UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
Commission file number:
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Registrant's telephone number, including area code) |
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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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. (Check one):
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| Non-accelerated filer ☐ | Smaller reporting company |
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| (Do not check if a smaller reporting company) | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act:
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The number of the registrant's common shares outstanding as of November 3, 2023 was
SUNOPTA INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2023
TABLE OF CONTENTS
Basis of Presentation
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q ("Form 10-Q") to the "Company," "SunOpta," "we," "us," "our" or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.
In this report, all currency amounts presented are expressed in thousands of United States ("U.S.") dollars ("$"), except per share amounts, unless otherwise stated. Other amounts may be presented in thousands of Canadian dollars ("C$") and Mexican pesos ("M$").
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that are based on management's current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," the negatives of such terms, and words and phrases of similar impact and include, but are not limited to, references to future financial and operating results, plans, objectives, expectations, and intentions; our expectations regarding the future profitability of our plant-based and fruit-based businesses, including anticipated results of operations, revenue trends, and gross margin profiles; the expected impact of the inflationary cost environment on our business, including raw material, packaging, labor, energy, fuel and transportation costs; the expected impact of pricing actions on sales volumes and gross margins; the expected impact of cost containment measures and productivity initiatives; our estimates for losses and related insurance recoveries associated with the recall of specific frozen fruit products in the second quarter of 2023; our expectations regarding customer demand, consumer preferences, competition, sales pricing, availability and pricing of raw material inputs, and timing and cost to complete capital expansion projects; our ability to successfully execute on our capital investment plans, and the viability of those plans; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of debt, working capital needs, planned capital expenditures; and our ability to obtain additional financing or issue additional debt or equity securities; our intentions related to the potential sale of selected businesses, operations, or assets; the outcome of litigation to which we may, from time to time, be a party; and other statements that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on certain assumptions, expectations and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments, as well as other factors that we believe are appropriate in the circumstances. Whether actual results and developments will be consistent with and meet our expectations and predictions is subject to many risks and uncertainties, including those set forth under Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, under Item 1A. "Risk Factors" of this report, and in our other filings with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators.
| SUNOPTA INC. | 3 | September 30, 2023 Form 10-Q |
All forward-looking statements made herein are qualified by these cautionary statements, and our actual results or the developments we anticipate may not be realized. Our forward-looking statements are based only on information currently available to us and speak only as of the date on which they are made. We do not undertake any obligation to publicly update our forward-looking statements, whether written or oral, after the date of this report for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities laws. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report.
| SUNOPTA INC. | 4 | September 30, 2023 Form 10-Q |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SunOpta Inc.
Consolidated Statements of Operations
For the quarters and three quarters ended September 30, 2023 and October 1, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars, except per share amounts)
| Quarter ended | Three quarters ended | ||||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
||||||||||
| $ | $ | $ | $ | ||||||||||
| (note 1) | (note 1) | ||||||||||||
| Revenues (note 15) | |||||||||||||
| Cost of goods sold | |||||||||||||
| Gross profit | |||||||||||||
| Selling, general and administrative expenses | |||||||||||||
| Intangible asset amortization | |||||||||||||
| Other expense (income), net | ( |
) | |||||||||||
| Foreign exchange loss (gain) | ( |
) | ( |
) | ( |
) | |||||||
| Operating income | |||||||||||||
| Interest expense, net | |||||||||||||
| Earnings (loss) from continuing operations before income taxes | ( |
) | ( |
) | |||||||||
| Income tax expense (note 11) | |||||||||||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | |||||||||
| Loss from discontinued operations (note 2) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Dividends and accretion on preferred stock (note 9) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Loss attributable to common shareholders | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Basic earnings (loss) per share (note 12) | |||||||||||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | |||||||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Loss attributable to common shareholders(1) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Diluted earnings (loss) per share (note 12) | |||||||||||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | |||||||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Loss attributable to common shareholders(1) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Weighted-average common shares outstanding (000s) (note 12) | |||||||||||||
| Basic | |||||||||||||
| Diluted | |||||||||||||
(1) The sum of the individual per share amounts may not add due to rounding.
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 5 |
September 30, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Balance Sheets
As at September 30, 2023 and December 31, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| (note 1) | ||||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash and cash equivalents | ||||||
| Restricted cash (note 3) | ||||||
| Accounts receivable, net of allowance for credit losses of $ |
||||||
| Inventories (note 4) | ||||||
| Prepaid expenses and other current assets | ||||||
| Income taxes recoverable | ||||||
| Current assets held for sale (note 2) | ||||||
| Total current assets | ||||||
| Property, plant and equipment, net | ||||||
| Operating lease right-of-use assets (note 5) | ||||||
| Intangible assets, net | ||||||
| Goodwill | ||||||
| Deferred income taxes | ||||||
| Other assets | ||||||
| Non-current assets held for sale (note 2) | ||||||
| Total assets | ||||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities (note 6) | ||||||
| Notes payable (note 7) | ||||||
| Income taxes payable | ||||||
| Current portion of long-term debt (note 8) | ||||||
| Current portion of operating lease liabilities (note 5) | ||||||
| Current liabilities held for sale (note 2) | ||||||
| Total current liabilities | ||||||
| Long-term debt (note 8) | ||||||
| Operating lease liabilities (note 5) | ||||||
| Deferred income taxes | ||||||
| Non-current liabilities held for sale (note 2) | ||||||
| Total liabilities | ||||||
| Series B-1 preferred stock (note 9) | ||||||
| SHAREHOLDERS' EQUITY | ||||||
| Common shares, |
||||||
| Additional paid-in capital | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||
| Accumulated other comprehensive income | ||||||
| Total shareholders' equity | ||||||
| Total liabilities and shareholders' equity | ||||||
| Commitments and contingencies (note 14) |
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 6 |
September 30, 2023 Form 10-Q |
Consolidated Statements of Shareholders' Equity
As at and for the quarters ended September 30, 2023 and October 1, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at July 1, 2023 | ( |
) | ||||||||||||||||
| Share issuance costs | - | ( |
) | - | - | - | ( |
) | ||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at September 30, 2023 | ( |
) | ||||||||||||||||
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at July 2, 2022 | ( |
) | ||||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at October 1, 2022 | ( |
) | ||||||||||||||||
| SUNOPTA INC. | 7 | September 30, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity (continued)
As at and for the three quarters ended September 30, 2023 and October 1, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at December 31, 2022 | ( |
) | ||||||||||||||||
| Exchange of Series B-1 preferred stock, net of | ||||||||||||||||||
| share issuance costs of $ |
- | - | - | |||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at September 30, 2023 | ( |
) | ||||||||||||||||
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at January 1, 2022 | ( |
) | ||||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at October 1, 2022 | ( |
) | ||||||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 8 |
September 30, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Cash Flows
For the quarters and three quarters ended September 30, 2023 and October 1, 2022
(Unaudited)
(Expressed in thousands of U.S. dollars)
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| $ | $ | $ | $ | |||||||||
| (note 1) | (note 1) | |||||||||||
| CASH PROVIDED BY (USED IN) | ||||||||||||
| Operating activities | ||||||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | ||||||||
| Items not affecting cash: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Amortization of debt issuance costs | ||||||||||||
| Deferred income taxes | ||||||||||||
| Stock-based compensation | ||||||||||||
| Other | ( |
) | ( |
) | ||||||||
| Changes in operating assets and liabilities, net of divestitures (note 13) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Net cash provided by (used in) operating activities of continuing operations | ( |
) | ( |
) | ||||||||
| Net cash provided by operating activities of discontinued operations | ||||||||||||
| Net cash provided by (used in) operating activities | ( |
) | ||||||||||
| Investing activities | ||||||||||||
| Additions to property, plant and equipment | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Proceeds from sale of property, plant and equipment | ||||||||||||
| Net cash used in investing activities of continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Net cash provided by (used in) investing activities of discontinued operations | ( |
) | ( |
) | ||||||||
| Net cash used in investing activities | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Financing activities | ||||||||||||
| Increase in borrowings under revolving credit facilities (note 8) | ||||||||||||
| Borrowings of long-term debt (notes 5 and 8) | ||||||||||||
| Repayment of long-term debt (note 5) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Proceeds from notes payable (note 7) | ||||||||||||
| Repayment of notes payable (note 7) | ( |
) | ( |
) | ||||||||
| Proceeds from the exercise of stock options and employee share purchases | ||||||||||||
| Payment of withholding taxes on stock-based awards | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Payment of cash dividends on preferred stock (note 9) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Payment of share issuance costs | ( |
) | ( |
) | ||||||||
| Payment of debt issuance costs | ( |
) | ( |
) | ||||||||
| Net cash provided by financing activities of continuing operations | ||||||||||||
| Net cash used in financing activities of discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Net cash provided by financing activities | ||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash in the period | ( |
) | ||||||||||
| Cash and cash equivalents, beginning of the period | ||||||||||||
| Cash, cash equivalents and restricted cash, end of the period | ||||||||||||
| Non-cash investing and financing activities (notes 5 and 13) | ||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 9 |
September 30, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements |
1. Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements of SunOpta Inc. (the "Company" or "SunOpta") have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and three quarters ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 30, 2023 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 31, 2022. For further information, refer to the consolidated financial statements, and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Form 10-K").
As described in notes 1 and 23 to the consolidated financial statements included in the 2022 Form 10-K, certain amounts previously reported for the quarter and three quarters ended October 1, 2022 have been revised.
Discontinued Operations
As described in note 2, on October 12, 2023, the Company completed the divestiture of its frozen fruit business ("Frozen Fruit"). The divestiture of Frozen Fruit completes the Company's strategic optimization plan for its non-core, commodity-based businesses, which included the divestiture of its sunflower business ("Sunflower") in October 2022, in order to focus on value-add products in plant-based and healthy snack categories. As at September 30, 2023, Frozen Fruit met the held for sale criteria and, together with Sunflower, qualifies for reporting as discontinued operations beginning in the third quarter of 2023. As a result, the operating results and cash flows of Frozen Fruit for the quarter and three quarters ended September 30, 2023 and October 1, 2022, together with the operating results and cash flows of Sunflower for the quarter and three quarters ended October 1, 2022, have been reclassified as discontinued operations on the consolidated statements of operations and cash flows, and the assets and liabilities of the Frozen Fruit disposal group have been reclassified and reported as held for sale on the consolidated balance sheets as at September 30, 2023 and December 31, 2022. In addition, the information disclosed in these notes to the unaudited consolidated financial statements is presented on a continuing operations basis, with comparative period information recast to reflect Frozen Fruit and Sunflower as discontinued operations.
