FLOWERS FOODS INC (Form: 10-Q, Received: 08/06/2020 16:19:26)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 11, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-16247

FLOWERS FOODS, INC.

(Exact name of registrant as specified in its charter)

Georgia

58-2582379

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, Georgia

(Address of principal executive offices)

31757

(Zip Code)

(229)-226-9110

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FLO

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2020, the registrant had 211,602,778 shares of common stock, $0.01 par value per share, outstanding.

FLOWERS FOODS, INC.

INDEX

			PAGE NUMBER
PART I. Financial Information			3
	Item 1.	Financial Statements (unaudited)	3
		Condensed Consolidated Balance Sheets as of July 11, 2020 and December 28, 2019	3
		Condensed Consolidated Statements of Income for the Twelve and Twenty-Eight Weeks Ended July 11, 2020 and July 13, 2019	4
		Condensed Consolidated Statements of Comprehensive Income for the Twelve and Twenty-Eight Weeks Ended July 11, 2020 and July 13, 2019	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Twelve and Twenty-Eight Weeks Ended July 11, 2020	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Twelve and Twenty-Eight Weeks Ended July 13, 2019	7
		Condensed Consolidated Statements of Cash Flows For the Twenty-Eight Weeks Ended July 11, 2020 and July 13, 2019	8
		Notes to Condensed Consolidated Financial Statements (unaudited)	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
	Item 4.	Controls and Procedures	54
PART II. Other Information			55
	Item 1.	Legal Proceedings	55
	Item 1A.	Risk Factors	55
	Item 2.	Unregistered Sales of Securities and Use of Proceeds	56
	Item 3.	Defaults Upon Senior Securities	56
	Item 4.	Mine Safety Disclosures	56
	Item 5.	Other Information	56
	Item 6.	Exhibits	57
Signatures			58

Forward-Looking Statements

Statements contained in this filing and certain other written or oral statements made from time to time by Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and the ultimate impact of the novel strain of coronavirus (“COVID-19”) on our business, results of operations and financial condition and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are based upon assumptions we believe are reasonable.

Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, liquidity, and achievements to differ materially from those projected are discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and may include, but are not limited to:

•

unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with or increased costs related to our employees and third-party service providers; (vi) laws and regulations (including environmental and health-related issues); and (vii) accounting standards or tax rates in the markets in which we operate;

•

the ultimate impact of the COVID-19 outbreak and measures taken in response thereto on our business, results of operations and financial condition, which are highly uncertain and are difficult to predict;

•

the loss or financial instability of any significant customer(s), including as a result of product recalls or safety concerns related to our products;

•

changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive store-branded products;

•

the level of success we achieve in developing and introducing new products and entering new markets;

•

our ability to implement new technology and customer requirements as required;

•

our ability to operate existing, and any new, manufacturing lines according to schedule;

•

our ability to execute our business strategies, including those strategies we have initiated under Project Centennial, which may involve, among other things, (i) the integration of acquisitions or the acquisition or disposition of assets at presently targeted values, (ii) the deployment of new systems and technology, and (iii) an enhanced organizational structure;

•

consolidation within the baking industry and related industries;

•

changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry;

•

disruptions in our direct-store-delivery distribution model, including litigation or an adverse ruling by a court or regulatory or governmental body that could affect the independent contractor classifications of the independent distributors;

•

increasing legal complexity and legal proceedings that we are or may become subject to;

•

increases in employee and employee-related costs, including funding of pension plans;

•

the credit, business, and legal risks associated with independent distributors and customers, which operate in the highly competitive retail food and foodservice industries;

•

any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters, labor strikes or work stoppages, technological breakdowns, product contamination, product recalls or safety concerns related to our products, or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events;

•

the failure of our information technology systems to perform adequately, including any interruptions, intrusions or security breaches of such systems; and

•

regulation and legislation related to climate change that could affect our ability to procure our commodity needs or that necessitate additional unplanned capital expenditures.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Refer to Part I, Item 1A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 28, 2019 (the “Form 10-K”), Part II, Item 1A., Risk Factors, of the Quarterly Report on Form 10-Q for the quarterly period ended April 18, 2020 (the “First Quarter Form 10-Q”), and Part II, Item 1A., Risk Factors, of this Form 10-Q for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this Form 10-Q are listed without the^© , ^® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights.

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

(Unaudited)

	July 11, 2020			December 28, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	299,562		$	11,044
Accounts and notes receivable, net of allowances of $16,036 and $9,473, respectively		326,667			285,606
Inventories, net:
Raw materials		48,746			46,171
Packaging materials		24,555			22,045
Finished goods		52,010			58,843
Inventories, net		125,311			127,059
Spare parts and supplies		68,690			67,456
Other		29,242			62,753
Total current assets		849,472			553,918
Property, plant and equipment, net:
Property, plant and equipment, gross		2,009,919			2,002,633
Less: accumulated depreciation		(1,312,792	)		(1,284,811	)
Property, plant and equipment, net		697,127			717,822
Financing lease right-of-use assets		19,254			22,829
Operating lease right-of-use assets		355,469			376,473
Notes receivable from independent distributor partners		187,540			198,639
Assets held for sale		7,605			4,408
Other assets		6,960			8,236
Goodwill		545,244			545,244
Other intangible assets, net		730,123			750,207
Total assets	$	3,398,794		$	3,177,776
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	-		$	3,730
Current maturities of financing leases		7,469			8,176
Current maturities of operating leases		52,232			52,806
Accounts payable		250,040			233,011
Current postretirement/post-employment obligations		926			29,380
Other accrued liabilities		227,409			201,040
Total current liabilities		538,076			528,143

Noncurrent long-term debt		1,009,596			862,778
Noncurrent financing lease obligations		16,672			19,390
Noncurrent operating lease obligations		307,853			324,131
Total long-term debt and right-of-use lease liabilities		1,334,121			1,206,299
Other liabilities:
Postretirement/post-employment obligations		14,280			14,328
Deferred taxes		124,285			121,395
Other long-term liabilities		51,544			44,181
Total other long-term liabilities		190,109			179,904
Commitments and Contingencies
Stockholders’ equity:
Preferred stock — $100 stated par value, 200,000 authorized shares and none issued		—			—
Preferred stock — $.01 stated par value, 800,000 authorized shares and none issued		—			—
Common stock — $.01 stated par value and $.001 current par value, 500,000,000 authorized shares and 228,729,585 shares and 228,729,585 shares issued, respectively		199			199
Treasury stock — 17,126,920 shares and 17,215,514 shares, respectively		(225,414	)		(226,287	)
Capital in excess of par value		653,672			648,492
Retained earnings		916,565			947,046
Accumulated other comprehensive loss		(8,534	)		(106,020	)
Total stockholders’ equity		1,336,488			1,263,430
Total liabilities and stockholders’ equity	$	3,398,794		$	3,177,776

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)

	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			July 11, 2020			July 13, 2019
Sales	$	1,025,861		$	975,759		$	2,375,305		$	2,239,654
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		506,033			508,552			1,176,906			1,160,693
Selling, distribution and administrative expenses		396,904			359,497			918,939			835,546
Depreciation and amortization		33,180			33,329			77,843			78,148
Recovery on inferior ingredients		—			—			—			(413	)
Restructuring and related impairment charges		10,535			2,047			10,535			2,765
Income from operations		79,209			72,334			191,082			162,915
Interest expense		9,001			9,192			20,640			21,663
Interest income		(6,132	)		(6,423	)		(14,457	)		(15,070	)
Pension plan settlement and curtailment loss		—			—			116,207			—
Other components of net periodic pension and postretirement benefits (credit) expense		(72	)		519			71			1,211
Income before income taxes		76,412			69,046			68,621			155,111
Income tax expense		18,493			15,951			16,474			36,150
Net income	$	57,919		$	53,095		$	52,147		$	118,961
Net income per common share:
Basic:
Net income per common share	$	0.27		$	0.25		$	0.25		$	0.56
Weighted average shares outstanding		211,780			211,685			211,766			211,517
Diluted:
Net income per common share	$	0.27		$	0.25		$	0.25		$	0.56
Weighted average shares outstanding		212,284			211,957			212,192			211,924
Cash dividends paid per common share	$	0.2000		$	0.1900		$	0.3900		$	0.3700

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			July 11, 2020			July 13, 2019
Net income	$	57,919		$	53,095		$	52,147		$	118,961
Other comprehensive income (loss), net of tax:
Pension and postretirement plans:
Settlement and curtailment loss		—			—			86,865			—
Net gain for the period		—			—			15,693			—
Amortization of prior service cost included in net income		9			60			64			139
Amortization of actuarial loss included in net income		43			1,177			996			2,746
Pension and postretirement plans, net of tax		52			1,237			103,618			2,885
Derivative instruments:
Net change in fair value of derivatives		(3,358	)		12,140			(7,207	)		2,547
Loss (gain) reclassified to net income		664			(945	)		1,075			(3,123	)
Derivative instruments, net of tax		(2,694	)		11,195			(6,132	)		(576	)
Other comprehensive income (loss), net of tax		(2,642	)		12,432			97,486			2,309
Comprehensive income	$	55,277		$	65,527		$	149,633		$	121,270

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	For the Twelve Weeks Ended July 11, 2020
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at April 18, 2020		228,729,585	$	199	$	651,258		$	900,988		$	(5,892	)		(17,167,036	)	$	(225,942	)	$	1,320,611
Net income									57,919												57,919
Derivative instruments, net of tax												(2,694	)								(2,694	)
Pension and postretirement plans, net of tax												52									52
Amortization of share-based compensation awards						2,942															2,942
Issuance of deferred compensation						(29	)								2,171			29			—
Issuance of deferred stock awards						(499	)								37,945			499			—
Dividends paid on vested share-based payment awards									(22	)											(22	)
Dividends paid — $0.2000 per common share									(42,320	)											(42,320	)
Balances at July 11, 2020		228,729,585	$	199	$	653,672		$	916,565		$	(8,534	)		(17,126,920	)	$	(225,414	)	$	1,336,488

	For the Twenty-Eight Weeks Ended July 11, 2020
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at December 28, 2019		228,729,585	$	199	$	648,492		$	947,046		$	(106,020	)		(17,215,514	)	$	(226,287	)	$	1,263,430
Net income									52,147												52,147
Derivative instruments, net of tax												(6,132	)								(6,132	)
Pension and postretirement plans, net of tax												103,618									103,618
Amortization of share-based compensation awards						6,836															6,836
Issuance of deferred compensation						(30	)								2,284			30			—
Time-based restricted stock units issued (Note 16)						(975	)								74,204			975			—
Issuance of deferred stock awards						(651	)								49,539			651			—
Stock repurchases															(37,433	)		(783	)		(783	)
Dividends paid on vested share-based payment awards									(109	)											(109	)
Dividends paid — $0.3900 per common share									(82,519	)											(82,519	)
Balances at July 11, 2020		228,729,585	$	199	$	653,672		$	916,565		$	(8,534	)		(17,126,920	)	$	(225,414	)	$	1,336,488

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	For the Twelve Weeks Ended July 13, 2019
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at April 20, 2019		228,729,585	$	199	$	645,090		$	969,067		$	(119,294	)		(17,269,408	)	$	(227,136	)	$	1,267,926
Net income									53,095												53,095
Derivative instruments, net of tax												11,195									11,195
Pension and postretirement plans, net of tax												1,237									1,237
Amortization of share-based compensation awards						1,132															1,132
Issuance of deferred compensation						(2	)								113			2			—
Issuance of deferred stock awards						(844	)								53,555			844			—
Dividends paid on vested share-based payment awards									(128	)											(128	)
Dividends paid — $0.1900 per common share									(40,188	)											(40,188	)
Balances at July 13, 2019		228,729,585	$	199	$	645,376		$	981,846		$	(106,862	)		(17,215,740	)	$	(226,290	)	$	1,294,269

	For the Twenty-Eight Weeks Ended July 13, 2019
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at December 29, 2018		228,729,585	$	199	$	653,477		$	945,410		$	(109,171	)		(17,834,378	)	$	(231,648	)	$	1,258,267
Net income									118,961												118,961
Derivative instruments, net of tax												(576	)								(576	)
Pension and postretirement plans, net of tax												2,885									2,885
Cumulative effect of change in accounting principle									(2,915	)											(2,915	)
Amortization of share-based compensation awards						4,311															4,311
Issuance of deferred compensation						(3	)								226			3			—
Performance-contingent restricted stock awards issued (Note 16)						(11,498	)								885,123			11,498			—
Issuance of deferred stock awards						(911	)								69,377			911			—
Stock repurchases															(336,088	)		(7,054	)		(7,054	)
Dividends paid on vested share-based payment awards									(1,361	)											(1,361	)
Dividends paid — $0.3700 per common share									(78,249	)											(78,249	)
Balances at July 13, 2019		228,729,585	$	199	$	645,376		$	981,846		$	(106,862	)		(17,215,740	)	$	(226,290	)	$	1,294,269

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income	$	52,147		$	118,961
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring and related impairment charges		9,270			1,781
Stock-based compensation		6,836			4,311
Loss (gain) reclassified from accumulated other comprehensive income to net income		1,355			(4,255	)
Depreciation and amortization		77,843			78,148
Deferred income taxes		(30,079	)		7,521
Provision for inventory obsolescence		651			416
Allowances for accounts receivable		9,245			6,554
Pension and postretirement plans cost		116,892			1,741
Other		1,500			1,352
Qualified pension plan contributions		(1,425	)		—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net		(49,803	)		(29,581	)
Inventories, net		1,097			(904	)
Hedging activities, net		(7,279	)		1,950
Accounts payable		18,615			8,567
Other assets and accrued liabilities		68,929			11,495
NET CASH PROVIDED BY OPERATING ACTIVITIES		275,794			208,057
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(46,594	)		(47,412	)
Proceeds from sale of property, plant and equipment		1,452			543
Repurchase of independent distributor territories		(1,749	)		(1,296	)
Cash paid at issuance of notes receivable		(5,057	)		(13,449	)
Principal payments from notes receivable		16,101			15,815
Other investing activities		68			55
NET CASH DISBURSED FOR INVESTING ACTIVITIES		(35,779	)		(45,744	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid, including dividends on share-based payment awards		(82,628	)		(79,610	)
Stock repurchases		(783	)		(7,054	)
Change in bank overdrafts		(1,986	)		(1,133	)
Proceeds from debt borrowings		480,100			335,900
Debt obligation payments		(337,600	)		(422,650	)
Contingent consideration payments		(4,700	)		—
Payments on financing leases		(3,900	)		(3,303	)
NET CASH PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES		48,503			(177,850	)
Net increase (decrease) in cash and cash equivalents		288,518			(15,537	)
Cash and cash equivalents at beginning of period		11,044			25,306
Cash and cash equivalents at end of period	$	299,562		$	9,769

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

BASIS OF ACCOUNTING — The accompanying unaudited Condensed Consolidated Financial Statements of Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements included herein contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the company’s financial position, results of operations and cash flows. The results of operations for the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019 are not necessarily indicative of the results to be expected for a full fiscal year. The Condensed Consolidated Balance Sheet at December 28, 2019 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2019 (the “Form 10-K”).

COVID-19 — On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide, which has led to adverse impacts on the United States (“U.S.”) and global economies. Due to the dramatic shift in consumer buying patterns as a result of the COVID-19 pandemic, we have experienced significant demand for our retail products resulting in significant sales increases and substantial growth in income from operations for the first half of fiscal 2020 compared to the same period in the prior year.

In light of COVID-19, the company has taken actions to safeguard its capital position. During the first quarter of fiscal 2020, we borrowed an additional $200.0 million under our credit facility (as defined below). We borrowed this additional amount out of an abundance of caution to ensure future liquidity given the significant impact on global financial markets and economies as a result of the COVID-19 outbreak. Subsequently, during the second quarter of fiscal 2020, we made net debt repayments of $61.3 million. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including $477.6 million of remaining availability on our debt facilities as of July 11, 2020, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds.

ESTIMATES — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, derivative instruments, valuation of long-lived assets, goodwill and other intangible assets, leases, self-insurance reserves, income tax expense and accruals, pension obligations, stock-based compensation, and commitments and contingencies. These estimates are summarized in the Form 10-K.

REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2020 consists of 53 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 18, 2020 (sixteen weeks), second quarter ended July 11, 2020 (twelve weeks), third quarter ending October 3, 2020 (twelve weeks) and fourth quarter ending January 2, 2021 (thirteen weeks).

REPORTING SEGMENT — The company has one operating segment based on the nature of products the company sells, intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the chief executive officer (“CEO”), who is the chief operating decision maker, for the purpose of assessing performance and allocating resources.

SIGNIFICANT CUSTOMER — Below is the effect that our largest customer, Walmart/Sam’s Club, had on the company’s sales for the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019. Walmart/Sam’s Club is the only customer to account for greater than 10% of the company’s sales.

For the Twelve Weeks Ended

For the Twenty-Eight Weeks Ended

July 11, 2020

July 13, 2019

July 11, 2020

July 13, 2019

(% of Sales)

Total

21.6

22.0

21.4

21.1

Walmart/Sam’s Club is our only customer with greater than 10% of outstanding trade receivables, representing 19.0% and 18.9%, on a consolidated basis, as of July 11, 2020 and December 28, 2019, respectively, of our trade receivables.

SIGNIFICANT ACCOUNTING POLICIES — Significant changes to our critical accounting policies from those disclosed in the Form 10-K are presented below. The policy changes for accounting for credit losses during the first quarter of our fiscal 2020 are a result of adopting new guidance issued by the Financial Accounting Standards Board (the “FASB”). See Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the new guidance.

Accounts and Notes Receivable. Accounts and notes receivable consist of trade receivables, current portions of distributor notes receivable, and miscellaneous receivables. The company recognizes an allowance for credit losses related to its accounts and notes receivable to present the net amount expected to be collected as of the balance sheet date. The company estimates this allowance based on historical data such as days sales outstanding trends, previous write-offs of balances, and weekly reviews of aged trial balances, among others. Accounts and notes receivable balances are written off when deemed uncollectible and are recognized as a deduction from the allowance for credit losses. Expected recoveries, not to exceed the amount previously written off, are considered in determining the reserve balance at the balance sheet date. As of fiscal year end, balances older than six months are deemed uncollectible and are fully reserved for in the allowance. Activity in the allowance for trade accounts receivable credit losses for the twenty-eight weeks ended July 11, 2020 was as follows (amounts in thousands):

Allowance at December 28, 2019	$	2,089
Amounts charged to expense		5,828
Write-offs		—
Recoveries and other		(899	)
Allowance at July 11, 2020	$	7,018

The amounts charged to expense for bad debts in the table above, along with other non-trade accounts receivable amounts, are reported as adjustments to reconcile net income to net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The write-offs represent the amounts that are used to reduce the gross accounts and notes receivable at the time the balance due from the customer is written-off.

In light of the current economic uncertainty for certain of our foodservice customers caused by COVID-19, we recorded an additional bad debt allowance of $2.7 million in the first quarter of fiscal 2020.

RECOVERY ON INFERIOR INGREDIENTS

Beginning in the second quarter of fiscal 2018 and continuing through the fourth quarter of fiscal 2019, we have recognized identifiable and measurable costs associated with receiving inferior ingredients. These costs totaled $0.1 million and $1.4 million for the twelve and twenty-eight weeks ended July 13, 2019, respectively. We received reimbursements for a portion of previously incurred costs of $0.1 million and $1.8 million during the twelve and twenty-eight weeks ended July 13, 2019, respectively. These reimbursements, net of the costs incurred, are presented as recoveries on the ‘Recovery on inferior ingredients’ line item in our Condensed Consolidated Statements of Income. We continue to seek recovery of all losses through appropriate means.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that effects loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Additional guidance for this topic was issued in April 2019. The new standard requires earlier recognition of credit losses. The company adopted the new standard as of December 29, 2019, the beginning of our fiscal 2020. The adoption of this guidance did not impact our financial statements; however, updated disclosures are included in Note 1, Basis of Presentation, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Changes were made to our internal control over financial reporting processes for estimating and evaluating the appropriateness of reserves for credit exposures.

In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removed Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Companies still have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The company adopted the new standard as of December 29, 2019, the beginning of our fiscal 2020, and, consistent with prior years, anticipates performing its annual impairment testing of goodwill in its fourth quarter of fiscal 2020, or earlier if there is a triggering event, under the new guidance. The company does not currently anticipate the adoption of the new standard to have a material impact on our financial statements.

Accounting pronouncements not yet adopted

In August 2018, the FASB issued guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (the company’s fiscal 2021). Disclosures were removed for the amounts in accumulated other comprehensive income (“AOCI”) expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of assets expected to be returned to the employer, certain related party disclosures, and the effects of a one-percentage-point change in the assumed health care cost trend rates. Additional disclosures include the weighted average interest crediting rate for plans with promised crediting interest rates and an explanation of the reasons for significant gains and losses related to the benefit obligation for the period. This guidance shall be applied on a retrospective basis and can be early adopted. The company is currently evaluating when this guidance will be adopted and the impact on our Condensed Consolidated Financial Statements.

In December 2019, the FASB issued guidance which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. This guidance will be effective for us in our fiscal 2021, with the option to early adopt at any time prior to the effective date. Accounting for franchise taxes will require adoption on a retrospective or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other applicable provisions will require adoption on a retrospective, modified retrospective, or prospective basis, as required by this guidance. We do not anticipate that the adoption of this guidance will have a material impact on our financial statements and disclosures.

In March 2020, the FASB issued new accounting rules that provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be applied anytime between the first quarter of 2020 and the fourth quarter of 2022. The company is currently in the process of evaluating the impact of adoption of the new rules on the company’s financial condition, results of operations, cash flows and disclosures.

We have reviewed other recently issued accounting pronouncements and concluded that either they are not applicable to our business or no material effect is expected upon future adoption.

3. RESTRUCTURING ACTIVITIES

In fiscal 2016, we announced the launch of Project Centennial, a comprehensive business and operational review. We identified opportunities to enhance revenue growth, streamline operations, improve efficiencies, and make investments that strengthen our competitive position and improve margins over the long term. We began Project Centennial with an evaluation of our brands, product mix, and organizational structure. We then developed strategic priorities to help us capitalize on retail and consumer changes. The primary objective is to improve margins and profitably grow revenue over time. These priorities are as follows:

Reduce costs to fuel growth. The company is focusing on reducing costs in our purchased goods and services initiative and our supply chain optimization plan. Purchased goods and services operations have been centralized to create standardization and develop consistent policies and specifications. Supply chain optimization intends to reduce operational complexity and capitalize on scale. This initiative includes, and will continue to include, consulting and other third-party costs as we finalize the organizational structure.

Develop leading capabilities. The company has operated under an organizational structure established with two business units (“BUs”), Fresh Bakery and Snacking/Specialty since May of 2017, and realigned key leadership roles. This structure also provided for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions, each with more clearly defined roles and responsibilities. On July 17, 2020, the company implemented additional organizational structure changes designed to increase focus on brand growth, product innovation, and improving its cake operations. Elimination of the BUs and adoption of a brand focused organization structure is expected to be completed in the third quarter of fiscal 2020 and the company anticipates continuing to report our financial results in one operating segment. See Note 1, Basis of Presentation, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for a description of our segment presentation.

As discussed above, the company continues to evaluate its organizational structure and incurred $1.3 million of employee termination benefits charges related to a voluntary employee separation incentive plan (the “VSIP”) in the second quarter of fiscal 2020. The payments under the VSIP are anticipated to be paid in the third quarter of fiscal 2020. These charges consisted primarily of employee severance and benefits-related costs and were recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income.

Reinvigorate core business. This objective is to invest in our brands to align brands to consumers to maximize our return on investment. We expect to incur significant incremental marketing costs annually for brand development. These costs will not be restructuring and will be recognized as incurred. Project Centennial is expected to be completed by the end of fiscal 2021.

During the second quarter of fiscal 2020, the company entered into a contract to sell three closed bakeries currently included in assets held for sale and certain idle equipment at other bakeries included in property, plant and equipment, resulting in the recognition of $4.6 million of impairment charges. The sale of these assets is anticipated to be completed during the third quarter of fiscal 2020. In order to optimize sales and production of our organic products, the company has decided to cease using the Alpine Valley finite-lived trademark resulting in a $4.6 million impairment charge in the second quarter of 2020. These costs are recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income as referenced in the table below.

The company recognized impairment charges related to manufacturing line closures in the first quarter of fiscal 2019 and for a closed plant recorded in assets held for sale during the second quarter of fiscal 2019. The plant is being sold to streamline our core operations. These costs are recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income as referenced in the table below. The company continues to explore additional opportunities to streamline our core operations, but as of July 11, 2020, we cannot estimate the additional costs expected to be incurred for this initiative.

Capitalize on product adjacencies. This initiative focuses on growing market share in underdeveloped markets. Adjacencies are geographic and/or product categories that are expected to leverage our competitive advantages. This can be achieved either organically with our high-potential brands or through strategic acquisitions. As of July 11, 2020 we cannot estimate the additional costs expected to be incurred for this initiative.

The tables below present the components of costs associated with Project Centennial and the consulting and third-party implementation costs related to the project for the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019 (amounts in thousands):

	For the Twelve Weeks Ended		For the Twenty-Eight Weeks Ended
	July 11, 2020		July 11, 2020
Restructuring and related impairment charges:
Impairment of trademark	$	4,636	$	4,636
Impairment of property, plant and equipment		4,634		4,634
Employee termination benefits		1,265		1,265
Restructuring and related impairment charges (1)		10,535		10,535
Project Centennial implementation costs (2)		5,584		8,976
Total Project Centennial restructuring and implementation costs	$	16,119	$	19,511

	For the Twelve Weeks Ended		For the Twenty-Eight Weeks Ended
	July 13, 2019		July 13, 2019
Restructuring and related impairment charges:
Reorganization costs	$	42	$	253
Impairment of assets		1,252		1,781
Employee termination benefits		753		731
Total Project Centennial restructuring costs (1)	$	2,047	$	2,765

(1)	Presented on our Condensed Consolidated Statements of Income.

(2)	Costs are recorded in the selling, distribution and administrative expenses line item of our Condensed Consolidated Statements of Income.

The tables below present the components of, and changes in, our restructuring accruals for the twenty-eight weeks ended July 11, 2020 and July 13, 2019 (amounts in thousands):

	VSIP			Employee Termination Benefits⁽¹⁾			Reorganization Costs⁽²⁾		Total
Liability balance at December 28, 2019	$	174		$	1,450		$	—	$	1,624
Charges		1,265			—			—		1,265
Cash payments		(174	)		(1,223	)		—		(1,397	)
Liability balance (3) at July 11, 2020	$	1,265		$	227		$	—	$	1,492

	VSIP		Employee Termination Benefits⁽¹⁾			Reorganization Costs⁽²⁾			Total
Liability balance at December 29, 2018	$	174	$	227		$	—		$	401
Charges		—		731			253			984
Cash payments		—		(205	)		(253	)		(458	)
Liability balance (3) at July 13, 2019	$	174	$	753		$	—		$	927

(1)	Employee termination benefits are not related to the VSIP.

(2)	Reorganization costs include employee relocation expenses.

(3)	Recorded in the other accrued current liabilities line item of our Condensed Consolidated Balance Sheets.

4. LEASES

The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation and IT equipment. The quantitative disclosures for our leases follow below.

The following table details lease modifications and renewals and lease impairments (amounts in thousands):

	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Lease modifications and renewals	$	4,266	$	3,606	$	6,821	$	4,933
Lease impairments		—		—		90		—

Lease costs incurred by lease type, and/or type of payment, and other supplemental quantitative disclosures as of and for the twenty-eight weeks ended July 11, 2020 and July 13, 2019 were as follows (amounts in thousands):

	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Lease cost:
Amortization of right-of-use assets	$	1,726	$	1,541	$	4,029	$	3,599
Interest on lease liabilities		201		219		487		532
Operating lease cost		16,552		16,316		38,681		37,680
Short-term lease cost		556		548		1,152		1,362
Variable lease cost		5,223		6,086		13,035		13,991
Total lease cost	$	24,258	$	24,710	$	57,384	$	57,164

	For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from financing leases	$	487	$	532
Operating cash flows from operating leases	$	40,567	$	38,971
Financing cash flows from financing leases	$	3,900	$	3,303
Right-of-use assets obtained in exchange for new financing lease liabilities	$	43	$	7,177
Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,957	$	16,633

Weighted-average remaining lease term (years):
Financing leases			3.2
Operating leases			9.6
Weighted-average IBR (percentage):
Financing leases			3.6
Operating leases			4.2

Estimated undiscounted future lease payments under non-cancelable operating leases and financing leases, along with a reconciliation of the undiscounted cash flows to operating and financing lease liabilities, respectively, as of July 11, 2020 (in thousands) were as follows:

	Operating lease liabilities			Financing lease liabilities
Remainder of 2020	$	34,426		$	4,758
2021		61,557			6,780
2022		50,411			5,476
2023		45,204			6,505
2024		37,644			1,501
2025 and thereafter		212,132			720
Total minimum lease payments		441,374			25,740
Less: amount of lease payments representing interest		(81,289	)		(1,599	)
Present value of future minimum lease payments		360,085			24,141
Less: current obligations under leases		(52,232	)		(7,469	)
Long-term lease obligations	$	307,853		$	16,672

5. ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)

The company’s total comprehensive income (loss) presently consists of net income, adjustments for our derivative financial instruments accounted for as cash flow hedges, and various pension and other postretirement benefit related items.

During the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019, reclassifications out of AOCI were as follows (amounts in thousands):

	Amount Reclassified from AOCI
	For the Twelve Weeks Ended						Affected Line Item in the Statement
Details about AOCI Components (Note 2)	July 11, 2020			July 13, 2019			Where Net Income is Presented
Gains and losses on cash flow hedges:
Interest rate contracts	$	(33	)	$	(33	)	Interest expense
Commodity contracts		(852	)		1,298		Cost of sales, Note 3
Total before tax		(885	)		1,265		Total before tax
Tax benefit (expense)		221			(320	)	Income tax expense
Total net of tax		(664	)		945		Net of tax
Amortization of defined benefit pension items:
Prior-service costs		(12	)		(80	)	Note 1
Actuarial losses		(57	)		(1,575	)	Note 1
Total before tax		(69	)		(1,655	)	Total before tax
Tax benefit		17			418		Income tax expense
Total net of tax		(52	)		(1,237	)	Net of tax
Total reclassifications	$	(716	)	$	(292	)	Net of tax

	Amount Reclassified from AOCI
	For the Twenty-Eight Weeks Ended						Affected Line Item in the Statement
Details about AOCI Components (Note 2)	July 11, 2020			July 13, 2019			Where Net Income is Presented
Gains and losses on cash flow hedges:
Interest rate contracts	$	(77	)	$	(77	)	Interest expense
Commodity contracts		(1,355	)		4,255		Cost of sales, Note 3
Total before tax		(1,432	)		4,178		Total before tax
Tax benefit (expense)		357			(1,055	)	Income tax expense
Total net of tax		(1,075	)		3,123		Net of tax
Amortization of defined benefit pension items:
Prior-service credits		(86	)		(186	)	Note 1
Settlement loss		(116,207	)		—		Note 1
Actuarial losses		(1,332	)		(3,673	)	Note 1
Total before tax		(117,625	)		(3,859	)	Total before tax
Tax benefit		29,700			974		Income tax expense
Total net of tax		(87,925	)		(2,885	)	Net of tax
Total reclassifications	$	(89,000	)	$	238		Net of tax

Note 1:

These items are included in the computation of net periodic pension cost and are reported in the other components of net periodic pension and postretirement benefits expense line item on the Condensed Consolidated Statements of Income. See Note 17, Postretirement Plans, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.

Note 2:

Amounts in parentheses indicate debits to determine net income.

Note 3:

Amounts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

During the twenty-eight weeks ended July 11, 2020, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):

	Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total
AOCI at December 28, 2019	$	1,658		$	(107,678	)	$	(106,020	)
Other comprehensive (loss) income before reclassifications		(7,207	)		15,693			8,486
Reclassified to earnings from AOCI		1,075			87,925			89,000
AOCI at July 11, 2020	$	(4,474	)	$	(4,060	)	$	(8,534	)

During the twenty-eight weeks ended July 13, 2019, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):

	Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total
AOCI at December 29, 2018	$	(4,135	)	$	(105,036	)	$	(109,171	)
Other comprehensive income before reclassifications		2,547			—			2,547
Reclassified to earnings from AOCI		(3,123	)		2,885			(238	)
AOCI at July 13, 2019	$	(4,711	)	$	(102,151	)	$	(106,862	)

Amounts reclassified out of AOCI to net income that relate to commodity contracts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The following table presents the net of tax amount reclassified from AOCI for our commodity contracts (amounts in thousands and positive value indicates credits to determine net income):

	For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019
Gross (loss) gain reclassified from AOCI into net income	$	(1,355	)	$	4,255
Tax expense		339			(1,074	)
Net of tax	$	(1,016	)	$	3,181

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The table below summarizes our goodwill and other intangible assets at July 11, 2020 and December 28, 2019, respectively, each of which is explained in additional detail below (amounts in thousands):

	July 11, 2020		December 28, 2019
Goodwill	$	545,244	$	545,244
Amortizable intangible assets, net of amortization		603,023		623,107
Indefinite-lived intangible assets		127,100		127,100
Total goodwill and other intangible assets	$	1,275,367	$	1,295,451

As of July 11, 2020 and December 28, 2019, respectively, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

	July 11, 2020						December 28, 2019
Asset	Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value
Trademarks	$	472,557	$	62,857	$	409,700	$	477,193	$	55,746	$	421,447
Customer relationships		318,021		127,192		190,829		318,021		117,836		200,185
Non-compete agreements		5,154		4,997		157		5,154		4,954		200
Distributor relationships		4,123		2,996		1,127		4,123		2,848		1,275
Distributor routes held and used		1,210		—		1,210		—		—		—
Total	$	801,065	$	198,042	$	603,023	$	804,491	$	181,384	$	623,107

Aggregate amortization expense for the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019 was as follows (amounts in thousands):

	Amortization Expense
For the twelve weeks ended July 11, 2020	$	7,115
For the twelve weeks ended July 13, 2019	$	6,767
For the twenty-eight weeks ended July 11, 2020	$	16,658
For the twenty-eight weeks ended July 13, 2019	$	15,790

Estimated amortization of intangibles for each of the next five years is as follows (amounts in thousands):

	Amortization of Intangibles
Remainder of 2020	$	13,909
2021	$	29,658
2022	$	29,108
2023	$	28,228
2024	$	27,532

There were $127.1 million of indefinite-lived intangible trademark assets separately identified from goodwill at July 11, 2020 and December 28, 2019. These trademarks are classified as indefinite-lived because we believe they are well established brands with a long history and well-defined markets. In addition, we are continuing to use these brands both in their original markets and throughout our expansion territories. We believe these factors support an indefinite-life. We perform an annual impairment analysis, or on an interim basis if the facts and circumstances change, to determine if the trademarks are realizing their expected economic benefits.

In order to optimize sales and production of our organic products, the company has decided to cease using the Alpine Valley finite-lived trademark resulting in a $4.6 million impairment charge in the second quarter of 2020. The impairment charge is recorded in the restructuring and related impairment charges line item of our Condensed Consolidated Statements of Income.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of independent distributors’ distribution rights by independent distributor partners (“IDPs”). These notes receivable are recorded in the Condensed Consolidated Balance Sheets at carrying value, which represents the closest approximation of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As a result, the appropriate interest rate that should be used to estimate the fair value of the distributor notes receivable is the prevailing market rate at which similar loans would be made to IDPs with similar credit ratings and for the same maturities. However, the company financed approximately 4,110 IDPs’ distribution rights as of July 11, 2020 and 4,200 as of December 28, 2019, respectively, all with varied financial histories and credit risks. Considering the diversity of credit risks among the IDPs, the company has no method to accurately determine a market interest rate to apply to the notes. The distribution rights are generally purchased by the IDP with a 5% down payment with the remainder financed for up to 10 years. The distributor notes receivable are collateralized by the IDPs’ distribution rights. The company maintains a wholly-owned subsidiary to assist in financing the distribution rights purchase activities if requested by new IDPs, using the distribution rights and certain associated assets as collateral. These notes receivable earn interest at a fixed rate.

Interest income was primarily related to the IDPs’ notes receivable and was as follows (amounts in thousands):

	Interest Income
For the twelve weeks ended July 11, 2020	$	6,132
For the twelve weeks ended July 13, 2019	$	6,423
For the twenty-eight weeks ended July 11, 2020	$	14,457
For the twenty-eight weeks ended July 13, 2019	$	15,070

At July 11, 2020 and December 28, 2019, respectively, the carrying value of the distributor notes receivable was as follows (amounts in thousands):

	July 11, 2020		December 28, 2019
Distributor notes receivable	$	215,751	$	226,348
Current portion of distributor notes receivable recorded in accounts and notes receivable, net		28,211		27,709
Long-term portion of distributor notes receivable	$	187,540	$	198,639

At July 11, 2020 and December 28, 2019, respectively, the company has evaluated the collectability of the distributor notes receivable and determined that a reserve is not necessary. Payments on these distributor notes receivable are collected by the company weekly in conjunction with the distributor settlement process.

