# Krispy Kreme, Inc. (DNUT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Krispy Kreme, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1857154/000185715423000020/dnut-20230101.htm
Accession: 0001857154-23-000020
Filing date: 2023-03-02
Report date: 2023-01-01
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DNUT/
All MD&A years: /company/DNUT/mda/
Previous year: /company/DNUT/mda/fy2022/ (FY 2022)
Next year: /company/DNUT/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section of the Annual Report on Form 10-K generally discusses fiscal 2022 and fiscal 2021 items and year-to-year comparisons of fiscal 2022 to fiscal 2021. Discussions of fiscal 2020 items and year-to-year comparisons of fiscal 2021 and fiscal 2020 are not included in this Annual Report on Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 2, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. The words “believe,” “may,” “could,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “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 including, without limitation, those described under the heading “Risk Factors” in this Annual Report on Form 10-K. 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. 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.

General

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 over 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.

We operate and report financial information on a 52 or 53-week fiscal year ending on the Sunday closest to December 31. Fiscal year 2022 reflects our results of operations for the 52-week period ended January 1, 2023. Fiscal year 2021 reflects our results of operations for the 52-week period ended January 2, 2022.

We conduct our business through the following three reported segments:

•U.S. and Canada: Includes all our Company-owned operations in the U.S. and Canada, including our Krispy Kreme and Insomnia Cookies-branded shops, DFD and our Branded Sweet Treat Line;

•International: Includes all our Krispy Kreme Company-owned operations in the U.K., Ireland, Australia, New Zealand and Mexico; and

•Market Development: Includes franchise operations across the globe, as well as the Company-owned operations in Japan.

The following table presents a summary of our financial results for the periods presented:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["(in thousands, except percentages)","January 1, 2023 (52 weeks)","","January 2, 2022 (52 weeks)","","% Change"],["Total Net Revenues (1)","$","1,529,898","","","$","1,384,391","","","10.5","%"],["Net Loss","(8,775)","","","(14,843)","","","40.9","%"],["Adjusted Net Income (2)","56,975","","","66,723","","","-14.6","%"],["Adjusted EBITDA (2)","190,729","","","187,945","","","1.5","%"]]
[[/GREPCENT_TABLE]]

(1)We generated 12.1% and 12.5% organic revenue growth in fiscal 2022 and fiscal 2021, respectively.

(2)Refer to “Key Performance Indicators and Non-GAAP Measures” below for more information as to how we define and calculate Adjusted EBITDA and Adjusted Net Income and for a reconciliation of Adjusted EBITDA and Adjusted Net Income to net loss, the most comparable GAAP measure.

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Significant Events and Transactions

Executing on our Transformation Strategy

We made strong progress on the execution of our omni-channel strategy in fiscal 2022, where we focus on being able to deliver fresh doughnuts and cookies to where our consumers are located. We continued to add quality Global Points of Access across our network as we convert markets into fully implemented Hub and Spoke models, including a net total of 1,410 new Global Points of Access in fiscal 2022 to surpass 11,800 Global Points of Access. The primary driver of the increased Points of Access during the year was the continued expansion of our low capital DFD network in alignment with our transformation strategy, as we added 1,273 DFD Doors globally, including 537 DFD Doors to the U.S. and Canada segment, 544 to the International segment, and 192 to the Market Development segment. As highlighted by the more developed model within the International segment, the capital-efficient Hub and Spoke distribution model increases accessibility to our consumers and drives higher profitability and increased margins. We expect DFD growth to continue to be one of our most significant drivers of earnings growth, through both increased door count and growth in average revenue per door per week (“APD”), which rose by 9.9% in the U.S. and Canada in fiscal 2022 compared to 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 15.0% from $4.0 million in fiscal 2021 to a record high $4.6 million in fiscal 2022. Our trailing four quarters International Sales per Hub also increased by 7.7% from $9.1 million to $9.8 million for the same periods. The increase in our Sales per Hub domestically and internationally led to 10.5% net revenue growth and 12.1% organic revenue growth in fiscal 2022. Our goal is to continue to grow our Sales per Hub over time, which we believe will drive higher margins and higher return on invested capital.

In addition to grocery and convenience stores, we have also begun to look strategically at additional DFD channels such as Quick Service Restaurant (“QSR”), club membership, and drug stores to further broaden availability of our doughnuts to consumers. At the beginning of the fourth quarter of fiscal 2022, we announced a partnership with McDonald’s on a small-scale test to offer doughnuts at McDonald’s restaurants in Louisville, Kentucky and the surrounding area, which began October 26, 2022. We have also recently begun small tests with Costco and Target. We continue to look for new ways to increase access to fresh doughnuts through our DFD network – a key element of our omni-channel strategy to attain more than 75,000 Global Points of Access.

During fiscal 2022, the macroeconomic environment has continued to be 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 business. To protect margins, we increased prices globally throughout the year. At the same time, we reduced the level of discounting beginning late in the third quarter of fiscal 2022, seeing a beneficial impact on adjusted EBITDA margins in the fourth quarter.

Additionally, during fiscal 2022, we continued to progress on 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 includes converting shop types to better leverage labor costs and to better facilitate the expansion of DFD, reviewing the overall cost structure, and other 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 additional Doughnut Shops in the U.S. during the second half of fiscal 2022. We will continue to assess the Krispy Kreme U.S. and Canada portfolio and business lines heading into fiscal 2023.

