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 OctoberJuly 3, 20212022
☐ 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: 001-04321
Krispy Kreme, Inc.
(Exact name of registrant as specified in its charter)
_________________________
| | | | | |
Delaware | 37-1701311 |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
21162116 Hawkins Street, Charlotte, North Carolina 28203
(Address of principal executive offices)
(800) 457-4779
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
_________________________
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, $0.01 par value per share | | DNUT | 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 Data 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 Act). ☐ Yes ☒ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The registrant had outstanding 167,250,735167,428,302 shares of common stock as of November 2, 2021.August 10, 2022.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Krispy Kreme, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts and number of shares)amounts)
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | October 3, 2021 (13 weeks) | | September 27, 2020 (13 weeks) | | October 3, 2021 (39 weeks) | | September 27, 2020 (39 weeks) | | July 3, 2022 (13 weeks) | | July 4, 2021 (13 weeks) | | July 3, 2022 (26 weeks) | | July 4, 2021 (26 weeks) |
Net revenues | Net revenues | | | | | | | | Net revenues | | | | | | | |
Product sales | Product sales | $ | 334,324 | | | $ | 281,317 | | | $ | 989,132 | | | $ | 769,461 | | Product sales | $ | 367,777 | | | $ | 341,223 | | | $ | 731,829 | | | $ | 654,808 | |
Royalties and other revenues | Royalties and other revenues | 8,475 | | | 8,916 | | | 24,662 | | | 26,960 | | Royalties and other revenues | 7,468 | | | 7,963 | | | 15,948 | | | 16,187 | |
Total net revenues | Total net revenues | 342,799 | | | 290,233 | | | 1,013,794 | | | 796,421 | | Total net revenues | 375,245 | | | 349,186 | | | 747,777 | | | 670,995 | |
Product and distribution costs | Product and distribution costs | 92,152 | | | 85,303 | | | 257,166 | | | 222,409 | | Product and distribution costs | 100,558 | | | 85,017 | | | 196,669 | | | 165,014 | |
Operating expenses | Operating expenses | 157,315 | | | 121,792 | | | 462,733 | | | 341,792 | | Operating expenses | 173,942 | | | 157,877 | | | 342,668 | | | 305,418 | |
Selling, general and administrative expense | Selling, general and administrative expense | 52,950 | | | 46,521 | | | 163,417 | | | 129,090 | | Selling, general and administrative expense | 51,754 | | | 60,930 | | | 105,465 | | | 110,467 | |
Marketing expenses | Marketing expenses | 12,062 | | | 8,015 | | | 31,621 | | | 24,704 | | Marketing expenses | 11,215 | | | 10,052 | | | 21,374 | | | 19,559 | |
Pre-opening costs | Pre-opening costs | 1,192 | | | 3,368 | | | 4,335 | | | 9,668 | | Pre-opening costs | 985 | | | 1,752 | | | 2,314 | | | 3,143 | |
Other (income)/expenses, net | (359) | | | 4,667 | | | (4,365) | | | 7,177 | | |
Other expenses/(income), net | | Other expenses/(income), net | 1,469 | | | (761) | | | (1,164) | | | (4,006) | |
Depreciation and amortization expense | Depreciation and amortization expense | 25,663 | | | 20,435 | | | 74,258 | | | 57,619 | | Depreciation and amortization expense | 27,814 | | | 25,194 | | | 55,655 | | | 48,595 | |
Operating income | Operating income | 1,824 | | | 132 | | | 24,629 | | | 3,962 | | Operating income | 7,508 | | | 9,125 | | | 24,796 | | | 22,805 | |
Interest expense, net | Interest expense, net | 7,186 | | | 7,908 | | | 25,228 | | | 26,263 | | Interest expense, net | 7,586 | | | 9,793 | | | 14,937 | | | 18,042 | |
Interest expense — related party | Interest expense — related party | — | | | 5,566 | | | 10,387 | | | 16,698 | | Interest expense — related party | — | | | 4,821 | | | — | | | 10,387 | |
Other non-operating expense/(income), net | Other non-operating expense/(income), net | 732 | | | (357) | | | (126) | | | (469) | | Other non-operating expense/(income), net | 756 | | | (416) | | | 435 | | | (858) | |
Loss before income taxes | (6,094) | | | (12,985) | | | (10,860) | | | (38,530) | | |
Income tax (benefit)/expense | (2,342) | | | 499 | | | 8,266 | | | (2,413) | | |
Net loss | (3,752) | | | (13,484) | | | (19,126) | | | (36,117) | | |
(Loss)/income before income taxes | | (Loss)/income before income taxes | (834) | | | (5,073) | | | 9,424 | | | (4,766) | |
Income tax expense | | Income tax expense | 1,574 | | | 9,923 | | | 5,374 | | | 10,608 | |
Net (loss)/income | | Net (loss)/income | (2,408) | | | (14,996) | | | 4,050 | | | (15,374) | |
Net income attributable to noncontrolling interest | Net income attributable to noncontrolling interest | 1,907 | | | 1,368 | | | 6,736 | | | 2,880 | | Net income attributable to noncontrolling interest | 1,441 | | | 2,146 | | | 3,897 | | | 4,829 | |
Net loss attributable to Krispy Kreme, Inc. | $ | (5,659) | | | $ | (14,852) | | | $ | (25,862) | | | $ | (38,997) | | |
Net (loss)/income attributable to Krispy Kreme, Inc. | | Net (loss)/income attributable to Krispy Kreme, Inc. | $ | (3,849) | | | $ | (17,142) | | | $ | 153 | | | $ | (20,203) | |
Net loss per share: | Net loss per share: | | | | | | | | Net loss per share: | | | | | | | |
Common stock — Basic | Common stock — Basic | $ | (0.04) | | | $ | (0.12) | | | $ | (0.20) | | | $ | (0.31) | | Common stock — Basic | $ | (0.02) | | | $ | (0.13) | | | $ | 0.00 | | | $ | (0.16) | |
Common stock — Diluted | Common stock — Diluted | $ | (0.04) | | | $ | (0.12) | | | $ | (0.20) | | | $ | (0.31) | | Common stock — Diluted | $ | (0.02) | | | $ | (0.13) | | | $ | 0.00 | | | $ | (0.16) | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | Weighted average shares outstanding: | |
Basic | Basic | 166,033,539 | | | 124,987,370 | | | 141,123,999 | | | 124,987,370 | | Basic | 167,367 | | | 132,351 | | | 167,314 | | | 128,669 | |
Diluted | Diluted | 166,033,539 | | | 124,987,370 | | | 141,123,999 | | | 124,987,370 | | Diluted | 167,367 | | | 132,351 | | | 167,314 | | | 128,669 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Krispy Kreme, Inc.
Condensed Consolidated Statements of Comprehensive Income/(Loss) (Unaudited)
(in thousands)
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | October 3, 2021 (13 weeks) | | September 27, 2020 (13 weeks) | | October 3, 2021 (39 weeks) | | September 27, 2020 (39 weeks) | | July 3, 2022 (13 weeks) | | July 4, 2021 (13 weeks) | | July 3, 2022 (26 weeks) | | July 4, 2021 (26 weeks) |
Net loss | $ | (3,752) | | | $ | (13,484) | | | $ | (19,126) | | | $ | (36,117) | | |
Net (loss)/income | | Net (loss)/income | $ | (2,408) | | | $ | (14,996) | | | $ | 4,050 | | | $ | (15,374) | |
Other comprehensive (loss)/income, net of income taxes: | Other comprehensive (loss)/income, net of income taxes: | | | | | | | | Other comprehensive (loss)/income, net of income taxes: | | | | | | | |
Foreign currency translation adjustment | Foreign currency translation adjustment | (9,823) | | | 10,839 | | | (13,544) | | | (18,168) | | Foreign currency translation adjustment | (37,513) | | | (1,457) | | | (36,179) | | | (3,721) | |
Unrealized income/(loss) on cash flow hedges, net of income taxes(1) | 1,398 | | | 1,066 | | | 7,631 | | | (16,262) | | |
Unrealized income on cash flow hedges, net of income taxes(1) | | Unrealized income on cash flow hedges, net of income taxes(1) | 2,872 | | | 1,131 | | | 17,106 | | | 6,233 | |
| Total other comprehensive (loss)/income, net of income taxes | Total other comprehensive (loss)/income, net of income taxes | (8,425) | | | 11,905 | | | (5,913) | | | (34,430) | | Total other comprehensive (loss)/income, net of income taxes | (34,641) | | | (326) | | | (19,073) | | | 2,512 | |
Comprehensive loss | Comprehensive loss | (12,177) | | | (1,579) | | | (25,039) | | | (70,547) | | Comprehensive loss | (37,049) | | | (15,322) | | | (15,023) | | | (12,862) | |
Net income attributable to noncontrolling interest | Net income attributable to noncontrolling interest | 1,907 | | | 1,368 | | | 6,736 | | | 2,880 | | Net income attributable to noncontrolling interest | 1,441 | | | 2,146 | | | 3,897 | | | 4,829 | |
Foreign currency translation adjustment attributable to noncontrolling interest | Foreign currency translation adjustment attributable to noncontrolling interest | (414) | | | — | | | (414) | | | — | | Foreign currency translation adjustment attributable to noncontrolling interest | (903) | | | — | | | (903) | | | — | |
Total comprehensive income attributable to noncontrolling interest | Total comprehensive income attributable to noncontrolling interest | 1,493 | | | 1,368 | | | 6,322 | | | 2,880 | | Total comprehensive income attributable to noncontrolling interest | 538 | | | 2,146 | | | 2,994 | | | 4,829 | |
Comprehensive loss attributable to Krispy Kreme, Inc. | Comprehensive loss attributable to Krispy Kreme, Inc. | $ | (13,670) | | | $ | (2,947) | | | $ | (31,361) | | | $ | (73,427) | | Comprehensive loss attributable to Krispy Kreme, Inc. | $ | (37,587) | | | $ | (17,468) | | | $ | (18,017) | | | $ | (17,691) | |
1.(1)Net of income tax (expense)/benefitexpense of ($0.5 million)$1.0 million and ($2.6 million) for the quarter and three quarters ended October 3, 2021, respectively, and ($0.4 million) and $5.4$5.7 million for the quarter and threetwo quarters ended September 27, 2020, respectively.July 3, 2022, respectively, and $0.4 million and $2.1 million for the quarter and two quarters ended July 4, 2021.
See accompanying notes to Condensed Consolidated Financial Statements.
Krispy Kreme, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)amounts)
| | | As of | | As of |
| | (Unaudited) October 3, 2021 | | January 3, 2021 | | (Unaudited) July 3, 2022 | | January 2, 2022 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 44,895 | | | $ | 37,460 | | Cash and cash equivalents | $ | 25,796 | | | $ | 38,562 | |
Marketable securities | 614 | | | 1,048 | | |
Restricted cash | Restricted cash | 193 | | | 23 | | Restricted cash | 411 | | | 630 | |
Accounts receivable, net | Accounts receivable, net | 60,069 | | | 74,351 | | Accounts receivable, net | 45,027 | | | 47,491 | |
Inventories | Inventories | 36,141 | | | 38,519 | | Inventories | 47,420 | | | 34,851 | |
Taxes receivable | | Taxes receivable | 14,614 | | | 14,662 | |
Prepaid expense and other current assets | Prepaid expense and other current assets | 22,068 | | | 12,692 | | Prepaid expense and other current assets | 29,264 | | | 20,701 | |
Total current assets | Total current assets | 163,980 | | | 164,093 | | Total current assets | 162,532 | | | 156,897 | |
Property and equipment, net | Property and equipment, net | 423,547 | | | 395,255 | | Property and equipment, net | 443,898 | | | 438,918 | |
Goodwill | Goodwill | 1,089,914 | | | 1,086,546 | | Goodwill | 1,083,199 | | | 1,105,322 | |
Other intangible assets, net | Other intangible assets, net | 993,440 | | | 998,014 | | Other intangible assets, net | 969,319 | | | 992,520 | |
Operating lease right of use asset, net | Operating lease right of use asset, net | 414,612 | | | 399,688 | | Operating lease right of use asset, net | 419,211 | | | 435,168 | |
Other assets | Other assets | 17,165 | | | 17,399 | | Other assets | 21,761 | | | 16,429 | |
Total assets | Total assets | $ | 3,102,658 | | | $ | 3,060,995 | | Total assets | $ | 3,099,920 | | | $ | 3,145,254 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Current portion of long-term debt | Current portion of long-term debt | $ | 38,608 | | | $ | 41,245 | | Current portion of long-term debt | $ | 39,844 | | | $ | 36,583 | |
Current operating lease liabilities | Current operating lease liabilities | 42,637 | | | 45,675 | | Current operating lease liabilities | 45,936 | | | 50,359 | |
Accounts payable | Accounts payable | 170,780 | | | 148,645 | | Accounts payable | 187,516 | | | 182,104 | |
Accrued liabilities | Accrued liabilities | 132,638 | | | 124,951 | | Accrued liabilities | 108,497 | | | 140,750 | |
Structured payables | Structured payables | 108,969 | | | 137,319 | | Structured payables | 135,542 | | | 116,361 | |
Total current liabilities | Total current liabilities | 493,632 | | | 497,835 | | Total current liabilities | 517,335 | | | 526,157 | |
Long-term debt, less current portion | Long-term debt, less current portion | 682,676 | | | 785,810 | | Long-term debt, less current portion | 686,013 | | | 680,307 | |
Related party notes payable | — | | | 344,581 | | |
| Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | 397,640 | | | 376,099 | | Noncurrent operating lease liabilities | 407,141 | | | 415,208 | |
Deferred income taxes, net | Deferred income taxes, net | 155,982 | | | 144,866 | | Deferred income taxes, net | 142,361 | | | 145,418 | |
Other long-term obligations and deferred credits | Other long-term obligations and deferred credits | 53,008 | | | 63,445 | | Other long-term obligations and deferred credits | 38,088 | | | 42,509 | |
Total liabilities | Total liabilities | 1,782,938 | | | 2,212,636 | | Total liabilities | 1,790,938 | | | 1,809,599 | |
Commitments and contingencies | Commitments and contingencies | 0 | | 0 | Commitments and contingencies | 0 | | 0 |
Shareholders’ equity: | Shareholders’ equity: | | Shareholders’ equity: | |
Common stock, $0.01 par value; 300,000,000 and 174,500,000 shares authorized as of October 3, 2021 and January 3, 2021, respectively; 167,112,953 and 124,987,370 shares issued and outstanding as of October 3, 2021 and January 3, 2021, respectively | 1,671 | | | 1,250 | | |
Common stock, $0.01 par value; 300,000 shares authorized as of both July 3, 2022 and January 2, 2022; 167,428 and 167,251 shares issued and outstanding as of July 3, 2022 and January 2, 2022, respectively | | Common stock, $0.01 par value; 300,000 shares authorized as of both July 3, 2022 and January 2, 2022; 167,428 and 167,251 shares issued and outstanding as of July 3, 2022 and January 2, 2022, respectively | 1,674 | | | 1,673 | |
Additional paid-in capital | Additional paid-in capital | 1,410,724 | | | 845,499 | | Additional paid-in capital | 1,420,410 | | | 1,415,185 | |
| Shareholder note receivable | Shareholder note receivable | (4,216) | | | (18,660) | | Shareholder note receivable | (4,573) | | | (4,382) | |
Accumulated other comprehensive loss, net of income tax | Accumulated other comprehensive loss, net of income tax | (6,707) | | | (1,208) | | Accumulated other comprehensive loss, net of income tax | (20,647) | | | (2,478) | |
Retained deficit | Retained deficit | (173,911) | | | (142,197) | | Retained deficit | (189,970) | | | (178,409) | |
Total shareholders’ equity attributable to Krispy Kreme, Inc. | Total shareholders’ equity attributable to Krispy Kreme, Inc. | 1,227,561 | | | 684,684 | | Total shareholders’ equity attributable to Krispy Kreme, Inc. | 1,206,894 | | | 1,231,589 | |
Noncontrolling interest | Noncontrolling interest | 92,159 | | | 163,675 | | Noncontrolling interest | 102,088 | | | 104,066 | |
Total shareholders’ equity | Total shareholders’ equity | 1,319,720 | | | 848,359 | | Total shareholders’ equity | 1,308,982 | | | 1,335,655 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 3,102,658 | | | $ | 3,060,995 | | Total liabilities and shareholders’ equity | $ | 3,099,920 | | | $ | 3,145,254 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Krispy Kreme, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except per share data)amounts)
| | | Common Stock | | Additional Paid-in Capital | | Subscription Receivable | | Shareholder Note Receivable | | Accumulated Other Comprehensive (Loss)/Income | | Retained (Deficit) Earnings | | Noncontrolling Interest | | Total | | Common Stock | | Additional Paid-in Capital | | Subscription Receivable | | Shareholder Note Receivable | | Accumulated Other Comprehensive Income/(Loss) | | Retained (Deficit)/ Earnings | | Noncontrolling Interest | | Total |
| | Shares Outstanding | | Amount | | Foreign Currency Translation Adjustment | | Unrealized Loss on Cash Flow Hedges | | Unrealized Loss on Employee Benefit Plans | | | Shares Outstanding | | Amount | | Foreign Currency Translation Adjustment | | Unrealized (Loss)/Income on Cash Flow Hedges | | Unrealized Loss on Employee Benefit Plans | |
Balance at January 3, 2021 | 124,987,370 | | | $ | 1,250 | | | $ | 845,499 | | | $ | — | | | $ | (18,660) | | | $ | 23,508 | | | $ | (24,610) | | | $ | (106) | | | $ | (142,197) | | | $ | 163,675 | | | $ | 848,359 | | |
Net (loss)/income for the quarter ended April 4, 2021 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,061) | | | 2,683 | | | (378) | | |
Other comprehensive income/(loss) for the quarter ended April 4, 2021 before reclassifications | — | | | — | | | — | | | — | | | — | | | (2,264) | | | 2,572 | | | — | | | — | | | — | | | 308 | | |
Balance at January 2, 2022 | | Balance at January 2, 2022 | 167,251 | | | $ | 1,673 | | | $ | 1,415,185 | | | $ | — | | | $ | (4,382) | | | $ | 8,967 | | | $ | (11,001) | | | $ | (444) | | | $ | (178,409) | | | $ | 104,066 | | | $ | 1,335,655 | |
Net income for the quarter ended April 3, 2022 | | Net income for the quarter ended April 3, 2022 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,002 | | | 2,456 | | | 6,458 | |
Other comprehensive income for the quarter ended April 3, 2022 before reclassifications | | Other comprehensive income for the quarter ended April 3, 2022 before reclassifications | — | | | — | | | — | | | — | | | — | | | 1,334 | | | 11,724 | | | — | | | — | | | — | | | 13,058 | |
Reclassification from AOCI | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 2,530 | | | — | | | — | | | — | | | 2,530 | | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 2,510 | | | — | | | — | | | — | | | 2,510 | |
Capital contribution by shareholders | | Capital contribution by shareholders | — | | | — | | | (3) | | | — | | | 243 | | | — | | | — | | | — | | | — | | | — | | | 240 | |
Share-based compensation | Share-based compensation | — | | | — | | | 2,368 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,368 | | Share-based compensation | — | | | — | | | 5,041 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,041 | |
Purchase of shares by noncontrolling interest | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | 139 | | | — | | | — | | | — | | | — | | | 12,048 | | | 12,187 | | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | (58) | | | — | | | — | | | — | | | — | | | 110 | | | 52 | |
Distribution to shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Dividends declared on common stock and equivalents ($0.035 per share) | | Dividends declared on common stock and equivalents ($0.035 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,855) | | | — | | | (5,855) | |
| Distribution to noncontrolling interest | Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | 363 | | | — | | | — | | | — | | | — | | | (2,239) | | | (1,876) | | Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | 21 | | | — | | | — | | | — | | | — | | | (1,383) | | | (1,362) | |
Issuance of common stock upon settlement of RSUs, net of shares withheld | | Issuance of common stock upon settlement of RSUs, net of shares withheld | 46 | | | — | | | (390) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (390) | |
Other | Other | — | | | — | | | (26) | | | — | | | (70) | | | — | | | — | | | — | | | 2 | | | (1) | | | (95) | | Other | — | | | — | | | (2) | | | — | | | (14) | | | — | | | — | | | — | | | 1 | | | — | | | (15) | |
Balance at April 4, 2021 | 124,987,370 | | | $ | 1,250 | | | $ | 847,841 | | | $ | — | | | $ | (18,228) | | | $ | 21,244 | | | $ | (19,508) | | | $ | (106) | | | $ | (145,256) | | | $ | 176,166 | | | $ | 863,403 | | |
Net (loss)/income for the quarter ended July 4, 2021 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (17,142) | | | 2,146 | | | (14,996) | | |
Other comprehensive loss for the quarter ended July 4, 2021 before reclassifications | — | | | — | | | — | | | — | | | — | | | (1,457) | | | (1,430) | | | — | | | — | | | — | | | (2,887) | | |
Balance at April 3, 2022 | | Balance at April 3, 2022 | 167,297 | | | $ | 1,673 | | | $ | 1,419,831 | | | $ | — | | | $ | (4,190) | | | $ | 10,301 | | | $ | 3,233 | | | $ | (444) | | | $ | (180,261) | | | $ | 105,249 | | | $ | 1,355,392 | |
Net (loss)/income for the quarter ended July 3, 2022 | | Net (loss)/income for the quarter ended July 3, 2022 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,849) | | | 1,441 | | | (2,408) | |
Other comprehensive (loss)/income for the quarter ended July 3, 2022 before reclassifications | | Other comprehensive (loss)/income for the quarter ended July 3, 2022 before reclassifications | — | | | — | | | — | | | — | | | — | | | (36,610) | | | 1,011 | | | — | | | — | | | (903) | | | (36,502) | |
Reclassification from AOCI | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 2,561 | | | — | | | — | | | — | | | 2,561 | | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 1,861 | | | — | | | — | | | — | | | 1,861 | |
Capital contribution from shareholders | Capital contribution from shareholders | 6,997,450 | | | 70 | | | 120,862 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 120,932 | | Capital contribution from shareholders | — | | | — | | | (31) | | | — | | | (236) | | | — | | | — | | | — | | | — | | | — | | | (267) | |
Share-based compensation | Share-based compensation | — | | | — | | | 8,290 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,290 | | Share-based compensation | — | | | — | | | 5,452 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,452 | |
Purchase of shares by noncontrolling interest | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | 14,421 | | | — | | | — | | | — | | | — | | | 26,648 | | | 41,069 | | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | (133) | | | — | | | — | | | — | | | — | | | 491 | | | 358 | |
Distribution to shareholders | — | | | — | | | (42,334) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (42,334) | | |
Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,142) | | | (4,142) | | |
Conversion of noncontrolling interest to additional paid-in capital in connection with the Merger | 9,370,881 | | | 93 | | | 107,258 | | | — | | | — | | | — | | | — | | | — | | | — | | | (107,351) | | | — | | |
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs | 29,411,765 | | | 294 | | | 459,391 | | | (471,250) | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,565) | | |
Issuance of common stock upon settlement of RSUs, net of shares withheld | 1,267,491 | | | 13 | | | (15,507) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,494) | | |
Repurchase of common stock | (8,439,441) | | | (84) | | | (122,922) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (123,006) | | |
Other | — | | | — | | | (4) | | | — | | | (20) | | | — | | | — | | | — | | | (1) | | | — | | | (25) | | |
Balance at July 4, 2021 | 163,595,516 | | | $ | 1,636 | | | $ | 1,362,875 | | | $ | (471,250) | | | $ | (3,827) | | | $ | 19,787 | | | $ | (18,377) | | | $ | (106) | | | $ | (162,399) | | | $ | 93,467 | | | $ | 821,806 | | |
Net (loss)/income for the quarter ended October 3, 2021 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,659) | | | 1,907 | | | (3,752) | | |
Other comprehensive loss for the quarter ended October 3, 2021 before reclassifications | — | | | — | | | — | | | — | | | — | | | (9,409) | | | (1,215) | | | — | | | — | | | (414) | | | (11,038) | | |
Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 2,613 | | | — | | | — | | | — | | | 2,613 | | |
Capital contribution from shareholders | — | | | — | | | (17) | | | — | | | (383) | | | — | | | — | | | — | | | — | | | — | | | (400) | | |
Share-based compensation | — | | | — | | | 6,315 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,315 | | |
Dividends declared on common stock and equivalents ($0.035 per share)(1) | Dividends declared on common stock and equivalents ($0.035 per share)(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,853) | | | — | | | (5,853) | | Dividends declared on common stock and equivalents ($0.035 per share)(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,860) | | | — | | | (5,860) | |
Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 81 | | | 81 | | |
| Distribution to noncontrolling interest | Distribution to noncontrolling interest | — | | | — | | | (13,413) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,882) | | | (16,295) | | Distribution to noncontrolling interest | — | | | — | | | (3,944) | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,190) | | | (8,134) | |
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs | 3,500,000 | | | 35 | | | 55,151 | | | 471,250 | | | — | | | — | | | — | | | — | | | — | | | — | | | 526,436 | | |
| Issuance of common stock upon settlement of RSUs, net of shares withheld | Issuance of common stock upon settlement of RSUs, net of shares withheld | 17,437 | | | — | | | (188) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (188) | | Issuance of common stock upon settlement of RSUs, net of shares withheld | 132 | | | 1 | | | (898) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (897) | |
| Other | Other | — | | | — | | | 1 | | | — | | | (6) | | | — | | | — | | | — | | | — | | | — | | | (5) | | Other | — | | | — | | | — | | | — | | | (14) | | | — | | | 1 | | | — | | | — | | | — | | | (13) | |
Balance at October 3, 2021 | 167,112,953 | | | $ | 1,671 | | | $ | 1,410,724 | | | $ | — | | | $ | (4,216) | | | $ | 10,378 | | | $ | (16,979) | | | $ | (106) | | | $ | (173,911) | | | $ | 92,159 | | | $ | 1,319,720 | | |
Balance at July 3, 2022 | | Balance at July 3, 2022 | 167,428 | | | $ | 1,674 | | | $ | 1,420,410 | | | $ | — | | | $ | (4,573) | | | $ | (26,309) | | | $ | 6,106 | | | $ | (444) | | | $ | (189,970) | | | $ | 102,088 | | | $ | 1,308,982 | |
|
1. (1)Includes a $0.035 cash dividend per common share declared in the thirdsecond quarter of fiscal 20212022 and expected to be paid in the fourththird quarter of fiscal 2021.2022.
See accompanying notes to Condensed Consolidated Financial StatementsStatements.