Segment Information
In connection with the divestiture of Frozen Fruit, the Company changed its internal organization and reporting structures in the third quarter of 2023 and began operating as one segment. These changes included the elimination of the roles and responsibilities of the former General Managers of the Company, who were previously identified as the segment managers of the Company's former Plant-Based and Fruit-Based Foods and Beverages operating and reportable segments. With these changes, the Company's Chief Executive Officer, who has been identified as the Chief Operating Decision Maker ("CODM"), manages operations on a company-wide basis, rather than at a product category or business unit level. The CODM is supported by a centralized management team based on functional area, including sales, marketing, supply chain, and research and development, as well as finance, IT and administration. Only the CODM has overall responsibility and accountability for the profitability and cash flows of the Company. Using financial information at the consolidated level, the CODM makes key operating decisions, including approving annual operating plans, expanding into new markets or product categories, pursuing business acquisitions or divestitures, and initiating major capital expenditure programs. In addition, the CODM determines the allocation of resources and capital investments to optimize operations and maximize opportunities for the Company as a whole, without regard to specific product categories or business units. The CODM also uses consolidated information to assess performance against the annual operating plan and to set company-wide incentive compensation targets. Following the divestiture of its commodity-based businesses, the majority of the Company's products are shelf-stable packaged food and beverage products and share similar customers and distribution. Refer to note 15 for a disaggregation of the Company's revenues by product category.
| SUNOPTA INC. | 10 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Fiscal Year
2. Discontinued Operations
Divestiture of Frozen Fruit
On October 12, 2023, the Company entered into an Asset Purchase Agreement ("APA") with Natures Touch Mexico, S. de R.L. de C.V. and Nature's Touch Frozen Fruits, LLC (the "Purchasers") to sell to the Purchasers certain assets and liabilities of Frozen Fruit for an aggregate purchase price of approximately $
At the Closing Date, the estimated aggregate purchase price comprised cash consideration of $
The estimated aggregate purchase price is subject to post-closing adjustments based on the final net working capital to be determined as of the Closing Date. Any downward adjustment to the aggregate purchase price will be deducted from the principal amount of the Seller Promissory Notes in an amount up to $
On the Closing Date, the Company entered into post-closing transitional services agreements with the Purchasers to facilitate an orderly transfer of the business operations. The services provided under the agreements include, but are not limited to, IT and financial shared services, payroll and benefits administration, supply chain transition services, and contract manufacturing. These services terminate at various times up to nine months from the Closing Date and certain services may be extended up to an additional three months. Internal labor and third-party costs incurred by the Company to provide these services are recoverable from the Purchasers as incurred, including a mark-up on manufacturing services. Reverse transition services to be provided by the Purchasers include, but are not limited to, support for the sell-through of the frozen fruit inventory that was not acquired by the Purchasers, in exchange for a broker fee on sales of the retained inventory to third parties.
As at September 30, 2023, the Company determined that Frozen Fruit qualified for reporting as a discontinued operation held for sale. The Company recognized an estimated pre-tax loss on divestiture of $
| SUNOPTA INC. | 11 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The net assets of Frozen Fruit that have been reclassified and reported as held for sale on the consolidated balance sheets as at September 30, 2023 and December 31, 2022, are as follows:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Assets | ||||||
| Accounts receivable | ||||||
| Inventories | ||||||
| Other current assets | ||||||
| Property, plant and equipment, net | ||||||
| Operating lease right-of-use assets | ||||||
| Intangible assets, net | ||||||
| Loss on divestiture | ( |
) | ||||
| Total assets held for sale | ||||||
| Liabilities | ||||||
| Accounts payable and accrued liabilities | ||||||
| Operating lease liabilities | ||||||
| Total liabilities held for sale |
The table below presents the major components of the results of discontinued operations reported in the consolidated statement of operations for the quarter and three quarters ended September 30, 2023 and October 1, 2022. The results of operations for the quarter and three quarters ended October 1, 2022 include the results of Sunflower, which prior to the divestiture of Frozen Fruit did not qualify on a quantitative basis for reporting as discontinued operations on a standalone basis.
| SUNOPTA INC. | 12 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | ||||||||||||
| Cost of goods sold(1) | ||||||||||||
| Selling, general and administrative expenses(2) | ||||||||||||
| Intangible asset amortization | ||||||||||||
| Other expense (income), net(3) | ( |
) | ( |
) | ||||||||
| Foreign exchange loss (gain) | ( |
) | ||||||||||
| Interest expense(4) | ||||||||||||
| Earnings (loss) before loss on divestiture | ( |
) | ( |
) | ||||||||
| Loss on divestiture(5) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss from discontinued operations before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Income tax benefit | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
(1) Cost of goods sold for the quarter and three quarters ended September 30, 2023, includes a $
(2) For all periods presented, selling, general and administrative expenses exclude the allocation of corporate costs.
(3) Other expense for the quarter and three quarters ended September 30, 2023, includes a $
(4) Interest expense reflects interest on bank loans and other interest-bearing liabilities directly attributable to Frozen Fruit.
(5) For the quarter ended October 1, 2022, reflects the pre-tax loss on divestiture of $
3. Restricted Cash
Restricted cash relates to certain bank accounts in Mexico, which were retained following the divestiture of Frozen Fruit, that are subject to a judicial hold in connection with a litigation matter that the Company considers to be without merit. The Company has filed a motion with the Court to release the hold on the bank accounts.
4. Inventories
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Raw materials and work-in-process | ||||||
| Finished goods | ||||||
| Inventory reserves | ( |
) | ( |
) | ||
| SUNOPTA INC. | 13 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
5. Leases
The Company leases certain manufacturing plants, warehouses, offices, machinery and equipment, and vehicles. At the lease commencement date, the Company classifies a lease as a finance lease if it has the right to obtain substantially all of the economic benefits from the right-of-use assets, otherwise the lease is classified as an operating lease.
The following tables present supplemental information related to leases:
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Lease Costs | ||||||||||||
| Operating lease cost | ||||||||||||
| Finance lease cost: | ||||||||||||
|
Depreciation of right-of-use assets |
||||||||||||
|
Interest on lease liabilities |
||||||||||||
| Net lease cost | ||||||||||||
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Balance Sheet Classification | ||||||
| Operating leases: | ||||||
|
Operating lease right-of-use assets |
||||||
|
Current portion of operating lease liabilities |
||||||
|
Operating lease liabilities |
||||||
|
Total operating lease liabilities |
||||||
| Finance leases: | ||||||
|
Property, plant and equipment, gross |
||||||
|
Accumulated depreciation |
( |
) | ( |
) | ||
|
Property, plant and equipment, net |
||||||
|
Current portion of long-term debt |
||||||
|
Long-term debt |
||||||
|
Total finance lease liabilities |
| SUNOPTA INC. | 14 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Cash Flow Information | ||||||||||||
| Cash paid (received) for amounts included in measurement of lease liabilities: | ||||||||||||
|
Operating cash flows from operating leases |
||||||||||||
|
Operating cash flows from finance leases |
||||||||||||
|
Financing cash flows from finance leases: |
||||||||||||
|
Cash paid under finance leases(1) |
||||||||||||
|
Cash received under finance leases(2) |
( |
) | ( |
) | ( |
) | ( |
) | ||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||||||||||
|
Operating leases |
||||||||||||
|
Finance leases |
||||||||||||
| Right-of-use assets and liabilities reduced through lease terminations or modifications: | ||||||||||||
|
Operating leases |
( |
) | ( |
) | ( |
) | ( |
) | ||||
(1) Represents repayments under finance leases recorded as a reduction of the lease liability and reported in repayment of long-term debt and net cash used in financing activities of discontinued operations on the consolidated statements of cash flows.
(2) Represents cash advances received by the Company under finance leases for the construction of right-of-use assets controlled by the Company, which related to the buildout of the Company's new plant-based beverage facility in Midlothian, Texas, in the first three quarters of 2023 and 2022, as well as the buildout of the Company's executive office and innovation center located in Eden Prairie, Minnesota, in the first three quarters of 2022. Cash received under finance leases is reported in borrowings of long-term debt on the consolidated statements of cash flows.
| September 30, 2023 | December 31, 2022 | |||||
| Other Information | ||||||
| Weighted-average remaining lease term (years): | ||||||
|
Operating leases |
||||||
|
Finance leases |
||||||
| Weighted-average discount rate: | ||||||
|
Operating leases |
||||||
|
Finance leases |
| SUNOPTA INC. | 15 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Operating leases | Finance leases | |||||
| $ | $ | |||||
| Maturities of Lease Liabilities | ||||||
| Remainder of 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Total lease payments | ||||||
| Less: imputed interest | ( |
) | ( |
) | ||
| Total lease liabilities |
6. Accounts Payable
The Company is party to a supplier finance program with a third-party financial institution, which is offered to certain of the Company's major suppliers. Under this arrangement, the Company agrees with a supplier on the contractual payment terms for the goods the Company procures regardless of whether the supplier elects to participate in the program. If a supplier does participate in the program, the supplier determines, at its own discretion, which invoices, if any, it wants to sell to the financial institution in order to be paid earlier than the contractual payment terms provide. A supplier's voluntary inclusion of an invoice in the program has no bearing on the Company's payment terms, which remain the original due date of the supplier invoice, or the amounts it pays the financial institution, and the Company has no economic interest in a supplier's decision to participate in the program. In addition, the Company has not pledged any assets to the financial institution as it relates to the program. Amounts due to suppliers that elected to participate in the program are included in accounts payable and accrued liabilities on the Company's consolidated balance sheets. As at September 30, 2023, the Company had outstanding payment obligations to these suppliers of $
7. Notes Payable
Commencing in the first quarter of 2023, the Company is financing certain purchases of trade goods and services through third-party extended payables facilities. Under these facilities, third-party intermediaries advance the amount of the scheduled payment to the supplier based on the invoice due date and issue a short-term note payable to the Company for the face amount of the supplier invoice. Interest accrues on the note payable from the contractual payment date of the supplier invoice to the extended due date of the note payable, as specified by the negotiated terms of each facility. The Company does not maintain any form of security with the third-party intermediaries. As at September 30, 2023, the Company had outstanding principal payment obligations to the third-party intermediaries of $
| SUNOPTA INC. | 16 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
8. Long-Term Debt
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Asset-based credit facilities: | ||||||
|
Revolving credit facilities |
||||||
|
Term loan facility |
||||||
|
Total asset-based credit facilities |
||||||
| Finance lease liabilities (see note 5) | ||||||
| Other(1) | ||||||
| Total debt | ||||||
| Less: current portion | ||||||
| Total long-term debt |
(1) Other long-term debt represents outstanding bank loans of the Mexican operations of Frozen Fruit, which were repaid on October 12, 2023, in connection with the divestiture of Frozen Fruit (see note 2).