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Increasing Our Global Presence

Another of our key strategic initiatives is to increase our global presence as we become the Most Loved Sweet Treat Brand in the World. We continue to grow the percentage of our revenues and Adjusted EBITDA generated outside the U.S. We expect to open in at least three new countries a year, with a key focus in Western Europe and select Asian and South American countries. We have signed new franchise agreements with plans to open Krispy Kreme-branded shops in Chile, Costa Rica, Switzerland, Ecuador, Jamaica, and Kazakhstan and we expect to have further announcements in fiscal 2023 as we grow our global business. In fiscal 2022, we also signed a new agreement for 33% equity ownership of Krispy Kreme development rights in France, with shop openings expected in the future.

Ecommerce, Brand, and Innovation

Ecommerce represented 18.0% of our Doughnut and Cookie Shop sales (excluding DFD) for fiscal 2022, up from less than 10% pre-COVID-19 pandemic and 17.2% for fiscal 2021. We are also expanding the delivery radius in several key markets around the world through partnerships with third-party aggregators.

Innovation is a significant driver of frequency as we create and introduce premium, fresh and buzz-worthy offerings to consumers across our Points of Access. High profile initiatives during the fourth quarter of fiscal 2022 included holiday and seasonal activations such as Halloween, Thanksgiving, and Christmas, among many others around the world.

Key Performance Indicators and Non-GAAP Measures

We monitor the key business metrics 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 metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.

Throughout this Annual Report on Form 10-K, we utilize “Global Points of Access” as a key performance indicator. Global Points of Access reflect all locations at which fresh doughnuts or cookies can be purchased. We define Global Points of Access to include all Hot Light Theater Shops, Fresh Shops, Carts and Food Trucks, 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 Points of Access 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.

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The following table presents our Global Points of Access, by segment and type, as of the end of fiscal 2022, fiscal 2021, and fiscal 2020:

[[GREPCENT_TABLE]]
[["","Global Points of Access (1)"],["","Fiscal Years Ended"],["","January 1, 2023","","January 2, 2022","","January 3, 2021"],["U.S. and Canada: (2)"],["Hot Light Theater Shops","238","","","241","","","229"],["Fresh Shops","68","","","66","","","47"],["Cookie Shops","231","","","210","","","184"],["Carts, Food Trucks, and Other (3)","\u2014","","","2","","","\u2014"],["DFD Doors","5,741","","","5,204","","","4,137"],["Total","6,278","","","5,723","","","4,597"],["International:"],["Hot Light Theater Shops","37","","","32","","","28"],["Fresh Shops","388","","","370","","","359"],["Carts, Food Trucks, and Other (3)","14","","","1","","","\u2014"],["DFD Doors","3,032","","","2,488","","","1,986"],["Total","3,471","","","2,891","","","2,373"],["Market Development: (4)"],["Hot Light Theater Shops.","111","","","109","","","119"],["Fresh Shops","867","","","782","","","732"],["Carts, Food Trucks, and Other (3)","27","","","31","","","30"],["DFD Doors","1,083","","","891","","","465"],["Total","2,088","","","1,813","","","1,346"],["Total Global Points of Access (as defined)","11,837","","","10,427","","","8,316"],["Total Hot Light Theater Shops","386","","","382","","","376"],["Total Fresh Shops","1,323","","","1,218","","","1,138"],["Total Cookie Shops","231","","","210","","","184"],["Total Shops","1,940","","","1,810","","","1,698"],["Total Carts, Food Trucks, and Other","41","","","34","","","30"],["Total DFD Doors","9,856","","","8,583","","","6,588"],["Total Global Points of Access (as defined)","11,837","","","10,427","","","8,316"]]
[[/GREPCENT_TABLE]]

(1)Excludes Branded Sweet Treat Line distribution points.

(2)Includes Points of Access that were acquired from franchisees in the U.S. and Canada. These Points of Access were previously included in the Market Development segment prior to the respective acquisition dates. See Note 2, Acquisitions, to the audited Consolidated Financial Statements for further information.

(3)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. Other includes a vending machine. Points of Access in this category are primarily found in international locations, in airports, train stations, etc.

(4)Includes locations in Japan, which are Company-owned. All remaining Points of Access in the Market Development segment relate to our franchise business. As of January 1, 2023, there were five Hot Light Theater Shops, 54 Fresh Shops, and 166 DFD Doors in Japan operating. As of January 2, 2022, there were four Hot Light Theater Shops, 48 Fresh Shops, and 105 DFD Doors in Japan operating.

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As of January 1, 2023, we had 11,837 Global Points of Access, with 1,940 Krispy Kreme and Insomnia Cookies-branded shops, 41 Carts and Food Trucks, and 9,856 DFD Doors. During fiscal 2022, we added a net 1,410 Global Points of Access, with a net 130 additional shops globally, including four Hot Light Theater Shops, 105 Fresh Shops, and 21 Insomnia Cookie Shops. Hot Light Theater Shop openings during the year included expansion in Staten Island, New York and Indianapolis, Indiana for the U.S. and Canada segment, Dublin, Ireland and Queretaro, Mexico for the International segment, and Amman, Jordan for the Market Development segment which represents our first franchise shop in Jordan. These additions were offset by the strategic exit of Hot Light Theater Shops in the U.S. discussed in “Significant Events and Transactions.” 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 DFD Doors (“Spokes”) through an integrated network of Company-operated delivery routes, ensuring quality and freshness. Specific to the U.S. and Canada segment, certain legacy Hubs have not historically had Spokes. Many Hubs in the U.S. and Canada segment are being converted to add Spokes while certain legacy Hubs will never have the ability or need to add Spokes.