Krispy Kreme, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except per share data)thousands)
| | | Common Stock | | Additional Paid-in Capital | | Subscription Receivable | | Shareholder Note Receivable | | Accumulated Other Comprehensive (Loss)/Income | | Retained (Deficit) Earnings | | Noncontrolling Interest | | Total | | Common Stock | | Additional Paid-in Capital | | Subscription Receivable | | Shareholder Note Receivable | | Accumulated Other Comprehensive Income/(Loss) | | Retained (Deficit)/ Earnings | | Noncontrolling Interest | | Total |
| | Shares Outstanding | | Amount | | Foreign Currency Translation Adjustment | | Unrealized Loss on Cash Flow Hedges | | Unrealized Loss on Employee Benefit Plans | | | Shares Outstanding | | Amount | | Foreign Currency Translation Adjustment | | Unrealized Loss on Cash Flow Hedges | | Unrealized Loss on Employee Benefit Plans | |
Balance at December 29, 2019 | 124,987,370 | | | $ | 1,250 | | | $ | 834,233 | | | $ | — | | | $ | (17,232) | | | $ | 4,629 | | | $ | (10,180) | | | $ | — | | | $ | (77,880) | | | $ | 148,597 | | | $ | 883,417 | | |
Net (loss)/income for the quarter ended March 29, 2020 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,515) | | | 567 | | | (10,948) | | |
Other comprehensive loss for the quarter ended March 29, 2020 before reclassifications | — | | | — | | | — | | | — | | | — | | | (46,423) | | | (16,130) | | | — | | | — | | | — | | | (62,553) | | |
Balance at January 3, 2021 | | Balance at January 3, 2021 | 124,987 | | | $ | 1,250 | | | $ | 845,499 | | | $ | — | | | $ | (18,660) | | | $ | 23,508 | | | $ | (24,610) | | | $ | (106) | | | $ | (142,197) | | | $ | 163,675 | | | $ | 848,359 | |
Net (loss)/income for the quarter ended April 4, 2021 | | Net (loss)/income for the quarter ended April 4, 2021 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,061) | | | 2,683 | | | (378) | |
Other comprehensive (loss)/income for the quarter ended April 4, 2021 before reclassifications | | Other comprehensive (loss)/income for the quarter ended April 4, 2021 before reclassifications | — | | | — | | | — | | | — | | | — | | | (2,264) | | | 2,572 | | | — | | | — | | | — | | | 308 | |
Reclassification from AOCI | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 695 | | | — | | | — | | | — | | | 695 | | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | 2,530 | | | — | | | — | | | — | | | 2,530 | |
Share-based compensation | | Share-based compensation | — | | | — | | | 2,368 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,368 | |
Purchase of shares by noncontrolling interest | | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | 139 | | | — | | | — | | | — | | | 12,048 | | | 12,187 | |
| Distribution to noncontrolling interest | | Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | 363 | | | — | | | — | | | — | | | (2,239) | | | (1,876) | |
Other | | Other | — | | | — | | | (26) | | | — | | | (70) | | | — | | | — | | | 2 | | | (1) | | | (95) | |
Balance at April 4, 2021 | | Balance at April 4, 2021 | 124,987 | | | $ | 1,250 | | | $ | 847,841 | | | $ | — | | | $ | (18,228) | | | $ | 21,244 | | | $ | (19,508) | | | $ | (106) | | | $ | (145,256) | | | $ | 176,166 | | | $ | 863,403 | |
Net (loss)/income for the quarter ended July 4, 2021 | | Net (loss)/income for the quarter ended July 4, 2021 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (17,142) | | | 2,146 | | | (14,996) | |
Other comprehensive loss for the quarter ended July 4, 2021 before reclassifications | | Other comprehensive loss for the quarter ended July 4, 2021 before reclassifications | — | | | — | | | — | | | — | | | — | | | (1,457) | | | (1,430) | | | — | | | — | | | — | | | (2,887) | |
Reclassification from AOCI | | Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 2,561 | | | — | | | — | | | — | | | 2,561 | |
Capital contribution from shareholders | | Capital contribution from shareholders | 6,997 | | | 70 | | | 120,862 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 120,932 | |
Share-based compensation | Share-based compensation | — | | | — | | | 3,167 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,167 | | Share-based compensation | — | | | — | | | 8,290 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,290 | |
Purchase of shares by noncontrolling interest | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,562 | | | 17,562 | | Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | 14,421 | | | — | | | — | | | — | | | — | | | 26,648 | | | 41,069 | |
Distribution to shareholders | Distribution to shareholders | — | | | — | | | (15) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15) | | Distribution to shareholders | — | | | — | | | (42,334) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (42,334) | |
Distribution to noncontrolling interest | Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,506) | | | (2,506) | | Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,142) | | | (4,142) | |
Conversion of noncontrolling interest to additional paid-in capital in connection with the Merger | | Conversion of noncontrolling interest to additional paid-in capital in connection with the Merger | 9,371 | | | 93 | | | 107,258 | | | — | | | — | | | — | | | — | | | — | | | — | | | (107,351) | | | — | |
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs | | Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs | 29,412 | | | 294 | | | 459,391 | | | (471,250) | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,565) | |
Issuance of common stock upon settlement of RSUs, net of shares withheld | | Issuance of common stock upon settlement of RSUs, net of shares withheld | 1,267 | | | 13 | | | (15,507) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,494) | |
Repurchase of common stock | | Repurchase of common stock | (8,439) | | | (84) | | | (122,922) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (123,006) | |
Other | Other | — | | | — | | | — | | | — | | | (76) | | | — | | | — | | | — | | | — | | | (1) | | | (77) | | Other | — | | | — | | | (4) | | | — | | | (20) | | | — | | | — | | | — | | | (1) | | | — | | | (25) | |
Balance at March 29, 2020 | 124,987,370 | | | $ | 1,250 | | | $ | 837,385 | | | $ | — | | | $ | (17,308) | | | $ | (41,794) | | | $ | (25,615) | | | $ | — | | | $ | (89,395) | | | $ | 164,219 | | | $ | 828,742 | | |
Net (loss)/income for the quarter ended June 28, 2020 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,630) | | | 945 | | | (11,685) | | |
Other comprehensive income/(loss) for the quarter ended June 28, 2020 before reclassifications | — | | | — | | | — | | | — | | | — | | | 17,416 | | | (3,855) | | | — | | | — | | | — | | | 13,561 | | |
Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 1,962 | | | — | | | — | | | — | | | 1,962 | | |
Share-based compensation | — | | | — | | | 2,974 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,974 | | |
Purchase of shares by noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 30 | | | 30 | | |
Distribution to shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | | |
Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | 178 | | | — | | | — | | | — | | | — | | | (3,284) | | | (3,106) | | |
Other | — | | | — | | | — | | | — | | | (18) | | | — | | | — | | | — | | | 1 | | | 1 | | | (16) | | |
Balance at June 28, 2020 | 124,987,370 | | | $ | 1,250 | | | $ | 840,359 | | | $ | — | | | $ | (17,148) | | | $ | (24,378) | | | $ | (27,508) | | | $ | — | | | $ | (102,028) | | | $ | 161,911 | | | $ | 832,458 | | |
Net (loss)/income for the quarter ended September 27, 2020 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (14,852) | | | 1,368 | | | (13,484) | | |
Other comprehensive income/(loss) for the quarter ended September 27, 2020 before reclassifications | — | | | — | | | — | | | — | | | — | | | 10,839 | | | (1,402) | | | — | | | — | | | — | | | 9,437 | | |
Reclassification from AOCI | — | | | — | | | — | | | — | | | — | | | — | | | 2,468 | | | — | | | — | | | — | | | 2,468 | | |
Share-based compensation | — | | | — | | | 3,095 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,095 | | |
Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (941) | | | (941) | | |
Other | — | | | — | | | (5) | | | — | | | (77) | | | — | | | — | | | — | | | (12) | | | (1) | | | (95) | | |
Balance at September 27, 2020 | 124,987,370 | | | $ | 1,250 | | | $ | 843,449 | | | $ | — | | | $ | (17,225) | | | $ | (13,539) | | | $ | (26,442) | | | $ | — | | | $ | (116,892) | | | $ | 162,337 | | | $ | 832,938 | | |
Balance at July 4, 2021 | | Balance at July 4, 2021 | 163,596 | | | $ | 1,636 | | | $ | 1,362,875 | | | $ | (471,250) | | | $ | (3,827) | | | $ | 19,787 | | | $ | (18,377) | | | $ | (106) | | | $ | (162,399) | | | $ | 93,467 | | | $ | 821,806 | |
|
See accompanying notes to Condensed Consolidated Financial StatementsStatements.
Krispy Kreme, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| | | Three Quarters Ended | | Two Quarters Ended |
| | October 3, 2021 (39 weeks) | | September 27, 2020 (39 weeks) | | July 3, 2022 (26 weeks) | | July 4, 2021 (26 weeks) |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (19,126) | | | $ | (36,117) | | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | |
Net income/(loss) | | Net income/(loss) | $ | 4,050 | | | $ | (15,374) | |
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | | Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | |
Depreciation and amortization expense | Depreciation and amortization expense | 74,258 | | | 57,619 | | Depreciation and amortization expense | 55,655 | | | 48,595 | |
Deferred income taxes | Deferred income taxes | 9,168 | | | (4,623) | | Deferred income taxes | (6,866) | | | 7,995 | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 1,700 | | | — | | Loss on extinguishment of debt | — | | | 1,700 | |
Impairment and lease termination charges | Impairment and lease termination charges | 854 | | | 3,287 | | Impairment and lease termination charges | 1,991 | | | 1,126 | |
Loss on disposal of property and equipment | 157 | | | 773 | | |
(Gain)/loss on disposal of property and equipment | | (Gain)/loss on disposal of property and equipment | (499) | | | 148 | |
Gain on sale-leaseback | | Gain on sale-leaseback | (2,374) | | | — | |
Share-based compensation | Share-based compensation | 16,973 | | | 9,236 | | Share-based compensation | 10,493 | | | 10,658 | |
Change in accounts and notes receivable allowances | Change in accounts and notes receivable allowances | 133 | | | 700 | | Change in accounts and notes receivable allowances | 193 | | | 110 | |
Inventory write-off | Inventory write-off | 2,983 | | | 34 | | Inventory write-off | 251 | | | 776 | |
Other | Other | (315) | | | 276 | | Other | (733) | | | (425) | |
Change in operating assets and liabilities, excluding business acquisitions and foreign currency translation adjustments | Change in operating assets and liabilities, excluding business acquisitions and foreign currency translation adjustments | 12,003 | | | (433) | | Change in operating assets and liabilities, excluding business acquisitions and foreign currency translation adjustments | (8,238) | | | 1,536 | |
Net cash provided by operating activities | Net cash provided by operating activities | 98,788 | | | 30,752 | | Net cash provided by operating activities | 53,923 | | | 56,845 | |
CASH FLOWS USED FOR INVESTING ACTIVITIES: | CASH FLOWS USED FOR INVESTING ACTIVITIES: | | | | CASH FLOWS USED FOR INVESTING ACTIVITIES: | | | |
Purchase of property and equipment | Purchase of property and equipment | (83,485) | | | (69,437) | | Purchase of property and equipment | (51,460) | | | (52,842) | |
Proceeds from disposals of assets | Proceeds from disposals of assets | 202 | | | 2,793 | | Proceeds from disposals of assets | 872 | | | 147 | |
Proceeds from sale-leaseback | | Proceeds from sale-leaseback | 3,000 | | | — | |
Acquisition of shops and franchise rights from franchisees, net of cash acquired | Acquisition of shops and franchise rights from franchisees, net of cash acquired | (33,888) | | | (59,658) | | Acquisition of shops and franchise rights from franchisees, net of cash acquired | — | | | (33,888) | |
Principal payments received from loans to franchisees | Principal payments received from loans to franchisees | 67 | | | 519 | | Principal payments received from loans to franchisees | 29 | | | 45 | |
Purchases of held-to-maturity debt securities | — | | | (56) | | |
Disbursement for loan receivable | | Disbursement for loan receivable | (720) | | | — | |
| Maturities of held-to-maturity debt securities | Maturities of held-to-maturity debt securities | 388 | | | 517 | | Maturities of held-to-maturity debt securities | — | | | 277 | |
Net cash used for investing activities | Net cash used for investing activities | (116,716) | | | (125,322) | | Net cash used for investing activities | (48,279) | | | (86,261) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
CASH FLOWS (USED FOR)/FROM FINANCING ACTIVITIES: | | CASH FLOWS (USED FOR)/FROM FINANCING ACTIVITIES: | | | |
Proceeds from the issuance of debt | Proceeds from the issuance of debt | 670,000 | | | 263,097 | | Proceeds from the issuance of debt | 53,000 | | | 540,000 | |
Repayment of long-term debt and lease obligations | Repayment of long-term debt and lease obligations | (1,115,910) | | | (206,966) | | Repayment of long-term debt and lease obligations | (50,179) | | | (541,353) | |
Payment of financing costs | Payment of financing costs | (1,700) | | | — | | Payment of financing costs | — | | | (1,700) | |
Proceeds from structured payables | Proceeds from structured payables | 194,927 | | | 211,892 | | Proceeds from structured payables | 153,097 | | | 140,598 | |
Payments on structured payables | Payments on structured payables | (223,063) | | | (155,951) | | Payments on structured payables | (133,530) | | | (138,100) | |
Payment of contingent consideration related to a business combination | Payment of contingent consideration related to a business combination | — | | | (506) | | Payment of contingent consideration related to a business combination | (900) | | | — | |
Capital contribution by shareholders | 120,532 | | | — | | |
Proceeds from IPO, net of underwriting discounts (excluding unpaid issuance costs) | 527,329 | | | — | | |
Capital contribution by shareholders, net of loans issued | | Capital contribution by shareholders, net of loans issued | (27) | | | 120,932 | |
Payments of issuance costs in connection with IPO | | Payments of issuance costs in connection with IPO | (12,458) | | | — | |
Proceeds from sale of noncontrolling interest in subsidiary | Proceeds from sale of noncontrolling interest in subsidiary | 53,337 | | | 17,592 | | Proceeds from sale of noncontrolling interest in subsidiary | 410 | | | 53,256 | |
Distribution to shareholders | Distribution to shareholders | (42,334) | | | (19) | | Distribution to shareholders | (11,710) | | | (34,364) | |
Payments for repurchase and retirement of common stock | Payments for repurchase and retirement of common stock | (138,501) | | | — | | Payments for repurchase and retirement of common stock | (2,363) | | | (102,698) | |
Distribution to noncontrolling interest | Distribution to noncontrolling interest | (17,257) | | | (6,553) | | Distribution to noncontrolling interest | (9,496) | | | (6,018) | |
Net cash provided by financing activities | 27,360 | | | 122,586 | | |
Net cash (used for)/provided by financing activities | | Net cash (used for)/provided by financing activities | (14,156) | | | 30,553 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,827) | | | 759 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | (4,473) | | | (1,161) | |
Net increase in cash, cash equivalents and restricted cash | 7,605 | | | 28,775 | | |
Net decrease in cash, cash equivalents and restricted cash | | Net decrease in cash, cash equivalents and restricted cash | (12,985) | | | (24) | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 37,483 | | | 35,450 | | Cash, cash equivalents and restricted cash at beginning of period | 39,192 | | | 37,483 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 45,088 | | | $ | 64,225 | | Cash, cash equivalents and restricted cash at end of period | $ | 26,207 | | | $ | 37,459 | |
Supplemental schedule of non-cash investing and financing activities: | Supplemental schedule of non-cash investing and financing activities: | | | | Supplemental schedule of non-cash investing and financing activities: | | | |
Accrual for property and equipment | $ | 3,137 | | | $ | 11,280 | | |
Increase in accrual for property and equipment | | Increase in accrual for property and equipment | $ | 4,499 | | | $ | 1,381 | |
Stock issuance under shareholder notes | Stock issuance under shareholder notes | 446 | | | — | | Stock issuance under shareholder notes | 324 | | | 446 | |
Accrual for distribution to noncontrolling interest | (5,056) | | | — | | |
| Common stock issuance under subscription receivable in connection with initial public offering, net of underwriting discounts and issuance costs | | Common stock issuance under subscription receivable in connection with initial public offering, net of underwriting discounts and issuance costs | — | | | 459,685 | |
Accrual for distribution to shareholders | Accrual for distribution to shareholders | (5,853) | | | — | | Accrual for distribution to shareholders | (5,860) | | | (7,970) | |
Accrual for repurchase and retirement of common stock | Accrual for repurchase and retirement of common stock | (188) | | | — | | Accrual for repurchase and retirement of common stock | — | | | (35,803) | |
Reconciliation of cash, cash equivalents and restricted cash at end of period: | Reconciliation of cash, cash equivalents and restricted cash at end of period: | | Reconciliation of cash, cash equivalents and restricted cash at end of period: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 44,895 | | | $ | 64,154 | | Cash and cash equivalents | $ | 25,796 | | | $ | 37,377 | |
Restricted cash | Restricted cash | 193 | | | 71 | | Restricted cash | 411 | | | 82 | |
Total cash, cash equivalents and restricted cash | Total cash, cash equivalents and restricted cash | $ | 45,088 | | | $ | 64,225 | | Total cash, cash equivalents and restricted cash | $ | 26,207 | | | $ | 37,459 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Krispy Kreme, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollarsdollars in thousands, unless otherwise specified)
Note 1 — Description of Business and Summary of Significant Accounting Policies
Description of Business
Krispy Kreme, Inc. (“KKI”) and its subsidiaries (collectively, the “Company” or “Krispy Kreme”) operatesoperate through itstheir omni-channel business model to provide doughnut experiences and produce doughnuts for Doughnut Shops, Delivered Fresh Daily (“DFD”) outlets, Ecommerce and delivery, and Krispy Kreme branded sweet treats (“Branded Sweet Treat Line”) channels, expanding consumer access to the Krispy Kreme brand.
The Company has 3 reportable operating segments: 1) U.S. and Canada, which includes all Krispy Kreme Company-owned operations in the U.S. and Canada, Insomnia Cookies shops and the Branded Sweet Treat Line; 2) International, which includes all Krispy Kreme Company-owned operations in the United Kingdom,U.K., Ireland, Australia, New Zealand and Mexico; and 3) Market Development, which includes worldwide franchise operations, across the globe, as well as Krispy Kreme Company-owned shops in Japan. Unallocated corporate costs are excluded from the Company’s measurement of segment performance.
Initial Public Offering
The Company’s registration statement on Form S-1 related to its initial public offering (“IPO”) was declared effective on June 30, 2021 and the Company’s common stock began trading on the Nasdaq Global Select Market on July 1, 2021. On July 1, 2021, the Company completed its IPO, in which the Company sold 29.4 million shares of common stock at a price to the public of $17.00 per share. The Company received aggregate net proceeds of $458.8 million after deducting underwriting discounts and commissions of $28.7 million and offering expenses of $12.5 million.
In connection with the IPO, the Company and its affiliates completed the following transactions:
•On June 10, 2021, the Company's wholly owned (excluding certain management equity interests) subsidiary, Krispy Kreme Holdings, Inc. (“KKHI”), entered into a term loan credit agreement, as borrower, which provided for term loans in an initial aggregate principal amount of $500.0 million (the “Term Loan Facility”). On June 17, 2021, KKHI borrowed $500.0 million under the Term Loan Facility, with debt issuance costs of $1.7 million which were included in Interest expense, net on the Condensed Consolidated Statements of Operations during the quarter ended July 4, 2021.The borrowings bore an all-in interest rate of 2.68175%. On June 28, 2021, following the Merger (as defined below), KKI assumed all of the obligations of KKHI as borrower under the Term Loan Facility. On July 7, 2021, the Company repaid in full and terminated the Term Loan Facility with a cash outflow of $500.7 million, which included $0.7 million of accrued interest. The Term Loan Facility would have matured on the earlier of (i) June 10, 2022 and (ii) within four business days following the consummation of the IPO.
•On June 28, 2021, KKHI merged into KKI (the “Merger”). As a result of the Merger, the Company eliminated $107.4 million of noncontrolling interest at KKHI as of the merger date. The management equity interests at KKHI were exchanged for common shares in KKI. Restricted stock units (“RSUs”) and stock options held at KKHI were exchanged for RSUs and stock options held at KKI at a rate of 317.24 KKI shares to 1 KKHI share.
•On June 30, 2021, the Company effected a 1,745-for-1 split of each outstanding share of common stock (the “Stock Split”).All share and per share information has been retroactively adjusted to effect the Stock Split for all periods presented.
In connection with the IPO, the Company used the proceeds from the Term Loan Facility for the following: (1) repay the related party notes payable (including accrued interest of $17.8 million) of $355.0 million during the quarter ended July 4, 2021, (2) redeem certain common stock of $102.7 million held by Krispy Kreme, G.P. (“KK GP”) during the quarter ended July 4, 2021 and (3) pay a pro rata dividend to members of its management who, prior to the Merger, held equity interests in KKHI in an aggregate amount of $42.3 million ($34.4 million of which was paid during the quarter ended July 4, 2021 and $7.9 million of which was paid during the quarter ended October 3, 2021). Additionally, at the beginning of the third quarter of fiscal 2021, the Company paid $20.3 million to repurchase approximately 1.3 million shares of common stock from certain of the Company’s executive officers at the price paid by the underwriters and $15.5 million to repurchase approximately 1.0 million shares of common stock from certain of its executive officers for payment of their withholding taxes with respect to the RSUs vesting or for which vesting was accelerated in connection with the offering.
On August 2, 2021, the underwriters exercised their over-allotment option and purchased an additional 3.5 million shares of common stock at the IPO price less the underwriting discounts and commissions. The net proceeds received on August 2, 2021 were $56.1 million after deducting underwriting discounts and commissions of $3.4 million. This brought total net IPO proceeds to $514.9 million.
Basis of Presentation and Consolidation
The Company operates and reports financial information on a 52 or 53-week year with the fiscal year ending on the Sunday closest to December 31. The data periods contained within fiscal years 20202021 and 20212022 reflect the results of operations for the 53-week period ended January 3, 2021 and the 52-week periodperiods ended January 2, 2022 and January 1, 2023, respectively. The quarters ended OctoberJuly 3, 20212022 and September 27, 2020July 4, 2021 were both 13-week periods.
The unaudited Condensed Consolidated Financial Statements include the accounts of KKI and subsidiaries and have been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these interim financial statements do not include all information and footnotes required under U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of results of operations, balance sheet, cash flows, and shareholders’ equity for the periods presented. All significant intercompany balances and transactions among KKI and subsidiaries have been eliminated in consolidation. Investments in entities over which the Company has the ability to exercise significant influence but which it does not control and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto as of and for the year ended January 3, 2021,2, 2022, included in the IPO Prospectus.Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of January 3, 20212, 2022 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The results of operations for the third quarter and two quarters ended OctoberJuly 3, 20212022 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending January 2, 2022.1, 2023.
Noncontrolling interest in the Company’s Condensed Consolidated Financial Statements represents the interest in subsidiaries held by joint venture partners and employee shareholders. The joint venture partners hold noncontrolling interests in the Company’s consolidated subsidiaries, Awesome Doughnut, LLC (“Awesome Doughnut”) and, W.K.S. Krispy Kreme, LLC (“WKS Krispy Kreme”), and Krispy K Canada, Inc. (“KK Canada”). Employee shareholders hold noncontrolling interests in the consolidated subsidiaries Krispy Kreme Holding UKU.K. Ltd. (“KKUK”), Krispy Kreme Holdings Pty Ltd. (“KK Australia”), Krispy Kreme Mexico S. de R.L. de C.V. (“KK Mexico”) and Insomnia Cookies Holdings, LLC (“Insomnia Cookies”). Since the Company consolidates the financial statements of these subsidiaries, the noncontrolling owners’ share of each subsidiary’s net assets and results of operations are deducted and reported as noncontrolling interest on the Condensed Consolidated Balance Sheets and as net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations and comprehensive income attributable to noncontrolling interest in the Condensed Consolidated Statements of Comprehensive Income/(Loss).
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for the year ended January 3, 20212, 2022 included in the IPO Prospectus.Annual Report on Form 10-K. There have been no material changes to the significant accounting policies during the quarter ended OctoberJuly 3, 2021.
Reclassifications
As previously disclosed in the Quarterly Report on Form 10-Q issued for the second quarter of fiscal 2021, Marketing expenses have been reclassified (formerly presented within Selling, general and administrative expense) to be consistent with the current quarter presentation. This reclassification does not have a significant impact on the reported financial position and does not impact the results of operations or cash flows.2022.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The Company adopted ASU 2019-12 at the beginning of fiscal year 2021, and the adoption had no material impact to the Company’s Condensed Consolidated Financial Statements.
In SeptemberMarch 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. It is effective for all entities as of March 12, 2020 through December 31, 2022. A company may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the effect of the new guidance on its Condensed Consolidated Financial Statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which prescribes the measurement of acquired contract assets and contract liabilities arising from revenue contracts with customers recognized in a business combination. It is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect of the new guidance on its Condensed Consolidated Financial Statements and related disclosures.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires certain disclosures to be made when an entity receives government assistance, including the types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. It is effective for all entities for financial statements issued for annual periods beginning after December 15, 2021. Early application of the amendments is permitted. The Company is currently evaluating the effect of the new guidance on its annual disclosures.
Note 2 — Acquisitions
20212022 Acquisitions
In the quarter ended October 3, 2021,first two quarters of fiscal 2022, there were no acquisitions. The Company acquired 10 franchise shops in Canada subsequent to the quarter ended October 3, 2021; see Note 15, Subsequent Events. 2021 Acquisitions
In the first quarter of fiscal 2021, the Company acquired the business and operating assets of 2 franchisees, collectively consisting of 17 Krispy Kreme shops in the United States. The Company paid total consideration of $38.1 million, consisting of $33.9 million of cash, $0.9 million of consideration payable to the sellers within 12 months of the respective acquisition dates, and $3.3 million settlement of amounts related to pre-existing relationships, to acquire substantially all of the shops’ assets. Consideration payable of $0.9 million was withheld to cover indemnification claims that could arise after closing. Absent any claims, these amounts are payable within 12 months of the respective acquisition dates.
The settlement of pre-existing relationships included in the purchase consideration includes the write-off of accounts and notes receivable, net of deferred revenue, of $0.6 million. It also includes the disposal of the franchise intangible asset related to the 2 franchisees recorded at time of the acquisition of Krispy Kreme by JAB. The cumulative net book value of the franchise intangible assets was $2.7 million at the acquisition dates. The Company accounted for the transactions as business combinations.
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition for the acquisitions above.
| | | | | |
| KK U.S. Shops |
Assets acquired: | |
Cash and cash equivalents | $ | 40 | |
Prepaid expense and other current assets | 474 | |
Property and equipment, net | 3,829 | |
Other intangible assets, net | 23,906 | |
Operating lease right of use asset, net | 19,292 | |
Other assets | 115 | |
Total identified assets acquired | 47,656 | |
Liabilities assumed: | |
Accrued liabilities | (334) | |
Current operating lease liabilities | (2,093) | |
Noncurrent operating lease liabilities | (17,199) | |
Total liabilities assumed | (19,626) | |
Goodwill | 10,036 | |
Purchase consideration, net | $ | 38,066 | |
Transaction costs in 2021 | $ | 1,252 | |
Transaction costs in 2020 | 184 | |
Reportable segment | U.S. and Canada |
During the measurement period, the Company will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments, if applicable, will be applied in the reporting period in which the adjustment amounts are determined. Measurement period changes for the 2021 acquisitions did not have a material impact to the Condensed Consolidated Financial Statements for the quarter endedOn October 3, 2021.
