UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K
10-K
☒
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 20172022
☐
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001‑37540001-37540
twnk-20221231_g1.jpg
HOSTESS BRANDS, INC.

(f/k/a GORES HOLDINGS, INC.)
(Exact name of registrant as specified in its charter)
Delaware
47-4168492
(State or other jurisdiction of
incorporation or organization)
47‑4168492
(I.R.S.
                                              (I.R.S. Employer
Identification No.)
7905 Quivira Road,
Lenexa,
1 East Armour Boulevard
Kansas City, MO
KS
66215
(Address of principal executive offices)
64111
(Zip Code)
  (zip code)
(816) 701‑4600701-4600
Registrant’s telephone number, including area code

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

Act
Title of Each ClassTicker SymbolName of Each Exchange on Which Registered
Class A Common Stock, par value of $0.0001 per shareNASDAQ CapitalTWNKThe Nasdaq Stock Market
56,499,890 Warrants, each exercisable for half share of Class A Common StockNASDAQ Capital Market LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x

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 days.Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act.:
Large accelerated filerx
☒
Accelerated
filer o
Non‑accelerated☐
Non-accelerated filer o
(Do not check if a
smaller reporting company)
☐
Smaller reporting company o
☐
Emerging growth companyo☐


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.o

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Act). Yes o☐ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2017,2022, computed by reference to the closing price reported on the NASDAQNasdaq Capital Market on such date was $1,460,103,929 (90,689,685$2,886,801,176 (136,105,666 shares at a closing price per share of $16.10)$21.21).

Shares of Class A common stock outstanding - 99,855,625133,474,299 shares at February 23, 201817, 2023
Shares of Class B common stock outstanding - 30,255,184no shares at February 23, 201817, 2023


DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 20182023 annual meeting of shareholdersstockholders (the “2018“2023 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 20182023 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.



HOSTESS BRANDS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBERDecember 31, 20172022


INDEX
Page
Part I
Item 1.Business
54
Item 1A.Risk Factors
13
Item 1B.Unresolved Staff Comments
2627
Item 2.Properties
2628
Item 3.Legal Proceedings
2728
Item 4.Mine Safety Disclosures
2728
Part II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
2829
Item 6.Selected Financial Data
3032
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
3332
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
5942
Item 8.Financial Statements and Supplementary Data
5944
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9876
Item 9A.Controls and Procedures
9876
Item 9B.Other Information
9876
Item 9CDisclosure Regarding Foreign Jurisdictions that Prevent Inspections
76
Part III
Item 10.Directors, Executive Officers and Corporate Governance
9877
Item 11.Executive Compensation
9877
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
9977
Item 13.Certain Relationships and Related Transactions, and Director Independence
9977
Item 14.Principal Accounting Fees and Services
9977
Part IV
Item 15.Exhibits, Financial Statement Schedules
9977






2

Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (“Annual Report”) contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Annual Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute forward-looking statements are generally identified through the inclusion of words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language. Statements addressing our future operating performance and statements addressing events and developments that we expect or anticipate will occur are also considered as forward-looking statements. All forward‑lookingforward-looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Annual Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified and discussed in Item 1A-Risk Factors in this Annual Report on Form 10-K.Report. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. The discussion and analysis of our financial condition and results of operations included in Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statementsconsolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.Report.
Explanatory Note


Hostess Brands, Inc. (f/k/a Gores Holdings, Inc.) was originally incorporated in Delaware on June 1, 2015 as a special purpose acquisition company (SPAC), formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On August 19, 2015, Gores Holdings, Inc.and consummated its initial public offering, (the “IPO”),on August 19, 2015, following which its shares began trading on the Nasdaq Capital Market (“NASDAQ”Nasdaq”).
On November 4, 2016, (the “Closing Date”), in a transaction referred to as the “Business“Hostess Business Combination,” Gores Holdings, Inc. acquired a controlling interest in Hostess Holdings, L.P. (“Hostess Holdings”), an entity owned indirectly by C. Dean Metropoulos (the “Metropoulos Entities”) and certain equity funds managed by affiliates of Apollo Global Management, LLC (the “Apollo Funds” and, together with the Metropoulos Entities, the “Legacy Hostess Equityholders”). Hostess Holdings had acquired the Hostess brand and certain strategic assets out of the bankruptcy liquidation proceedings of its prior owner (“Old Hostess”), free and clear of all past liabilities, in April 2013, and relaunched the Hostess brand later that year.LLC.
In connection with the closing of the Hostess Business Combination, Gores Holdings, Inc. changed its name to “HostessHostess Brands, Inc.” and its trading symbols on NASDAQNasdaq from “GRSH” and “GRSHW,” to “TWNK” and “TWNKW”.
As a result of the Business Combination, for accounting purposes, Hostess Brands, Inc. (“we”, “us” or the “Company”) is the acquirer and Hostess Holdings is the acquired party and accounting predecessor. Our financial statement presentation includes the financial statements of Hostess Holdings and its subsidiaries as “Predecessor” for periods prior to the completion of the Business Combination and of Hostess Brands, Inc., including the consolidation of Hostess Holdings and its subsidiaries, for periods from and after the Closing Date.






3




PART I
Item 1. Business


Hostess - Who We Are

Timeline Since Relaunch


Hostess Brands, Inc. (together with its subsidiaries) (“We” or the “Company”) is a leading packaged foodsweet snacks company whose brands date back to 1919, whenfocused on developing, manufacturing, marketing, selling and distributing snacks in North America primarily under the Hostess® CupCake was introduced, followedand Voortman® brands. We produce a variety of new and classic snacks, including iconic Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs®, and Zingers®, as well as Voortman® branded cookies and wafers. Our mission is to inspire moments of joy by Twinkies®putting our twnk-20221231_g2.jpginto everything we do. We seek to leverage our iconic brands, pricing power, impactful innovation, efficient manufacturing and distribution model, collaborative customer and strategic sourcing partnerships, and strong cash flows to drive profitable and sustained growth.
Our business operates in 1930.growing categories and snacking occasions. Our brands represent 17.2% of the Sweet Baked Goods (“SBG”) products represented 21.2% of their category according to Nielsen total universe for the 52-week52-weeks ended December 30, 20171.
31, 2022. Our cookie and wafer products represented 2.1% of the adjacent Cookie category, providing a significant opportunity for growth. We believe our strong brand history and our market position, in the SBG categorycombined with our innovative spirit and scalable operating model, provide an unparalleleda strong platform to execute our strategicgrowth initiatives.






1Unless otherwise noted, all market data is from Nielsen Total Universe for the 52-week period ending December 30, 2017.