The following table presents our Hubs, by segment and type, as of the end of fiscal 2022, fiscal 2021, and fiscal 2020, respectively:

[[GREPCENT_TABLE]]
[["","Hubs"],["","Fiscal Years Ended"],["","January 1, 2023","","January 2, 2022","","January 3, 2021"],["U.S. and Canada:"],["Hot Light Theater Shops (1)","232","","","238","","","226"],["Doughnut Factories","4","","","4","","","5"],["Total","236","","","242","","","231"],["Hubs with Spokes","137","","","126","","","113"],["Hubs without Spokes","99","","","116","","","118"],["International:"],["Hot Light Theater Shops (1)","28","","","25","","","27"],["Doughnut Factories","11","","","11","","","9"],["Total","39","","","36","","","36"],["Hubs with Spokes","39","","","36","","","36"],["Market Development:"],["Hot Light Theater Shops (1)","106","","","106","","","116"],["Doughnut Factories","27","","","27","","","26"],["Total","133","","","133","","","142"],["Total Hubs","408","","","411","","","409"]]
[[/GREPCENT_TABLE]]

(1)Includes only Hot Light Theater Shops and excludes Mini Theaters. A Mini Theater is a Spoke location that produces 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 U.S. (“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

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measures in conjunction with our historical Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K.

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 “organic revenue growth” as the growth in revenues, excluding (i) acquired shops owned by us for less than 12 months following their acquisition, (ii) the impact of foreign currency exchange rate changes, (iii) shop closures related to restructuring programs such as the shop portfolio optimization program initiated for Krispy Kreme U.S. and Canada during fiscal 2022, and (iv) 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. 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 Adjust 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 to Adjusted EBITDA and net loss to Adjusted Net Income for the periods presented:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["(in thousands)","January 1, 2023","","January 2, 2022","","January 3, 2021"],["Net loss","$","(8,775)","","","$","(14,843)","","","$","(60,940)"],["Interest expense, net","34,102","","","32,622","","","34,741"],["Interest expense \u2014 related party (1)","\u2014","","","10,387","","","22,468"],["Income tax expense","612","","","10,745","","","9,112"],["Depreciation and amortization expense","110,261","","","101,608","","","80,398"],["Share-based compensation","18,170","","","22,923","","","11,601"],["Employer payroll taxes related to share-based compensation","312","","","2,044","","","\u2014"],["Other non-operating expense/(income), net (2)","3,036","","","2,191","","","(1,101)"],["New York City flagship Hot Light Theater Shop opening (3)","\u2014","","","\u2014","","","6,513"],["Strategic initiatives (4)","2,841","","","\u2014","","","20,517"],["Acquisition and integration expenses (5)","2,333","","","5,255","","","12,679"],["New market penetration expenses (6)","1,511","","","\u2014","","","\u2014"],["Shop closure expenses (7)","19,465","","","2,766","","","6,269"],["Restructuring and severance expenses (8)","7,125","","","1,733","","","\u2014"],["IPO-related expenses (9)","\u2014","","","14,534","","","3,184"],["Gain on sale-leaseback","(6,549)","","","(8,673)","","","\u2014"],["Other (10)","6,285","","","4,653","","","(7)"],["Adjusted EBITDA","$","190,729","","","$","187,945","","","$","145,434"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["(in thousands)","January 1, 2023","","January 2, 2022","","January 3, 2021"],["Net loss","$","(8,775)","","","$","(14,843)","","","$","(60,940)"],["Interest expense \u2014 related party (1)","\u2014","","","10,387","","","22,468"],["Share-based compensation","18,170","","","22,923","","","11,601"],["Employer payroll taxes related to share-based compensation","312","","","2,044","","","\u2014"],["Other non-operating expense/(income), net (2)","3,036","","","2,191","","","(1,101)"],["New York City flagship Hot Light Theater Shop opening (3)","\u2014","","","\u2014","","","6,513"],["Strategic initiatives (4)","2,841","","","\u2014","","","20,517"],["Acquisition and integration expenses (5)","2,333","","","5,255","","","12,679"],["New market penetration expenses (6)","1,511","","","\u2014","","","\u2014"],["Shop closure expenses (7)","19,715","","","2,766","","","6,269"],["Restructuring and severance expenses (8)","7,125","","","1,733","","","\u2014"],["IPO-related expenses (9)","\u2014","","","14,534","","","3,184"],["Gain on sale-leaseback","(6,549)","","","(8,673)","","","\u2014"],["Other (10)","6,285","","","4,653","","","(7)"],["Amortization of acquisition related intangibles (11)","28,456","","","29,803","","","26,328"],["KKI Term Loan Facility interest and debt issuance costs (12)","\u2014","","","2,448","","","\u2014"],["Tax impact of adjustments (13)","(14,609)","","","(12,434)","","","(27,629)"],["Tax specific adjustments (14)","(2,876)","","","3,936","","","22,464"],["Adjusted net income","$","56,975","","","$","66,723","","","$","42,346"]]
[[/GREPCENT_TABLE]]

(1)Consists of interest expense related to the Related Party Notes which were paid off in full during the second quarter of fiscal 2021.

(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)Fiscal 2022 consists mainly of equipment disposals, equipment relocation and installation, consulting and advisory fees, and other costs associated with our shift of Branded Sweet Treat Line manufacturing capability from Burlington, Iowa to Winston-Salem, North Carolina. Fiscal 2020 consists mainly of consulting and advisory fees, personnel transition costs, and network conversion and set-up costs related to the evolution of the Company’s legacy wholesale business in the U.S.

(5)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-related activities for the applicable period.

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

(7)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment. Shop closure expenses included in Adjusted Net Income for fiscal 2022 are inclusive of accelerated depreciation related to replacing a point of sale system.