The fair value of the company’s variable rate debt at July 11, 2020 approximates the recorded value. The fair value of the company’s 3.5% senior notes due 2026 (“2026 notes”) and 4.375% senior notes due 2022 (“2022 notes”), as discussed in Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q are estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements and are considered a Level 2 valuation. The fair value of the 2026 notes and 2022 notes are presented in the table below (amounts in thousands, except level classification):

	Carrying Value		Fair Value		Level
2026 notes	$	396,430	$	429,448	2
2022 notes	$	399,166	$	417,248	2

For fair value disclosure information about our derivative assets and liabilities see Note 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

8. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1:

Fair value based on unadjusted quoted prices for identical assets or liabilities at the measurement date

Level 2:

Modeled fair value with model inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3:

Modeled fair value with unobservable model inputs that are used to estimate the fair value of the asset or liability

Commodity Risk

The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, and diesel fuel are also important commodity inputs.

As of July 11, 2020, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	21		$	—	$	—	$	21
Other long-term		6			—		—		6
Total		27			—		—		27

Liabilities:
Other current		(4,497	)		—		—		(4,497	)
Other long-term		(990	)		—		—		(990	)
Total		(5,487	)		—		—		(5,487	)
Net Fair Value	$	(5,460	)	$	—	$	—	$	(5,460	)

As of December 28, 2019, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	3,191		$	—	$	—	$	3,191
Other long-term		589			—		—		589
Total		3,780			—		—		3,780

Liabilities:
Other current		(814	)		—		—		(814	)
Other long-term		(792	)		—		—		(792	)
Total		(1,606	)		—		—		(1,606	)
Net Fair Value	$	2,174		$	—	$	—	$	2,174

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period extending into fiscal 2022. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All the company-held commodity derivatives at July 11, 2020 and December 28, 2019, respectively, qualified for hedge accounting.

Interest Rate Risk

The company previously entered into treasury rate locks at the time we executed the 2022 and 2026 notes. These rate locks were designated as a cash flow hedge and the fair value at termination was deferred in AOCI. The deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the related notes through the maturity date.

Derivative Assets and Liabilities

The company has the following derivative instruments located on the Condensed Consolidated Balance Sheets, which are utilized for the risk management purposes detailed above (amounts in thousands):

	Derivative Assets						Derivative Liabilities
	July 11, 2020			December 28, 2019			July 11, 2020			December 28, 2019
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current assets	$	21	Other current assets	$	3,191	Other accrued liabilities	$	4,497	Other accrued liabilities	$	814
Commodity contracts	Other assets		6	Other assets		589	Other long-term liabilities		990	Other long-term liabilities		792
Total		$	27		$	3,780		$	5,487		$	1,606

Derivative AOCI transactions

The company had the following derivative instruments for deferred gains and (losses) on closed contracts and the effective portion for changes in fair value recorded in AOCI (no amounts were excluded from the effectiveness test), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):

	Amount of Gain or (Loss)						Amount of Gain or (Loss)
	Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)					Location of Gain or (Loss)	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twelve Weeks Ended					Reclassified from AOCI	For the Twelve Weeks Ended
Hedge Relationships(1)	July 11, 2020			July 13, 2019		into Income (Effective Portion)(2)	July 11, 2020			July 13, 2019
Interest rate contracts	$	—		$	—	Interest expense	$	(25	)	$	(25	)
Commodity contracts		(3,358	)		12,140	Production costs(3)		(639	)		970
Total	$	(3,358	)	$	12,140		$	(664	)	$	945

	Amount of Gain or (Loss)						Amount of Gain or (Loss)
	Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)					Location of Gain or (Loss)	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twenty-Eight Weeks Ended					Reclassified from AOCI	For the Twenty-Eight Weeks Ended
Hedge Relationships(1)	July 11, 2020			July 13, 2019		into Income (Effective Portion)(2)	July 11, 2020			July 13, 2019
Interest rate contracts	$	—		$	—	Interest expense	$	(58	)	$	(58	)
Commodity contracts		(7,207	)		2,547	Production costs(3)		(1,017	)		3,181
Total	$	(7,207	)	$	2,547		$	(1,075	)	$	3,123

1.	Amounts in parentheses indicate debits to determine net income.

2.	Amounts in parentheses, if any, indicate credits to determine net income.

3.	Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

There was no hedging ineffectiveness, and no amounts were excluded from the ineffectiveness testing, during the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019, respectively, related to the company’s commodity risk hedges.

At July 11, 2020, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):

	Commodity Price Risk Derivatives			Interest Rate Risk Derivatives		Totals
Closed contracts	$	(560	)	$	180	$	(380	)
Expiring in 2020		(1,973	)		—		(1,973	)
Expiring in 2021		(1,879	)		—		(1,879	)
Expiring in 2022		(242	)		—		(242	)
Total	$	(4,654	)	$	180	$	(4,474	)

Derivative Transactions Notional Amounts

As of July 11, 2020, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):

	Notional Amount
Wheat contracts	$	114,619
Soybean oil contracts		15,881
Natural gas contracts		9,126
Corn contracts		7,148
Total	$	146,774

The company’s derivative instruments contain no credit-risk related contingent features at July 11, 2020. As of July 11, 2020 and December 28, 2019, the company had $12.0 million and $7.0 million, respectively, in other current assets representing collateral for hedged positions. At July 11, 2020 and December 28, 2019, the company had $0.8 million and $1.2 million, respectively, recorded in other accrued liabilities representing collateral from counterparties for hedged positions.

9. OTHER CURRENT AND NON-CURRENT ASSETS

Other current assets consist of (amounts in thousands):

	July 11, 2020		December 28, 2019
Prepaid assets	$	17,012	$	15,380
Recovery from legal settlement in principle		—		22,300
Fair value of derivative instruments		21		3,191
Collateral to counterparties for derivative positions		11,964		7,012
Income taxes receivable		—		13,924
Other		245		946
Total	$	29,242	$	62,753

The recovery from legal settlement in principle represents funds in the amount of $22.3 million that were paid by the company’s insurance provider to the plaintiffs at final settlement of two lawsuits during the first quarter of fiscal 2020. See Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on this settlement in principle.

Other non-current assets consist of (amounts in thousands):

	July 11, 2020		December 28, 2019
Unamortized financing fees	$	856	$	1,084
Investments		3,143		3,496
Fair value of derivative instruments		6		589
Deposits		1,944		1,998
Unamortized cloud computing arrangement costs		882		929
Other		129		140
Total	$	6,960	$	8,236

10. OTHER ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES

Other accrued liabilities consist of (amounts in thousands):

	July 11, 2020		December 28, 2019
Employee compensation	$	25,554	$	21,966
VSIP liabilities		1,265		174
Employee vacation		18,847		23,660
Employee bonus		31,739		19,476
Fair value of derivative instruments		4,497		814
Self-insurance reserves		32,648		30,294
Bank overdraft		11,780		13,767
Accrued interest		8,845		7,881
Accrued utilities		4,628		5,005
Accrued income taxes		30,272		—
Accrued other taxes		13,600		6,870
Accrued advertising		2,400		4,637
Accrued legal settlements		29,150		51,450
Accrued legal costs		4,461		1,705
Contingent acquisition consideration		—		5,000
Accrued short-term deferred income		4,998		5,337
Collateral from counterparties for derivative positions		841		1,188
Other		1,884		1,816
Total	$	227,409	$	201,040

See Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the legal settlements.

Other long-term liabilities consist of (amounts in thousands):

	July 11, 2020		December 28, 2019
Deferred income	$	21,745	$	24,840
Deferred compensation		16,251		15,558
Fair value of derivative instruments		990		792
Other deferred credits		1,376		1,609
Deferred payroll taxes under the CARES Act		9,650		—
Other		1,532		1,382
Total	$	51,544	$	44,181

11. ASSETS HELD FOR SALE

The company repurchases distribution rights from IDPs in circumstances when the company decides to exit a territory or, in some cases, when the IDP elects to terminate its relationship with the company. In most of the distributor agreements, if the company decides to exit a territory or stop using the independent distribution model in a territory, the company is contractually required to purchase the distribution rights from the IDP. In the event an IDP terminates its relationship with the company, the company, although not legally obligated, may repurchase and operate those distribution rights as a company-owned territory. The IDPs may also sell their distribution rights to another person or entity. Distribution rights purchased from IDPs and operated as company-owned territories are recorded on the Condensed Consolidated Balance Sheets in the line item assets held for sale while the company actively seeks another IDP to purchase the distribution rights for the territory. Distribution rights held for sale and operated by the company are sold to IDPs at fair market value pursuant to the terms of a distributor agreement. There are multiple versions of the distributor agreement in place at any given time and the terms of such distributor agreements vary.

Additional assets recorded in assets held for sale are for property, plant and equipment. During the first quarter of fiscal 2020, two closed bakeries were reclassified as held for sale. During the second quarter of fiscal 2020, the company entered into a contract to sell these two closed bakeries and an additional bakery previously recorded as held for sale, resulting in the recognition of $4.2 million of impairment charges. The impairment charge is recorded in the restructuring and related impairment charges line item of our Condensed Consolidated Statements of Income. The carrying values of assets held for sale are not amortized and are evaluated for impairment as required at the end of the reporting period. The table below presents the assets held for sale as of July 11, 2020 and December 28, 2019, respectively (amounts in thousands):

	July 11, 2020		December 28, 2019
Distributor territories	$	3,225	$	3,016
Property, plant and equipment		4,380		1,392
Total assets held for sale	$	7,605	$	4,408

12. DEBT AND OTHER OBLIGATIONS

Long-term debt (net of issuance costs and debt discounts excluding line-of-credit arrangements) (leases are separately discussed in Note 4, Leases) consisted of the following at July 11, 2020 and December 28, 2019, respectively (amounts in thousands):

	July 11, 2020		December 28, 2019
Unsecured credit facility	$	100,000	$	41,750
2026 notes		396,430		396,122
2022 notes		399,166		398,906
Accounts receivable securitization facility		114,000		26,000
Other notes payable		—		3,730
		1,009,596		866,508
Less current maturities of long-term debt		—		(3,730	)
Total long-term debt	$	1,009,596	$	862,778

Bank overdrafts occur when checks have been issued but have not been presented to the bank for payment. Certain of our banks allow us to delay funding of issued checks until the checks are presented for payment. The delay in funding results in a temporary source of financing from the bank. The activity related to bank overdrafts is shown as a financing activity in our Condensed Consolidated Statements of Cash Flows. Bank overdrafts are included in other accrued liabilities on our Condensed Consolidated Balance Sheets.

The company also had standby letters of credit (“LOCs”) outstanding of $8.4 million at July 11, 2020 and December 28, 2019 which reduce the availability of funds under the credit facility. The outstanding LOCs are for the benefit of certain insurance companies and lessors. None of the outstanding LOCs are recorded as a liability on the Condensed Consolidated Balance Sheets.

2026 Notes, Accounts Receivable Securitization Facility, 2022 Notes, and Credit Facility

2026 Notes. On September 28, 2016, the company issued $400.0 million of senior notes. The company pays semiannual interest on the 2026 notes on each April 1 and October 1 and the 2026 notes will mature on October 1, 2026. The notes bear interest at 3.500% per annum. The 2026 notes are subject to interest rate adjustments if either Moody’s or S&P downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the 2026 notes. On any date prior to July 1, 2026, the company may redeem some or all of the notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the

remaining scheduled payments of principal and interest on the 2026 notes to be redeemed that would be due if such notes matured July 1, 2026 (exclusive of interest accrued to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the indenture governing the notes), plus 30 basis points, plus in each case accrued and unpaid interest. At any time on or after July 1, 2026, the company may redeem some or all of the 2026 notes at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the notes in whole. The 2026 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.

The face value of the 2026 notes is $400.0 million. There was a debt discount of $2.1 million representing the difference between the net proceeds, after expenses, received upon issuance of debt and the amount repayable at its maturity. The company also paid issuance costs of $3.6 million (including underwriting fees and legal fees) on the 2026 notes. Debt issuance costs and the debt discount are being amortized to interest expense over the term of the 2026 notes. As of July 11, 2020, and December 28, 2019, respectively, the company was in compliance with all restrictive covenants under the indenture governing the 2026 notes.

Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The company has amended the facility seven times since execution, most recently on September 27, 2019. These amendments include provisions which (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million, (ii) added a leverage pricing grid, (iii) added an additional bank to the lending group, (iv) made certain other conforming changes, and (v) extended the term, most recently one additional year to September 27, 2021. The amendment that added the additional bank was accounted for as an extinguishment of the debt. The remaining amendments were accounted for as modifications.

Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables. As borrowings are made under the facility, the subsidiary pledges the receivables as collateral. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our Condensed Consolidated Financial Statements. The facility contains certain customary representations and warranties, affirmative and negative covenants, and events of default. As of July 11, 2020 and December 28, 2019, respectively, the company was in compliance with all restrictive covenants under the facility.

The table below presents the borrowings and repayments under the facility during the twenty-eight weeks ended July 11, 2020:

	Amount (thousands)
Balance at December 28, 2019	$	26,000
Borrowings		207,500
Payments		(119,500	)
Balance at July 11, 2020	$	114,000

The table below presents the net amount available for working capital and general corporate purposes under the facility as of July 11, 2020:

	Amount (thousands)
Gross amount available	$	200,000
Outstanding		(114,000	)
Available for withdrawal	$	86,000

Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables. The table below presents the highest and lowest outstanding balance under the facility during the twenty-eight weeks ended July 11, 2020:

Amount

(thousands)

High balance

154,000

Low balance

19,000

Optional principal repayments may be made at any time without premium or penalty. Interest is due two days after our reporting periods end in arrears on the outstanding borrowings and is computed as the cost of funds rate plus an applicable margin of 85 basis points. An unused fee of 30 basis points is applicable on the unused commitment at each reporting period. Financing costs paid at inception of the facility and at the time amendments are executed are being amortized over the life of the facility. The balance of unamortized financing costs was $0.1 million on July 11, 2020 and $0.2 million on December 28, 2019, respectively, and is recorded in other assets on the Condensed Consolidated Balance Sheets.

2022 Notes. On April 3, 2012, the company issued $400.0 million of senior notes. The company pays semiannual interest on the 2022 notes on each April 1 and October 1 and the 2022 notes will mature on April 1, 2022. The 2022 notes bear interest at 4.375% per annum. On any date prior to January 1, 2022, the company may redeem some or all of the 2022 notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal thereof (not including any interest accrued thereon to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the indenture governing the notes), plus 35 basis points, plus in each case, unpaid interest accrued thereon to, but not including, the date of redemption. At any time on or after January 1, 2022, the company may redeem some or all of the 2022 notes at a price equal to 100% of the principal amount of the 2022 notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the 2022 notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the 2022 notes in whole. The 2022 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.

The face value of the 2022 notes is $400.0 million and the debt discount on the 2022 notes at issuance was $1.0 million. The company paid issuance costs (including underwriting fees and legal fees) on the 2022 notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the 2022 notes. As of July 11, 2020 and December 28, 2019, the company was in compliance with all restrictive covenants under the indenture governing the 2022 notes.

Credit Facility. The company is party to an amended and restated credit agreement, dated as of October 24, 2003, with the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, the swingline lender and issuing lender. Under the amended and restated credit agreement, our credit facility (the “credit facility”) is a five-year, $500.0 million senior unsecured revolving loan facility with the following terms and conditions: (i) a maturity date of November 29, 2022; (ii) an applicable margin for revolving loans maintained as (1) base rate loans and swingline loans with a range of 0.00% to 0.575% and (2) Eurodollar loans with a range of 0.575% to 1.575%, in each case, based on the leverage ratio of the company and its subsidiaries; (iii) an applicable facility fee with a range of 0.05% to 0.30%, due quarterly on all commitments under the amended and restated credit agreement, based on the leverage ratio of the company and its subsidiaries; and (iv) a maximum leverage ratio covenant to permit the company, at its option, in connection with certain acquisitions and investments and subject to the terms and conditions provided in the amended and restated credit agreement, to increase the maximum ratio permitted thereunder on one or more occasions to 4.00 to 1.00 for a period of four consecutive fiscal quarters, including and/or immediately following the fiscal quarter in which such acquisitions or investments were completed (the “covenant holiday”), provided that each additional covenant holiday will not be available to the company until it has achieved and maintained a leverage ratio of at least 3.75 to 1.00 and has been complied with for at least two fiscal quarters.

In addition, the credit facility contains a provision that permits the company to request up to $200.0 million in additional revolving commitments, for a total of up to $700.0 million, subject to the satisfaction of certain conditions. Proceeds from the credit facility may be used for working capital and general corporate purposes, including capital expenditures, acquisition financing, refinancing of indebtedness, dividends and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the amended credit facility and can meet its presently foreseeable financial requirements. As of July 11, 2020 and December 28, 2019, respectively, the company was in compliance with all restrictive covenants under the credit facility.

Financing costs paid at inception of the credit facility and at the time amendments are executed are being amortized over the life of the credit facility. The balance of unamortized financing costs was $0.7 million and $0.9 million on July 11, 2020 and December 28, 2019, respectively, and are recorded in other assets on the Condensed Consolidated Balance Sheets.

Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions, which are part of the company’s overall risk management strategy as discussed in Note 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. The table below presents the borrowings and repayments under the credit facility during the twenty-eight weeks ended July 11, 2020.

	Amount (thousands)
Balance at December 28, 2019	$	41,750
Borrowings		272,600
Payments		(214,350	)
Balance at July 11, 2020	$	100,000

The table below presents the net amount available under the credit facility as of July 11, 2020:

	Amount (thousands)
Gross amount available	$	500,000
Outstanding		(100,000	)
Letters of credit		(8,400	)
Available for withdrawal	$	391,600

The table below presents the highest and lowest outstanding balance under the credit facility during the twenty-eight weeks ended July 11, 2020:

Amount

(thousands)

High balance

235,000

Low balance

6,400

Aggregate maturities of debt outstanding as of July 11, 2020 are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):

Remainder of 2020	$	—
2021		114,000
2022		500,000
2023		—
2024		—
2025 and thereafter		400,000
Total	$	1,014,000

Debt discount and issuance costs are being amortized straight-line (which approximates the effective method) over the term of the underlying debt outstanding. The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at July 11, 2020 (amounts in thousands):

			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2026 notes	$	400,000	$	3,570	$	396,430
2022 notes		400,000		834		399,166
Other notes payable		-		-		-
Total	$	800,000	$	4,404	$	795,596

The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at December 28, 2019 (amounts in thousands):

			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2026 notes	$	400,000	$	3,878	$	396,122
2022 notes		400,000		1,094		398,906
Other notes payable		3,750		20		3,730
Total	$	803,750	$	4,992	$	798,758

13. VARIABLE INTEREST ENTITIES

Distribution rights agreement VIE analysis

The incorporated IDPs qualify as VIEs. The IDPs who are formed as sole proprietorships are excluded from the following VIE accounting analysis and discussion.

Incorporated IDPs acquire distribution rights and enter into a contract with the company to sell the company’s products in the IDPs’ defined geographic territory. The incorporated IDPs have the option to finance the acquisition of their distribution rights with the company. They can also pay cash or obtain external financing at the time they acquire the distribution rights. The combination of the company’s loans to the incorporated IDPs and the ongoing distributor arrangements with the incorporated IDPs provide a level of funding to the equity owners of the various incorporated IDPs that would not otherwise be available. As of July 11, 2020 and December 28, 2019, there was $178.2 million and $183.2 million, respectively, in gross distribution rights notes receivable outstanding from incorporated IDPs.

The company is not considered to be the primary beneficiary of the VIEs because the company does not (i) have the ability to direct the significant activities of the VIEs that would affect their ability to operate their respective businesses and (ii) provide any implicit or explicit guarantees or other financial support to the VIEs, other than the financing described above, for specific return or performance benchmarks. The activities controlled by the incorporated IDPs that are deemed to most significantly impact the ultimate success of the incorporated IDP entities relate to those decisions inherent in operating the distribution business in the territory, including acquiring trucks and trailers, managing fuel costs, employee matters and other strategic decisions. In addition, we do not provide, nor do we intend to provide, financial or other support to the IDP. The IDPs are responsible for the operations of their respective territories.

The company’s maximum contractual exposure to loss for the incorporated IDP relates to the distributor rights note receivable for the portion of the territory the incorporated IDPs financed at the time they acquired the distribution rights. The incorporated IDPs remit payment on their distributor rights note receivable each week during the settlement process of their weekly activity. The company will operate a territory on behalf of an incorporated IDP in situations where the IDP has abandoned its distribution rights. Any remaining balance outstanding on the distribution rights notes receivable is relieved once the distribution rights have been sold on the IDPs behalf. The company’s collateral from the territory distribution rights mitigates the potential losses.

14. COMMITMENTS AND CONTINGENCIES

Self-insurance reserves and other commitments and contingencies

The company records self-insurance reserves, excluding the distributor litigation discussed below, as an other accrued liability on our Condensed Consolidated Balance Sheets. The reserves include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on the company’s assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and current cost trends. The amount of the company’s ultimate liability in respect of these matters may differ materially from these estimates.

In the event the company ceases to utilize the independent distributor model or exits a geographic market, the company is contractually required in some situations to purchase the distribution rights from the independent distributor. The company expects to continue operating under this model and has concluded that the possibility of a loss is remote.

The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these laws and regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company believes it is currently in substantial compliance with all material environmental laws and regulations affecting the company and its properties.

Litigation

The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.

At this time, the company is defending 20 complaints filed by distributors alleging that such distributors were misclassified as independent contractors. Fourteen of these lawsuits seek class and/or collective action treatment. The remaining six cases either allege individual claims or do not seek class or collective action treatment or, in cases in which class treatment was sought, the court denied class certification. The respective courts have ruled on plaintiffs’ motions for class certification in nine of the pending cases, each of which is discussed below. Unless otherwise noted, a class was conditionally certified under the FLSA in each of the cases described below, although the company has the ability to petition the court to decertify that class at a later date:

Case Name

Case No.

Venue

Date Filed

Status

Rosinbaum et al. v. Flowers Foods,

Inc. and Franklin Baking Co., LLC

7:16-cv-00233

U.S. District Court Eastern

District of North Carolina

12/1/2015

On January 31, 2020, the parties reached an agreement in principal to settle this matter for a payment of $8.3 million, inclusive of attorneys’ fees and costs, service awards, and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. The parties are currently working to obtain final court approval of the settlement. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the fourth quarter of fiscal 2019.

Neff et al. v. Flowers Foods, Inc.,

Lepage Bakeries Park Street, LLC,

and CK Sales Co., LLC

5:15-cv-00254

U.S. District Court District of

Vermont

12/2/2015

On January 31, 2020, the parties reached an agreement in principal to settle this matter for a payment of $7.6 million, inclusive of attorneys’ fees and costs, service awards, and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. The parties are currently working to obtain final court approval of the settlement. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the fourth quarter of fiscal 2019.

Noll v. Flowers Foods, Inc., Lepage Bakeries Park Street, LLC, and CK Sales Co., LLC	1:15-cv-00493	U.S. District Court District of Maine	12/3/2015	On January 15, 2019, the Court denied defendants’ motion to decertify the FLSA class and granted Plaintiff’s motion to certify under Federal Rule of Civil Procedure 23 a state law class of distributors who operated in the state of Maine. On August 3, 2020, the Court reconsidered its January 15, 2019 order and decertified the FLSA collective action.
Richard et al. v. Flowers Foods, Inc., Flowers Baking Co. of Lafayette, LLC, Flowers Baking Co. of Baton Rouge, LLC, Flowers Baking Co. of Tyler, LLC and Flowers Baking Co. of New Orleans, LLC	6:15-cv-02557	U.S. District Court Western District of Louisiana	10/21/2015
Carr et al. v. Flowers Foods, Inc. and Flowers Baking Co. of Oxford, Inc.	2:15-cv-06391	U.S. District Court Eastern District of Pennsylvania	12/1/2015	On January 31, 2020, the parties reached an agreement in principal to settle this matter and the Boulange matter (see below) for a payment of $13.25 million, inclusive of attorneys’ fees and costs, service awards, and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. The parties are currently working to obtain final court approval of the settlement. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the fourth quarter of fiscal 2019.
Boulange v. Flowers Foods, Inc. and Flowers Baking Co. of Oxford, Inc.	2:16-cv-02581	U.S. District Court Eastern District of Pennsylvania	3/25/2016	This matter has been consolidated with the Carr litigation described immediately above.
Medrano v. Flowers Foods, Inc. and Flowers Baking Co. of El Paso, LLC	1:16-cv-00350	U.S. District Court District of New Mexico	4/27/2016
Martins v. Flowers Foods, Inc., Flowers Baking Co. of Bradenton, LLC and Flowers Baking Co. of Villa Rica, LLC	8:16-cv-03145	U.S. District Court Middle District of Florida	11/8/2016
Caddick et al. v. Tasty Baking Co.	2:19-cv-02106	U.S. District Court Eastern District of Pennsylvania	5/15/2019

The company and/or its respective subsidiaries contests the allegations and are vigorously defending all of these lawsuits. Given the stage of the complaints and the claims and issues presented, except for lawsuits disclosed herein that have reached a settlement or agreement in principle, the company cannot reasonably estimate at this time the possible loss or range of loss that may arise from the unresolved lawsuits.

Since the beginning of fiscal 2019, the company has settled, and the appropriate court has approved, the following collective lawsuit filed by distributors alleging that such distributors were misclassified as independent contractors:

Case Name

Case No.

Venue

Date Filed

Comments

Green et al. v. Flowers Foods, Inc. et al.

1:19-cv-01021

U.S. District Court Western

District of Tennessee

2/1/2019

On September 7, 2018, the company negotiated a global settlement to resolve 12 pending collective action lawsuits against the company for a payment in the amount of $9.0 million, comprised of $5.4 million in settlement funds and $3.6 million in attorneys’ fees. The proposed settlement class consisted of approximately 900 members. The settlement also contained certain non-economic terms intended to strengthen and enhance the independent contractor model, which remains in place. On February 1, 2019, plaintiffs' counsel filed a consolidated complaint with the U.S. District Court for the Western District of Tennessee to obtain judicial approval of the parties' global settlement. The court approved the global settlement on February 27, 2019. Thereafter, the parties moved to dismiss the 12 settled lawsuits with prejudice. This settlement was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the third quarter of fiscal 2018. A total of $4.2 million was paid in March 2019, and a second payment of $3.5 million was made in June 2019. The remainder of the settlement funds ($1.3 million) reverted to Flowers during the second quarter of fiscal 2019 per the terms of the settlement, and was recorded as a reduction of selling, distribution and administrative expense in our Condensed Consolidated Statements of Income.

On August 12, 2016, a class action complaint was filed in the U.S. District Court for the Southern District of New York by Chris B. Hendley (the “Hendley complaint”) against the company and certain senior members of management (collectively, the “defendants”). On August 17, 2016, another class action complaint was filed in the U.S. District Court for the Southern District of New York by Scott Dovell, II (the “Dovell complaint” and together with the Hendley complaint, the “complaints”) against the defendants. Plaintiffs in the complaints are securities holders that acquired company securities between February 7, 2013 and August 10, 2016. The complaints generally allege that the defendants made materially false and/or misleading statements and/or failed to disclose that (1) the company’s labor practices were not in compliance with applicable federal laws and regulations; (2) such non-compliance exposed the company to legal liability and/or negative regulatory action; and (3) as a result, the defendants’ statements about the company’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis. The counts of the complaints are asserted against the defendants pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 under the Exchange Act. The complaints seek (1) class certification under the Federal Rules of Civil Procedure, (2) compensatory damages in favor of the plaintiffs and all other class members against the defendants, jointly and severally, for all damages sustained as a result of wrongdoing, in an amount to be proven at trial, including interest, and (3) awarding plaintiffs and the class their reasonable costs and expenses incurred in the actions, including counsel and expert fees. On October 21, 2016, the U.S. District Court for the Southern District of New York consolidated the complaints into one action captioned “In re Flowers Foods, Inc. Securities Litigation” (the “consolidated securities action”), appointed Walter Matthews as lead plaintiff (“lead plaintiff”), and appointed Glancy Prongay & Murray LLP and Johnson & Weaver, LLP as co-lead counsel for the putative class. On November 21, 2016, the court granted defendants’ and lead plaintiff’s joint motion to transfer the consolidated securities action to the U.S. District Court for the Middle District of Georgia. Lead plaintiff filed his Consolidated Class Action Complaint on January 12, 2017, raising the same counts and general allegations and seeking the same relief as the Dovell and Hendley complaints. On March 13, 2017, the defendants filed a motion to dismiss the lawsuit which was granted in part and denied in part on March 23, 2018. The court dismissed certain allegedly false or misleading statements as nonactionable under federal securities laws and allowed others to proceed to fact discovery. On July 23, 2018, lead plaintiff filed his motion for class certification. The defendants filed their memorandum of law in opposition to class certification on October 5, 2018. The court scheduled a hearing on the class certification motion for February 28, 2019. On May 10, 2019, the parties filed a notice of settlement informing the court that a settlement in principle of the case had been reached. On July 12, 2019, lead plaintiff and Plaintiff Chris B. Hendley filed an unopposed motion for (1) preliminary approval of the class action settlement; (2) certification of the settlement class; and (3) approval of notice to the settlement class. Also, on July 12, 2019, the parties entered into a Stipulation and Agreement of Settlement (the “Stipulation”), which (along with its exhibits) sets forth in detail the settlement terms, which include releases of the claims asserted against the defendants. On December 11, 2019, the Court approved the settlement described in the Stipulation. The settlement required payment of $21.0 million, which amount the company’s insurer deposited in the escrow account described in the Stipulation. This amount was recorded on the company’s Condensed Consolidated Balance Sheet as of December 28, 2019 as an other current asset due from the insurer and an other accrued liability due for the settlement in principle. Recording this transaction resulted in no impact to the company’s Condensed Consolidated Statements of Income because the expense for the settlement in principle was offset by the expected recovery from the insurer. At the satisfaction of all requirements under the Stipulation in January 2020 the ‘Recovery from legal settlement in principle’ and ‘Accrued legal settlement’ amounts (both recorded on the Condensed Consolidated Balance Sheets) were de-recognized on the company’s Condensed Consolidated Balance Sheet.

On June 8, 2018, a verified shareholder derivative complaint was filed in the U.S. District Court for the Middle District of Georgia by William D. Wrigley, derivatively on behalf of the company (the “Wrigley complaint”), against certain current and former directors and officers of the company. On June 14, 2018, a related verified shareholder derivative complaint was filed in the U.S. District Court for the Middle District of Georgia by Stephen Goldberger, derivatively on behalf of the company (the “Goldberger complaint” and together with the Wrigley complaint, the “federal derivative complaints”), against the same current and former directors and officers of the company. The federal derivative complaints allege, among other things, breaches of fiduciary duties and violations of federal securities laws relating to the company’s labor practices, and seek unspecified damages, disgorgement, and other relief. On June 27, 2018, these federal derivative actions were consolidated and stayed until the earlier of (1) an order from the court on any summary judgment motions that may be filed in the consolidated federal securities action, or (2) notification that there has been a settlement reached in the consolidated federal securities action, or until otherwise agreed to by the parties.

On June 21, 2018, two verified shareholder derivative complaints were filed in the Superior Court of Thomas County, State of Georgia, by Margaret Cicchini Family Trust and Frank Garnier, separately, derivatively on behalf of the company (together, the “state derivative complaints”), against certain current and former directors and officers of the company. The state derivative complaints allege, among other things, breaches of fiduciary duties relating to the company’s labor practices, and seek unspecified damages, disgorgement, and other relief. On July 12, 2018, these state derivative actions were consolidated and stayed until the earlier of (1) an order from the court on any summary judgment motions that may be filed in the consolidated federal securities action, or (2) notification that there has been a settlement reached in the consolidated federal securities action, or until otherwise agreed to by the parties.

On September 26, 2019, the parties to the consolidated federal derivative action filed a Notice of Settlement in Principle and Joint Status Report. On September 30, 2019, the court entered an order staying all deadlines and proceedings, except those that are settlement-related, and ordered the parties to file the settlement documents no later than October 28, 2019. On October 28, 2019, the parties executed a stipulation of settlement, which the plaintiffs filed with the court along with a motion for preliminary approval of the settlement. The settlement terms include certain governance reforms, releases of the claims asserted against the defendants, and the payment by the company’s insurer of $1.3 million in attorneys’ fees, expenses, and service awards (the “Fee Award”) to the plaintiffs’ counsel. On February 26, 2020, the court granted judgment approving the consolidated federal derivative action settlement and Fee Award. The judgment became final on March 27, 2020. Pursuant to the stipulation of settlement, once the judgment dismissing the consolidated federal derivative action became final, the plaintiffs in the consolidated state derivative action voluntarily dismissed that action with prejudice on April 2, 2020. The Fee Award was recorded on the company’s Condensed Consolidated Balance Sheet as of December 28, 2019 as an other current asset due from the insurer and an other accrued liability due for the settlement in principle. Recording this transaction resulted in no impact to the company’s Condensed Consolidated Statements of Income because the expense for the settlement in principle was offset by the expected recovery from the insurer. At the satisfaction of all requirements under the Fee Award in early April 2020, the ‘Recovery from legal settlement in principle’ and ‘Accrued legal settlement’ amounts (both recorded on the Condensed Consolidated Balance Sheets) were de-recognized on the company’s Condensed Consolidated Balance Sheets.

See Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the company’s commitments.

15. EARNINGS PER SHARE

The following is a reconciliation of net income and weighted average shares for calculating basic and diluted earnings per common share for the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019, respectively (amounts and shares in thousands, except per share data):

	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Net income	$	57,919	$	53,095	$	52,147	$	118,961
Basic Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		211,780		211,685		211,766		211,517
Basic earnings per common share	$	0.27	$	0.25	$	0.25	$	0.56
Diluted Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		211,780		211,685		211,766		211,517
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock		504		272		426		407
Diluted weighted average shares outstanding for common stock		212,284		211,957		212,192		211,924
Diluted earnings per common share	$	0.27	$	0.25	$	0.25	$	0.56

There were no anti-dilutive shares and 334,820 anti-dilutive shares during the twelve and twenty-eight weeks ended July 11, 2020, respectively, and there were 54,360 and 65,390 anti-dilutive shares during the twelve and twenty-eight weeks ended July 13, 2019, respectively.

16. STOCK-BASED COMPENSATION

On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards to provide our officers, key employees, and non-employee directors’ incentives and rewards for performance. Equity awards granted after May 21, 2014 are governed by the Omnibus Plan. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares.

The following is a summary of restricted stock and deferred stock outstanding under the Omnibus Plan described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below. The company typically grants awards at the beginning of its fiscal year. Information on grants to employees during fiscal 2020 is discussed below.

Performance-Contingent Restricted Stock Awards

Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)

Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of TSR Shares. The awards vest approximately three years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date the vesting conditions are satisfied. The total shareholder return (“TSR”) is the percent change in the company’s stock price over the measurement period plus the dividends paid to shareholders. The performance payout is calculated at the end of each of the last four quarters (averaged) in the measurement period. Once the TSR is determined for the company (“Company TSR”), it is compared to the TSR of our food company peers (“Peer Group TSR”). The Company TSR compared to the Peer Group TSR will determine the payout as set forth below:

Percentile	Payout as % of Target
90th		200	%
70th		150	%
50th		100	%
30th		50	%
Below 30th		0	%

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, vested at 153% of target. No awards vested during the twenty-eight weeks ended July 11, 2020.

The TSR shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the TSR shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) TSR from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ TSR. The inputs are based on historical capital market data.

On May 23, 2019, the company’s CEO received an award of TSR Shares that brings his total grant equal to the CEO’s target award (“promotion award”). This grant is measured under the same guidelines as the December 30, 2018 grant of TSR Shares described above. The company’s former CEO forfeited 112,840 TSR shares at his retirement on May 23, 2019.

The following performance-contingent TSR Shares have been granted under the Omnibus Plan and have service period remaining (amounts in thousands, except price data):

Grant Date	Shares Granted		Vesting Date	Fair Value per Share
12/30/2018		440	3/1/2022	$	21.58
5/23/2019		11	3/1/2022	$	27.23
7/14/2019		5	3/1/2022	$	23.32
10/6/2019		2	3/1/2022	$	22.52
12/29/2019		331	2/28/2023	$	25.00
4/19/2020		8	2/28/2023	$	23.14

Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)

Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of ROIC Shares. The awards generally vest approximately three years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date, the vesting conditions are satisfied. Return on Invested Capital (“ROIC”) is calculated by dividing our profit, as defined, by the invested capital. Generally, the performance condition requires the company’s average ROIC to exceed its average weighted cost of capital (“WACC”) by between 1.75 to 4.75 percentage points (the “ROI Target”) over the three fiscal year performance period. If the lowest ROI Target is not met, the awards are forfeited. The ROIC Shares can be earned based on a range from 0% to 125% of target as defined below:

•

ROIC above WACC by less than 1.75 percentage points pays 0% of ROI Target;

•

ROIC above WACC by 1.75 percentage points pays 50% of ROI Target;

•

ROIC above WACC by 3.75 percentage points pays 100% of ROI Target; or

•

ROIC above WACC by 4.75 percentage points pays 125% of ROI Target.