The Brand
Hostess® has been an iconic American brand for generations. In April 2013, we acquired the Hostess® and Dolly Madison® brands out of the bankruptcy liquidation proceedings of its prior owners, free and clear of all prior liabilities, contracts, deferred taxes and other “legacy” issues. After a brief hiatus in production, we began providing Hostess products to retailer partners and consumers nationwide in July 2013. We offer a variety of new and classic treats under the Hostess® brand including Twinkies®, Cupcakes, Ding Dongs®, Ho Hos®, Donettes®, and Zingers® among others. By combining Hostess’ strong reputation with innovative technology and a Direct-To-Warehouse (“DTW”) business model, we rapidly recaptured market share.
In nearly five years we have invested approximately $200 millionsignificantly in retailer and consumer data analytics to upgrade our manufacturing footprint, implementidentify new IT systems and enhance production efficiency throughopportunities in the installation of automated baking and packaging lines.categories in which we compete. These investments, combined with our DTWDirect-to-Warehouse (“DTW”) distribution model, have reestablished Hostess’support our leading premium brand position inwithin the $6.6$8.5 billion U.S. SBG category and have increased our distribution channels and paved new growth opportunitiesthe adjacent $8.8 billion Cookie category according to Nielsen total universe for the Company.52-weeks ended December 31, 2022, paving a path towards future sustained, profitable growth.
Our DTW distribution model uses centralized distribution centers and common carriers to fill orders, with products generally delivered to our customers’ warehouses.warehouses through the use of common carriers. This model has eliminated the need for Direct-Store-Deliverydirect-store delivery (“DSD”) routes and drivers, which has allowedallows us to expand our core distribution while gaining access to new channels (e.g., further penetration into convenience, drug store, dollar, foodservice,channels.
Brands and cash & carry). We have both renewed and added relationships with retailers and distributors around the country.
Products
The following is a summary of our principal product lines:
Twinkies®Coffee Cakes
Donettes®Cinnamon Rolls
CupcakesHoney Buns
Ding Dongs®Sno Balls®
Fruit PiesChocodiles®
Mini MuffinsBrownies
Ho Hos®Bread and Buns
Suzy Qs®Jumbo Muffins
DanishEclairs
Iced CookiesHostess Bake Shop™
MadeleinesHostess Bakery Petites™
Zingers®

Experienced team with an entrepreneurial spirit.
The Company’s culture is an integral part of our strategy, built on entrepreneurship, innovation, collaboration and a competitive spirit. Embodying these tenets is a strong and experienced management team, led by our Executive Chairman, Dean Metropoulos. With our CEO Bill Toler’s expected retirement, Dean Metropoulos has expanded his duties as Executive Chairman to ensure continuity of leadership.
Dean MetropoulosHostess® has been involved in many successful transactions involving brandsan iconic American brand for generations. Our extensive portfolio of timeless and universally recognized names such as Chef Boyardee, Duncan Hines, Ghirardelli Chocolate, Bumble Bee Tuna, Pabst Blue Ribbon, Premier Foods (the biggest UK food company)Twinkies®, Ding Dongs® and MummDonettes® evokes an emotional affinity with consumers that has the potential to be further unlocked through effective marketing and Perrier Jouet Champagnes. Dean Metropoulos has over 30 years of experience revamping iconic brands throughout theconsumer-insight based innovation. We produce cookie and creme wafer products, including sugar free varieties under our Voortman® brand, which we acquired in 2020. We also produce Dolly Madison®, Cloverhill® and Big Texas® branded products. Our classic treats target different snacking occasions and consumer space. In addition, we believe we have a strong supporting cast of senior leaders. Key team members have on average over 19 years of industry experience and expertise across all business functions.needs.

twnk-20221231_g3.jpg
Our management team is complemented by an experienced Board of Directors, all of which have senior executive leadership and bring with them extensive consumer products knowledge. Our board members include:
4
Dean Metropolous

Bill Toler
Mark R. Stone
Laurence Bodner
Neil P. DeFeo
Jerry D. Kaminski
Craig D. Steeneck

A detailed biography of each of our board members and key management team members can be found at www.hostessbrands.com. Unless expressly stated otherwise, the information contained on or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K.
Our Growth Strategy
We execute against our growth strategy and strengthen our Hostess® and Voortman® brands by focusing on faster-growing snacking occasions through innovation, marketing, strategic sourcing partnerships and strong relationships with our customers. We leverage our highly efficient and profitable business model and productivity initiatives to maintain the momentum of our growth fly-wheel, while leveraging our strong balance sheet to pursue strategic opportunities.
Our strategy isBusiness Sits in Growing Spaces
We compete in growing snacking categories. The approximate $90 billion sweet snacking universe has grown at an annual rate of 8.5% over the last three years1.
The U.S. SBG and Cookie categories combined are a significant portion of this universe, with retail sales of $17 billion according to be the premium sweet baked goods market leaderNielsen U.S. total universe for the 52-weeks ended December 31, 2022. Our Voortman® branded cookies and wafer products are included in the United States by producing innovativeCookie category and provide another platform to capitalize on the growing consumer snacking trends. Voortman® branded products which enable us to grow faster thanare in the specialty cookie segment of the category and benefit from consumer demand for better-for-you ingredients. Within the SBG category.  This growth will be drivenand Cookie categories, we are targeting large, fast growing snacking occasions. With consumers snacking to satisfy hunger, provide an emotional lift and increase social connection, we believe our product portfolio is well positioned to benefit from these broader snacking trends.
We believe that we have maintained the Hostess® brand equity and high awareness for over a century by satisfying consumers’ needs for great-tasting sweet treats. We have established our strategic initiatives:
Strategic initiatives
–Core distribution expansion
–Innovation
–Expansion of white space
–Platform for future acquisitions

Our strategic initiatives have been a key partleadership position in the SBG category through the strength and quality of our success sinceproducts, developing and promoting brands and pricing our launch in 2013. We continueproducts at a reasonable premium to execute on these as we launch items that expand on our core distribution and whitespace opportunities. With our recent acquisition of the Cloverhill® bakery in February 2018, we continue to leverage our position and deliver on our strategic initiatives.other snacking alternatives.
Core Distribution Expansion
We plan to capitalize on the strength of the Hostess® brandour brands and our attractiveeffective retailer economics in order to drive growth by generating new customers and increasing the number of stores carrying our products. With the potential afforded by the extended reach of the warehouse model, distribution and market share gains are expected to come from traditional channels (“core expansion”)by attracting new consumers within our identified consumer occasions through our continued investment in quality and wide-scale availability, meaningful innovation, targeted marketing product renovation and a focus on our topmost effective brands and SKUs that continue to deliver. Our top 7 brands in 2017 represented 74.0% of our net revenue for the fiscal year and 82.9% of our market share for the 52-weeks ending December 30, 2017. The Company grew total distribution points by 11% in 2017.
products. Our brand strategy, combined with investments in highly effective marketing and brand-building, has resulted in what we believe to be one of the strongest brand equities in snacking. While wesnacking, evidenced by our over 90% brand awareness for Hostess®2.
We continue to launch new partnerships and enter into licensing agreements that leverage our iconic brands. We have re-establishedpartnered with companies in various industries to bring our iconic brands and grown our presenceflavor profiles to complementary products, such as popcorn and ready‐to‐eat pudding. Our Voortman® branded products are sold throughout the U.S. and Canada. Both our Hostess® and Voortman® products are distributed by third parties internationally, including products packaged specifically for Mexico and the United Kingdom, among others. In addition, our products are sold on various e-commerce platforms.
We understand the need to continually evolve while maintaining the traditional offerings our loyal consumer base has come to know and love. We continue to invest in new product development, building our long-term innovation pipeline and leveraging our portfolio and commercialization process to bring new products to market in a timely fashion.