Asset-Based Credit Facilities
On December 31, 2020, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement"), as amended by the First Amendment, dated as of April 15, 2021, the Second Amendment, dated as of July 2, 2021, the Third Amendment, dated as of February 25, 2022, and the Fourth Amendment, dated as of September 2, 2022, among the Company, SunOpta Foods Inc. ("SunOpta Foods"), the other borrowers and guarantors party thereto, and the lenders party thereto (the "Lenders"). As part of the Credit Agreement, the Lenders provided a
As described in note 2, on October 12, 2023, the Company repaid $
As at September 30, 2023, the Company was in compliance with all covenants of the Credit Agreement.
| SUNOPTA INC. | 17 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
9. Series B-1 Preferred Stock
On April 15, 2020, the Company and SunOpta Foods entered into a subscription agreement (the "Series B Subscription Agreement") with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, "Oaktree") and Engaged Capital, LLC, Engaged Capital Flagship Master Fund, LP and Engaged Capital Co-Invest IV-A, LP (collectively, "Engaged"). On April 24, 2020, pursuant to the Series B Subscription Agreement, SunOpta Foods issued
On March 3, 2023, Engaged exercised their right to exchange all of their shares of Series B-1 Preferred Stock for
In connection with the exchange of the Series B-1 Preferred Stock, the Company redeemed all Special Shares, Series 2, par value $
As at September 30, 2023, SunOpta Foods had
On May 19, 2023, the Company issued
10. Stock-Based Compensation
During the second quarter of 2023, the Company granted
| SUNOPTA INC. | 18 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The following table summarizes all EBITDA PSU activity for the three quarters ended September 30, 2023:
| Weighted- | ||||||
| average grant- | ||||||
| EBITDA PSUs | date fair value | |||||
| Non-vested, beginning of period | $ | |||||
| Granted | ||||||
| Vested | ( |
) | ||||
| Cancelled | ( |
) | ||||
| Non-vested, end of period | $ |
On July 10, 2023, the Company granted
The weighted-average grant-date fair value of each RSU was estimated to be $
| TSR PSUs | Stock options | |||||
| Grant-date stock price | $ | $ | ||||
| Exercise price | $ | |||||
| Dividend yield | ||||||
| Expected volatility(a) | ||||||
| Risk-free interest rate(b) | ||||||
| Expected life (in years)(c) |
| SUNOPTA INC. | 19 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(a) Determined based on the historical volatility of the Common Shares over the performance period of the PSUs and expected life of the stock options.
(b) Determined based on U.S. Treasury yields with a remaining term equal to the performance period of the PSUs and expected life of the stock options.
(c) Determined based on the performance period of the PSUs and the mid-point of vesting (three years) and expiration (ten years) for the stock options.
The aggregate grant-date fair value of the RSUs, PSUs and stock options granted under the 2023 LTIP was determined to be $
11. Income Taxes
The effective tax rates recognized for the quarter and three quarters ended September 30, 2023 were
12. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (shares in thousands):
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| Basic Earnings (Loss) Per Share | ||||||||||||
| Numerator for basic earnings (loss) per share: | ||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | ||||
| Less: dividends and accretion on preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings (loss) from continuing operations attributable to common shareholders |
( |
) | ( |
) | ||||||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss attributable to common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Denominator for basic earnings (loss) per share: | ||||||||||||
| Basic weighted-average number of shares outstanding | ||||||||||||
| Basic earnings (loss) per share: | ||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | ||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss attributable to common shareholders(1) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| SUNOPTA INC. | 20 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| Diluted Earnings (Loss) Per Share | ||||||||||||
| Numerator for diluted earnings (loss) per share: | ||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | ||||
| Less: dividends and accretion on preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings (loss) from continuing operations attributable to common shareholders | ( |
) | ( |
) | ||||||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss attributable to common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Denominator for diluted earnings (loss) per share: | ||||||||||||
| Basic weighted-average number of shares outstanding | ||||||||||||
| Dilutive effect of the following: | ||||||||||||
| Stock options, restricted stock units and performance share units(2) | ||||||||||||
| Series B-1 Preferred Stock(3) | ||||||||||||
| Diluted weighted-average number of shares outstanding | ||||||||||||
| Diluted earnings (loss) per share: | ||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | ||||
| Loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss attributable to common shareholders(1) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
(1) The sum of the individual per share amounts may not add due to rounding.
(2) For the quarter and three quarters ended September 30, 2023,
(3) For the quarter and three quarters ended September 30, 2023 and October 1, 2022, it was more dilutive to assume the Series B-1 Preferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings per share calculation was not adjusted to add back the dividends and accretion on the Series B-1 Preferred Stock and the denominator was not adjusted to include the
| SUNOPTA INC. | 21 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
13. Supplemental Cash Flow Information
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Changes in Operating Assets and Liabilities, Net of Divestitures | ||||||||||||
| Accounts receivable | ( |
) | ( |
) | ( |
) | ||||||
| Inventories | ( |
) | ( |
) | ( |
) | ||||||
| Accounts payable and accrued liabilities | ( |
) | ( |
) | ( |
) | ||||||
| Other operating assets and liabilities |
( |
) |
( |
) |
||||||||
| ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Non-Cash Investing and Financing Activities | ||||||||||||
| Change in additions to property, plant and equipment included in accounts payable and accrued liabilities | ( |
) | ( |
) | ( |
) | ||||||
| Change in accrued dividends on preferred stock included in accounts payable and accrued liabilities | ( |
) | ||||||||||
| Change in proceeds receivable from sale of Sunflower(1) | ||||||||||||
(1) Reflect the settlement of the final working capital adjustment related to the divestiture of Sunflower, which is included in investing activities of discontinued operations on the consolidated statement of cash flows for the first three quarters of 2023.
14. Commitments and Contingencies
Legal Proceedings
Various current and potential claims and litigation arising in the ordinary course of business are pending against the Company. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable that may be incurred in connection with any such currently pending matter. In the Company's opinion, the eventual resolution of such matters, either individually or in the aggregate, is not expected to have a material impact on the Company's financial position, results of operations, or cash flows. However, litigation is inherently unpredictable and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on the Company's financial position, results of operations, and cash flows for the reporting period in which any such resolution or disposition occurs.
Product Recall
| SUNOPTA INC. | 22 | September 30, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 30, 2023 and October 1, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
15. Disaggregation of Revenue
The principal products that comprise the Company's product categories are as follows:
|
Category |
Principal Products |
|
Beverages and broths |
Plant-based beverages utilizing oat, almond, soy, coconut, rice, hemp, and other bases, including Dream® and West Life™ brands; oat-based creamers, including SOWN® brand; ready-to-drink protein shakes; packaged teas and concentrates; meat and vegetable broths and stocks. |
|
Fruit snacks |
Ready-to-eat fruit snacks made from apple purée and juice concentrate in bar, bit, twist, strip and sandwich formats; cold pressed fruit bars. |
|
Smoothie bowls |
Ready-to-eat fruit smoothie and chia bowls topped with frozen fruit. |
|
Ingredients |
Liquid and powder ingredients utilizing oat, soy and hemp bases. |
Revenue disaggregated by product category is as follows:
| Quarter ended | Three quarters ended | |||||||||||
| September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Product Category | ||||||||||||
| Beverages and broths | ||||||||||||
| Fruit snacks | ||||||||||||
| Smoothie bowls | ||||||||||||
| Ingredients | ||||||||||||
| Total revenues | ||||||||||||
| SUNOPTA INC. | 23 | September 30, 2023 Form 10-Q |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended September 30, 2023 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 9, 2023.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations, and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
We operate as a manufacturer for leading natural and private label brands and also produce our own brands, including SOWN®, Dream® and West LifeTM. Our consumer product portfolio includes plant-based beverages and creamers, protein shakes, teas, and broths packaged in shelf-stable formats, together with fruit snacks and smoothie bowls, which are sold through retail and foodservice channels. We also produce liquid and dry ingredients for internal use and for sale to other food and beverage manufacturers.
Recent Developments
Divestiture of Frozen Fruit
On October 12, 2023, we completed the sale of certain assets and liabilities of our frozen fruit business ("Frozen Fruit") for an aggregate purchase price of approximately $141 million, subject to closing working capital adjustments. This transaction represents our exit from the processing, packaging and selling of individually quick frozen fruit for retail, foodservice and industrial applications. The divestiture of Frozen Fruit completes our strategic optimization plan for our non-core, commodity-based businesses, which included the divestiture of our sunflower business ("Sunflower") in October 2022, in order to focus on value-add products in plant-based and healthy snack categories. As at September 30, 2023, Frozen Fruit met the held for sale criteria and, together with Sunflower, qualifies for reporting as discontinued operations beginning in the third quarter of 2023. As a result, the information in this MD&A is presented on a continuing operations basis, with all periods presented recast to reflect the reporting of Frozen Fruit and Sunflower as discontinued operations. For further information regarding the divestiture of Frozen Fruit and discontinued operations, see note 2 to the unaudited consolidated financial statements included in this report.
| SUNOPTA INC. | 24 | September 30, 2023 Form 10-Q |
Segment Change
In connection with the divestiture of Frozen Fruit and the management changes described below, we changed our internal organization and reporting structures in the third quarter of 2023 and began operating as one segment. As a result, the information in this MD&A is presented on a consolidated basis for all periods presented. For further information regarding the change in our segment structure, see note 1 to the unaudited consolidated financial statements included in this report.
Management Changes
Effective October 9, 2023 and October 13, 2023, respectively, Michael Buick, Senior Vice President and General Manager of Plant-Based Foods and Beverages and Scott Huckins, Chief Financial Officer ("CFO") and General Manager of Fruit-Based Foods and Beverages left the Company. With their departures, we have eliminated the position of General Manager and have adopted a centralized functional structure reporting directly to the Chief Executive Officer.
Effective October 13, 2023, Greg Gaba, our former Vice President Corporate Finance and Deputy CFO, was appointed CFO of the Company.