(8)Fiscal 2022 consists of costs associated with restructuring of the global and U.S. executive teams. Fiscal 2021 consists of severance and related benefits costs associated with the Company’s realignment of the Company Shop organizational structure to better support the DFD and Branded Sweet Treat Line businesses.

(9)Includes consulting and advisory fees incurred in connection with preparation for and execution of the Company’s IPO.

(10)Fiscal 2022 and fiscal 2021 consist primarily of legal expenses incurred outside the ordinary course of business on matters described in Note 14, Commitments and Contingencies, to the audited Consolidated Financial Statements, including the net settlement of approximately $3.3 million negotiated with TSW in fiscal 2022. Fiscal 2020 consists primarily of fixed asset and impairment expenses, net of a gain on the sale of land, as well as $1.2 million of management fees paid to JAB.

(11)Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the Consolidated Statements of Operations.

(12)Includes interest expense and debt issuance costs incurred and recognized as expenses in connection with the extinguishment of the KKI Term Loan Facility within four business days of receipt of the net proceeds from the IPO.

(13)Tax impact of adjustments calculated applying the applicable statutory rates. The Company’s adjusted effective tax rate is 24.1%, 22.4%, and 25.2% for each of the fiscal years 2022, 2021, and 2020, respectively. Fiscal 2022 includes the impact

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of disallowed executive compensation expense and a discrete tax benefit related to a legal accrual. Fiscal 2021 includes the impact of disallowed executive compensation expense incurred in connection with the IPO.

(14)Fiscal 2022 consists of the recognition of previously unrecognized tax benefits unrelated to ongoing operations, as well as benefits attributable to multiple tax years due to lapse of the statute of limitations. Fiscal 2022 also includes the effect of discrete adjustments to the Company’s deferred tax liabilities that are unrelated to the Company’s ongoing operations. Fiscal 2021 consists primarily of the effect of tax law changes on existing temporary differences. Fiscal 2020 includes a valuation allowance of $20.5 million associated with tax attributes primarily attributable to incremental costs removed from the calculation of Adjusted Net Income.

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 periods below:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["(in thousands, unless otherwise stated)","January 1, 2023 (52 weeks)","","January 2, 2022 (52 weeks)","","January 3, 2021 (53 weeks)"],["U.S. and Canada:"],["Revenues","$","1,033,125","","","$","928,413","","","$","782,717"],["Non-Fresh Revenues (1)","(38,380)","","","(37,311)","","","(128,619)"],["Fresh Revenues from Insomnia Cookies and Hubs without Spokes (2)","(407,558)","","","(415,768)","","","(323,079)"],["Sales from Hubs with Spokes","587,187","","","475,334","","","331,019"],["Sales per Hub (millions)","4.6","","","4.0","","","3.5"],["International:"],["Sales from Hubs with Spokes (3)","$","365,916","","","$","332,995","","","$","230,185"],["Sales per Hub (millions)","9.8","","","9.1","","","6.4"]]
[[/GREPCENT_TABLE]]

(1)Includes legacy wholesale business revenues and Branded Sweet Treat Line revenues.

(2)Includes Insomnia Cookies revenues and Fresh Revenues generated by Hubs without Spokes.

(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 $9.8 million, up from $9.1 million in the fiscal year 2021, and also up from $6.4 million in the fiscal year 2020. International 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’s quick recovery from the impacts of the COVID-19 pandemic and growth in profit margins. In the U.S. and Canada, we reached Sales per Hub of $4.6 million, up from $4.0 million in the fiscal year 2021 and up from $3.5 million in the fiscal year 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 the International segment. As we further extend the Hub and Spoke model into existing and new markets around the world, we expect to see this measure continue to grow.

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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.

Fiscal Year ended January 1, 2023 compared to the Fiscal Year ended January 2, 2022

The following table presents our audited consolidated results of operations for fiscal 2022 and fiscal 2021:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["","January 1, 2023 (52 weeks)","","January 2, 2022 (52 weeks)","","Change"],["(in thousands, except percentages)","Amount","","% of Revenue","","Amount","","% of Revenue","","$","","%"],["Net revenues"],["Product sales","$","1,497,882","","","97.9","%","","$","1,353,466","","","97.8","%","","$","144,416","","","10.7","%"],["Royalties and other revenues","32,016","","","2.1","%","","30,925","","","2.2","%","","1,091","","","3.5","%"],["Total net revenues","1,529,898","","","100.0","%","","1,384,391","","","100.0","%","","145,507","","","10.5","%"],["Product and distribution costs","406,227","","","26.6","%","","354,093","","","25.6","%","","52,134","","","14.7","%"],["Operating expenses","704,287","","","46.0","%","","630,239","","","45.5","%","","74,048","","","11.7","%"],["Selling, general and administrative expense","223,198","","","14.6","%","","222,394","","","16.1","%","","804","","","0.4","%"],["Marketing expenses","42,566","","","2.8","%","","39,489","","","2.9","%","","3,077","","","7.8","%"],["Pre-opening costs","4,227","","","0.3","%","","5,568","","","0.4","%","","(1,341)","","","-24.1","%"],["Other expenses/(income), net","10,157","","","0.7","%","","(10,102)","","","-0.7","%","","20,259","","","200.5","%"],["Depreciation and amortization expense","110,261","","","7.2","%","","101,608","","","7.3","%","","8,653","","","8.5","%"],["Operating income","28,975","","","1.9","%","","41,102","","","3.0","%","","(12,127)","","","-29.5","%"],["Interest expense, net","34,102","","","2.2","%","","32,622","","","2.4","%","","1,480","","","4.5","%"],["Interest expense \u2013 related party","\u2014","","","\u2014","%","","10,387","","","0.8","%","","(10,387)","","","-100.0","%"],["Other non-operating expense, net","3,036","","","0.2","%","","2,191","","","0.2","%","","845","","","38.6","%"],["Loss before income taxes","(8,163)","","","-0.5","%","","(4,098)","","","-0.3","%","","(4,065)","","","-99.2","%"],["Income tax expense","612","","","\u2014","%","","10,745","","","0.8","%","","(10,133)","","","-94.3","%"],["Net loss","(8,775)","","","-0.6","%","","(14,843)","","","-1.1","%","","6,068","","","40.9","%"],["Net income attributable to noncontrolling interest","6,847","","","0.4","%","","9,663","","","0.7","%","","(2,816)","","","-29.1","%"],["Net loss attributable to Krispy Kreme, Inc.","$","(15,622)","","","-1.0","%","","$","(24,506)","","","-1.8","%","","$","8,884","","","36.3","%"]]
[[/GREPCENT_TABLE]]