1 NielsenIQ Total Universe select categories through November 2022
2 Hostess Brand Health Tracking, US Adults 18+, N=1375, Time Period Oct-Dec 2022
5

Best in Class Business Model
Our business model is based on the wide availability of our products and go-to-market approach, both enabled by our DTW distribution model. The DTW model uses centralized distribution and common carriers. We ship the majority of our products from a centralized distribution center in Edgerton, Kansas. Centralizing our distribution improves visibility and control of distribution and is a key component of our operating model. We utilize other smaller distribution centers focused on certain products or geographic areas. The distribution centers allow us to consolidate inventory and fill customer orders, while reducing overall inventory on-hand as a result of this centralized consolidation of inventory. The majority of our products are delivered to customers’ warehouses from the distribution centers using common carriers.
The DTW model is enabled by our extended shelf life (“ESL”) technology. We do not keep a significant backlog of finished goods inventory, as our bakery products are promptly shipped to our distribution centers after being produced. Some of our products are shipped frozen at the request of certain customers.
We believe our DTW distribution model allows our products to be everywhere consumers shop for snacks. It provides greater reach into convenience, drug and dollar stores. Distributing to these channels in which Old Hostess previously operated, there remains further opportunityunder a DSD model can be inefficient due to closesmall average drop size. Historically, DSD sweet baked goods companies have competed with candy and tobacco companies for distribution; however, under our DTW model, we partner with third-party distributors to profitably penetrate the gap inconvenience store, drug store and dollar store channels. In 2022, the convenience, drug and dollar channels accounted for 40.0% of our net revenue. We have established a strong presence and market share relative to Old Hostess’ penetration. Byin the convenience, drug and dollar channels and are focused on continuously expanding points ofcoverage. These partnerships further expand our distribution increasing SKU assortmentsreach in a highly efficient manner, and recapturing shelf space in existing retailers, we plan to continue our top line growth. Our top three products (Donettes®, Twinkies® and Cupcakes) have All Commodity Volume (“ACV”) distribution rates in core channels that are significantly higher than the average rate achieved by other products in our portfolio (based on Nielsen 52 weeks ending December 30, 2017) . These high levels are directly correlatedbelieve they will add to our focusedgrowth potential going forward.
We believe that impulse purchase decisions are another fundamental driver of our retail sales, which makes prominent in-store placement important. The DTW and centralized distribution model provides us with a competitive advantage through the ability to utilize retail-ready corrugate displays. These pre-built displays are visually impactful, economically produced and require minimal in-store labor to assemble or load; thus providing cost-efficient display vehicles that benefit both us and the retailer. Preloaded displays also allow us full control over our branded merchandising and the ability to execute retailer-wide campaigns regionally or nationally in a consistent manner, providing a unique competitive advantage across the entire SBG category, which our competitors predominantly serve through a DSD model.
We have a tailored channel-based go-to-market model that demonstrates key capabilities for growth. We continue to invest in data capabilities, which enable focus on store-level compliance and growth opportunities with our Hostess Partner Program (“HPP”). We also have a unique consortium retail merchandising approach onwhere we partner with brokers to drive in-store performance at lower costs, ensuring strong shelf presence and sending a stream of retail and customer data back to our marketing and sales teams.
Our business model is supported by cost-advantaged distribution, expanded channel/retail store reach and enhanced in-store merchandising capabilities and offers our retail partners attractive margins that incentivize further distribution of our products.
We continue to invest in the business to further our strategic initiatives. By applying this tailoredOur disciplined capital investment plan focuses on operational capabilities that directly support or expand our growth and focused approachinnovation with strong return on investment metrics. We are making targeted investments in the production capacity to enable further expansion of our other existingfastest growing product lines,forms. In 2022, we purchased a facility in Arkadelphia, Arkansas, which will workbecome our sixth bakery upon completion of capital investments, including new production lines. Further, we anticipate continued investment in automation, which allows for improved product quality, consistency and efficiency.
Consumer Capabilities
We leverage our consumer capabilities to drive incremental growth above the category. We strive to meet our consumers at their need states with retailers to expand the average number of SKUs offeredinnovative products and attempt to reduce distribution gaps. The average number of products selling at core retailers today is approximately 23 items.cultivate top-of-mind awareness through efficient digital advertising.
6