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, actual attainment was 75% of ROI Target. No awards vested during the twenty-eight weeks ended July 11, 2020.

The ROIC Shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of ROIC Shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the ROIC Shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. Since these awards have a performance condition feature, the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. The 2019 award is being expensed at 100% of ROI Target.

On May 23, 2019, the company’s CEO received a promotion award of ROIC Shares. This grant is measured under the same guidelines as the December 30, 2018 grant of ROIC Shares described above. The company’s former CEO forfeited 112,840 ROIC shares at his retirement on May 23, 2019.

The following performance-contingent ROIC Shares have been granted under the Omnibus Plan and have service period remaining (amounts in thousands, except price data):

Grant Date	Shares Granted		Vesting Date	Fair Value per Share
12/30/2018		440	3/1/2022	$	18.29
5/23/2019		11	3/1/2022	$	23.08
7/14/2019		5	3/1/2022	$	23.32
10/6/2019		2	3/1/2022	$	22.52
12/29/2019		331	2/28/2023	$	21.74
4/19/2020		8	2/28/2023	$	23.14

Performance-Contingent Restricted Stock Summary

The table below presents the TSR modifier share adjustment, ROIC modifier share adjustment, accumulated dividends on vested shares, and the tax benefit/(expense) at vesting of the performance-contingent restricted stock awards (amounts in thousands, except share data).

Award Granted

Fiscal Year

Vested

TSR Modifier

Increase

ROIC Modifier

Decrease

Dividends at

Vesting

(thousands)

Tax

Benefit

Fair Value at

Vesting

2017

2019

205,686

(97,131

)

1,219

936

18,570

Performance-Contingent Restricted Stock

The company’s performance-contingent restricted stock activity for the twenty-eight weeks ended July 11, 2020 is presented below (amounts in thousands, except price data):

	Shares			Weighted Average Grant Date Fair Value
Nonvested shares at December 28, 2019		662		$	20.16
Initial grant at target		678		$	23.34
Vested		—		$	—
Forfeited		(72	)	$	20.69
Nonvested shares at July 11, 2020		1,268		$	21.82

As of July 11, 2020, there was $19.0 million of total unrecognized compensation cost related to nonvested restricted stock granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 2.31 years. The total intrinsic value of shares vested during the twenty-eight weeks ended July 13, 2019 was $18.6 million. There were no shares that vested during the twelve and twenty-eight weeks ended July 11, 2020.

Time-Based Restricted Stock Units

Certain key employees have been granted time-based restricted stock units (“TBRSU Shares”). The executive officers of the company did not receive any TBRSU Shares. These awards vest on January 5th each year in equal installments over a three-year period beginning in fiscal 2020. Dividends earned on shares will be held by the company during the vesting period and paid in cash when the awards vest and shares are distributed.

On May 23, 2019, the company’s CEO was granted TBRSU Shares of approximately $1.0 million pursuant to the Omnibus Plan. This award will vest 100% on the fourth anniversary of the date of grant provided the CEO remains employed by the company during this period. Vesting will also occur in the event of the CEO’s death or disability, but not his retirement if prior to the fourth anniversary of the grant date. Dividends will accrue on the award and will be paid to the CEO on the vesting date for all shares that vest. There were 43,330 shares issued for this award at a fair value of $23.08 per share.

The following TBRSU Shares have been granted under the Omnibus Plan and have service periods remaining (amounts in thousands, except price data):

Grant Date	Shares Granted		Vesting Date	Fair Value per Share
12/30/2018		244	Equally over 3 years	$	18.29
5/23/2019		43	5/23/2023	$	23.08
12/29/2019		219	Equally over 3 years	$	21.74

The TBRSU Shares activity for the twenty-eight weeks ended July 11, 2020 is set forth below (amounts in thousands, except price data):

	TBRSU Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized Compensation Cost
Nonvested shares at December 28, 2019		270		$	19.06
Vested		(74	)	$	18.29
Granted		219		$	21.74
Forfeitures		(16	)	$	20.20
Nonvested shares at July 11, 2020		399		$	20.63		2.23	$	6,425

The table below presents the accumulated dividends on vested shares and the tax benefit/(expense) at vesting of the time-based restricted stock units (amounts in thousands).

Award Granted

Fiscal Year

Vested

Dividends at

Vesting

(thousands)

Tax

Benefit

Fair Value at

Vesting

2019

2020

1,584

Deferred Stock

Non-employee directors may convert their annual board retainers into deferred stock equal in value to 100% of the cash payments directors would otherwise receive and the vesting period is a one-year period to match the period that cash would have been received if no conversion existed. Accumulated dividends are paid upon delivery of the shares. During fiscal 2020, non-employee directors elected to receive, and were granted, an aggregate grant of 2,299 common shares for board retainer deferrals pursuant to the Omnibus Plan. During the first quarter of fiscal 2020, 2,707 common shares were vested and deferred. A total of 4,660 common shares that were previously vested and deferred were issued for board retainer deferrals.

Non-employee directors also receive annual grants of deferred stock. This deferred stock vests one year from the grant date. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one-year minimum vesting period. During fiscal 2019, non-employee directors received an aggregate of 46,240 shares, of which 17,340 shares were deferred, for their annual grant pursuant to the Omnibus Plan that vested during the twelve weeks ended July 11, 2020. During fiscal 2020, non-employee directors received 39,900 shares for their annual grant pursuant to the Omnibus Plan. During the twenty-eight weeks ended July 11, 2020, non-employee directors received 15,979 shares of previously deferred annual grant awards.

The deferred stock activity for the twenty-eight weeks ended July 11, 2020 is set forth below (amounts in thousands, except price data):

	Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized compensation cost
Nonvested shares at December 28, 2019		49		$	22.31
Vested		(49	)	$	22.31
Granted		42		$	22.76
Nonvested shares at July 11, 2020		42		$	22.76		0.85	$	805

Stock-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock-based compensation expense for the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019, respectively (amounts in thousands):

	For the Twelve Weeks Ended
	July 11, 2020		July 13, 2019
Performance-contingent restricted stock awards	$	1,985	$	508
TBRSU Shares		703		354
Deferred and restricted stock		254		270
Total stock-based compensation	$	2,942	$	1,132

	For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019
Performance-contingent restricted stock awards	$	4,599	$	2,865
TBRSU Shares		1,650		802
Deferred and restricted stock		587		644
Total stock-based compensation	$	6,836	$	4,311

17. POSTRETIREMENT PLANS

The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at July 11, 2020 compared to accounts at December 28, 2019 (amounts in thousands):

	July 11, 2020		December 28, 2019
Current liability	$	926	$	29,380
Noncurrent liability	$	14,280	$	14,328
Accumulated other comprehensive loss, net of tax	$	4,060	$	107,678

Defined Benefit Plans and Nonqualified Plan

On September 28, 2018, the Board of Directors approved a resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1 (“Plan No. 1”), effective December 31, 2018. During the third quarter of fiscal 2019, the company offered Plan No. 1 participants the option to receive an annuity purchased from an insurance carrier or a lump sum cash payment. During the first quarter of fiscal 2020, the company transferred $6.4 million in cash to Plan No. 1 to ensure that sufficient assets were available for the lump sum payments and annuity purchases. This was made up of a $1.4 million cash contribution and an unsecured, short-term, interest-free loan to Plan No. 1 of $5.0 million which has been fully reserved for and is expected to be unwound, at which time it will be converted to a contribution, by the end of the third quarter of fiscal 2020. Additionally, the company completed the transfer of all lump sum payments and transferred all remaining benefit obligations related to Plan No. 1 to a highly rated insurance company on March 4, 2020 in order to purchase a group annuity contract which began paying plan benefits on May 1, 2020. The company recognized $116.2 million of non-cash pension termination charges, made up of a settlement charge of $111.9 million and a curtailment loss of $4.3 million, in our Condensed Consolidated Statements of Income during the first quarter of fiscal 2020. The company recognizes settlement accounting charges in years when lump sums paid during that year exceed the sum of the plan’s service and interest costs. Settlement accounting accelerates recognition of a plan’s unrecognized net gain or loss. There were no settlement charges recorded during the twenty-eight weeks ended July 13, 2019.

The company continues to sponsor two remaining pension plans, the Flowers Foods, Inc. Retirement Plan No. 2 (“Plan No. 2), and the Tasty Baking Company Supplemental Executive Retirement Plan (“Tasty SERP”). The Tasty SERP is frozen and has only retirees and beneficiaries remaining in the plan.

The company used a measurement date of December 31, 2019 for the defined benefit and postretirement benefit plans described below.

The company contributed $1.4 million during our first quarter of fiscal 2020 to Plan No. 1 in connection with the termination of Plan No. 1, as described above. There were no contributions made by the company to any plan during the first or second quarter of fiscal 2019. We expect to contribute $2.5 million during the third quarter of fiscal 2020 to Plan No. 2.

Additionally, in March 2020, the company provided a short-term, interest-free loan to Plan No. 1 of $5.0 million. The loan has been fully reserved for and is expected to be unwound, at which time it will be converted to a contribution, by the end of the third quarter of fiscal 2020. There was no net impact to either the Condensed Consolidated Balance Sheet or Condensed Consolidated Statements of Income on July 11, 2020 as a result of the interest-free loan. This loan provides Plan No. 1 with incremental liquidity to pay ongoing benefits and administrative costs. The entire principal amount of this loan is due by December 31, 2020. The loan is unsecured, and the company has no recourse against Plan No. 1 to demand prepayment.

The net periodic pension cost for the company’s plans include the following components (amounts in thousands):

	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			July 11, 2020			July 13, 2019
Service cost	$	197		$	163		$	462		$	378
Interest cost		228			2,752			1,651			6,425
Expected return on plan assets		(415	)		(3,957	)		(3,104	)		(9,233	)
Settlement and curtailment loss		—			—			116,207			—
Amortization of prior service cost		13			89			88			208
Amortization of net loss		126			1,638			1,493			3,822
Total net periodic pension cost	$	149		$	685		$	116,797		$	1,600

The components of net periodic benefit cost other than the service cost are included in the other components of net periodic pension and postretirement benefits expense line item on our Condensed Consolidated Statements of Income.

Postretirement Benefit Plan

The company provides certain medical and life insurance benefits for eligible retired employees covered under the active medical plans. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at various premium levels. Eligibility and maximum period of coverage is based on age and length of service.

The net periodic postretirement expense for the company includes the following components (amounts in thousands):

	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			July 11, 2020			July 13, 2019
Service cost	$	65		$	65		$	152		$	153
Interest cost		46			69			106			160
Amortization of prior service credit		(1	)		(9	)		(2	)		(22	)
Amortization of net gain		(69	)		(63	)		(161	)		(149	)
Total net periodic postretirement cost	$	41		$	62		$	95		$	142

The components of net periodic postretirement benefits cost other than the service cost are included in the other components of net periodic pension and postretirement benefits expense line item on our Condensed Consolidated Statements of Income.

401(k) Retirement Savings Plan

The Flowers Foods, Inc. 401(k) Retirement Savings Plan (“401(k) plan”) covers substantially all the company’s employees who have completed certain service requirements. The total cost and employer contributions were as follows (amounts in thousands):

	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Total cost and employer contributions	$	6,593	$	6,370	$	15,222	$	14,873

18. INCOME TAXES

The company’s effective tax rate for twenty-eight weeks ended July 11, 2020 and July 13, 2019 was 24.0% and 23.3%, respectively. The increase in the rate was primarily due to reduced windfalls on stock-based compensation in the current year, and state tax credits recorded discretely in 2019. During the twenty-eight weeks ended July 11, 2020, the primary differences in the effective rate and the statutory rate were state income taxes.

During the twenty-eight weeks ended July 11, 2020, the company’s activity with respect to its uncertain tax positions and related interest expense accrual was not significant to the Condensed Consolidated Financial Statements. As of July 11, 2020, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

19. SUBSEQUENT EVENTS

The company has evaluated subsequent events since July 11, 2020, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements other than the item discussed below.

On July 17, 2020, the company implemented organizational structure changes designed to increase focus on brand growth, product innovation, and improving our cake business. Actions taken include consolidating of the company’s Fresh Packaged Bread business unit and Specialty/Snacking business unit into a single function responsible for all brands, establishing a stand-alone innovation function, creating a new position to focus exclusively on improving cake plant operations, and repositioning the foodservice business from the Snacking/Specialty BU to the sales function.

The company has eliminated approximately 250 positions across different departments and job levels to better balance the resources required to support the company’s business. A few eliminated positions were included in a VSIP that resulted in the recognition of $1.3 million of expenses during the second quarter of fiscal 2020. The remaining eliminated positions are a reduction in force that will be recognized in the company’s third quarter of fiscal 2020 and is expected to be between approximately $6.8 million and $7.2 million. We anticipate additional costs as the new structure is implemented but, the additional costs cannot be reasonably estimated at this time.

The company anticipates remaining a single operating segment for financial reporting purposes as we move to the new organization structure.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the company as of and for the twelve and twenty-eight weeks ended July 11, 2020 should be read in conjunction with the Form 10-K, Part II, Item 1A., Risk Factors, of the First Quarter Form 10-Q, and Part II, Item 1A., Risk Factors, of this Form 10-Q.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is segregated into four sections, including:

•

Executive overview — provides a summary of our business, operating performance and cash flows, and strategic initiatives.

•

Critical accounting estimates — describes the accounting areas where management makes critical estimates to report our financial condition and results of operations. There have been no changes to this section from the Form 10-K.

•

Results of operations — an analysis of the company’s consolidated results of operations for the two comparative periods presented in our Condensed Consolidated Financial Statements.

•

Liquidity and capital resources — an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

Matters Affecting Comparability

•

COVID-19 – On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide, which has led to adverse impacts on the United States (“U.S.”) and global economies. Due to the drastic shift in consumer buying patterns as a result of the COVID-19 pandemic, we have experienced significant demand for our branded retail products resulting in significant sales increases and growth in income from operations during the twelve and twenty-eight weeks ended July 11, 2020 compared to the same period in the prior year. For additional details on the impact of the COVID-19 pandemic to our business operations and results of operations, see the “Executive Overview – Impact of COVID-19 on Our Business,” “Results of Operations” and “Liquidity and Capital Resources” sections below.

•

Conversion of our Lynchburg, Virginia bakery to organic production — During the first quarter of fiscal 2020, we began the conversion our Lynchburg, Virginia bakery to an all-organic production facility. Upon completion, the converted facility is expected to increase production capacity of our Dave’s Killer Bread (“DKB”) products, allowing the company to better serve east coast markets with fresher product and reduce distribution costs. We incurred start-up costs related to the conversion of approximately $1.5 million and $3.2 million for the twelve and twenty-eight weeks ended July 11, 2020, respectively, and these costs are included in materials, supplies, labor and other production costs in our Condensed Consolidated Statements of Income. We anticipate incurring additional start-up costs of approximately $1.5 million to $2.0 million and expect the bakery will resume production in the third quarter of fiscal 2020.

•

Product recall – On July 9, 2019, we issued a voluntary product recall for certain hamburger and hot dog buns and other bakery products due to the potential presence of small pieces of hard plastic that may have been introduced during production. The products recalled were distributed to retail customers under a variety of brand names in 18 states. We incurred costs related to lost production time, scrapped inventory, and product removal, among other costs, of approximately $0.5 million during the second quarter of fiscal 2019.

•

Canyon acquisition — On December 14, 2018, we completed the acquisition of Canyon, a leading gluten-free bread baker. Prior to the acquisition, Canyon’s products were distributed frozen through natural, specialty, grocery, and mass retailers around the country and we expect to continue this distribution model in the future. In addition to frozen distribution, we began distributing Canyon branded products fresh via our direct-store-delivery (“DSD") distribution system during the first quarter of fiscal 2019. A contingent consideration payment of $5.0 million was paid during the first quarter of fiscal 2020 to the sellers based on the achievement of certain sales objectives by the Canyon business in fiscal 2019.

Additionally, detailed below are expense (recovery) items affecting comparability that will provide additional context while reading this discussion:

	For the Twelve Weeks Ended					For the Twenty-Eight Weeks Ended					Footnote
	July 11, 2020		July 13, 2019			July 11, 2020		July 13, 2019			Disclosure
	(Amounts in thousands)					(Amounts in thousands)
Project Centennial consulting costs	$	5,584	$	—		$	8,976	$	—		Note 3
Restructuring and related impairment charges		10,535		2,047			10,535		2,765		Note 3
Recovery on inferior ingredients		—		—			—		(413	)	Note 1
Canyon acquisition costs		—		—			—		22
Legal settlements (recovery)		—		(1,286	)		3,220		(1,136	)	Note 14
Executive retirement agreement		—		(568	)		—		763
Pension plan settlement and curtailment loss		—		—			116,207		—		Note 17
Other pension plan termination costs		—		—			133		—
	$	16,119	$	193		$	139,071	$	2,001

•

Project Centennial consulting costs — During the second quarter of fiscal 2016, we launched Project Centennial, an enterprise-wide business and operational review. Key milestones and initiatives of this multi-year project are outlined in the “Executive Overview” section below. Consulting costs associated with the project during the twelve and twenty-eight weeks ended July 11, 2020 were $5.6 million and $9.0 million, respectively, and are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect these costs to be approximately $5.5 million to $6.5 million for the remainder of fiscal 2020. There were no consulting costs associated with the project during the twenty-eight weeks ended July 13, 2019.

•

Restructuring and related impairment charges – The following table details restructuring charges recorded during the twelve and twenty-eight weeks ended July 11, 2020 and July 13, 2019 (amounts in thousands):

	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Employee termination benefits and other cash charges	$	1,265	$	796	$	1,265	$	984
Property, plant and equipment impairments		4,634		1,251		4,634		1,781
Trademark impairments		4,636		—		4,636		—
Total restructuring and related impairment charges	$	10,535	$	2,047	$	10,535	$	2,765

The company continues to evaluate its organizational structure in an effort to increase its focus on brand growth and product innovation and improve its cake operations, as discussed further in the “Project Centennial” section below. The organizational structure changes resulted in $1.3 million of employee termination benefits charges related to a voluntary employee separation plan (the “VSIP”) in the second quarter of fiscal 2020. Additionally, early in the third quarter of fiscal 2020, the company announced and recognized charges related to an involuntary reduction-in-force plan of approximately $6.8 million to $7.2 million. The VSIP and reduction-in-force plans together eliminated approximately 250 positions across different departments and job levels and the related payments are anticipated to be made by the end of fiscal 2020.

Also, during the second quarter of fiscal 2020, the company entered into a contract to sell three closed bakeries currently included in assets held for sale and certain idle equipment at other bakeries, resulting in the recognition of $4.6 million of impairment charges. The sale is anticipated to be completed during the third quarter of fiscal 2020. Additionally, in order to optimize sales and production of our organic products, the company has decided to cease using the Alpine Valley brand, a finite-lived trademark, resulting in a $4.6 million impairment charge in the second quarter of fiscal 2020.

In the prior year, restructuring charges primarily consisted of asset impairments related to a closed bakery included in assets held for sale, manufacturing line closures, and severance and employee relocation costs. We continue to explore additional opportunities to streamline our core operations, but as of July 11, 2020 we are unable to estimate the expected costs to be incurred for this initiative.

•

Recovery on inferior ingredients – Beginning in the second quarter of fiscal 2018 and continuing through the fourth quarter of fiscal 2019, we recognized identifiable and measurable costs associated with receiving inferior ingredients. During the twelve and twenty-eight weeks ended July 13, 2019, we recognized $0.1 million and $1.4 million, respectively, for these costs and received reimbursements of previously incurred costs in the amount of $0.1 million and $1.8 million, respectively. No losses or recoveries of inferior ingredients were incurred or received during the twelve and twenty-eight weeks ended July 11, 2020. We continue to seek recovery of all losses through appropriate means.

•

Legal settlements – Through the second quarters of fiscal 2020 and 2019, we reached agreements to settle distributor-related litigation, including plaintiffs’ attorney fees, in the aggregate amount of $3.2 million and $0.15 million, respectively. Additionally, during the second quarter of fiscal 2019, we recorded a benefit of $1.3 million related to an adjustment of a prior year settlement based on the final amount paid. These amounts are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

•

Executive retirement agreement – On February 15, 2019, Allen Shiver, president and chief executive officer of the company and a member of the Board of Directors, notified the company he would be retiring from these positions effective May 23, 2019. In connection with Mr. Shiver’s retirement, the company and Mr. Shiver entered into a retirement agreement and general release, and as part of the agreement, Mr. Shiver was paid $1.3 million upon his retirement, which was expensed in the first quarter of fiscal 2019. Additionally, upon his retirement in the second quarter of fiscal 2019, we recognized a benefit of $0.6 million related to the forfeiture of his unvested long-term incentive stock awards. These amounts are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

•

Pension plan termination – On September 28, 2018, the Board of Directors approved a resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1 (“Plan No. 1”), effective December 31, 2018. During the third quarter of fiscal 2019, the company offered Plan No. 1 participants the option to receive an annuity purchased from an insurance carrier or a lump sum cash payment. During the first quarter of fiscal 2020, the company transferred $6.4 million in cash to Plan No. 1 to ensure that sufficient assets were available for the lump sum payments and annuity purchases. Of this amount, $1.4 million was a cash contribution and $5.0 million is a loan to Plan No. 1 which has been fully reserved for and is expected to be unwound by the end of the third quarter of fiscal 2020. Additionally, the company completed the transfer of all lump sum payments and transferred all remaining benefit obligations related to Plan No. 1 to a highly rated insurance company in order to purchase a group annuity contract which began paying pension plan benefits May 1, 2020. The company recognized $116.2 million of non-cash pension termination charges, comprised of a settlement charge of $111.9 million and a curtailment loss of $4.3 million, and an additional $0.1 million of cash charges for other pension termination costs in our Condensed Consolidated Statements of Income during the first quarter of fiscal 2020. As of March 20, 2020, Plan No. 1 has been terminated and reflects no unfunded liability. No settlement charges were recorded in the first half of fiscal 2019.

Executive Overview

Business

Flowers is the second-largest producer and marketer of packaged bakery foods in the U.S. We operate in the highly competitive fresh bakery market and our product offerings include fresh breads, buns, rolls, snack cakes and tortillas, as well as frozen breads and rolls. We are focused on opportunities for growth within the grain-based foods category and seek to have our products available wherever bakery foods are consumed or sold — whether in homes, restaurants, fast food outlets, institutions, supermarkets, convenience stores, or vending machines. We manage our business as one operating segment.

Highlights

•

Major brands include Nature’s Own, DKB, Wonder, Canyon Bakehouse, Mrs. Freshley’s, and Tastykake.

•

Nature’s Own, including Whitewheat, is the best-selling loaf bread in the U.S., DKB is the #1 selling organic brand in the U.S., and Canyon Bakehouse is the #1 selling gluten-free bread brand in the U.S. (Source: IRI Total US MultiOutlet+C-Store L52 Weeks Ending 7/12/20)

•

Retail sales comprised 80.6% of total sales for the first half of fiscal 2020 and non-retail and other sales comprised 19.4%.

•

We operate 46 bakeries, which produce fresh and frozen breads and rolls, as well as snack cakes and tortillas.

•

We utilize a DSD distribution model for fresh bakery foods, whereby product is sold primarily by a network of independent distributors to retail and foodservice customers with access to more than 85% of the U.S. population.

•

Nationwide distribution of certain fresh snack cakes and frozen breads and rolls via contract carriers.

Impact of COVID-19 on Our Business

The COVID-19 pandemic has significantly impacted our business operations and results of operations during the first half of fiscal 2020, as further described under “Results of Operations” and “Liquidity and Capital Resources” below. The resulting dramatic changes in consumer buying patterns has led to an overwhelming increase in demand for our retail products and substantial growth in income from operations. Sales through our non-retail category, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, have declined significantly during the pandemic. The volume losses in the non-retail category exceeded the volume gains in the retail category.

Additionally, in recognition and support of our frontline workers, we paid $6.2 million in one-time bonuses to eligible hourly and non-exempt employees, leased labor, and contract workers during the first quarter of fiscal 2020. These appreciation bonuses are in addition to the company’s annual bonus program, in which all Flowers employees participate.

On April 14, 2020, we temporarily ceased production at our Tucker, Georgia bakery and on July 9, 2020, we temporarily ceased production at our Savannah, Georgia bakery. Both closures were due to an increase in the number of confirmed COVID-19 cases at these bakeries and an increase in number of workers self-quarantining. Production resumed at the Tucker bakery on April 27, 2020 and at the Savannah Bakery on July 17, 2020. While our other bakeries were able to assist with meeting production needs, the closure of several of our bakeries across the country at one time or in close succession could negatively impact our ability to meet our production requirements.

While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will continue to be impacted by decreases in foodservice and other non-retail outlets sales. Foodservice sales are likely to remain under pressure until the restaurant industry returns to more normal operations. We cannot predict the timing and speed of the foodservice industry recovery, and any delay in the recovery could significantly impact our future results. We continue to actively monitor the collectability of our trade accounts receivables, including our foodservice customers in particular, and recorded additional bad debt allowances of $2.7 million in the first quarter of fiscal 2020. Future losses may be realized if more customers are forced into financial distress or bankruptcy and cannot pay us or their other suppliers on a timely basis or at all.

We continue to actively monitor the global outbreak and spread of COVID-19 and are taking steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We are focused on navigating these challenges presented by the COVID-19 global pandemic through the implementation of additional procedures at each of our locations to comply with U.S. Centers for Disease Control and Prevention (CDC) suggestions. These procedures and actions include, but are not limited to, monitoring the symptoms of employees as shifts start, using personal protective equipment, maintaining (where possible) six feet of distancing, and other considerations. Certain non-production employees have also been working remotely to mitigate contact between personnel. A non-essential travel and visitors ban was also implemented as a way to reduce potential exposure. We are considering the options available to us under the Families First Coronavirus Response Act (“FFCRA Act”) and Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) and, as of the beginning of the second quarter of fiscal 2020, we began taking advantage of deferrals of certain payroll tax payments in accordance with the CARES Act. In addition, we continue to evaluate the impact of certain tax credits that are available under these Acts. We have also taken advantage of the deferral of Federal income tax payments made available under an emergency declaration on March 13, 2020. Although we anticipate both sales and income from operations to normalize over time, we cannot currently estimate when this will occur. The evolving COVID-19 pandemic could continue to impact our results of operations and liquidity; the operations of our suppliers, vendors, and customers; and our employees as a result of health concerns, quarantines, facility closures, and travel and logistics restrictions.

Summary of Operating Results, Cash Flows and Financial Condition

Sales increased 5.1% for the twelve weeks ended July 11, 2020 compared to the same quarter in the prior year primarily due to a significant rise in demand for our branded retail products due to the COVID-19 pandemic causing a positive shift in mix. Additionally, decreased promotional activity and decreased product returns in the current quarter contributed to the increase. Considerable volume declines in non-retail sales caused by the pandemic and decreased volume for store branded retail products partially offset the increase.

For the twenty-eight weeks ended July 11, 2020, sales increased 6.1% compared to the same period in the prior year primarily due to a positive shift in mix resulting from a significant demand for our branded retail products combined with reduced promotional activity and fewer product returns. Partially offsetting the increase were substantial declines in our non-retail sales which have been negatively impacted by lower foodservice sales due to restaurant closings or limited capacity restrictions experienced by these customers during the ongoing pandemic.

Net income for the twelve weeks ended July 11, 2020 increased 9.1% primarily due to increased sales as a result of the COVID-19 pandemic combined with lower ingredient and packaging costs, partially offset by higher restructuring and related impairment charges, Project Centennial consulting costs, and employee incentive costs and increased marketing investments in the current quarter.

Net income was $52.1 million for the twenty-eight weeks ended July 11, 2020, a decrease of 56.2% as compared to the same period in the prior year, primarily due to recognizing non-cash pension plan termination costs of $116.2 million in connection with the termination of Plan No. 1, partially offset by significant sales increases, largely resulting from the COVID-19 pandemic and decreased ingredient and packaging costs. Increased employee compensation costs, including appreciation bonuses paid to frontline workers, restructuring and related impairment charges, legal settlements, and consulting costs, combined with start-up costs for the Lynchburg, Virginia bakery conversion, also contributed to the decrease in net income year over year.

During the twenty-eight weeks ended July 11, 2020, we generated net cash flows from operations of $275.8 million and invested $46.6 million in capital expenditures. Additionally, we paid $82.6 million in dividends to our shareholders and increased our total indebtedness by $142.5 million. During the first quarter of fiscal 2020, we borrowed an additional $200.0 million under our senior unsecured revolving credit facility (the “credit facility”). Although we do not have any presently anticipated need for this additional liquidity, we decided to borrow this additional amount to ensure future liquidity given the significant impact on global financial markets and economies as a result of the COVID-19 outbreak. During the second quarter of fiscal 2020, the company made net debt repayments of $61.3 million. During the twenty-eight weeks ended July 13, 2019, we generated net cash flows from operations of $208.1 million, invested $47.4 million in capital expenditures, paid $79.6 million in dividends to our shareholders and reduced our total indebtedness by $86.8 million.

Project Centennial - Strategic Initiatives and Update on Progress

In June of 2016, the company launched Project Centennial, an enterprise-wide business and operational review to evaluate opportunities to streamline our operations, drive efficiencies, and invest in strategic capabilities that we believe will strengthen our competitive position and help us achieve our long-term objectives to build value for our shareholders. The company has been executing on the following strategic priorities with a focus on targeting the optimal portfolio to promote margin accretive growth and tailoring the network and resources required to support and grow the portfolio going forward:

•

Reinvigorate core business. Focus on national brands, streamline the product assortment, align brands to consumers, invest in brand growth and innovation, and support independent distributor partners (“IDPs”).

•

Reduce costs to fuel growth. Prioritize margins, simplify and streamline our operating model, optimize product portfolio and supply chain network, and better leverage our national footprint.

•

Capitalize on adjacencies. Make smart acquisitions in the baked foods category in growing bakery segments and underdeveloped geographic areas.

•

Invest in capabilities and growth. Develop the team by adding critical capabilities to build brands, manage costs, and deliver insights.

In fiscal 2020, the company:

•

Further refined its organizational structure to better align with our strategic priority to be brands-focused by consolidating the existing two business units - Fresh Packaged Bread and Snacking/Specialty – into a single function.

•

Established the role of chief brand officer who is responsible for managing all Flowers’ brands, as well as its revenue management, shopper marketing, and brand partnership programs.

•

Named a president of cake operations who will focus exclusively on improving profitability of cake operations.

•

Continued to streamline our brand assortment in key retail categories.

•

Augmented sales growth with new product introductions of Nature’s Own Brioche style buns, and DKB hamburger buns.

•

Began converting its Lynchburg, Virginia facility to organic production to support growing sales of organic products and lower transportation costs.

•

Made enhancements to our digital marketing strategy to capture e-commerce benefits as consumers move to more online shopping.

•

Updated its incentive compensation framework to continue recruitment and development of our executive team.

•

Announced a VSIP and a reduction-in-force plan as part of its effort to restructure and streamline operations.

In the second half of fiscal 2020, the company is targeting savings in the range of $10 million to $20 million driven by ongoing optimization initiatives in its procurement, distribution, operations, and administrative functions. Currently, the company does not expect COVID-19 to materially impact the conversion of the Lynchburg bakery or the foregoing optimization initiatives.

CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with GAAP. These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Please see the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K except as disclosed in Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q, which details recently adopted accounting pronouncements and accounting pronouncements not yet adopted.

RESULTS OF OPERATIONS:

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve weeks ended July 11, 2020 and July 13, 2019, respectively, are set forth below (dollars in thousands):

	For the Twelve Weeks Ended
						Percentage of Sales					Increase (Decrease)
	July 11, 2020			July 13, 2019		July 11, 2020			July 13, 2019		Dollars			%
Sales	$	1,025,861		$	975,759		100.0			100.0	$	50,102			5.1
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		506,033			508,552		49.3			52.1		(2,519	)		(0.5	)
Selling, distribution and administrative expenses		396,904			359,497		38.7			36.8		37,407			10.4
Restructuring and related impairment charges		10,535			2,047		1.0			0.2		8,488		NM
Depreciation and amortization		33,180			33,329		3.2			3.4		(149	)		(0.4	)
Income from operations		79,209			72,334		7.7			7.4		6,875			9.5
Other components of net periodic pension and postretirement benefits (credit) expense		(72	)		519		(0.0	)		0.1		(591	)	NM
Interest expense, net		2,869			2,769		0.3			0.3		100			3.6
Income tax expense		18,493			15,951		1.8			1.6		2,542			15.9
Net income	$	57,919		$	53,095		5.6			5.4	$	4,824			9.1
Comprehensive income	$	55,277		$	65,527		5.4			6.7	$	(10,250	)		(15.6	)

NM	Not meaningful.

Percentages may not add due to rounding.

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twenty-eight weeks ended July 11, 2020 and July 13, 2019, respectively, are set forth below (dollars in thousands):

	For the Twenty-Eight Weeks Ended
						Percentage of Sales					Increase (Decrease)
	July 11, 2020		July 13, 2019			July 11, 2020		July 13, 2019			Dollars			%
Sales	$	2,375,305	$	2,239,654			100.0		100.0		$	135,651			6.1
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		1,176,906		1,160,693			49.5		51.8			16,213			1.4
Selling, distribution and administrative expenses		918,939		835,546			38.7		37.3			83,393			10.0
Restructuring and related impairment charges		10,535		2,765			0.4		0.1			7,770		NM
(Recovery) on inferior ingredients		—		(413	)		—		(0.0	)		413		NM
Depreciation and amortization		77,843		78,148			3.3		3.5			(305	)		(0.4	)
Income from operations		191,082		162,915			8.0		7.3			28,167			17.3
Other components of net periodic pension and postretirement benefits expense		71		1,211			0.0		0.1			(1,140	)	NM
Pension plan settlement loss		116,207		—			4.9		—			116,207		NM
Interest expense, net		6,183		6,593			0.3		0.3			(410	)		(6.2	)
Income tax expense		16,474		36,150			0.7		1.6			(19,676	)		(54.4	)
Net income	$	52,147	$	118,961			2.2		5.3		$	(66,814	)		(56.2	)
Comprehensive income	$	149,633	$	121,270			6.3		5.4		$	28,363			23.4

NM	Not meaningful.

Percentages may not add due to rounding.

TWELVE WEEKS ENDED JULY 11, 2020 COMPARED TO TWELVE WEEKS ENDED JULY 13, 2019

Sales (dollars in thousands)

	For the Twelve Weeks Ended
					Percentage of Sales				Increase (Decrease)
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019		Dollars			%
Branded retail	$	689,481	$	585,886		67.2		60.0	$	103,595			17.7
Store branded retail		145,160		162,843		14.2		16.7		(17,683	)		(10.9	)
Non-retail and other		191,220		227,030		18.6		23.3		(35,810	)		(15.8	)
Total	$	1,025,861	$	975,759		100.0		100.0	$	50,102			5.1

(The table above presents certain sales by category that have been reclassified from amounts previously reported.)

The change in sales was generally attributable to the following:

Percentage Point Change in Sales Attributed to:
Pricing/mix	8.4
Volume	(3.3	)
Total percentage change in sales	5.1

Sales increases quarter over quarter were primarily due to a significant rise in demand for our branded retail products caused by the COVID-19 pandemic, which resulted in a positive shift in mix from non-retail and store-branded retail sales to branded retail sales. Reduced promotional activity and a reduction in product returns also contributed to the sales increase. Partially offsetting the increase were substantial volume declines in the non-retail and other sales category, most notably, foodservice sales. The pandemic has continued to disrupt business for most of our foodservice customers as restaurants were temporarily closed for a period of time during the current quarter. Although many of our foodservice customers have been able to reopen, they are subject to capacity restrictions and other limiting factors which has negatively impacted our sales to those customers. We expect these trends to continue while the pandemic is ongoing, although we expect the sales growth in branded retail to moderate as shopping patterns continue to return to normal.