Global Economic Conditions and Inflationary Cost Environment
Our businesses continue to be exposed to the effects of the current global macroeconomic environment, including elevated inflation, higher interest rates, and shifts in consumer demand.
| SUNOPTA INC. | 25 | September 30, 2023 Form 10-Q |
Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022
| September 30, 2023 | October 1, 2022 | Change | Change | |||||||||
| For the quarter ended | $ | $ | $ | % | ||||||||
| Revenues | 152,541 | 144,023 | 8,518 | 5.9% | ||||||||
| Cost of goods sold | 132,273 | 118,891 | 13,382 | 11.3% | ||||||||
| Gross profit | 20,268 | 25,132 | (4,864 | ) | -19.4% | |||||||
| Gross margin(1) | 13.3% | 17.4% | -4.1% | |||||||||
| Operating expenses | ||||||||||||
| Selling, general and administrative expenses | 18,377 | 17,866 | 511 | 2.9% | ||||||||
| Intangible asset amortization | 446 | 446 | - | 0.0% | ||||||||
| Other expense (income), net | - | 451 | (451 | ) | -100.0% | |||||||
| Foreign exchange gain | (37 | ) | (223 | ) | 186 | 83.4% | ||||||
| Total operating expenses | 18,786 | 18,540 | 246 | 1.3% | ||||||||
| Operating income | 1,482 | 6,592 | (5,110 | ) | -77.5% | |||||||
| Interest expense, net | 7,162 | 3,901 | 3,261 | 83.6% | ||||||||
| Earnings (loss) from continuing operations before income taxes | (5,680 | ) | 2,691 | (8,371 | ) | * | ||||||
| Income tax expense | - | 332 | (332 | ) | -100.0% | |||||||
| Earnings (loss) from continuing operations | (5,680 | ) | 2,359 | (8,039 | ) | * | ||||||
| Loss from discontinued operations | (140,143 | ) | (14,293 | ) | (125,850 | ) | -880.5% | |||||
| Net loss(2),(3) | (145,823 | ) | (11,934 | ) | (133,889 | ) | -1121.9% | |||||
| Dividends and accretion on preferred stock | (426 | ) | (764 | ) | 338 | 44.2% | ||||||
| Loss attributable to common shareholders(4) | (146,249 | ) | (12,698 | ) | (133,551 | ) | -1051.7% |
* Percentage not meaningful due to figures being positive and negative.
(1) Gross margin is a measure of gross profit (equal to revenues less cost of goods sold) as a percentage of revenues. We use a measure of adjusted gross margin that excludes non-capitalizable start-up costs included in cost of goods sold that are incurred in connection with capital expansion projects. Start-up costs have had, and are expected to continue to have, a significant impact on the comparability of reported gross margins, which may obscure trends in our margin performance.
We use the measure of adjusted gross margin to evaluate the underlying profitability of our revenue-generating activities within each reporting period. We believe that disclosing this non-GAAP measure provides investors with a meaningful, consistent comparison of our profitability measure for the periods presented. However, the non-GAAP measure of adjusted gross margin should not be considered in isolation or as a substitute for gross margin calculated based on gross profit determined in accordance with U.S. GAAP. The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP.
| For the quarter ended | September 30, 2023 | October 1, 2022 | ||||
| Reported gross margin | 13.3% | 17.4% | ||||
| Start-up costs(a) | 3.1% | 0.4% | ||||
| Adjusted gross margin | 16.4% | 17.8% |
(a) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the third quarter of 2023, start-up costs included in cost of goods sold related to the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of a new extrusion line at our fruit snacks facility in Omak, Washington. For the third quarter of 2022, start-up costs included in cost of goods sold related to the hiring and training of new employees for the Midlothian facility.
| SUNOPTA INC. | 26 | September 30, 2023 Form 10-Q |
(2) When assessing our financial performance, we use an internal measure of adjusted earnings/loss that excludes specific items recognized in other income or expense, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of the financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of adjusted earnings (loss) from net earnings (loss), which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, we have prepared this table in columnar format to present the effects of discontinued operations on our consolidated results for the periods presented. We believe this presentation assists investors in assessing the financial performance of our continuing operations.
| Continuing | Discontinued | |||||||||||||||||
| Operations | Operations | Consolidated | ||||||||||||||||
| Per Share | Per Share | Per Share | ||||||||||||||||
| For the quarter ended | $ | $ | $ | $ | $ | $ | ||||||||||||
| September 30, 2023 | ||||||||||||||||||
| Net loss | (5,680 | ) | (140,143 | ) | (145,823 | ) | ||||||||||||
| Dividends and accretion on preferred stock | (426 | ) | - | (426 | ) | |||||||||||||
| Loss attributable to common shareholders | (6,106 | ) | (0.05 | ) | (140,143 | ) | (1.21 | ) | (146,249 | ) | (1.26 | ) | ||||||
| Adjusted for: | ||||||||||||||||||
| Loss on divestiture of discontinued operations(a) | - | 118,795 | 118,795 | |||||||||||||||
| Inventory reserves and impairment charges(b) | - | 17,864 | 17,864 | |||||||||||||||
| Start-up costs(c) | 4,733 | - | 4,733 | |||||||||||||||
| Business development costs(d) | 928 | - | 928 | |||||||||||||||
| Severance costs(e) | 897 | - | 897 | |||||||||||||||
| Other(f) | - | 21 | 21 | |||||||||||||||
| Net income tax on adjusting items(g) | - | - | - | |||||||||||||||
| Adjusted earnings (loss) | 452 | 0.00 | (3,463 | ) | (0.03 | ) | (3,011 | ) | (0.03 | ) | ||||||||
| October 1, 2022 | ||||||||||||||||||
| Net earnings (loss) | 2,359 | (14,293 | ) | (11,934 | ) | |||||||||||||
| Dividends and accretion on preferred stock | (764 | ) | - | (764 | ) | |||||||||||||
| Earnings (loss) attributable to common shareholders | 1,595 | 0.01 | (14,293 | ) | (0.13 | ) | (12,698 | ) | (0.12 | ) | ||||||||
| Adjusted for: | ||||||||||||||||||
| Loss on divestiture of discontinued operations(a) | - | 23,227 | 23,227 | |||||||||||||||
| Sale of frozen fruit processing facility(h) | - | (3,460 | ) | (3,460 | ) | |||||||||||||
| Start-up costs(c) | 608 | - | 608 | |||||||||||||||
| Exit from fruit ingredient processing facility(i) | 206 | - | 206 | |||||||||||||||
| Business development costs(d) | 75 | - | 75 | |||||||||||||||
| Other(f) | 245 | (18 | ) | 227 | ||||||||||||||
| Net income tax on adjusting items(g) | (299 | ) | (5,192 | ) | (5,491 | ) | ||||||||||||
| Adjusted earnings | 2,430 | 0.02 | 264 | 0.00 | 2,694 | 0.02 | ||||||||||||
(a) Reflects the estimated pre-tax loss on the divestiture of Frozen Fruit in the third quarter of 2023 and the pre-tax loss on the divestiture of Sunflower in the third quarter of 2022, which are recorded in loss from discontinued operations.
(b) For the third quarter of 2023, reflects inventory reserves and impairment charges on equipment and operating lease right-of-use assets recognized in connection with the divestiture of Frozen Fruit, which are recorded in loss from discontinued operations.
(c) For the third quarter of 2023, start-up costs included the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of a new extrusion line at our fruit snacks facility in Omak, Washington, which are recorded in cost of goods sold. For the third quarter of 2022, start-up costs included the hiring and training of new employees for the Midlothian facility, which are recorded in cost of goods sold ($0.5 million) and SG&A expenses ($0.1 million).
| SUNOPTA INC. | 27 | September 30, 2023 Form 10-Q |
(d) Represents third-party costs associated with business development activities, which are inclusive of costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. For the third quarters of 2023 and 2022, business development costs related to the divestiture of Frozen Fruit and are recorded in SG&A expenses.
(e) For the third quarter of 2023, reflects employee severance costs accrued in connection with the consolidation of our continuing operations following the divestiture of Frozen Fruit, which are recorded in SG&A expenses.
(f) Other includes reserves for legal settlements and gains and loss on the disposal of assets, which are recorded in other income/expense and loss from discontinued operations.
(g) Reflects the tax effect of the adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment, net of deferred tax valuation allowances.
(h) For the third quarter of 2022, reflects the gain on sale in August 2022 of a previously owned frozen fruit processing facility, net of exit costs, which is recorded in loss from discontinued operations.
(i) For the third quarter of 2022, reflects exit costs related to a former fruit ingredient processing facility, which are recorded in other expense.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings (loss). However, adjusted earnings (loss) is not, and should not be viewed as, a substitute for net earnings (loss) prepared under U.S. GAAP. Adjusted earnings (loss) is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted EBITDA when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, and stock-based compensation, as well as other unusual items that affect the comparability of operating performance. We also use this measure to assess operating performance in connection with our employee incentive programs. We define adjusted EBITDA as net earnings (loss) before interest, income taxes, depreciation, amortization, and stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings (loss) (refer above to footnote (2)). The following table presents a reconciliation of adjusted EBITDA from net earnings (loss), which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, as described above in footnote (2), we have prepared this table in columnar format to present the effects of discontinued operations on our consolidated results for the periods presented. We believe this presentation assists investors in assessing the financial performance of our continuing operations.
| Continuing | Discontinued | ||||||||
| Operations | Operations | Consolidated | |||||||
| For the quarter ended | $ | $ | $ | ||||||
| September 30, 2023 | |||||||||
| Net loss | (5,680 | ) | (140,143 | ) | (145,823 | ) | |||
| Income tax benefit | - | (805 | ) | (805 | ) | ||||
| Interest expense, net | 7,162 | 840 | 8,002 | ||||||
| Depreciation and amortization | 7,983 | 2,966 | 10,949 | ||||||
| Stock-based compensation | 3,068 | - | 3,068 | ||||||
| Adjusted for: | |||||||||
| Loss on divestiture of discontinued operations(a) | - | 118,795 | 118,795 | ||||||
| Inventory reserves and impairment charges(b) | - | 17,864 | 17,864 | ||||||
| Start-up costs(c) | 4,733 | - | 4,733 | ||||||
| Business development costs(d) | 928 | - | 928 | ||||||
| Severance costs(e) | 897 | - | 897 | ||||||
| Other | - | 21 | 21 | ||||||
| Adjusted EBITDA | 19,091 | (462 | ) | 18,629 |
| SUNOPTA INC. | 28 | September 30, 2023 Form 10-Q |
| Continuing | Discontinued | ||||||||
| Operations | Operations | Consolidated | |||||||
| For the quarter ended | $ | $ | $ | ||||||
| October 1, 2022 | |||||||||
| Net earnings (loss) | 2,359 | (14,293 | ) | (11,934 | ) | ||||
| Income tax expense (benefit) | 332 | (5,296 | ) | (4,964 | ) | ||||
| Interest expense, net | 3,901 | 441 | 4,342 | ||||||
| Depreciation and amortization | 5,837 | 3,893 | 9,730 | ||||||
| Stock-based compensation | 4,092 | - | 4,092 | ||||||
| Adjusted for: | |||||||||
| Loss on divestiture of discontinued operations(a) | - | 23,227 | 23,227 | ||||||
| Sale of frozen fruit processing facility(h) | - | (3,460 | ) | (3,460 | ) | ||||
| Start-up costs(c) | 608 | - | 608 | ||||||
| Exit from fruit ingredient processing facility(i) | 206 | - | 206 | ||||||
| Business development costs(d) | 75 | - | 75 | ||||||
| Other | 245 | (18 | ) | 227 | |||||
| Adjusted EBITDA | 17,655 | 4,494 | 22,149 |
(a)-(i) Refer to footnote (2) above.