Innovation

Our innovation is key to fueling our growth. We extend the Hotess® brand in segments to meet consumer demand. In doing this, we are devoted to maintaining our iconic brands while contemporizing them in order to stay relevant with consumers into the future. Supporting our premiumconsumer base and attract new consumers. We believe that to support our market position, requires us towe must continually evolve with changing consumer preferences and trends.
We are focused on continuing to innovate and expand our core products by launching new flavors of iconic products and expanding new product forms, pack-sizes and packaging to target faster growing snacking occasions and drive incremental revenue and profit. One example of our recent innovation is our Hostess® Bouncers™, which was launched in fall 2022 and provides the consumer the same iconic Hostess® cake and filling flavors in a fun, poppable, portable form targeting the lunchbox consumer snacking occasion. In 2023, we are also innovating on Voortman® branded products to improve the consumer experience by making our packaging resealable. The success of our product innovation is in part driven by deeper understanding consumer preferences,of consumers’ snacking occasions and providing awareness and trials by partnering with our customers, all while maintaining our iconic brands and product quality. With strong innovation from previous years, we continued in 2017 with a robust pipeline of innovation including peanut butter products, Hostess Bake Shop™, and Hostess Bakery Petites™. This, combined with flavor innovation in 2017 with the Golden Cup Cake, Chocolate Cake Twinkies®, and White Fudge Ding Dongs®, led to a contribution of approximately $62.5 million of net revenue from products launched in 2017. We will continue this innovation and expect to introduce a number of new items in early 2018.
During 2017 we launched Hostess Bakery Petites™, a premium snacking platform made with no artificial flavors or colors or high fructose corn syrup. We believe there is growth potential in providing an on-the-go snacking option for ingredient conscious consumers. We continue to develop new flavors and platforms, and have a robust innovation pipeline that expands the Hostess brand across categories.
The in-store bakery (“ISB”) sections of grocery and club retailers are increasingly utilized to provide a differentiated shopping experience and to showcase product offerings. Our Superior on Main® and Hostess Bake Shop™ brands include eclairs, madeleines, brownies, and iced cookies, as well as preservative-free and gluten-free products offered in the ISB section.
The breakfast sub-category is a significant opportunity for the Company where our share is 15%, nearly a 5.0% share gap compared to All Day Snacking. This sub-category represents approximately 51.3% of the $6.6 billion SBG category according to Nielsen U.S. total universe for the 52 weeks ended December 30, 2017. According to a July 2016 study by Mintel, convenience and brand preference continue to influence snack selection, as over half of U.S. consumers rate portability as a key attribute in breakfast items. These consumption trends play to our strengths as our products conveniently come packaged in both single-serve and multipack varieties. In addition, we have launched a line of Hostess jumbo muffins, danishes, and glazed donuts, which have been well-received as new breakfast offerings. Further to this, we expect our recent acquisition of the Cloverhill® bakery in Chicago to enable us to leverage our current platform and to expand our breakfast capabilities in this core product category.
We also understand the need to continually evolve while maintaining the tradition and offerings our loyal consumer base has come to know and love. We have been actively investing in new product development and building our long-term pipeline, leveraging our innovation pipeline and commercialization process to bring new products to market in a timely fashion. Our product innovation strategy is organized around four key objectives:
Complementing our existing product offering by launching classic products not yet launched or entirely new products in SBG sub-segments where we currently do not compete;
Launching line extensions to drive sub-brand reach;
Unlocking new consumer segments with new benefits and / or occasions; and
Expanding into new categories and markets to drive highly incremental growth.    
Whitespace opportunity
We continue to penetrate ISBincrease our digital advertising to efficiently reach consumers. Our analysis shows that simply reminding consumers about Hostess® could drive incremental sales. As opposed to more traditional media, digital advertising provides us the flexibility and agility to invest in more targeted areas and demographics as we learn about the grocery and club channels. Our ISB focus is on core product support and seasonality-relevant core extensions by leveraging the Superior on Main® market presence and product offerings. impact of our programs. This results in an efficient, high-return investment that we expect will drive continued growth.
Execute Strategic Acquisitions to Accelerate Growth
We have had early success with our licensing in frozen retail and continue to expand into food service through our relationship with a national distributor. We have products that are now packaged for sale in Mexico, the United Kingdom and Canada through third parties. Our products are also sold on various e-commerce platforms.

Platform for future acquisitions
We believe we serve as asolid platform for growth.growth through acquisitions. Within the fragmented consumer packaged goods market, there existsbroader snacking universe, the opportunity exists to drive value creation through acquisitions by leveraging our brand, platform, infrastructure and performance drivenperformance-driven management culture. We are committed to seeking-outseeking out opportunities that add new capabilities to our already broad offerings.
The Voortman acquisition diversified and expanded our product offerings and manufacturing capabilities in the attractive, adjacent $8.8 billion Cookie category (based on Nielsen data as of December 31, 2022). The acquisition also leverages our broad customer reach and lean and agile business model. During 2020, we integrated Voortman’s distribution model into our DTW structure, with all Voortman U.S. sales shipping through our centralized distribution center. In addition to sharing established, efficient infrastructure, sales of Voortman® branded products have benefited from the Cloverhill® bakerystrengthening of collaborative retail partnerships in Chicago, IL, announced in February 2018, is an example where we can leverage our warehouse modelthe United States and expand our existing breakfast capabilities1. Canada.
As we explore other strategic acquisition opportunities, we will consider our ability to leverage our core capabilities to reinvigorate or develop acquired brands and further expand within the brand in indulgent Snacking, expand into ISB,wider snacking universe. We will also consider our ability to integrate acquisitions with our business and the opportunities to generate synergies through leveraging our assets and DTW model. The successful integration of Voortman exhibits our ability to execute and integrate existing SBG business to be produced on our existing assets or integrate a broader market to leverage our warehouse model.
Our experienced management team includes several individuals who have successfully managed and acquired consumer businesses.acquisitions in adjacent categories. We believe our scale, access to capital and management experience will allow us to consider both smallexecute and large acquisitionsintegrate additional acquisitions.
Competitive Landscape
We compete in the future and to integrate them inbroad snacking universe with a seamless fashion.








1 For the 52-week period ended December 30, 2017, Breakfast represented 51% of the SBG category and we had a 15% share compared to All Day Snacking, which represents 49% of the SBG category, where we had a 20% share

The Category: Large and Attractive
Nearly all U.S. consumers eatfocus on sweet snacks at least once per day. The U.S. SBG category is one of the largest categories within the broader $97 billion U.S. Total Snack category, with estimated retail sales of $6.6 billion in 2017 according to Nielsen U.S. total universe for the 52 weeks ended December 30, 2017. The SBG category includes breakfast items (e.g., donuts, breakfast danishes, and muffins) and all-daytargeted consumer snacking items (e.g., snack cakes, pies, bars, brownies, blondies, and cookies). According to The Nielsen Company, the Sweet Snacks category (Candy, Cookies, Desserts, Fruit Snacks, SBG) accounted for 59.2% of the Total Snacks category dollars.
Since its reintroduction to the market in 2013, the Hostess® brand has contributed significantly to the total growth of the SBG category. During the Hostess® brand’s hiatus from 2012 to 2013 the category declined by 8%. From the reintroduction of Hostess® through December 31, 2017, the category has grown 14%.
During 2017, the Hostess® brands contributed $38 million or 3.5% to the category’s growth. All other brands on a combined basis declined $95 million. The Hostess® brand’s 17.2% share of the category represents an opportunity for continued growth in comparison to its pre-hiatus share of 22.8%.occasions. Hostess® is the number one#2 brand inand has the two largest SBG category segments: snack cakes#1 cupcake and doughnuts. These two segments accounted for 49% of total category sales volume. The brand’s average price point is at an 80% premium over the category leader.
Competitive landscape

