Share-based Compensation

12 Months Ended

Jan. 01, 2023

Share-Based Payment Arrangement [Abstract]

Restricted Stock Units (“RSUs”)

The Company and certain of its subsidiaries issue time-vested restricted stock units (“RSUs”) under their respective executive ownership plans and long-term incentive plans.

The time-vested RSUs are awarded to eligible employees and non-employee directors and entitle the grantee to receive shares of common stock at the end of a vesting period. The majority of RSUs vest in 54 months from the date of grant and include a minimum holding period of six months before the shareholder may redeem the shares. Certain RSUs vest over a 60-month period subsequent to the grant date (with 60% vesting during the third year following the grant date, 20% vesting during the fourth year, and 20% vesting at the end of the 60-month term). Throughout the vesting period and the holding period, shareholders are subject to the market risk on the value of their shares.

Effective March 22, 2022 (the “modification date”), the Company amended certain KKI time-vested RSU agreements issued in fiscal 2021 to change the vesting terms to a graded-vesting schedule over a 54-month period subsequent to the original commencement date (with one-third vesting in 18 months following the vesting commencement date, one-third vesting in 36 months, and one-third vesting in 54 months). The impacted awards previously had a 54-month cliff vesting schedule. The modification affected approximately 615 grantees and approximately 1.1 million unvested RSUs. The amended vesting terms as of the modification date resulted in no incremental compensation cost and the remaining unrecognized compensation cost for each award will be recognized on a straight-line basis over the remaining requisite service period for the entire award.

RSUs held by KKI are granted to U.S. employees and directors as well as certain employees of the Company’s subsidiaries. Certain U.K. employees receive RSUs held by KKUK. Certain Insomnia Cookies employees receive RSUs held by Insomnia Cookies. Certain Australia employees receive RSUs held by KK Australia. Certain Mexico employees receive RSUs held by KK Mexico.

RSU activity under the various plans during the fiscal years presented is as follows:


(in thousands, except per share amounts)	Non-vested shares outstanding at January 3, 2021		Granted	RSU Dividend Equivalents(1)	Vested	Forfeited	Non-vested shares outstanding at January 2, 2022		Granted	Vested	Forfeited	Non-vested shares outstanding at January 1, 2023
KKI
RSUs	4,649		3,339	1,019	2,585	556	5,866		1,049	1,060	909	4,946
Weighted Average Grant Date Fair Value	$	11.37	17.95	—	9.29	14.32	$	13.78	14.27	11.79	14.24	$	14.23
KKUK
RSUs	405		7	—	352	—	60		—	—	—	60
Weighted Average Grant Date Fair Value	$	12.45	29.80	—	12.22	—	$	15.77	—	—	—	$	15.77
Insomnia Cookies
RSUs	29		15	—	1	10	33		11	1	5	38
Weighted Average Grant Date Fair Value	$	68.87	97.77	—	74.12	75.68	$	79.66	168.57	74.12	102.67	$	101.54
KK Australia
RSUs	1,844		79	—	—	26	1,897		21	1,564	—	354
Weighted Average Grant Date Fair Value	$	1.48	1.45	—	—	1.36	$	1.48	1.73	1.49	—	$	1.47
KK Mexico
RSUs	25		33	—	—	—	58		2	—	—	60
Weighted Average Grant Date Fair Value	$	29.21	35.64	—	—	—	$	32.86	40.14	—	—	$	33.08

(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.