Branded retail sales increased significantly due to the COVID-19 pandemic as discussed above. Sales of traditional loaf branded breads, led by our Nature’s Own and Wonder brands, and sales of DKB organic products contributed most significantly to the increase. Increased sales of branded cake and Canyon Bakehouse gluten-free products also contributed to the overall growth in branded retail sales. New product introductions during the second quarter, including Nature’s Own Brioche style hamburger buns and DKB hamburger buns, among others, also contributed to the sales growth. The decrease in store branded retail sales resulted from lost store branded breakfast bread business and volume declines for other store branded products as these sales have shifted to branded retail sales. As discussed above, significant volume losses drove the decrease in non-retail and other sales, with our foodservice customers experiencing the greatest declines.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)

	For the Twelve Weeks Ended				Increase
Line Item Component	July 11, 2020 % of Sales		July 13, 2019 % of Sales		(Decrease) as a % of Sales
Ingredients and packaging		27.0		29.3		(2.3	)
Workforce-related costs		14.5		15.0		(0.5	)
Other		7.8		7.8		—
Total		49.3		52.1		(2.8	)

Costs as a percent of sales were considerably lower quarter over quarter as the ongoing COVID-19 pandemic resulted in positive shifts in mix from non-retail and store-branded retail products to branded retail products. Partially offsetting the lower costs were $1.5 million of start-up costs incurred with the ongoing conversion of our Lynchburg, Virginia facility to an organic bakery and these costs were largely workforce-related. We currently anticipate the conversion to be complete during the third quarter of fiscal 2020. Ingredient and packaging costs were much lower as percent of sales due to the positive shift in mix and a reduction in product returns, both discussed above, combined with a decrease in production volumes quarter over quarter.

Selling, Distribution and Administrative Expenses (as a percent of sales)

	For the Twelve Weeks Ended				Increase
Line Item Component	July 11, 2020 % of Sales		July 13, 2019 % of Sales		(Decrease) as a % of Sales
Workforce-related costs		11.2		10.4		0.8
Distributor distribution fees		15.4		14.8		0.6
Other		12.1		11.6		0.5
Total		38.7		36.8		1.9

Higher employee incentive costs drove the increase in workforce-related costs as a percent of sales quarter over quarter. The increase in distributor distribution fees as a percent of sales was primarily driven by the shift in product mix, which resulted in a larger portion of our sales being made through IDPs. Consulting costs associated with Project Centennial and increased investments in marketing in the current quarter were partially offset by reduced transportation and travel and entertainment costs all of which are included in the Other line item in the table above. Project Centennial consulting costs were $5.6 million in the current quarter and we currently expect these costs to be approximately $5.5 million to $6.5 million for the remainder of fiscal 2020.

Restructuring and Related Impairment Charges

Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

Depreciation and Amortization Expense

Depreciation and amortization expense was relatively consistent quarter over quarter.

Income from Operations

Income from operations increased as a percent of sales for the twelve weeks ended July 11, 2020 compared to the twelve weeks ended July 13, 2019 largely due to significant sales increases from positive price/mix caused by the COVID-19 pandemic. Higher restructuring and related impairment charges in the current quarter, combined with higher selling, distribution and administrative expenses discussed above, partially offset the overall improvement in income from operations.

Net Interest Expense

Net interest expense for the current quarter was relatively consistent with the prior year quarter as a percent of sales.

Income Tax Expense

The effective tax rate for the twelve weeks ended July 11, 2020 was 24.2% compared to 23.1% in the prior year quarter. The increase in the rate quarter over quarter primarily resulted from recognizing a discrete tax benefit in the prior year quarter for state tax credits. This adjustment reduced our tax rate in the prior year quarter by 1.5%.

For the current quarter, the primary differences in the effective rate and the statutory rate were state income taxes. The CARES ACT did not have a material impact on the effective tax rate for the second quarter of fiscal 2020 and there is no anticipated material impact on the effective tax rate in future periods. The primary differences in the effective rate and statutory rate for the prior year quarter were state income taxes and state tax credits booked discretely.

As discussed above, we have also taken advantage of the deferral of Federal income tax payments made available under an emergency declaration issued on March 13, 2020.

Comprehensive Income

The decrease in comprehensive income quarter over quarter resulted primarily from changes in the fair value of derivatives, net of the increase net income.

TWENTY-EIGHT WEEKS ENDED JULY 11, 2020 COMPARED TO TWENTY-EIGHT WEEKS ENDED JULY 13, 2019

Sales (dollars in thousands)

	Twenty-Eight Weeks Ended
					Percentage of Sales				Increase (Decrease)
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019		Dollars			%
Branded retail	$	1,579,811	$	1,343,338		66.5		60.0	$	236,473			17.6
Store branded retail		335,352		353,896		14.1		15.8		(18,544	)		(5.2	)
Non-retail and other		460,142		542,420		19.4		24.2		(82,278	)		(15.2	)
Total	$	2,375,305	$	2,239,654		100.0		100.0	$	135,651			6.1

(The table above presents certain sales by category that have been reclassified from amounts previously reported.)

The change in sales was generally attributable to the following:

Percentage Point Change in Sales Attributed to:
Pricing/mix	7.2
Volume	(1.1	)
Total percentage change in sales	6.1

Sales increased significantly year over year primarily due to a significant rise in demand for our branded retail products caused by the ongoing COVID-19 pandemic, which resulted in a positive shift in mix from non-retail sales to branded retail sales. A reduction in product returns in the current year also positively impacted sales. Substantial volume declines for non-retail and other sales partially offset the overall increase. At the onset of the pandemic in the U.S., business was disrupted for most of our non-retail customers, most significantly foodservice customers, and many had to close or greatly reduce their operations. Although many of our foodservice customers have been able to reopen, they are subject to capacity restrictions and other limiting factors, which are continuing to negatively impact our non-retail sales. We expect these trends to continue while the pandemic is ongoing, although we expect the sales growth to continue to moderate as away-from-home dining returns to more normal levels.

Branded retail sales increased significantly due to the COVID-19 pandemic as discussed above. In order to quickly meet heightened customer and consumer demand for traditional branded loaf breads and buns at the start of the pandemic, we streamlined our product offerings and focused production on certain high-demand items. While panic-buying and stock-up shopping patterns appear to have subsided, the shift to at-home consumption remained elevated through the second quarter and continued to favorably impact sales of our traditional branded loaf breads and buns. Additionally, DKB organic breads, buns, and breakfast items, Canyon Bakehouse gluten-free products, and branded cake contributed to the overall growth in branded retail sales. The decrease in store branded retail sales resulted from lost store branded breakfast bread business in the second half of the prior year and volume declines for other store-branded products as consumers shifted to branded retail products. As discussed above, significant volume losses drove the decrease in non-retail and other sales, with our foodservice customers experiencing the greatest declines.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)

	For the Twenty-Eight Weeks Ended				Increase
Line item component	July 11, 2020 % of sales		July 13, 2019 % of sales		(Decrease) as a % of sales
Ingredients and packaging		27.1		29.2		(2.1	)
Workforce-related costs		14.8		15.0		(0.2	)
Other		7.6		7.6		—
Total		49.5		51.8		(2.3	)

Overall, costs were considerably lower year over year as a percent of sales as the COVID-19 pandemic resulted in positive shifts in mix from non-retail and store-branded retail products to branded retail products, as well as a reduction in product returns. Partially offsetting the lower costs were $4.1 million of appreciation bonuses paid to frontline workers and $3.2 million of start-up costs incurred with the ongoing conversion of our Lynchburg, Virginia plant to an organic bakery. We currently anticipate the conversion to be complete during the third quarter of fiscal 2020. Ingredient and packaging costs were significantly lower as percent of sales due to the positive shift in mix and decrease in product returns, both discussed above. Additionally, lower prices for organic and non-organic flour, bread bags, and corrugated packaging contributed to the improvement, partially offset by higher prices for yeast and mixes.

Selling, Distribution and Administrative Expenses (as a percent of sales)

	For the Twenty-Eight Weeks Ended				Increase
Line item component	July 11, 2020 % of sales		July 13, 2019 % of sales		(Decrease) as a % of sales
Workforce-related costs		11.3		10.8		0.5
Distributor distribution fees		15.4		14.8		0.6
Other		12.0		11.7		0.3
Total		38.7		37.3		1.4

Workforce-related costs were higher in the current year as a percent of sales compared to the prior year due to higher employee incentive costs, including $2.1 million of appreciation bonuses paid to frontline workers as a result of the COVID-19 pandemic. Distributor distribution fees increased considerably as a percent of sales due to the shift in sales mix, which resulted in a larger portion of our sales being made through IDPs. Consulting costs associated with Project Centennial in the current year and increased legal and marketing expenses were somewhat offset by reduced transportation and travel and entertainment costs, all of which are included in the Other line item in the table above. Project Centennial consulting costs were $9.0 million in the current year and we currently expect these costs to be approximately $5.5 million to $6.5 million for the remainder of fiscal 2020. Legal settlements recorded in the current year were $3.2 million as compared to a net benefit of $1.1 million in the prior year. See Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding legal settlements.

Restructuring and Related Impairment Charges and Recovery on Inferior Ingredients

Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

Depreciation and Amortization Expense

Depreciation and amortization expense was relatively consistent year over year.

Income from Operations

The growth in income from operations year over year as a percent of sales resulted largely from significant sales increases due to positive price/mix caused by the COVID-19 pandemic. Increased restructuring and related impairment charges in the current year as well as higher selling, distribution, and administrative expenses, as discussed above, partially offset the overall increase.

Pension Plan Settlement and Curtailment Loss

We recognized $116.2 million of non-cash pension plan termination charges in the first quarter of fiscal 2020 comprised of a settlement charge of $111.9 million and a curtailment loss of $4.3 million as discussed in the “Matter Affecting Comparability” section above.

Net Interest Expense

Net interest expense for the current year was relatively consistent with the prior year as a percent of sales.

Income Tax Expense

The effective tax rate for the twenty-eight weeks ended July 11, 2020 was 24.0% compared to 23.3% in the prior year. The increase in the rate year over year was primarily due to the reduced windfalls on the vesting of stock-based compensation awards in the current year, and state tax credits recorded discretely in the prior year.

For the current year, the primary differences in the effective rate and statutory rate were state income taxes. The CARES Act did not have a material impact on the effective tax rate for the first half of fiscal 2020 and there is no anticipated material impact on the effective tax rate in future periods. The primary differences in the effective rate and statutory rate for the prior year were state income taxes and windfalls on stock-based compensation.

As discussed above, we have also taken advantage of the deferral of Federal income tax payments made available under an emergency declaration issued on March 13, 2020.

Comprehensive Income

The increase in comprehensive income year over year resulted primarily from recognizing the pension settlement and curtailment loss in earnings in conjunction with the pension plan termination, net of the decrease in net earnings and changes in the fair value of derivatives.

LIQUIDITY AND CAPITAL RESOURCES:

Strategy

We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. The COVID-19 pandemic may continue to significantly impact the economy and our ability to generate future cash flows. In particular, if the foodservice industry is slow to recover, our future cash flows could be negatively impacted. Additionally, we strive to maintain a conservative financial position. We believe having a conservative financial position allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, pension contributions and obligated debt repayments. We believe we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company’s strategy for use of its excess cash flows includes:

•

implementing our strategies under Project Centennial;

•

paying dividends to our shareholders;

•

maintaining an investment grade credit rating;

•

making strategic acquisitions;

•

repurchasing shares of our common stock; and

•

making discretionary contributions to our qualified pension plans.

The situation surrounding COVID-19 remains fluid and its future impact on the company’s business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. We believe the fundamentals of the company remain strong and that we have sufficient liquidity on hand to continue business operations during the pandemic. The company has total available liquidity of $777.2 million as of July 11, 2020, consisting of cash on hand and the available balances under our credit facility and accounts receivable securitization facility (the “facility”).

In light of the potential risks associated with the pandemic, the company has taken actions to safeguard its capital position. During the first quarter of fiscal 2020, we borrowed an additional $200.0 million under our credit facility. We borrowed this additional amount out of an abundance of caution to ensure future liquidity given the significant impact on global financial markets and economies as a result of the COVID-19 outbreak. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds.

Liquidity Discussion for the Twenty-Eight Weeks Ended July 11, 2020 and July 13, 2019

The pandemic presents potential new risks to the company’s business. Although there has been no material adverse impact on the company’s results of operations for the twenty-eight weeks ended July 11, 2020, we considered various potential COVID-19-related business risks. Those potential risks include foodservice business continuity as customers have experienced disruptions that negatively impacted their sales and could affect their ability to meet their obligations, including to the company, an extension of days of sales outstanding as customers shift to work-from-home operations, and possible further impacts to production, among other risks.

Cash and cash equivalents were $299.6 million at July 11, 2020 compared to $11.0 million at December 28, 2019, an increase of $288.5 million as a result of the increased liquidity risk discussed above. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands):

	For the Twenty-Eight Weeks Ended
Cash Flow Component	July 11, 2020			July 13, 2019			Change
Cash provided by operating activities	$	275,794		$	208,057		$	67,737
Cash disbursed for investing activities		(35,779	)		(45,744	)		9,965
Cash provided by (disbursed for) financing activities		48,503			(177,850	)		226,353
Total change in cash	$	288,518		$	(15,537	)	$	304,055

Cash Flows Provided by Operating Activities. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net income (amounts in thousands):

	For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			Change
Depreciation and amortization	$	77,843		$	78,148		$	(305	)
Restructuring and related impairment charges		9,270			1,781			7,489
Loss (gain) reclassified from accumulated other comprehensive income to net income		1,355			(4,255	)		5,610
Allowances for accounts receivable		9,245			6,554			2,691
Stock-based compensation		6,836			4,311			2,525
Deferred income taxes		(30,079	)		7,521			(37,600	)
Pension and postretirement plans cost		116,892			1,741			115,151
Other non-cash items		2,151			1,768			383
Net non-cash adjustment to net income	$	193,513		$	97,569		$	95,944

•

Refer to the Restructuring and related impairment charges and Pension plan termination discussions in the “Matters Affecting Comparability” section above for additional information.

•

The change in deferred income taxes was primarily due to the termination of Plan No. 1.

•

Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs and gains or losses on the sale of assets.

Net changes in working capital and pension plan contributions consisted of the following items (amounts in thousands):

	For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			Change
Changes in accounts receivable, net	$	(49,803	)	$	(29,581	)	$	(20,222	)
Changes in inventories, net		1,097			(904	)		2,001
Changes in hedging activities, net		(7,279	)		1,950			(9,229	)
Changes in other assets and accrued liabilities, net		68,929			11,495			57,434
Changes in accounts payable, net		18,615			8,567			10,048
Qualified pension plan contributions		(1,425	)		—			(1,425	)
Net changes in working capital and pension plan contributions	$	30,134		$	(8,473	)	$	38,607

•

Changes in accounts receivable, inventories, and accounts payable resulted from sales increases.

•

Hedging activities change from market movements that affect the fair value and the associated required collateral of positions and the timing and recognition of deferred gains or losses. These changes will continue to occur as part of our hedging program.

•

The change in other assets primarily resulted from changes in income tax receivable balances year over year and changes in deferred gains recorded in conjunction with the sale of distribution rights to IDPs. Changes in employee compensation accruals, changes in legal accruals, and changes in payroll and income taxes payable resulted in the change in other accrued liabilities. During the first quarter of fiscal 2020 and fiscal 2019, we paid $18.6 million and $7.9 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plan. An additional $0.2 million and $1.2 million was paid during the first quarter of fiscal 2020 and fiscal 2019, respectively, for our share of employment taxes on the vesting of employee restricted stock awards in each respective year. During the twenty-eight weeks ended July 11, 2020, we recognized and paid $3.2 million of legal settlements. In the prior year, we paid $7.9 million of legal settlements, all of which had been accrued for in prior periods. Under the CARES Act, the company expects to defer an estimated $32 million of the employer share of the Social Security tax for the period beginning the second quarter of fiscal 2020 to December 31, 2020 and in the second quarter of fiscal 2020 deferred $9.7 million. The company otherwise is responsible for the remaining federal employment taxes. The deferred employment tax will be paid over the next two years with half of the required amount to be paid by December 31, 2021 and the remaining amount by December 31, 2022.

•

During the twenty-eight weeks ended July 11, 2020, the company made a cash contribution of $1.4 million and a $5.0 million loan, which has been fully reserved for and is expected to be unwound by the end of the third quarter of fiscal 2020, to fully fund the liabilities of Plan No. 1 at termination. We anticipate making a $2.5 million voluntary defined benefit plan pension contribution to Plan No. 2 in the third quarter of fiscal 2020. The company believes its cash flow and balance sheet will allow it to fund future pension needs without adversely affecting the business strategy of the company.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the twenty-eight weeks ended July 11, 2020 and July 13, 2019, respectively (amounts in thousands):

	For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			Change
Purchases of property, plant, and equipment	$	(46,594	)	$	(47,412	)	$	818
Principal payments from notes receivable, net of repurchases of independent distributor territories		9,363			1,125			8,238
Proceeds from sale of property, plant and equipment		1,452			543			909
Net cash disbursed for investing activities	$	(35,779	)	$	(45,744	)	$	9,965

•

We currently anticipate capital expenditures of $85 million to $95 million for fiscal 2020.

Cash Flows Provided by (Disbursed for) Financing Activities. The table below presents net cash provided by (disbursed for) financing activities for the twenty-eight weeks ended July 11, 2020 and July 13, 2019, respectively (amounts in thousands):

	For the Twenty-Eight Weeks Ended
	July 11, 2020			July 13, 2019			Change
Dividends paid	$	(82,628	)	$	(79,610	)	$	(3,018	)
Stock repurchases		(783	)		(7,054	)		6,271
Change in bank overdrafts		(1,986	)		(1,133	)		(853	)
Payment of contingent consideration		(4,700	)		—			(4,700	)
Net change in debt obligations		142,500			(86,750	)		229,250
Payments on financing leases		(3,900	)		(3,303	)		(597	)
Net cash provided by (disbursed for) financing activities	$	48,503		$	(177,850	)	$	226,353

•

Our dividends paid increased due to an increased dividend payout rate compared to the prior year. While there are no requirements to increase the dividend payout, we have shown a historical trend to do so. If this trend continues in the future, we will have additional cash needs to meet these expected dividend payouts. Our Board of Directors declared the following quarterly dividends during the twenty-eight weeks ended July 11, 2020 (amounts in thousands, except per share data):

Date Declared

Record Date

Payment Date

Dividend per

Common Share

Dividends

Paid

May 21, 2020

June 5, 2020

June 19, 2020

0.2000

42,320

February 14, 2020

February 28, 2020

March 13, 2020

0.1900

40,199

Additionally, we paid dividends of $0.1 million at the time of vesting of our performance-contingent restricted stock awards and at issuance of deferred compensation shares.

•

Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. During the twenty-eight weeks ended July 11, 2020, we repurchased 0.04 million shares for $0.8 million under a share repurchase plan approved by our Board of Directors.

•

The payment for contingent consideration was made to satisfy the contingent consideration liability recorded in the Canyon acquisition.

•

See the discussion below under the “Capital Structure” section regarding changes in debt obligations.

Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at July 11, 2020 and December 28, 2019, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 4, Leases, and Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

	Balance at				Fixed or	Final
	July 11, 2020		December 28, 2019		Variable Rate	Maturity
Long-term debt and right-of-use lease obligations	(Amounts in thousands)
2026 notes	$	396,430	$	396,122	Fixed Rate	2026
2022 notes		399,166		398,906	Fixed Rate	2022
Credit facility		100,000		41,750	Variable Rate	2022
Accounts receivable securitization facility		114,000		26,000	Variable Rate	2021
Right-of-use lease obligations		384,226		404,503		2041
Other notes payable		—		3,730		2020
		1,393,822		1,271,011
Current maturities of long-term debt and right-of-use lease obligations		59,701		64,712
Long-term debt and right-of-use lease obligations	$	1,334,121	$	1,206,299

Total stockholders' equity
Total stockholders' equity	$	1,336,488	$	1,263,430

The facility and credit facility are generally used for short-term liquidity needs. As discussed above, in light of the current economic uncertainty in the U.S. and throughout the world due to the COVID-19 pandemic, the company has increased its liquidity through borrowings under the credit facility during the current quarter, although we do not have any presently anticipated need for this additional liquidity. There is no current portion payable over the next year for these obligations. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.

The following table details the amounts available under the facility and credit facility and the highest and lowest balances outstanding under these arrangements during the twenty-eight weeks ended July 11, 2020:

	Amount Available		For the Twenty-Eight Weeks Ended July 11, 2020
	for Withdrawal at		Highest		Lowest
Facility	July 11, 2020		Balance		Balance
	(Amounts in thousands)
The facility	$	86,000	$	154,000	$	19,000
The credit facility (1)		391,600		235,000		6,400
	$	477,600

(1)	Amount excludes a provision in the credit facility agreement which allows the company to request an additional $200.0 million in additional revolving commitments.

Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the twenty-eight weeks ended July 11, 2020, the company borrowed $272.6 million in revolving borrowings under the credit facility and repaid $214.4 million in revolving borrowings. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

The facility and the credit facility are variable rate debt. In periods of rising interest rates, the cost of using the facility and the credit facility will become more expensive and increase our interest expense. Therefore, borrowings under these facilities provide us the greatest direct exposure to rising rates. In addition, if interest rates do increase, it will make the cost of funds more expensive.

Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet presently foreseeable financial requirements. As of July 11, 2020, the company was in compliance with all restrictive covenants under our debt agreements.

The company has begun assessing the impact changes from LIBOR to an alternative interest rate benchmark could have on our business.

Additionally, in March 2020, the company provided an unsecured, short-term, interest-free loan to Plan No. 1 of $5.0 million which has been fully reserved for and is expected to be unwound, at which time it will be converted to a contribution, by the end of the third quarter of fiscal 2020. The loan provides Plan No. 1 with incremental liquidity to pay ongoing benefits and administrative costs.

Under our share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the twenty-eight weeks ended July 11, 2020, 0.04 million shares, at a cost of $0.8 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through July 11, 2020, 68.4 million shares, at a cost of $643.4 million, have been repurchased.

Off-Balance Sheet Arrangements

At July 11, 2020, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Accounting Pronouncements Recently Adopted and Not Yet Adopted

See Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding recently adopted accounting pronouncements and accounting pronouncements not yet adopted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.

Commodity Price Risk

The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of July 11, 2020, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(5.5) million, based on quoted market prices. Of this amount, approximately $(2.7) million relates to instruments that will be utilized in fiscal 2020, $(2.5) million that will be utilized in fiscal 2021, and $(0.3) million in fiscal years 2022.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to the derivative portfolio. Based on the company’s derivative portfolio as of July 11, 2020, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $14.1 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the CEO, CFO and CAO concluded that the company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the company files or submits to the SEC under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended July 11, 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of all material pending legal proceedings, see Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

ITEM 1A. RISK FACTORS

Refer to Part I, Item 1A., Risk Factors, in the Form 10-K and Part II, Item 1A., Risk Factors, in the First Quarter Form 10-Q for information regarding other factors that could affect the company’s results of operations, financial condition and liquidity. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our Board of Directors has approved a plan that authorizes share repurchases of up to 74.6 million shares. Under the share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated share repurchase program at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors.

There were no common stock repurchases under the plan during the twelve weeks ended July 11, 2020. During the twenty-eight weeks ended July 11, 2020, 0.04 million shares, at a cost of $0.8 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through July 11, 2020, 68.4 million shares, at a cost of $643.4 million, have been repurchased. The company currently has 6.2 million shares remaining available for repurchase under the share repurchase plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

The following documents are filed as exhibits hereto:

Exhibit No			Name of Exhibit
2.6	*	—	Stock Purchase Agreement, dated as of August 12, 2015, by and among AVB, Inc., Goode Seed Holdings, LLC, Goode Seed Co-Invest, LLC, Glenn Dahl, trustee of the Glenn Dahl Family Trust, U/A/D November 28, 2012, David J. Dahl, trustee of the David Dahl Family Trust, U/A/D May 1, 2012, Shobi L. Dahl, trustee of the Shobi Dahl Family Trust, U/A/D, December 16, 2011, Flowers Bakeries, LLC, Flowers Foods, Inc., and Goode Seed Holdings, LLC, as shareholders’ representative.
3.1		—	Amended and Restated Articles of Incorporation of Flowers Foods, Inc., as amended through May 21, 2020 (Incorporated by reference to Exhibit 3.1 to Flowers Foods’ Current Report on Form 8-K, dated May 28, 2020, File No. 1-16247).
3.2		—	Amended and Restated Bylaws of Flowers Foods, Inc., as amended through May 21, 2020 (Incorporated by reference to Exhibit 3.2 to Flowers Foods’ Current Report on Form 8-K, dated May 28, 2020, File No. 1-16247).
31.1	*	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	*	—	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by A. Ryals McMullian, President and Chief Executive Officer and R. Steve Kinsey, Chief Financial Officer and Chief Accounting Officer, for the quarter ended July 11, 2020.
101.INS	*	—	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	*	—	Inline XBRL Taxonomy Extension Schema Linkbase.
101.CAL	*	—	Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	*	—	Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB	*	—	Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE	*	—	Inline XBRL Taxonomy Extension Presentation Linkbase.
104		—	The cover page from Flowers Foods’ Quarterly Report on Form 10-Q for the quarter ended July 11, 2020 has been formatted in Inline XBRL.

*	Filed herewith

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.

	FLOWERS FOODS, INC.

	By:		/s/ A. RYALS MCMULLIAN
	Name:		A. Ryals McMullian
	Title:		President and Chief Executive Officer

By:

/s/ R. STEVE KINSEY

Name:

R. Steve Kinsey

Title:

Chief Financial Officer and

Chief Accounting Officer

Date: August 6, 2020

Exhibit 2.6

EXECUTION VERSION

stock purchase AGREEMENT

by and among

AVB, Inc.,

Goode Seed Holdings, LLC,

Goode Seed Co-Invest, LLC,

GLENN DAHL, TRUSTEE OF THE GLENN DAHL FAMILY TRUST,
U/A/D NOVEMBER 28, 2012,

DAVID J. DAHL, TRUSTEE OF THE DAVID DAHL FAMILY TRUST,
U/A/D MAY 1, 2012,

SHOBI L. DAHL, TRUSTEE OF THE SHOBI L. DAHL FAMILY TRUST,
U/A/D DECEMBER 16, 2011,

FLOWERS BAKERIES, LLC,

Flowers Foods, Inc.,

and

Goode Seed Holdings, LLC, as Shareholders’ Representative

Dated as of AUGUST 12, 2015

Table of Contents

		Page
Article I.	Definitions	1
Section 1.1	Certain Definitions	1
Section 1.2	Certain Additional Definitions	10
Article II.	THE PURCHASE AND SALE	11
Section 2.1	Purchase and Sale	11
Section 2.2	Closing	12
Section 2.3	Certain Closing Date Payments	13
Section 2.4	Purchase Price Adjustment	13
Section 2.5	Transfer Taxes	17
Section 2.6	Withholding	17
Article III.	REPRESENTATIONS AND WARRANTIES OF THE COMPANY	17
Section 3.1	Authority	18
Section 3.2	Organization; Subsidiaries	18
Section 3.3	Capitalization	19
Section 3.4	Conflicts	19
Section 3.5	Consents, Approvals, Etc	19
Section 3.6	Financial Statements; Undisclosed Liabilities	20
Section 3.7	Certain Changes or Events	20
Section 3.8	Tax Matters	22
Section 3.9	Litigation and Governmental Orders	23
Section 3.10	Compliance with Laws	23
Section 3.11	Permits	24
Section 3.12	Real Property	24
Section 3.13	Tangible Personal Property	25
Section 3.14	Intellectual Property	25
Section 3.15	Certain Contracts	27
Section 3.16	Employee Benefit Matters	28
Section 3.17	Labor Matters	30
Section 3.18	Environmental Matters	30

Table of Contents

(continued)

		Page
Section 3.19	Related Party Transactions	31
Section 3.20	Brokers	32
Section 3.21	Suppliers, Customers and Distributors	32
Section 3.22	Product Standards	32
Section 3.23	No Other Representations or Warranties	32
Article IV.	REPRESENTATIONS AND WARRANTIES OF THE SELLERS	33
Section 4.1	Authority	33
Section 4.2	Organization	33
Section 4.3	Conflicts	33
Section 4.4	Consents, Approvals, Etc	34
Section 4.5	Ownership	34
Section 4.6	No Other Representations or Warranties	34
Article V.	REPRESENTATIONS AND WARRANTIES OF BUYER AND GUARANTOR	35
Section 5.1	Authority	35
Section 5.2	Organization	35
Section 5.3	Conflicts	35
Section 5.4	Consents, Approvals, Etc	36
Section 5.5	Litigation and Governmental Orders	36
Section 5.6	Adequate Funds	36
Section 5.7	Due Diligence Investigation	36
Section 5.8	Brokers	37
Section 5.9	Investment Intent	37
Section 5.10	No Other Representations or Warranties	37
Article VI.	COVENANTS OF THE COMPANY AND THE SELLERS	37
Section 6.1	No Solicitation	37
Section 6.2	Conduct of the Company Prior to the Closing	38
Section 6.3	Access to Information	41
Section 6.4	Stock Options	41
Section 6.5	Termination of Certain Agreements	41
Section 6.6	Parachute Payments	42
Section 6.7	Update to Schedule	42
Section 6.8	Directors’ and Officers’ Insurance	42

Table of Contents

(continued)

		Page
Article VII.	COVENANTS OF BUYER AND GUARANTOR	42
Section 7.1	Indemnification	42
Section 7.2	Confidentiality	43
Section 7.3	R&W Insurance	43
Article VIII.	COVENANTS OF THE COMPANY, THE SELLERS AND BUYER	43
Section 8.1	Efforts; Consents; Regulatory and Other Authorizations	43
Section 8.2	Further Action	45
Article IX.	CONDITIONS TO CLOSING	45
Section 9.1	Conditions to Obligations of All Parties	45
Section 9.2	Conditions to Obligations of the Sellers	45
Section 9.3	Conditions to Obligations of Buyer	46
Article X.	TERMINATION	47
Section 10.1	Termination	47
Section 10.2	Buyer Termination Fee	48
Section 10.3	Effect of Termination	48
Article XI.	TAX MATTERS	48
Section 11.1	Tax Returns	48
Section 11.2	Straddle Period Allocation	49
Section 11.3	Amended Tax Returns	49
Section 11.4	Tax Refunds	49
Section 11.5	Audits	50
Section 11.6	Cooperation; Tax Records	50
Article XII.	INDEMNIFICATION	50
Section 12.1	Indemnification by the Sellers	50
Section 12.2	Indemnification by Buyer	51
Section 12.3	Notice and Opportunity to Defend	51
Section 12.4	Survivability; Limitations	53
Section 12.5	Exclusive Remedy	54
Section 12.6	Treatment of Indemnification Payments	54

iii

Table of Contents

(continued)

		Page
Article XIII.	GENERAL PROVISIONS	55
Section 13.1	Shareholders’ Representative	55
Section 13.2	Expenses	56
Section 13.3	Costs and Attorneys’ Fees	57
Section 13.4	Notices	57
Section 13.5	Public Announcements	58
Section 13.6	Provision Respecting Legal Representation	59
Section 13.7	Interpretation	59
Section 13.8	Severability	59
Section 13.9	Entire Agreement	60
Section 13.10	Assignment	60
Section 13.11	No Third-Party Beneficiaries	60
Section 13.12	Waivers and Amendments	60
Section 13.13	Governing Law; Consent to Jurisdiction	61
Section 13.14	Waiver of Jury Trial	61
Section 13.15	Exclusivity of Representations and Warranties	61
Section 13.16	Equitable Remedies	62
Section 13.17	Counterparts	62
Section 13.18	Time is of the Essence	62
Section 13.19	Guaranty	62

EXHIBITS

Exhibit A	–	Form of Escrow Agreement
Exhibit B	–	Form of Optionholder Pay-Off Agreement
Exhibit C	–	Seller Notice Information

SCHEDULES

Schedule 1.1(a)	–	Closing Debt
Schedule 1.1(b)	–	Sample Calculation of Closing Net Working Capital Amount
Schedule 1.1(c)	–	Company Transaction Expenses Tax Benefit
Schedule 1.1(d)	–	Identified Capital Expenditures
Schedule 2.1	–	Shares
Schedule 2.4(a)	–	Specified Accounting Principles
Schedule 6.2(a)	–	Conduct of the Company
Schedule 6.2(b)	–	Limitations on Conduct of the Company
Schedule 9.3	–	Certain Closing Conditions

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of August 12, 2015 (the “Effective Date”) by and among AVB, Inc., an Oregon corporation (the “Company”), Goode Seed Holdings, LLC, a Delaware limited liability company (“GSH”), Goode Seed Co-Invest, LLC, a Delaware limited liability company (“GSC”), Glenn Dahl, Trustee of the Glenn Dahl Family Trust, U/A/D November 28, 2012 (“GDT”), David J. Dahl, Trustee of the David Dahl Family Trust, U/A/D May 1, 2012 (“DDT”), Shobi L. Dahl, Trustee of the Shobi L. Dahl Family Trust, U/A/D December 16, 2011 (“SDT”, and together with GDT, DDT, GSH and GSC, the “Sellers”), Flowers Bakeries, LLC, a Georgia limited liability company (“Buyer”), Flowers Foods, Inc., a Georgia corporation (“Guarantor”), and GSH, as the Shareholders’ Representative.

RECITALS

WHEREAS, the Sellers collectively own all of the issued and outstanding capital stock (the “Shares”) of the Company;

WHEREAS, Buyer desires to purchase from each Seller, and each Seller desires to sell to Buyer, 100% of the Shares owned by such Seller, upon the terms and subject to the conditions set forth herein;

WHEREAS, the Company and the Sellers have approved this Agreement and the consummation of the transactions contemplated hereby in accordance with the Company Organizational Documents.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants, promises and agreements hereinafter set forth, the mutual benefits to be gained by the performance thereof, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and accepted, the parties to this Agreement, intending to be legally bound, hereby agree as follows:

ARTICLE I.

DEFINITIONS

Section 1.1Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings:

“Acquisition Proposal” means, other than the transactions contemplated by this Agreement, any offer, proposal relating to (a) the sale, license, disposition or acquisition of all or substantially all of the assets of the Company, taken as a whole, (b) the issuance, disposition or acquisition of (i) shares of capital stock or other equity securities of the Company (other than the exercise of stock options in existence as of the Effective Date), (ii) any subscription, option, call, warrant, preemptive right, right of first refusal or any other right (whether or not exercisable) to

acquire shares of capital stock or other equity securities of the Company, or (iii) securities, instruments or obligations that are or may become convertible into or exchangeable for shares of capital stock or other equity securities of the Company, or (c) any merger, consolidation, business combination, reorganization or similar transaction involving the Company.

“Act” means the Oregon Business Corporation Act.

“Action” means any claim, action, suit or proceeding, arbitral action, criminal prosecution or other governmental investigation.

“Affiliate” means, when used with respect to a specified Person, another Person that either directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person.

“Business Day” means any day except Saturday, Sunday or any other day on which commercial banks located in Portland, Oregon or New York, New York are authorized or required by Law to be closed for business.

“Cash” means cash and Cash Equivalents determined in accordance with GAAP on a consolidated basis, using the Specified Accounting Principles.

“Cash Equivalents” means investment securities with original maturities of ninety (90) days or less and credit card receivables incurred in the ordinary course of business consistent with past practice.

“CERCLA” means the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. § 9601 et seq.).

“Closing Cash” means the aggregate amount of all Cash of the Company as of the close of business on the day immediately preceding the Closing Date.

“Closing Date Payment Schedule” means a schedule, prepared by the Company, setting forth as of the close of business on the day immediately preceding the Closing Date, (a) the calculation of the Closing Date Purchase Price pursuant to Section 2.1; (b) to the extent applicable for each Seller: (i) such Seller’s name and wire transfer instructions and (ii) the number and type of Shares held by such Seller; and (c) the portion of the Closing Date Payment to be paid to each Seller.

“Closing Debt” means the aggregate principal amount of, and accrued interest on, the Debt of the Company as of the close of business on the day immediately preceding the Closing Date set forth on Schedule 1.1(a).

“Closing Net Working Capital Amount” means, except as provided in Section 2.3(f), (a) the aggregate dollar amount of all assets properly characterized as current assets of the Company and that are of a type listed on Schedule 1.1(b) attached hereto (excluding, for the avoidance of doubt, Cash, all income Tax accounts, all interest accounts, and prepaid Company Transaction Expenses), minus (b) the aggregate dollar amount of all liabilities properly characterized as current liabilities of the Company and that are of a type listed on

Schedule 1.1(b) attached hereto (excluding, for the avoidance of doubt, income Tax accounts, all interest accounts, Closing Debt and Unpaid Company Transaction Expenses), in the case of each of clause (a) and clause (b), as of the close of business on the day immediately preceding the Closing Date and calculated in accordance with GAAP using the Specified Accounting Principles. Schedule 1.1(b) attached hereto sets forth the Closing Net Working Capital Amount and the Closing Net Working Capital Adjustment Amount as if the Closing occurred on the Business Day immediately following the Balance Sheet Date.