Hostess® is #2mini-donut product in the U.S. SBG category.category, according to Nielsen retail data as of December 31, 2022. The top three brands, Little Debbie, Hostess® and Entenmann’s account for 60%67%of the SBG retail sales, according to Nielsen, while the rest of the category remains fairly fragmented. With limited private label penetration withinin the SBG category, (3.5% market share vs. 19.5% for overall packaged food), consumers have shown a strong preference for trusted brands within the SBG category.brands. The leading positions are solidified through extensive product portfolios, strong brand awareness, established distribution capabilities and long-standing relationships with critical high-volume retailers. Furthermore, high levels of capital investment are required to establish manufacturing and distribution capabilities of meaningful scale, providingprovide additional barriers to entry.
SeasonalityVoortman® has the #1 creme wafer and sugar free cookie products within the larger Cookie category in the U.S. Nabisco® is the top brand with approximately 41.4% of the overall Cookie category according to Nielsen retail data as of December 31, 2022. There is higher private label penetration in the Cookie category than the SBG category.
Sweet baked goods
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We face competition from other brands, large national bakeries, smaller regional operators and supermarket chains with their own private label brands. The key competitive factors in the industry include product quality, price, brand recognition and loyalty, promotional activities, access to retail outlets, sufficient shelf-space and ability to identify and satisfy consumer preferences. Some of our largest national SBG competitors include Flowers Foods, Inc., Grupo Bimbo, S.A., McKee Foods Corporation and Mondelez International, Inc. In addition, we also compete with regional manufacturers and other companies that produce cookies, candies and other snacks. At times, we experience pricing pressure in certain markets from competitor promotions and other pricing practices. However, we believe our brand recognition, product quality and innovation have generated consumer loyalty to many of our products, which helps mitigate this impact.
Seasonality
SBG revenues tend to be moderately seasonal, with declines during the early winter period, which we believe are attributable to altered consumption patterns during the holiday season. We expect this trend to continue and continue to be applicable to our business. We strive to mitigate the seasonality by running certain targeted promotional campaigns.
Strategy Execution
Our Competitive Strengths
Leading brands synonymous with American snacking
We believe that we have maintained our brand power and category awareness for nearly a century by satisfying consumers’ need for fun, light-hearted treats. We believe our portfolio of highly recognized products is synonymous with American snacking, and there is perhaps no better indicator of this than our 90%+ brand awareness, according to a Harman Atchison study in 2014. We believe that we have established our leadership position in the SBG segment through the strength and quality of our products, developing and promoting a brand that unites our loyal consumer base and by pricing our products at a reasonable premium to other snacking alternatives.
The New Hostess is an innovation engine
When we relaunched Hostess®, we set out to challenge the status quo business model of our competitors. We established our innovative DTW distribution model and heavily invested in our bakeries, which has resulted in energy, labor and time savings, along with the ability to achieve efficiently made quality products. These investments paved the way for new product innovation. Unlike Old Hostess, whose DSD model required new products to be manufactured on various lines in multiple facilities in order to facilitate distribution across the country, we can now leverage our existing infrastructure and produce new products on one line in one facility. Centralized production allows us to continually innovate and bring new products to market while not disrupting the production of our existing product portfolio.
We are devoted to maintaining our iconic brands while contemporizing in order to stay relevant with consumers into the future. We believe that to support our premium position, we must continually evolve with changing consumer preferences and trends. As such, we have created an infrastructure that allows us to remain flexible. We continue to develop new flavors and platforms, and have a robust innovation pipeline that expands the Hostess® brand across categories. Recent launches include White Fudge Ding Dongs®, Hostess Bake Shop™ , Hostess Bakery Petites™ and Peanut Butter Ho Hos®. Collectively, we believe our product launches have been successful and augmented our top line growth. Product launches in 2017 have resulted in net revenue of $62.5 million for the year ended December 31, 2017.
DTW Distribution Model
We believe our DTW distribution model has created a substantial whitespace opportunity, which is one of the key drivers that we expect to fuel our future growth. We have greater access to convenience, drug and dollar stores. Distributing to these channels under a DSD model can be inefficient due to small average drop size. Similarly, we have an opportunity to continue building distribution in the drug store channel after having successfully established a strong presence. Historically, DSD snack cake companies have competed with candy and tobacco distributors; however, our

DTW model has enabled us to partner with these third-party distributors who can profitably penetrate both the convenience store and drug store channels and who are looking for opportunities to gain share in the SBG category. For 2017, convenience and drug stores accounted for 32.6% of net revenues. We have established a strong presence and market share in the drug store channel and are focused on continuously expanding coverage of convenience stores. These partnerships further expand our distribution reach in a highly efficient manner, and we believe they will add to our growth potential going forward.
We utilize a DTW distribution system, using centralized distribution centers and common carriers. From our five baking facilities, products are shipped to three distribution centers located in Shorewood, Illinois, Carthage, Missouri and Worcester, Massachusetts. Each distribution center is owned and operated by third parties. The distribution centers are able to fill customer orders and reduce inventory on hand as a result of this centralized consolidation of inventory. Products are delivered to customers’ warehouses from the distribution centers using common carriers. A small number of our customers pick up their orders directly from our distribution centers.
 The DTW model is enabled by our extended shelf life (“ESL”) technology. Some of our products are shipped frozen at the request of certain retailers. As a result of our DTW model, we do not keep a significant backlog of finished goods inventory, as our fresh bakery products are promptly shipped to our distribution centers after being produced.
Highly efficient and profitable business model.COVID-19
We continue to invest heavilymonitor the impact of the COVID-19 pandemic and adjust our operations in automation, which allows for improved product quality, consistencyresponse. As discussed further below, as well as in “Risk Factors” included in Item 1A and efficiency. However,“Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, we have taken and continue to take actions to respond to the benefitsdisruptions caused by the pandemic and to protect the health and well-being of our industry redefining model are felt even after our products leave the bakery. By shipping products using prebuilt, shippable display cases through our DTW network, we believe we now offer retailers an enhanced merchandising assetentire team, their families and the ability to execute nationwide marketing campaigns with retail-ready displays placed in stores across the country all on the same day. Given the impulse driven nature of the category, in-store displays are a key differentiator in driving sales velocities.
Our business model is supported by cost-advantaged manufacturing and distribution, expanded channel/retail store reach and enhanced in-store merchandising capabilities, and offers retailers attractive margins that incentivize further distribution of our products.
We believe that impulse purchase decisions are another fundamental driver of retail sales in the SBG category, which makes prominent in-store placement an essential growth lever. The DTW model provides us with a competitive advantage through the ability to utilize retail-ready corrugated displays. These pre-built displays are visually impactful, produced economically, and require minimal in-store labor to assemble or load, thus providing cost-efficient display vehicles that benefit both the retailer and us alike. Preloaded displays also allow us full control over our brand marketing, which allows us to execute retailer-wide campaigns regionally or nationally in a consistent manner, providing a unique competitive advantage across the entire SBG category, which is predominantly DSD-served.
Investment of Capital
With nearly $200 million invested in the business since the re-launch in 2013, combined with our growth strategy,communities we anticipate continued investment in the business under our strategic initiatives. Our capital investment focus will be on operational capabilities that directly support or expand our growth and innovation. Further, we anticipate continued investment in automation and productivity gains.serve.
Production
We produce Hostess® and/or Dolly Madison®have an efficient, agile, resilient and scalable model that delivers quality results. Our products are primarily produced at three baking facilitiesfive bakeries located in Emporia, Kansas; Columbus, Georgia; Indianapolis, Indiana; Chicago, Illinois; and Indianapolis, Indiana. In-StoreBurlington, Ontario. In 2022, we purchased a facility in Arkadelphia, Arkansas. The facility will become our sixth bakery products are produced at two baking facilities locatedupon completion of capital investments to install production lines and other necessary improvements needed to make the facility operational. The facility is expected to open in Southbridge, Massachusetts. We have invested heavilythe fourth quarter of 2023.
Our investments in baking and packaging technology to improve productivity and efficiency, including installing two Autobake systems and a fully-automated packaging system. A portion of our products are co-manufactured and packaged under our brands and sold through our distribution facilities.