The Company recorded total non-cash compensation expense related to the RSUs under the plans of $15.5 million, $19.6 million, and $11.6 million for fiscal years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively. The net deferred tax (expense)/benefits recognized were ($0.3 million), ($4.9 million), and $2.7 million for fiscal years ended January 1, 2023, January 2, 2022, and January 3, 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 January 1, 2023
	Unrecognized Compensation Cost		Recognized Over a Weighted- Average Period of
KKI	$	45,353	3.2 years
KKUK	193		1.0 year
Insomnia Cookies	2,396		2.6 years
KK Australia	175		1.5 years
KK Mexico	1,361		3.0 years

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

The total grant date fair values of shares vested under the KKI plan were $12.5 million and $24.0 million for the fiscal years ended January 1, 2023 and January 2, 2022, respectively; no shares vested for the fiscal year ended January 3, 2021. The total grant date fair values of shares vested under the KKUK plan was $4.3 million for the fiscal year ended January 2, 2022; no shares vested for the fiscal years ended January 1, 2023 and January 3, 2021, respectively. The total grant date fair values of shares vested under the Insomnia Cookies plan was $0.1 million for the fiscal years ended January 1, 2023, January 2, 2022, and January 3, 2021. The total grant date fair values of shares vested under the KK Australia plan were $2.3 million for the fiscal year ended January 1, 2023; no shares vested for the fiscal years ended January 2, 2022 and January 3, 2021. No shares under the KK Mexico plan vested during the three fiscal years presented.

Time-Vested Stock Options

KKI issues time-vested stock options under its Omnibus Incentive Plan. The stock options are awarded to eligible employees and entitle the grantee to purchase shares of common stock at the respective exercise price at the end of a vesting period. Stock options vest over a 60-month period subsequent to the grant date (with 60% vesting during the third year following the grant date, 20% vesting during the fourth year, and 20% vesting at the end of the 60-month term), and as such are subject to a service condition. The maximum contractual term of the stock options is 10 years.

The fair value of time-vested stock options was estimated on the date of grant using the Black-Scholes option pricing model. This model is impacted by the Company’s stock price and certain assumptions related to the Company’s stock and employees’ exercise behavior. The expected term for stock options granted during fiscal year 2021 was estimated utilizing the simplified method. Management utilized the simplified method because the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free interest rate assumption was based on yields of U.S. Treasury securities in effect at the date of grant with terms similar to the expected term. Expected volatility was estimated based on the Company’s historical volatility, and also considering historical volatility of peer companies over a period equivalent to the expected term. Additionally, the dividend yield was estimated based on dividends currently being paid on the underlying common stock at the date of grant. Estimated and actual forfeitures have not had a material impact on share-based compensation expense.

The following weighted-average assumptions were utilized in determining the fair value of the time-vested stock options granted during the fiscal years presented:


	Fiscal Years Ended
	January 1, 2023		January 2, 2022
KKI
Risk-free interest rate	—	%	1.3	%
Expected volatility	—	%	34.4	%
Dividend yield	—	%	1.0	%
Expected term (years)	—		6.8 years

A summary of the status of the time-vested stock options as of January 1, 2023 and changes during fiscal years presented is as follows:


	Share options outstanding at					Share options outstanding at					Share options outstanding at
(in thousands, except per share amounts)	January 3, 2021		Granted	Exercised	Forfeited or expired	January 2, 2022		Granted	Exercised	Forfeited or expired	January 1, 2023
KKI
Options	—		2,817	—	—	2,817		—	—	248	2,569
Weighted Average Grant Date Fair Value	$	—	6.10	—	—	$	6.10	—	—	6.10	$	6.10
Weighted Average Exercise Price	$	—	14.61	—	—	$	14.61	—	—	14.61	$	14.61
Weighted Average Remaining Contractual Term (years)	—					9.3 years					8.3 years
Aggregate Intrinsic Value (in thousands)	$	—				$	12,151				$	—

The Company recorded total non-cash compensation expense related to the time-vested stock options of $2.7 million and $3.3 million for the fiscal years ended January 1, 2023 and January 2, 2022, respectively. No non-cash compensation expense related to time-vested stock options was recorded for the fiscal year ended January 3, 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 January 1, 2023
	Unrecognized Compensation Cost		Recognized Over a Weighted- Average Period of
KKI	$	9,702	3.3 years

No time-vested stock options under the KKI plan vested nor were exercised during the fiscal periods presented.