“Closing Net Working Capital Adjustment Amount” means an amount equal to: the Closing Net Working Capital Amount minus (a) $13,000,000 if the Closing Net Working Capital Amount is greater than $13,000,000 or (b) $10,100,000 if the Closing Net Working Capital Amount is less than $10,100,000, it being understood that the “Closing Net Working Capital Adjustment Amount” means $0 if the Closing Net Working Capital Amount is between $10,100,000 and $13,000,000.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Employee” means each employee of the Company immediately before the Effective Date.

“Company Licensed IP” means all Intellectual Property licensed to the Company, other than COTS Software.

“Company Owned IP” means all Intellectual Property owned by, registered to, or purportedly owned by or registered to the Company.

“Company Registered IP” means all Company Owned IP that constitutes Registered Intellectual Property.

“Company Transaction Expenses” means (a) the fees and disbursements payable to legal counsel, accountants or other advisors of the Company that are payable by the Company in connection with the transactions contemplated by this Agreement; (b) any amounts payable to any current or former employees, officers or directors of the Company as a result of the transactions contemplated by this Agreement pursuant to (i) agreements in existence as of the date hereof, (ii) bonuses set forth on Section 3.16(a) of the Company Disclosure Schedule, but specifically excluding the Special Employee Bonuses which are payable pursuant to Section 2.1(i) and Section 2.3(f), (iii) the Optionholder Pay-off Agreements, and (iv) any withholding and payroll taxes associated with (i), (ii) or (iii) herein; (c) all other miscellaneous expenses or costs, in each case, incurred by the Company in connection with the transactions contemplated by this Agreement; (d) the total costs for the R&W Insurance (including all underwriting costs and binding fees) in an aggregate amount not to exceed $880,000; and (e) the premium for directors’ and officers’ insurance for the Company’s directors and officers obtained pursuant to Section 6.8 in each case to the extent not paid by Company as of the Closing Date; provided, however, that the foregoing clauses (a) and (b) shall not include any fees, expense or disbursements incurred by Buyer, or by the Company which are on behalf of Buyer, including without limitation, the advisory fee payable to Deutsche Bank Securities, Inc. and the fees and expenses of Buyer’s attorneys, accountants and other advisors.

“Company Transaction Expenses Tax Benefit” means the sum of the (1) estimated Tax refunds that will be received by Buyer, any Affiliate of Buyer, the Company or any affiliated group of which any of them is a member with respect to any Pre-Closing Tax Period, and (2) 50% of the estimated reduction in liability for Taxes of Buyer, any Affiliate of Buyer, the Company or any affiliated group of which any of them is a member with respect to any Tax period or portion thereof ending after the Closing Date, in either case resulting directly or indirectly from (including by way of a net operating loss carryback or carryover) a Company Transaction Expense or payment of the Special Employee Bonuses, in each case as set forth on Schedule 1.1(c).

“Confidentiality Agreement” means the letter agreement between the Company and Buyer dated April 2, 2015.

“Contract” means any legally binding contract, agreement, license, indenture, note, bond, loan, instrument, lease, conditional sales contract, mortgage or other arrangement or commitment, whether written or oral.

“COTS Software” means commercially available software non-exclusively licensed on standard terms for an annual cost of less than $100,000.

“Debt” means both the current and long-term portions of any amount owed (including unpaid interest thereon), without duplication and without regard to whether matured or unmatured, absolute or contingent, (a) in respect of borrowed money, (b) in respect of obligations evidenced by bonds, debentures, notes, or other similar instruments; (c) in respect of obligations to pay the deferred purchase price of assets or services excluding (i) any trade accounts payables arising in the ordinary course of business consistent with past practice and accrued expenses incurred and properly recorded on the Financial Statements, and (ii) the Identified Capital Expenditures; (d) capitalized lease obligations (determined under GAAP); (e) in respect of obligations to reimburse or prepay any Person in respect of amounts paid under a letter of credit, banker’s acceptance, or similar instrument in support of Debt; (f) in respect of obligations to repurchase assets previously sold (including any obligation to repurchase any accounts or chattel paper under any factoring, receivables purchase, or similar arrangement, but excluding any obligation to repurchase unsold products in the ordinary course of business consistent with past practice); and (g) guarantees of obligations of the type described in clauses (a) through (g); provided, however, that notwithstanding the foregoing, Debt shall not be deemed to include any accounts payable incurred in the ordinary course of business consistent with past practice or any obligations under undrawn letters of credit.

“Encumbrance” means any security interest, pledge, mortgage, lien, charge, adverse claim of ownership or use, restriction on transfer (such as a right of first refusal or other similar rights), defect of title or other similar encumbrance.

“Environmental Law” means any and all Laws issued or promulgated by any Governmental Authority, relating to pollution (or the cleanup thereof) or the protection of human health, including worker health, the environment, preservation or reclamation of natural resources, or to the management or Release of Hazardous Materials, including CERCLA, the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. § 136 et seq.), the Federal Water

Pollution Control Act (33 U.S.C. § 1251 et seq.), the Clean Air Act (42 U.S.C. § 7401 et seq.), the Occupational Safety and Health Act (29 U.S.C. § 651 et seq.), the Toxic Substances Control Act of 1976 (15 U.S.C. § 2601 et seq.), the United States Emergency Planning and Community Right-to-Know Act of 1986 (42 U.S.C. § 11001 et seq.), the United States Safe Drinking Water Act of 1974 (42 U.S.C. § 300f et seq.), the United States Hazardous Materials Transportation Act (49 U.S.C. § 180 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.) and any similar Law, and all amendments thereto or regulations promulgated thereunder effective as of the date of this Agreement.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means any entity that is a member of a “controlled group of corporations” with or otherwise required to be aggregated with the Company pursuant to Sections 414(b), (c), (m) or (o) of the Code.

“Escrow Fund” means the Working Capital Escrow Fund and the Indemnity Escrow Fund.

“Estimated Adjustment Amount” means (a) Estimated Closing Cash, plus (b) Estimated Identified Capital Expenditures, less (c) the Estimated Closing Debt, less (d) the Estimated Unpaid Company Transaction Expenses, in each case as finally estimated in accordance with Section 2.4(a).

“FDA” means the Food and Drug Administration.

“Final Adjustment Amount” means (a) the Closing Net Working Capital Adjustment Amount, plus (b) Closing Cash, plus (c) Identified Capital Expenditures, less (d) Closing Debt, less (d) Unpaid Company Transaction Expenses, in each case as finally determined in accordance with Section 2.4(c).

“Fundamental Representations” means Section 3.1 (Authority), Section 3.2 (Organization; Subsidiaries), Section 3.3 (Capitalization), the second sentence of Section 3.13(a), Section 3.20 (Brokers), Section 4.1 (Authority), Section 4.2 (Organization) and Section 4.5 (Ownership).

“GAAP” means generally accepted accounting principles in the United States as of the date of this Agreement.

“Governmental Authority” means any national, sovereign, federal, state, local or foreign government or any political subdivision thereof, any governmental entity, commission, board, agency or instrumentality, any court, tribunal or judicial body or other governmental entity, instrumentality or official exercising executive, legislative, judicial, regulatory or administrative functions of government whether domestic or foreign.

“Governmental Order” means any order, judgment, injunction, award, ruling, charge, writ or decree issued, promulgated or entered by any Governmental Authority.

“Hazardous Material” means any material or substance that the use, generation, transportation, storage, treatment, disposal, Release of, or exposure to is prohibited or regulated by any Environmental Law.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, any successor statute thereto, and the rules and regulations promulgated thereunder.

“Identified Capital Expenditures” means the capital expenditures paid by the Company as of the Closing Date associated with the Milwaukie facility’s installation of a Divider, Molder and Auto-Enrober including those amounts set forth on Schedule 1.1(d); provided, however, if after the Effective Date, the Company believes that amounts paid prior to Closing are reasonably likely to exceed the amounts set forth on Schedule 1.1(d), then the Company shall provide an updated Schedule 1.1(d), and to the extent permitted by Law, consult with the Buyer as to the anticipated increases, with such increases not to exceed $2,500,000.

“Income Tax” means any federal, state, local or non-U.S. income Tax measured by or imposed on net income, including any interest, penalty, or addition thereto.

“Income Tax Return” means any Tax Return relating to Income Tax.

“Indemnity Escrow Fund” means an amount equal to $1,375,000 to be held for the purpose of securing the obligations of the Sellers in Article XII.

“Intellectual Property” means all intellectual property and other similar proprietary rights in any jurisdiction worldwide, whether registered or unregistered, including such rights in and to: (a) industrial designs, industrial design registrations, patents (including all reissues, divisions, provisionals, continuations and continuations-in-part, re-examinations, renewals and extensions thereof), patent applications, patent disclosures or other indicia of ownership of an invention, discovery or improvement issued by an Governmental Authority; (b) copyrights, whether in published or unpublished works of authorship and all registrations, applications for registration, and renewals for any of the foregoing, and any “moral” rights or other similar rights recognized in a work of authorship by a Governmental Authority; (c) trademarks, service marks, trade names, business names, logos, trade dress, certification marks and other indicia of commercial source or origin together with all goodwill associated with the foregoing, and all registrations, applications and renewals for any of the foregoing; (d) trade secrets and business, technical and know-how information, databases, data collections and other confidential and proprietary information that is not generally known or readily ascertainable and all rights therein (“Trade Secrets”); (e) software, including data files, source code, object code, application programming interfaces, architecture, files, records, schematics, computerized databases and other software-related specifications and documentation; (f) Internet domain name registrations and social media addresses and accounts; (g) recipes and formulas; and (h) any and all other intellectual or industrial property rights recognized by any Governmental Authority under the Laws of any country throughout the world.

“IRS” means the United States Internal Revenue Service, and any successor agency thereto.

“Knowledge of the Company” and any other phrases of similar import means, with respect to any matter in question relating to the Company, means the actual knowledge, after reasonable inquiry, of John Tucker, John Wells, Greg Intlekofer and Martin Nash.

“Law” means any common law or federal, state, county, local or foreign statute, law, ordinance, Governmental Order or regulation or code of any Governmental Authority of competent jurisdiction.

“Liability” means any and all debts, liabilities and obligations of any kind or nature, whether accrued or fixed, absolute or contingent, matured or unmatured, or determined or determinable.

“Loss” means any Liability, claim, judgment, damage, award, loss, penalty, fine, cost, Tax, settlement, or obligation, including court costs and reasonable attorneys’ fees and expenses, but excluding any special, indirect, consequential, exemplary or punitive damages, and any damages associated with any lost profits or lost opportunities (including loss of future revenue, income or profits, diminution of value or loss of business reputation). The parties acknowledge and agree that “Losses” will be calculated without application of any multiple of revenue or earnings to any of the foregoing items that would otherwise constitute a “Loss”.

“Material Adverse Effect” means any change or effect that is, or would reasonably be expected to be, materially adverse to the business, operations, condition (financial or otherwise) or results of operations of the Company, taken as a whole; provided, however, that none of the following shall be deemed, either alone or in combination, to constitute, and no change or effect arising from or attributable or relating to any of the following shall be taken into account in determining whether there has been a Material Adverse Effect: (a) the execution, delivery, public announcement or pendency of this Agreement or any of the transactions contemplated herein or compliance with the terms of, or the taking of any action required by, this Agreement, or otherwise taken with the consent of Buyer, including the impact thereof on the relationships of the Company with customers, suppliers, consultants, employees or independent contractors or other third parties with whom the Company has any relationship; (b) conditions affecting the industry in which the Company operates or participates, the U.S. economy or financial markets, other than any such condition that has a materially disproportionate effect on the Company relative to other Persons principally engaged in the same industry as the Company; (c) any change in GAAP or applicable Laws (or interpretation thereof); (d) any acts of God, calamities, acts of war or terrorism, or national or international political or social conditions; (e) any action required to be taken under applicable Laws, including any actions taken or required to be taken by the Company in order to obtain any approval or authorization for the consummation of the transactions contemplated by this Agreement under applicable antitrust or competition Laws; or (f) any failure in and of itself by the Company to meet any projections, estimates or forecasts for any period.

“Permit” means any license, authorization, registration, certificate, franchise, approval or permit issued by any Governmental Authority.

“Permitted Encumbrances” means (a) all statutory or other liens for current Taxes or assessments which are not yet due and payable or Taxes the validity of which are being contested

in good faith by appropriate proceedings; (b) all landlords’, workmen’s, repairmen’s, warehousemen’s and carriers’ liens and other similar liens imposed by Law if payment is not yet due and payable on the underlying obligation, or as may contested in good faith and for which appropriate reserves have been established in accordance with GAAP; (c) Encumbrances that will be released and discharged at or prior to the Closing; and (d) all matters of record, easements, claims of easement and other imperfections of title and Encumbrances that, individually or in the aggregate, would not reasonably be expected to have a material adverse effect on the use of such property (real or personal) or assets of the Company.

“Person” means any individual, general or limited partnership, firm, corporation, limited liability company, association, trust, unincorporated organization or other entity.

“Post-Closing Payment Schedule” means a schedule, prepared by the Shareholders’ Representative with respect to any Positive Adjustment Amount, any Escrow Fund Excess Amount or any Expense Fund Excess Amount, as applicable, setting forth (a) to the extent applicable for each Seller: (i) such Seller’s name and wire transfer instructions and (ii) the number and type of Shares held by such Seller; and (b) the portion of such Positive Adjustment Amount, such Escrow Fund Excess Amount or such Expense Fund Excess Amount, as applicable, to be paid to each Seller.

“Post-Closing Tax Period” means any Tax period (other than a Straddle Period) of the Company ending after the Closing Date, and, in the case of a Straddle Period, the portion of such Straddle Period beginning on the day immediately following the Closing Date.

“PPACA” means the Patient Protection and Affordable Care Act.

“Pre-Closing Tax Period” means any Tax period of the Company ending on or prior to the Closing Date, and, in the case of a Straddle Period, the portion of such Straddle Period ending on and including the Closing Date.

“Pro Rata Portion” means as to each Seller as of any specific date, the ratio equal to (a) the portion of the Purchase Price to be paid to such Seller divided by (b) the Purchase Price, as forth on Schedule 2.1 attached hereto.

“Registered Intellectual Property” means any active copyright registration or application for registration, design registration or application for registration, patent or patent application, trademark registration or application for registration, or Internet domain name registration or social media address or account.

“Related Party” means: (a) each of the Sellers; (b) each individual who is an officer or board member of the Company or any of the Sellers; (c) each member of the immediate family of each of the individuals referenced in (a) and (b) above; and (d) any trust or other Person (other than the Company) in which any one of the individuals referred to in clauses (a), (b) and (c) above holds (or in which more than one of such individuals collectively hold), beneficially or otherwise, a controlling voting, proprietary or equity interest.

“Release” has the meaning ascribed to such term in Section 101(22) of CERCLA (42 U.S.C. § 9601(22)).

“R&W Insurance” means that certain binding representations and warranties insurance policy for the benefit of Buyer and Buyer’s Affiliates issued as of the Closing Date by Illinois Union Insurance Company, a copy of which has been provided to the Shareholders’ Representative.

“Special Employee Bonuses” means those certain bonuses described and defined in Section 3.16(a) of the Company Disclosure Schedule.

“Straddle Period” means any Tax period of the Company that begins on or before the Closing Date and ends after the Closing Date.

“Subsidiary” means with respect to any entity, that such entity shall be deemed to be a “Subsidiary” of another Person if such other Person directly or indirectly owns, beneficially or of record, an amount of voting securities of other interests in such entity that is sufficient to enable such Person to elect at least a majority of the members of such entity’s board of directors or other governing body.

“Tax” or “Taxes” means any and all taxes, assessments, levies, tariffs, duties or other charges or impositions in the nature of a tax (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Authority, including income, estimated income, gross receipts, profits, license, occupation, franchise, capital stock, real or personal property, sales, use, transfer, value added, employment or unemployment, social security, disability, alternative or add-on minimum, customs, excise, stamp, environmental, commercial rent or withholding taxes.

“Tax Return” means any return (including any information return or statement), report, claim for refund or other document (including any schedule or attachment thereto and any amendment thereof) filed with or submitted to, or required to be filed with or submitted to, any Governmental Authority with respect to any Tax.

“Trade Secrets” has the meaning set forth in the definition of Intellectual Property.

“Transfer Taxes” means any and all transfer, documentary, sales, use, stamp, registration, value added, goods and services, recording and other similar Taxes incurred in connection with the transactions contemplated by this Agreement (including any real property or leasehold interest transfer Tax and any similar Tax).

“Unpaid Company Transaction Expenses” means Company Transaction Expenses, but only to the extent they have not been paid by or on behalf of the Company in Cash on or prior to the close of business on the day immediately preceding the Closing Date and have, accordingly, not reduced the Closing Cash.

“USDA” means the United States Department of Agriculture.

“Working Capital Escrow Fund” means an amount equal to $1,000,000 to be held for the purpose of securing the obligations of the Company and the Sellers in Section 2.4.

Section 1.2Certain Additional Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed thereto in the respective sections of this Agreement set forth opposite each such term below:


Term	Section
Accounting Firm	2.4(c)(iv)
Agreement	Preamble
Balance Sheet Date	3.6(a)
Buyer	Preamble
Buyer Indemnified Parties	12.1
Buyer Subsidiaries	5.5
Buyer Termination Fee	10.2
Claims Notice	12.3(a)
Closing	2.2
Closing Balance Sheet	2.4(b)
Closing Date	2.2
Closing Date Payment	2.1(i)
Closing Date Purchase Price	2.1(f)
Closing Date Schedule	2.4(b)
Closing Employee Payments	2.3(f)
Common Stock	3.3(a)
Company	Preamble
Company Benefit Plan	3.16(a)
Company Disclosure Schedule	Article III
Company Financial Statements	3.6(a)
Company Indemnified Parties	7.1(a)
Company Organizational Documents	3.2(a)
Company Pre-Closing Certificate	2.4(a)
Company Representatives	6.1
Current Balance Sheet	3.6(a)
DDT	Preamble
Dispute Notice	2.4(c)(ii)
Effective Date	Preamble
Escrow Agent	2.3(d)
Escrow Agreement	2.3(d)
Escrow Fund Excess Amount	2.4(d)(iii)
Estimated Closing Cash	2.4(a)
Estimated Closing Debt	2.4(a)
Estimated Identified Capital Expenditures	2.4(a)
Estimated Unpaid Company Transaction Expenses	2.4(a)
Excluded Claims	12.4(b)
Expense Fund Excess Amount	2.4(d)(iv)
Expert Calculations	2.4(c)(iv)
Expiration Date	12.4(a)
Final Closing Date Payment Schedule	2.3(a)
Fraud Claims	12.4(a)


Term	Section
GDT	Preamble
GSC	Preamble
GSH	Preamble
Guarantor	Preamble
Holder Group	13.6
Indemnified Party	12.3(a)
Indemnifying Party	12.3(a)
Leased Real Property	3.12(b)
Liability Claim	12.3(a)
Listed Contracts	3.15(a)
Litigation Conditions	12.3(b)
Major Customers	3.21(b)
Major Suppliers	3.21(a)
Mini-Basket	12.4(b)
Negative Adjustment Amount	2.4(d)(i)
Optionholder	3.3(a)
Optionholder Pay-Off Agreements	6.4(a)
Outside Date	10.1(c)
Positive Adjustment Amount	2.4(d)(ii)
Pre-Closing Period	6.1
Property Taxes	11.2
Purchase and Sale	2.1
Purchase Price	2.1(h)
Review Period	2.4(c)(ii)
SDT	Preamble
Seller Indemnified Parties	12.2
Sellers	Preamble
Shareholders’ Representative	13.1(a)
Shareholders’ Representative Expense Fund	2.3(e)
Shares	Recitals
Specified Accounting Principles	2.4(a)
Stock Options	3.3(a)
Tax Losses	12.4(c)
Threshold Amount	12.4(b)

ARTICLE II.

THE PURCHASE AND SALE

Section 2.1Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, at the Closing, Buyer shall purchase from the Sellers, and each Seller shall, severally and not jointly, sell and transfer to Buyer, the Shares owned by such Seller that are set forth on Schedule 2.1 attached hereto (the “Purchase and Sale”), for an aggregate amount in cash (adjusted to the nearest whole cent), equal to the sum of the following:

(a)Two Hundred Seventy Five Million Dollars ($275,000,000), plus

(b)the Estimated Closing Cash, plus

(c)an amount equal to the Company Transaction Expenses Tax Benefit, plus

(d)the Estimated Identified Capital Expenditures, less

(e)the Estimated Unpaid Company Transaction Expenses, less

(f)the Estimated Closing Debt, (the result of clauses (a) through (f), the “Closing Date Purchase Price”); plus

(g)any Positive Adjustment Amount; less

(h)any Negative Adjustment Amount (the result of clauses (a) through (h), the “Purchase Price”).

(i)For purposes of this Agreement, the amount equal to (i) the Closing Date Purchase Price less (ii) the sum of (A) the Escrow Fund and (B) the Shareholders’ Representative Expense Fund shall be referred to herein as the “Closing Date Payment”. As of any specific date, the aggregate cash amount to be paid to each Seller hereunder shall be calculated in accordance with the Seller’s Pro Rata Portion set forth on Schedule 2.1. Similarly, in the event that the Purchase Price payable pursuant to this Section 2.1(i) is reduced as a result of a payment to Buyer from the Escrow Fund or to the Shareholders’ Representative from the Shareholders’ Representative Expense Fund in accordance with this Agreement, the portion of the Purchase Price to which each Seller is otherwise entitled hereunder shall be calculated by so reducing the aggregate Purchase Price and then determining the distribution of the remaining portion of the Purchase Price in accordance with the preceding sentence. Notwithstanding the foregoing, immediately prior to the Closing, a portion of the Closing Date Payment otherwise payable to each of GDT, DDT and SDT equal to the Special Employee Bonuses shall be transferred, on their behalf, pro rata in proportion to the Closing Date Payments, to the Company as a capital contribution. The Company shall use such amount to pay all the Special Employee Bonuses pursuant to Section 2.3(f).

Section 2.2Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place by electronic exchange of signature pages, documents and funds on a date to be mutually agreed to by the parties hereto, which date shall be no later than three (3) Business Days after the satisfaction or waiver of the last of the conditions set forth in ARTICLE IX to be satisfied or waived (other than those conditions to be satisfied at the Closing but subject to the satisfaction or waiver of those conditions), or at such other time, date and location as the parties hereto agree in writing (such date hereinafter, the “Closing Date”). The Company shall provide written notice of the Closing Date to Buyer promptly after such date is known.

Section 2.3Certain Closing Date Payments.

(a)Closing Date Payment Schedule. At least two (2) Business Days prior to the Closing, the Company shall prepare and deliver to Buyer the Company’s good faith draft of the Closing Date Payment Schedule. The Company may update the Closing Date Payment Schedule from time to time prior to the Closing, and shall provide Buyer with a final Closing Date Payment Schedule at least one (1) Business Day prior to the Closing (the “Final Closing Date Payment Schedule”).

(b)Payment of Closing Date Payment. At the Closing, Buyer shall pay or cause to be paid the applicable portion of the Closing Date Payment to each Seller, by wire transfer of immediately available funds, in accordance with the payment instructions contained in the Final Closing Date Payment Schedule.

(c)Payment of Unpaid Company Transaction Expenses and Closing Debt. At the Closing, Buyer shall pay or cause to be paid (i) all Unpaid Company Transaction Expenses, as directed by the Company in writing at or prior to Closing and (ii) all Closing Debt, as directed by the Company in writing at or prior to Closing.

(d)Deposit of Escrow Fund. At the Closing, Buyer shall deposit an amount equal to the Working Capital Escrow Fund and an amount equal to the Indemnity Escrow Fund with Union Bank, N.A. or an alternative nationally recognized banking corporation reasonably agreed to by the Shareholders’ Representative and Buyer (the “Escrow Agent”) to hold in separate accounts and distribute in accordance with the terms of this Agreement and the escrow agreement to be executed at Closing by Buyer, the Escrow Agent and the Shareholders’ Representative in substantially the form attached hereto as Exhibit A (the “Escrow Agreement”).

(e)Deposit of Shareholders’ Representative Expense Fund. At the Closing, Buyer shall deposit an amount equal to $250,000 (the “Shareholders’ Representative Expense Fund”) with the Shareholders’ Representative, which the Shareholders’ Representative shall hold in a segregated account and distribute in accordance with the terms of this Agreement.

(f)Payments to Employees. On the Closing Date, Buyer shall deposit with the Company an amount equal to (i) the portion of the Company Transaction Expenses attributable to the payments in subsection (b) of the definition of the Company Transaction Expenses, plus (ii) the Special Employee Bonuses (the “Closing Employee Payments”). Promptly, and no later than the first regular payroll date of the Company following the Closing Date, the Company shall pay or cause to be paid all Closing Employee Payments, less any Taxes required to be withheld pursuant to Section 2.6. For clarity, for purposes of determining the Closing Net Working Capital Amount, an amount of cash equal to the Closing Employee Payments will not be treated as a current asset, or as cash or a cash equivalent asset, of the Company at Closing, nor will the obligations arising in connection with such payments be treated as current liabilities of the Company at Closing.

Section 2.4Purchase Price Adjustment.

(a)Estimated Purchase Price. Not later than two (2) days before the Closing, the Company shall deliver to Buyer and the Shareholders’ Representative a certificate of the

Company (the “Company Pre-Closing Certificate”) executed on its behalf by the Chief Financial Officer of the Company that sets forth in reasonable detail the Company’s estimates of the Closing Cash (“Estimated Closing Cash”), Identified Capital Expenditures (the “Estimated Identified Capital Expenditures”), Closing Debt (“Estimated Closing Debt”) and Unpaid Company Transaction Expenses (“Estimated Unpaid Company Transaction Expenses”), along with reasonable supporting detail therefore, such estimates to be prepared in accordance with GAAP, using the policies, conventions, methodologies and procedures set forth on Schedule 2.4(a) attached hereto and used by the Company in preparation of Schedule 1.1(d) (the “Specified Accounting Principles”). Prior to Closing, the Company and Buyer shall cooperate in good faith to agree upon the calculation of the Estimated Closing Cash, Estimated Identified Capital Expenditures, Estimated Closing Debt and Estimated Unpaid Company Transaction Expenses upon which the Closing Date Purchase Price shall be based; provided that, if the Company and Buyer are unable to agree as to any item set forth on the Company Pre-Closing Certificate, then the amount set forth as the Estimated Closing Cash, Estimated Identified Capital Expenditures, Estimated Closing Debt or Estimated Unpaid Company Transaction Expenses, as applicable, on the Company Pre-Closing Certificate shall be deemed to be the parties’ estimate of Estimated Closing Cash, Estimated Identified Capital Expenditures, Estimated Closing Debt or Estimated Unpaid Company Transaction Expenses, as applicable.

(b)Calculation. As promptly as practicable, but in no event later than forty-five (45) days following the Closing Date, Buyer shall cause the Company, at its expense, (i) to cause to be prepared, in accordance with GAAP, using the policies, conventions, methodologies and procedures used by the Company in preparing the Company Financial Statements, an unaudited consolidated balance sheet of the Company as of the close of business on the day immediately preceding the Closing Date, but which shall not reflect the transactions occurring at the Closing (the “Closing Balance Sheet”), together with a statement (the “Closing Date Schedule”) setting forth in reasonable detail the Company’s calculation of the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses in each case with reasonable supporting detail therefore, such calculations to be prepared in accordance with GAAP using the Specified Accounting Principles; and (ii) deliver to the Shareholders’ Representative the Closing Balance Sheet and the Closing Date Schedule, together with a certificate of the Company executed on its behalf by the Chief Financial Officer of the Company confirming that the Closing Balance Sheet and the Closing Date Schedule were properly prepared in good faith and in accordance with the Specified Accounting Principles and this Section 2.4(b).

(c)Review; Disputes.

(i)From and after the Closing, Buyer shall and shall cause the Company to provide the Shareholders’ Representative and any accountants or advisors retained by the Shareholders’ Representative with full access to the books and records of the Company for the purposes of: (A) enabling the Shareholders’ Representative and its accountants and advisors to calculate, and to review the Company’s calculation of, the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses; and (B) identifying any dispute related to the calculation of any of the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt or the Unpaid Company Transaction

Expenses. The reasonable fees and expenses of any such accountants and advisors retained by the Shareholders’ Representative shall not be the personal obligations of the Shareholders’ Representative and shall be paid by the Shareholders’ Representative (on behalf of the Sellers) from the Shareholders’ Representative Expense Fund.

(ii)If the Shareholders’ Representative disputes the calculation of any of the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt or the Unpaid Company Transaction Expenses set forth in the Closing Date Schedule, then the Shareholders’ Representative shall deliver a written notice (a “Dispute Notice”) to Buyer and the Company at any time during the forty-five (45)-day period commencing upon receipt by the Shareholders’ Representative of the Closing Balance Sheet, the Closing Date Schedule and the related certificate of the Company’s Chief Financial Officer, all as prepared by the Company in accordance with the requirements of Section 2.4(b) (subject to automatic extension for any period of inadequate access to the underlying records pursuant to Section 2.4(c)(i) (the “Review Period”). The Dispute Notice shall set forth the basis for the dispute of any such calculation in reasonable detail.

(iii)If the Shareholders’ Representative does not deliver a Dispute Notice to the Company prior to the expiration of the Review Period, the Company’s calculation of the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses set forth in the Closing Date Schedule shall be deemed final and binding on Buyer, the Company, the Shareholders’ Representative and the Sellers for all purposes of this Agreement.

(iv)If the Shareholders’ Representative delivers a Dispute Notice to Buyer prior to the expiration of the Review Period, then the Shareholders’ Representative and Buyer shall use commercially reasonable efforts to reach agreement on the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses. If the Shareholders’ Representative and Buyer are unable to reach agreement on the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt, and the Unpaid Company Transaction Expenses within thirty (30) days following delivery of the Dispute Notice, either party shall have the right to refer such dispute to an accounting firm of national reputation that is independent of Buyer and the Company and is reasonably acceptable to both the Shareholders’ Representative and Buyer (such firm, or any successor thereto, being referred to herein as the “Accounting Firm”) after such thirtieth day. In connection with the resolution of any such dispute by the Accounting Firm: (A) each of Buyer and the Shareholders’ Representative shall have a reasonable opportunity to meet with the Accounting Firm to provide their views as to any disputed issues with respect to the calculation of any of the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses; (B) the Accounting Firm shall determine the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses in accordance with the terms of this Agreement and using the Specified Accounting Principles within thirty (30) days of such referral and upon reaching such determination shall deliver a copy of its calculations (the “Expert Calculations”) to the Shareholders’ Representative, Buyer and the Escrow Agent; and (C)

the determination made by the Accounting Firm of the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses shall be final and binding on Buyer, the Company, the Shareholders’ Representative and the Sellers for all purposes of this Agreement, absent manifest error. In calculating the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses, the Accounting Firm (x) shall be limited to addressing any particular disputes referred to in the Dispute Notice and (y) such calculation shall, with respect to any disputed item, be no greater than the higher amount calculated by the Shareholders’ Representative or the Company, and no less than the lower amount calculated by the Shareholders’ Representative or the Company, as the case may be. The Expert Calculations shall reflect in detail the differences, if any, between the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses reflected therein and the Closing Net Working Capital Amount, Closing Cash, Identified Capital Expenditures, Closing Debt and the Unpaid Company Transaction Expenses set forth in the Closing Date Schedule. The fees and expenses of the Accounting Firm shall be borne equally by Buyer and the Shareholders’ Representative (on behalf of the Sellers) (it being understood that any fees and expenses of the Accounting Firm payable by the Shareholders’ Representative (on behalf of the Sellers) shall be payable from the Shareholders’ Representative Expense Fund).

(d)Payment upon Final Determination of Adjustments.

(i)If (A) the Estimated Adjustment Amount is greater than (B) the Final Adjustment Amount (such difference between the Final Adjustment Amount and the Estimated Adjustment Amount, the “Negative Adjustment Amount”), then (x) the Shareholders’ Representative and Buyer shall deliver joint written instructions to the Escrow Agent directing the Escrow Agent to deliver an amount equal to the Negative Adjustment Amount (from dollar one) from the Working Capital Escrow Fund, to Buyer and (y) each Seller shall pay to Buyer within two (2) Business Days the applicable portion of the difference, if any, between the Negative Adjustment Amount and the Working Capital Escrow Fund.

(ii)If (A) the Final Adjustment Amount is greater than (B) the Estimated Adjustment Amount (such difference between the Final Adjustment Amount and the Estimated Adjustment Amount, the “Positive Adjustment Amount”), then (x) the Shareholders’ Representative shall prepare a Post-Closing Payment Schedule with respect to an amount equal to the Positive Adjustment Amount (from dollar one) and deliver such Post-Closing Payment Schedule to Buyer, and (y) no later than two (2) Business Days after receipt of such Post-Closing Payment Schedule and in accordance with the Post-Closing Payment Schedule, Buyer shall pay, or cause the Company to pay, the applicable portion of the Positive Adjustment Amount set forth in the Post-Closing Payment Schedule to each Seller, as applicable.

(iii)Promptly following the payment of the Final Adjustment Amount pursuant to this Section 2.4(d) (and in any event within two (2) Business Days after the

date of such payment) any amount remaining in the Working Capital Escrow Fund (such remaining portion, the “Escrow Fund Excess Amount”) shall be paid to the Sellers, by wire transfer of immediately available funds, in accordance with the payment instructions contained in the Post-Closing Payment Schedule.

(iv)In connection with the payment of the Final Adjustment Amount pursuant to this Section 2.4(d) and the preparation of the Post-Closing Payment Schedule, Shareholders’ Representative shall include in the Post-Closing Payment Schedule any amount remaining in the Shareholders’ Representative Expense Fund following the payment of any amounts pursuant to Section 13.1 to the Shareholders’ Representative in connection with costs and expenses incurred or to be incurred by the Shareholders’ Representative resulting from the performance of its rights or obligations under this Agreement and the Escrow Agreement and the taking of any and all actions in connection therewith (such remaining portion, the “Expense Fund Excess Amount”). Promptly after the payment of the Final Adjustment Amount, the Shareholders’ Representative shall promptly (and in any event within two (2) Business Days) following preparation of such Post-Closing Payment Schedule pay from the Shareholders’ Representative Expense Fund, to each Seller the applicable portion of the Expense Fund Excess Amount set forth in the Post-Closing Payment Schedule in accordance therewith.

Section 2.5Transfer Taxes. Buyer shall be responsible for and shall timely pay (without any adjustment to or deduction or withholding from the Purchase Price) all Transfer Taxes arising from or in connection with the transactions effected pursuant to this Agreement. Buyer shall, at its own expense, timely file all Tax Returns with respect to such Transfer Taxes. The Sellers will cooperate as reasonably requested by Buyer in filing any such Tax Returns and will provide any information and take any other actions as Buyer shall reasonably request in connection with filing any such Tax Returns.

Section 2.6Withholding. Buyer shall be entitled to deduct and withhold from any payment made pursuant to this Agreement such amounts as are required to be deducted and withheld with respect to such payment under the Code, or any other provision of applicable Law; provided, however, that there shall be no withholding from any payment if, on or before the Closing Date, each Seller shall have delivered to Buyer a duly executed and properly completed IRS Form W-9 establishing a complete exemption from backup withholding and complied with Section 9.3(f). To the extent that any amounts are so withheld, such withheld amounts (a) shall be remitted by Buyer to the applicable Governmental Authority, and (b) shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such withholding was made.

ARTICLE III.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Attached hereto is a disclosure schedule prepared by the Company with numbered sections corresponding to the relevant sections in this Agreement (the “Company Disclosure Schedule”). Any exception or qualification set forth in the Company Disclosure Schedule with respect to a particular representation, warranty or covenant contained herein shall be deemed to

be an exception or qualification with respect to all other representations, warranties and covenants contained in this Agreement if the applicability of such exception or qualification to any other representation, warranty or covenant would be reasonably apparent to a Person reviewing the Company Disclosure Schedule, regardless of whether an explicit reference to such other representation, warranty or covenant is made. Nothing in the Company Disclosure Schedule is intended to broaden the scope of any representation, warranty or covenant of the Company contained in this Agreement. Subject to the exceptions and qualifications set forth in the Company Disclosure Schedule, the Company hereby represents and warrants to Buyer as follows with respect to the Company:

Section 3.1Authority. The Company has the requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the Purchase and Sale and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder, and the consummation by the Company of the Purchase and Sale and the other transactions contemplated by this Agreement, have been duly authorized by the board of directors of the Company, and no other corporate action on the part of the Company is necessary to authorize the execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder or the consummation by the Company of the Purchase and Sale and the other transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by the other parties to this Agreement, this Agreement constitutes a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be subject to (a) the effect of any applicable Law of general application relating to bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting creditors’ rights and relief of debtors generally and (b) the effect of rules of Law and general principles of equity, including rules of Law and general principles of equity governing specific performance, injunctive relief and other equitable remedies (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

Section 3.2Organization; Subsidiaries.

