June 25, 2022 excluded 0.2 million shares underlying stock options issuable upon exercise that would have been anti-dilutive due to the net loss for the period. There were no anti-dilutive shares for the diluted EPS calculation for the 26 weeks ended June 26, 2021.

Subsequent Events

6 Months Ended

Jun. 25, 2022

Subsequent Events

Subsequent Events

18. Subsequent Events

The Company has evaluated subsequent events after the balance sheet date of June 25, 2022, through the filing date of this report. Other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited Condensed Consolidated Financial Statements.

Interest Rate Hedge

In July 2022, the Company entered into a cash flow hedge to manage interest rate risk on its variable rate under the Initial First Lien Term Loan Facility. Effective July 29, 2022, the Company transacted an interest rate cap with JPMorgan Chase Bank, N.A. for a notional amount of $240 million, a strike rate of 4.00% and a maturity date of July 31, 2024.

Summary of Significant Accounting Policies (Policies)	6 Months Ended
Summary of Significant Accounting Policies (Policies)	Jun. 25, 2022
Summary of Significant Accounting Policies
Hedging and Derivative Financial Instruments	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.
New Accounting Pronouncements and Policies	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.

Revenue Recognition (Tables)

6 Months Ended

Jun. 25, 2022

Revenue Recognition

Schedule of revenue disaggregated