Product sales: Product sales increased $144.4 million, or 10.7%, from fiscal 2021 to fiscal 2022. Approximately $20.3 million of the increase in product sales was attributable to shops acquired from franchisees. However, product sales growth was partially offset by $37.3 million attributable to foreign currencies weakening against the U.S. dollar.

Royalties and other revenues: Royalties and other revenues increased $1.1 million, or 3.5%, from fiscal 2021 to fiscal 2022, reflecting the impact of franchise expansions into new markets such as Egypt and Jordan, partially offset by the impact of franchise acquisitions including U.S. franchisees during fiscal 2021 and the third quarter of fiscal 2022, and KK Canada during the fourth quarter of fiscal 2021.

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The following table presents a further breakdown of total net revenue and organic revenue growth by segment for the periods indicated:

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","U.S. and Canada","","International","","Market Development","","Total Company"],["Total net revenues in fiscal 2022 (52 weeks)","$","1,033,125","","","$","365,916","","","$","130,857","","","$","1,529,898"],["Total net revenues in fiscal 2021 (52 weeks)","928,413","","","332,995","","","122,983","","","1,384,391"],["Total Net Revenue Growth","104,712","","","32,921","","","7,874","","","145,507"],["Total Net Revenue Growth %","11.3","%","","9.9","%","","6.4","%","","10.5","%"],["Less: Impact of shop optimization program closures","(1,374)","","","\u2014","","","\u2014","","","(1,374)"],["Adjusted net revenues in fiscal 2021","927,039","","","332,995","","","122,983","","","1,383,017"],["Adjusted Net Revenue Growth","106,086","","","32,921","","","7,874","","","146,881"],["Impact of acquisitions","(24,391)","","","\u2014","","","6,899","","","(17,492)"],["Impact of foreign currency translation","2,299","","","26,052","","","8,991","","","37,342"],["Organic Revenue Growth","$","83,994","","","$","58,973","","","$","23,764","","","$","166,731"],["Organic Revenue Growth %","9.1","%","","17.7","%","","19.3","%","","12.1","%"]]
[[/GREPCENT_TABLE]]

Total net revenue growth of $145.5 million, or approximately 10.5%, and organic revenue growth of $166.7 million, or approximately 12.1%, was driven by the continued and successful execution of our growth strategy and transformation deploying our omni-channel approach globally. We have continued to increase availability through new Global Points of Access, particularly the expansion of Spokes, including DFD Doors, for existing Hubs with Spokes during fiscal 2022.

U.S. and Canada segment growth was driven by a combination of continued execution of our omni-channel strategy as well as franchise acquisitions (17 shops in the first quarter of fiscal 2021, ten shops in the fourth quarter of fiscal 2021, and six shops in the third quarter of fiscal 2022). U.S. and Canada net revenue grew $104.7 million, or approximately 11.3% from fiscal 2021 to fiscal 2022 while organic revenue grew $84.0 million, or approximately 9.1%, from fiscal 2021 to fiscal 2022. Organic growth was driven by significant expansion of the low capital DFD business, with DFD Doors increasing by 537 and APD up 9.9% compared to fiscal 2021. Organic growth was aided by an increase of 21 Insomnia Cookies shops during fiscal 2022, increased leverage of Ecommerce and delivery channels, and successful LTOs. Our organic growth has also been supplemented by effective pricing increases taken in the second half of fiscal 2021 and again during the second half of fiscal 2022, leading to significant increase in the average transaction size, but offset some by transaction declines.

Our International segment net revenue grew $32.9 million, or approximately 9.9%, from fiscal 2021 to fiscal 2022, in spite of foreign currency translation impacts of $26.1 million from a strengthening U.S. dollar. International organic revenue grew $59.0 million or approximately 17.7%, from fiscal 2021 to fiscal 2022. Organic growth for the period was driven by successful LTOs, effective pricing increases, and an increased leverage of DFD channels, with DFD Doors increasing by 544 compared to fiscal 2021. Growth was strong in Mexico, Australia, and New Zealand, and we still saw double-digit organic growth in the U.K. and Ireland despite inflationary pressures contributing to a decline in consumer traffic in our shops.

Our Market Development segment net revenue grew $7.9 million, or approximately 6.4%, from fiscal 2021 to fiscal 2022, in spite of the impacts of franchise acquisitions such as KK Canada and certain foreign currencies devaluing against the U.S. dollar. When adjusted for the impacts of acquisitions and foreign currency, Market Development organic revenue grew $23.8 million, or approximately 19.3%, from fiscal 2021 to fiscal 2022, driven by focused growth in Japan and international franchise markets, including benefits from DFD expansion.

Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $52.1 million, or 14.7%, from fiscal 2021 to fiscal 2022, largely in line with and attributable to the same factors as our revenue growth. Product and distribution costs as a percentage of revenue increased by approximately 100 basis points from 25.6% in fiscal 2021 to 26.6% in fiscal 2022. This increase was primarily driven by inflationary pressures on commodities and logistics costs in fiscal 2022, as well as increased promotional activity in the U.S. and Canada such as the “Beat the Pump” promotion. We significantly reduced the level of discounting for Krispy Kreme U.S. and Canada towards the end of the third quarter of fiscal 2022, which led to a reduction of product and distribution costs as a percentage of revenue in the fourth quarter.

Operating expenses: Operating expenses increased $74.0 million, or 11.7%, from fiscal 2021 to fiscal 2022, driven mainly by labor cost inflation and investments to support growth. Operating expenses as a percentage of revenue increased approximately 50 basis points, from 45.5% in fiscal 2021 to 46.0% in fiscal 2022 with decreased performance for Hubs without Spokes for

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Krispy Kreme U.S. and Canada coupled with transaction volume declines for KKUK. This has been partially offset by efficiency benefits from DFD expansion as we execute our Hub and Spoke transformation.

Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expenses increased $0.8 million, or 0.4%, from fiscal 2021 to fiscal 2022. As a percentage of revenue, SG&A decreased by approximately 150 basis points, from 16.1% in fiscal 2021 to 14.6% in fiscal 2022, primarily due to a decrease in advisory service fees as we completed our IPO in fiscal 2021. The decrease was also due to lower share-based compensation expenses, as well as economies of scale from our top-line revenue growth.

Other expenses/(income), net: Other expenses, net of $10.2 million in fiscal 2022 were primarily driven by impairment and lease termination costs, net of gains from sale-leaseback transactions described in Note 8, Leases, to the audited Consolidated Financial Statements. As part of our omni-channel transformation, we initiated portfolio optimization efforts for Krispy Kreme U.S. and Canada during fiscal 2022, which included deciding to exit certain lower margin shops in the U.S. Other income, net of $10.1 million in fiscal 2021 was primarily driven by a gain on a sale-leaseback transaction, as well as $3.5 million related to one-time COVID-19 related business interruption insurance proceeds for KKUK.

Depreciation and amortization expense: Depreciation and amortization expense increased $8.7 million, or 8.5%, from fiscal 2021 to fiscal 2022, primarily driven by increased assets placed into service to support the Hub and Spoke model evolution.

Interest expense – related party: Interest expense with related parties decreased $10.4 million, or 100.0%, from fiscal 2021 to 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: Income tax expense decreased $10.1 million, or 94.3%, from fiscal 2021 to fiscal 2022. During fiscal 2022, income tax expense was driven by the mix of income between the U.S. and foreign jurisdictions, disallowed executive compensation expense, and the recognition of previously unrecognized tax benefits. During fiscal 2021, income tax expense was significantly impacted by disallowed executive compensation expense incurred in connection with the IPO, tax law changes, and the mix of pre-tax earnings between different jurisdictions.

Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest decreased $2.8 million, or 29.1%, from fiscal 2021 to fiscal 2022, driven by less earnings allocated to certain consolidated subsidiaries, particularly WKS Krispy Kreme and Awesome Doughnut.

Results of Operations by Segment – Fiscal Year ended January 1, 2023 compared to the Fiscal Year ended January 2, 2022

The following table presents Adjusted EBITDA by segment for the periods indicated:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Change"],["(in thousands, except percentages)","January 1, 2023 (52 weeks)","","January 2, 2022 (52 weeks)","","$","","%"],["Adjusted EBITDA"],["U.S. and Canada","$","118,483","","","$","107,571","","","$","10,912","","","10.1","%"],["International","75,512","","","81,422","","","(5,910)","","","-7.3","%"],["Market Development","44,421","","","40,824","","","3,597","","","8.8","%"],["Corporate","(47,687)","","","(41,872)","","","(5,815)","","","-13.9","%"],["Total Adjusted EBITDA (1)","$","190,729","","","$","187,945","","","$","2,784","","","1.5","%"]]
[[/GREPCENT_TABLE]]

(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 $10.9 million, or 10.1%, from fiscal 2021 to fiscal 2022, primarily driven by the revenue growth of 11.3%. Our strategic expansion of the DFD business as part of the Hub and Spoke transformation contributed to this growth with 555 added Points of Access during fiscal 2022. Adjusted EBITDA margin for fiscal 2022 was 11.5% which was essentially flat with margin for fiscal 2021, driven by cost increases in labor and commodities and underperformance in our Hubs without Spokes, partially offset by the positive impacts from an increase in our Points of Access in our Hubs with Spokes and effective pricing increases in the second half of fiscal 2021 and the second half of fiscal 2022. Additionally, we believe the legacy U.S. and Canada optimization efforts discussed in “Significant Events and Transactions” above will yield improvement to margins in fiscal 2023 and 2024.

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International Adjusted EBITDA decreased $5.9 million, or 7.3%, with margin decline of approximately 390 basis points to 20.6% from fiscal 2021 to fiscal 2022, due primarily to an increase in labor and commodity costs compared to timing of price increases, adverse foreign currency translation impacts, as well as a challenging consumer environment in the U.K. Adjusted EBITDA in fiscal 2021 was also impacted positively by $3.5 million business interruption insurance proceeds related to COVID-19 in the U.K. Despite these factors, we have seen positive impacts on Adjusted EBITDA margin from Points of Access expansion and efficiencies from our Hub and Spoke model evolution.