(a)The Company is a corporation, duly incorporated, validly existing and in good standing under the Laws of the State of Oregon, and has the requisite corporate power and authority to own, operate or lease the properties and assets now owned, operated or leased by it, and to carry on the Company’s business as currently conducted. The Company is duly qualified to do business as a foreign company, and is in good standing (where such concept is recognized), under the Laws of each jurisdiction in which the character of its properties owned, operated or leased, or the nature of its activities, makes such qualification necessary, except in those jurisdictions where the failure to be so qualified or in good standing, when taken together with all other failures by the Company to be so qualified or in good standing, would not have a Material Adverse Effect. True and complete copies of the Company’s organizational documents (collectively, the “Company Organizational Documents”), each as amended and in effect as of the date of this Agreement, have been made available to Buyer or its advisors.

(b)The Company does not have any Subsidiaries.

Section 3.3Capitalization.

(a)The authorized capital stock of the Company consists of (i) 10,000,000 shares of common stock (the “Common Stock”), 5,000,000 of which are issued and outstanding and (ii) 10,000,000 shares of convertible preferred stock, 5,000,000 of which are issued and outstanding, and are collectively owned and held of record by the Sellers. As of the date of this Agreement, there are 608,000 stock options for the purchase of shares of Common Stock issued and outstanding (“Stock Options”). Section 3.3(a) of the Company Disclosure Schedule sets forth a list of the Shares owned by each Seller and a list of each Stock Option, the strike price, the holder thereof (each, an “Optionholder”) and whether each Stock Option is fully vested or will be fully vested as of the Closing.

(b)The Shares have not been issued in violation of any purchase option, call, right of first refusal, preemptive, subscription or similar rights under any provision of applicable Law, the charter and bylaws of the Company, or any Contract to which the Company is subject or by which it is bound. Except as set forth in Section 3.3(a) of the Company Disclosure Schedule, there are no outstanding warrants, options, rights, agreements, convertible or exchangeable securities or other commitments pursuant to which either the Company is or may become obligated to issue, sell, purchase, return or redeem any Shares. There are no agreements with respect to the voting or transfer of the Company’s capital stock, other than this Agreement.

Section 3.4Conflicts. Assuming all consents, waivers, approvals, authorizations, orders, Permits, declarations, filings, registrations and notifications and other actions set forth in Section 3.5 have been obtained or made, the execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder, and the consummation by the Company of the Purchase and Sale and the other transactions contemplated by this Agreement, does not and will not (i) conflict with or result in a violation of the Company Organizational Documents; (ii) conflict with or result in a violation of any Governmental Order or Law applicable to the Company or its assets or properties; or (iii) result in a breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give rise to any rights of termination, amendment, modification, acceleration or cancellation of or loss of any material benefit under, or result in the creation of any Encumbrance on any of the assets or properties of the Company pursuant to, any Contract to which the Company is a party, or by which any of the assets or properties of the Company is bound, except, in the case of clauses (ii) and (iii) of this Section 3.4, as would not result in a material liability to the Company.

Section 3.5Consents, Approvals, Etc. No consent, waiver, approval, authorization, order or Permit of, or declaration, filing or registration with, or notification to, any Governmental Authority is required to be made or obtained by the Company in connection with the execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder, or the consummation by the Company of the Purchase and Sale and the other transactions contemplated by this Agreement, except: (a) applicable requirements, if any, under the Act, federal or state securities or “blue sky” Laws; (b) such filings as may be required under the HSR Act; (c) as set forth in Section 3.5 of the Company Disclosure Schedule; and (d) any failure to obtain any of the foregoing that would not, when taken together with all other such failures, result in a Liability that is material in nature or amount to the Company.

Section 3.6Financial Statements; Undisclosed Liabilities.

(a)The Company has prepared, or caused to be prepared, and made available to Buyer or its advisors the audited financial statements of the Company (including the balance sheet and the related statements of operations, shareholders’ capital and cash flows of the Company) as of and for each of the fiscal years ended December 25, 2013, and December 30, 2014 and the unaudited financial statements of the Company (including the balance sheet and the related statements of operations, shareholders’ capital and cash flows of the Company) as of and for the year to date period ended June 20, 2015 (collectively, the “Company Financial Statements”). Except as set forth therein, the Company Financial Statements have been prepared in accordance with GAAP and applied on a consistent basis throughout the periods indicated therein and with each other, (except that such financial statements which are unaudited do not contain all of the footnotes required under GAAP and are subject to year-end adjustments), and present fairly, in all material respects, the financial position, results of operations and cash flows of the Company as of the respective dates and during the respective periods indicated therein. The unaudited balance sheet of the Company as of June 20, 2015 shall be referred to in this Agreement as the “Current Balance Sheet” and the date thereof shall be referred to in this Agreement as the “Balance Sheet Date.”

(b)The Company has no material Liabilities that would be required to be shown on the Company Financial Statements in accordance with GAAP, other than (i) as disclosed, reflected or reserved against in the Company Financial Statements and (ii) Liabilities incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date and not otherwise in violation of this Agreement, or (iii) otherwise disclosed on Section 3.6(b) of the Company Disclosure Schedule.

(c)To the Knowledge of the Company, there have been no instances of fraud that involve the Company’s management or other employees who have a significant role in the Company’s system of internal control over financial reporting.

(d)The financial books and records of the Company represent actual, bona fide transactions.

(e)All accounts receivable and notes receivable due and uncollected of the Company reflected on the Company Financial Statements or arising subsequent to the Balance Sheet Date have arisen from bona fide transactions in the ordinary course of business consistent with past practice. The Company has good and marketable title to its accounts receivable, free and clear of all Encumbrances except for Permitted Encumbrances.

(f)Since the Balance Sheet Date, there have not been any write-offs of any notes or accounts receivable of the Company nor is there any such write-off that has not been made but that is required to be made consistent with past practice, as of the date of this Agreement, except in each case for write-offs that were properly recorded on the Company Financial Statements.

Section 3.7Certain Changes or Events. Between January 1, 2015 and the Effective Date, there has not been, occurred or arisen:

(a)any event or condition of any kind or character that has had a Material Adverse Effect;

(b)any amendment or modification to the Company Organizational Documents;

(c)any issuance, delivery, sale or grant of (i) shares of capital stock or other equity interests of the Company, except upon the exercise of warrants, options, rights, agreements, convertible or exchangeable securities or other commitments, (ii) any warrants, options, rights, agreements, convertible or exchangeable securities, (iii) any “phantom” stock, “phantom” stock rights, stock appreciation rights or stock-based performance units, or (iv) other commitments obligating the Company to issue, sell, purchase, return or redeem any shares of capital stock or other equity interests of the Company;

(d)any declaration, setting aside or payment of any dividend, or other distribution or capital return in respect of any shares of capital stock or other equity interests of the Company, or any redemption, repurchase or other acquisition by the Company of any shares of capital stock or other equity interests of the Company;

(e)(i) any material damage, destruction or other material casualty loss (whether or not covered by insurance) affecting the Company or the assets of, or property owned, leased or otherwise used by the Company; (ii) any sale (except for inventory in the ordinary course of business consistent with past practice), lease, or disposition of any material asset of the Company; or (iii) any mortgage, pledge, or imposition of any Encumbrance (other than Permitted Encumbrances) upon, any material asset of the Company;

(f)any sale, assignment, transfer or license, or agreement to sell, assign, transfer or license, any material Intellectual Property, other than nonexclusive licenses granted in the ordinary course of business consistent with past practice;

(g)any acquisition (by merger, consolidation or other combination, or acquisition of stock or assets or otherwise) by the Company of any Person or division, or business of or equity interest in any Person, except for purchases of inventory, components or supplies in the ordinary course of business consistent with past practice;

(h)any material change in any method of financial or Tax accounting or financial or Tax accounting practice used by the Company, other than such changes as are required by GAAP or Tax law, as applicable;

(i)any material Tax election (including any change to any such election);

(j)any employment agreement with a Company Employee entered into or amended;

(k)(i) any cancellation or waiver of any material claims or material rights with a value to the Company or (ii) any settlement or compromise of any material Actions, other than such Actions in which the amount paid in settlement or compromise, including the cost to the Company of complying with any provisions of such settlement or compromise other than cash payments, does not exceed $100,000 without regard to any amount covered by insurance;

(l)any capital expenditure, or commitment for a capital expenditure in excess of $100,000 individually or $500,000 in the aggregate (excluding any individual capital expenditures or commitments for capital expenditures in amounts less than $50,000), for additions or improvements to the property, plant and equipment of the Company, other than the Identified Capital Expenditures;

(m)any amendment, termination, or written notice of termination of any Contract involving a commitment by the Company extending for more than one year and involving a total remaining commitment by the Company of at least $100,000;

(n)any loan, advance or capital contribution to or investment in any Person;

(o)any default in any Liability set forth on the Company Financial Statements that has not since been cured and that, taken together with all other defaults in Liabilities set forth on the Company Financial Statements, resulted in or is reasonably likely to result in Losses to the Company in excess of $50,000.

(p)any labor dispute, other than routine individual grievances, or, to the Knowledge of the Company, any activity or proceeding by a labor union or representative thereof to organize any Company Employees, or any lockouts, strikes, slowdowns, work stoppages or, to the Knowledge of the Company, threats thereof by or with respect to any Company Employees; or

(q)any agreement, other than this Agreement, to take any actions specified in this Section 3.7.

Section 3.8Tax Matters.

(a)All Tax Returns required to be filed by the Company have been timely filed and such Tax Returns are complete and correct in all material respects. All Taxes shown as due and outstanding on such Tax Returns have been timely paid, other than such Taxes, if any, as are being contested in good faith. All Taxes that the Company is required to withhold in connection with amounts paid or owing to any employee, independent contractor, creditor or stockholder have been duly withheld and, to the extent required, have been paid to the proper Governmental Authority.

(b)Section 3.8(b) of the Company Disclosure Schedule lists all Tax Returns filed with respect to the Company for Tax periods ended on or after December 31, 2012, indicates those Tax Returns that have been audited or for which the applicable Governmental Authority has notified the Company in writing that an audit will begin in the future, and indicates those Tax Returns that currently are the subject of audit. The Sellers have delivered to Buyer correct and complete copies of all Income Tax Returns, examination reports, and statements of deficiencies filed, assessed against or agreed to by the Company since December 31, 2012. No Governmental Authority has indicated in writing to the Company that it will assess any additional Taxes for any period for which Tax Returns have been filed.

(c)The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to and Tax assessment or deficiency.

(d)The Company has not been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code filing a consolidated federal Income Tax Return, other than a group the common parent of which is the Company. The Company has no liability for the Taxes of any Person other than the Company under Treasury Regulations Section 1.1502‑6 (or any similar provision of state, local or non-U.S. law).

(e)The Company has not (i) made any change in method of accounting for a taxable period ending on or prior to the Closing Date, (ii) executed any “closing agreement” as described in Code Section 7121 (or any corresponding or similar provision of Income Tax Law) on or prior to the Closing Date, (iii) entered into any intercompany transaction or created any excess loss account described in Treasury Regulations under Code Section 1502 (or any corresponding provision of Income Tax Law), (iv) entered into any installment sale or open transaction disposition on or prior to the Closing Date, (v) received any prepaid amount on or prior to the Closing Date, or (vi) made an election under Code Section 108(i), in each case, to the extent any such action would increase the Company’s liability for Taxes in a Post-Closing Tax Period.

(f)The Company is not a party to any Tax allocation or sharing agreement.

(g)The Company has not been a “United States real property holding corporation” within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii).

(h)The Company is not and has not been a party to any (i) “listed transaction,” as defined in Section 6707A(c)(2) of the Code and Treasury Regulations Section 1.6011-4(b)(2).

(i)The Company has disclosed on its U.S. federal Income Tax Returns all positions taken therein that could give rise to a substantial understatement of U.S. federal Income Tax within the meaning of Code Section 6662.

(j)The representations and warranties set forth in this Section 3.8 are the sole representations and warranties of the Company as to Tax matters.

Section 3.9Litigation and Governmental Orders. There are no Actions pending or, to the Knowledge of the Company, threatened against the Company, any of the assets or properties of the Company, or any of the board members and officers of the Company in their capacity as board members or officers of the Company. Neither the Company nor any of the Company’s assets and properties is subject to any Governmental Order.

Section 3.10Compliance with Laws.

(a)The Company is conducting its business in compliance in all material respects with applicable Law. Since January 1, 2013, the Company has not received any written notice from any Governmental Authority to the effect that the Company is not in compliance with any applicable Law.

(b)Since January 1, 2013, the Company has not received and, to the Knowledge of the Company, no third party that manufactures or processes products for the Company received written notice that the products sold by the Company are or at any time have been the subject of

any warning letter, written notice of violation, seizure, injunction, regulatory enforcement action, or criminal Action issued, initiated or, to the Knowledge of the Company, threatened by the FDA or USDA or other Governmental Authority.

Section 3.11Permits. The Company has all material Permits required to permit the Company to conduct its business as currently conducted, each of which is listed on Section 3.11 of the Company Disclosure Schedule. All of the material Permits held by or issued to the Company are in full force and effect, and the Company is in compliance with each such material Permit held by or issued to them. To the Knowledge of the Company, there are no processes pending or threatened that would be reasonably likely to result in the revocation, cancellation or suspension of any such material Permit by any Governmental Authority.

Section 3.12Real Property.

(a)The Company does not own any real property.

(b)Section 3.12(b) of the Company Disclosure Schedule contains a true, correct and complete list of each item of real property that is leased from or to a third party by the Company (“Leased Real Property”), the name of the third party lessor(s) or lessee(s) thereof, as the case may be, the date of the lease contract relating thereto and all amendments thereof. (i) All Leased Real Property is leased by the Company under valid and subsisting leases or subleases (as the same may have been amended or modified) that are in full force and effect and constitute a legal, valid and binding obligation of the Company and, to the Knowledge of the Company, the other parties thereto; (ii) the Company has not received written notice of any material breach or default, or cancellation or termination thereunder; (iii) to the Knowledge of the Company, there are no conditions, events or circumstances which with notice or lapse of time, or both, would constitute a material breach or default under such lease or sublease; and (iv) the Company has not received any payment from a lessor as inducement for entry into such lease. None of the Leased Real Property is subleased to any other Person.

(c)There are no pending, or to the Knowledge of the Company, threatened, condemnation or similar proceedings against the Company or otherwise relating to any of the Leased Real Property, and the Company has not received any written notice of the same.

(d)To the Knowledge of the Company, no assessments, water charges or sewer charges relating to the Leased Real Property are delinquent and to the Knowledge of the Company, there are no special assessments or charges pending or threatened in writing against the Leased Real Property, and the Company has not received any written notice of the same.

(e)The water, sewer, gas, electric, telephone and drainage facilities and all other utilities currently service the Leased Real Property in the capacities necessary to satisfy (i) to the Knowledge of the Company, existing requirements of Law and (ii) the current use and operation of the Leased Real Property.

(f)The Leased Real Property is in good operating condition and repair, subject only to ordinary wear and tear, for the purposes for which it is currently used.

(g)The Company has not received written notice of any pending or contemplated changes in the status of the zoning for the Leased Real Property. The Company is not a party to any agreement currently in effect with any county or township in which a tract is located, or any other entity, public or private, other than any Permitted Encumbrances, which would be binding and would prevent the use of the Leased Real Property for any of the uses allowed by the current zoning of the Leased Real Property.

(h)The Company has delivered or otherwise made available to Buyer true and complete copies of all leases for the Leased Real Property together with all amendments, modifications or supplements, if any, thereto.

Section 3.13Tangible Personal Property.

(a)Section 3.13(a) of the Company Disclosure Schedule sets forth a list of all material machinery and equipment, and all vehicles owned by the Company. The Company has good and marketable title to all of the assets set forth on Section 3.13(a) of the Company Disclosure Schedule, free and clear of all Encumbrances other than Permitted Encumbrances. None of the assets set forth on Section 3.13(a) of the Company Disclosure Schedule is leased to any other Person.

(b)Section 3.13(b) of the Company Disclosure Schedule includes a list of all leases of all material machinery and equipment of which the Company is a lessee. The Company has not received any payment from a lessor in connection with or as inducement for entering into any such lease. None of the assets set forth on Section 3.13(b) of the Company Disclosure Schedule is subleased to any Person.

(c)To the Knowledge of the Company, all material tangible personal assets and properties used or leased for use by the Company in connection with the conduct of its business are in good operating condition and repair, subject only to ordinary wear and tear.

(d)All inventories owned by the Company consist only of items of a quality and quantity readily usable or readily salable, at prices equal to the values at which such items are reflected in the Company’s books, in the ordinary course of business consistent with past practice and are valued so as to reflect the normal valuation policy of the Company, all in accordance with GAAP, applied on a basis consistent with prior years, but not in excess of the lower of cost or net realizable market value. Since the Balance Sheet Date, there have not been any write-downs of the value of, or establishment of any reserves against, any inventory, except for write-downs and reserves that were made in the ordinary course of business consistent with past practice.

Section 3.14Intellectual Property.

(a)Section 3.14(a) of the Company Disclosure Schedule sets forth a true, correct and complete list of (i) all Company Registered IP, (ii) all Company Owned IP which is not Registered Intellectual Property that is material to the conduct of the Company’s business as currently conducted, and (iii) all Company Licensed IP that is material to the conduct of the Company’s business as currently conducted. Section 3.14(a) of the Company Disclosure Schedule lists the registration or application numbers, registration filing dates, countries in which

registered or filed and expiration or renewal dates for registrations listed thereon. With respect to registered trademarks, Section 3.14(a) of the Company Disclosure Schedule sets forth a list of all goods and services in which such trademarks are registered or applied for. Each of the applications to register or obtain any copyrights, patents or trademarks required to be listed in Section 3.14(a) of the Company Disclosure Schedule is pending and in good standing without final rejection or denial of any kind. Except as set forth on Section 3.14(a) of the Company Disclosure Schedule, the Company exclusively owns, or possesses adequate and enforceable rights to use the Company Owned IP that is material to the conduct of the Company’s business as currently conducted and the Company Licensed IP that is material to the conduct of the Company’s business as currently conducted and has the right to utilize such rights without payment to any other Person, and the consummation of the transactions contemplated by this Agreement will not conflict, alter or impair any of such rights. Except as set forth on Section 3.14(a) of the Company Disclosure Schedule, there is no Company Licensed IP that is material to the conduct of the Company’s business as currently conducted.

(b)Except as set forth on Section 3.14(b) of the Company Disclosure Schedule, the Company has not granted any options, licenses, assignments or agreements of any kind relating to any of the Company Owned IP. Except as set forth on Section 3.14(b), the Company is not bound by or a party to any material options, licenses or agreements of any kind relating to the Intellectual Property rights of any other Person, except agreements relating to software. All Company Owned IP that is material to the conduct of the Company’s business as currently conducted is free and clear of the claims of any other Person and of all Encumbrances, other than Permitted Encumbrances. To the Knowledge of the Company, none of (i) the Company Owned IP, (ii) the Company Licensed IP, and (iii) the operation of the business of the Company as currently conducted and proposed to be conducted violate, conflict with, misappropriate or infringe the Intellectual Property rights of any other Person. No Actions are pending or, to the Knowledge of the Company, threatened against the Company by any other Person with respect to the ownership, validity, enforceability, effectiveness or use of any of the Company Owned IP or the Company Licensed IP, and the Company has not received any written communications alleging that the Company has violated any rights relating to Intellectual Property rights of any other Person.

(c)No former or current personnel has asserted any claim against the Company in connection with such personnel’s involvement in the conception and development of any Company Owned IP; and no such claim has been asserted or, to the Knowledge the Company, is threatened. To the Knowledge of the Company, no former or current employee of the Company has any patent issued, copyright registered, or application pending for any device, process, design or invention of any kind now used or needed by the Company in the operation of its business, which patents, registrations, or applications have not been assigned to the Company with such assignment duly recorded in the United States Patent Office.

(d)The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of all Trade Secrets used in the Company’s business.

Section 3.15Certain Contracts.

(a)Section 3.15(a) of the Company Disclosure Schedule contains a true, correct and complete list, and true, correct and complete copies have been made available to Buyer of, all of the following Contracts to which the Company is a party or to which its assets, property or business is bound or subject (other than purchase orders in the ordinary course of business consistent with past practice):

(i)Contracts governing the borrowing of money or the guarantee or the repayment of Debt or granting of Encumbrances on any property or asset of the Company (including any such Contract under which the Company has incurred any Debt) in excess of $100,000;

(ii)Contracts providing for the employment of any Person other than offer letters confirming at-will employment;

(iii)joint venture Contracts, partnership agreements or limited liability company agreements;

(iv)Contracts (excluding Contracts for Leased Real Property) with annual expenditures after the date of this Agreement in excess of $100,000 which are not terminable by the Company upon thirty (30) days’ notice without payment of a fee or other penalty;

(v)Contracts between the Company, on the one hand, and any board member, Company Employee or Affiliate of the Company, on the other hand (other than employment arrangements, including stock option grant agreements, entered into in the ordinary course of business);

(vi)Contracts containing covenants limiting the freedom of the Company to compete with any Person in any line of business or in any geographic area or market;

(vii)Contracts for the use of or restricting the use of Intellectual Property, other than for COTS Software;

(viii)Contracts providing for the purchase, maintenance or acquisition, or the sale or furnishing, of materials, supplies, merchandise or equipment (including but not limited to computer hardware or software or other property or services, but excluding COTS Software) with annual expenditures after the date of this Agreement in excess of $100,000, except for purchase orders submitted in the ordinary course of business;

(ix)Contracts granting to any Person a first refusal, first offer or similar preferential right to purchase or acquire any right, asset or property of the Company;

(x)Contracts pertaining to the lease of equipment or other personal property with annual expenditures after the date of this Agreement in excess of $50,000;

(xi)Contracts providing for any offset, countertrade or barter arrangement with annual expenditures after the date of this Agreement in excess of $100,000;

(xii)Contracts involving any distributor, sales representative, broker or advertising arrangement which are not terminable by the Company upon thirty (30) days’ notice without payment of a fee or other penalty;

(xiii)Contracts involving management services, consulting services, support services or any other similar services, including service agreements under which the Company is required to provide services to insurers, self insured employees or any governmental or private health plan, managed care plan or other similar Person with annual expenditures after the date of this Agreement in excess of $100,000;

(xiv)Contracts involving the acquisition of any business enterprise whether via stock or asset purchase or otherwise in excess of $100,000; or

(xv)any other material Contract with annual expenditures after the date of this Agreement in excess of $100,000.

Contracts listed or required to be listed on Section 3.15(a) of the Company Disclosure Schedule are referred to herein as the “Listed Contracts”.

(b)Each Listed Contract is in full force and effect in all material respects and represents a legally valid and binding obligation of the Company enforceable in accordance with its terms. The Company has performed, in all material respects, all obligations required to be performed by it under each of the Listed Contracts to which it is a party. There are no (with or without the lapse of time or the giving of notice or both) material defaults or, to the Knowledge of the Company, threatened material defaults by the Company or, to the Knowledge of the Company, by any other party thereto, and the Company has not waived any of its rights under any Listed Contract.

Section 3.16Employee Benefit Matters.

(a)Section 3.16(a) of the Company Disclosure Schedule contains a true, correct and complete list of each plan, program, policy, agreement or other arrangement providing for compensation, severance, deferred compensation, performance awards, stock or stock-based awards, fringe, retirement, death, disability or medical benefits or other employee benefits or remuneration of any kind, including each employment, severance, retention, change in control or consulting plan, program arrangement or agreement, in each case whether written or unwritten or otherwise, funded or unfunded, including any “employee benefit plan” as defined in Section 3(3) of ERISA, whether or not subject to ERISA, maintained, sponsored, contributed to or required to be contributed to by the Company and under which current or former employees and directors of the Company benefit (each, a “Company Benefit Plan” and, collectively, the “Company Benefit Plans”). The Company has made available to Buyer and its agents and representatives copies (or, if a plan is not written, a written description) of (i) each Company Benefit Plan and any amendments thereto, including schedules and financial statements attached thereto; (ii) the most recent annual report (Form 5500) filed with the IRS with respect to each such Company Benefit Plan, if applicable; (iii) each trust agreement and any other material written agreement relating to

each such Company Benefit Plan, if applicable; (iv) the most recent summary plan description for each such Company Benefit Plan for which a summary plan description is required, together with any summary of material modifications thereto; (v) the most recent determination or opinion letter issued by the IRS with respect to any such Company Benefit Plan intended to be qualified under Section 401(a) of the Code, if applicable; and (vi) for the preceding three (3) plan years, all actuarial valuation reports related to any Company Benefit Plan.

(b)(i) Each Company Benefit Plan has been established, administered and maintained in all material respects in accordance with its terms and in compliance in all material respects with applicable Law, including ERISA, the PPACA, the Code and federal securities Laws, (ii) the Company has timely made all material contributions and other material payments required by and due under the terms of each Company Benefit Plan and applicable Law, and all material benefits accrued under any unfunded Company Benefit Plan have been paid, accrued or otherwise adequately reserved to the extent required by, and in accordance with GAAP, (iii) there are no audits, inquiries or proceedings pending or, to the Knowledge of the Company, threatened by the IRS or any other Governmental Authority with respect to any Company Benefit Plan (other than routine claims for benefits in the normal course), (iv) no “prohibited transaction,” within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred with respect to any Company Benefit Plan, (v) there are no actions, suits or claims pending or, to the Knowledge of the Company, threatened (other than routine claims for benefits) against any Company Benefit Plan or against the assets of any Company Benefit Plan, (vi) neither the Company nor any ERISA Affiliate is subject to any penalty or Tax with respect to any Company Benefit Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Code and (vii) except to the extent limited by applicable Law, each Company Benefit Plan can be amended, terminated or otherwise discontinued after the Closing Date in accordance with its terms, without material liability to the Company (other than ordinary administration expenses and in respect of accrued benefits thereunder). Any Company Benefit Plan intended to be qualified under Section 401(a) of the Code has obtained a favorable determination letter (or opinion letter, if applicable) as to its qualified status under the Code and, as of the date hereof, to the Knowledge of the Company, no such determination letter has been revoked nor has any such revocation been threatened in writing, and as of the date hereof, to the Knowledge of the Company, no circumstance exists that would reasonably be expected to result in the loss of such qualified status under Sections 401(a) and 501(a) of the Code.

(c)Neither the Company nor any ERISA Affiliate has since January 1, 2013 maintained, established, sponsored, participated in, or contributed to, any “employee pension benefit plan,” within the meaning of Section 3(2) of ERISA subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.

(d)Neither the Company nor any ERISA Affiliate has contributed to or been obligated to contribute to any multiemployer plan (as defined in Section 3(37) of ERISA). Neither the Company nor any ERISA Affiliate has at any time since January 1, 2013 maintained, established, sponsored, participated in or contributed to any multiple employer plan or to any plan described in Section 413 of the Code.

(e)There is no Contract or Company Benefit Plan covering any employee of the Company that would result, separately or in the aggregate, in the payment of an “excess parachute payment” within the meaning of Section 280G(b)(1) of the Code as a result of the transactions contemplated by this Agreement. There is no Contract by which the Company is bound to compensate any employee of the Company for excise Taxes paid pursuant to Section 4999 of the Code.

Section 3.17Labor Matters.

(a)The Company is not a party to any labor agreement, collective bargaining agreement or recognition agreement with respect to its employees with any labor organization, group or association, nor, to the Knowledge of the Company, have there been any attempts to organize the employees of the Company since January 1, 2013.

(b)Since January 1, 2013, there have been no labor strikes, labor disturbances, walkouts, lockouts or work stoppages pending, or, to the Knowledge of the Company, threatened, against the Company.

(c)To the Knowledge of the Company, no union organizational campaign is in progress with respect to Company Employees and no disputes or organizational efforts concerning representation exists with respect to such employees.

(d)To the Knowledge of the Company, there is no unfair labor practice charge, complaint or grievance against the Company pending or threatened in writing before the United States National Labor Relations Board or any other Governmental Authority.

(e)To the Knowledge of the Company, there are no pending or threatened charges or recommendations against the Company or any current or former employee of the Company or before the United States Equal Employment Opportunity Commission or other Governmental Authority responsible for the prevention of unlawful employment practices.

(f)Since January 1, 2013, the Company has not incurred any material Liability or obligation under the Workers Adjustment and Retraining Notification Act or any other similar state or local law that remains unsatisfied.

Section 3.18Environmental Matters. The Company has made available to Buyer prior to the date of this Agreement, all material written environmental reports which are in the possession or control of the Company that relate to operations at any of the facilities or properties of the Company, all of which reports are listed on Section 3.18 of the Company Disclosure Schedule. Except as specifically set forth on Section 3.18 of the Company Disclosure Schedule:

(a)The Company is, and has been for the past five (5) years, in compliance in all material respects with all applicable Environmental Laws and has obtained and is in compliance in all material respects with all Permits required under any Environmental Law for the operation of its business as presently conducted. Such Permits are valid and in full force and effect.

(b)The Company has not received any written claim, written notice, demand letter or request for information alleging that the Company may be in material violation of, or have any unpaid material Liability under, any Environmental Law, and, to the Knowledge of the Company, there are no facts or conditions which would reasonably be expected to result in such Liability.

(c)The Company is not subject to any outstanding written Governmental Order, decree or injunction or other arrangement with any Governmental Authority, or to any written indemnity or other written agreement with any third party, pursuant to which the Company has any unpaid material Liability under any Environmental Law or with respect to Hazardous Material.

(d)None of the Leased Real Property is listed or, to the Knowledge of the Company, proposed for listing on the National Priorities List pursuant to CERCLA, or listed on the Comprehensive Environmental Response Compensation Liability Information System List (as defined in CERCLA) or any similar federal, state or foreign list of sites evidencing material levels of Hazardous Materials contamination of such Leased Real Property requiring investigation or remediation.

(e)No Encumbrance has been recorded against any of the Leased Real Property by any Governmental Authority pursuant to any Environmental Law.

(f)There have been no Releases of Hazardous Materials by the Company on, into or from the Leased Real Property or on, into or from any real property currently or formerly owned, leased or operated by the Company, and to the Knowledge of the Company, during any other Persons’ use, ownership or operation of the Leased Real Property, in an amount or manner that requires any reporting, investigation or remediation pursuant to any Environmental Laws or which could reasonably be expected to result in a material Liability of the Company under any Environmental Law. To the Knowledge of the Company, none of the Leased Real Property contains any damaged friable asbestos-containing materials or underground storage tanks.

(g)The Company has no unpaid material Liability under any Environmental Law arising out of any Hazardous Material contamination at any location to or at which any Hazardous Material has been transported or disposed of by, or on behalf of, the Company, and, to the Knowledge of the Company, there are no facts or conditions which would reasonably be expected to result in such Liability.

(h)There are no civil, criminal or administrative actions, suits, hearings or proceedings, and no written notices of violation pending or, to the Knowledge of the Company, threatened against the Company under Environmental Laws.

Section 3.19Related Party Transactions. To the Knowledge of the Company, as of the date of this Agreement, no Related Party (a) has any direct or indirect interest in any material asset used in or otherwise relating to the Company’s business, (b) has entered into any material Contract, transaction or business dealing involving the Company, (c) is competing with the Company or (d) has any claim or right against the Company (other than rights to receive

compensation for services performed, or indemnification, as a member, board member, officer or employee of the Company).

Section 3.20Brokers. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon any arrangements made by or on behalf of the Company.

Section 3.21Suppliers, Customers and Distributors.

(a)Section 3.21(a) of the Company Disclosure Schedule lists for each of the year ending December 31, 2014 and the period from January 1, 2015 through the Balance Sheet Date, the names of the respective suppliers that were, in the aggregate, the ten (10) largest suppliers in terms of dollar value of products or services, or both, to the Company (the “Major Suppliers”).

(b)Section 3.21(b) of the Company Disclosure Schedule lists for each of the year ending December 31, 2014 and the period from January 1, 2015 through the Balance Sheet Date, the names of the respective customers that were, in the aggregate, the ten (10) largest customers of the Company’s products in terms of dollar value (the “Major Customers”).

(c)Since January 1, 2014, no Major Supplier or Major Customer has: (i) canceled, terminated or otherwise materially altered its relationship with the Company under any Contract between such supplier, customer or distributor and the Company, or (ii) notified in writing the Company of any intention to materially alter its relationship with the Company, or (iii) sought in writing to materially modify the pricing policies for goods or services provided by the Company under any Contract between such supplier, customer or distributor and the Company, effective prior to or as of the Closing Date except in the ordinary course of business consistent with past practice.

Section 3.22Product Standards. To the Knowledge of the Company, since January 1, 2013, no product distributed or sold by the Company would have warranted legal action by any Governmental Authority so that a product recall should have occurred or did, in fact occur.

Section 3.23No Other Representations or Warranties. Except for the representations and warranties contained in this ARTICLE III (as modified by the Company Disclosure Schedule) and the certificate to be delivered pursuant to Section 9.3(a), neither the Company nor any other Person makes any other express or implied representation or warranty with respect to the Company or the transactions contemplated by this Agreement, and the Company disclaims any other representations or warranties, whether made by the Company or any of its Affiliates, board members, officers, employees, agents or representatives. Except for the representations and warranties contained in this ARTICLE III (as modified by the Company Disclosure Schedule) and the certificate to be delivered pursuant to Section 9.3(a), the Company hereby disclaims all liability and responsibility for any representation, warranty, statement, or information made, communicated, or furnished (orally or in writing) to Buyer or its Affiliates or representatives (including any opinion, information, projection, or advice that may have been or may be provided to Buyer by any board member, officer, employee, agent, consultant, or representative of the Company or any of its Affiliates). The Company makes no representations

or warranties to Buyer regarding any projection or forecast regarding future results or activities or the probable success or profitability of the Company.

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES OF THE SELLERS

Each Seller hereby severally, and not jointly, represents and warrants to Buyer as follows:

Section 4.1Authority. Such Seller has the requisite individual or organizational power and authority, as applicable, to enter into this Agreement, to perform its obligations hereunder and to consummate the Purchase and Sale and the other transactions contemplated by this Agreement, including in the case of each Seller who is individual, being of the age of consent. The execution and delivery of this Agreement by such Seller, the performance by such Seller of its obligations hereunder, and the consummation by such Seller of the Purchase and Sale and the other transactions contemplated by this Agreement, have been duly authorized by such Seller, and no other individual or organizational action, as applicable, on the part of such Seller is necessary to authorize the execution and delivery of this Agreement by such Seller, the performance by such Seller of its obligations hereunder or the consummation by such Seller of the Purchase and Sale and the other transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by such Seller and, assuming due authorization, execution and delivery by the other parties to this Agreement, this Agreement constitutes a legally valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except as such enforceability may be subject to (a) the effect of any applicable Law of general application relating to bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting creditors’ rights and relief of debtors generally and (b) the effect of rules of Law and general principles of equity, including rules of Law and general principles of equity governing specific performance, injunctive relief and other equitable remedies (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

Section 4.2Organization. Such Seller that is not an individual is a limited liability company, limited partnership, other business organization or trust duly organized, validly existing and in good standing (to the extent such concept is recognized) under the Laws of the jurisdiction of its organization and has the requisite power and authority to own, operate or lease the properties and assets now owned, operated or leased by it, and to carry on its business in all material respects.

Section 4.3Conflicts. The execution and delivery of this Agreement by such Seller, the performance by such Seller of its obligations hereunder, and the consummation by such Seller of the Purchase and Sale and the other transactions contemplated by this Agreement, does not and will not (a) in the case of a Seller that is not an individual, conflict with or result in a violation of the organizational documents of such Seller; (b) conflict with or result in a violation of any Governmental Order or Law applicable to such Seller or its assets or properties, except for such conflicts or violations which would not prevent the consummation of the transactions contemplated by this Agreement; or (c) result in a material breach of, or constitute a material

default (or event which with the giving of notice or lapse of time, or both, would become a material default) under, or give rise to any rights of termination, amendment, modification, acceleration or cancellation of or loss of any benefit under, or result in the creation of any Encumbrance on any of the assets or properties of such Seller pursuant to, any Contract to which such Seller is a party, or by which any of the assets or properties of such Seller are bound or affected, except for such breaches or defaults which would not prevent the consummation of the transactions contemplated by this Agreement.

Section 4.4Consents, Approvals, Etc. No consent, waiver, approval, authorization, order or permit of, or declaration, filing or registration with, or notification to, any Governmental Authority is required to be made or obtained by such Seller in connection with the execution and delivery of this Agreement by such Seller, the performance by such Seller of its obligations hereunder, or the consummation by such Seller of the transactions contemplated by this Agreement, except: (a) applicable requirements, if any, under the Act, federal or state securities or “blue sky” Laws; (b) such filings as may be required under the HSR Act; and (c) where the failure to obtain such consent, waiver, approval, authorization, order or permit, or to make such declaration, filing, registrations or notification would not, when taken together with all other such failures by such Seller, have a material adverse effect on the ability of such Seller to perform its obligations under this Agreement or consummate the transactions contemplated by this Agreement.