Although we use adjusted EBITDA as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, operating income, net earnings/loss, and adjusted earnings/loss to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. For example, as described above under footnote (1), we evaluate our adjusted gross margins on a basis that excludes the impact of start-up costs. In addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for an analysis of our results as reported under U.S. GAAP.
| SUNOPTA INC. | 29 | September 30, 2023 Form 10-Q |
Revenues for the quarter ended September 30, 2023 increased by 5.9% to $152.5 million from $144.0 million for the quarter ended October 1, 2022. The change in revenues from the third quarter of 2022 to the third quarter of 2023 was due to the following:
| $ | % | |||||
| 2022 revenues | 144,023 | |||||
| Volume/Mix | 7,921 | 5.5% | ||||
| Price | 597 | 0.4% | ||||
| 2023 revenues | 152,541 | 5.9% |
For the quarter ended September 30, 2023, the 5.9% increase in revenues reflected a favorable volume/mix impact of 5.5% and a 0.4% overall increase in pricing. The favorable volume/mix reflected sales volume growth for oat milks and creamers, 330-milliliter protein shakes, and teas, together with higher sales volumes for fruit snacks, partially offset by lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base, together with softer demand for almond beverages. The increase in pricing mainly reflected the wrap-around benefit of pricing actions taken with customers in 2022 to offset inflationary cost increases.
Gross profit decreased $4.8 million, or 19.4%, to $20.3 million for the quarter ended September 30, 2023, compared with $25.1 million for the quarter ended October 1, 2022. Gross margin for the quarter ended September 30, 2023 was 13.3% compared to 17.4% for the quarter ended October 1, 2022, a decrease of 410 basis points.
In the third quarter of 2023, we incurred start-up costs included in cost of goods sold of $4.7 million (3.1% gross margin impact) related to our new plant in Midlothian, Texas, and new extrusion line at our fruit snacks facility in Omak, Washington, compared with $0.5 million (0.4% gross margin impact) of start-up costs incurred in the third quarter of 2022. Excluding the impact of these costs, adjusted gross margin for the quarter ended September 30, 2023 was 16.4% compared to 17.8% for the quarter ended October 1, 2022, a decrease of 140 basis points. See footnote (1) to the "Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022" table for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
The 140-basis point decrease in adjusted gross margin reflected the impact of incremental depreciation of new production equipment for capital expansion projects ($2.3 million or 1.5% gross margin impact) and higher manufacturing costs, partially offset by a favorable mix shift in our plant-based ingredient operations, with increased internal use of oat base to support our beverage business and lower external sales.
Operating income decreased $5.1 million to $1.5 million for the quarter ended September 30, 2023, compared with $6.6 million for the quarter ended October 1, 2022. The decrease in operating income reflected lower gross profit, as described above, together with higher business development and employee severance costs in connection with the divestiture of Frozen Fruit and related consolidation of our continuing operations, partially offset by lower employee incentive compensation accruals and variable stock-based compensation expense based on performance.
(Further details on the changes in revenue, gross profit and operating income are provided in the rollforward tables below.)
Net interest expense increased by $3.3 million to $7.2 million for the quarter ended September 30, 2023, compared with $3.9 million for the quarter ended October 1, 2022, resulting from an increase in outstanding debt to finance capital expansion projects, together with the impact of higher interest rates.
For the quarter ended September 30, 2023, we recognized a full valuation allowance against U.S. deferred tax assets arising in the third quarter of 2023, based on our assessment that the related tax benefits were no longer more likely than not to be realized in the future, resulting in no income tax expense/benefit recognized for the period. For the quarter ended October 1, 2022, we recognized income tax expense of $0.3 million on pre-tax earnings of $2.7 million, reflecting an effective tax rate of 12.3%.
Loss from continuing operations for the quarter ended September 30, 2023 was $5.7 million, compared with earnings of $2.4 million for the quarter ended October 1, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.05 for the quarter ended September 30, 2023, compared with a diluted earnings per share of $0.01 for the quarter ended October 1, 2022.
We recognized a loss from discontinued operations of $140.1 million (diluted loss per share of $1.21) for the quarter ended September 30, 2023, compared with $14.3 million (diluted loss per share of $0.13) for the quarter ended October 1, 2022. The increase in the loss from discontinued operations reflected the estimated pre-tax loss on the divestiture of Frozen Fruit of $118.8 million recognized in the third quarter of 2023, compared with a pre-tax loss on the divestiture of Sunflower of $23.2 million recorded in the third quarter of 2022. In addition, the increase in the loss from discontinued operations reflected a period-over-period decrease in the gross profit of Frozen Fruit prior to the divestiture due to lower sales and production volumes as a result of softer retail consumption trends and lost foodservice distribution, together with inventory reserves recognized in connection with the divestiture.
| SUNOPTA INC. | 30 | September 30, 2023 Form 10-Q |
We realized a loss attributable to common shareholders of $146.2 million (diluted loss per share of $1.26) for the quarter ended September 30, 2023, compared with a loss attributable to common shareholders of $12.7 million (diluted loss per share of $0.12) for the quarter ended October 1, 2022. Loss attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $0.4 million and $0.8 million in the third quarters of 2023 and 2022, respectively.
On a consolidated basis, adjusted loss for the quarter ended September 30, 2023 was $3.0 million, or $0.03 loss per diluted share, compared with adjusted earnings of $2.7 million, or $0.02 earnings per diluted share, for the quarter ended October 1, 2022. For the quarter ended September 30, 2023, adjusted earnings from continuing operations were $0.5 million, or $0.00 earnings per diluted share, compared with adjusted earnings of $2.4 million, or $0.02 earnings per diluted share, for the quarter ended October 1, 2022.
On a consolidated basis, adjusted EBITDA decreased $3.5 million, or 15.9%, for the quarter ended September 30, 2023 to $18.6 million, compared with $22.1 million for the quarter ended October 1, 2022. Adjusted EBITDA from continuing operations increased $1.4 million, or 8.1%, to $19.1 million for the quarter ended September 30, 2023, compared with $17.7 million for the quarter ended October 1, 2022.
Adjusted earnings (loss) and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the "Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022" table for a reconciliation of adjusted earnings (loss) and adjusted EBITDA from net earnings (loss), which we consider to be the most directly comparable U.S. GAAP financial measure.
Rollforward of Revenue, Gross Profit and Operating Income
| For the quarter ended | September 30, 2023 | October 1, 2022 | Change | % Change | ||||||||
| Revenues | $ | 152,541 | $ | 144,023 | $ | 8,518 | 5.9% | |||||
| Gross profit | 20,268 | 25,132 | (4,864 | ) | -19.4% | |||||||
| Gross margin | 13.3% | 17.4% | -4.1% | |||||||||
| Operating income | $ | 1,482 | $ | 6,592 | $ | (5,110 | ) | -77.5% | ||||
| Operating margin | 1.0% | 4.6% | -3.6% |
Revenues
The table below explains the $8.5 million increase in revenues from $144.0 million for the third quarter of 2022 to $152.5 million for the third quarter of 2023:
| Revenues for the quarter ended October 1, 2022 | $144,023 | |
| Sales volume growth for oat milks and creamers, 330-milliliter protein shakes, and teas, partially offset by softer demand for almond beverages | 10,101 | |
| Higher sales volumes for fruit snacks and smoothie bowls | 4,206 | |
| Lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base | (5,789) | |
| Revenues for the quarter ended September 30, 2023 | $152,541 | |
| SUNOPTA INC. | 31 | September 30, 2023 Form 10-Q |
Gross Profit
The table below explains the $4.8 million decrease in gross profit of from $25.1 million for the third quarter of 2022 to $20.3 million for the third quarter of 2023:
| Gross profit for the quarter ended October 1, 2022 | $25,132 | |
| Increase in start-up costs related to capital expansion projects | (4,195) | |
| Incremental depreciation related to capital expansion projects | (2,307) | |
| Impact of sales volume growth and increased internal use of oat base to support our beverage business, partially offset by higher manufacturing costs | 1,638 | |
| Gross profit for the quarter ended September 30, 2023 | $20,268 | |
Operating Income
The table below explains the $5.1 million decrease in operating income from $6.6 million for the third quarter of 2022 to $1.5 million for the third quarter of 2023:
| Operating income for the quarter ended October 1, 2022 | $6,592 | |
| Decrease in gross profit, as explained above | ($4,864) | |
| Higher business development and employee severance costs in connection with the divestiture of Frozen Fruit and related consolidation of our continuing operations, partially offset by lower employee incentive compensation accruals based on performance | (1,270) | |
| Lower variable stock-based compensation expense based on performance | 1,024 | |
| Operating income for the quarter ended September 30, 2023 | $1,482 | |
Outlook for the Fourth Quarter of 2023
We expect sequential and year-over-year revenue growth from our continuing operations in the fourth quarter of 2023 as we continue to ramp-up production of protein shakes and teas at our Midlothian, Texas, facility, and deliver on new business. In addition, we expect to be producing at near to full capacity on our new fruit snack extrusion line by the end of the fourth quarter of 2023 in order to address unfilled category demand. We anticipate sequential and year-over-year improvements in the gross margin profile of our continuing operations in the fourth quarter of 2023, with higher production volumes and improved plant utilization more than offsetting manufacturing cost increases. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Various factors could adversely impact our ability to meet these forward-looking expectations, including the impact of current economic conditions on consumer buying behavior and demand for our products; our ability to successfully ramp up production at our Midlothian, Texas facility and on our new fruit snacks extrusion line; our ability to successfully commercialize new business; and other factors described above under "Forward-Looking Statements."