Our state of the art Autobakebaking technologies have resulted in significant energy, labor and time savings. The technology provides fully-automated industrial baking ovensmajority of our products are shipped through a centralized distribution center in Edgerton, Kansas. This facility was opened in 2020 and systems, combining cost efficient, compactexpanded our distribution capacity by 75% and continuous baking solutions that can be custom configured. The first Autobake, which exclusively produces Twinkies®, was installedremoved two million miles from our distribution network.
With the increase in Emporia, Kansasdemand for our products, we continue to make adjustments to our production schedules, product assortment and equipment to maximize production capacity in July 2014. Its capabilities include equipment that fully-automates the packaging process (from wrappingour existing facilities. We are diligent in our efforts to palletizing). We installed the second Autobake in Emporia in March 2015, which exclusively produces cupcakes.find opportunities to reduce complexity and drive value within our supply chain. A portion of our products are manufactured and packaged by third parties under our brands and distributed through our facilities.
Raw Materials
Our principal raw materials are cooking oil, sugar, coatings, flour sweeteners, edible oils and compound coating,eggs, as well as cartons, corrugate and films used to package our products. We utilize various buying strategies to lock in prices for variouscertain raw materials and packaging to reduce the impact of commodity price fluctuations. In addition, we are dependent on natural gas as fuel for firing our ovens. Our third-party common carriers use gasoline and diesel as fuel for their trucks.
We approach sourcing with a holistic strategy to acquire the best quality ingredients and packaging materials at the lowest possible cost. We have strategic, long-term relationships with our key suppliers for our raw materials and packaging that help leverage our buying power. While the cost of some raw materials has, and may continue to increase or decrease over time, we believe that we will be able to purchase an adequate supply of raw materials as needed.We also sole source certain raw materials.materials for efficiency. We have multiple vendors that meet the Company’sour supply requirements for the sole sourced materials, except inmajority of our sole-sourced ingredients. With respect to the case of thesole-sourced ingredients for which we do not have multiple vendors to meet our supply requirements, including certain enzymes used in our ESL technology. With respect to the enzymes,technology, we continue to evaluate otheralternative sources in order to maintain business continuity and flexibility.
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Customers
Our top 10ten customers in 20172022 accounted for 59.9%59.4% of total net revenue. During 2017,2022, our largest customer, Wal-Mart and affiliates,related entities, represented 20.4%19.6% of our net revenue. No other customer accounted for more than 10% of 20172022 net revenue. The loss of, or a material negative change in, our relationship with Wal-Mart or any of our other top 10 customers could have a material adverse effect on our business. Our customers include mass merchandisers, supermarkets and other retailers and distributors, convenience, drug and dollar stores.
Competition
We face competition from other brands, large national bakeries, smaller regional operators, supermarket chains with their own private label brands, and grocery stores with their own in-store bakery departments. The key competitive factors in the industry include product quality, price, customer service, brand recognition and loyalty, promotional activities, access to retail outlets, sufficient shelf-space and ability to identify and satisfy consumer preferences. Some of our largest national competitors include Flowers Foods, Inc., Group Bimbo, S.A. and McKee Foods Corporation. In addition, we also compete with regional sweet goods branded manufacturers and other companies, including in the ISB space, that produce cookies, candies and other sweet snacks. At times, we experience pricing pressure in certain of our markets from competitor promotions and other pricing practices. However, we believe our brand recognition, product quality and innovation have generated consumer loyalty to many of our products help mitigate this impact.
Trademarks and Other Intellectual Property
We believe that our intellectual property has substantial value and has contributed to the success of our business. In particular, our trademarks, including our registered Hostess®Hostess®, Voortman®, Dolly Madison®, Cloverhill®, and Dolly Madison®Big Texas®brand trademarks and our sub-brand trademarks, including Twinkies®Twinkies®, Ding Dongs®Dongs®, Ho Hos®Hos®, Zingers®Zingers®, Sno Balls®Balls®, and Donettes®Donettes®, are valuable assets that we believe reinforcesreinforce our consumers’ favorable perception of our products. These trademarks have a perpetual life, subject to renewal. This provides us the opportunity to sell our products at premium price points and pursue licensing opportunities.
From time to time, third parties have used names similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property rights. Third parties have also, from time to time, opposed our trademarks and challenged our intellectual property rights. We respond to these actions on a case-by-case basis.

We rely on laws and regulations, as well as contractual restrictions, to protect our intellectual property and proprietary rights.
Research and Development
The majority of our research and development spend is dedicated to enhancingthe development of innovative snack products based on consumer insights and expanding our product lines, respondingprocess technology. These products help address new user occasions and seek to bring new consumers into the category based on changing consumer preferences and trendstrends. Through the development timeline, research guidance testing to optimize attributes based on appropriate taste, flavor and continuing to enhance the taste oftexture combined with efficient cost management, helps support our products.growth. In addition, our research and development organization provides technical support to our manufacturing team to ensure that our core products are consistently produced in accordance with our specifications and high standards of qualityquality. Finally, our research and specifications. Finally, thisdevelopment department is charged with developing processes to reduceoptimize our costs without adversely affecting the quality of our products. Our innovation lab within our Lenexa, Kansas corporate office provides us increased rapid prototyping, speed to market and small-scale batch process experimentation along with the testing capabilities, analytics and market research insights needed to support our growth objectives.
Information Technology
We rely heavily on information systems for management of our supply chain, inventory, payment of obligations, collection of cash, human capital management, financial tools and other business processes and procedures. Our ability to manage our business functions efficiently and effectively depends significantly on the reliability and capacity of these systems. We have instituted controls, including information technology governance controls that are intended to protect our computer systems and our information technology systems and networks. We also have business continuity plans that attempt to anticipate and mitigate failures. However, we cannot control or prevent every potential technology failure, adverse environmental event, third-party service interruption or cybersecurity risk.
We increasingly rely on cloud computing and other technologies that result in third parties holding customer, consumer or employee information on our behalf.