Market Development Adjusted EBITDA increased $3.6 million, or 8.8%, from fiscal 2021 to fiscal 2022 driven by top-line growth of our international franchise markets and Japan. This growth more than offset the impact of acquisitions and foreign currency translation.

Corporate expenses within Adjusted EBITDA increased $5.8 million, or 13.9% from fiscal 2021 to fiscal 2022, primarily driven by an increase in costs associated with our operation as a public company. Corporate expenses within Adjusted EBITDA as a percentage of revenue remained essentially flat from fiscal 2021 to fiscal 2022.

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 1, 2023, we had the following future obligations:

•An aggregate principal amount of $748.8 million outstanding under the 2019 Facility;

•Non-cancellable future minimum operating lease payments totaling $680.8 million;

•Non-cancellable future minimum finance lease payments totaling $47.1 million; and

•Purchase commitments under ingredient and other forward purchase contracts of $118.5 million.

Refer to Note 7, Long-Term Debt, Note 8, Leases, and Note 14, Commitments and Contingencies, to the audited Consolidated Financial Statements for more information.

We had cash and cash equivalents of $35.4 million and $38.6 million as of January 1, 2023 and January 2, 2022, respectively. 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. In fiscal 2023, we expect to use our available cash to support and invest in the growth of our core businesses, including investing in new ways to serve our consumers and support our shop partners, increasing our omni-channel presence as we increase the expansion of DFD Doors in priority areas, as well as investing in new shop openings and new market penetration within the U.S. and internationally. Total capital expenditures for fiscal 2023 are expected to be in the range of $105 million to $115 million, with our focus on deploying the capital-efficient Hub and Spoke model to reduce capital expenditures as a percentage of revenues. We also expect to continue to reduce leverage by repaying debt, as well as to continue to return cash to shareholders through common stock cash dividend payments.

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.

As discussed in Note 7, Long-Term Debt to the audited Consolidated Financial Statements, our 2019 Facility is scheduled to mature on June 13, 2024. We expect to refinance with our lenders prior to the maturity date and are in process of determining

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the terms of any refinancing. We do not expect any cash flows associated with our 2019 Facility and its potential refinancing to inhibit our expected use of cash for operations and investments discussed above.

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:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["(in thousands)","January 1, 2023 (52 weeks)","","January 2, 2022 (52 weeks)"],["Net cash provided by operating activities","$","139,818","","","$","141,224"],["Net cash used for investing activities","(121,474)","","","(153,407)"],["Net cash (used for)/provided by financing activities","(16,838)","","","16,096"]]
[[/GREPCENT_TABLE]]

Cash Flows Provided by Operating Activities

Cash provided by operations totaled $139.8 million for fiscal 2022, a decrease of $1.4 million compared with fiscal 2021. Cash provided by operations decreased primarily due to working capital management, with declines due to an increase in accounts receivable and inventories, which were partially offset by $8.5 million received in fiscal 2022 related to novation of our interest rate swap derivatives.

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 (the SCF Program). Our typical payment terms for trade payables range 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 Program has continued through the end of fiscal 2022.

Cash Flows Used for Investing Activities

Cash used for investing activities totaled $121.5 million for fiscal 2022, a decrease in investment of $31.9 million compared with fiscal 2021. The decrease is primarily due to a reduction of cash spent on acquisitions of shops and franchise rights, as well lower property and equipment purchases aided by capital-light DFD expansion.

Cash Flows (Used for)/Provided by Financing Activities

Cash used for financing activities totaled $16.8 million for fiscal 2022, a reduction in financing of $32.9 million compared with fiscal 2021. The reduction in financing was primarily due to decreasing our reliance on equity financing in fiscal 2022 compared to fiscal 2021 (when we completed our IPO), in addition to our payment of $12.5 million of issuance costs in connection with the IPO during the first quarter of fiscal 2022.

The reductions in financing were partially offset by $8.3 million change in cash flows related to structured payables programs (net payments on structured payables of $12.4 million in fiscal 2022 compared to net payments on structured payables of $20.8 million in fiscal 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 card products are classified as structured payables on our Consolidated Balance Sheets and the associated cash flows are included in the financing section of our Consolidated Statements of Cash Flows.

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Debt

Our long-term debt obligations consist of the following:

[[GREPCENT_TABLE]]
[["(in thousands)","January 1, 2023","","January 2, 2022"],["2019 Facility - term loan","$","586,250","","","$","621,250"],["2019 Facility - revolving credit facility","162,500","","","75,000"],["Less: Debt issuance costs","(2,247)","","","(3,833)"],["Financing obligations","32,583","","","24,473"],["Total long-term debt","779,086","","","716,890"],["Less: Current portion of long-term debt","(40,034)","","","(36,583)"],["Long-term debt, less current portion","$","739,052","","","$","680,307"]]
[[/GREPCENT_TABLE]]

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 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 5.25 to 1.00 as of January 1, 2023, 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. Our Total Net Leverage Ratio was 3.41 to 1.00 as of the end of fiscal 2022 compared to 2.99 to 1.00 as of the end of fiscal 2021.

We were in compliance with the financial and other covenants related to the 2019 Facility as of January 1, 2023 and as of the date of this filing of our Annual Report on Form 10-K, 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. For additional information, refer to Note 7, Long-Term Debt, to the audited Consolidated Financial Statements.