| SUNOPTA INC. | 32 | September 30, 2023 Form 10-Q |
Consolidated Results of Operations for the Three Quarters Ended September 30, 2023 and October 1, 2022
| September 30, 2023 | October 1, 2022 | Change | Change | |||||||||
| For the three quarters ended | $ | $ | $ | % | ||||||||
| Revenues | 448,673 | 431,605 | 17,068 | 4.0% | ||||||||
| Cost of goods sold | 385,697 | 355,691 | 30,006 | 8.4% | ||||||||
| Gross profit | 62,976 | 75,914 | (12,938 | ) | -17.0% | |||||||
| Gross margin(1) | 14.0% | 17.6% | -3.6% | |||||||||
| Operating expenses | ||||||||||||
| Selling, general and administrative expenses | 58,403 | 58,864 | (461 | ) | -0.8% | |||||||
| Intangible asset amortization | 1,338 | 1,338 | - | 0.0% | ||||||||
| Other expense (income), net | (20 | ) | 1,408 | (1,428 | ) | * | ||||||
| Foreign exchange loss (gain) | 44 | (208 | ) | 252 | * | |||||||
| Total operating expenses | 59,765 | 61,402 | (1,637 | ) | -2.7% | |||||||
| Operating income | 3,211 | 14,512 | (11,301 | ) | -77.9% | |||||||
| Interest expense, net | 19,391 | 8,844 | 10,547 | 119.3% | ||||||||
| Earnings (loss) from continuing operations before income taxes | (16,180 | ) | 5,668 | (21,848 | ) | * | ||||||
| Income tax expense | 3,978 | 1,360 | 2,618 | 192.5% | ||||||||
| Earnings (loss) from continuing operations | (20,158 | ) | 4,308 | (24,466 | ) | * | ||||||
| Loss from discontinued operations | (143,126 | ) | (10,203 | ) | (132,923 | ) | -1302.8% | |||||
| Net loss(2),(3) | (163,284 | ) | (5,895 | ) | (157,389 | ) | -2669.9% | |||||
| Dividends and accretion on preferred stock | (1,552 | ) | (2,279 | ) | 727 | 31.9% | ||||||
| Loss attributable to common shareholders(4) | (164,836 | ) | (8,174 | ) | (156,662 | ) | -1916.6% |
* Percentage not meaningful due to figures being positive and negative.
(1) The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP (refer to footnote (1) to the "Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022" table regarding the use of this non-GAAP measure).
| For the three quarters ended | September 30, 2023 | October 1, 2022 | ||||
| Reported gross margin | 14.0% | 17.6% | ||||
| Start-up costs(a) | 3.6% | 0.3% | ||||
| Adjusted gross margin | 17.7% | 17.9% |
Note: percentages may not add due to rounding.
(a) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the first three quarters of 2023, start-up costs included in cost of goods sold related to the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of new extrusion and high-speed packaging lines at our fruit snacks facility in Omak, Washington. For the third quarter of 2022, start-up costs included in cost of goods sold related to the hiring and training of new employees for the Midlothian facility, together with the integration of the acquired Dream and West Life brands.
(2) The following table presents a reconciliation of adjusted earnings (loss) from net earnings (loss), which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (2) to the "Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022" table regarding the use of this non-GAAP measure).
| SUNOPTA INC. | 33 | September 30, 2023 Form 10-Q |
| Continuing | Discontinued | |||||||||||||||||
| Operations | Operations | Consolidated | ||||||||||||||||
| Per Share | Per Share | Per Share | ||||||||||||||||
| For the three quarters ended | $ | $ | $ | $ | $ | $ | ||||||||||||
| September 30, 2023 | ||||||||||||||||||
| Net loss | (20,158 | ) | (143,126 | ) | (163,284 | ) | ||||||||||||
| Dividends and accretion on preferred stock | (1,552 | ) | - | (1,552 | ) | |||||||||||||
| Loss attributable to common shareholders | (21,710 | ) | (0.19 | ) | (143,126 | ) | (1.26 | ) | (164,836 | ) | (1.45 | ) | ||||||
| Adjusted for: | ||||||||||||||||||
| Loss on divestiture of discontinued operations(a) | - | 118,795 | 118,795 | |||||||||||||||
| Inventory reserves and impairment charges(b) | - | 17,864 | 17,864 | |||||||||||||||
| Start-up costs(c) | 17,855 | - | 17,855 | |||||||||||||||
| Product recall costs, net of insurance recoveries(d) | - | 2,500 | 2,500 | |||||||||||||||
| Business development costs(e) | 2,390 | - | 2,390 | |||||||||||||||
| Severance costs(f) | 897 | - | 897 | |||||||||||||||
| Other(g) | (20 | ) | 519 | 499 | ||||||||||||||
| Net income tax on adjusting items(h) | - | - | - | |||||||||||||||
| Change in valuation allowance for deferred tax assets(i) | 3,978 | - | 3,978 | |||||||||||||||
| Adjusted earnings (loss) | 3,390 | 0.03 | (3,448 | ) | (0.03 | ) | (58 | ) | (0.00 | ) | ||||||||
| October 1, 2022 | ||||||||||||||||||
| Net earnings (loss) | 4,308 | (10,203 | ) | (5,895 | ) | |||||||||||||
| Dividends and accretion on preferred stock | (2,279 | ) | - | (2,279 | ) | |||||||||||||
| Earnings (loss) attributable to common shareholders | 2,029 | 0.02 | (10,203 | ) | (0.09 | ) | (8,174 | ) | (0.08 | ) | ||||||||
| Adjusted for: | ||||||||||||||||||
| Loss on divestiture of discontinued operations(a) | - | 31,468 | 31,468 | |||||||||||||||
| Sale of frozen fruit processing facility(j) | - | (2,544 | ) | (2,544 | ) | |||||||||||||
| Start-up costs(c) | 1,329 | - | 1,329 | |||||||||||||||
| Business development costs(e) | 874 | - | 874 | |||||||||||||||
| Exit from fruit ingredient processing facility(k) | 577 | - | 577 | |||||||||||||||
| Other(g) | 831 | (64 | ) | 767 | ||||||||||||||
| Net income tax on adjusting items(h) | (949 | ) | (16,414 | ) | (17,363 | ) | ||||||||||||
| Adjusted earnings | 4,691 | 0.04 | 2,243 | 0.02 | 6,934 | 0.06 | ||||||||||||
(a) For the first three quarters of 2023, reflects the estimated pre-tax loss on the divestiture of Frozen Fruit which is recorded in loss from discontinued operations. For the first three quarters of 2022, reflects the pre-tax loss on the divestiture of Sunflower of $23.2 million, together with a loss of $8.2 million on the settlement of the purchase price allocation related to the 2020 divestiture of our global ingredients business, Tradin Organic, which are recorded in loss from discontinued operations.
(b) For the first three quarters of 2023, reflects inventory reserves and impairment charges on equipment and operating lease right-of-use assets recognized in connection with the divestiture of Frozen Fruit, which are recorded in loss from discontinued operations.
(c) For the first three quarters of 2023, start-up costs included the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, the start-up of new extrusion and high-speed packaging lines at our fruit snacks facility in Omak, Washington, and professional fees related to productivity initiatives within our manufacturing operations, which were recorded in cost of goods sold ($16.3 million) and SG&A expenses ($1.5 million). For the first three quarters of 2022, start-up costs mainly related to the hiring and training of new employees for the Midlothian facility, and the integration of the Dream and West Life brands, which were recorded in cost of goods sold ($1.2 million) and SG&A expenses ($0.1 million).
(d) Reflects the self-insured retention amount under our insurance policies related to the recall of specific frozen fruit products initiated in the second quarter of 2023, which is recorded in loss from discontinued operations.
| SUNOPTA INC. | 34 | September 30, 2023 Form 10-Q |
(e) Represents third-party costs associated with business development activities, which are inclusive of costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. For the first three quarters of 2023, business development costs related to the divestiture of Frozen Fruit, and, for the first three quarters of 2022, these costs related to the divestitures of Frozen Fruit and Sunflower, together with our inaugural Investor Day held in June 2022. These costs were recorded in SG&A expenses.
(f) For the first three quarters of 2023, reflects employee severance costs accrued in connection with the consolidation of our continuing operations following the divestiture of Frozen Fruit, which are recorded in SG&A expenses.
(g) Other includes reserves for legal settlements and gains and loss on the disposal of assets, which are recorded in other income/expense and loss from discontinued operations.
(h) Reflects the tax effect of the preceding adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment, net of deferred tax valuation allowances. In addition, for the first three quarters of 2022, reflects $11.0 million of tax benefits resulting from the settlement of the purchase price allocation related to the divestiture of Tradin Organic.
(i) For the first three quarters, reflects an increase to the valuation allowance for U.S. deferred tax assets recognized in the second quarter of 2023, based on an assessment of the future realizability of the related tax benefits.
(j) For the first three quarters of 2022, reflects the gain on sale in August 2022 of a previously owned frozen fruit processing facility, net of exit costs, which is recorded in loss from discontinued operations.
(k) For the first three quarters of 2022, reflects exit costs related to a former fruit ingredient processing facility, which are recorded in other expense.
(3) The following table presents a reconciliation of adjusted EBITDA from net earnings (loss), which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (3) to the "Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022" table regarding the use of this non-GAAP measure).
| Continuing | Discontinued | ||||||||
| Operations | Operations | Consolidated | |||||||
| For the three quarters ended | $ | $ | $ | ||||||
| September 30, 2023 | |||||||||
| Net loss | (20,158 | ) | (143,126 | ) | (163,284 | ) | |||
| Income tax expense (benefit) | 3,978 | (636 | ) | 3,342 | |||||
| Interest expense, net | 19,391 | 1,392 | 20,783 | ||||||
| Depreciation and amortization | 22,873 | 8,861 | 31,734 | ||||||
| Stock-based compensation | 8,989 | - | 8,989 | ||||||
| Adjusted for: | |||||||||
| Loss on divestiture of discontinued operations(a) | - | 118,795 | 118,795 | ||||||
| Inventory reserves and impairment charges(b) | - | 17,864 | 17,864 | ||||||
| Start-up costs(c) | 17,855 | - | 17,855 | ||||||
| Product recall costs, net of insurance recoveries(d) | - | 2,500 | 2,500 | ||||||
| Business development costs(e) | 2,390 | - | 2,390 | ||||||
| Severance costs(f) | 897 | - | 897 | ||||||
| Other(g) | (20 | ) | 519 | 499 | |||||
| Adjusted EBITDA | 56,195 | 6,169 | 62,364 |
| SUNOPTA INC. | 35 | September 30, 2023 Form 10-Q |
| Continuing | Discontinued | ||||||||
| Operations | Operations | Consolidated | |||||||
| For the three quarters ended | $ | $ | $ | ||||||
| October 1, 2022 | |||||||||
| Net earnings (loss) | 4,308 | (10,203 | ) | (5,895 | ) | ||||
| Income tax expense (benefit) | 1,360 | (15,978 | ) | (14,618 | ) | ||||
| Interest expense, net | 8,844 | 1,160 | 10,004 | ||||||
| Depreciation and amortization | 16,828 | 11,687 | 28,515 | ||||||
| Stock-based compensation | 9,691 | - | 9,691 | ||||||
| Adjusted for: | |||||||||
| Loss on divestiture of discontinued operations(a) | - | 31,468 | 31,468 | ||||||
| Sale of frozen fruit processing facility(j) | - | (2,544 | ) | (2,544 | ) | ||||
| Start-up costs(c) | 1,329 | - | 1,329 | ||||||
| Business development costs(e) | 874 | - | 874 | ||||||
| Exit from fruit ingredient processing facility(k) | 577 | - | 577 | ||||||
| Other(g) | 831 | (64 | ) | 767 | |||||
| Adjusted EBITDA | 44,642 | 15,526 | 60,168 |
(a)-(k) Refer to footnote (2) above.