2020 Acquisitions
In the second half of fiscal year 2020,4, 2021, the Company acquired all equity interestsa 60% controlling ownership interest in Krispy Kreme Doughnut Japan Co., Ltd. (“KK Japan”) and the business and operating assets of an additional 8 franchisees10 franchise shops in the United States.Canada (KK Canada). The valuation for the acquisitions requires significant estimates and assumptions. The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for the acquisitions. Measurement period changesadjustments for the 20202021 acquisitions did not have a material impact to the Condensed Consolidated Financial Statements for the quarter and two quarters ended OctoberJuly 3, 2021.2022.
Note 3 — Inventories
The components of Inventories are as follows:
| | | October 3, 2021 | | January 3, 2021 | | July 3, 2022 | | January 2, 2022 |
Raw materials | Raw materials | $ | 15,052 | | | $ | 16,263 | | Raw materials | $ | 18,084 | | | $ | 15,278 | |
Work in progress | Work in progress | 393 | | | 871 | | Work in progress | 816 | | | 700 | |
Finished goods and purchased merchandise | Finished goods and purchased merchandise | 20,696 | | | 21,385 | | Finished goods and purchased merchandise | 28,520 | | | 18,873 | |
Total Inventories | $ | 36,141 | | | $ | 38,519 | | |
Total inventories | | Total inventories | $ | 47,420 | | | $ | 34,851 | |
Note 4 — Goodwill and Other Intangible Assets, net
Goodwill
Changes in the carrying amount of goodwill by reportable segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. and Canada | | International | | Market Development | | Total |
Balance as of January 3, 2021 | $ | 642,704 | | | $ | 290,872 | | | $ | 152,970 | | | $ | 1,086,546 | |
Acquisitions | 27,560 | | | — | | | (17,524) | | | 10,036 | |
Measurement periods adjustments related to fiscal year 2020 acquisitions | 186 | | | — | | | — | | | 186 | |
Foreign currency impact | — | | | (6,854) | | | — | | | (6,854) | |
Balance as of October 3, 2021 | $ | 670,450 | | | $ | 284,018 | | | $ | 135,446 | | | $ | 1,089,914 | |
Acquisitions of franchises result in a reclassification of goodwill between segments. | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. and Canada | | International | | Market Development | | Total |
Balance as of January 2, 2022 | $ | 688,048 | | | $ | 283,342 | | | $ | 133,932 | | | $ | 1,105,322 | |
| | | | | | | |
| | | | | | | |
Foreign currency impact | (307) | | | (21,816) | | | — | | | (22,123) | |
Balance as of July 3, 2022 | $ | 687,741 | | | $ | 261,526 | | | $ | 133,932 | | | $ | 1,083,199 | |
Other intangible assetsIntangible Assets, net
Other intangible assets consist of the following:
| | | October 3, 2021 | | January 3, 2021 | | July 3, 2022 | | January 2, 2022 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
Intangible assets with indefinite lives | Intangible assets with indefinite lives | | | | | | | | | | | | Intangible assets with indefinite lives | | | | | | | | | | | |
Trade name | Trade name | $ | 657,900 | | | $ | — | | | $ | 657,900 | | | $ | 657,900 | | | $ | — | | | $ | 657,900 | | Trade name | $ | 657,900 | | | $ | — | | | $ | 657,900 | | | $ | 657,900 | | | $ | — | | | $ | 657,900 | |
Intangible assets with definite lives | Intangible assets with definite lives | | Intangible assets with definite lives | |
Franchise agreements | Franchise agreements | 32,961 | | | (8,090) | | | 24,871 | | | 36,254 | | | (7,519) | | | 28,735 | | Franchise agreements | 32,545 | | | (9,143) | | | 23,402 | | | 32,545 | | | (8,369) | | | 24,176 | |
Customer relationships | Customer relationships | 15,000 | | | (4,467) | | | 10,533 | | | 15,000 | | | (3,819) | | | 11,181 | | Customer relationships | 15,000 | | | (5,116) | | | 9,884 | | | 15,000 | | | (4,684) | | | 10,316 | |
Reacquired franchise rights | Reacquired franchise rights | 377,836 | | | (77,700) | | | 300,136 | | | 358,095 | | | (59,432) | | | 298,663 | | Reacquired franchise rights | 370,249 | | | (92,116) | | | 278,133 | | | 384,305 | | | (84,177) | | | 300,128 | |
Website development costs | Website development costs | 6,500 | | | (6,500) | | | — | | | 6,500 | | | (4,965) | | | 1,535 | | Website development costs | 6,500 | | | (6,500) | | | — | | | 6,500 | | | (6,500) | | | — | |
Total intangible assets with definite lives | Total intangible assets with definite lives | 432,297 | | | (96,757) | | | 335,540 | | | 415,849 | | | (75,735) | | | 340,114 | | Total intangible assets with definite lives | 424,294 | | | (112,875) | | | 311,419 | | | 438,350 | | | (103,730) | | | 334,620 | |
Total intangible assets | Total intangible assets | $ | 1,090,197 | | | $ | (96,757) | | | $ | 993,440 | | | $ | 1,073,749 | | | $ | (75,735) | | | $ | 998,014 | | Total intangible assets | $ | 1,082,194 | | | $ | (112,875) | | | $ | 969,319 | | | $ | 1,096,250 | | | $ | (103,730) | | | $ | 992,520 | |
Amortization expense related to intangible assets included in depreciation and amortization expense was $7.5$7.0 million and $22.6$14.2 million for the quarter and threetwo quarters ended OctoberJuly 3, 2021,2022, respectively, and $6.6$7.6 million and $19.1$15.1 million for the quarter and threetwo quarters ended September 27, 2020,July 4, 2021, respectively.
Note 5 — Leases
The Company included the following amounts related to operating and finance lease assets and liabilities within the Condensed Consolidated Balance Sheets:
| | | As of | | As of |
| | | October 3, 2021 | | January 3, 2021 | | | July 3, 2022 | | January 2, 2022 |
Assets | Assets | Classification | | | | Assets | Classification | | | |
Operating lease | Operating lease | Operating lease right of use asset, net | $ | 414,612 | | | $ | 399,688 | | Operating lease | Operating lease right of use asset, net | $ | 419,211 | | | $ | 435,168 | |
Finance lease | Finance lease | Property and equipment, net | 23,499 | | | 23,556 | | Finance lease | Property and equipment, net | 22,989 | | | 19,298 | |
Total leased assets | Total leased assets | | $ | 438,111 | | | $ | 423,244 | | Total leased assets | $ | 442,200 | | | $ | 454,466 | |
Liabilities | Liabilities | | | | | Liabilities | | | | |
Current | Current | | | Current | | |
Operating lease | Operating lease | Current operating lease liabilities | $ | 42,637 | | | $ | 45,675 | | Operating lease | Current operating lease liabilities | $ | 45,936 | | | $ | 50,359 | |
Finance lease | Finance lease | Current portion of long-term debt | 3,608 | | | 6,245 | | Finance lease | Current portion of long-term debt | 4,844 | | | 1,583 | |
Noncurrent | Noncurrent | | | Noncurrent | | |
Operating lease | Operating lease | Noncurrent operating lease liabilities | 397,640 | | | 376,099 | | Operating lease | Noncurrent operating lease liabilities | 407,141 | | | 415,208 | |
Finance lease | Finance lease | Long-term debt, less current portion | 21,906 | | | 19,979 | | Finance lease | Long-term debt, less current portion | 23,303 | | | 22,890 | |
Total leased liabilities | Total leased liabilities | | $ | 465,791 | | | $ | 447,998 | | Total leased liabilities | $ | 481,224 | | | $ | 490,040 | |
Lease costs were as follows:
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Lease cost | Lease cost | Classification | | | | | | | | Lease cost | Classification | | | | | | | |
Operating lease cost | Operating lease cost | Selling, general and administrative expense | $ | 648 | | | $ | 752 | | | $ | 1,967 | | | $ | 2,325 | | Operating lease cost | Selling, general and administrative expense | $ | 413 | | | $ | 609 | | | $ | 977 | | | $ | 1,319 | |
Operating lease cost | Operating lease cost | Operating expenses | 21,201 | | | 17,149 | | | 62,910 | | | 50,748 | | Operating lease cost | Operating expenses | 21,774 | | | 21,368 | | | 43,657 | | | 41,706 | |
Short-term lease cost | Short-term lease cost | Operating expenses | 233 | | | 693 | | | 1,797 | | | 2,122 | | Short-term lease cost | Operating expenses | 1,241 | | | 792 | | | 2,286 | | | 1,564 | |
Variable lease costs | Variable lease costs | Operating expenses | 4,015 | | | 2,497 | | | 11,309 | | | 6,385 | | Variable lease costs | Operating expenses | 6,328 | | | 4,218 | | | 11,335 | | | 7,297 | |
Sublease income | Sublease income | Royalties and other revenues | (108) | | | (140) | | | (285) | | | (380) | | Sublease income | Royalties and other revenues | (71) | | | (97) | | | (140) | | | (177) | |
Finance lease cost: | Finance lease cost: | | | | | | Finance lease cost: | | | | | |
Amortization of right of use assets | Amortization of right of use assets | Depreciation and amortization expense | 727 | | | 586 | | | 2,375 | | | 1,917 | | Amortization of right of use assets | Depreciation and amortization expense | $ | 1,359 | | | $ | 850 | | | $ | 1,943 | | | $ | 1,648 | |
Interest on lease liabilities | Interest on lease liabilities | Interest expense, net | $ | 466 | | | $ | 484 | | | $ | 1,540 | | | $ | 1,545 | | Interest on lease liabilities | Interest expense, net | 496 | | | 481 | | | 941 | | | 1,074 | |
Supplemental disclosures of cash flow information related to leases were as follows:
| | | Three Quarters Ended | | Two Quarters Ended |
| | October 3, 2021 | | September 27, 2020 | | July 3, 2022 | | July 4, 2021 |
Other information | Other information | | | | Other information | | | |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 67,129 | | | $ | 54,031 | | |
Operating cash flows from finance leases | 1,458 | | | 1,452 | | |
Financing cash flows from finance leases | 2,512 | | | 2,619 | | |
Operating cash flows for operating leases | | Operating cash flows for operating leases | $ | 51,147 | | | $ | 45,889 | |
Operating cash flows for finance leases | | Operating cash flows for finance leases | 950 | | | 984 | |
Financing cash flows for finance leases | | Financing cash flows for finance leases | 1,679 | | | 1,705 | |
Right-of-use assets obtained in exchange for new lease liabilities: | Right-of-use assets obtained in exchange for new lease liabilities: | | Right-of-use assets obtained in exchange for new lease liabilities: | |
Operating leases | Operating leases | 48,770 | | | 33,427 | | Operating leases | $ | 19,682 | | | $ | 39,473 | |
Finance leases | Finance leases | $ | 1,788 | | | $ | 6,827 | | Finance leases | 455 | | | 1,788 | |
The Company did not record anyrecognized $1.4 million of lease termination costscharges in the quarter and threetwo quarters ended OctoberJuly 3, 2021. Lease2022, related to the decision to exit 6 Krispy Kreme shops in the U.S. later in fiscal 2022. There were no lease termination charges included in Other (income)/expenses, net were $1.6 million and $3.3 million in the quarter and threetwo quarters ended September 27, 2020, respectively.July 4, 2021.
In March 2022, the Company completed a sale-leaseback transaction whereby it disposed of the land at 1 real estate property for proceeds of $3.0 million. The Company subsequently leased back the property, which is accounted for as an operating lease. The Company recognized a gain on sale of $2.6 million, which is included in Other expenses/(income), net on the Condensed Consolidated Statement of Operations for the two quarters ended July 3, 2022. There were no sale-leaseback transactions completed in the two quarters ended July 4, 2021.
Note 6 — Fair Value Measurements
The following table presents assets and liabilities that are measured at fair value on a recurring basis as of OctoberJuly 3, 20212022 and January 3, 2021:2, 2022:
| | | October 3, 2021 | | July 3, 2022 | |
| | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | |
Assets: | Assets: | | | | | | Assets: | | | | |
401(k) mirror plan assets | 401(k) mirror plan assets | $ | 215 | | | $ | — | | | $ | — | | 401(k) mirror plan assets | $ | 7 | | | $ | — | | |
Foreign currency derivatives | — | | | 238 | | | — | | |
Interest rate derivatives | | Interest rate derivatives | — | | | 8,141 | | |
Commodity derivatives | Commodity derivatives | — | | | 1,776 | | | — | | Commodity derivatives | — | | | 2,159 | | |
Total Assets | Total Assets | $ | 215 | | | $ | 2,014 | | | $ | — | | Total Assets | $ | 7 | | | $ | 10,300 | | |
Liabilities: | Liabilities: | | | | | | Liabilities: | | | | |
Interest rate derivatives | — | | | 22,638 | | | — | | |
Foreign currency derivatives | | Foreign currency derivatives | $ | — | | | $ | 334 | | |
Total Liabilities | Total Liabilities | $ | — | | | $ | 22,638 | | | $ | — | | Total Liabilities | $ | — | | | $ | 334 | | |
| | | January 3, 2021 | | January 2, 2022 | |
| | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | |
Assets: | Assets: | | | | | | Assets: | | | | |
401(k) mirror plan assets | 401(k) mirror plan assets | $ | 237 | | | $ | — | | | $ | — | | 401(k) mirror plan assets | $ | 111 | | | $ | — | | |
Foreign currency derivatives | — | | | 131 | | | — | | |
| Commodity derivatives | Commodity derivatives | — | | | 420 | | | — | | Commodity derivatives | — | | | 1,486 | | |
Total Assets | Total Assets | $ | 237 | | | $ | 551 | | | $ | — | | Total Assets | $ | 111 | | | $ | 1,486 | | |
Liabilities: | Liabilities: | | | | | | Liabilities: | | | | |
Foreign currency derivatives | | Foreign currency derivatives | $ | — | | | $ | 80 | | |
Interest rate derivatives | Interest rate derivatives | — | | | 32,813 | | | — | | Interest rate derivatives | — | | | 14,667 | | |
Total Liabilities | Total Liabilities | $ | — | | | $ | 32,813 | | | $ | — | | Total Liabilities | $ | — | | | $ | 14,747 | | |
There were no assets nor liabilities measured using Level 3 inputs and no transfers of financial assets or liabilities among the levels within the fair value hierarchy during the quarter ended OctoberJuly 3, 20212022 and fiscal year ended January 3, 2021.2, 2022. The Company’s derivatives are valued using discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and currency rates.
Note 7 — Derivative Instruments
Commodity Price Risk
The Company uses forward contracts to protect against the effects of commodity price fluctuations in the cost of ingredients of its products, of which flour, sugar and shortening are the most significant, and the cost of gasoline used by its delivery vehicles. Management has not designated these forward contracts as hedges. As of Octoberboth July 3, 20212022 and January 3, 2021,2, 2022, the total notional amount of commodity derivatives was 1.9 million and 3.0 million gallons of gasoline, respectively.gasoline. They were scheduled to mature between OctoberJuly 4, 20212022 and December 1, 2023 and January 3, 2022 and March 31, 2023, respectively. As of July 3, 2022 and January 4, 2021 and December 1,2, 2022, respectively. As of October 3, 2021 and January 3, 2021, the Company recorded an asset of $1.8$2.2 million and $0.4$1.5 million, respectively, related to the fair market values of its commodity derivatives. The settlement of commodity derivative contracts is reported in the Condensed Consolidated Statements of Cash Flows as a cash flow from operating activities.
Interest Rate Risk
The Company is exposeduses interest rate swaps to manage its exposure to interest rate risk related tovolatility from its borrowing obligations. From time to time, the Company enters into interest rate swap arrangements to manage the risk.debt arrangements. Management has designated the swap agreements as cash flow hedges and recognized the changes in the fair value of these swaps in other comprehensive income. As of OctoberJuly 3, 20212022 and January 3, 2021,2, 2022, the Company has recorded assets of $8.1 million and liabilities of $22.6 million and $32.8$14.7 million, respectively, related to the fair market values of its interest rate derivatives. The cash flows associated with the interest rate swaps are reflected in operating activities in the Condensed Consolidated Statements of Cash Flows, which is consistent with the classification as operating activities of the interest payments on the term loan.
Foreign Currency Exchange Rate Risk
The Company is exposed to foreign currency risk primarily from its investments in consolidated subsidiaries that operate in Canada, the United Kingdom,U.K., Ireland, Australia, New Zealand, Mexico and Japan. In order to mitigate the impact of foreign exchange fluctuations on commercial and financial transactions with these subsidiaries, the Company enters into foreign exchange forward contracts. Management has not designated these forward contracts as hedges. As of OctoberJuly 3, 20212022 and January 3, 2021,2, 2022, the total notional amount of foreign exchange derivatives was $31.3$54.1 million and $26.7$51.8 million, respectively. They were scheduled to mature in July 2022 and between October 2021January 2022 and November 2021, and in January 2021,February 2022, respectively. The Company recorded an asseta liability of $0.2$0.3 million and $0.1 million as of OctoberJuly 3, 20212022 and January 3, 2021,2, 2022, respectively, related to the fair market values of its foreign exchange derivatives.
Quantitative Summary of Derivative Positions and Their Effect on Results of Operations
The following tables present the fair values of derivative instruments included in the Condensed Consolidated Balance Sheets as of OctoberJuly 3, 20212022 and January 3, 2021,2, 2022, for derivatives not designated as hedging instruments and derivatives designated as hedging instruments, respectively. The Company only has cash flow hedges that are designated as hedging instruments.
| | | Derivatives Fair Value | | | Derivatives Fair Value | |
Derivatives Not Designated as Hedging Instruments | Derivatives Not Designated as Hedging Instruments | October 3, 2021 | | January 3, 2021 | | Balance Sheet Location | Derivatives Not Designated as Hedging Instruments | July 3, 2022 | | January 2, 2022 | | Balance Sheet Location |
| Commodity derivatives | | Commodity derivatives | $ | 2,159 | | | $ | 1,486 | | | Prepaid expense and other current assets |
Total Assets | | Total Assets | $ | 2,159 | | | $ | 1,486 | | |
Foreign currency derivatives | Foreign currency derivatives | $ | 238 | | | $ | 131 | | | Prepaid expense and other current assets | Foreign currency derivatives | $ | 334 | | | $ | 80 | | | Accrued liabilities |
Commodity derivatives | 1,776 | | | 420 | | | Prepaid expense and other current assets | |
| $ | 2,014 | | | $ | 551 | | | |
| Total Liabilities | | Total Liabilities | $ | 334 | | | $ | 80 | | |
| | | | | | | | | | | | | | | | | |
| Derivatives Fair Value | | |
Derivatives Designated as Hedging Instruments | October 3, 2021 | | January 3, 2021 | | Balance Sheet Location |
Interest rate derivatives | $ | 10,046 | | | $ | 10,235 | | | Accrued liabilities |
Interest rate derivatives | 12,592 | | | 22,578 | | | Other long-term obligations and deferred credits |
| $ | 22,638 | | | $ | 32,813 | | | |
| | | | | | | | | | | | | | | | | |
| Derivatives Fair Value | | |
Derivatives Designated as Hedging Instruments | July 3, 2022 | | January 2, 2022 | | Balance Sheet Location |
Interest rate derivatives (current) | $ | 5,358 | | | $ | — | | | Prepaid expense and other current assets |
Interest rate derivatives (noncurrent) | 2,783 | | | — | | | Other assets |
Total Assets | $ | 8,141 | | | $ | — | | | |
Interest rate derivatives (current) | $ | — | | | $ | 8,535 | | | Accrued liabilities |
Interest rate derivatives (noncurrent) | — | | | 6,132 | | | Other long-term obligations and deferred credits |
Total Liabilities | $ | — | | | $ | 14,667 | | | |
The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the quarter and threetwo quarters ended OctoberJuly 3, 20212022 and September 27, 2020July 4, 2021 is as follows:
| | | Derivative Gain/(Loss) Recognized in Income for the Quarter Ended | | Derivative Gain/(Loss) Recognized in Income for the Three Quarters Ended | | | | | Derivative Gain/(Loss) Recognized in Income for the Quarter Ended | | Derivative Gain/(Loss) Recognized in Income for the Two Quarters Ended | | |
Derivatives Designated as Hedging Instruments | Derivatives Designated as Hedging Instruments | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | Location of Derivative Gain/(Loss) Recognized in Income | | Derivatives Designated as Hedging Instruments | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 | | Location of Derivative Gain/(Loss) Recognized in Income |
Loss on interest rate derivatives | Loss on interest rate derivatives | $ | (2,613) | | | $ | (2,468) | | | $ | (7,704) | | | $ | (5,125) | | | Interest expense, net | | Loss on interest rate derivatives | $ | (1,861) | | | $ | (2,561) | | | $ | (4,371) | | | $ | (5,091) | | | Interest expense, net |
| | $ | (2,613) | | | $ | (2,468) | | | $ | (7,704) | | | $ | (5,125) | | | | | | $ | (1,861) | | | $ | (2,561) | | | $ | (4,371) | | | $ | (5,091) | | | |
| | | Derivative Gain/(Loss) Recognized in Income for the Quarter Ended | | Derivative Gain/(Loss) Recognized in Income for the Three Quarters Ended | | | | Derivative Gain/(Loss) Recognized in Income for the Quarter Ended | | Derivative Gain/(Loss) Recognized in Income for the Two Quarters Ended | | |
Derivatives Not Designated as Hedging Instruments | Derivatives Not Designated as Hedging Instruments | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | Location of Derivative Gain/(Loss) Recognized in Income | Derivatives Not Designated as Hedging Instruments | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 | | Location of Derivative Gain/(Loss) Recognized in Income |
Gain/(loss) on foreign currency derivatives | Gain/(loss) on foreign currency derivatives | $ | 632 | | | $ | (258) | | | $ | 256 | | | $ | (73) | | | Other non-operating expense/(income), net | Gain/(loss) on foreign currency derivatives | $ | 108 | | | $ | 235 | | | $ | (255) | | | $ | (375) | | | Other non-operating expense/(income), net |
(Loss)/gain on commodity derivatives | (Loss)/gain on commodity derivatives | (114) | | | 530 | | | 1,356 | | | (345) | | | Other non-operating expense/(income), net | (Loss)/gain on commodity derivatives | (188) | | | 477 | | | 672 | | | 1,470 | | | Other non-operating expense/(income), net |
| | $ | 518 | | | $ | 272 | | | $ | 1,612 | | | $ | (418) | | | | | $ | (80) | | | $ | 712 | | | $ | 417 | | | $ | 1,095 | | | |
Note 8 — Share-based Compensation
Restricted Stock Units (“RSUs”)
The Company and certain of its subsidiaries issue time-vested RSUs under their respective executive ownership plans and long-term incentive plans.
RSU activity under the Company’s various plans during the periods presented is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-vested shares outstanding at January 3, 2021 | | Granted | | RSU Dividend Equivalents(1) | | Vested | | Forfeited | | Non-vested shares outstanding at October 3, 2021 |
KKI | | | | | | | | | | | |
RSUs | 4,649,551 | | | 3,283,065 | | | 1,018,629 | | | 2,417,395 | | | 326,975 | | | 6,206,875 | |
Weighted Average Grant Date Fair Value | $ | 11.37 | | | 18.13 | | | — | | | 9.42 | | | 13.72 | | | $ | 13.71 | |
KKUK | | | | | | | | | | | |
RSUs | 404,568 | | | — | | | — | | | 351,500 | | | — | | | 53,068 | |
Weighted Average Grant Date Fair Value | $ | 12.45 | | | — | | | — | | | 12.22 | | | — | | | $ | 13.98 | |
Insomnia Cookies | | | | | | | | | | | |
RSUs | 29,279 | | | 15,173 | | | — | | | — | | | 9,224 | | | 35,228 | |
Weighted Average Grant Date Fair Value | $ | 68.87 | | | 97.77 | | | — | | | — | | | 75.68 | | | $ | 79.54 | |
KK Australia | | | | | | | | | | | |
RSUs | 1,844,241 | | | 78,534 | | | — | | | — | | | 26,042 | | | 1,896,733 | |
Weighted Average Grant Date Fair Value | $ | 1.48 | | | 1.45 | | | — | | | — | | | 1.36 | | | $ | 1.48 | |
KK Mexico | | | | | | | | | | | |
RSUs | 25,055 | | | 32,963 | | | — | | | — | | | — | | | 58,018 | |
Weighted Average Grant Date Fair Value | $ | 29.21 | | | 35.64 | | | — | | | — | | | — | | | $ | 32.86 | |
1.For KKI RSU holders that did not vest upon IPO, dividend equivalent shares were granted after the IPO at a weighted average grant date fair value of zero. The vesting terms for the dividend equivalent shares are the same as the underlying RSUs. The KKI shares presented have been retroactively adjusted to give effect to the Stock Split and the Merger. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | Non-vested shares outstanding at January 2, 2022 | | Granted | | | | Vested | | Forfeited | | Non-vested shares outstanding at July 3, 2022 |
KKI | | | | | | | | | | | |
RSUs | 5,866 | | | 941 | | | | | 267 | | | 318 | | | 6,222 | |
Weighted Average Grant Date Fair Value | $ | 13.78 | | | 14.45 | | | | | 9.35 | | | 14.66 | | | $ | 14.03 | |
KKUK | | | | | | | | | | | |
RSUs | 60 | | | — | | | | | — | | | — | | | 60 | |
Weighted Average Grant Date Fair Value | $ | 15.77 | | | — | | | | | — | | | — | | | $ | 15.77 | |
Insomnia Cookies | | | | | | | | | | | |
RSUs | 33 | | | 10 | | | | | — | | | 4 | | | 40 | |
Weighted Average Grant Date Fair Value | $ | 79.66 | | | 169.70 | | | | | — | | | 100.80 | | | $ | 100.40 | |
KK Australia | | | | | | | | | | | |
RSUs | 1,897 | | | 21 | | | | | — | | | — | | | 1,918 | |
Weighted Average Grant Date Fair Value | $ | 1.48 | | | 1.73 | | | | | — | | | — | | | $ | 1.49 | |
KK Mexico | | | | | | | | | | | |
RSUs | 58 | | | 2 | | | | | — | | | — | | | 60 | |
Weighted Average Grant Date Fair Value | $ | 32.86 | | | 40.14 | | | | | — | | | — | | | $ | 33.08 | |
The Company recorded total non-cash compensation expense related to RSUs under the plans of $5.1$4.7 million and $14.9$8.9 million for the quarter and threetwo quarters ended OctoberJuly 3, 2021,2022, respectively, and $3.1$7.4 million and $9.3$9.8 million for the quarter and threetwo quarters ended September 27, 2020,July 4, 2021, respectively.
The unrecognized compensation cost related to the unvested RSUs and the weighted-average period over which such cost is expected to be recognized are as follows:
| | | | | | | | | | | |
| As of OctoberJuly 3, 20212022 |
| Unrecognized Compensation Cost | | Recognized Over a Weighted-Average Period of |
KKI | $ | 64,50058,025 | | | 3.33.2 years |
KKUK | 278291 | | | 1.61.5 years |
Insomnia Cookies | 1,9832,847 | | | 3.33.2 years |
KK Australia | 755305 | | | 1.30.6 years |
KK Mexico | $ | 1,7601,498 | | | 4.23.5 years |
The estimated fair value of restricted stock is calculated using a market approach (i.e., market multiple is used for the KKUK and Insomnia Cookies plans and an agreed-upon EBITDA buyout multiple is used for KK Australia and KK Mexico plans).