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”). The Related Party Notes were paid off in full during the second quarter of fiscal 2021. The interest expense for the fiscal years ended January 2, 2022 and January 3, 2021 was $10.4 million and $22.5 million, respectively. No interest expense was recorded for the fiscal year ended January 1, 2023. See Note 15, Related Party Transactions, to the audited Consolidated Financial Statements for more information.

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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 January 2, 2022, 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 $2.4 million for the fiscal year ended January 2, 2022, which included $1.7 million of debt issuance costs incurred and recognized as expenses. For additional information, refer to Note 7, Long-Term Debt, to the audited Consolidated Financial Statements.

Critical Accounting Estimates

The financial information discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon or derived from the audited Consolidated Financial Statements, which have been prepared in conformity with GAAP. The preparation of the 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 the audited Consolidated Financial Statements.

On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. We review our financial reporting and disclosure practices and accounting policies quarterly to confirm that they provide accurate and transparent information relative to the current economic and business environment. A summary of our significant accounting policies is included in Note 1, Description of Business and Summary of Significant Accounting Policies, to the audited Consolidated Financial Statements. We believe that our critical accounting estimates are:

Self-Insurance Risks and Receivables from Insurers

We are subject to workers’ compensation, vehicle and general liability claims and are self-insured for a significant portion of our workers’ compensation, vehicle and general liability claims up to the amount of stop-loss insurance coverage purchased from commercial insurance carriers. We maintain accruals for the estimated cost of claims, without regard to the effects of stop-loss coverage, using actuarial methods which evaluate known open and incurred but not reported claims and consider historical loss development experience. In addition, we record receivables from the insurance carriers for claims amounts estimated to be recovered under the stop-loss insurance policies when these amounts are estimable and probable of collection. We estimate such stop-loss receivables using the same actuarial methods used to establish the related claims accruals and taking into account the amount of risk transferred to the carriers under the stop-loss policies. The stop-loss policies provide coverage for claims in excess of retained self-insurance risks, which are determined on a claim-by-claim basis. As of January 1, 2023 and January 2, 2022, the Company had approximately $17.7 million and $14.7 million, respectively, reserved for such programs. Inclusive of the receivables from the stop-loss insurance policies, the Company’s limited liability balance was $8.4 million and $7.5 million as of January 1, 2023 and January 2, 2022, respectively.

Our estimated liability is not discounted and is based on a number of assumptions and factors. The critical assumptions used in determining these related expenses and obligations are future cost projections of claims, which include healthcare cost projections. These critical assumptions are calculated based on historical Company data and experience, as well as appropriate market indicators including inflation, societal attitudes toward legal action, and changes in law. The assumptions are evaluated at least semiannually by us in conjunction with outside actuaries and are closely monitored and adjusted when warranted by changing circumstances. If a greater amount of claims are reported, or if medical costs increase beyond our expectations, our liabilities may not be sufficient, and we could recognize additional expense.

Income Taxes

Our provision for income taxes, deferred tax assets and liabilities including valuation allowance requires the use of estimates based on our management’s interpretation and application of complex tax laws and accounting guidance. We are primarily subject to income taxes in the U.S. We establish reserves for uncertain tax positions for material, known tax exposures in accordance with ASC 740, Income Taxes relating to deductions, transactions and other matters involving some uncertainty as to the measurement and recognition of the item. We may adjust these reserves when our judgment changes as a result of the evaluation of new information not previously available and will be reflected in the period in which the new information is

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available. While we believe that our reserves are adequate, issues raised by a tax authority may be resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in future periods.

Realization of deferred tax assets involves estimates regarding (i) the timing and amount of the reversal of taxable temporary differences, (ii) expected future taxable income, and (iii) the impact of tax planning strategies. We believe that it is more likely than not that we will not realize the benefit of certain deferred tax assets and, accordingly, have established a valuation allowance against them. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of and potential changes to ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Although realization is not assured for the remaining deferred tax assets, we believe it is more likely than not that the remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies. However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced or tax strategies are no longer viable.

Goodwill and Indefinite Lived Intangible Assets

For each reporting unit, the Company assesses goodwill for impairment annually at the beginning of the fourth fiscal quarter or more frequently when impairment indicators are present. If the carrying value of the reporting unit exceeds its fair value, the Company recognizes an impairment charge for the difference up to the carrying value of the allocated goodwill. The fair value is estimated using a combination of a discounted cash flow approach and a market approach.

When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit is influenced by a number of factors, inclusive of the carrying value of the reporting unit’s goodwill, the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new shop concepts, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives, local market economics, and the local business environment impacting the reporting unit’s performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.

For the fiscal years 2022, 2021 and 2020, there were no goodwill impairment charges. We continue to believe the fair value of each of our reporting units is significantly in excess of its carrying value, and absent a sustained multi-year global decline in our business in key markets such as the U.S. and Canada, we do not anticipate incurring significant goodwill impairment in the next 12 months.

Other intangible assets, net primarily represent the trade names for our brands, franchise agreements (domestic and international), reacquired franchise rights, and customer relationships. The trade names have been assigned an indefinite useful life and are reviewed annually for impairment. The fair value calculation for the trade names includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group’s forecasted growth and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion. All other intangible assets are amortized on a straight-line basis over their estimated useful lives. Definite-lived intangible assets are assessed for impairment whenever triggering events or indicators of potential impairment occur. We did not have any impairment charges of indefinite-lived intangible assets during any of the periods presented, and we do not anticipate incurring significant impairment charges in the next 12 months.

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New Accounting Pronouncements

Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, to the audited Consolidated Financial Statements for a detailed description of recent accounting pronouncements.

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