(4) Refer to footnote (4) to the "Consolidated Results of Operations for the Quarters Ended September 30, 2023 and October 1, 2022" table regarding the use of certain other non-GAAP measures in the discussion of our results of operations below.
Revenues for the three quarters ended September 30, 2023 increased by 4.0% to $448.7 million from $431.6 million for the three quarters ended October 1, 2022. The change in revenues from the first three quarters of 2022 to the first three quarters of 2023 was due to the following:
| $ | % | |||||
| 2022 revenues | 431,605 | |||||
| Price | 19,558 | 4.5% | ||||
| Volume/Mix | (2,490 | ) | -0.6% | |||
| 2023 revenues | 448,673 | 4.0% |
Note: percentages may not add due to rounding.
For the three quarters ended September 30, 2023, the 4.0% increase in revenues reflected a 4.5% increase in pricing mainly reflecting the wrap-around benefit of pricing actions taken with customers in 2022 to offset inflationary cost increases, partially offset by an unfavorable volume/mix impact of 0.6%. The unfavorable volume/mix reflected lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base, together with softer demand for almond beverages and lower sales volumes of everyday broths, partially offset by sales volume growth for oat milks and creamers, 330-milliliter protein shakes, and teas, together with higher sales volumes for fruit snacks.
Gross profit decreased $12.9 million, or 17.0%, to $63.0 million for the three quarters ended September 30, 2023, compared with $75.9 million for the three quarters ended October 1, 2022. Gross margin for the three quarters ended September 30, 2023 was 14.0% compared to 17.6% for the three quarters ended October 1, 2022, a decrease of 360 basis points.
In the first three quarters of 2023, we incurred start-up costs included in cost of goods sold of $16.3 million (3.6% gross margin impact) related to our new plant in Midlothian, Texas, and new extrusion and high-speed packaging lines at our fruit snacks facility in Omak, Washington, compared with $1.2 million (0.3% gross margin impact) of start-up costs incurred in the first three quarters of 2022. Excluding the impact of these costs, adjusted gross margin for the three quarters ended September 30, 2023 was 17.7% compared to 17.9% for the three quarters ended October 1, 2022, a decrease of 20 basis points. See footnote (1) to the "Consolidated Results of Operations for the Three Quarters Ended September 30, 2023 and October 1, 2022" table for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
| SUNOPTA INC. | 36 | September 30, 2023 Form 10-Q |
The 20-basis point decrease in adjusted gross margin reflected the impact of incremental depreciation of new production equipment for capital expansion projects ($6.4 million or 1.7% gross margin impact), together with the negative impacts of higher manufacturing costs and lower production volumes and plant utilization, largely offset by the wrap-around benefit of pricing actions taken in 2022 to recover input cost inflation, together with a favorable mix shift in our plant-based ingredient operations, with increased internal use of oat base to support our beverage business and lower external sales.
Operating income decreased $11.3 million to $3.2 million for the three quarters ended September 30, 2023, compared with $14.5 million for the three quarters ended October 1, 2022. The decrease in operating income reflected lower gross profit, as described above, together with higher business development and employee severance costs in connection with the divestiture of Frozen Fruit and related consolidation of our continuing operations, partially offset by lower employee incentive compensation accruals and variable stock-based compensation expense based on performance.
(Further details on the changes in revenue, gross profit and operating income are provided in the rollforward tables below.)
Net interest expense increased by $10.6 million to $19.4 million for the three quarters ended September 30, 2023, compared with $8.8 million for the three quarters ended October 1, 2022, resulting from an increase in outstanding debt to finance capital expansion projects, together with the impact of higher interest rates.
For the three quarters ended September 30, 2023, we recognized income tax expense of $4.0 million on a pre-tax loss of $16.2 million, reflecting the recognition of a full valuation allowance against U.S. deferred tax assets in the second quarter of 2023, based on our assessment that the related tax benefits were no longer more likely than not to be realized in the future. For the three quarters ended October 1, 2022, we recognized income tax expense of $1.4 million on pre-tax earnings of $5.7 million, reflecting an effective tax rate of 24.0%.
Loss from continuing operations for the three quarters ended September 30, 2023 was $20.2 million, compared with earnings of $4.3 million for the three quarters ended October 1, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.19 for the three quarters ended September 30, 2023, compared with a diluted earnings per share of $0.02 for the three quarters ended October 1, 2022.
We recognized a loss from discontinued operations of $143.1 million (diluted loss per share of $1.26) for the three quarters ended September 30, 2023, compared with $10.2 million (diluted loss per share of $0.09) for the three quarters ended October 1, 2022. The increase in the loss from discontinued operations reflected the estimated pre-tax loss on the divestiture of Frozen Fruit of $118.8 million recognized in the third quarter of 2023, compared with a pre-tax loss on the divestiture of Sunflower of $23.2 million recorded in the third quarter of 2022, together with an $8.2 million loss on the settlement of the purchase price allocation related to the 2020 divestiture of our global ingredients business, Tradin Organic. In addition, the increase in the loss from discontinued operations reflected a period-over-period decrease in the gross profit of Frozen Fruit prior to the divestiture due to lower sales and production volumes as a result of softer retail consumption trends and lost foodservice distribution, together with inventory reserves recognized in connection with the divestiture.
We realized a loss attributable to common shareholders of $164.8 million (diluted loss per share of $1.45) for the three quarters ended September 30, 2023, compared with a loss attributable to common shareholders of $8.2 million (diluted loss per share of $0.08) for the three quarters ended October 1, 2022. Loss attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $1.6 million and $2.3 million in the first three quarters of 2023 and 2022, respectively.
On a consolidated basis, adjusted loss for the three quarters ended September 30, 2023 was $0.1 million, or $0.00 loss per diluted share, compared with adjusted earnings of $6.9 million, or $0.06 earnings per diluted share, for the three quarters ended October 1, 2022. For the three quarters ended September 30, 2023, adjusted earnings from continuing operations were $3.4 million, or $0.03 earnings per diluted share, compared with adjusted earnings of $4.7 million, or $0.04 earnings per diluted share, for the three quarters ended October 1, 2022.
On a consolidated basis, adjusted EBITDA increased $2.2 million, or 3.6%, for the three quarters ended September 30, 2023 to $62.4 million, compared with $60.2 million for the three quarters ended October 1, 2022. Adjusted EBITDA from continuing operations increased $11.6 million, or 25.9%, to $56.2 million for the three quarters ended September 30, 2023, compared with $44.6 million for the three quarters ended October 1, 2022.
| SUNOPTA INC. | 37 | September 30, 2023 Form 10-Q |
Adjusted earnings (loss) and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the "Consolidated Results of Operations for the Three Quarters Ended September 30, 2023 and October 1, 2022" table for a reconciliation of adjusted earnings (loss) and adjusted EBITDA from net earnings (loss), which we consider to be the most directly comparable U.S. GAAP financial measure.
Rollforward of Revenue, Gross Profit and Operating Income
| For the three quarters ended | September 30, 2023 | October 1, 2022 | Change | % Change | ||||||||
| Revenues | $ | 448,673 | $ | 431,605 | $ | 17,068 | 4.0% | |||||
| Gross profit | 62,976 | 75,914 | (12,938 | ) | -17.0% | |||||||
| Gross margin | 14.0% | 17.6% | -3.6% | |||||||||
| Operating income | $ | 3,211 | $ | 14,512 | $ | (11,301 | ) | -77.9% | ||||
| Operating margin | 0.7% | 3.4% | -2.7% |
Revenues
The table below explains the $17.1 million increase in revenues from $431.6 million for the first three quarters of 2022 to $448.7 million for the first three quarters of 2023:
| Revenues for the three quarters ended October 1, 2022 | $431,605 | |
| Wrap-around benefit of pricing actions taken in 2022 to offset input cost inflation, together with sales volume growth for oat milks and creamers, 330-milliliter protein shakes and teas, partially offset by softer demand for almond beverages and lower sales volumes of everyday broths | 26,849 | |
| Higher sales volumes for fruit snacks and smoothie bowls | 11,872 | |
| Lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base | (21,653) | |
| Revenues for the three quarters ended September 30, 2023 | $448,673 | |
Gross Profit
The table below explains the $12.9 million decrease in gross profit of from $75.9 million for the first three quarters of 2022 to $63.0 million for the first three quarters of 2023:
| Gross profit for the three quarters ended October 1, 2022 | $75,914 | |
| Increase in start-up costs related to capital expansion projects | (15,156) | |
| Incremental depreciation related to capital expansion projects | (6,396) | |
| Higher sales pricing and increased internal use of oat base to support our beverage business, partially offset by higher manufacturing costs, together with the impact of lower production volumes and plant utilization | 8,614 | |
| Gross profit for the three quarters ended September 30, 2023 | $62,976 | |
| SUNOPTA INC. | 38 | September 30, 2023 Form 10-Q |
Operating Income
The table below explains the $11.3 million decrease in operating income from $14.5 million for the first three quarters of 2022 to $3.2 million for the first three quarters of 2023:
| Operating income for the three quarters ended October 1, 2022 | $14,512 | |
| Decrease in gross profit, as explained above | ($12,938) | |
| Lower employee incentive compensation accruals based on performance, partially offset by higher business development and employee severance costs in connection with the divestiture of Frozen Fruit and related consolidation of our continuing operations | 935 | |
| Lower variable stock-based compensation expense based on performance | 702 | |
| Operating income for the three quarters ended September 30, 2023 | $3,211 | |
Liquidity and Capital Resources
From time to time, as part of our ongoing efforts to improve working capital efficiency, we utilize, at our sole discretion, supplier finance programs offered by some of our major customers that allow us to sell our receivables from the customers to such customers' financial institutions, on a non-recourse basis, in order to be paid earlier than our payment terms with the customer provide at a discount rate that leverages those customers' favorable credit ratings. Utilizing these programs reduces our accounts receivable balances, improves our cash flows, and reduces the cost of servicing these receivables with our revolving credit facility.