Except for limited information related to the usage of our websites, location data, or voluntarily submitted by users of our websites or others to our Consumer Affairs Team, we typically do not collect or store consumer data or personal information. However, third-party providers, including our licensees, co-manufacturers, e-commerce contractors and third-party sellers may do so. The website operations of such third parties may be affected by reliance on other third-party hardware and software providers, technology changes, risks related to the failure of computer systems through which these website operations are conducted, telecommunications failures, data security breaches and similar disruptions.
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Corporate Sustainability
We published our second Corporate Responsibility Report (“CRR”) in May 2022, identifying four key areas of focus for the Company - Environment, Governance, Health and Safety, and Diversity, Equity, Inclusion & Belonging. We strive to be a responsible, caring member of the communities in which we operate by focusing on our environmental impact and community involvement. Some examples of this are our product and monetary donations and employee volunteer activities.
Environment
At Hostess Brands, we understand the need to manage our environmental resources in a sustainable manner, which is why we are committed to the responsible sourcing of packaging and ingredients, as well as water and energy conservation. We are emphasizing a “sustainability-first” approach as we design our next bakery in Arkansas and are developing a climate action plan with the assistance of a third-party specialist which we expect to complete during 2023.

Government Regulation
Our operations, including the manufacturing, processing, formulating, packaging, labeling and advertising of products, are subject to regulation by various federal agencies, including the Food and Drug Administration (the “FDA”(“FDA”), the Federal Trade Commission (the “FTC”(“FTC”), and the Environmental Protection Agency (the “EPA”(“EPA”)., as well as the Canadian Food Inspection Agency (“CFIA”) and Health Canada for our Canadian operations. Our products are subject to various local, state or provincial, and federal laws, regulations and administrative practices affecting our business. We must comply with provisions regulating registrations and licensing, health and sanitation standards, currentingredient standards, Current Good Manufacturing Practices (“CGMPs”), food traceability, hazard analysis and traceability,risk-based preventative controls, food labeling and advertising, hazard reporting and recall requirements, equal employment, wage and hour requirements, and environmental protection, among others. We take compliance and the safety of our products and employees seriously and take all steps that we consider necessary or appropriate to comply with all applicable laws, rules and regulations.
EmployeesHuman Capital
As of December 31, 2017,2022, we employed approximately 1,3402,800 people. Of our total workforce, approximately 1,17090% were located at our bakery facilities.bakeries. The remaining workers comprised functions including operations management, sales and supply chain, among others. In early 2015,other corporate functions.
Our employees are critical to our success and allow us to continue to bring joy to our consumers and customers.
Health & Safety
Safety remains our top priority, and we are proud to have achieved the best total safety record in our over nine-year history during 2022. We have improved our total safety record five years running, with 2022 results for key metrics scoring best in class for categories consistent with Occupational Safety and Heath Administration (“OSHA”) standards. For the full year, we achieved a Total Incident Rate (“TIR”) of 1.08 vs. Commercial Bakery average of 4.23. We develop and maintain safety policies in our facilities and conduct periodic audits to ensure compliance.
Labor
Our ability to achieve sustained, profitable results is predicated on our ability to attract, retain, and engage a team of employees aligned to our common purpose to deliver products that create moments of joy for our customers and consumers. We are committed to providing a safe work environment, competitive wage and benefits packages, career development and training opportunities to produce a more stable, informed and fulfilled workforce, and an inclusive culture that encourages each employee to bring their whole self to work.
There were continued labor challenges across the U.S. during 2022, and while this issue impacted us like virtually all employers, we have worked closely with our employees to ensure we can deliver on the promise of our Mission, Vision, and Values in serving our customers and consumers. We have entered into collective bargaining agreements with the local unions of the Bakery, Confectionary,Confectionery, Tobacco Workers and Grain Millers Union in Indianapolis, Indiana, Columbus, Georgia and Columbus, Georgia.Burlington, Ontario; and AFL-CIO and the Chemical Production Workers Union Local No. 30 in Chicago, Illinois. Approximately 3601,200 employees are covered by these collective bargaining agreements.
We consider our relations with employees to be good and have not experienced a strike or significant work stoppage.
Employee Safety
3 Bureau of Labor Statistics, U.S. Department of Labor, Survey of Occupational Injuries and Environmental SustainabilityIllnesses, Commercial Bakeries
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We agreed to four-year contracts in our Burlington, Ontario and Columbus, Georgia locations in March and December 2022, respectively, and a three-year contract for our Indianapolis bakery in January 2022.
We offer competitive wages and benefits, including medical, dental, vision, paid family leave, paid time off, 401(k) plan, Employee Stock Purchase Plan and a number of other programs to best suit the needs of our employees. Beginning in 2023, we enhanced our 401(k) plan by increasing the employer match by 1% and converting to a safe harbor plan.
Diversity, Equity, Inclusion, & Belonging
To best achieve our desired results, it is vital that employees are committedcomfortable bringing their whole selves to keepingwork. We believe diversity, equity, inclusion, and belonging efforts are key to maintaining our positive culture. In addition to training and education at all levels, in 2022 we continued to develop our enterprise-wide DEI&B Team, which identifies opportunities to improve our culture, including the planning and execution of celebration and appreciation events for a variety of groups, including the continuation of a Speaker Series, programming around culture and appreciation events, and review and enhancement of our diversity policies and practices. Specifically, we sponsored celebrations of diversity and heritage events promoting MLK Day, Hispanic, Women’s History and LGBTQ Pride Months, among others. We also have developed employee resource groups (“ERG”) based on the interest of employees, including our Veteran’s ERG established in 2022 and our Women’s ERG established in the first quarter of 2023.