Time-Vested Stock Options
KKI issues time-vested stock options under its Omnibus Incentive Plan. The fair value of time-vested stock options was estimated on the date of grant using the Black-Scholes option pricing model.
A summary of the status of the time-vested stock options as of January 3, 20212, 2022 and changes during the first two quarters of fiscal year 20212022 is presented below:
| | | Share Options Outstanding At | | Share Options Outstanding At | | Share Options Outstanding At | | Share Options Outstanding At |
| January 3, 2021 | | Granted | | Exercised | | Forfeited or Expired | | October 3, 2021 | |
(in thousands, except per share amounts) | | (in thousands, except per share amounts) | January 2, 2022 | | Granted | | Exercised | | Forfeited or Expired | | July 3, 2022 |
KKI | KKI | | | | | | | | | | KKI | | | | | | | | | |
Options | Options | — | | | 2,817,398 | | | — | | | — | | | 2,817,398 | Options | 2,817 | | | — | | | — | | | — | | | 2,817 |
Weighted Average Grant Date Fair Value | Weighted Average Grant Date Fair Value | $ | — | | | $ | 6.10 | | | $ | — | | | $ | — | | | $ | 6.10 | Weighted Average Grant Date Fair Value | $ | 6.10 | | | — | | | — | | | — | | | $ | 6.10 |
Weighted Average Exercise Price | Weighted Average Exercise Price | $ | — | | | $ | 14.61 | | | $ | — | | | $ | — | | | $ | 14.61 | Weighted Average Exercise Price | $ | 14.61 | | | — | | | — | | | — | | | $ | 14.61 |
The Company recorded total non-cash compensation expense related to the time-vested stock options of $1.2 million and $2.1$0.8 million and $1.6 million for the quarter and threetwo quarters ended OctoberJuly 3, 2021, respectively.2022, respectively, and $0.9 million for the quarter and two quarters ended July 4, 2021.
The unrecognized compensation cost related to the unvested stock options and the weighted-average period over which such cost is expected to be recognized are as follows:
| | | | | | | | | | | |
| As of OctoberJuly 3, 20212022 |
| Unrecognized Compensation Cost | | Recognized Over a Weighted-Average Period of |
KKI | $ | 15,07112,235 | | | 3.33.8 years |
No time-vested stock options under the KKI plan vested nor were exercised during the fiscal periods presented.
Note 9 — Income Taxes
For interim tax reporting, the Company estimates a worldwide annual effective tax rate and applies that rate to the year-to-date ordinary income/(loss). The tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
The Company’s effective income tax rates were 38.43%(188.73)% and (76.11)57.02% for the quarter and two quarters ended July 3, 2022, respectively, and (195.60)% and (222.58)% for the quarter and threetwo quarters ended October 3,July 4, 2021, respectively and (3.84)% and 6.26% for the quarter and three quarters ended September 27, 2020, respectively. The Company’s effective income tax rate for the quarter and threetwo quarters ended OctoberJuly 3, 2022 differed from the respective statutory rates primarily due to disallowed executive compensation expense, the mix of income and taxes attributable to foreign jurisdictions, the recognition of previously unrecognized tax benefits, and a discrete tax benefit related to a legal accrual discussed in Note 10, Commitments and Contingencies. The Company’s effective income tax rate for the quarter and two quarters ended July 4, 2021 differed from the respective statutory rates primarily due to the revaluation of U.K. deferred taxes as a result of the increase in the corporate tax rate from 19.0% to 25.0% beginning in 2023 and disallowed executive compensation expense in connection with the IPO. The Company’s effective income tax rates were also impacted by the mix of income and taxes attributable to foreign jurisdictions. Note 10 — Commitments and Contingencies
Pending Litigation
K2 Asia litigation
On April 7, 2009, a Cayman Islands corporation, K2 Asia Ventures and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against the Company, the Company’s franchisee in the Philippines and other persons associated with the franchisee. The suit alleges that the Company and the other defendants conspired to deprive the plaintiffs of claimed “exclusive rights” to negotiate franchise and development agreements with prospective franchisees in the Philippines and sought at least $3.0 million. The case was dismissed by the North Carolina Superior Court on November 9, 2018. As of August 10, 2021, all levels of appellate review were exhausted and denied. No loss has been incurred with respect to this matter, and accordingly no liability related to it has been reflected in the accompanying Condensed Consolidated Financial Statements.
Insomnia Cookies litigation related to employee wages
Insomnia Cookies is currently a party to a class action lawsuit alleging violations of unfair competition, unpaid minimum wages, unpaid overtime, meal and rest period violations and unpaid premiums, failure to reimburse for business expenses, untimely paid wages, and violation of the California Private Attorneys General Act. Insomnia Cookies vigorously disputes these claims. On March 11, 2021, the parties participated in a mediation and reached a class wide settlement and release of claims in principle for $0.4 million. The parties have executed a memorandum of understanding memorializing the key settlement terms and are in the process of finalizing long form settlement documents and seeking preliminary court approval of the settlement.
TSW Food,Foods, LLC litigation
On November 13, 2020, TSW Foods, LLC (“TSW”), a reseller of certain Krispy Kreme packaged products, filed a demand for arbitration and statement of claim alleging Anticipatory Repudiation of the Master Reseller Agreement, Breach of the Master Reseller Agreement, and Breach of the Implied Covenant of Good Faith and Fair Dealing. The Company intends to vigorously defend against TSW’s claims and prosecute its counterclaims. The parties have scheduled a voluntary, non-binding mediation for November 11, 2021. At this timeOn July 14, 2022, the Company is unable to predictand TSW negotiated a net settlement of approximately $3.3 million, for which the outcome of this matter,related liability has been reflected in the potential loss or range of loss, if any, associated with the resolution of this matter or any potential effect it may have on the Company or its operations.accompanying Condensed Consolidated Financial Statements.
Other Legal Matters
The Company also is engaged in various legal proceedings arising in the normal course of business. The Company maintains insurance policies against certain kinds of such claims and suits, including insurance policies for workers’ compensation and personal injury, all of which are subject to deductibles. While the ultimate outcome of these matters could differ from management’s expectations, management currently does not believe their resolution will have a material adverse effect on the Company’s Condensed Consolidated Financial Statements.
Other Commitments and Contingencies
One of the Company’s primary banks issued letters of credit on its behalf totaling $8.5$10.3 million and $14.0$8.5 million as of OctoberJuly 3, 20212022 and January 3, 2021,2, 2022, respectively, a majority of which secure the Company’s reimbursement obligations to insurers under its self-insurance arrangements.
Note 11 — Related Party Transactions
As of OctoberJuly 3, 20212022 and January 3, 2021,2, 2022, the Company had an equity ownership in 2 franchisees, KremeWorks USA, LLC (20% ownership) and KremeWorks Canada, L.P. (25% ownership), with an aggregate carrying value of $0.7 million and $0.9$1.1 million as of Octoberboth July 3, 20212022 and January 3, 2021, respectively. Revenues from sales of ingredients and equipment to these franchisees were $1.9 million and $5.7 million for the quarter and three quarters ended October 3, 2021, respectively, and $1.5 million and $4.9 million for the quarter and three quarters ended September 27, 2020, respectively. Royalty revenues from these franchisees were $0.3 million and $1.0 million for the quarter and three quarters ended October 3, 2021, respectively, and $0.3 million and $0.9 million for the quarter and three quarters ended September 27, 2020. Trade receivables from these franchisees are included in Accounts receivable, net on the Condensed Consolidated Balance Sheets, which were $0.4 million and $0.4 million as of October 3, 2021 and January 3, 2021, respectively.
Keurig Dr Pepper Inc. (“KDP”), an affiliated company of JAB, licenses the Krispy Kreme trademark for the Company in the manufacturing of portion packs for the Keurig brewing system. KDP also sells beverage concentrates and packaged beverages to Krispy Kreme for resale through Krispy Kreme’s shops. Licensing revenues from KDP were $0.4 million and $1.4 million for the quarter and three quarters ended October 3, 2021, respectively, and $0.5 million and $1.3 million for the quarter and three quarters ended September 27, 2020, respectively.
The Company had service agreements with BDT Capital Partners, LLC (“BDT”), a minority investor in KKI, to provide advisory services to the Company, including valuation services related to certain acquisitions. The Company recognized expenses of $0.6 million related to the service agreements with BDT for the three quarters ended October 3, 2021, and $0.9 million and $1.6 million for the quarter and three quarters ended September 27, 2020, respectively. No related expenses were incurred for the quarter ended October 3, 2021.
In connection with valuation assistance provided by BDT in preparation for the IPO, the Company incurred costs of $6.3 million that are capitalized in additional paid-in capital for the three quarters ended October 3, 2021. No related costs were incurred for the quarter ended October 3, 2021, nor for the quarter and three quarters ended September 27, 2020.
In connection with tax sharing arrangements with JAB and other JAB portfolio companies, the Company had a $7.4 million related party receivable from JAB and a $15.3 million related party payable to the other JAB portfolio companies offset by a $15.3 million income tax receivable due from taxing authorities as of January 3, 2021. No related party receivable nor related party payable was due to JAB or other JAB portfolio companies as of October 3, 2021. The related party receivable amounts were presented within Accounts receivable, net on the Condensed Consolidated Balance Sheet as of January 3, 2021.2, 2022.
The Company was party to a senior unsecured note agreement (the “original agreement”with Krispy Kreme, G.P. (“KK GP”) with KK GP. In the original agreement, which was outstanding prior to fiscal year ended December 30, 2018, thefor an aggregate principal amount wasof $283.1 million. In April 2019, the Company entered into an additional unsecured note with KK GP for $54.0 million (the “additional agreement”(such notes together, the “Related Party Notes”). As of January 3, 2021, the outstanding amount of principal and interest was $344.6 million. The note wasRelated Party Notes were paid off in full during the second quarter ended July 4,of fiscal 2021. The interest expense was $10.4 million for the three quarters ended October 3, 2021, and $5.6$4.8 million and $16.7$10.4 million for the quarter and threetwo quarters ended September 27, 2020.July 4, 2021. No interest expense was incurred for the quarter and two quarters ended OctoberJuly 3, 2021.
The Company granted loans to employees of KKI, KKUK, KK Australia, KK Mexico and Insomnia Cookies for the purchase of shares in those subsidiaries. The loan balance was $4.2 million and $18.7 million as of October 3, 2021 and January 3, 2021, respectively, and it is presented as a reduction from Shareholders’ equity on the Condensed Consolidated Balance Sheet.2022.
Note 12 — Revenue Recognition
Disaggregation of Revenues
Revenues are disaggregated as follows: | | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Company Shops, DFD and Branded Sweet Treat Line | Company Shops, DFD and Branded Sweet Treat Line | $ | 322,410 | | | $ | 265,554 | | | $ | 952,680 | | | $ | 714,504 | | Company Shops, DFD and Branded Sweet Treat Line | $ | 354,551 | | | $ | 329,775 | | | $ | 706,385 | | | $ | 630,270 | |
Mix and equipment revenue from franchisees | Mix and equipment revenue from franchisees | 11,914 | | | 15,763 | | | 36,452 | | | 54,957 | | Mix and equipment revenue from franchisees | 13,226 | | | 11,448 | | | 25,444 | | | 24,538 | |
Franchise royalties and other | Franchise royalties and other | 8,475 | | | 8,916 | | | 24,662 | | | 26,960 | | Franchise royalties and other | 7,468 | | | 7,963 | | | 15,948 | | | 16,187 | |
Total net revenues | Total net revenues | $ | 342,799 | | | $ | 290,233 | | | $ | 1,013,794 | | | $ | 796,421 | | Total net revenues | $ | 375,245 | | | $ | 349,186 | | | $ | 747,777 | | | $ | 670,995 | |
Other revenues include advertising fund contributions from franchisees, rental income, development and franchise fees, and licensing royalties from Keurig related to Krispy Kreme brands coffee sales.
Contract Balances
Deferred revenue subject to Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and related receivables are as follows:
| | | October 3, 2021 | | January 3, 2021 | | Balance Sheet Location | | July 3, 2022 | | January 2, 2022 | | Balance Sheet Location |
Trade receivables, net of allowances of $796 and $1,437, respectively | $ | 37,476 | | | $ | 39,624 | | | Accounts receivables, net | |
Trade receivables, net of allowances of $424 and $896, respectively | | Trade receivables, net of allowances of $424 and $896, respectively | $ | 37,413 | | | $ | 41,132 | | | Accounts receivables, net |
Deferred revenue: | Deferred revenue: | | Deferred revenue: | |
Current | Current | 15,901 | | | 16,045 | | | Accrued liabilities | Current | $ | 16,916 | | | $ | 17,458 | | | Accrued liabilities |
Noncurrent | Noncurrent | 2,889 | | | 2,838 | | | Other long-term obligations and deferred credits | Noncurrent | 3,084 | | | 2,981 | | | Other long-term obligations and deferred credits |
Total deferred revenue | Total deferred revenue | $ | 18,790 | | | $ | 18,883 | | | Total deferred revenue | $ | 20,000 | | | $ | 20,439 | | | |
Note 13 — Net Loss per Share
The following table presents the calculations of basic and diluted EPS:
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
(in thousands, except share and per share amounts) | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | |
Net loss attributable to Krispy Kreme, Inc. | $ | (5,659) | | | $ | (14,852) | | | $ | (25,862) | | | $ | (38,997) | | |
Adjustment to net loss attributable to common shareholders | (522) | | | 34 | | | (1,815) | | | (121) | | |
(in thousands, except per share amounts) | | (in thousands, except per share amounts) | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Net (loss)/income attributable to Krispy Kreme, Inc. | | Net (loss)/income attributable to Krispy Kreme, Inc. | $ | (3,849) | | | $ | (17,142) | | | $ | 153 | | | $ | (20,203) | |
Adjustment to net (loss)/income attributable to common shareholders | | Adjustment to net (loss)/income attributable to common shareholders | — | | | (424) | | | (374) | | | (417) | |
Net loss attributable to common shareholders - Basic | Net loss attributable to common shareholders - Basic | $ | (6,181) | | | $ | (14,818) | | | $ | (27,677) | | | $ | (39,118) | | Net loss attributable to common shareholders - Basic | $ | (3,849) | | | $ | (17,566) | | | $ | (221) | | | $ | (20,620) | |
Additional income attributed to noncontrolling interest due to subsidiary potential common shares | Additional income attributed to noncontrolling interest due to subsidiary potential common shares | (88) | | | (22) | | | (237) | | | (48) | | Additional income attributed to noncontrolling interest due to subsidiary potential common shares | (83) | | | (120) | | | (122) | | | (145) | |
Net loss attributable to common shareholders - Diluted | Net loss attributable to common shareholders - Diluted | $ | (6,269) | | | $ | (14,840) | | | $ | (27,914) | | | $ | (39,166) | | Net loss attributable to common shareholders - Diluted | $ | (3,932) | | | $ | (17,686) | | | $ | (343) | | | $ | (20,765) | |
Basic weighted average common shares outstanding | Basic weighted average common shares outstanding | 166,033,539 | | | 124,987,370 | | | 141,123,999 | | | 124,987,370 | | Basic weighted average common shares outstanding | 167,367 | | | 132,351 | | | 167,314 | | | 128,669 | |
Dilutive effect of outstanding common stock options and RSUs | Dilutive effect of outstanding common stock options and RSUs | — | | | — | | | — | | | — | | Dilutive effect of outstanding common stock options and RSUs | — | | | — | | | — | | | — | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | 166,033,539 | | | 124,987,370 | | | 141,123,999 | | | 124,987,370 | | Diluted weighted average common shares outstanding | 167,367 | | | 132,351 | | | 167,314 | | | 128,669 | |
Loss per share attributable to common shareholders: | Loss per share attributable to common shareholders: | | | | | Loss per share attributable to common shareholders: | | | | |
Basic | Basic | $ | (0.04) | | | $ | (0.12) | | | $ | (0.20) | | | $ | (0.31) | | Basic | $ | (0.02) | | | $ | (0.13) | | | $ | 0.00 | | | $ | (0.16) | |
Diluted | Diluted | $ | (0.04) | | | $ | (0.12) | | | $ | (0.20) | | | $ | (0.31) | | Diluted | $ | (0.02) | | | $ | (0.13) | | | $ | 0.00 | | | $ | (0.16) | |
Potential dilutive shares consist of unvested RSUs and stock options, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes certain unvested RSUs granted under certain subsidiaries’ executive ownership plans and long-term incentive plans, because their inclusion would have been antidilutive.
The following table summarizes the gross number of potential dilutive unvested RSUs excluded due to antidilution (unadjusted for the treasury stock method):
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | |
(in thousands) | | (in thousands) | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
KKI | KKI | 6,206,875 | | | 4,556,675 | | | 6,206,875 | | | 4,556,675 | | KKI | 6,222 | | | 5,318 | | | 6,222 | | | 5,238 | |
KKUK | KKUK | — | | | 404,568 | | | — | | | 412,235 | | KKUK | — | | | 3 | | | — | | | 3 | |
Insomnia Cookies | Insomnia Cookies | — | | | 16,200 | | | — | | | 13,365 | | Insomnia Cookies | — | | | — | | | 5 | | | — | |
KK Australia | KK Australia | — | | | — | | | — | | | — | | KK Australia | — | | | — | | | — | | | — | |
KK Mexico | KK Mexico | — | | | — | | | — | | | — | | KK Mexico | — | | | — | | | 1 | | | — | |
The 2,817,398 KKIFor the quarter and two quarters ended July 3, 2022, as well as the quarter and two quarters ended July 4, 2021, all 2.8 million time-vested stock options were also excluded from the computations forcomputation of diluted weighted average common shares outstanding based on application of the quarter and three quarters ended October 3, 2021 due to antidilution.treasury stock method.
Note 14 — Segment Reporting
The Company conducts business through the 3 reportable segments: U.S. and Canada, International, and Market Development. Unallocated corporate costs are excluded from the Company’s measurement of segment performance. These costs include general corporate expenses.
The reportable segment results are as follows:
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Net revenues: | Net revenues: | | | | | | | | Net revenues: | | | | | | | |
U.S. and Canada | U.S. and Canada | $ | 225,807 | | | $ | 202,575 | | | $ | 679,195 | | | $ | 557,280 | | U.S. and Canada | $ | 250,460 | | | $ | 230,918 | | | $ | 503,587 | | | $ | 453,388 | |
International | International | 87,262 | | | 63,504 | | | 243,005 | | | 158,575 | | International | 93,853 | | | 89,237 | | | 181,054 | | | 155,743 | |
Market Development | Market Development | 29,730 | | | 24,154 | | | 91,594 | | | 80,566 | | Market Development | 30,932 | | | 29,031 | | | 63,136 | | | 61,864 | |
Total net revenues | Total net revenues | $ | 342,799 | | | $ | 290,233 | | | $ | 1,013,794 | | | $ | 796,421 | | Total net revenues | $ | 375,245 | | | $ | 349,186 | | | $ | 747,777 | | | $ | 670,995 | |
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Segment Adjusted EBITDA: | Segment Adjusted EBITDA: | | | | | | | | Segment Adjusted EBITDA: | | | | | | | |
U.S. and Canada | U.S. and Canada | $ | 19,912 | | | $ | 20,028 | | | $ | 75,760 | | | $ | 69,216 | | U.S. and Canada | $ | 26,017 | | | $ | 28,285 | | | $ | 59,625 | | | $ | 55,848 | |
International | International | 21,655 | | | 15,098 | | | 60,676 | | | 27,909 | | International | 19,535 | | | 23,673 | | | 36,779 | | | 39,021 | |
Market Development | Market Development | 9,033 | | | 9,374 | | | 29,782 | | | 27,959 | | Market Development | 10,495 | | | 9,858 | | | 21,782 | | | 20,749 | |
Corporate | Corporate | (9,183) | | | (6,715) | | | (26,005) | | | (21,386) | | Corporate | (8,686) | | | (9,423) | | | (21,918) | | | (16,822) | |
| | 41,417 | | | 37,785 | | | 140,213 | | | 103,698 | | | 47,361 | | | 52,393 | | | 96,268 | | | 98,796 | |
Interest expense, net | Interest expense, net | 7,186 | | | 7,908 | | | 25,228 | | | 26,263 | | Interest expense, net | 7,586 | | | 9,793 | | | 14,937 | | | 18,042 | |
Interest expense — related party(1) | Interest expense — related party(1) | — | | | 5,566 | | | 10,387 | | | 16,698 | | Interest expense — related party(1) | — | | | 4,821 | | | — | | | 10,387 | |
Income tax (benefit)/expense | (2,342) | | | 499 | | | 8,266 | | | (2,413) | | |
Income tax expense | | Income tax expense | 1,574 | | | 9,923 | | | 5,374 | | | 10,608 | |
Depreciation and amortization expense | Depreciation and amortization expense | 25,663 | | | 20,435 | | | 74,258 | | | 57,619 | | Depreciation and amortization expense | 27,814 | | | 25,194 | | | 55,655 | | | 48,595 | |
Share-based compensation | Share-based compensation | 6,315 | | | 3,095 | | | 16,973 | | | 9,236 | | Share-based compensation | 5,452 | | | 8,290 | | | 10,493 | | | 10,658 | |
Employer payroll taxes related to share-based compensation | Employer payroll taxes related to share-based compensation | 1,171 | | | — | | | 2,012 | | | — | | Employer payroll taxes related to share-based compensation | 35 | | | 841 | | | 90 | | | 841 | |
Other non-operating expense/(income), net(2) | Other non-operating expense/(income), net(2) | 732 | | | (357) | | | (126) | | | (469) | | Other non-operating expense/(income), net(2) | 756 | | | (416) | | | 435 | | | (858) | |
New York City flagship Hot Light Theater Shop opening(3) | — | | | 2,190 | | | — | | | 6,429 | | |
Strategic initiatives(4) | — | | | 4,649 | | | — | | | 13,923 | | |
Acquisition and integration expenses(5) | 1,288 | | | 4,274 | | | 3,663 | | | 8,697 | | |
Shop closure expenses(6) | — | | | 2,058 | | | — | | | 4,844 | | |
Restructuring and severance expenses(7) | 57 | | | — | | | 1,393 | | | — | | |
IPO-related expenses(8) | 4,018 | | | 206 | | | 14,221 | | | 206 | | |
Other(9) | 1,081 | | | 746 | | | 3,064 | | | (1,218) | | |
Net Loss | $ | (3,752) | | | $ | (13,484) | | | $ | (19,126) | | | $ | (36,117) | | |
Acquisition and integration expenses(3) | | Acquisition and integration expenses(3) | 82 | | | 223 | | | 599 | | | 2,375 | |
Shop closure expenses(4) | | Shop closure expenses(4) | 1,894 | | | — | | | 2,124 | | | — | |
Restructuring and severance expenses(5) | | Restructuring and severance expenses(5) | 476 | | | 1,336 | | | 476 | | | 1,336 | |
IPO-related expenses(6) | | IPO-related expenses(6) | — | | | 6,727 | | | — | | | 10,203 | |
Gain on sale-leaseback | | Gain on sale-leaseback | — | | | — | | (2,374) | | | — | |
Other(7) | | Other(7) | 4,100 | | | 657 | | | 4,409 | | | 1,983 | |
Net (loss)/income | | Net (loss)/income | $ | (2,408) | | | $ | (14,996) | | | $ | 4,050 | | | $ | (15,374) | |
1.(1)Consists of interest expense related to the Related Party Notes which were paid off in full during the quarter ended July 4, 2021.
2.(2)Primarily foreign translation gains and losses in each period.
3.Consists of pre-opening costs related to our New York City flagship Hot Light Theater Shop opening, including shop design, rent, and additional consulting and training costs incurred and reflected in selling, general and administrative expenses.
4.The quarter and three quarters ended September 27, 2020 consists mainly of consulting and advisory fees, personnel transition costs, and network conversion and set-up costs related to the transformation of the Company’s legacy wholesale business in the United States.
5.(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, consulting and advisory fees incurred in connection with acquisition-relatedacquisition and integration-related activities for the applicable period.
6.(4)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment.
7.(5)ConsistsThe quarter and two quarters ended July 3, 2022 consist of costs associated with restructuring of the global executive team. The quarter and two quarters ended July 4, 2021 consist of severance and related benefits costs associated with the Company’s realignment of the Company Shopshop organizational structure to better support the DFD and Branded Sweet Treat Line businesses.
8.(6)Includes consulting and advisory fees incurred in connection with preparation for and execution of the Company’s IPO. Due to the timing
9.(7)The quarter and threetwo quarters ended OctoberJuly 3, 2022 and July 4, 2021 consist primarily of legal expenses incurred outside the ordinary course of business on matters described in Note 10, Commitments and Contingencies. The quarter and three quarters ended September 27, 2020 consists primarily of fixed asset and lease impairment expenses, net of a gain onContingencies, including the sale of land.TSW litigation.Note 15 — Subsequent Events
The Company evaluated subsequent events and transactions for potential recognition or disclosure in the Condensed Consolidated Financial Statements through November 9, 2021,August 17, 2022, the date the Condensed Consolidated Financial Statements were available to be issued. All subsequent events requiring recognition and disclosure have been incorporated into these Condensed Consolidated Financial Statements.
On October 4, 2021,August 5, 2022, the Company acquired a 60% controllingsigned an agreement to acquire ownership interest in 10of 6 franchise shops in Canada forthe U.S. (located in the Midwest), as well as an additional shop still under construction. The acquisition is expected to occur later in August, with an expected total cash consideration of approximately $14.7 million, consisting of approximately $14.4 million in cash and approximately $0.3 million related to settlement of pre-existing relationships.$18.5 million. The acquisition provides the opportunity to expand the Company’s omni-channel strategy in Canada,the U.S., and willis expected to be accounted for as a business combination. The results of the acquired franchise business were reported within the Market Development segment as ofthrough the quarter ended OctoberJuly 3, 20212022 and willare expected to be reported within the U.S. and Canada segment beginning atfollowing the acquisition date in the fourth quarter of fiscal 2021. As of the date of issuance of this Quarterly Report on Form 10-Q, the Company has not completed the initial accounting for this business combination.date.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statementsConsolidated Financial Statements and related notes included in our Annual Report included in our IPO Prospectuson Form 10-K for the year ended January 3, 2021,2, 2022, and in other reports filed subsequently with the SEC.
Cautionary Note Regarding Forward-Looking Statements
This discussionreport contains forward-looking statements that involve risks and uncertainties. The words “believe,” “may,” “could,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “intend,“outlook,” “objective,“guidance,” “seek,” “strive” or similar words, or the negative of these words, identify forward-looking statements. Such forward-looking statements are based on certain assumptions and estimates that we consider reasonable but are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial conditions, business, prospects, growth strategy and liquidity. Accordingly, there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause actual results to differ from those expressed in forward-looking statements include, without limitation, the risks and uncertainties described under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended January 2, 2022, filed by us with the SEC and described in the other filings we make from time to time with the SEC. We believe that these factors include, but are not limited to, the impact of pandemics, changes in consumer preferences, the impact of inflation, and our ability to execute on our omni-channel business strategy. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statement to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Overview
Krispy Kreme is one of the most beloved and well-known sweet treat brands in the world. Our iconic Original Glazed® doughnut is universally recognized for its hot-off-the-line, melt-in-your-mouth experience. Krispy Kreme operates in 31over 30 countries through its unique network of fresh Doughnut Shops, partnerships with leading retailers, and a rapidly growing Ecommerce and delivery business. Our purpose of touching and enhancing lives through the joy that is Krispy Kreme guides how we operate every day and is reflected in the love we have for our people, our communities, and the planet.