In connection with our efforts to extend payment terms with our major suppliers to enhance cash flows, we facilitate our own voluntary supplier finance program through a third-party financial institution, by which a participating supplier may elect to sell an invoice to the financial institution in order to be paid earlier than the contractual payment terms provide (see note 6 to the unaudited consolidated financings statements included in this report.) Additionally, we are financing certain other purchases of goods and services through extended payables facilities, by which third-party intermediaries settle the supplier invoice on the contractual due date, and we pay the intermediaries the face amount of the invoice, together with interest, at a later date (see note 7 to the unaudited consolidated financial statements included in this report.)
On December 31, 2020, we entered into a five-year credit agreement, as amended, for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $250 million, subject to borrowing base capacity. As at September 30, 2023, we had outstanding borrowings under the revolving credit facility of $139.9 million (December 31, 2022 - $137.3 million), including a $12.5 million first-in-last-out ("FILO") term loan (December 31, 2022 - $20.0 million), and available borrowing capacity of approximately $39 million (January 1, 2022 - $50 million). Commencing with the first quarter of 2023, we are making amortization payments on the principal amount of the FILO term loan of $2.5 million each quarter, with the remaining amount payable at the maturity thereof on April 15, 2024.
In October 2023, we utilized a portion of the cash proceeds from the divestiture of Frozen Fruit to reduce the outstanding borrowings under our revolving credit facility by $74.7 million, which increased our available borrowing capacity to approximately $52 million.
The credit agreement also provided a five-year, up to $75 million delayed draw term loan, to be used for capital expenditures, which could be drawn upon up to March 31, 2023. As at March 31, 2023, we had utilized $57.0 million on the term loan facility to partially finance the purchase of equipment for our new plant-based beverage facility in Midlothian, Texas, as well as certain other equipment purchases. Commencing in March 2023, we are repaying the term loan facility in monthly installments of $0.7 million, with the remaining amount payable at the maturity thereof on December 31, 2025. As at September 30, 2023, the principal amount outstanding under the term loan facility was $52.3 million (December 31, 2022 - $43.7 million).
For the three quarters ended September 30, 2023, the weighted-average interest rate on all outstanding borrowings under our asset-based credit facilities was 7.21% (October 1, 2022 - 3.83%), reflecting increases in short-term interest rates.
For more information on our asset-based credit facilities, see note 8 to the unaudited consolidated financial statements included in this report.
| SUNOPTA INC. | 39 | September 30, 2023 Form 10-Q |
As at September 30, 2023, we had outstanding finance lease liabilities of $113.3 million (December 31, 2022 - $124.1 million), with a weighted-average implicit interest rate of 8.05% and a weighted-average remaining lease term of 3.1 years. Additions to finance leases in the first three quarters of 2023 were related to the final buildout of our Midlothian, Texas, facility, and the additions of new extrusion and high-speed packaging lines at our fruit snacks facility in Omak, Washington. For more information on our operating and finance lease obligations, including maturity dates, see note 5 to the unaudited consolidated financial statements included in this report.
As at September 30, 2023, our subsidiary, SunOpta Foods Inc. ("SunOpta Foods") had 15,000 shares of Series B-1 preferred stock issued and outstanding. The Series B-1 preferred stock currently has a liquidation preference of approximately $1,015 per share and is exchangeable into shares of our common stock at an exchange price of $2.50 per share, which presently equates to approximately 6,089,333 common shares. Cumulative preferred dividends accrue daily on the Series B-1 preferred stock at an annualized rate of 8.0% of the liquidation preference, which equates to quarterly dividend distributions of approximately $0.3 million. At any time, the holders of the Series B-1 preferred stock may elect to exchange their shares of Series B-1 preferred stock into shares of our common stock. In addition, since April 24, 2023, SunOpta Foods may cause the holders of the Series B-1 Preferred Stock to exchange all of their shares of Series B-1 preferred stock into shares of our common stock if the volume-weighted average trading price of our common shares during the then preceding 20 trading day period is greater than 200% of the $2.50 exchange price per share.
For more information on the Series B-1 preferred stock, see note 9 to the unaudited consolidated financial statements included in this report.
We estimate cash expenditures of approximately $45 million on identified capital projects in fiscal 2023, including $38.7 million spent in the first three quarters of 2023 (including $1.5 million related to discontinued operations). Cash expenditures on continuing operations mainly related to the completion of our Midlothian, Texas, facility. We funded our cash expenditures in the first three quarters of 2023 using our term loan facility, together with cash advances under finance leases and our revolving credit facility. In addition, $9.7 million of finance leases commenced in the first three quarters of 2023, related to the new extrusion and high-speed packaging lines at our fruit snacks facility in Omak, Washington.
We believe that our operating cash flows, including the selective use of supplier finance programs and the extended payables facility to improve payment terms, together with our revolving credit facility, and access to lease financing, will be adequate to meet our operating, investing, and financing needs for the foreseeable future, including the 12-month period following the fiscal period end of our financial statements included in this report. However, in order to finance significant investments in our existing businesses, or significant business acquisitions, if any, that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering of debt or equity securities, or the issuance of common stock. There can be no assurance that these types of financing would be available at all or, if so, on terms that are acceptable to us. In addition, we may explore the sale of selected operations or assets from time to time to improve our profitability, reduce our indebtedness, and/or improve our position to obtain additional financing.
Cash Flows
Summarized cash flow information for the periods ended September 30, 2023 and October 1, 2022 is as follows:
| For the quarter ended | For the three quarters ended | |||||||||||||||||
| September 30, 2023 | October 1, 2022 | Change | September 30, 2023 | October 1, 2022 | Change | |||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||
| Net cash flows provided by (used in): | ||||||||||||||||||
| Continuing operations: | ||||||||||||||||||
| Operating activities | (25,853 | ) | 9,339 | (35,192 | ) | (8,385 | ) | 23,419 | (31,804 | ) | ||||||||
| Investing activities | (4,716 | ) | (37,281 | ) | 32,565 | (37,272 | ) | (94,560 | ) | 57,288 | ||||||||
| Financing activities | 30,573 | 27,942 | 2,631 | 45,661 | 77,466 | (31,805 | ) | |||||||||||
| Discontinued operations | 2,559 | (94 | ) | 2,653 | 2,861 | (6,093 | ) | 8,954 | ||||||||||
| SUNOPTA INC. | 40 | September 30, 2023 Form 10-Q |
Operating Activities of Continuing Operations
Cash used in operating activities of continuing operations increased $35.2 million and $31.8 million from the third quarter and first three quarters of 2022 to the comparable periods of 2023. The increases in cash used mainly reflected the impact of start-up costs related to our Midlothian, Texas, facility, and higher cash interest expense on borrowings to finance capital expenditures, together with increases in working capital in the third quarter and first three quarters of 2023, mainly due to the timing of receivables and payables, partially offset by higher inventory purchases in the third quarter and first three quarters of 2022 to support our fruit snacks operations.
Investing Activities of Continuing Operations
Cash used in investing activities of continuing operations decreased $32.6 million and $57.3 million from the third quarter and first three quarters of 2022 to the comparable periods of 2023. The year-over-year decreases in investing cash outflows reflected the completion of certain major capital projects, including the construction of our new plant-based beverage facility in Midlothian, Texas.
Financing Activities of Continuing Operations
Cash provided by financing activities of continuing operations increased $2.6 million from the third quarter of 2022 to the third quarter of 2023, and decreased $31.8 million from the first three quarters of 2022 to the first three quarters of 2023. The year-over-year movements in financing cash flows mainly reflected increased borrowings under our revolving credit facilities to fund changes in working capital and capital expenditures in the third quarter and first three quarters of 2023, together with net proceeds from notes payable associated with our use of extended payables facilities, offset by net repayments of long-term debt as capital projects are completed.
Discontinued Operations
Net cash provided by discontinued operations increased $2.7 million and $9.0 million in the third quarter and first three quarters of 2023, respectively, which reflected lower period-over-period purchases of frozen fruit inventory to align with demand. In addition, in the third quarter and first three quarters of 2022, cash provided by investing activities of discontinued operations included net proceeds of $16.1 million received on the sale of a frozen fruit processing facility, partially offset in the first three quarters of 2022 by a $6.3 million payment in settlement of the purchase price allocation and other post-closing matters related to the 2020 divestiture of Tradin Organic.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. The estimates and assumptions made require us to exercise our judgment and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the information that forms the basis of our estimates and assumptions as our business and the business environment generally changes.
There have been no material changes to the critical accounting estimates disclosed under the heading "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of the Form 10-K. There have been no material changes to our exposures to market risks since December 31, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission's rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
| SUNOPTA INC. | 41 | September 30, 2023 Form 10-Q |
Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report. As a result of the material weaknesses in internal control over financial reporting identified and described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our disclosure controls and procedures were not effective as of September 30, 2023.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
The Company is in the process of improving its policies and procedures relating to the preparation and review of the consolidated income tax provision and recognition of deferred tax assets related to stock-based compensation. Management plans to enhance its internal controls by adding controls to ensure proper review and assessment of business activities impacting the provision and completeness and accuracy of data used in preparing the consolidated tax provision and deferred tax assets.
The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As a result of the material weakness relating to the annual consolidated income tax provision and recognition of deferred tax assets, we believe the remediation will occur in the fourth quarter of fiscal 2023 and will strengthen our internal control over financial reporting and will prevent a reoccurrence of the material weaknesses described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Changes in Internal Control over Financial Reporting
Other than the actions taken under "Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting" discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| SUNOPTA INC. | 42 | September 30, 2023 Form 10-Q |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 14 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Item 1A. Risk Factors
Certain risks associated with our operations are discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to the previously reported risk factors as of the date of this quarterly report. Our previously reported risk factors should be carefully reviewed in connection with an evaluation of our Company.
Item 6. Exhibits
The following exhibits are included as part of this report.
† Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
| SUNOPTA INC. | 43 | September 30, 2023 Form 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SUNOPTA INC. |
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Date: November 9, 2023 | /s/ Greg Gaba |
| Greg Gaba |
| Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
| SUNOPTA INC. | 44 | September 30, 2023 Form 10-Q |