Section 4.5Ownership. Such Seller has good and valid title to the Shares set forth next to its name on Schedule 2.1, free and clear of all Encumbrances and any other restrictions on transfer (other than Encumbrances set forth under the Company Organizational Documents, Encumbrances or restrictions that shall be released, waived or otherwise terminated in connection with the Closing and any restrictions under the Securities Act of 1933, as amended, and state securities laws). Such Seller is not a party to any option, warrant, right, contract, call, pledge, put or other agreement or commitment providing for the disposition or acquisition of such Seller’s Shares.

Section 4.6No Other Representations or Warranties. Except for the representations and warranties contained in this ARTICLE IV and the certificate to be delivered pursuant to Section 9.3(a), none of the Sellers nor any other Person makes any other express or implied representation or warranty with respect to such Seller or the transactions contemplated by this Agreement, and such Seller disclaims any other representations or warranties, whether made by another Seller or any of its Affiliates, officers, board members, employees, agents or representatives. Except for the representations and warranties contained in ARTICLE IV and the certificate to be delivered pursuant to Section 9.3(a), such Seller hereby disclaims all liability and responsibility for any representation, warranty, statement, or information made, communicated, or furnished (orally or in writing) to Buyer or its Affiliates or representatives (including any opinion, information, projection, or advice that may have been or may be provided to Buyer by any board member, officer, employee, agent, consultant, or representative of the Company or any of its Affiliates).

ARTICLE V.

REPRESENTATIONS AND WARRANTIES OF BUYER AND GUARANTOR

Buyer hereby represents and warrants to the Company as follows:

Section 5.1Authority. Buyer and Guarantor have the requisite power and authority to enter into this Agreement, to perform their obligations hereunder and to consummate the Purchase and Sale and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by Buyer and Guarantor, the performance by Buyer and Guarantor of their obligations hereunder, and the consummation by Buyer and Guarantor of the Purchase and Sale and the other transactions contemplated by this Agreement, have been duly authorized by the board of directors of Guarantor, and equivalent body of Buyer, and no other action on the part of Buyer or Guarantor is necessary to authorize the execution and delivery of this Agreement by Buyer and Guarantor, the performance by Buyer and Guarantor of their obligations hereunder or the consummation by Buyer and Guarantor of the Purchase and Sale and the other transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by Buyer and Guarantor and, assuming due authorization, execution and delivery by the other parties to this Agreement, this Agreement constitutes a legally valid and binding obligation of Buyer and Guarantor, enforceable against Buyer and Guarantor in accordance with its terms, except as such enforceability may be subject to (a) the effect of any applicable Law of general application relating to bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting creditors’ rights and relief of debtors generally and (b) the effect of rules of Law and general principles of equity, including rules of Law and general principles of equity governing specific performance, injunctive relief and other equitable remedies (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

Section 5.2Organization. Buyer and Guarantor are duly organized, validly existing and in good standing under the Laws of the jurisdictions in which they are organized, and have the requisite power and authority to own, operate or lease the properties and assets now owned, operated or leased by them, and to carry on their businesses in all material respects as currently conducted. Buyer and Guarantor are duly qualified to do business and are in good standing (to the extent such concept is recognized), under the Laws of each jurisdiction in which the character of their properties owned, operated or leased, or the nature of their activities, makes such qualification necessary, except in those jurisdictions where the failure to be so qualified or in good standing, when taken together with all other failures by Buyer or Guarantor, as applicable, to be so qualified or in good standing, would not have a material adverse effect on the ability of Buyer and Guarantor to perform its obligations under this Agreement or consummate the transactions contemplated by this Agreement.

Section 5.3Conflicts. Assuming all consents, waivers, approvals, authorizations, orders, Permits, declarations, filings, registrations and notifications and other actions set forth in Section 5.4 have been obtained or made, the execution and delivery of this Agreement by Buyer and Guarantor, the performance by Buyer and Guarantor of their obligations hereunder, and the consummation by Buyer and Guarantor of the Purchase and Sale and the other transactions contemplated by this Agreement, does not and will not (a) conflict with or result in a violation of

the organizational documents of Buyer or Guarantor; (b) conflict with or result in a violation of any Governmental Order or Law applicable to Buyer or Guarantor or their assets or properties; or (c) result in a material breach of, or constitute a material default (or event which with the giving of notice or lapse of time, or both, would become a material default) under, or give rise to any rights of termination, amendment, modification, acceleration or cancellation of or loss of any material benefit under, or result in the creation of any Encumbrance on any of the assets or properties of Buyer or Guarantor pursuant to, any Contract to which Buyer or Guarantor is a party, or by which any of the assets or properties of Buyer or Guarantor is bound or affected, except, in the case of clauses (b) and (c) of this Section 5.3, as would not have a material adverse effect on the ability of Buyer or Guarantor to perform its obligations under this Agreement or consummate the transactions contemplated by this Agreement.

Section 5.4Consents, Approvals, Etc. No consent, waiver, approval, authorization, order or Permit of, or declaration, filing or registration with, or notification to, any Governmental Authority or third party is required to be made or obtained by Buyer or Guarantor in connection with the execution and delivery of this Agreement by Buyer and Guarantor, the performance by Buyer and Guarantor of their obligations hereunder, or the consummation by Buyer and Guarantor of the Purchase and Sale and the other transactions contemplated by this Agreement, except (a) applicable requirements, if any, under the Act, federal or state securities or “blue sky” Laws; (b) such filings as may be required under the HSR Act; and (c) where the failure to obtain such consent, approval, authorization or action, or to make such filing or notification would not, when taken together with all other such failures by Buyer and Guarantor, have a material adverse effect on the ability of Buyer or Guarantor to perform its obligations under this Agreement or consummate the transactions contemplated by this Agreement.

Section 5.5Litigation and Governmental Orders. There are no Actions pending against Buyer, Guarantor or any Subsidiaries of Buyer (“Buyer Subsidiaries”), or any of the assets or properties of Buyer, Guarantor or any Buyer Subsidiaries, or any of the board members, managers or officers of Buyer, Guarantor or any Buyer Subsidiaries in their capacity as board members, managers or officers of Buyer, Guarantor or any Buyer Subsidiaries that would have a material adverse effect on the ability of Buyer or Guarantor to perform its obligations under this Agreement or consummate the transactions contemplated by this Agreement. Buyer, Guarantor and the Buyer Subsidiaries and their respective assets and properties are not subject to any material Governmental Order that would prevent Buyer or Guarantor from performing its obligations under this Agreement or consummating the Purchase and Sale and the other transactions contemplated by this Agreement.

Section 5.6Adequate Funds. Buyer and Guarantor will have currently available funds on hand as of the Closing sufficient to satisfy its obligations set forth in this Agreement, including payment in full of the Purchase Price and any amounts required to be paid by them or on their behalf pursuant to this Agreement.

Section 5.7Due Diligence Investigation. Buyer and Guarantor have had an opportunity to discuss the business, management, operations and finances of the Company with their board members, managers, members, officers, employees, agents, representatives and affiliates, and have had an opportunity to inspect the facilities of the Company. Buyer and Guarantor have conducted their own independent investigation of the Company. In making the

decision to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement, Buyer and Guarantor have relied solely upon the representations and warranties of the Company set forth in ARTICLE III and of the Sellers set forth in ARTICLE IV (and acknowledge that such representations and warranties are the only representations and warranties made by the Company and any Seller, as the case may be) and have not relied upon any other information provided by, for or on behalf of the Company or any Seller, or their respective agents or representatives, to Buyer or Guarantor in connection with the transactions contemplated by this Agreement. Buyer and Guarantor have entered into the transactions contemplated by this Agreement with the understanding, acknowledgement and agreement that no representations or warranties, express or implied, are made with respect to any projection or forecast regarding future results or activities or the probable success or profitability of the Company.

Section 5.8Brokers. Except for Deutsche Bank Securities, Inc. (the fees and expenses of which shall be paid in full by Buyer), no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon any arrangements made by or on behalf of Buyer, Guarantor or any of their respective Affiliates.

Section 5.9Investment Intent. Buyer is acquiring the Shares hereunder for its own account for investment, without a view to resale or distribution thereof in violation of federal or state securities Laws and with no present intention of distributing or reselling any part thereof. Buyer will not so distribute or resell any such Share in violation of any such Law.

Section 5.10No Other Representations or Warranties. Except for the representations and warranties contained in this ARTICLE V and the certificate to be delivered pursuant to Section 9.2(a), neither Buyer nor Guarantor nor any other Person makes any other express or implied representation or warranty with respect to Buyer or Guarantor or the transactions contemplated by this Agreement, and Buyer and Guarantor disclaim any other representations or warranties, whether made by Buyer, Guarantor or any of their Affiliates, board members, officers, employees, agents or representatives. Except for the representations and warranties contained in this ARTICLE V and the certificate to be delivered pursuant to Section 9.2(a), Buyer and Guarantor hereby disclaim all liability and responsibility for any representation, warranty, statement, or information made, communicated, or furnished (orally or in writing) to the Company, the Sellers or their Affiliates or representatives (including any opinion, information, projection, or advice that may have been or may be provided to the Company or the Sellers by any board member, officer, employee, agent, consultant, or representative of Buyer, Guarantor or any of their Affiliates).

ARTICLE VI.

COVENANTS OF THE COMPANY AND THE SELLERS

Section 6.1No Solicitation. During the period commencing with the execution and delivery of this Agreement and terminating upon the earlier to occur of the Closing and the termination of this Agreement pursuant to and in accordance with Section 10.1 (the “Pre-Closing Period”), the Sellers and the Company shall not, and shall direct each of the board members,

officers, affiliates, shareholders and employees of the Company and any investment banker, attorney or other advisor or representative retained by the Company (all of the foregoing collectively being the “Company Representatives”) not to, directly or indirectly, (a) solicit, initiate, seek, encourage, facilitate, support or induce the making, submission or announcement of any inquiry, expression of interest, proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal, (b) enter into, participate in, maintain or continue any negotiations regarding, or deliver or make available to any Person any non-public information with respect to, or take any other action regarding, any inquiry, expression of interest, proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal, (c) agree to, accept, approve, endorse or recommend any Acquisition Proposal; or (d) enter into any letter of intent or any other Contract contemplating or otherwise relating to any Acquisition Proposal. The Sellers and the Company shall immediately cease and cause to be terminated any and all existing activities, discussions or negotiations with any Persons conducted prior to or on the date of this Agreement with respect to any Acquisition Proposal.

Section 6.2Conduct of the Company Prior to the Closing.

(a)Conduct of the Company Generally. Unless Buyer otherwise consents in writing (which consent shall not be unreasonably withheld, conditioned or delayed) and except as otherwise contemplated or permitted by this Agreement, required by applicable Law or as set forth on Schedule 6.2(a) attached hereto, during the Pre-Closing Period, the Company (i) shall conduct its business in the ordinary course consistent with past practice, (ii) shall use commercially reasonable efforts to preserve intact its business and keep available the services of its current officers and its workforce and (iii) shall use commercially reasonable efforts to maintain its relationships with customers, suppliers, licensors, licensees and distributors; provided, however, neither Sellers nor the Company shall be in breach of this subsection (iii) to the extent that such relationships are harmed, disrupted or otherwise affected by the execution, delivery, public announcement or pendency of this Agreement or any of the transactions contemplated herein.

(b)Specific Limitations on the Conduct of the Company. Except as otherwise contemplated or permitted by this Agreement, required by applicable Law or as set forth on Schedule 6.2(b) attached hereto, during the Pre-Closing Period, the Company shall not do or cause to be done any of the following without the prior written consent of Buyer (which consent shall not be unreasonably withheld, conditioned or delayed):

(i)issue, deliver, sell or grant (A) any shares of capital stock or other equity interests of the Company, except upon the exercise of warrants, options, rights, agreements, convertible or exchangeable securities or other commitments outstanding on the date of this Agreement, (B) any warrants, options, rights, convertible or exchangeable securities (C) any “phantom” stock, “phantom” stock rights, stock appreciation rights or stock-based performance units or (D) other commitments obligating the Company to issue, sell, purchase, return or redeem any shares of capital stock or other equity interests of the Company;

(ii)except in the ordinary course of business consistent with past practice, create any Encumbrance on any assets or properties (whether tangible or intangible) of the Company, other than (A) Permitted Encumbrances; and (B) Encumbrances on assets or properties having an aggregate value not in excess of $100,000;

(iii)sell, assign, transfer, lease, license or otherwise dispose of, or agree to sell, assign, transfer, lease, license or otherwise dispose of, any of the assets of the Company, except for sales of inventory, components or supplies in the ordinary course of business consistent with past practice;

(iv)license, grant any rights to or transfer any of the Company Owned IP, other than non-exclusive grants of licenses in the ordinary course of business consistent with past practice;

(v)abandon, cancel, let lapse, fail to renew, fail to continue to prosecute, protect or defend or otherwise dispose of any of the Company Registered IP other than in the ordinary course of business consistent with past practice;

(vi)acquire (by merger, consolidation or combination, or acquisition of stock or assets) any Person or division, or business of or equity interest in any Person, except for purchases of inventory, components or supplies in the ordinary course of business consistent with past practice;

(vii)(A) grant to any Company Employee or director of the Company any increase in compensation, including, without limitation, bonus opportunity, except to the extent required under employment agreements in effect as of the date hereof or applicable Law, other than in the ordinary course of business consistent with past practice and excluding any Closing Employee Payments, (B) grant to any Company Employee or director of the Company any increase in severance or termination pay, except to the extent required under any agreement in effect as of the date hereof or applicable Law, (C) enter into or amend any employment, consulting, indemnification, severance or termination agreement with any Person, (D) establish, adopt, enter into or amend in any material respect any collective bargaining agreement or Company Benefit Plan other than renewals and extensions of existing benefits in the ordinary course of business solely with respect to Company Benefit Plans, or (E) take any action to accelerate any rights or benefits, or make any determinations not in the ordinary course of business consistent with past practice, under any collective bargaining agreement or Company Benefit Plan;

(viii)except as set forth on Schedule 6.2(b) attached hereto, make, authorize or enter into commitments to make capital expenditures in an amount that, when added to all other capital expenditures made during the Pre-Closing Period on behalf of the Company and not identified on Schedule 6.2(b) attached hereto, would exceed $200,000;

(ix)adopt or materially change any method of financial or Tax accounting or financial or Tax accounting practice used by the Company, other than as required by GAAP or Tax Law, as applicable, or make or change any material Tax election;

(x)make, change or rescind any election in respect of Taxes, file any Income Tax Return (without prior opportunity for Buyer to review and approve which approval shall not be unreasonably witheld, conditioned or delayed) or any amendment to an Income Tax Return (without prior opportunity for Buyer to review and approve which approval shall not be unreasonably witheld, conditioned or delayed), enter into any “closing agreement” as described in Code Section 7121 (or any corresponding or similar provision of Income Tax Law), settle any claim or assessment in respect of any amount of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes, in each case, to the extent any such action would increase Buyer’s or any Affiliate of Buyer’s liability for Taxes in Post-Closing Tax Periods;

(xi)amend the Company Organizational Documents;

(xii)declare, set aside or pay any dividend or other distribution or capital return in respect of any shares of capital stock or other equity interests of the Company, or redeem, repurchase or otherwise acquire any shares of capital stock or other equity interests of the Company;

(xiii)(A) incur any Debt, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company, guarantee any debt securities of another Person, enter into any “keep well” or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing, except for short-term borrowings incurred in the ordinary course of business consistent with past practice or (B) make any loans, advances or capital contributions to, or investments in, any other Person;

(xiv)(A) cancel any material Debt (individually or in the aggregate) or waive any claims or rights or (B) waive any material benefits of, or agree to modify in any material manner, any confidentiality, standstill or similar agreement to which the Company is a party;

(xv)enter into any non-compete, exclusivity or similar agreement that would restrict or limit the operations of the Company, or, after the Closing, of Buyer and its Affiliates;

(xvi)settle or compromise any material litigation, or waive, release or assign any material claims;

(xvii)engage in (A) any forward selling or acceleration of customer orders or Contracts, (B) any deferral in paying payables, (C) any deferral in making capital expenditures that are necessary to maintain the fixed assets of the Company in the ordinary course of business consistent with past practice, (D) any delay in capital projects that are necessary to maintain the fixed assets of the Company in the ordinary course of business consistent with past practice, (E) any grant of any discount to customers or any other change in the terms of conditions of sale or purchase (including, without limitation, payment and delivery terms) or (F) any other changes not covered by (A) through (E)

above which are intended to materially increase the current income and cash collection of the Company prior to the Closing Date, except in each of (A) through (E) any actions in the ordinary course of business consistent with past practice;

(xviii)fail to maintain insurance coverage at commercially reasonable levels; or

(xix)enter into any agreement to take, or cause to be taken, any of the actions set forth in this Section 6.2(b).

Section 6.3Access to Information. Subject to the terms of the Confidentiality Agreement, during the Pre-Closing Period, upon reasonable notice and during normal business hours, the Company shall, and shall cause each Company Representative to, (a) afford the officers, employees and authorized agents and representatives of Buyer reasonable access to the offices, properties, books and records of the Company and (b) furnish to the officers, employees and authorized agents and representatives of Buyer such additional financial and operating data and other information regarding the assets, properties and business of the Company as Buyer may from time to time reasonably request in order to assist Buyer in fulfilling its obligations under this Agreement and to facilitate the consummation of the transactions contemplated by this Agreement; provided, however, that such access and requests do not unreasonably interfere with any of the operations or business activities of the Company. Notwithstanding the foregoing, the Company shall not be required to provide access to or disclose information where such access or disclosure would waive the attorney-client, work product or any similar legal privilege of the Company or contravene any Law or binding agreement entered into prior to the date of this Agreement; provided that the Company shall (i) notify Buyer that the information is reasonably likely to violate the Company’s obligations under any such Law or agreement or is reasonably likely to cause such privilege to be undermined and (ii) the Company shall cooperate with Buyer in seeking to find a way to allow disclosure of such information (including by entering into a joint-defense or similar agreement) including through the use of customer “clean-room” arrangements pursuant to which appropriately designated representatives of Buyer shall be provided access to such information. Any information furnished to or otherwise obtained by Buyer or its officers, employees and authorized agents and representatives pursuant to this Section 6.3 shall be subject to the terms of the Confidentiality Agreement.

Section 6.4Stock Options.

(a)Not later than thirty (30) days after the date hereof, and no less than two (2) Business Days before the Closing Date, the Company shall use its commercially reasonable efforts to enter into, and provide Buyer a true, correct and complete copy of, a Contract with each Optionholder in substantially the form attached hereto as Exhibit B (the “Optionholder Pay-Off Agreements”).

(b)By not later than the Closing, the Company shall terminate all Stock Options pursuant to the Optionholder Pay-Off Agreements and/or the applicable Company Benefit Plan.

Section 6.5Termination of Certain Agreements. Prior to the Closing Date, the Company shall take all actions necessary to terminate as of the Closing Date, and shall cause to be terminated as of the Closing Date, the Contracts listed on Schedule 9.3(g) attached hereto.

Section 6.6Parachute Payments. The Company shall seek to obtain shareholder approval pursuant to Code Section 280G(b)(5) and the Treasury Regulations thereunder of any payment that would otherwise be an “excess parachute payment.”

Section 6.7Update to Schedule. At least two (2) Business Days prior to the Closing Date, the Company shall provide to Buyer an updated Schedule 1.1(c) (Company Transaction Expenses Tax Benefit), which shall take into account any amounts that are determined not to be deductible by the Company under Code Section 280G(a) due to any failure of the shareholders to approve such amounts in accordance with Code Section 280G(b)(5).

Section 6.8Directors’ and Officers’ Insurance. At or prior to the Closing, the Company shall purchase (as a Company Transaction Expense) a prepaid directors’ and officers’ liability insurance policy or policies (i.e., “tail coverage”) which policy or policies provide those persons who are currently covered by the Company’s directors’ and officers’ liability insurance policy.

ARTICLE VII.

COVENANTS OF BUYER AND GUARANTOR

Section 7.1Indemnification.

(a)Indemnification of Directors and Officers. For a period of six (6) years after the Closing, Buyer shall, and shall cause the Company to, (i) indemnify and hold harmless each present and former board member and officer of the Company (collectively, the “Company Indemnified Parties”), against any and all Losses incurred or suffered by any of the Company Indemnified Parties in connection with any Liabilities or any Action, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Closing, whether asserted or claimed prior to, at or after the Closing, to the fullest extent that the Company would have been permitted under applicable Law and under the Company Organizational Documents or any individual indemnity agreements, as the case may be, in each case as in effect on the date of this Agreement, to indemnify such Company Indemnified Parties and (ii) advance expenses as incurred by any Company Indemnified Party in connection with any matters for which such Company Indemnified Party is entitled to indemnification from Buyer pursuant to this Section 7.1(a) to the fullest extent permitted under applicable Law or, if greater, under the Company Organizational Documents or any individual indemnity agreements; provided, however, that the Company Indemnified Party to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately and finally determined by a court of competent jurisdiction and all rights of appeal have lapsed that such Company Indemnified Party is not entitled to indemnification under applicable Law, the Company Organizational Documents, and pursuant to this Section 7.1(a).

(b)Third-Party Beneficiaries. The terms and provisions of this Section 7.1 are intended to be in addition to the rights otherwise available to the Company Indemnified Parties by applicable Law, charter, bylaw or agreement, and shall operate for the benefit of, and shall be enforceable by, the Company Indemnified Parties and their respective heirs and representatives, each of whom is an intended third party beneficiary of this Section 7.1.

(c)Successors and Assigns. In the event Buyer or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, Buyer shall cause such successors and assigns to assume the obligations set forth in this Section 7.1.

Section 7.2Confidentiality. Each of Buyer and Guarantor hereby agrees to be bound by and comply with the terms of the Confidentiality Agreement, which are hereby incorporated into this Agreement by reference and shall continue in full force and effect until the Closing, such that the information obtained by Buyer, or its respective officers, employees, agents or representatives, during any investigation conducted pursuant to Section 6.3, or in connection with the negotiation and execution of this Agreement or the consummation of the transactions contemplated by this Agreement, or otherwise, shall be governed by the terms of the Confidentiality Agreement.

Section 7.3R&W Insurance. Buyer agrees to not seek to make, enter into or consent to, any amendment to the R&W Insurance following the Closing without the Shareholders’ Representative’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, except for ordinary course amendments that do not adversely affect Sellers’ rights under this Agreement.

ARTICLE VIII.

COVENANTS OF THE COMPANY, THE SELLERS AND BUYER

Section 8.1Efforts; Consents; Regulatory and Other Authorizations.

(a)Each party to this Agreement shall use its commercially reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to promptly satisfy the conditions set forth in ARTICLE IX and to consummate and make effective the Purchase and Sale and the other transactions contemplated by this Agreement; (ii) obtain all authorizations, consents, orders and approvals of, and give all notices to and make all filings with, all Governmental Authorities and other third parties that may be or become necessary for the performance of its obligations under this Agreement and the consummation of the transactions contemplated by this Agreement; and (iii) fulfill all conditions to such party’s obligations under this Agreement. Each party to this Agreement shall cooperate fully with the other parties to this Agreement in promptly seeking to obtain all such authorizations, consents, orders and approvals, giving such notices, and making such filings. Each party shall use its commercially reasonable efforts to oppose any Governmental Order contemplated by this Section 8.1(a) or to have any Governmental Order contemplated by this Section 8.1(a) vacated or made inapplicable to the transactions contemplated by this Agreement. Notwithstanding the foregoing or anything to the contrary set forth in this Agreement (except as set forth in subsection (b) below), in connection with obtaining such consents from third parties, no party to this Agreement shall be required to make payments, commence litigation or agree to modifications of the terms and conditions of any agreements with third parties. The parties to this Agreement shall not take any action that is

reasonably likely to have the effect of unreasonably delaying, impairing or impeding the receipt of any required authorizations, consents, orders or approvals.

(b)In furtherance and not in limitation of the terms of Section 8.1(a), to the extent required by applicable Law, each of Buyer and the Company shall file, or cause to be filed, a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated by this Agreement within ten (10) Business Days of the date of this Agreement (including, in the case of Buyer, a request for early termination of the applicable waiting period under the HSR Act), shall supply promptly any additional information and documentary material that may be requested by any Governmental Authority (including the Antitrust Division of the United States Department of Justice and the United States Federal Trade Commission) pursuant to the HSR Act, and shall cooperate in connection with any filing under applicable antitrust Laws and in connection with resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by any Governmental Authority, including the United States Federal Trade Commission, the Antitrust Division of the United States Department of Justice, or the office of any U.S. state attorney general. Each Party will, and will cause its Affiliates to, use their commercially reasonable efforts to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of such filings. In furtherance and not in limitation of the foregoing, Buyer and the Company shall use commercially reasonable efforts to obtain the necessary regulatory approvals as soon as practicable and will cooperate fully with the other parties hereto in promptly seeking all regulatory approvals necessary to close the transactions contemplated by this Agreement, including but not limited to responding to or otherwise providing information in response to a Request for Additional Information and Documentary Material issued under the HSR Act; provided that Buyer will not be required to agree, and the Sellers and the Company will not agree without Buyer’s consent, to waive any rights to or accept any limitation on its operations that would reasonably be expected to have an adverse effect on the business, assets, results of operations or financial condition of the Company, Buyer or any Affiliate of Buyer or to dispose of any assets in connection with obtaining any such consent or authorization.

(c)Subject to applicable Laws (i) the parties shall keep one another promptly apprised of the status of any proceeding under the HSR Act or other Antitrust Law relating to the Agreement, including any discussion or decision by Buyer to pull and refile the HSR; (ii) each party shall promptly notify each other of all communications, inquiries or requests for additional information received from a Governmental Authority (including the Antitrust Division of the United States Department of Justice and the United States Federal Trade Commission) relating to the Agreement; (iii) to the extent practicable each party shall give all other parties advance notice of, and a meaningful opportunity to review, to the extent lawfully permitted, all communications, filings, or other submissions to a Governmental Authority (including the Antitrust Division of the United States Department of Justice and the United States Federal Trade Commission) under the HSR Act or any other applicable Antitrust Law; and (iv) no party to this Agreement shall agree to participate in any meeting or conference with any Governmental Authority (including the Antitrust Division of the United States Department of Justice and the United States Federal Trade Commission) in respect of any filings, investigation or other inquiry unless it consults with the other parties in advance and, to the extent permitted by such Governmental Authority, gives the other parties the opportunity to attend and participate at such meeting or conference.

Section 8.2Further Action. Subject to the terms and conditions provided in this Agreement, each of the parties to this Agreement shall use its commercially reasonable efforts to deliver, or cause to be delivered, such further certificates, instruments and other documents, and to take, or cause to be taken, such further actions, as may be necessary, proper or advisable under applicable Law to consummate and make effective the transactions contemplated by this Agreement.

ARTICLE IX.

CONDITIONS TO CLOSING

Section 9.1Conditions to Obligations of All Parties. The obligations of the Company, the Sellers and Buyer to consummate the Purchase and Sale and the other transactions contemplated by this Agreement shall be subject to the satisfaction, fulfillment or written waiver by each such Party, at or prior to the Closing, of each of the following conditions:

(a)No Governmental Order. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Governmental Order which is in effect and has the effect of making illegal or otherwise restraining or prohibiting the consummation of the Purchase and Sale or the other transactions contemplated by this Agreement.

(b)HSR Act. The waiting period under the HSR Act, if applicable, shall have expired or been terminated.

Section 9.2Conditions to Obligations of the Sellers. The obligations of the Sellers to consummate the Purchase and Sale and the other transactions contemplated by this Agreement shall be subject to the satisfaction, fulfillment or written waiver by the Shareholders’ Representative, at or prior to the Closing, of each of the following conditions:

(a)Representations and Warranties; Covenants. (i) The representations and warranties of Buyer and Guarantor set forth in ARTICLE V shall be true and correct in all respects (giving effect to any limitation as to “materiality” or “material adverse effect” set forth therein), in each case at and as of the date of this Agreement and as of the Closing Date (except that those representations and warranties that are made as of a specific date need only be so true and correct as of such date), in each case, except where the failure of such representations and warranties to be true and correct has not had, individually or in the aggregate, a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby; (ii) the covenants and agreements set forth in this Agreement to be performed or complied with by Buyer at or prior to the Closing shall have been performed or complied with in all material respects; and (iii) the Sellers shall have received an officer’s certificate of Buyer, dated as of the Closing Date, certifying as to the matters set forth in clauses (i) and (ii) of this Section 9.2(a).

(b)Closing Date Payment. Buyer shall have delivered the Closing Date Payments in accordance with Section 2.3.

(c)Escrow Agreement. Buyer and the Escrow Agent shall have executed and delivered the Escrow Agreement.

Section 9.3Conditions to Obligations of Buyer. The obligations of Buyer to consummate the Purchase and Sale and the other transactions contemplated by this Agreement shall be subject to the satisfaction, fulfillment or written waiver by Buyer, at or prior to the Closing, of each of the following conditions:

(a)Representations and Warranties; Covenants. (i) The representations and warranties of the Company set forth in ARTICLE III and the Sellers set forth in ARTICLE IV shall be true and correct in all respects at and as of the date of this Agreement and as of the Closing Date (except that those representations and warranties that are made as of a specific date need only be so true and correct in all respects as of such date), except where the failure of such representations and warranties to be true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) has not had, individually or in the aggregate, a Material Adverse Effect; (ii) the covenants and agreements set forth in this Agreement to be performed or complied with by the Company and the Sellers at or prior to the Closing shall have been performed or complied with in all material respects; and (iii) Buyer shall have received an officer’s certificate of the Company, dated as of the Closing Date, certifying as to the matters set forth in clauses (i) and (ii) of this Section 9.3(a).

(b)Stock Certificates. Each Seller shall have delivered a stock power or assignment separate from the certificate for such Seller’s Shares, executed by such Seller.

(c)Resignations. The Company shall have delivered a resignation from each director and each officer of the Company set forth on Schedule 9.3(c) attached hereto.

(d)Escrow Agreement. The Shareholders’ Representative and the Escrow Agent shall have executed and delivered the Escrow Agreement.

(e)Payoff Letter. The Company shall provide to Buyer a duly executed payoff letter with respect to the Closing Debt set forth in Schedule 1.1(a).

(f)FIRPTA Certificates. Each Seller shall deliver to Buyer a certification of non-foreign status, dated as of the Closing Date and in form and substance required under Treasury Regulations Section 1.1445-2(b)(2) so that Buyer is exempt from withholding any portion of the Purchase Price thereunder.

(g)Termination of Certain Agreements. The Company shall provide to Buyer a duly executed termination agreement for each of the Contracts listed on Schedule 9.3(g).

(h)Termination of all Options. The Company shall provide to Buyer evidence of the termination of all outstanding stock options in accordance with the applicable Company Benefit Plan.

(i)Consents. The Company shall provide to Buyer a duly executed written consent to the consummation of the transactions contemplated by this Agreement from each of the counterparties to the Contracts set forth on Schedule 9.3(i).

(j)No Material Adverse Effect. There shall not have been or occurred any change or effect that, individually or in the aggregate with any other change or fact, has or which could reasonably be expected to have, a Material Adverse Effect.

(k)IRS Form W-9. Each Seller shall deliver to Buyer a duly executed IRS Form W‑9.

ARTICLE X.

TERMINATION

Section 10.1Termination. This Agreement may be terminated at any time prior to the Closing:

(a)by the mutual written consent of the Company, Buyer and the Sellers;

(b)by either Buyer or the Company by written notice to the other party if any Governmental Authority with jurisdiction over such matters shall have issued a final, non-appealable Governmental Order permanently restraining, enjoining or otherwise prohibiting the consummation of the Purchase and Sale or any of the other transactions contemplated by this Agreement;

(c)by either Buyer or the Company by written notice to the other party if the transactions contemplated by this Agreement shall not have been consummated on or before the close of business on (i) the date that is ninety (90) days from the Effective Date or (ii) December 31, 2015, upon the request by either Buyer or the Company, provided that all conditions to Closing in ARTICLE IX of the party requesting the extension are satisfied other than (A) the condition set forth in Section 9.1(b) (HSR) and (B) those conditions that by their nature can only be satisfied at Closing (the “Outside Date”), unless the failure to consummate the transactions contemplated by this Agreement on or prior to the Outside Date is the result of any material breach of this Agreement by the party seeking to terminate;

(d)by the Company, upon a breach of any representation, warranty, covenant or agreement on the part of Buyer set forth in this Agreement, or if any representation or warranty of Buyer shall have become untrue, in either case such that the conditions set forth in Section 9.2(a) would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided that prior to any termination of this Agreement under this Section 10.1(d), Buyer shall be entitled to cure any such breach capable of being cured during a thirty (30) day period following receipt of written notice from the Company to Buyer of such breach (it being understood that the Company may not terminate this Agreement pursuant to this Section 10.1(d) if the Sellers or the Company shall have materially breached this Agreement or if such breach by Buyer is cured during such thirty (30) day period so that such conditions would then be satisfied); or

(e)by Buyer, upon a breach of any representation, warranty, covenant or agreement on the part of the Company or the Sellers set forth in this Agreement, or if any representation or warranty of the Company or the Sellers shall have become untrue, in either case such that the conditions set forth in Section 9.3(a) would not be satisfied as of the time of such breach or as of

the time such representation or warranty shall have become untrue, provided that prior to any termination of this Agreement under this Section 10.1(e), the Company and the Sellers shall be entitled to cure any such breach capable of being cured during a thirty (30) day period following receipt of written notice from Buyer to the Company and the Sellers of such breach (it being understood that Buyer may not terminate this Agreement pursuant to this Section 10.1(e) if it shall have materially breached this Agreement or if such breach by the Company or the Sellers is cured during such thirty (30) day period so that such conditions would then be satisfied).

Section 10.2Buyer Termination Fee. If this Agreement is terminated pursuant to (a) Section 10.1(b) unless such Governmental Order in effect has been initiated by a third party pursuant to claims (i) wholly unrelated to antitrust or other anti-competitive issues and not as a result of Buyer’s breach of this Agreement or (ii) resulting from the Company’s breach of this Agreement, (b) Section 10.1(b) due to the failure of the satisfaction of the condition set forth in Section 9.1(b), (c) Section 10.1(c) due to the failure of the satisfaction of the condition set forth in Section 9.1(b), or (d) Section 10.1(d), the parties agree that the Company and the Sellers shall have suffered a loss and value to the Company of an incalculable nature and amount, unrecoverable in law, and Buyer shall pay to Sellers a fee of $11,000,000 (the “Buyer Termination Fee”), it being understood that in no event shall Buyer be required to pay the Buyer Termination Fee on more than one occasion. The Buyer Termination Fee shall be paid in immediately available funds by wire transfer to the Sellers no later than five (5) Business Days after such termination, with each Seller to receive an amount equal to such Seller’s Pro Rata Portion of the Buyer Termination Fee.

Section 10.3Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated by this Agreement pursuant to and in accordance with Section 10.1, this Agreement shall forthwith become void and of no further force or effect whatsoever and there shall be no liability on the part of any party to this Agreement; provided, however, that notwithstanding the foregoing, nothing contained in this Agreement shall relieve any party to this Agreement from any liability resulting from or arising out of any knowing, intentional and willful material breach of any agreement or covenant hereunder; and provided, further, that notwithstanding the foregoing, (a) the terms of Section 7.2, Section 10.2, this Section 10.3 and Article XIII shall remain in full force and effect and shall survive any termination of this Agreement, whether in accordance with Section 10.1 or otherwise and (b) nothing herein shall relieve Buyer from liability for any intentional breach of any provision of this Agreement which results in a termination by the Company pursuant to Section 10.1.

ARTICLE XI.