The following table presents a summary of our financial results for the periods presented:
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
(in thousands except percentages) | (in thousands except percentages) | October 3, 2021 | | September 27, 2020 | | % Change | | October 3, 2021 | | September 27, 2020 | | % Change | (in thousands except percentages) | July 3, 2022 | | July 4, 2021 | | % Change | | July 3, 2022 | | July 4, 2021 | | % Change |
Total Net Revenues | Total Net Revenues | $ | 342,799 | | | $ | 290,233 | | | 18.1 | % | | $ | 1,013,794 | | | $ | 796,421 | | | 27.3 | % | Total Net Revenues | $ | 375,245 | | | $ | 349,186 | | | 7.5 | % | | $ | 747,777 | | | $ | 670,995 | | | 11.4 | % |
Net Loss | (3,752) | | | (13,484) | | | 72.2 | % | | (19,126) | | | (36,117) | | | 47.0 | % | |
Net (Loss)/Income | | Net (Loss)/Income | (2,408) | | | (14,996) | | | 83.9 | % | | 4,050 | | | (15,374) | | | 126.3 | % |
Adjusted Net Income | Adjusted Net Income | 12,616 | | | 11,782 | | | 7.1 | % | | 50,711 | | | 28,673 | | | 76.9 | % | Adjusted Net Income | 14,646 | | | 20,469 | | | -28.4 | % | | 30,729 | | | 38,095 | | | -19.3 | % |
Adjusted EBITDA | Adjusted EBITDA | 41,417 | | | 37,785 | | | 9.6 | % | | 140,213 | | | 103,698 | | | 35.2 | % | Adjusted EBITDA | 47,361 | | | 52,393 | | | -9.6 | % | | 96,268 | | | 98,796 | | | -2.6 | % |
We generated 6.2%8.9% and 11.9%11.8% organic revenue growth for the quarter and threetwo quarters ended OctoberJuly 3, 2021, respectively.2022.
Significant Events and Transactions
Executing on our TransformationOmni-channel Strategy
We continuemade strong progress on the execution of our omni-channel model in the second quarter of fiscal 2022, where we focus on being able to deliver fresh doughnuts to where our consumers are located. We continued to add quality pointsGlobal Points of accessAccess across our network as we convert markets into fully implemented Hub and Spoke models, surpassing 10,000 pointsincluding a net total of access as382 new Global Points of Access in the end of the thirdsecond quarter of fiscal 2021.2022 to surpass 11,400 Global Points of Access. The primary driver of the increased pointsPoints of access fromAccess during the second quarter of fiscal 2021 was the continued expansion of our low capital DFD network in alignment with our transformation strategy, as we added 393396 DFD Doors globally, including 153109 DFD Doors to the U.S. and Canada segment, (including expansion in major markets such as Chicago, Dallas, Phoenix, Los Angeles, and Denver), 151209 to the International segment, and 8978 to the Market Development segment.
The increase in DFD Doors is the result of our focus on executing our omni-channel strategy to drive our transformation. As highlighted by the more developed model within the International segment, which has experienced a quick recovery from the impacts of the COVID-19 pandemic, the capital-efficient Hub and Spoke distribution model provides a routeincreases
accessibility to marketour consumers and powers profitability. As of the end of the third quarter of fiscal 2021, our Krispy Kreme U.S.drives higher profitability and Canada business has completed the conversion of the last few designated market areas from our legacy wholesale business to DFD, allowing us to focus on DFD expansion in priority areas.increased margins. We expect DFD growth to continue to be one of our most significant drivers of profitabilityearnings growth, through both increased door count and growth in average revenue per door per week (“APD”), which has risen over 50%rose by 9.0% in the thirdU.S. and Canada in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021.
The increase in Points of Access and the strong growth in APD in the U.S. and Canada allowed our trailing four quarters Sales per Hub to increase 22.2% from $3.6 million in the second quarter of fiscal 2021 to a record high $4.4 million in the second quarter of fiscal 2022. Our trailing four quarters International Sales per Hub also increased by 22.5% from $8.0 million to $9.8 million for the same periods. The increase in our Sales per Hub domestically and internationally led to 8.9% organic revenue growth in the second quarter compared to the third quarter of fiscal 2020. Additionally, we expect further global expansion of points of access to comesame period in the near-term asprior year. Our goal is to continue to grow our Sales per Hub over time, which we acquired ten franchise shopsbelieve will drive higher margins and higher return on invested capital.
During the second quarter, the macroeconomic environment has been challenging with supply chain disruption, inflationary pressures in commodities and labor costs, and inflationary pressures on consumer demand. These effects have been felt most heavily by our KKUK and Krispy Kreme U.S. and Canada at the beginningbusinesses, with weakness in our less resilient Hubs without Spokes. With this backdrop, our strategy has been to continue to focus on long-term growth through execution of the fourth quarteromni-channel model in the U.S. and Canada as well as internationally, and to invest in the consumer through Acts of fiscal 2021, providing opportunity to expand our omni-channel strategyJoy, including a “Sweet New Deal” and other higher promotional activity. We also delayed pricing action in Canada.
COVID-19 Update
As of the endU.K. and the U.S. and Canada until the beginning of the third quarter of fiscal 2021, approximately 98% of global system-wide shops (includes Company-owned2022, when we increased prices by mid to high single digits for the first time in fiscal 2022. We made the increase to offset labor and franchise shops) were operational. In the U.S.commodity pressures, while continuing to leverage innovation and Canada, all Krispy Kremepromotions to connect with consumers in a thoughtful way and all Insomnia Cookies shops were operational with certain locations still limiting lobby dining based on local regulations throughout the quarter.build brand power.
The International segment continued to perform strongly with all shops in the United Kingdom, Ireland, and Mexico operational as of the end of the third quarter of fiscal 2021. Australia and New Zealand were more heavily impacted by COVID-19 restrictionsAdditionally, during the quarter, experiencing temporary shop closures and with lobby dining currently not allowed at certain locations.
Certain international franchise markets within the Market Development segment were more heavily impacted by COVID-19 restrictions during the third quarter of fiscal 2021, with 23% of shops operating at reduced hours and 13% with lobby dining closed as of the end of the quarter. This still represented an improvement from conditions as of the end of the second quarter of fiscal 2021, contributing2022, we initiated portfolio optimization efforts for our legacy Krispy Kreme U.S. and Canada business, with a focus on our Hubs without Spokes and overall efficiencies. Some of this optimization may include converting shop types to better leverage labor costs and to better facilitate the expansion of DFD, reviewing the overall cost structure, and other potential actions. We believe this will enable us to focus even more on capital-efficient expansion in key strategic markets and to improve overall margins. As part of these efforts, we decided to exit six Doughnut Shops in the U.S. during the second quarter of fiscal 2022.
Ecommerce, Brand, and Innovation
Ecommerce represented 17.5% of our Doughnut and Cookie Shop sales (excluding DFD) for the second quarter of fiscal 2022, up from less than 10% pre-pandemic and 17.2% for the full fiscal year 2021. This reflects the growing importance of our loyalty members which increased to over 13 million in our equity markets during the second quarter. We are also expanding the delivery radius in several key markets around the world through partnerships with third party aggregators and the addition of Dark Shops.
Innovation is a continued trendsignificant driver of growth for Market Development.frequency as we create and introduce premium, fresh and buzz-worthy offerings to consumers across our Points of Access. High profile initiatives during the second quarter included Cinnamon Toast Crunch in the U.S. and Xbox in the U.K. In addition, we started a limited pilot of soft-serve ice cream products in 44 shops in the U.S. which generated over one billion earned media impressions. We also had successful seasonal activations across the globe, including our Easter and Mother’s Day limited time offerings (“LTOs”), and our celebrations of National Doughnut Day and Krispy Kreme’s 85th birthday.
Key Performance Indicators and Non-GAAP Measures
We monitor the key business metricsperformance indicators and non-GAAP metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The calculation of the key business metricsperformance indicators discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.
Throughout this Quarterly Report on Form 10-Q, we utilize “global points“Global Points of access”Access” as a key performance indicator. Global pointsPoints of accessAccess reflect all locations at which fresh doughnuts or cookies can be purchased. We define global pointsGlobal Points of accessAccess to include all Hot Light Theater Shops, Fresh Shops, Carts, and Food Trucks, and Other, DFD Doors, Cookie Shops, and other defined points at both Company-owned and franchise locations as of the end of the respective reporting period. We monitor global pointsGlobal Points of accessAccess as a metric that informs the growth of our omni-channel presence over time and believe this metric is useful to investors to understand our footprint in each of our segments and by asset type.
The following table presents our global pointsGlobal Points of access,Access, by segment and type, as of the end of the thirdsecond quarter of 2021, thirdfiscal 2022, the second quarter of 2020fiscal 2021, and fiscal 2020,2021, respectively:
| | | Global Points of Access (1) | | Global Points of Access (1) |
| | Quarter Ended | | Fiscal Year Ended | | Quarter Ended | | Fiscal Year Ended |
| | October 3, 2021 | | September 27, 2020 | | January 3, 2021 | | July 3, 2022 | | July 4, 2021 | | January 2, 2022 |
U.S. and Canada: (2) | U.S. and Canada: (2) | | | | | | U.S. and Canada: (2) | | | | | |
Hot Light Theater Shops | Hot Light Theater Shops | 238 | | | 206 | | | 229 | | Hot Light Theater Shops | 245 | | | 237 | | | 241 | |
Fresh Shops | Fresh Shops | 57 | | | 48 | | | 47 | | Fresh Shops | 66 | | | 56 | | | 66 | |
Cookie Shops | Cookie Shops | 206 | | | 178 | | | 184 | | Cookie Shops | 221 | | | 199 | | | 210 | |
DFD Doors (3) | 5,220 | | | 2,846 | | | 4,137 | | |
Carts, Food Trucks, and Other (3) | | Carts, Food Trucks, and Other (3) | 1 | | | — | | | 2 | |
DFD Doors | | DFD Doors | 5,520 | | | 5,067 | | | 5,204 | |
Total | Total | 5,721 | | | 3,278 | | | 4,597 | | Total | 6,053 | | | 5,559 | | | 5,723 | |
International: | International: | | International: | |
Hot Light Theater Shops | Hot Light Theater Shops | 30 | | | 28 | | | 28 | | Hot Light Theater Shops | 34 | | | 28 | | | 32 | |
Fresh Shops | Fresh Shops | 352 | | | 353 | | | 348 | | Fresh Shops | 386 | | | 365 | | | 370 | |
Carts, Food Trucks, and Other (4) | 12 | | | 10 | | | 11 | | |
DFD Doors (3) | 2,415 | | | 1,833 | | | 1,986 | | |
Carts, Food Trucks, and Other (3) | | Carts, Food Trucks, and Other (3) | 2 | | | — | | | 1 | |
DFD Doors | | DFD Doors | 3,003 | | | 2,264 | | | 2,488 | |
Total | Total | 2,809 | | | 2,224 | | | 2,373 | | Total | 3,425 | | | 2,657 | | | 2,891 | |
Market Development: (5) | | |
Market Development: (4) | | Market Development: (4) | |
Hot Light Theater Shops | Hot Light Theater Shops | 113 | | | 144 | | | 119 | | Hot Light Theater Shops | 107 | | | 113 | | | 109 | |
Fresh Shops | Fresh Shops | 761 | | | 716 | | | 732 | | Fresh Shops | 778 | | | 739 | | | 782 | |
Carts, Food Trucks, and Other (4) | 30 | | | 30 | | | 30 | | |
DFD Doors (3) | 607 | | | 470 | | | 465 | | |
Carts, Food Trucks, and Other (3) | | Carts, Food Trucks, and Other (3) | 29 | | | 30 | | | 31 | |
DFD Doors | | DFD Doors | 1,017 | | | 518 | | | 891 | |
Total | Total | 1,511 | | | 1,360 | | | 1,346 | | Total | 1,931 | | | 1,400 | | | 1,813 | |
Total global points of access (as defined) | 10,041 | | | 6,862 | | | 8,316 | | |
Total Global Points of Access (as defined) | | Total Global Points of Access (as defined) | 11,409 | | | 9,616 | | | 10,427 | |
Total Hot Light Theater Shops | Total Hot Light Theater Shops | 381 | | | 378 | | | 376 | | Total Hot Light Theater Shops | 386 | | | 378 | | | 382 | |
Total Fresh Shops | Total Fresh Shops | 1,170 | | | 1,117 | | | 1,127 | | Total Fresh Shops | 1,230 | | | 1,160 | | | 1,218 | |
Total Cookie Shops | Total Cookie Shops | 206 | | | 178 | | | 184 | | Total Cookie Shops | 221 | | | 199 | | | 210 | |
Total Shops | Total Shops | 1,757 | | | 1,673 | | | 1,687 | | Total Shops | 1,837 | | | 1,737 | | | 1,810 | |
Total Carts, Food Trucks, and Other | Total Carts, Food Trucks, and Other | 42 | | | 40 | | | 41 | | Total Carts, Food Trucks, and Other | 32 | | | 30 | | | 34 | |
Total DFD Doors | Total DFD Doors | 8,242 | | | 5,149 | | | 6,588 | | Total DFD Doors | 9,540 | | | 7,849 | | | 8,583 | |
Total global points of access (as defined) | 10,041 | | | 6,862 | | | 8,316 | | |
Total Global Points of Access (as defined) | | Total Global Points of Access (as defined) | 11,409 | | | 9,616 | | | 10,427 | |
1.(1)Excludes Branded Sweet Treat Line distribution points and legacy wholesale business doors.points.
2.(2)Includes pointsPoints of accessAccess that were acquired from franchiseesa franchisee in the United StatesCanada during the firstfourth quarter of fiscal 2021 and the second half2021. These Points of fiscal 2020. These points of accessAccess were previously included in the Market Development segment. See Note 2, Acquisitions, to our Condensed Consolidated Financial Statements for further information.3.(3)DFD Doors for both the U.S. and Canada and Market Development segments exclude legacy wholesale doors, which have been declining consistent with our strategy to evolve our legacy wholesale business to focus on the new DFD model and our new Branded Sweet Treat Line. As of July 4, 2021 legacy wholesale doors for the U.S. and Canada and the Market Development segments were substantially eliminated.
4.Beginning in the quarter ended October 3, 2021, the Company includes Carts and Food Trucks in its calculation of global points of access. Carts and Food Trucks are non-producing, mobile (typically on wheels) facilities without walls or a door where product is received from a Hot Light Theater Shop or Doughnut Factory. TheyOther includes a vending machine as of July 3, 2022.
Points of Access in this category are primarily found in international locations, in airports, train stations, etc. Comparative data has been included in all periods presented above.
5.(4)Includes locations in Japan, which were acquired in Decemberthe fourth quarter of fiscal 2020 and are now Company-owned. All remaining pointsPoints of accessAccess in the Market Development segment relate to our franchise business.
As of OctoberJuly 3, 2021,2022, we had 10,041 global points11,409 Global Points of access,Access, with 1,7571,837 Krispy Kreme and Insomnia Cookies branded shops, 4232 Carts, and Food Trucks, and 8,242Other, and 9,540 DFD Doors. During the thirdsecond quarter of fiscal 2021,2022 we added a net 3118 additional shops globally (excluding the exit of 30 franchise shops in Russia), including threetwo Hot Light Theater Shops, 2112 Fresh Shops and sevenfour Insomnia Cookie Shops. TheIn the quarter, Hot Light Theater Shop openings included expansionShops were added in Lakeland, FL for the U.S. and Canada segment, Boca del Rio, Mexico for the International segment, andlocations such as Cairo, Egypt forand Maribyrnong, Australia. We added 396 new DFD Doors during the Market Development segment which representsquarter as we continue to focus on the expansion of our first franchise shop in Egypt, increasing our global presence to 31 countries.Hub and Spoke model. We plan to continue adding new locations and expanding our Ecommerce and delivery platform in order to extend the availability of our products.
We also utilize “Hubs” as a key performance indicator. Our transformation is driven by the implementation of an omni-channel strategy to reach more consumers where they are and drive revenue growth, and this strategy is supported by a capital-efficient Hub and Spoke distribution model that provides a route to market and powers profitability. Our Hot Light Theater shops and Doughnut Factories serve as centralized production facilities (“Hubs”). From these Hubs, we deliver doughnuts to our Fresh Shops, Carts, and Food Trucks, and Other, Dark Shops, and DFD Doors (“Spokes”) through an integrated network of company-operated delivery routes, ensuring quality and freshness. A Dark Shop is a non-consumer facing, non-producing facility where product is received from a Hub and stored until taken out for delivery, typically via Ecommerce channels.
| | | | | | | | | | | | | | | | | |
| Hubs |
| Quarter Ended | | Fiscal Year Ended |
| October 3, 2021 | | September 27, 2020 | | January 3, 2021 |
U.S. and Canada: | | | | | |
Hot Light Theater Shops (1) | 234 | | | 203 | | | 226 | |
Doughnut Factories | 4 | | | 7 | | | 5 | |
Total | 238 | | | 210 | | | 231 | |
Hubs with Spokes | 121 | | | 112 | | | 113 | |
International: | | | | | |
Hot Light Theater Shops (1) | 25 | | | 27 | | | 27 | |
Doughnut Factories | 10 | | | 9 | | | 9 | |
Total | 35 | | | 36 | | | 36 | |
Hubs with Spokes | 35 | | | 36 | | | 36 | |
Market Development: | | | | | |
Hot Light Theater Shops (1) | 111 | | | 141 | | | 116 | |
Doughnut Factories | 26 | | | 26 | | | 26 | |
Total | 137 | | | 167 | | | 142 | |
Total Hubs | 410 | | | 413 | | | 409 | |
The following table presents our Hubs, by segment and type, as of the end of the second quarter of fiscal 2022, the second quarter of fiscal 2021 and fiscal 2021, respectively: | | | | | | | | | | | | | | | | | |
| Hubs |
| Quarter Ended | | Fiscal Year Ended |
| July 3, 2022 | | July 4, 2021 | | January 2, 2022 |
U.S. and Canada: | | | | | |
Hot Light Theater Shops (1) | 242 | | | 233 | | | 238 | |
Doughnut Factories | 4 | | | 5 | | | 4 | |
Total | 246 | | | 238 | | | 242 | |
Hubs with Spokes | 127 | | | 114 | | | 126 | |
International: | | | | | |
Hot Light Theater Shops (1) | 26 | | | 25 | | | 25 | |
Doughnut Factories | 11 | | | 12 | | | 11 | |
Total | 37 | | | 37 | | | 36 | |
Hubs with Spokes | 37 | | | 37 | | | 36 | |
Market Development: | | | | | |
Hot Light Theater Shops (1) | 104 | | | 112 | | | 106 | |
Doughnut Factories | 26 | | | 26 | | | 27 | |
Total | 130 | | | 138 | | | 133 | |
Total Hubs | 413 | | | 413 | | | 411 | |
1.(1)Includes only Hot Light Theater Shops and excludes Mini Theaters. A Mini Theater is a spokeSpoke location that produces hot doughnuts.some doughnuts for itself and also receives doughnuts from another producing location.
Non-GAAP Measures
We report our financial results in accordance with generally accepted accounting principles in the United States of America (“GAAP”); however, management evaluates our results of operations using, among other measures, organic revenue growth, adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), and Adjusted Net Income as we believe these non-GAAP measures are useful in evaluating our operating performance.
These non-GAAP financial measures are not universally consistent calculations, limiting their usefulness as comparative measures. Other companies may calculate similarly titled financial measures differently than we do or may not calculate them at all. Additionally, these non-GAAP financial measures are not measurements of financial performance under GAAP. In order to
facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP financial measures in conjunction with our historical Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q.
Organic Revenue Growth
Organic revenue growth measures our revenue growth trends excluding the impact of acquisitions and foreign currency, and we believe it is useful for investors to understand the expansion of our global footprint through internal efforts. We define “organicorganic revenue growth”growth as the growth in revenues, excluding (i) acquired shops owned by us for less than twelve months following their acquisition, (ii) the impact of foreign currency exchange rate changes, and (iii) the impact of revenues generated during the 53rd week for those fiscal years that have a 53rd week based on our fiscal calendar defined in the “Overview” section.Note 1, Description of Business and Summary of Significant Accounting Policies. See “Results of Operations” for our organic growth calculations for the periods presented. Adjusted EBITDA and Adjusted Net Income
We define “Adjusted EBITDA” as earnings before interest expense, net (including interest payable to related parties), income tax expense/(benefit), and depreciation and amortization, with further adjustments for share-based compensation, certain strategic initiatives, acquisition and integration expenses, and other certain non-recurring, infrequent or non-core income and expense items. Adjusted EBITDA enables operating performance to be reviewed across reporting periods on a consistent basis and is one of the principal measures used by management to evaluate and monitor our operating performance.
We define “Adjusted Net Income” as net loss adjusted for interest expense – related party, share-based compensation, certain strategic initiatives, acquisition and integration expenses, amortization of acquisition-related intangibles, the tax impact of adjustments and other certain non-recurring, infrequent or non-core income and expense items.
Adjusted EBITDA and AdjustAdjusted Net Income have certain limitations, including adjustments for income and expense items that are required by GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as share-based compensation. Our presentation of Adjusted EBITDA and Adjusted Net Income should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA and Adjusted Net Income supplementally.
The following tables present a reconciliation of net loss(loss)/income to Adjusted EBITDA and net loss(loss)/income to Adjusted Net Income for the periods presented: | | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
(in thousands) | (in thousands) | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | (in thousands) | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Net loss | $ | (3,752) | | | $ | (13,484) | | | $ | (19,126) | | | $ | (36,117) | | |
Net (loss)/income | | Net (loss)/income | $ | (2,408) | | | $ | (14,996) | | | $ | 4,050 | | | $ | (15,374) | |
Interest expense, net | Interest expense, net | 7,186 | | | 7,908 | | | 25,228 | | | 26,263 | | Interest expense, net | 7,586 | | | 9,793 | | | 14,937 | | | 18,042 | |
Interest expense — related party(1) | Interest expense — related party(1) | — | | | 5,566 | | | 10,387 | | | 16,698 | | Interest expense — related party(1) | — | | | 4,821 | | | — | | | 10,387 | |
Income tax (benefit)/expense | (2,342) | | | 499 | | | 8,266 | | | (2,413) | | |
Income tax expense | | Income tax expense | 1,574 | | | 9,923 | | | 5,374 | | | 10,608 | |
Depreciation and amortization expense | Depreciation and amortization expense | 25,663 | | | 20,435 | | | 74,258 | | | 57,619 | | Depreciation and amortization expense | 27,814 | | | 25,194 | | | 55,655 | | | 48,595 | |
Share-based compensation | Share-based compensation | 6,315 | | | 3,095 | | | 16,973 | | | 9,236 | | Share-based compensation | 5,452 | | | 8,290 | | | 10,493 | | | 10,658 | |
Employer payroll taxes related to share-based compensation | Employer payroll taxes related to share-based compensation | 1,171 | | | — | | | 2,012 | | | — | | Employer payroll taxes related to share-based compensation | 35 | | | 841 | | | 90 | | | 841 | |
Other non-operating expense/(income), net(2) | Other non-operating expense/(income), net(2) | 732 | | | (357) | | | (126) | | | (469) | | Other non-operating expense/(income), net(2) | 756 | | | (416) | | | 435 | | | (858) | |
New York City flagship Hot Light Theater Shop opening(3) | — | | | 2,190 | | | — | | | 6,429 | | |
Strategic initiatives(4) | — | | | 4,649 | | | — | | | 13,923 | | |
| Acquisition and integration expenses(5)(3) | Acquisition and integration expenses(5)(3) | 1,288 | | | 4,274 | | | 3,663 | | | 8,697 | | Acquisition and integration expenses(5)(3) | 82 | | | 223 | | | 599 | | | 2,375 | |
Shop closure expenses(6)(4) | Shop closure expenses(6)(4) | — | | | 2,058 | | | — | | | 4,844 | | Shop closure expenses(6)(4) | 1,894 | | | — | | | 2,124 | | | — | |
Restructuring and severance expenses(7)(5) | Restructuring and severance expenses(7)(5) | 57 | | | — | | | 1,393 | | | — | | Restructuring and severance expenses(7)(5) | 476 | | | 1,336 | | | 476 | | | 1,336 | |
IPO-related expenses(8)(6) | IPO-related expenses(8)(6) | 4,018 | | | 206 | | | 14,221 | | | 206 | | IPO-related expenses(8)(6) | — | | | 6,727 | | | — | | | 10,203 | |
Other(9) | 1,081 | | | 746 | | | 3,064 | | | (1,218) | | |
Gain on sale-leaseback | | Gain on sale-leaseback | — | | | — | | | (2,374) | | — | |
Other(7) | | Other(7) | 4,100 | | | 657 | | | 4,409 | | | 1,983 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 41,417 | | | $ | 37,785 | | | $ | 140,213 | | | $ | 103,698 | | Adjusted EBITDA | $ | 47,361 | | | $ | 52,393 | | | $ | 96,268 | | | $ | 98,796 | |
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
(in thousands) | (in thousands) | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | (in thousands) | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
Net loss | $ | (3,752) | | | $ | (13,484) | | | $ | (19,126) | | | $ | (36,117) | | |
Net (loss)/income | | Net (loss)/income | $ | (2,408) | | | $ | (14,996) | | | $ | 4,050 | | | $ | (15,374) | |
Interest expense — related party(1) | Interest expense — related party(1) | — | | | 5,566 | | | 10,387 | | | 16,698 | | Interest expense — related party(1) | — | | | 4,821 | | | — | | | 10,387 | |
Share-based compensation | Share-based compensation | 6,315 | | | 3,095 | | | 16,973 | | | 9,236 | | Share-based compensation | 5,452 | | | 8,290 | | | 10,493 | | | 10,658 | |
Employer payroll taxes related to share-based compensation | Employer payroll taxes related to share-based compensation | 1,171 | | | — | | | 2,012 | | | — | | Employer payroll taxes related to share-based compensation | 35 | | | 841 | | | 90 | | | 841 | |
Other non-operating expense/(income), net(2) | Other non-operating expense/(income), net(2) | 732 | | | (357) | | | (126) | | | (469) | | Other non-operating expense/(income), net(2) | 756 | | | (416) | | | 435 | | | (858) | |
New York City flagship Hot Light Theater Shop opening(3) | — | | | 2,190 | | | — | | | 6,429 | | |
Strategic initiatives(4) | — | | | 4,649 | | | — | | | 13,923 | | |
| Acquisition and integration expenses(5)(3) | Acquisition and integration expenses(5)(3) | 1,288 | | | 4,274 | | | 3,663 | | | 8,697 | | Acquisition and integration expenses(5)(3) | 82 | | | 223 | | | 599 | | | 2,375 | |
Shop closure expenses(6)(4) | Shop closure expenses(6)(4) | — | | | 2,058 | | | — | | | 4,844 | | Shop closure expenses(6)(4) | 2,144 | | | — | | | 2,374 | | | — | |
Restructuring and severance expenses(7)(5) | Restructuring and severance expenses(7)(5) | 57 | | | — | | | 1,393 | | | — | | Restructuring and severance expenses(7)(5) | 476 | | | 1,336 | | | 476 | | | 1,336 | |
IPO-related expenses(8)(6) | IPO-related expenses(8)(6) | 4,018 | | | 206 | | | 14,221 | | | 206 | | IPO-related expenses(8)(6) | — | | | 6,727 | | | — | | | 10,203 | |
Other(9) | 1,081 | | | 746 | | | 3,064 | | | (1,218) | | |
Amortization of acquisition related intangibles(10) | 7,497 | | | 6,566 | | | 22,573 | | | 19,138 | | |
KKI Term Loan Facility interest and debt issuance costs(11) | 107 | | | — | | | 2,448 | | | — | | |
Tax impact of adjustments(12) | (5,784) | | | (5,702) | | | (10,604) | | | (14,669) | | |
Tax specific adjustments(13) | (114) | | | 1,975 | | | 3,833 | | | 1,975 | | |
Gain on sale-leaseback | | Gain on sale-leaseback | — | | | — | | (2,374) | | — |
Other(7) | | Other(7) | 4,100 | | | 657 | | | 4,409 | | | 1,983 | |
Amortization of acquisition related intangibles(8) | | Amortization of acquisition related intangibles(8) | 6,978 | | | 7,627 | | | 14,224 | | | 15,076 | |
KKI Term Loan Facility interest and debt issuance costs(9) | | KKI Term Loan Facility interest and debt issuance costs(9) | — | | | 2,341 | | | — | | | 2,341 | |
Tax impact of adjustments(10) | | Tax impact of adjustments(10) | (2,341) | | | (798) | | | (3,419) | | | (4,820) | |
Tax specific adjustments(11) | | Tax specific adjustments(11) | (628) | | | 3,816 | | | (628) | | | 3,947 | |
Adjusted net income | Adjusted net income | $ | 12,616 | | | $ | 11,782 | | | $ | 50,711 | | | $ | 28,673 | | Adjusted net income | $ | 14,646 | | | $ | 20,469 | | | $ | 30,729 | | | $ | 38,095 | |
1.(1)Consists of interest expense related to the Related Party Notes which were paid off in full during the quarter ended July 4, 2021.