TAX MATTERS

Section 11.1Tax Returns. Buyer shall prepare, or cause to be prepared, and timely file or cause to be timely filed, taking into account any applicable extensions, all Tax Returns of the Company required to be filed after the Closing Date and Buyer shall timely pay or cause to be timely paid to the applicable Governmental Authority all Taxes shown as due and owing on such Tax Returns. The Shareholders’ Representative, on behalf of the Sellers, shall pay to Buyer an amount equal to any such Taxes that are attributable to a Pre-Closing Tax Period (determined in the manner set forth in Section 11.2) within fifteen (15) days after receiving notice from Buyer

that such Taxes are due. Each such Tax Return shall, to the extent it relates to a Pre-Closing Tax Period, be prepared in a manner consistent with past custom and practice. Buyer shall provide a copy of each such Tax Return that relates in whole or in part to a Pre-Closing Tax Period, together with all supporting documentation and workpapers, to the Shareholders’ Representative for review and approval at least thirty (30) days prior to the due date (taking into account all applicable extensions) for filing such Tax Return, and Buyer shall incorporate such comments and make such revisions to such Tax Returns as are reasonably requested by the Shareholders’ Representative in writing at least fifteen (15) days prior to the due date (taking into account all applicable extensions) for filing such Tax Return. For the avoidance of doubt, all deductions arising from Company Transaction Expenses, the exercise of any Stock Option, the payment of the Special Employee Bonuses, or from any other bonus or other compensation paid to any employee or independent contractor of the Company in connection with the transactions contemplated by this Agreement shall be allocable to the Pre-Closing Tax Period and shall not be allocable to any taxable period beginning after the Closing Date pursuant to the “next day” rule under Treasury Regulations Section 1.1502-76(b)(1)(ii)(B) or pursuant to the ratable allocation method under Treasury Regulations Section 1.1502-76(b)(2)(ii) or 1.1502-76(b)(2)(iii).

Section 11.2Straddle Period Allocation. In the case of any Straddle Period, the portion of Taxes attributable to the Pre-Closing Tax Period of such Straddle Period shall be determined as follows: (a) the amount of any Taxes based on or measured by income, gains, or receipts, or any Taxes other than Property Taxes, attributable to the Pre-Closing Tax Period portion of such Straddle Period will be determined based on an interim closing of the books as of the close of business on the Closing Date; and (b) the amount of any real property, personal property, ad valorem or similar Taxes (“Property Taxes”) attributable to the Pre-Closing Tax Period portion of such Straddle Period will be the total amount of such Property Taxes for the entire Straddle Period multiplied by a fraction, (i) the numerator of which is the number of days in the Straddle Period up to and including the Closing Date, and (ii) the denominator of which is the total number of days in such Straddle Period.

Section 11.3Amended Tax Returns. Notwithstanding any other provision in this Agreement, Buyer shall not, and shall not cause or permit any of its Affiliates or the Company or any of the Company’s Affiliates to, (a) amend any Tax Return of the Company that covers a Pre-Closing Tax Period or Straddle Period or (b) make any Tax election with respect to the Company that has retroactive effect to any Pre-Closing Tax Period or Straddle Period, in each case without the prior written consent of the Shareholders’ Representative, which consent shall not be unreasonably withheld, conditioned or delayed.

Section 11.4Tax Refunds. The amount or economic benefit of any refund (whether in cash or as a credit against or offset of Tax) of Taxes of or with respect to the Company in respect of a Pre-Closing Tax Period or attributable to the Pre-Closing Tax Period portion of any Straddle Period shall be for the account of the Sellers. Any such refund received by Buyer, the Company or any of their respective Affiliates (including any interest received thereon) to the extent not taken into account as a Company Transaction Expense Tax Benefit as set forth on Schedule 1.1(c) shall be paid by Buyer to the Shareholders’ Representative on behalf of the Sellers within fifteen (15) days after any such refund is received, credited or applied as an offset, as the case may be.

Section 11.5Audits. Buyer, at its expense, shall control all examinations, audits or other proceedings with respect to the Taxes of the Company by any Governmental Authority; provided that the Shareholders’ Representative (on behalf of and at the expense of the Sellers) shall be entitled to participate in the conduct of any such examination, audit or other proceeding and Buyer shall not settle or compromise any such examination, audit or other proceeding without the prior written consent of the Shareholders’ Representative, such consent not to be unreasonably withheld or delayed, to the extent that such audit, examination or other proceeding relates to a Pre-Closing Tax Period or Straddle Period. The fees and expenses of the Shareholders’ Representative with respect to such examinations, audits or other proceedings provided for in this Section 11.5 on behalf of the Sellers shall be paid from the Shareholders’ Representative Expense Fund.

Section 11.6Cooperation; Tax Records. Buyer and the Sellers shall cooperate as and to the extent reasonably requested by the other party in connection with the filing of Tax Returns and any examination, audit, litigation or other proceeding with respect to Taxes. Buyer and the Sellers agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). The Company shall retain all books and records with respect to Taxes attributable to any period (or portion thereof) on or prior to the Closing Date required to be retained by it under Section 6001 of the Code and the Treasury Regulations thereunder or any comparable or similar statute, law or regulation under federal, state, local or non-U.S. law until sixty (60) days after the expiration of any applicable statute of limitations. The Company shall provide any Seller with access to any such books and records reasonably required by such party for Tax purposes.

ARTICLE XII.

INDEMNIFICATION

Section 12.1Indemnification by the Sellers. Subject to the limitations set forth in this ARTICLE XII, each Seller hereby covenants and agrees that to the fullest extent permitted by Law, such Seller will defend, indemnify and hold harmless Buyer and its officers, directors, managers, employees, agents and Affiliates and successors and assigns of the foregoing (collectively, the “Buyer Indemnified Parties”) for, from and against any and all Losses actually sustained by any of such Persons following the Closing resulting from:

(a)any breach of a representation or warranty made by the Company in ARTICLE III;

(b)any breach of a representation or warranty made by such Seller in ARTICLE IV;

(c)(i) any Loss attributable to any breach of any covenant, agreement, undertaking or obligation in ARTICLE XI; (ii) all Taxes of the Company for all Pre-Closing Tax Periods; (iii) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Company (or any predecessor of the Company) is or was a member on or prior to the Closing Date by reason of a liability under Treasury Regulation Section 1.1502-6 or any comparable or

similar Law; and (iv) any and all Taxes of any Person imposed on the Company arising under the principles of transferee or successor liability or by Contract, relating to any event or transaction occurring before the Closing Date. Notwithstanding anything herein to the contrary, any Loss in respect of Taxes shall be limited to Taxes attributable to Pre-Closing Tax Periods;

(d)any breach by the Company or such Seller of any agreement or covenant made by the Company or such Seller contained in this Agreement; and/or

(e)any claim by any Person for any brokerage or finder’s fee, commission or similar payment based upon any agreement or understanding alleged to have been made by such Person with the Company or the Sellers or representatives thereof in connection with this Agreement or any of the transactions contemplated hereby.

Section 12.2Indemnification by Buyer. Subject to the limitations set forth in this ARTICLE XII, Buyer hereby covenants and agrees that, to the fullest extent permitted by Law, it will defend, indemnify and hold harmless the Company and the Sellers, and their respective officers, directors, managers, employees, agents and Affiliates and successors and assigns of the foregoing (collectively, the “Seller Indemnified Parties”) for, from and against any and all Losses actually sustained by any of such Persons following the Closing resulting from:

(a)any breach of a representation or warranty made by Buyer or Guarantor in ARTICLE V;

(b)any breach by Buyer of any agreement or covenant made by Buyer contained in this Agreement;

(c)any claim by any Person for any brokerage or finder’s fee, commission or similar payment based upon any agreement or understanding alleged to have been made by such Person with Buyer or any Affiliate or representative thereof in connection with this Agreement or any of the transactions contemplated hereby; and/or

(d)(i) any Loss attributable to any breach of any covenant, agreement, undertaking or obligation in ARTICLE XI; (ii) all Taxes of the Company for all Post-Closing Tax Periods; (iii) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Company is a member after the Closing Date by reason of a liability under Treasury Regulation Section 1.1502-6 or any comparable or similar Law; (iv) any and all Taxes of any Person imposed on the Company arising by Contract relating to any event or transaction occurring on or after the Closing Date; and (v) any transaction occurring on the Closing Date after the Closing outside the ordinary course of business.

Section 12.3Notice and Opportunity to Defend.

(a)Notice of Asserted Liability. As soon as is reasonably practicable after a Buyer Indemnified Party or Seller Indemnified Party (as applicable under the circumstances, the Buyer Indemnified Party or Seller Indemnified Party, the “Indemnified Party”) becomes aware of any claim that it has under Section 12.1 or Section 12.2 that may result in a Loss (a “Liability Claim”), it will give written notice thereof (a “Claims Notice”) to either the Sellers through the Shareholders’ Representative or Buyer as may be applicable under the circumstances (as

applicable under the circumstances, the Sellers or Buyer, the “Indemnifying Party”). A Claims Notice will describe the Liability Claim in reasonable detail, and will indicate the amount (estimated, if necessary and to the extent feasible) of the Loss that has been or may be suffered by the Indemnified Party. No delay in or failure to give a Claims Notice by the Indemnified Party to the Indemnifying Party pursuant to this Section 12.3(a) will adversely affect any of the other rights or remedies that the Indemnified Party has under this Agreement, or alter or relieve the Indemnifying Party of its obligation to indemnify the Indemnified Party to the extent that such delay or failure has not materially prejudiced the Indemnifying Party.

(b)Opportunity to Defend. The Indemnifying Party will have the right, exercisable by written notice to the Indemnified Party within thirty (30) days of receipt of a Claims Notice from the Indemnified Party of the commencement or assertion of any Liability Claim in respect of which indemnity may be sought hereunder, to assume and conduct the defense of such Liability Claim in accordance with the limits set forth in this Agreement with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party; provided, however, that (i) the Liability Claim solely seeks (and continues to seek) monetary damages and (ii) the Indemnifying Party expressly agrees in writing that as between the Indemnifying Party and the Indemnified Party, the Indemnifying Party will be solely obligated to satisfy and discharge the Liability Claim (as finally determined pursuant to the provisions of this Article XII) in accordance with the limits set forth in this Agreement (the conditions set forth in clauses (i) and (ii) are collectively referred to as the “Litigation Conditions”). If the Indemnifying Party does not assume the defense of a Liability Claim in accordance with this Section 12.3(b), the Indemnified Party may continue to defend the Liability Claim. If the Indemnifying Party has assumed the defense of a Liability Claim as provided in this Section 12.3(b), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof; provided, however, that if (i) any of the Litigation Conditions cease to be met, or (ii) the Indemnifying Party fails to take reasonable steps necessary to defend diligently such Liability Claim, the Indemnified Party may assume its own defense, and the Indemnifying Party will be liable for all reasonable costs or expenses paid or incurred in connection therewith. The Indemnifying Party or the Indemnified Party, as the case may be, will have the right to participate in (but not control), at its own expense, the defense of any Liability Claim which the other is defending as provided in this Agreement. The Indemnifying Party, if it will have assumed the defense of any Liability Claim as provided in this Agreement, will not, without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld, conditioned or delayed, consent to a settlement of, or the entry of any judgment arising from, any such Liability Claim that (i) does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a complete release from all liability in respect of such Liability Claim or (ii) grants any injunctive or equitable relief. The Indemnified Party will have the right to settle any Liability Claim, the defense of which has not been assumed by the Indemnifying Party, in its discretion exercised in good faith and upon advice of counsel, either before or after the initiation of litigation, at such time and upon such terms as the Indemnified Party deems fair and reasonable, provided that (x) at least ten (10) days prior to any such settlement, the Indemnifying Party has given its written consent to such settlement and (y) the Liability Claim to be settled solely seeks monetary damages.

Section 12.4Survivability; Limitations.

(a)The representations and warranties of the Company and the Sellers contained in this Agreement will survive for a period ending eighteen (18) months after the Closing Date and the obligations of Sellers to indemnify the Buyer Indemnified Parties hereunder shall expire on the date that is eighteen (18) months after the Closing Date except (i) the Fundamental Representations, the representations and warranties set forth in Section 3.8 (Taxes), and Sellers’ obligations to indemnify the Buyer Indemnified Parties under Section 12.1(c) (Pre-Closing Taxes) and Section 12.1(e) (Brokers), shall expire sixty (60) days after the expiration of the applicable statute of limitations, and (ii) a breach or violation of any representation and warranty of the Company or Sellers contained in this Agreement as a result of actual fraud or willful misconduct by the Company or the Sellers (“Fraud Claims”) shall not expire (each, an “Expiration Date”). Notwithstanding the foregoing, any Liability Claim pending on any applicable Expiration Date for which a Claims Notice has been given in accordance with Section 12.3 on or before such applicable Expiration Date may continue to be asserted and indemnified against until finally resolved. All covenants and agreements contained herein which by their terms are to be performed subsequent to the Closing Date shall survive the Closing in accordance with their terms. All other covenants and agreements contained herein shall not survive the Closing and shall thereupon terminate, and no Action for any breach thereof, or failure to perform any such covenant or agreement, or to recover damages or losses in respect thereof, shall survive, or be available after, the Closing.

(b)The Sellers will not have any liability for an individual claim or group of related claims with respect to any Losses unless and until the amount of Losses that otherwise would be payable pursuant to Section 12.1(a) or Section 12.1(b) with respect to such claim or group of related claims exceeds $10,000 (the “Mini Basket”) and then the Sellers will be liable only for the excess over the Mini-Basket, it being understood that any such individual claims or group of related claims for amounts less than the Mini-Basket shall be ignored in determining whether the Threshold Amount (as defined below) has been exceeded. The Sellers will not have any liability for Losses arising under Section 12.1(a), Section 12.1(b) or Section 12.1(c) unless and until the aggregate of all such Losses for which indemnification is sought under Section 12.1(a), Section 12.1(b) and Section 12.1(c) exceeds $1,375,000 (the “Threshold Amount”), after which Buyer will be entitled to be fully indemnified for all Losses under Section 12.1(a), Section 12.1(b) and Section 12.1(c) exceeding the Threshold Amount. Losses arising pursuant to (i) Section 12.1(a) with respect to a breach or violation of the Fundamental Representations, (ii) Section 12.1(e) (Brokers), or (iii) any Fraud Claims (collectively, “Excluded Claims”) will not be subject to the Mini Basket or the Threshold Amount.

(c)Notwithstanding anything to the contrary contained in this ARTICLE XII, the Sellers will not have any liability for any Losses to the extent that Losses for which indemnification is sought exceeds the amount remaining in the Indemnity Escrow Fund and the Buyer Indemnified Parties’ sole and exclusive source of indemnification shall be the Indemnity Escrow Fund, in each case except with respect to Losses arising pursuant to (i) the Excluded Claims for which Sellers’ aggregate liability and obligation to indemnify the Buyer Indemnified Parties shall be limited to the Purchase Price and (ii) (A) a breach or violation of the representations and warranties set forth in Section 3.8 (Taxes) or (B) Section 12.1(c) (Pre-Closing Taxes) (collectively, “Tax Losses”) for which Sellers’ aggregate liability and obligation

to indemnify the Buyer Indemnified Parties shall be limited to an amount equal to $22,000,000 minus the amount remaining under the R&W Insurance for all claims thereunder (e.g. the insurance limit minus claims paid to Buyer).

(d)Notwithstanding anything to the contrary contained in this ARTICLE XII, the Buyer Indemnified Parties shall not be entitled to seek indemnification directly from any Seller, and no Seller shall have any Liability to any Buyer Indemnified Party:

(i)unless and until (A) the Indemnity Escrow Fund has been depleted, and (B) such Buyer Indemnified Party has exhausted its, or its Affiliate’s, rights and remedies to recover under the R&W Insurance and for which Buyer shall have delivered to the Shareholders’ Representative copies of all notices submitted and received by or on behalf of such Buyer Indemnified Party regarding any such claim submitted under the R&W Insurance, including any final determinations regarding coverage for such claim, in each case to be delivered promptly upon submission or receipt of such notice, as the case may be; provided, however, that Buyer shall not be required to make claims for matters which are exclusions under the R&W Insurance, and (C) with respect to Tax Losses, the aggregate insurance limit under the R&W Insurance has been reached for all claims and the Buyer Indemnified Parties are not entitled to recover any amounts under such R&W Insurance;

(ii)in excess of such Seller’s Pro Rata Portion of the Losses subject to indemnification hereunder; or

(iii)for the indemnification obligations of any other Seller pursuant to Section 12.1(b).

(e)Each Indemnified Party will take and will cause their respective Affiliates to take all reasonable steps to mitigate and otherwise minimize any Loss to the maximum extent reasonably possible upon and after becoming aware of any event which would reasonably be expected to give rise to any Loss. The Indemnified Party will use its commercially reasonable efforts to recover under any available insurance policies.

(f)For the purposes of calculating Losses, any materiality or Material Adverse Effect qualifications in the representations, warranties, covenants and agreements will be disregarded.

Section 12.5Exclusive Remedy. Except (a) as may be required to enforce covenants or other agreements contained in this Agreement through specific performance or injunctive relief, or (b) Fraud Claims, the indemnification rights provided in this ARTICLE XII will be the sole and exclusive remedy available to the parties hereto for any and all Losses related to a breach of any of the terms, conditions, covenants, agreements, representations or warranties contained herein, or any right, claim or action arising from the transactions contemplated hereby (and each party hereby waives and releases, to the fullest extent that it may do so, any other right or remedy that may arise under any Law).

Section 12.6Treatment of Indemnification Payments. All indemnification and similar payments made pursuant to this Agreement shall be treated for tax purposes as an adjustment to the Purchase Price, to the extent permissible under applicable Tax Law.

ARTICLE XIII.

GENERAL PROVISIONS

Section 13.1Shareholders’ Representative.

(a)By virtue of the execution of this Agreement by the Sellers, and without further action of any Seller, each Seller shall be deemed to have irrevocably constituted and appointed GSH (and by execution of this Agreement it hereby accepts such appointment) as agent and attorney-in-fact (“Shareholders’ Representative”) for and on behalf of the Sellers (in their capacity as shareholders of the Company), with full power of substitution, to act in the name, place and stead of each Seller with respect to Section 2.4 and the Escrow Agreement and the taking by the Shareholders’ Representative of any and all actions and the making of any decisions required or permitted to be taken by the Shareholders’ Representative under Section 2.4 and the Escrow Agreement (it being understood that the Sellers shall have no right to pursue any claim on behalf of any Company Indemnified Party in respect of the rights granted to Company Indemnified Parties under Section 7.1). The power of attorney granted in this Section 13.1(a) is coupled with an interest and is irrevocable, may be delegated by the Shareholders’ Representative and shall survive the sale, transfer, merger, reorganization, bankruptcy, liquidation, dissolution, death or incapacity of each Seller. Such agency may be changed by the holders of a majority in interest of the Escrow Fund from time to time (including in the event of the death, disability or other incapacity of a Shareholders’ Representative that is an individual), and any such successor shall succeed the Shareholders’ Representative as Shareholders’ Representative hereunder. No bond shall be required of the Shareholders’ Representative, and the Shareholders’ Representative shall receive no compensation for its services. At any time from the Closing Date until payment of any remaining amounts in the Shareholders’ Representative Expense Fund in accordance with Section 2.4(c)(i), the amount of documented costs and expenses (including all fees and disbursements of counsel, financial advisors and accountants) incurred by the Shareholders’ Representative in connection with the performance of its rights or obligations under this Agreement and the taking of any and all actions in connection therewith, shall be paid to the Shareholders’ Representative from the Shareholders’ Representative Expense Fund. In connection with the performance of its rights and obligations under this Agreement and the Escrow Agreement and the taking of any and all actions in connection therewith, the Shareholders’ Representative shall not be required to expend any of the amounts held in the Shareholders’ Representative Expense Fund (though, for the avoidance of doubt, it may do so at any time and from time to time in its sole discretion) and in no event shall the Shareholders’ Representative be required to incur any costs or expenses or expend any amount in excess of amounts held in the Shareholders’ Representative Expense Fund. Notwithstanding the foregoing, (i) the Shareholders’ Representative may retain in the Shareholders’ Representative Expense Fund, in accordance with the terms of this Agreement, any amount that the Shareholders’ Representative deems in its reasonable discretion to be necessary to satisfy any documented costs and expenses (including all fees and disbursements of counsel, financial advisors and accountants) incurred or to be incurred by the Shareholders’ Representative in connection with the performance of its rights or obligations under this Agreement and the Escrow Agreement and the taking of any and all actions in connection therewith and (ii) to the extent that funds are no longer available in the Shareholders’ Representative Expense Fund, the Shareholders’ Representative shall have recourse against each

Seller directly for such costs and expenses (it being understood that and agreed that any such recourse shall be against each Seller, severally and not jointly, in accordance with the percentage of the aggregate Purchase Price received by or attributable to such Seller as of such date).

(b)The Shareholders’ Representative shall not be liable to any Person for any act of the Shareholders’ Representative arising out of or in connection with the acceptance or administration of its duties under this Agreement and the Escrow Agreement (it being understood that any act done or omitted pursuant to the advice of legal counsel shall be conclusive evidence of such good faith and reasonable judgment), except to the extent any liability, loss, damage, penalty, fine, cost or expense is actually incurred by such Person as a proximate result of the fraud or bad faith of the Shareholders’ Representative. The Shareholders’ Representative shall not be liable for, and shall be indemnified by the Sellers for, any liability, loss, damage, penalty, or fine incurred by the Shareholders’ Representative (and any cost or expense incurred by the Shareholders’ Representative in connection therewith) arising out of or in connection with the acceptance or administration of its duties under this Agreement and the Escrow Agreement, except to the extent that any such liability, loss, damage, penalty, or fine, cost or expense is the proximate result of the fraud or bad faith of the Shareholders’ Representative. The Shareholders’ Representative Expense Fund shall be available to indemnify and hold the Shareholders’ Representative harmless against any liability, loss, damage, penalty, fine, cost or expense incurred by the Shareholders’ Representative arising out of or in connection with the acceptance or administration of its duties under this Agreement and the Escrow Agreement, except to the extent that any such liability, loss, damage, penalty, fine, cost or expense is the proximate result of the fraud or bad faith of the Shareholders’ Representative. The Shareholders’ Representative shall be entitled to recover any out-of-pocket costs and expenses reasonably incurred by the Shareholders’ Representative in connection with actions taken by the Shareholders’ Representative pursuant to the terms of Section 2.4 or the Escrow Agreement (including the hiring of legal counsel and the incurring of legal fees and costs) from the Shareholders’ Representative Expense Fund.

(c)From and after the Closing, Buyer shall cause the Company to provide the Shareholders’ Representative with reasonable access to information about the Company and the reasonable assistance of the officers and employees of Buyer and the Company for purposes of performing its duties and exercising its rights under this Agreement, provided that the Shareholders’ Representative shall treat confidentially any nonpublic information about the Company (except in connection with the performance by the Shareholders’ Representative of its duties or the exercise of its rights under this Agreement).

(d)From and after the Closing, a decision, act, consent or instruction of the Shareholders’ Representative shall constitute a decision of all the Sellers and shall be final, binding and conclusive upon each Seller, and the Escrow Agent and Buyer may rely upon any decision, act, consent or instruction of the Shareholders’ Representative as being the decision, act, consent or instruction of each Seller. Buyer is hereby relieved from any liability to any Person for any acts done by Buyer in accordance with any such decision, act, consent or instruction of the Shareholders’ Representative.

Section 13.2Expenses. Except as otherwise expressly provided in this Agreement, all costs and expenses (including all fees and disbursements of counsel, financial advisors and

accountants) incurred in connection with the negotiation and preparation of this Agreement, the performance of the terms of this Agreement and the consummation of the transactions contemplated by this Agreement, shall be paid by the respective party incurring such costs and expenses, whether or not the Closing shall have occurred.

Section 13.3Costs and Attorneys’ Fees. Subject to the limitations set forth herein, in the event that any action, suit or other proceeding is instituted by any party hereto against any other party hereto concerning or arising out of this Agreement, the prevailing party or parties shall recover all of such prevailing party’s or parties’ costs and reasonable attorneys’ fees incurred in connection with each and every such action, suit or other proceeding, including any and all appeals and petitions therefrom, from the non-prevailing party or parties.

Section 13.4Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given or made as follows: (a) if sent by registered or certified mail in the United States return receipt requested, upon receipt; (b) if sent by nationally recognized overnight air courier, one (1) Business Day after mailing; (c) if sent by facsimile transmission or by electronic mail, when transmitted and receipt is confirmed; and (d) if otherwise actually personally delivered, when delivered, provided that such notices, requests, demands and other communications are delivered to the address set forth below, or to such other address as any party shall provide by like notice to the other parties to this Agreement:

(a)if to the Company (prior to the Closing), to:

AVB Inc., c/o Goode Seed Holdings, LLC
767 Third Avenue, 22nd Floor
New York, NY 10017
Facsimile: (212) 317-2827
Attn: Daniel Bonoff
Email: dbonoff@goodepartners.com

with a copy (which shall not constitute notice) to:

Davis Wright Tremaine LLP
1300 SW 5^th Avenue, Suite 2400
Portland, Oregon 97201
Facsimile:  (503) 778-5299
Attention:  Jesse Lyon
Email:  jesselyon@dwt.com

(b)if to the Sellers, to the address below each Seller’s name on Exhibit C attached hereto, with a copy (which shall not constitute notice) to:

Davis Wright Tremaine LLP
1300 SW 5th Avenue, Suite 2400
Portland, Oregon 97201
Facsimile:  (503) 778-5299
Attention:  Jesse Lyon
Email:  jesselyon@dwt.com

(c)if to Buyer or Guarantor or, if after the Closing, to the Company, to:

Flowers Foods, Inc.
1919 Flowers Circle
Thomasville, Georgia  31757
Facsimile:  (229) 225-5426
Attention:  A. Ryals McMullian, Jr.
Email:  ryals.mcmullian@flocorp.com

with a copy (which shall not constitute notice) to:

Jones Day
1420 Peachtree Street, N.E. Suite 800
Atlanta, Georgia  30309-3053
Facsimile:  (404) 581-8330
Attention:  Sterling A. Spainhour, Jr.
Email:  sspainhour@jonesday.com

(d)if to the Shareholders’ Representative, to:

Goode Seed Holdings, LLC
767 Third Avenue, 22nd Floor
New York, NY 10017
Facsimile: (212) 317-2827
Attn: Daniel Bonoff
Email: dbonoff@goodepartners.com

with a copy (which shall not constitute notice) to:

Davis Wright Tremaine LLP
1300 SW 5th Avenue, Suite 2400
Portland, Oregon 97201
Facsimile:  (503) 778-5299
Attention:  Jesse Lyon
Email:  jesselyon@dwt.com

Section 13.5Public Announcements. Unless otherwise required by applicable Law or applicable stock exchange rules and regulations, no party to this Agreement shall make any public announcements in respect of this Agreement or the transactions contemplated by this Agreement, or otherwise communicate with any news media regarding this Agreement or the transactions contemplated by this Agreement, without the prior written consent of the other

parties to this Agreement. If a public statement is required to be made pursuant to applicable Law or applicable stock exchange rules and regulations, the parties shall consult with each other, to the extent reasonably practicable, in advance as to the contents and timing thereof.

Section 13.6Provision Respecting Legal Representation. Each of the parties to this Agreement hereby agrees, on its own behalf and on behalf of its board members, members, partners, officers, employees and Affiliates, that Davis Wright Tremaine LLP may serve as counsel to each and any holder of Shares and their respective Affiliates (individually and collectively, the “Holder Group”), on the one hand, and the Company, on the other hand, in connection with the negotiation, preparation, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, and that, following consummation of the transactions contemplated hereby, Davis Wright Tremaine LLP (or any successor) may serve as counsel to the Holder Group, the Shareholders’ Representative or any board member, member, partner, officer, employee or Affiliate of the Holder Group or the Shareholders’ Representative, in connection with any litigation, claim or obligation arising out of or relating to this Agreement or the transactions contemplated by this Agreement notwithstanding such representation, and each of the parties hereto hereby consents thereto and waives any conflict of interest or duty of confidentiality arising therefrom, and each of such parties shall cause any Affiliate thereof to consent to waive any conflict of interest or duty of confidentiality arising from such representation.

Section 13.7Interpretation. The Article and Section headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provision of this Agreement. References to Articles, Sections, Schedules or Exhibits in this Agreement, unless otherwise indicated, are references to Articles, Sections, Schedules and Exhibits of or to this Agreement. The parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises with respect to any term or provision of this Agreement, this Agreement shall be construed as if drafted jointly by the parties to this Agreement, and no presumption or burden of proof shall arise favoring or disfavoring any party to this Agreement by virtue of the authorship of any of the terms or provisions of this Agreement. Any reference to any federal, state, county, local or foreign statute or Law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. For all purposes of and under this Agreement, (a) the word “including” shall be deemed to be immediately followed by the words “without limitation;” (b) words (including defined terms) in the singular shall be deemed to include the plural and vice versa; (c) words of one gender shall be deemed to include the other gender as the context requires; (d) the terms “hereof,” “herein,” “hereto,” “herewith” and any other words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits to this Agreement) and not to any particular term or provision of this Agreement, unless otherwise specified; and (e) unless otherwise defined in this Agreement, accounting terms shall have the respective meanings assigned to them in accordance with GAAP consistently applied with the Company Financial Statements. Any amount to be paid hereunder shall be paid in United States dollars and in immediately available funds.

Section 13.8Severability. In the event that any one or more of the terms or provisions contained in this Agreement or in any other certificate, instrument or other document referred to

in this Agreement, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or any other such certificate, instrument or other document referred to in this Agreement, and the parties to this Agreement shall use their commercially reasonable efforts to substitute one or more valid, legal and enforceable terms or provisions into this Agreement which, insofar as practicable, implement the purposes and intent of this Agreement. Any term or provision of this Agreement held invalid or unenforceable only in part, degree or within certain jurisdictions shall remain in full force and effect to the extent not held invalid or unenforceable to the extent consistent with the intent of the parties as reflected by this Agreement. To the extent permitted by applicable Law, each party waives any term or provision of Law which renders any term or provision of this Agreement to be invalid, illegal or unenforceable in any respect.

Section 13.9Entire Agreement. This Agreement (including the Company Disclosure Schedule, the other Schedules and the Exhibits to this Agreement) and the Confidentiality Agreement constitute the entire agreement of the parties to this Agreement with respect to the subject matter of this Agreement and the Confidentiality Agreement, and supersede all prior agreements and undertakings, both written and oral, among the parties to this Agreement with respect to the subject matter of this Agreement and the Confidentiality Agreement, except as otherwise expressly provided in this Agreement.

Section 13.10Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties to this Agreement (whether by operation of law or otherwise) without the prior written consent of the other parties to this Agreement, and any purported assignment or other transfer without such consent shall be void and unenforceable. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties to this Agreement and their respective successors and assigns.

Section 13.11No Third-Party Beneficiaries. Except for Section 7.1, this Agreement is for the sole benefit of the parties to this Agreement and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

Section 13.12Waivers and Amendments. This Agreement may be amended or modified only by a written instrument executed by the Shareholders’ Representative (on behalf of the Sellers), the Company and Buyer. Any failure of the parties to this Agreement to comply with any obligation, covenant, agreement or condition in this Agreement may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver. No delay on the part of any party to this Agreement in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party to this Agreement of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Unless otherwise provided, the rights and remedies provided for in this Agreement are cumulative and are not exclusive of any rights or remedies which the parties to this Agreement may otherwise have at law or in equity. Whenever this

Agreement requires or permits consent by or on behalf of a party, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 13.12.

Section 13.13Governing Law; Consent to Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed entirely within such State. Each of the parties to this Agreement hereby irrevocably and unconditionally submits, for itself and its assets and properties, to the exclusive jurisdiction of the U.S. District Court for the District of Oregon, in any action or proceeding arising out of or relating to this Agreement, the agreements delivered in connection with this Agreement, or the transactions contemplated hereby or thereby, or for recognition or enforcement of any judgment relating thereto, and each of the parties to this Agreement hereby irrevocably and unconditionally (a) agrees not to commence any such action or proceeding except in such courts; (b) agrees that any claim in respect of any such action or proceeding may be heard and determined in such Federal court; (c) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in such Federal court; and (d) waives, to the fullest extent permitted by Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in such Federal court. Each of the parties to this Agreement hereby agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each of the parties to this Agreement hereby irrevocably consents to service of process in the manner provided for notices in Section 13.4. Nothing in this Agreement shall affect the right of any party to this Agreement to serve process in any other manner permitted by applicable Law.

Section 13.14Waiver of Jury Trial. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE, IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (a) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (b) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (c) IT MAKES SUCH WAIVERS VOLUNTARILY AND (d) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 13.14.

Section 13.15Exclusivity of Representations and Warranties. It is the explicit intent and understanding of each of the parties to this Agreement that no party to this Agreement, nor any of their respective Affiliates, representatives or agents, is making any representation or warranty whatsoever, oral or written, express or implied, other than those set forth in this Agreement (as qualified by the Company Disclosure Schedule), and none of the parties to this

Agreement is relying on any statement, representation or warranty, oral or written, express or implied, made by another party to this Agreement or such other party’s Affiliates, representatives or agents, except for the representations and warranties set forth in this Agreement.

Section 13.16Equitable Remedies. Each of the parties to this Agreement acknowledges and agrees that the other parties to this Agreement would be irreparably damaged in the event that any of the terms or provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Therefore, notwithstanding anything to the contrary set forth in this Agreement, each of the parties to this Agreement hereby agrees that the other parties to this Agreement shall be entitled to seek an injunction or injunctions to prevent breaches of any of the terms or provisions of this Agreement, and to enforce specifically the performance by such first party under this Agreement, and each party to this Agreement hereby agrees to waive the defense in any such suit that the other parties to this Agreement have an adequate remedy at law and to interpose no opposition, legal or otherwise, as to the propriety of injunction or specific performance as a remedy, and hereby agrees to waive any requirement to post any bond in connection with obtaining such relief. The equitable remedies described in this Section 13.16 shall be in addition to, and not in lieu of, any other remedies at law or in equity that the parties to this Agreement may elect to pursue.

Section 13.17Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile or electronic signature and by electronic mail or PDF), each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement.

Section 13.18Time is of the Essence. Time is of the essence with respect to the performance of this Agreement.

Section 13.19Guaranty. In consideration of, and as an inducement to the Sellers entering into this Agreement, Guarantor hereby absolutely, unconditionally and irrevocably guarantees to the Sellers the due and punctual payment and the full and complete performance and observance of all obligations of Buyer pursuant to this Agreement. Any breach of, or other failure to perform, any representation, warranty, covenant, obligation, agreement or undertaking of Buyer shall also be deemed to be a breach or failure to perform by the Guarantor, and the Sellers and the Company shall have the right, exercisable in their sole discretion, to pursue any and all available remedies they may have arising out of any such breach or nonperformance directly against either or both of Buyer and Guarantor in the first instance. This guarantee is a guarantee of performance and not exclusively of collection. The Guarantor acknowledges that it will receive substantial direct and indirect benefits from the transactions contemplated by this Agreement.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

BUYER:

FLOWERS BAKERIES, LLC,
a Georgia limited liability company

/s/ Ryals McMullian

Name: Ryals McMullian

Title: Assistant Secretary

Guarantor:

Flowers Foods, Inc.,
a Georgia corporation

/s/ Allen L. Shiver

Name: Allen L. Shiver

Title: President and Chief Executive Officer

Signature Page to Stock Purchase Agreement

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

SELLERS:		COMPANY:

Goode Seed Holdings, LLC, a Delaware limited liability company		AVB, Inc., an Oregon corporation

By:	/s/ Daniel R. Bonoff	By:	/s/ Daniel R. Bonoff
	Daniel R. Bonoff, President		Daniel R. Bonoff, Secretary

Goode Seed Co-Invest, LLC, a Delaware limited liability company		SHAREHOLDERS’ REPRESENTATIVE:

		Goode Seed Holdings, LLC, a Delaware limited liability company

By:	/s/ Daniel R. Bonoff	By:	/s/ Daniel R. Bonoff
	Daniel R. Bonoff, President		Daniel R. Bonoff, President

Glenn Dahl, Trustee of the Glenn Dahl Family Trust, U/A/D November 28, 2012

By:	/s/ Glenn Dahl
	Glenn Dahl, Trustee

DAvid J. Dahl, Trustee of the DAVID Dahl Family Trust, U/A/D May 1, 2012

By:	/s/ David J. Dahl
	David J. Dahl, Trustee

SHobi L. Dahl, Trustee of the SHobi L. Dahl Family Trust, U/A/D December 16, 2011

By:	/s/ Shobi L. Dahl
	Shobi L. Dahl, Trustee

Signature Page to Stock Purchase Agreement

CERTIFICATIONS — EXHIBIT 31.1

I, A. Ryals McMullian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Flowers Foods, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2020		/s/ A. RYALS MCMULLIAN
		A. Ryals McMullian
		President and Chief Executive Officer

CERTIFICATIONS — EXHIBIT 31.2

I, R. Steve Kinsey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Flowers Foods, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2020

/S/ R. STEVE KINSEY

R. Steve Kinsey

Chief Financial Officer and

Chief Accounting Officer

CERTIFICATIONS — EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Flowers Foods, Inc. (the “company”) on Form 10-Q for the period ended July 11, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company as of the dates and for the periods expressed in the Report.

		/s/ A. RYALS MCMULLIAN
		A. Ryals McMullian
		President and
		Chief Executive Officer

/s/ R. STEVE KINSEY

R. Steve Kinsey

Chief Financial Officer and

Chief Accounting Officer

Date: August 6, 2020

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.