2.(2)Primarily foreign translation gains and losses in each period.
3.Consists of pre-opening costs related to our New York City flagship Hot Light Theater Shop opening, including shop design, rent, and additional consulting and training costs incurred and reflected in selling, general and administrative expenses.
4.The quarter and three quarters ended September 27, 2020 consists mainly of consulting and advisory fees, personnel transition costs, and network conversion and set-up costs related to the transformation of the Company’s legacy wholesale business in the United States.
5.(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, consulting and advisory fees incurred in connection with acquisition-relatedacquisition and integration-related activities for the applicable period.
6.(4)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment. Shop closure expenses included in Adjusted Net Income are inclusive of accelerated depreciation related to replacing a point of sale system.
7.(5)ConsistsThe quarter and two quarters ended July 3, 2022 consist of costs associated with restructuring of the global executive team. The quarter and two quarters ended July 4, 2021 consist of severance and related benefits costs associated with the Company’s realignment of the Company Shopshop organizational structure to better support the DFD and Branded Sweet Treat Line businesses.
8.(6)Includes consulting and advisory fees incurred in connection with preparation for and execution of the Company’s IPO. Due to the timing of the IPO, certain costs were incurred in the quarter ended October 3, 2021 that are not expected to recur in future quarters.
9.(7)The quarter and threetwo quarters ended OctoberJuly 3, 2022 and July 4, 2021 consist primarily of legal expenses incurred outside the ordinary course of business on matters described in Note 10, Commitments and Contingencies to our unaudited Condensed Consolidated Financial Statements. The quarter and three quarters ended September 27, 2020 consists primarily of fixed asset and impairment expenses, net of a gain on the sale of land.Contingencies.10.(8)Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the consolidated statementsCondensed Consolidated Statements of operations.Operations.
11.(9)Includes interest expense of $0.6 million and debt issuance costs of $1.7 million incurred and recognized as expenses in the quarter ended July 4, 2021 in connection with the extinguishment of the KKI Term Loan Facility within four business days of receipt of the net proceeds from the IPO.
12.(10)Tax impact of adjustments calculated applying the applicable statutory rates. The threequarter and two quarters ended OctoberJuly 3, 20212022 also includesinclude the impact of disallowed executive compensation expense incurredand a discrete tax benefit related to a legal accrual described in connection with the IPO.Note 10, Commitments and Contingencies.13.(11)The threequarter and two quarters ended OctoberJuly 3, 2022 consist of the recognition of a previously unrecognized tax benefit unrelated to ongoing operations. The quarter and two quarters ended July 4, 2021 consistsconsist primarily of the effect of the U.K. 2023 statutory tax rate change from 19.0% to 25.0%law changes on existing temporary differences.
Sales Per Hub
In order to measure the effectiveness of our Hub and Spoke model, we use “Sales per Hub” on a trailing four-quarter basis, which includes all revenue generated from a Hub and its associated Spokes. Sales per Hub equals Fresh Revenues from Hubs with Spokes, divided by the average number of Hubs with Spokes during the period. Fresh Revenues include product sales generated from our Doughnut Shop business (including Ecommerce and delivery), as well as DFD sales, but excluding sales from our legacy wholesale business and our Branded Sweet Treat Line. It also excludes all Insomnia Cookies revenues as the measure is focused on the Krispy Kreme business. The Average Hub with Spokes for a period is calculated as the average of the number of Hubs with Spokes at the end of the five most recent quarters. The Sales per Hub performance measure allows us and investors to measure our effectiveness at leveraging the Hubs in the Hub and Spoke model to distribute product and generate cost efficiencies and profitability.
Sales per Hub was as follows for each of the trailing four quarters periods below:
| | | Trailing Four Quarters Ended | | Fiscal Year Ended | | Trailing Four Quarters Ended | | Fiscal Year Ended |
(in thousands, unless otherwise stated) | (in thousands, unless otherwise stated) | October 3, 2021 | | January 3, 2021 | | December 29, 2019 | (in thousands, unless otherwise stated) | July 3, 2022 | | January 2, 2022 | | January 3, 2021 |
U.S. and Canada: | U.S. and Canada: | | | | | | U.S. and Canada: | | | | | |
Revenues | Revenues | $ | 904,633 | | | $ | 782,717 | | | $ | 587,522 | | Revenues | $ | 978,612 | | | $ | 928,413 | | | $ | 782,717 | |
Non-Fresh Revenues (1) | Non-Fresh Revenues (1) | (53,719) | | | (128,619) | | | (112,051) | | Non-Fresh Revenues (1) | (39,677) | | | (37,311) | | | (128,619) | |
Fresh Revenues from Insomnia Cookies and Hubs without Spokes (2) | Fresh Revenues from Insomnia Cookies and Hubs without Spokes (2) | (414,186) | | | (323,079) | | | (271,067) | | Fresh Revenues from Insomnia Cookies and Hubs without Spokes (2) | (399,959) | | | (415,768) | | | (323,079) | |
Sales from Hubs with Spokes | Sales from Hubs with Spokes | 436,728 | | | 331,019 | | | 204,404 | | Sales from Hubs with Spokes | 538,976 | | | 475,334 | | | 331,019 | |
Sales per Hub (millions) | Sales per Hub (millions) | 3.8 | | | 3.5 | | | 3.2 | | Sales per Hub (millions) | 4.4 | | | 4.0 | | | 3.5 | |
| International: | International: | | International: | |
Sales from Hubs with Spokes (3) | Sales from Hubs with Spokes (3) | $ | 314,615 | | | $ | 230,185 | | | $ | 223,115 | | Sales from Hubs with Spokes (3) | $ | 358,306 | | | $ | 332,995 | | | $ | 230,185 | |
Sales per Hub (millions) | Sales per Hub (millions) | 8.6 | | | 6.4 | | | 8.3 | | Sales per Hub (millions) | 9.8 | | | 9.1 | | | 6.4 | |
1.(1)Includes legacy wholesale business revenues and Branded Sweet Treat Line revenues.
2.(2)Includes Insomnia Cookies revenues and Fresh Revenues generated by Hubs without Spokes.
3.(3)Total International net revenues is equal to Fresh Revenues from Hubs with Spokes for that business segment.
In our International segment, where the Hub and Spoke model is most developed, Sales per Hub reached $8.6$9.8 million, up from $9.1 million in the full fiscal year 2021 and $6.4 million in the full fiscal year 2020, and also up from pre-pandemic levels in the full fiscal year 2019.2020. The International segment illustrates the benefits of leveraging our Hub and Spoke model in the most efficient way to grow the business, as shown by the International segment’sits quick recovery from the impacts of the COVID-19 pandemic and growth in profit margins. In the U.S. and Canada segment, we reached Sales per Hub of $3.8$4.4 million, up from $4.0 million in the full fiscal year 2021 and $3.5 million in the full fiscal year 2020 and up from $3.2 million at the beginning of our transformation in 2019.2020. U.S. and Canada growth was driven by our efforts to increase the number of DFD Doors served by our Hubs and to increase APD for the DFD Door portfolio, as the segment makes progress toward optimizing the model to look more like International. As we further extend the Hub and Spoke model into existing and new markets around the world, increase innovation, and selectively take pricing actions, we expect to see this measure continue to grow.
Results of Operations
The following comparisons are historical results and are not indicative of future results which could differ materially from the historical financial information presented.
Quarter ended OctoberJuly 3, 20212022 compared to the Quarter ended September 27, 2020July 4, 2021
The following table presents our unaudited condensed consolidated results of operations for the quarter ended OctoberJuly 3, 20212022 and the quarter ended September 27, 2020:July 4, 2021:
| | | Quarter Ended | | | Quarter Ended | |
| | October 3, 2021 | | September 27, 2020 | | Change | | July 3, 2022 | | July 4, 2021 | | Change |
(in thousands except percentages) | (in thousands except percentages) | Amount | | % of Revenue | | Amount | | % of Revenue | | $ | | % | (in thousands except percentages) | Amount | | % of Revenue | | Amount | | % of Revenue | | $ | | % |
Net revenues | Net revenues | | | | | | | | | | | | Net revenues | | | | | | | | | | | |
Product sales | Product sales | $ | 334,324 | | | 97.5 | % | | $ | 281,317 | | | 96.9 | % | | $ | 53,007 | | | 18.8 | % | Product sales | $ | 367,777 | | | 98.0 | % | | $ | 341,223 | | | 97.7 | % | | $ | 26,554 | | | 7.8 | % |
Royalties and other revenues | Royalties and other revenues | 8,475 | | | 2.5 | % | | 8,916 | | | 3.1 | % | | (441) | | | -4.9 | % | Royalties and other revenues | 7,468 | | | 2.0 | % | | 7,963 | | | 2.3 | % | | (495) | | | -6.2 | % |
Total net revenues | Total net revenues | 342,799 | | | 100.0 | % | | 290,233 | | | 100.0 | % | | 52,566 | | | 18.1 | % | Total net revenues | 375,245 | | | 100.0 | % | | 349,186 | | | 100.0 | % | | 26,059 | | | 7.5 | % |
Product and distribution costs | Product and distribution costs | 92,152 | | | 26.9 | % | | 85,303 | | | 29.4 | % | | 6,849 | | | 8.0 | % | Product and distribution costs | 100,558 | | | 26.8 | % | | 85,017 | | | 24.3 | % | | 15,541 | | | 18.3 | % |
Operating expenses | Operating expenses | 157,315 | | | 45.9 | % | | 121,792 | | | 42.0 | % | | 35,523 | | | 29.2 | % | Operating expenses | 173,942 | | | 46.4 | % | | 157,877 | | | 45.2 | % | | 16,065 | | | 10.2 | % |
Selling, general and administrative expense | Selling, general and administrative expense | 52,950 | | | 15.4 | % | | 46,521 | | | 16.0 | % | | 6,429 | | | 13.8 | % | Selling, general and administrative expense | 51,754 | | | 13.8 | % | | 60,930 | | | 17.4 | % | | (9,176) | | | -15.1 | % |
Marketing expenses | Marketing expenses | 12,062 | | | 3.5 | % | | 8,015 | | | 2.8 | % | | 4,047 | | | 50.5 | % | Marketing expenses | 11,215 | | | 3.0 | % | | 10,052 | | | 2.9 | % | | 1,163 | | | 11.6 | % |
Pre-opening costs | Pre-opening costs | 1,192 | | | 0.3 | % | | 3,368 | | | 1.2 | % | | (2,176) | | | -64.6 | % | Pre-opening costs | 985 | | | 0.3 | % | | 1,752 | | | 0.5 | % | | (767) | | | -43.8 | % |
Other (income)/expenses, net | (359) | | | -0.1 | % | | 4,667 | | | 1.6 | % | | (5,026) | | | -107.7 | % | |
Other expenses/(income), net | | Other expenses/(income), net | 1,469 | | | 0.4 | % | | (761) | | | -0.2 | % | | 2,230 | | | 293.0 | % |
Depreciation and amortization expense | Depreciation and amortization expense | 25,663 | | | 7.5 | % | | 20,435 | | | 7.0 | % | | 5,228 | | | 25.6 | % | Depreciation and amortization expense | 27,814 | | | 7.4 | % | | 25,194 | | | 7.2 | % | | 2,620 | | | 10.4 | % |
Operating income | Operating income | 1,824 | | | 0.5 | % | | 132 | | | — | % | | 1,692 | | | 1281.8 | % | Operating income | 7,508 | | | 2.0 | % | | 9,125 | | | 2.6 | % | | (1,617) | | | -17.7 | % |
Interest expense, net | Interest expense, net | 7,186 | | | 2.1 | % | | 7,908 | | | 2.7 | % | | (722) | | | -9.1 | % | Interest expense, net | 7,586 | | | 2.0 | % | | 9,793 | | | 2.8 | % | | (2,207) | | | -22.5 | % |
Interest expense – related party | — | | | — | % | | 5,566 | | | 1.9 | % | | (5,566) | | | -100.0 | % | |
Interest expense — related party | | Interest expense — related party | — | | | — | % | | 4,821 | | | 1.4 | % | | (4,821) | | | -100.0 | % |
Other non-operating expense/(income), net | Other non-operating expense/(income), net | 732 | | | 0.2 | % | | (357) | | | -0.1 | % | | 1,089 | | | 305.0 | % | Other non-operating expense/(income), net | 756 | | | 0.2 | % | | (416) | | | -0.1 | % | | 1,172 | | | 281.7 | % |
Loss before income taxes | Loss before income taxes | (6,094) | | | -1.8 | % | | (12,985) | | | -4.5 | % | | 6,891 | | | 53.1 | % | Loss before income taxes | (834) | | | -0.2 | % | | (5,073) | | | -1.5 | % | | 4,239 | | | 83.6 | % |
Income tax (benefit)/expense | (2,342) | | | -0.7 | % | | 499 | | | 0.2 | % | | (2,841) | | | -569.3 | % | |
Income tax expense | | Income tax expense | 1,574 | | | 0.4 | % | | 9,923 | | | 2.8 | % | | (8,349) | | | -84.1 | % |
Net loss | Net loss | (3,752) | | | -1.1 | % | | (13,484) | | | -4.6 | % | | 9,732 | | | 72.2 | % | Net loss | (2,408) | | | -0.6 | % | | (14,996) | | | -4.3 | % | | 12,588 | | | 83.9 | % |
Net income attributable to noncontrolling interest | Net income attributable to noncontrolling interest | 1,907 | | | 0.6 | % | | 1,368 | | | 0.5 | % | | 539 | | | 39.4 | % | Net income attributable to noncontrolling interest | 1,441 | | | 0.4 | % | | 2,146 | | | 0.6 | % | | (705) | | | -32.9 | % |
Net loss attributable to Krispy Kreme, Inc. | Net loss attributable to Krispy Kreme, Inc. | $ | (5,659) | | | -1.7 | % | | $ | (14,852) | | | -5.1 | % | | $ | 9,193 | | | 61.9 | % | Net loss attributable to Krispy Kreme, Inc. | $ | (3,849) | | | -1.0 | % | | $ | (17,142) | | | -4.9 | % | | $ | 13,293 | | | 77.5 | % |
Product salessales:: Product sales increased $53.0$26.6 million, or 18.8%7.8%, from the thirdsecond quarter of fiscal 20202021 to the thirdsecond quarter of fiscal 2021.2022. Approximately $32.5$4.5 million of the increase in product sales was attributable to shops acquired from franchisees.franchisees. However, product sales growth was partially offset by $9.1 million attributable to foreign currencies weakening against the U.S. dollar.
Royalties and other revenues: Royalties and other revenues decreased $0.4$0.5 million, or 4.9%6.2%, from the third quarter of fiscal 2020 to the thirdsecond quarter of fiscal 2021 to the second quarter of fiscal 2022, reflecting the impact of the acquisitionsacquisition of KK Japan and U.S. franchises made duringCanada in the second half of fiscal 2020 and the firstfourth quarter of fiscal 2021.
The following table presents a further breakdown of total net revenue and organic revenue growth by segment for the quarter ended OctoberJuly 3, 2021 and2022 compared to the quarter ended September 27, 2020:July 4, 2021:
| (in thousands except percentages) | (in thousands except percentages) | U.S. and Canada | | International | | Market Development | | Total Company | (in thousands except percentages) | U.S. and Canada | | International | | Market Development | | Total Company |
Total net revenues in third quarter of fiscal 2021 | $ | 225,807 | | | $ | 87,262 | | | $ | 29,730 | | | $ | 342,799 | | |
Total net revenues in third quarter of fiscal 2020 | 202,575 | | | 63,504 | | | 24,154 | | | 290,233 | | |
Total net revenues in second quarter of fiscal 2022 | | Total net revenues in second quarter of fiscal 2022 | $ | 250,460 | | | $ | 93,853 | | | $ | 30,932 | | | $ | 375,245 | |
Total net revenues in second quarter of fiscal 2021 | | Total net revenues in second quarter of fiscal 2021 | 230,918 | | | 89,237 | | | 29,031 | | | 349,186 | |
Total Net Revenues Growth | Total Net Revenues Growth | 23,232 | | | 23,758 | | | 5,576 | | | 52,566 | | Total Net Revenues Growth | 19,542 | | | 4,616 | | | 1,901 | | | 26,059 | |
Total Net Revenues Growth % | Total Net Revenues Growth % | 11.5 | % | | 37.4 | % | | 23.1 | % | | 18.1 | % | Total Net Revenues Growth % | 8.5 | % | | 5.2 | % | | 6.5 | % | | 7.5 | % |
Impact of acquisitions | Impact of acquisitions | (27,928) | | | — | | | (1,195) | | | (29,123) | | Impact of acquisitions | (5,795) | | | — | | | 1,623 | | | (4,172) | |
Impact of foreign currency translation | Impact of foreign currency translation | — | | | (5,305) | | | — | | | (5,305) | | Impact of foreign currency translation | — | | | 7,018 | | | 2,044 | | | 9,062 | |
Organic Revenue Growth | Organic Revenue Growth | $ | (4,696) | | | $ | 18,453 | | | $ | 4,381 | | | $ | 18,138 | | Organic Revenue Growth | $ | 13,747 | | | $ | 11,634 | | | $ | 5,568 | | | $ | 30,949 | |
Organic Revenue Growth % | Organic Revenue Growth % | -2.3 | % | | 29.1 | % | | 18.1 | % | | 6.2 | % | Organic Revenue Growth % | 6.0 | % | | 13.0 | % | | 19.2 | % | | 8.9 | % |
Total net revenue growth during the second quarter of $52.6fiscal 2022 of $26.1 million, or approximately 18.1%7.5%, and organic revenue growth of $18.1$30.9 million, or approximately 6.2%8.9%, was driven by increasing availability through new pointsGlobal Points of access and the omni-channel model, particularly the expansion of spokes, includingAccess, mostly capital-light DFD Doors, for existing Hubs with Spokesand via Ecommerce. A record 420 million doughnuts were sold around the world during the quarter, an increase of 7% over the prior year. The lower revenue growth compared to recent quarters is primarily explained by the strong U.S. dollar as well as wider consumer traffic declines in the U.K. Additionally, pricing action was taken early in the third quarter of fiscal 2021.2022 in the U.S. and the U.K. to offset labor and commodity inflation impacts.
U.S. and Canada segment net revenue growth was driven by a combination of franchise acquisitions (17 shops in the first quarter of fiscal 2021 and 51 shops in the second half of fiscal 2020) and continued execution of our omni-channel strategy.strategy and the acquisition of KK Canada (10 shops in the fourth quarter of fiscal 2021). U.S. and Canada net revenue grew $23.2$19.5 million, or approximately 11.5%8.5%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022 2021 while U.S. and Canada organic revenue decreased $4.7increased $13.7 million, or approximately 2.3%6.0%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022. 2021. The decrease in organic revenueOrganic growth was driven by a $22.8 million withdrawal in revenue from our legacy wholesale business, reflecting the evolution of the DFD business and the discontinuance of certain legacy extended shelf-life products sold through that channel. Excluding the impact of exiting the legacy wholesale business, U.S. and Canada organic growth was 8.9% and was driven by thecontinued expansion of our pointsfresh Points of access,Access, particularly our DFD network, higher DFD APD, and the strong performance of Insomnia Cookies. As we continue our transformation and implementation of the Hub and Spoke model, the transition to DFD from our legacy wholesale business continues to drive strong results with record APD established in the quarter and substantial growth versus 2020 and 2019 driven by the quality of newlow capital DFD Doors (including expansionwhich have increased by 453 (and with a 9.0% increase in major markets such as Chicago, Dallas, Phoenix, Los Angeles, and Denver) and consumer convenience. This growth was partially offset by declines in revenues from our early-stage Branded Sweet Treat Line as we lapped the substantial revenues associated with shipments for the initial launch in 2020. However, we continue to expand production and the customer base and revenues increased whenAPD) compared to the second quarter of fiscal 2021. We also operated an additional 22 Insomnia Cookies shops compared to the second quarter of fiscal 2021. Our organic growth has also been supplemented by effective pricing increases taken in the second half of fiscal 2021, leading to significant increase in the average transaction size, but offset some by transaction declines.
Our International segment ne segment nett revenue grew $23.8$4.6 million, or approximately 37.4%5.2%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022 2021 and, in spite of foreign currency translation impacts of $7.0 million from a strengthening U.S. dollar. International organic revenue grew $18.5$11.6 million, or approximately 29.1%13.0%, from the thirdsecond quarter of fiscal 20202021 to the thirdsecond quarter of fiscal 2022, driven by the substantial expansion of DFD Doors and new shop openings, with fresh Points of Access increasing by 768, or 28.9%, to 3,425 compared to the second quarter of fiscal 2021. OrganicGrowth was strong in Mexico, Australia, and New Zealand. We still saw growth in the quarter was driven by successful limited time offerings, substantial expansion of DFD,U.K. and while lappingIreland despite a previous period which was negatively impacted by COVID-19. Our businesses in the United Kingdom, Ireland, and Mexico in particular saw strong organic growth during the third quarter,challenging consumer environment, with U.K industry retail footfall traffic returning stronger than priordeclining compared to the pandemic, while our businesses in Australia and New Zealand also contributed to organic growth even with heavier impacts from COVID-19 restrictions and temporary shop closures.prior year.
Our Market Development segment net revenue increased $1.9 million, or approximately 6.5%, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, in spite of the impact of franchise acquisitions such as KK Canada and by certain foreign currencies devaluing against the U.S. dollar. When adjusted for the impacts of acquisitions and foreign currency, Market Development organic revenue grew $5.6 million, or approximately 23.1%19.2%, from the thirdfirst quarter of fiscal 2020 2021 to the thirdfirst quarter of fiscal 2021, 2022, driven mainly by the acquisition of KK Japanfocused growth in the final quarter of 2020. Market Development organic revenue grew $4.4 million, or approximately 18.1%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, driven mainly by improved market conditions forour international franchise locations as COVID-19 restrictionsmarkets and benefits from DFD and Ecommerce expansion in certain key markets continued to ease.Japan.
Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $6.8$15.5 million, or 8.0%18.3%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022 2021, largely in line with and, attributable to the same factors as our revenue growth.
Product and distribution costs as a percentage of revenue decreasedincreased by approximately 250 basis points from 29.4%24.3% in the thirdsecond quarter of fiscal 20202021 to 26.9%26.8% in the thirdsecond quarter of fiscal 2021.2022. This margin improvementincrease was primarily driven by the U.S.inflationary pressures on commodities and Canada segment, which benefited from higher margins from its DFD business due to the shift to fresh doughnut sales from the legacy wholesale business. In addition, margins improved as a result of the sales mix shift due to the impact of franchise acquisitions. These factors more than offset the impact of commodity cost pressurelogistics costs in the thirdsecond quarter of fiscal 2021.2022, as well as targeted discount promotions such as “Beat the Pump.”
Operating expenses: Operating expenses increased $16.1 million, or 10.2%, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, driven mainly by labor cost inflation, as well as investments to support growth. Operating expenses as a percentage of revenue increased approximately 120 basis points, from 45.2% in the second quarter of fiscal 2021 to 46.4% in the second quarter of fiscal 2022 with decreased performance for Hubs without Spokes for Krispy Kreme U.S. and
Operating expenses:Canada coupled with transaction volume declines for KKUK. Operating expenses increased $35.5 million, or 29.2%,This has been partially offset by efficiency benefits from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, driven mainly by franchise acquisitions and labor investments.
Operating expensesDFD expansion as a percentage of revenue increased approximately 390 basis points, from 42.0% in the third quarter of fiscal 2020 to 45.9% in the third quarter of fiscal 2021, driven in part by the impact of franchise acquisitions, such as KK Japan, which resulted in additional operating expenses that are needed to run Company-owned operations versus franchises. Additionally, we incurred higher labor costs in part due to labor needed to support theexecute our Hub and Spoke model transformation and labor investments as a result of the current labor markets around the world.transformation.
Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expenses increased $6.4expense decreased $9.2 million, or 13.8%15.1%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. The increase was driven by higher costs related to operating as a public company, increased share-based compensation expense, and by SG&A expenses incurred by franchise shops acquired subsequent to the thirdsecond quarter of fiscal 2020.2021 to the second quarter of fiscal 2022. As a percentage of revenue, SG&A expensesexpense decreased approximately 60360 basis points, from 16.0%17.4% in the thirdsecond quarter of fiscal 20202021 to 15.4%13.8% in the second quarter of fiscal 2022, primarily due to economiesa decrease in advisory service fees as we completed our IPO in the second quarter of scale from our top-line revenue growth.fiscal 2021. The decline for the quarter was also driven by a decrease in employee compensation.
Marketing expenses: Marketing expenses increased $4.0$1.2 million, or 50.5%11.6%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022 2021,, primarily driven by spend associated with thean increased revenues during the quarter.cost of advertising.
Pre-opening costs:Other expense/(income), net: Pre-opening costs decreased $2.2Other expense, net of $1.5 million or 64.6%, from in the thirdsecond quarter of fiscal 2020 to the third quarter of fiscal 2021, 2022 was primarily driven by costs associated withimpairment and lease termination costs. As part of our expansion in NYC inomni-channel transformation, we initiated portfolio optimization efforts for Krispy Kreme U.S. and Canada during the thirdsecond quarter of fiscal 2020, including expenses incurred as we prepared for the opening of our NYC flagship Hot Light Theater Shop near the end of the third quarter of fiscal 2020.
Other (income)/expenses, net: Other expenses, net of $4.7 million2022, which included deciding to exit six lower margin shops in the third quarter of fiscal 2020 were primarily driven byU.S. We expect additional impairment and lease termination costs impairment charges, and losses on disposal of property and equipment, a majority of which were related to shop closures driven by impactsthis project in the second half of COVID-19.fiscal 2022.
Depreciation and amortization expense: Depreciation and amortization expense increased $5.2$2.6 million, or 25.6%10.4%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022 2021,, primarily driven by the impact of acquired franchises and depreciation resulting from increased capital expenditures.spend and assets placed into service to support the Hub and Spoke model evolution.
Interest expense - related party: Interest expense with related parties decreased $5.6$4.8 million or 100.0%, from the thirdsecond quarter of fiscal 2020 2021 to the thirdsecond quarter of fiscal 2022 2021,, driven by paying off our Related Party Notes in full with KK GP during the second quarter of fiscal 2021.
Income tax (benefit)/expense: The income tax benefitexpense of $2.3$1.6 million in the thirdsecond quarter of fiscal 20212022 was driven by pre-tax results anddisallowed executive compensation expense, the recognition of previously unrecognized tax benefits, and a discrete tax benefit related to the vesting of RSUs.a legal accrual described in Note 10, Commitments and Contingencies. Our tax expense was also impacted by the mix of income between the U.S. and foreign jurisdictions. Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest fordecreased $0.7 million or 32.9%, from the thirdsecond quarter of fiscal 2021 increased $0.5 million, or 39.4%, from to the thirdsecond quarter of fiscal 2022 2020, reflecting stronger, driven by less earnings allocated to the shareholders ofcertain consolidated subsidiaries, particularly Insomnia Cookies.WKS Krispy Kreme.
Results of Operations by Segment – Quarter ended OctoberJuly 3, 20212022 compared to the Quarter ended September 27, 2020July 4, 2021
The following table presents Adjusted EBITDA by segment for the periods indicated:
| | | Quarter Ended | | Change | | Quarter Ended | | Change |
(in thousands except percentages) | (in thousands except percentages) | October 3, 2021 | | September 27, 2020 | | $ | | % | (in thousands except percentages) | July 3, 2022 | | July 4, 2021 | | $ | | % |
Adjusted EBITDA | Adjusted EBITDA | | | | | | | | Adjusted EBITDA | | | | | | | |
U.S. and Canada | U.S. and Canada | $ | 19,912 | | | $ | 20,028 | | | $ | (116) | | | -0.6 | % | U.S. and Canada | $ | 26,017 | | | $ | 28,285 | | | $ | (2,268) | | | -8.0 | % |
International | International | 21,655 | | | 15,098 | | | 6,557 | | | 43.4 | % | International | 19,535 | | | 23,673 | | | (4,138) | | | -17.5 | % |
Market Development | Market Development | 9,033 | | | 9,374 | | | (341) | | | -3.6 | % | Market Development | 10,495 | | | 9,858 | | | 637 | | | 6.5 | % |
Corporate | Corporate | (9,183) | | | (6,715) | | | (2,468) | | | -36.8 | % | Corporate | (8,686) | | | (9,423) | | | 737 | | | 7.8 | % |
Total Adjusted EBITDA (1) | Total Adjusted EBITDA (1) | $ | 41,417 | | | $ | 37,785 | | | $ | 3,632 | | | 9.6 | % | Total Adjusted EBITDA (1) | $ | 47,361 | | | $ | 52,393 | | | $ | (5,032) | | | -9.6 | % |
1. (1)Refer to “Key Performance Indicators and Non-GAAP Measures” above for a reconciliation of Adjusted EBITDA to net loss.income/(loss).
U.S. and Canada Adjusted EBITDA decreased $0.1$2.3 million, or 0.6%8.0%, fromwith margin decline of approximately 180 basis points to 10.4% in the thirdsecond quarter of fiscal 20202022 compared to the thirdsecond quarter of fiscal 2021. EfficiencyThis decrease was driven by cost increases in labor and commodities, as well as weaker performance in our Hubs without Spokes. This has been partially offset by efficiency benefits offrom DFD expansion as we execute our Hub and Spoke transformation, were offset by short-term supply challenges related to theas well as an improvement in margin for our Branded Sweet Treat line as well as commodity cost and labor pressures. AtLine. Since the end of the thirdsecond quarter of fiscal 2021,2022, we increased prices on fresh doughnuts to help mitigate these cost pressures as well ashave also implemented mid-single digit pricing increases which we believe will improve margins. Additionally, we believe the growing impact of wage inflation in the marketplace.
International Adjusted EBITDA increased $6.6 million, or 43.4%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily driven by revenue growth of 37.4% due to DFD expansion and the adverse impacts of the COVID-19 pandemic on our international markets during the third quarter of fiscal 2020. Revenue growth significantly out-paced expense growth, leading to higher margins consistent with these more established Hub and Spoke markets. We expect the International segment to continue to contribute to strong EBITDA performance as the markets have rebounded well to match or exceed their performance prior to the pandemic.
Market Development Adjusted EBITDA decreased $0.3 million, or 3.6%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021 driven mainly by the impact oflegacy U.S. and Canada franchise acquisitions, which more than offset EBITDA growth in the international franchise markets.
Corporate Adjusted EBITDA decreased $2.5 million, or 36.8%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021 driven by an increase in costs associated with our operation as a public company.
optimization efforts discussed in “Significant Events and Transactions” above will yield improvement to margins in fiscal 2023 and 2024.
International Adjusted EBITDA decreased $4.1 million, or 17.5%, with margin decline of approximately 570 basis points to 20.8% from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, due to cycling record performance a year ago upon the re-opening from COVID-19, cost pressures from labor and commodities, and a challenging consumer environment in the U.K. Additionally, foreign currency translation had an adverse impact of $1.4 million on International’s Adjusted EBITDA during the quarter.
Market Development Adjusted EBITDA increased $0.6 million, or 6.5%, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022 driven by top-line growth of our international franchise markets, which more than offset the impact of acquisitions and foreign currency fluctuations.
ThreeCorporate expenses within Adjusted EBITDA decreased $0.7 million, or 7.8%, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022 driven in part by a decrease of our employee compensation accrual.
Two Quarters ended OctoberJuly 3, 20212022 compared to the ThreeTwo Quarters ended September 27, 2020July 4, 2021
The following table presents our unaudited condensed consolidated results of operations for the threetwo quarters ended OctoberJuly 3, 20212022 and September 27, 2020:the two quarters ended July 4, 2021:
| | | Three Quarters Ended | | | Two Quarters Ended | |
| | October 3, 2021 | | September 27, 2020 | | Change | | July 3, 2022 | | July 4, 2021 | | Change |
(in thousands except percentages) | (in thousands except percentages) | Amount | | % of Revenue | | Amount | | % of Revenue | | $ | | % | (in thousands except percentages) | Amount | | % of Revenue | | Amount | | % of Revenue | | $ | | % |
Net revenues | Net revenues | | | | | | | | | | | | Net revenues | | | | | | | | | | | |
Product sales | Product sales | $ | 989,132 | | | 97.6 | % | | $ | 769,461 | | | 96.6 | % | | $ | 219,671 | | | 28.5 | % | Product sales | $ | 731,829 | | | 97.9 | % | | $ | 654,808 | | | 97.6 | % | | $ | 77,021 | | | 11.8 | % |
Royalties and other revenues | Royalties and other revenues | 24,662 | | | 2.4 | % | | 26,960 | | | 3.4 | % | | (2,298) | | | -8.5 | % | Royalties and other revenues | 15,948 | | | 2.1 | % | | 16,187 | | | 2.4 | % | | (239) | | | -1.5 | % |
Total net revenues | Total net revenues | 1,013,794 | | | 100.0 | % | | 796,421 | | | 100.0 | % | | 217,373 | | | 27.3 | % | Total net revenues | 747,777 | | | 100.0 | % | | 670,995 | | | 100.0 | % | | 76,782 | | | 11.4 | % |
Product and distribution costs | Product and distribution costs | 257,166 | | | 25.4 | % | | 222,409 | | | 27.9 | % | | 34,757 | | | 15.6 | % | Product and distribution costs | 196,669 | | | 26.3 | % | | 165,014 | | | 24.6 | % | | 31,655 | | | 19.2 | % |
Operating expenses | Operating expenses | 462,733 | | | 45.6 | % | | 341,792 | | | 42.9 | % | | 120,941 | | | 35.4 | % | Operating expenses | 342,668 | | | 45.8 | % | | 305,418 | | | 45.5 | % | | 37,250 | | | 12.2 | % |
Selling, general and administrative expense | Selling, general and administrative expense | 163,417 | | | 16.1 | % | | 129,090 | | | 16.2 | % | | 34,327 | | | 26.6 | % | Selling, general and administrative expense | 105,465 | | | 14.1 | % | | 110,467 | | | 16.5 | % | | (5,002) | | | -4.5 | % |
Marketing expenses | Marketing expenses | 31,621 | | | 3.1 | % | | 24,704 | | | 3.1 | % | | 6,917 | | | 28.0 | % | Marketing expenses | 21,374 | | | 2.9 | % | | 19,559 | | | 2.9 | % | | 1,815 | | | 9.3 | % |
Pre-opening costs | Pre-opening costs | 4,335 | | | 0.4 | % | | 9,668 | | | 1.2 | % | | (5,333) | | | -55.2 | % | Pre-opening costs | 2,314 | | | 0.3 | % | | 3,143 | | | 0.5 | % | | (829) | | | -26.4 | % |
Other (income)/expenses, net | (4,365) | | | -0.4 | % | | 7,177 | | | 0.9 | % | | (11,542) | | | -160.8 | % | |
Other income, net | | Other income, net | (1,164) | | | -0.2 | % | | (4,006) | | | -0.6 | % | | 2,842 | | | 70.9 | % |
Depreciation and amortization expense | Depreciation and amortization expense | 74,258 | | | 7.3 | % | | 57,619 | | | 7.2 | % | | 16,639 | | | 28.9 | % | Depreciation and amortization expense | 55,655 | | | 7.4 | % | | 48,595 | | | 7.2 | % | | 7,060 | | | 14.5 | % |
Operating income | Operating income | 24,629 | | | 2.4 | % | | 3,962 | | | 0.5 | % | | 20,667 | | | 521.6 | % | Operating income | 24,796 | | | 3.3 | % | | 22,805 | | | 3.4 | % | | 1,991 | | | 8.7 | % |
Interest expense, net | Interest expense, net | 25,228 | | | 2.5 | % | | 26,263 | | | 3.3 | % | | (1,035) | | | -3.9 | % | Interest expense, net | 14,937 | | | 2.0 | % | | 18,042 | | | 2.7 | % | | (3,105) | | | -17.2 | % |
Interest expense – related party | Interest expense – related party | 10,387 | | | 1.0 | % | | 16,698 | | | 2.1 | % | | (6,311) | | | -37.8 | % | Interest expense – related party | — | | | — | % | | 10,387 | | | 1.5 | % | | (10,387) | | | -100.0 | % |
Other non-operating income, net | (126) | | | — | % | | (469) | | | -0.1 | % | | 343 | | | 73.1 | % | |
Loss before income taxes | (10,860) | | | -1.1 | % | | (38,530) | | | -4.8 | % | | 27,670 | | | 71.8 | % | |
Income tax expense/(benefit) | 8,266 | | | 0.8 | % | | (2,413) | | | -0.3 | % | | 10,679 | | | 442.6 | % | |
Net loss | (19,126) | | | -1.9 | % | | (36,117) | | | -4.5 | % | | 16,991 | | | 47.0 | % | |
Other non-operating expense/(income), net | | Other non-operating expense/(income), net | 435 | | | 0.1 | % | | (858) | | | -0.1 | % | | 1,293 | | | 150.7 | % |
Income/(loss) before income taxes | | Income/(loss) before income taxes | 9,424 | | | 1.3 | % | | (4,766) | | | -0.7 | % | | 14,190 | | | 297.7 | % |
Income tax expense | | Income tax expense | 5,374 | | | 0.7 | % | | 10,608 | | | 1.6 | % | | (5,234) | | | -49.3 | % |
Net income/(loss) | | Net income/(loss) | 4,050 | | | 0.5 | % | | (15,374) | | | -2.3 | % | | 19,424 | | | 126.3 | % |
Net income attributable to noncontrolling interest | Net income attributable to noncontrolling interest | 6,736 | | | 0.7 | % | | 2,880 | | | 0.4 | % | | 3,856 | | | 133.9 | % | Net income attributable to noncontrolling interest | 3,897 | | | 0.5 | % | | 4,829 | | | 0.7 | % | | (932) | | | -19.3 | % |
Net loss attributable to Krispy Kreme, Inc | $ | (25,862) | | | -2.6 | % | | $ | (38,997) | | | -4.9 | % | | $ | 13,135 | | | 33.7 | % | |
Net income/(loss) attributable to Krispy Kreme, Inc | | Net income/(loss) attributable to Krispy Kreme, Inc | $ | 153 | | | — | % | | $ | (20,203) | | | -3.0 | % | | $ | 20,356 | | | 100.8 | % |
Product sales: Product sales increased $219.7$77.0 million, or 28.5%11.8%, from the first threetwo quarters of fiscal 20202021 to the first threetwo quarters of fiscal 2021.2022. Approximately $104.8$12.9 million of the increase in product sales was attributable to shops acquired from franchisees. However, product sales growth was partially offset by $13.2 million attributable to foreign currencies weakening against the U.S. dollar.
Royalties and other revenues: Royalties and other revenues decreased $2.3 million, or 8.5%,remained consistent from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 reflectingto the first two quarters of fiscal 2022, impacted by activity related to the start of business with franchisees in new markets such as Chile, Costa Rica, Jordan, and Switzerland offset by the impact of franchise acquisitions such as KK Canada in the acquisitions of KK Japan and U.S. franchises made during the second half of fiscal 2020 and the firstfourth quarter of fiscal 2021.
The following table presents a further breakdown of total net revenue and organic revenue growth by segment for the threetwo quarters ended OctoberJuly 3, 2022 compared to the two quarters ended July 4, 2021 and September 27, 2020::
| (in thousands except percentages) | (in thousands except percentages) | U.S. and Canada | | International | | Market Development | | Total Company | (in thousands except percentages) | U.S. and Canada | | International | | Market Development | | Total Company |
Total net revenues in first three quarters of fiscal 2021 | $ | 679,195 | | $ | 243,005 | | $ | 91,594 | | $ | 1,013,794 | |
Total net revenues in first three quarters of fiscal 2020 | 557,280 | | 158,575 | | 80,566 | | 796,421 | |
Total net revenues in first two quarters of fiscal 2022 | | Total net revenues in first two quarters of fiscal 2022 | $ | 503,587 | | $ | 181,054 | | $ | 63,136 | | $ | 747,777 |
Total net revenues in first two quarters of fiscal 2021 | | Total net revenues in first two quarters of fiscal 2021 | 453,388 | | 155,743 | | 61,864 | | 670,995 |
Total Net Revenues Growth | Total Net Revenues Growth | 121,915 | | 84,430 | | 11,028 | | 217,373 | Total Net Revenues Growth | 50,199 | | 25,311 | | 1,272 | | 76,782 |
Total Net Revenues Growth % | Total Net Revenues Growth % | 21.9 | % | | 53.2 | % | | 13.7 | % | | 27.3 | % | Total Net Revenues Growth % | 11.1 | % | | 16.3 | % | | 2.1 | % | | 11.4 | % |
Impact of acquisitions | Impact of acquisitions | (99,062) | | — | | (1,584) | | (100,646) | Impact of acquisitions | (14,929) | | — | | 4,213 | | (10,716) |
Impact of foreign currency translation | Impact of foreign currency translation | — | | (21,767) | | — | | (21,767) | Impact of foreign currency translation | — | | 9,953 | | 3,205 | | 13,158 |
Organic Revenue Growth | Organic Revenue Growth | $ | 22,853 | | $ | 62,663 | | $ | 9,444 | | $ | 94,960 | Organic Revenue Growth | $ | 35,270 | | $ | 35,264 | | $ | 8,690 | | $ | 79,224 |
Organic Revenue Growth % | Organic Revenue Growth % | 4.1 | % | | 39.5 | % | | 11.7 | % | | 11.9 | % | Organic Revenue Growth % | 7.8 | % | | 22.6 | % | | 14.0 | % | | 11.8 | % |
Total net revenue growth of $217.4$76.8 million, or approximately 27.3%11.4%, and organic revenue growth of $95.0$79.2 million, or approximately 11.9%11.8%, was driven by the continued and successful execution of our growth strategy and transformationof deploying our omni-channel approach globally. We have continued to increase availability through new pointsGlobal Points of accessAccess and the omni-channel model, particularly the expansion of spokes,Spokes, including DFD Doors, for existing Hubs with Spokes during the first threetwo quarters of fiscal 2021.2022.
U.S. and Canada segment net revenue growth, which reflectsgrew $50.2 million, or approximately 11.1% from the first two quarters of fiscal 2021 to the first two quarters of fiscal 2022, and was impacted by U.S. franchise acquisitions (17 shops in the first quarter of fiscal 20212021) and 51 shops in the second halfacquisition of fiscal 2020), was also driven by strong organic revenue growth. U.S. and Canada net revenue grew $121.9 million, or approximately 21.9% from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021 andKK Canada. U.S. and Canada organic revenue grew $22.9$35.3 million, or approximately 4.1%7.8%, forfrom the period,first two quarters of fiscal 2021 to the first two quarters of fiscal 2022, driven by significant expansion of the DFD business in strategic markets, our adaptation to changing consumer behavior in response to the COVID-19 pandemic (which heavily impacted the segment during the first fiscal quarter of 2020), including increased leverage of Ecommerce and delivery channels, Krispy Kreme and Insomnia Cookies new shop openings, and successful limited time offers. Organic growth was partially offset by an $80.7 million withdrawal in revenue from our legacy wholesale business, reflecting the evolution of the DFD business and the discontinuance of certain legacy extended shelf-life products sold through that channel.LTOs.
Our International segment net revenue grew $84.4$25.3 million, or approximately 53.2%16.3%, from the first threetwo quarters of fiscal 20202021 to the first threetwo quarters of fiscal 2021.2022, in spite of foreign currency translation impacts of $10.0 million from a strengthening U.S. dollar. International organic revenue grew $62.7$35.3 million, or approximately 39.5%22.6%, from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 to the first two quarters of fiscal 2022, driven mainly by successfully leveraging our Hub and Spoke model with added points of access and by COVID-19 restrictions being lifted compared to 2020. Despite certain ongoing COVID-19 restrictions in place during the first fiscal quarter of 2021, our international markets experienced a strong rebound in the second and third fiscal quarters of 2021, helped by our continued increase in global Ecommerce penetration, thesubstantial expansion of DFD Doors, new shop openings, and successful leverage of limited time offers and promotions.LTOs.
Our Market Development segment net revenue grew $11.0$1.3 million, or approximately 13.7%2.1%, from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 driven mainly byto the acquisition of KK Japan in the final quarterfirst two quarters of fiscal 2020.2022, in spite of the impact of franchise acquisitions and by certain foreign currencies devaluing against the U.S. dollar. Market Development organic revenue grew $9.4$8.7 million, or approximately 11.7%14.0%, from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 to the first two quarters of fiscal 2022, driven mainly by improved market conditions forfocused expansion in Japan and international franchise locations as COVID-19 restrictions in certain key markets began to ease.markets.
Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $34.8$31.7 million, or 15.6%19.2%, from the first threetwo quarters of fiscal 20202021 to the first threetwo quarters of fiscal 2021,2022, largely in line with and attributable to the same factors as our revenue growth.
Product and distribution costs as a percentage of revenue decreasedincreased by approximately 250170 basis points from 27.9%24.6% in the first threetwo quarters of fiscal 20202021 to 25.4%26.3% in the first threetwo quarters of fiscal 2021. This margin improvement2022. The increase was primarily driven by inflationary pressures on commodities and logistics costs in the U.S. and Canada segment, which benefitedfirst two quarters of fiscal 2022.
Operating expenses: Operating expenses increased $37.3 million, or 12.2%, from higher margins from its DFD business duethe first two quarters of fiscal 2021 to the shiftfirst two quarters of fiscal 2022, driven mainly by franchise acquisitions, labor cost inflation, and labor investments to fresh doughnut sales fromsupport growth. Franchise acquisitions, which result in additional operating expenses that are needed to run Company-owned operations versus franchises, contributed to the legacy wholesale business. In addition, margins improvedincrease. Operating expenses as a resultpercentage of revenue increased approximately 30 basis points, from 45.5% in the sales mix shift duefirst two quarters of fiscal 2021 to 45.8% in the impactfirst two quarters of franchise acquisitions.fiscal 2022 with decreased
Operating expenses: performance for Hubs without SpokesOperating expenses increased $120.9 million, or 35.4%, for Krispy Kreme U.S. and Canada coupled with transaction volume declines for KKUK. This has been partially offset by efficiency benefits from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021, driven mainly by franchise acquisitions and labor investments.
Operating expensesDFD expansion as a percentage of revenue increased approximately 270 basis points, from 42.9% in the first three quarters of fiscal 2020 to 45.6% in the first three quarters of fiscal 2021 driven mainly by the impact of franchise acquisitions, such as KK Japan, which resulted in additional operating expenses which are needed to run Company-owned operations versus franchises. Additionally, we incurred higher labor costs in part due to labor needed to support theexecute our Hub and Spoke model transformation and labor investments as a result of the current labor markets around the world.transformation.
Selling, general and administrative expense: Selling, general and administrativeSG&A expenses increased $34.3decreased by $5.0 million, or 26.6%4.5%, from the first threetwo quarters of fiscal 20202021 to the first threetwo quarters of fiscal 2021. The increase was driven mainly by an increase in costs related to the completion of our IPO ($14.2 million), increased sha2022. re-based compensation expense related to the accelerated vesting of certain employee restricted stock units in conjunction with the IPO (as well as the re-loading of executive units and stock options during the second quarter of fiscal 2021),and by SG&A expenses incurred related to the impact of franchise acquisitions. As a percentage of revenue, SG&A expenses decreased approximately 10240 basis points, from 16.2%16.5% in the first three quarters of fiscal 2020 to 16.1% in the first threetwo quarters of fiscal 2021 primarily due to 14.1% in the first two quarters of fiscal 2022. The decrease was driven by higher IPO costs and acquisition and integration costs recognized in the first two quarters of fiscal 2021, a decrease of our employee compensation accrual in the second quarter of fiscal 2022, as well as economies of scale from our top-line revenue growth.
Marketing expenses: growthMarketing expenses increased $6.9 million, or 28.0%, from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021, primarily driven by spend associated with the increased revenues during the three quarters.
Pre-opening costs: Pre-opening costs decreased $5.3 million, or 55.2%, from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021, primarily driven by $3.6 million costs associated with our expansion in NYC in the second half of fiscal 2020, including expenses incurred as we prepared for the opening of our NYC flagship Hot Light Theater Shop near the end of the third quarter of fiscal 2020..
Other (income)/expenses,income, net: Other income, net of $4.4$1.2 million in the first threetwo quarters of fiscal 2022 was primarily driven by a gain on sale-leaseback of $2.6 million during the first quarter of fiscal 2022, partially offset by impairment and lease termination costs in the second quarter of fiscal 2022. Other income, net of $4.0 million in the first two quarters of fiscal 2021 was primarily driven by one-time COVID-19 relatedCOVID-related business interruption insurance proceeds of approximately $3.5 million for KKUK in the first quarter of fiscal 2021.U.K. and Ireland.
Depreciation and amortization expense: Depreciation and amortization expense increased $16.6$7.1 million, or 28.9%14.5%, from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 to the first two quarters of fiscal 2022, primarily driven by increased assets placed into service to support the impact of acquired franchisesHub and depreciation resulting from increased capital expenditures.Spoke model evolution.
Interest expense - related party: Interest expense with related parties decreased $6.3$10.4 million, or 37.8% 100.0% from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 to the first two quarters of fiscal 2022, driven by paying off our Related Party Notes in full with KK GP during the second quarter of fiscal 2021.
Income tax expense/(benefit):expense: Income tax expense of $8.3$5.4 million in the first threetwo quarters of fiscal 20212022 was driven by the revaluation of U.K. deferred taxes as a result of the increase in the corporate tax rate from 19.0% to 25.0% beginning in 2023 and disallowed executive compensation in connection with the IPO. Our tax expense was also impacted by the mix of income between the U.S. and foreign jurisdictions.jurisdictions, disallowed executive compensation expense, the recognition of previously unrecognized tax benefits, and a discrete tax benefit related to a legal accrual described in Note 10, Commitments and Contingencies. Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest for the first threetwo quarters of fiscal 2022 decreased $0.9 million, or 19.3%, from the first two quarters of fiscal 2021, increased $3.9 million, or 133.9%, from the first three quarters of fiscal 2020, reflecting strongerdriven by less earnings allocated to the shareholders ofcertain consolidated subsidiaries, particularly Insomnia Cookies, WKS Krispy Kreme and KKUK..
Results of Operations by Segment – ThreeTwo Quarters ended OctoberJuly 3, 20212022 compared to the ThreeTwo Quarters ended September, 27 2020July 4, 2021
The following table presents Adjusted EBITDA by segment for the periods indicated:
| | | Three Quarters Ended | | Change | | Two Quarters Ended | | Change |
(in thousands except percentages) | (in thousands except percentages) | October 3, 2021 | | September 27, 2020 | | $ | | % | (in thousands except percentages) | July 3, 2022 | | July 4, 2021 | | $ | | % |
Adjusted EBITDA | Adjusted EBITDA | | | | | | | | Adjusted EBITDA | | | | | | | |
U.S. and Canada | U.S. and Canada | $ | 75,760 | | | $ | 69,216 | | | $ | 6,544 | | | 9.5 | % | U.S. and Canada | $ | 59,625 | | | $ | 55,848 | | | $ | 3,777 | | | 6.8 | % |
International | International | 60,676 | | | 27,909 | | | 32,767 | | | 117.4 | % | International | 36,779 | | | 39,021 | | | (2,242) | | | -5.7 | % |
Market Development | Market Development | 29,782 | | | 27,959 | | | 1,823 | | | 6.5 | % | Market Development | 21,782 | | | 20,749 | | | 1,033 | | | 5.0 | % |
Corporate | Corporate | (26,005) | | | (21,386) | | | (4,619) | | | -21.6 | % | Corporate | (21,918) | | | (16,822) | | | (5,096) | | | -30.3 | % |
Total Adjusted EBITDA (1) | Total Adjusted EBITDA (1) | $ | 140,213 | | | $ | 103,698 | | | $ | 36,515 | | | 35.2 | % | Total Adjusted EBITDA (1) | $ | 96,268 | | | $ | 98,796 | | | $ | (2,528) | | | -2.6 | % |
1. (1)Refer to “Key Performance Indicators and Non-GAAP Measures” above for a reconciliation of Adjusted EBITDA to net loss.
U.S. and Canada Adjusted EBITDA increased $6.5$3.8 million, or 9.5%6.8%, with margin decline of approximately 50 basis points to 11.8% from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 primarily driven by the revenue growth of 21.9%. Our strategic expansion of the DFD programs contributed to this growth with added points of access. As the DFD business continues to grow it will become even more impactful on profitability in future quarters. The Insomnia Cookies business saw significant EBITDA margin expansion compared to the first threetwo quarters of fiscal 2020 due to2022. This decrease in margin was driven by cost increases in labor and commodities and underperformance in our Hubs without Spokes, partially offset by the top-line revenue growth aided by a returnpositive impacts from an increase in our Points of activity to college campuses. This offset some margin decline forAccess in our Hubs with Spokes. Since the Krispy Kremeend of the second quarter of fiscal 2022, we also implemented mid-single digit pricing increases which we believe will improve margins. Additionally, we believe the legacy U.S. and Canada business which was impacted by increased near-term costs, primarily relatedoptimization efforts discussed in “Significant Events and Transactions” above will yield improvement to a challenging labormargins in fiscal 2023 and commodity environment. The Krispy Kreme U.S. and Canada business also saw increased occupancy costs as a percentage of revenue in part due to NYC rents (including Times Square), and incremental costs from our Branded Sweet Treat Line (initiatives that currently have higher operational expenses compared to the prior comparative period that have not yet been absorbed by the sales generated). Overall for U.S. and Canada, we believe our long-term EBITDA margin outlook remains strong as we see the efforts of our transformation emerging.2024.
International Adjusted EBITDA increased $32.8decreased $2.2 million, or 117.4%5.7%, with margin decline of approximately 480 basis points to 20.3% from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 to the first two quarters of fiscal 2022, due primarily driven by revenue growthto an increase in labor and commodity costs compared to timing of 53.2% due to strong DFD performanceprice increases, as well as widespread impacts of the COVID-19 pandemic on our international markets during 2020, particularlya challenging consumer environment in the United Kingdom and Ireland. AsU.K. Additionally, foreign currency translation had an adverse impact of $2.0 million on International’s Adjusted EBITDA during the end offirst two quarters. Adjusted EBITDA in the third quarterfirst two quarters of fiscal 2021 all shopswas also impacted positively by $3.5 million business interruption insurance proceeds related to COVID-19 in the United Kingdom, Ireland,U.K. Despite these factors, we have seen positive impacts on Adjusted EBITDA margin from Points of Access expansion and Mexico were operational. We expect the International segment to continue to contribute to strong EBITDA performance as the markets have rebounded well to match (or exceed) their performance prior to the pandemic. Additionally, during the first quarter of fiscal 2021, KKUK received one-time insurance proceeds of $3.5 million which helped to offset continued COVID-19 impacts.efficiencies from our Hub and Spoke model evolution.
Market Development Adjusted EBITDA increased $1.8$1.0 million, or 6.5%5.0%, from the first three quarters of fiscal 2020 to the first threetwo quarters of fiscal 2021 to the first two quarters of fiscal 2022 driven mainly by improved market conditions fortop-line growth of our international franchise locationsmarkets and Japan. This growth more than offset the impact of acquisitions and foreign currency translation.
Corporate expenses within Adjusted EBITDA increased $5.1 million, or 30.3%, from the first two quarters of fiscal 2021 to the first two quarters of fiscal 2022 driven by an increase in costs associated with our operation as COVID-19 restrictions in certain key markets continued to ease.a public company.
Capital Resources and Liquidity
Our principal sources of liquidity to date have included cash from operating activities, cash on hand, amounts available under our credit facility, and commercial trade financing including our “Supply Chain Financing Program” or the “SCF Program.” Our primary use of liquidity is to fund the cash requirements of our business operations, including working capital needs, capital expenditures, acquisitions and other commitments.
Our future obligations primarily consist of our debt and lease obligations, as well as commitments under ingredient and other forward purchase contracts. As of January 3, 2021,2, 2022, we had the following future obligations:
•An aggregate principal amount of $806.3$696.3 million outstanding under the 2019 Facility;
• An aggregate principal amount of $337.1 million outstanding under the Related Party Notes;
• Non-cancellable future minimum operating lease payments totaling $645.0$722.6 million;
•Non-cancellable future minimum finance lease payments totaling $43.7$39.9 million; and
•Purchase commitments under ingredient and other forward purchase contracts of $48.3$132.4 million.
As of OctoberJuly 3, 2021,2022, our outstanding principal amount under the 2019 Facility was $700.0$700.8 million. The reductionincrease from the balance as of January 3, 2021 included2, 2022 is due to a net paydowndraw of $80.0$22.0 million on the revolving credit facility, and cumulativewhich was used in part to fund quarterly term loan repayments of $26.3 million, which were funded mainly by capital contributions from shareholders and other minority interests in the first three quarters of fiscal 2021.$17.5 million.
We had cash and cash equivalents of $37.5$38.6 million as of January 3, 20212, 2022 and $44.9$25.8 million as of OctoberJuly 3, 2021.2022. We believe that our existing cash and cash equivalents and debt facilities will be sufficient to fund our operating and capital needs for at least the next twelve months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to acquire franchises, the growth of our presence in new markets and the expansion of our omni-channel model in existing markets. We may enter into arrangements in the future to acquire or invest in complementary businesses, services and technologies. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations and financial condition would be adversely affected.
Cash Flows
We generate significant cash from operations and have substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures and debt repayments. Our requirement for working capital is not significant because our consumers pay us in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the vendor of such items. The following table and discussion present, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities:
| | | Three Quarters Ended | | Two Quarters Ended |
(in thousands) | (in thousands) | October 3, 2021 | | September 27, 2020 | (in thousands) | July 3, 2022 | | July 4, 2021 |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 98,788 | | | $ | 30,752 | | Net cash provided by operating activities | $ | 53,923 | | | $ | 56,845 | |
Net cash used for investing activities | Net cash used for investing activities | (116,716) | | | (125,322) | | Net cash used for investing activities | (48,279) | | | (86,261) | |
Net cash provided by financing activities | 27,360 | | | 122,586 | | |
Net cash (used for)/provided by financing activities | | Net cash (used for)/provided by financing activities | (14,156) | | | 30,553 | |
Cash Flows Provided by Operating Activities
Cash provided by operations totaled $98.8$53.9 million for the first threetwo quarters of fiscal 2021, an increase2022, a decrease of $68.0$2.9 million compared with the amount for the first threetwo quarters of fiscal 2020.2021. Cash provided by operations increased primarilydecreased due to a decline of $9.8 million from changes in operating assets and liabilities, largely as a result of increases in inventories and other current and noncurrent assets and partially offset by increases in accounts payable and accrued liabilities. These effects were also partially offset by operating results producing net income in the first two quarters of fiscal 2022 compared to a smaller net loss in the first threetwo quarters of fiscal 2021 due in part to impacts on business operations during the COVID-19 pandemic in the first three quarters of fiscal 2020. The increase also reflected an improvement of approximately $12.4 million from working capital management primarily as a result of changes in accounts receivable and inventories balances.
We have undertaken broad efforts to improve our working capital position and cash generation, in part by negotiating longer payment terms with vendors. We have an agreement with a third-party administrator which allows participating vendors to track our payments, and if voluntarily elected by the vendor, to sell payment obligations from us to financial institutions as part of our SCF Program. Our typical payment terms for trade payables range up to 180 days outside of the SCF Program, depending on the type of vendors and the nature of the supplies or services. For vendors under the SCF Program, we have established payable terms ranging up to, but not exceeding, 360 days. When participating vendors elect to sell one or more of our payment obligations, our rights and obligations to settle the payables on their contractual due date are not impacted. We have no economic or commercial interest in a vendor’s decision to enter into these agreements and the financial institutions do not provide us with incentives such as rebates or profit sharing under the SCF Program. We agree on commercial terms with vendors for the goods and services procured, which are consistent with payment terms observed at other peer companies in the industry, and as the terms are not impacted by the SCF Program, such obligations are classified as trade payables. Our increased use of the SCF programs has continued through the three quartersquarter ended OctoberJuly 3, 2021.2022.
Cash Flows Used for Investing Activities
Cash used for investing activities totaled $116.7$48.3 million for the first threetwo quarters of fiscal 2021,2022, a decrease in investment of $8.6$38.0 million compared with the first threetwo quarters of fiscal 2020.2021. The decrease is primarily due to $59.7$33.9 million cash used for acquisitions of franchised shops in the first threetwo quarters of fiscal 20202021 (compared to $33.9 millionno cash used for acquisitions in the first two quarters of fiscal 2022), in addition to $3.0 million of proceeds from a sale-leaseback transaction completed in the first three quartersquarter of fiscal 2021), offset by an incremental $14.1 million2022. We also decreased our cash paid for purchases of property and equipment purchasesas a percentage of net revenue in the first threetwo quarters of fiscal 2021.2022 compared to the first two quarters of fiscal 2021, aided by capital-light DFD expansion.
Cash Flows (Used for)/Provided by Financing Activities
Cash provided byused for financing activities totaled $27.4$14.2 million for the first threetwo quarters of fiscal 2021,2022, a decreasereduction in financing of $95.2$44.7 million compared with the first threetwo quarters of fiscal 2020.2021. The decreasereduction in financing was mainly drivenprimarily due to decreasing our reliance on equity financing (reduction of $54.3 million invested, net of distributions) in the first two quarters of fiscal 2022 compared to the first two quarters of fiscal 2021, in addition to our payment of $12.5 million of issuance costs in connection with the IPO during the first quarter of fiscal 2022.
These reductions in financing were partially offset by a variance$17.1 million of $84.1 million cash flowsinflows related to structured payables programs (net paymentsproceeds on structured payables of $28.1$19.6 million in the threetwo quarters ended OctoberJuly 3, 20212022 compared to net proceeds from structured payables of $55.9$2.5 million in the threetwo quarters ended September 27, 2020), as we utilized excess cash to pay off outstanding balances.July 4, 2021). We utilize various card products issued by financial institutions to facilitate purchases of goods and services. By using these products, we may receive differing levels of rebates based on timing of repayment. The payment obligations under these cards products are classified as structured payables on our Condensed Consolidated Balance Sheets and the associated cash flows are included in the financing section of our Condensed Consolidated Statement of Cash Flows.
Other highlights from the three quarters ended October 3, 2021 included:
• Repayments of long-term debt and lease obligations (net of proceeds from the issuance of debt) of $447.6 million, which included the extinguishment of the Related Party Notes and the Term Loan Facility described further below;
• Proceeds from investments by shareholders of $701.2 million, including receipt of $527.3 million IPO proceeds net of underwriting discounts (but excluding $12.5 million capitalized offering expenses unpaid as of the end of the third quarter of fiscal 2021); and
• Distributions to shareholders and payments for the repurchase and retirement of common stock of $198.1 million.
Debt
Our long-term debt obligations consist of the following:
| (in thousands) | (in thousands) | October 3, 2021 | | January 3, 2021 | (in thousands) | July 3, 2022 | | January 2, 2022 |
2019 Facility - term loan | 2019 Facility - term loan | $ | 630,000 | | | $ | 656,250 | | 2019 Facility - term loan | $ | 603,750 | | | $ | 621,250 | |
2019 Facility - revolving credit facility | 2019 Facility - revolving credit facility | 70,000 | | | 150,000 | | 2019 Facility - revolving credit facility | 97,000 | | | 75,000 | |
Less: Debt issuance costs | Less: Debt issuance costs | (4,229) | | | (5,419) | | Less: Debt issuance costs | (3,040) | | | (3,833) | |
Financing obligations | Financing obligations | 25,513 | | | 26,224 | | Financing obligations | 28,147 | | | 24,473 | |
Total long-term debt | Total long-term debt | 721,284 | | | 827,055 | | Total long-term debt | 725,857 | | | 716,890 | |
Less: Current portion of long-term debt | Less: Current portion of long-term debt | (38,608) | | | (41,245) | | Less: Current portion of long-term debt | (39,844) | | | (36,583) | |
Long-term debt, less current portion | Long-term debt, less current portion | 682,676 | | | 785,810 | | Long-term debt, less current portion | $ | 686,013 | | | $ | 680,307 | |
Related party notes payable (excluding accrued interest) | — | | | 337,148 | | |
Total debt and related party notes payable | $ | 682,676 | | | $ | 1,122,958 | | |
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2019 Facility
On June 13, 2019, we entered into a credit agreement (the “2019 Facility”). The 2019 Facility provides for senior secured credit facilities in the form of $700.0 million in aggregate principal of term loans and $300.0 million of revolving capacity. Borrowings under the 2019 Facility are subject to an interest rate of one-month LIBOR plus 2.25% if our Total Net Leverage Ratio (as defined in the 2019 Facility) equals or exceeds 4.00 to 1.00, 2.00% if our Total Net Leverage Ratio is less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00 or 1.75% if our Total Net Leverage Ratio is less than 3.00 to 1.00, as determined under the 2019 Facility. We are required to make equal installments of 1.25% of the aggregate closing date principal amount of the term loans on the last business day of each fiscal quarter. All remaining term loan and revolving loan balances are to be due five years from the initial closing date.
Under the terms of the 2019 Facility, we are subject to a requirement to maintain a Total Net Leverage Ratio of less than 5.505.25 to 1.00 as of OctoberJuly 3, 2021,2022, which reduces to 5.00 to 1.00 by April 2, 2023. The Total Net Leverage Ratio under the 2019 Facility is defined as the ratio of (a) Total Indebtedness (as defined in the 2019 Facility, which includes all debt and finance lease obligations) minus unrestricted cash and cash equivalents to (b) a defined calculation of Adjusted EBITDA (“2019 Facility Adjusted EBITDA”) for the most recently ended Test Period (as defined in the 2019 Facility). The 2019 Facility Adjusted EBITDA for purposes of these restrictive covenants includes incremental adjustments beyond those included in our Adjusted EBITDA non-GAAP measure. Specifically, the 2019 Facility Adjusted EBITDA definition includes pro forma impact of EBITDA to be received from new shop openings and acquisitions for periods not yet in operation, certain acquisition related
synergies and cost optimization activities and incremental add-backs for pre-opening costs and for COVID-19 expenses and lost profits.costs. Our Total Net Leverage Ratio was 3.19 to 1.00 as of the end of the third quarter of fiscal 2021 compared to 2.923.31 to 1.00 as of the end of the second quarter of fiscal 2022 compared to 2.99 to 1.00 as of the end of fiscal 2021, primarily due to certain IPO-related costs which were paid during the third quarter of fiscal 2021, including share repurchasesa reduction in cash and distributions to shareholders.cash equivalents.
We were in compliance with the financial and other covenants related to the 2019 Facility as of OctoberJuly 3, 20212022 and expect to remain in compliance over the next 12 months. If we are unable to meet the 2019 Facility financial or other covenants in future periods, it may negatively impact our liquidity by limiting our ability to draw on the revolving credit facility, could result in the lenders accelerating the maturity of such indebtedness and foreclosing upon the collateral pledged thereunder, and could require the replacement of the 2019 Facility with new sources of financing, which there is no guaranty we could secure.
Related Party Notes
We were previously party to a senior unsecured note agreement with KK GP for an aggregate principal amount of $283.1 million. In April 2019, we entered into an additional unsecured note with KK GP for $54.0 million (such notes together, the “Related Party Notes”). As of January 3, 2021, the outstanding amount of principal and interest was $344.6 million. The Related Party Notes were paid off in full during the second quarter of fiscal 2021. The interest expense was $10.4 million for the quarter and three quarters ended October 3, 2021, and $5.6 million and $16.7 million for the quarter and three quarters ended September 27, 2020. No interest expense was incurred for the quarter ended October 3, 2021.
Term Loan Facility
On June 10, 2021, we entered into the Term Loan Facility. On June 17, 2021, we borrowed $500.0 million under the Term Loan Facility. The borrowings under the Term Loan Facility bore an all-in interest rate of 2.68175%. As of October 3, 2021, there was no outstanding principal amount under the Term Loan Facility, as it was paid off in full and terminated on July 7, 2021, primarily using the net IPO proceeds with the difference being partially funded by a drawdown of $100.0 million on the 2019 Facility’s revolving credit facility. The Term Loan Facility would have matured on the earlier of (i) June 10, 2022 and (ii) within four business days following consummation of the IPO. The interest expense was $0.1 million and $2.4 million for the quarter and three quarters ended October 3, 2021, respectively, which included $1.7 million of debt issuance costs incurred and recognized as expenses in the second quarter of fiscal 2021.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with U.S. GAAP. The preparation of the Condensed Consolidated Financial Statements requires the use of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our Condensed Consolidated Financial Statements. Actual results could differ from the estimates made by management.
There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our IPO Prospectus.Annual Report on Form 10-K for the year ended January 2, 2022.
New Accounting Pronouncements
Refer to Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a detailed description of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Effects of Changing Prices – Inflation
We are exposed to the effects of commodity price fluctuations in the cost of ingredients of our products, of which flour, sugar and shortening are the most significant. During the third quarterfirst two quarters of fiscal 20212022, we have experiencedcontinued to experience headwinds from commodity inflation globally. We have undertaken efforts to effectively manage inflationary cost increases through rapid inventory turnover and reduced inventory waste, increased focus on resiliency of our supply chains, and an ability to adjust pricing of our products (including price increases taking effect at the end of the third quarter of fiscal 2021).products. Additionally, from time to time we may enter into forward contract for supply through our vendors for raw materials which are ingredients of our products or which are components of such ingredients, including wheat and soybean oil.
We are also exposed to the effects of commodity price fluctuations in the cost of gasoline used by our delivery vehicles. To mitigate the risk of fluctuations in the price of our gasoline purchases, we may directly purchase commodity futures contracts.
Interest Rate Risk
We are exposed to changes in interest rates on any borrowings under our debt facilities, which bear interest based on the one-month LIBOR (with a floor of zero). Generally, interest rate changes could impact the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are held constant. To mitigate the impact of changes in LIBOR on interest expense for a portion of our variable rate debt, we have entered into interest rate swaps on $505.0 million notional of our $700.0$700.8 million of outstanding debt under the 2019 Facility as of OctoberJuly 3, 2021,2022, which we account for as cash flow hedges. Based on the $195.0$195.8 million of unhedged outstanding as of OctoberJuly 3, 2021,2022, a 100 basis point increase in the one-month LIBOR would result in a $2.0 million increase in interest expense for a twelve-month period, while a 100 basis point decrease would result in the floor of zero and thus a $0.7 million decrease in interest expense of $0.2 million for a twelve-month period based on the daily average of the one-month LIBOR through the fiscal quarter ended OctoberJuly 3, 2021.2022.
The Financial Conduct Authority in the U.K. intends to phase out LIBOR by the end of 2023. We have negotiated terms in consideration of this discontinuation and do not expect that the discontinuation of the LIBOR rate, including any legal or regulatory changes made in response to its future phase out, will have a material impact on our liquidity or results of operations.
Foreign Currency Risk
We are exposed to foreign currency translation risk on the operations of our subsidiaries that have functional currencies other than the U.S. dollar, whose revenues accounted for approximately 27%29% of our total net revenues through the threetwo quarters ended OctoberJuly 3, 2021.2022. A substantial majority of these revenues, or approximately $275.1$215.1 million through the threetwo quarters ended OctoberJuly 3, 2021,2022, were attributable to subsidiaries whose functional currencies are the Canadian dollar, the British pound sterling, the Euro, the Australian dollar, the New Zealand dollar, the Mexican peso, and the Japanese yen. A 10% increase or decrease in the average fiscal 2021 exchange rate of the Canadian dollar, the British pound sterling, the Euro, the Australian dollar, the New Zealand dollar, the Mexican peso, and the Japanese yen against the U.S. dollar would have resulted in a decrease or increase of approximately $27.5$21.5 million in our total net revenues through the threetwo quarters ended OctoberJuly 3, 2021.2022.
From time to time, we engage in foreign currency exchange and credit transactions with our non-U.S. subsidiaries, which we typically hedge. To date, the impact of such transactions, including the cost of hedging, has not been material. We do not engage in foreign currency or hedging transactions for speculative purposes.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of OctoberJuly 3, 2021,2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.Quarterly Report on Form 10-Q.
There were no changes during the fiscal quarter ended OctoberJuly 3, 20212022 in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of conducting our business, we have in the past and may in the future become involved in various legal actions and other claims. We may also become involved in other judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses. Some of these matters may involve claims of substantial amounts. These legal proceedings may be subject to many uncertainties and there can be no assurance of the outcome of any individual proceedings. We do not presently anticipate any material legal proceedings that, if determined adversely to us, would have a material adverse effect on our financial position, results of operations or cash flows. See Note 10, Commitments and Contingencies, to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for information regarding certain legal proceedings in which we are involved. Shareholder Derivative Suit
On December 3, 2021, a shareholder of the Company brought a shareholder class and derivative action complaint against the members of the Company’s Board of Directors, the Company, JAB Holdings B.V. (“JAB”), and certain entities related to JAB (JAB and the related entities, collectively the “JAB Entities”). The plaintiff alleges that the members of the Company’s Board breached their fiduciary duty by allowing the JAB Entities to conduct a creeping takeover of the Company and that the JAB Entities aided and abetted those breaches.
On December 16, 2021, the court denied the plaintiff’s request for an emergency temporary restraining order to prohibit further acquisitions of the Company’s stock by the JAB Entities. On March 14, 2022, the Company entered into a letter agreement with the JAB Entities that, among other things, (i) requires JAB to provide notice at least 30 days prior to an acquisition of voting rights, directly or indirectly, that would exceed 45% of the Company’s total outstanding voting stock, (ii) restricts directors who are employees or designees of the JAB Entities from involvement in the consideration of such acquisition by the Company’s Board of Directors, (iii) permits the JAB Entities to enter into future cash-settled total return swap agreements provided that the JAB Entities must comply with the 30-day notice requirement before acquiring shares from or entering into a voting arrangement with the counterparty and that the JAB Entities do not try to influence the voting decisions of the counterparty. The terms of this agreement shall remain in effect for one year from the date of signing, subject to extension by JAB in its sole discretion.
On March 29, 2022, the parties filed a stipulation and order to dismiss the action with prejudice as moot and begin negotiation for an award of attorneys’ fees and reimbursement of expenses. No compensation in any form has passed directly or indirectly from any defendant(s) in the action to plaintiff or plaintiff’s attorneys in this action, and no promise to give any such compensation has been made. At this time the Company is unable to predict the amount of attorneys’ fees (if any) that the court will award, but we do not expect the amount to be material to the Company.
Item 1A. Risk Factors
ThereWith the exception of the changes discussed below, there have been no material changes tofrom the risk factors previously disclosed in our IPO Prospectus“Risk Factors” in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the year ended January 3, 2021.2, 2022.
We will become increasingly reliant on a single vendor for distribution of materials and supplies in the U.S. and a portion of Canada. If the vendor fails to provide these materials and supplies per the agreement, our and our franchisees’ ability to make doughnuts could be negatively affected.
To consolidate our third-party logistics operations, we have entered into an exclusive distribution agreement (the “Distribution Agreement”) with BakeMark USA LLC, a Delaware limited liability company (“BakeMark”). The Distribution Agreement, among other things, grants BakeMark exclusive rights to distribute ingredients, packaging, and supplies to Company-owned and franchise shops in the U.S., except for New York City and British Columbia, Canada. Exclusivity is granted on a regional basis once BakeMark commences distribution to Company-owned and franchise shops in each of the territories, with all regions expected to be served by BakeMark on or before March 15, 2023. The initial term ends on December 31, 2028, and renews automatically on an annual basis unless either the Company or BakeMark elect not to continue the arrangement.
As BakeMark distribution progresses, we will become increasingly reliant on BakeMark to distribute materials and supplies. If BakeMark experiences economic or operational challenges, this could cause disruptions to our supply chain in the U.S. and Canada. We cannot control the factors that may cause such challenges, and we may not be able to find an alternative distribution channel in a timely manner to prevent disruptions to our operations, which might even require that we temporarily
stop production in the affected shops until other arrangements are taken. Additionally, the cost of a replacement distribution channel may also affect the financial performance of these shops. Severe disruption to BakeMark could result in a material and adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 1, 2021 we completed the IPO of our Class A common stock, $0.01 par value, pursuant to our Registration Statement on Form S-1, as amended (No. 333-256664) that was declared effective on June 30, 2021. We sold 29,411,765 shares in the offering at a price to the public of $17.00 per share. The lead book-running managers in the offering were J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, BofA Securities, Inc. and Citigroup Global Markets Inc.
The net proceeds received by us in the offering were $458.8 million.
None of the underwriting discounts and commissions or offering expenses were incurred or paid to our directors or officers or their associates or to persons owning 10% or more of our common stock or to any affiliates of ours. In the quarter ended October 3, 2021 we used the net proceeds of the offering along with additional borrowings under our 2019 Facility revolving credit facility as follows: (i) $500.0 million to repay all of the outstanding indebtedness under the Term Loan Facility, (ii) $20.3 million to repurchase approximately 1.3 million shares of common stock from certain of our executive officers at the price to be paid by the underwriters and (iii) $15.5 million to repurchase approximately 1.0 million shares of common stock from certain of our executive officers for payment of their withholding taxes with respect to the RSUs vesting or for which vesting was accelerated in connection with the offering.
On August 2, 2021 the underwriters exercised their over-allotment option and purchased an additional 3,500,000 shares of common stock at the IPO price less the underwriting discounts and commissions. The net proceeds received on August 2, 2021 were $56.1 million after deducting underwriting discounts and commissions of $3.4 million. This brought total net IPO proceeds to $514.9 million.None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit No. | | Description of Exhibit |
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| | Master Amendment No. 1, dated as of July 8, 2021, among Cotton Parent, Inc., Krispy Kreme, Doughnuts, Inc., the other guarantors party thereto, the lenders party theretoJAB Indulgence B.V., and Citibank, N.A., as administrative agentJAB Holdings B.V. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File number 001-40573, filed on July 13, 2021,March 16, 2022, and incorporated by reference herein). |
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| | Joinder to Credit Agreement,Exclusive distribution agreement dated as of July 8, 2021, betweenMarch 15, 2022, by and among Krispy Kreme Inc.Doughnut Corporation and Citibank, N.A., as administrative agent (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, File number 001-40573, filed on July 13, 2021, and incorporated by reference herein).BakeMark USA LLC. |
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10.3* | | |
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31.1* | | |
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101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended OctoberJuly 3, 2021,2022, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income/(Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
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* | Filed herewith. |
** | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on November 9, 2021.August 17, 2022.
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Krispy Kreme, Inc. |
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By: | /s/ Josh Charlesworth |
Name: | Josh Charlesworth |
Title: | Global President, Chief Operating Officer & Chief Financial Officer |