As of December 31, 2022, our employee demographics in the U.S. were:
Total U.S. Hostess Brands
American Indian or Alaska Native0.3 %
Asian1.5 %
Black or African American34.6 %
Decline to State2.0 %
Hispanic or Latino28.7 %
Native Hawaiian or Other Pacific Islander0.6 %
Two or More Races0.4 %
White32.0 %
Management
American Indian or Alaska Native0.5 %
Asian3.3 %
Black or African American16.1 %
Decline to State1.5 %
Hispanic or Latino11.3 %
Two or More Races0.5 %
White66.8 %
Our gender makeup as of December 31, 2022, was:
Total U.S. Hostess Brands
Female39.9 %
Male59.9 %
Not declared0.2 %
Management
Female29.2 %
Male70.8 %
Culture & Engagement
The Company’s culture is an integral part of our strategy, built on creativity, commitment, collaboration, positive energy, and strong sense of ownership. We launched our Mission, Vision, and Values in May 2021 to ensure everyone on our team understands the purpose of our work. Our Mission: We inspire moments of joy by putting our twnk-20221231_g2.jpginto everything we do. Our Vision: We envision a world where the everyday is worth celebrating.
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As a Company, we strive to achieve each of our six values every day:
•People: We rise together because every member of our diverse team has ownership and common purpose. Our team members are the heart of Hostess.
•Nimbleness: We overcome challenges and take advantage of opportunities by being quick to assess, decide and act.
•Integrity: We hold ourselves accountable to do the right thing for all stakeholders. Trust is the key ingredient to our recipe for successful relationships and reputation.
•Tenacity: We depend on our resilience and resolve to achieve the ambitious goals we set.
•Inclusivity: We are inclusive of ideas, individuals, and differing points of view. Everyone’s contributions are necessary for us to succeed.
•Quality: We do what it takes to deliver a great experience, from the quality of our products to a day in the life of our team members.
To better understand the full experience of our employees, safe, protectingto hear what they value, and what they believe could be improved, in May 2022, we conducted a Pulse of Hostess Brands engagement survey across our full employee base. As a result of this process and other activities, we are engaged in action planning to make our work environment even better. Using both live roundtable sessions with small groups of employees and virtual sessions with executive leadership, we regularly check in with our employees to identify issues needing attention, while sharing key messages with all employees through quarterly Town Hall meetings. In 2022, we also continued the environmentHeart of Hostess and providing developmental opportunities forHostess Hero awards, employee honors that recognize leadership and character.
To further demonstrate our employees.  We endeavorcommitment to be a company of energized people and to be a good corporate citizen.
Our goal is to create a higher standard of living and quality of life for our employees and increase belonging, we entered into a partnership with the National Alliance on Mental Illness (NAMI) during 2022. We are engaging in NAMI’s StigmaFree workplace program, which seeks to provide support and resources both in the workplace and in communities where Hostess operates.
Embodying our communities.  New automation, safety investmentsmission, vision and behavioral safety training have resulted in higher employee engagementvalues is a strong and lower workers’ compensation costs. We meet periodically with localexperienced management team, led by Andy Callahan, our President and state leaders to discuss business planning and ways to become a better community partner with educational, municipal and regulatory agencies.  We promote participation in charitable organizations and make philanthropic donations in someChief Executive Officer. Members of the communities where we operate.management team have extensive experience in the consumer packaged goods industry across the sales, operations, marketing, human resources, legal, and finance disciplines.
We also routinely donate a portion
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Our management team is complemented by an experienced Board of Directors, all of whom have senior executive leadership experience and bring with them extensive consumer products knowledge. Our board members and management include:
Board of Directors:Executive Officers:
Jerry D. Kaminski, ChairmanAndy P. Callahan, President and Chief Executive Officer
Andy P. Callahan, DirectorTravis E. Leonard, Executive Vice President, Chief Financial Officer
Olu Beck, DirectorArist R. Mastorides, Executive Vice President, Chief Customer Officer
Laurence Bodner, DirectorDaniel J. O’Leary, Executive Vice President, Chief Growth Officer
Gretchen R. Crist, DirectorAdrian Poretti, Senior Vice President, Chief Supply Chain Officer
Rachel P. Cullen, DirectorDarryl P. Riley, Senior Vice President, Chief Sustainability Officer
Hugh G. Dineen, DirectorJolyn J. Sebree, Senior Vice President, General Counsel and Secretary
Ioannis Skoufalos, DirectorRobert C. Weber, Senior Vice President, Chief People Officer
Craig D. Steeneck, Director
A detailed biography of each of our excess production to food banks in areas where we operate.board members and key management team members can be found at www.hostessbrands.com. Unless expressly stated otherwise, the information contained on or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K.
Available Information
This discussion of the business should be read in conjunction with, and is qualified by reference to, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) under Item 7 herein. In addition, the information set forth under the headings “Forward Looking Statements,” and “Introduction” in the MD&A is incorporated herein by reference in partial response to this Item 1.
The Company’s Internet website address is www.hostessbrands.com. The Company makes available free of charge (other than an investor’s own Internet access charges) through its Internet website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission.Commission (the “SEC”).
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company is not including the information contained on or available through its website or the SEC’s website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.



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Item 1A. Risk Factors
You should carefully consider the following risk factors, together with all of the other information included in this Annual Report on Form 10-K. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also have an adverse effect on us. Any risk described below may have a material adverse impact on our business or financial condition. Under these circumstances, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.
Risks Related to Our BusinessRISKS RELATED TO OUR BRANDS, REPUTATION AND COMPETITION
Maintaining, extending and expanding our reputation and brand imageimages are essential to our business success.
We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain our brand imageimages for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.

We seek to maintain, extend, and expand our brand imageimages through marketing investments, including advertising, and consumer promotions, public relations initiatives, media coverage and product innovation. Increasing attention on the role of food marketing could adversely affect our brand image.images. It could also lead to stricter regulations and greater scrutiny of marketing practices. Existing or increased legal or regulatory restrictions on our labeling, advertising, consumer promotions and marketing, or our response to those restrictions, could limit our efforts to maintain, extend and expand our brands. Moreover, adverse publicity about regulatory or legal action against us, product recalls or other adverse publicity could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action isthese actions are unfounded or not material to our operations.
Our reputation could be adversely impacted by the perception that we don’t maintain high ethical, social or environmental standards for all of our operations and activities or a perceived negative environmental impact, including use of agricultural materials, packaging, energy use, water use and waste management. Any such negative perceptions, or any negative publicity regarding our ESG practices, could impact our reputation with customers, consumers and other constituents, which could have a material impact on our business. In addition, our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. The growing use of socialSocial and digital media increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our brands or our products on social or digital media, whether or not valid, could seriously damage our brands and reputation. If we do not maintain, extend, and expand our brand image, then our product sales, financial condition and operating results could be materially and adversely affected.
We may be unable to leverage our brand value to compete against lower-priced alternative brands.
In most of our product categories, we compete with lower-priced alternative products. Our products must provide higher value and/or quality to our consumers than these alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if our products do not provide higher value and/or quality. If consumers choose the lower-priced brands, then we could lose market share and sales volumes, which could materially and adversely affect our product sales, financial condition, and operating results.
We may be limited in our ability to pass cost increases on to our customers in the form of price increases.
We may not be able to pass some or all of any increases in the price of raw materials, labor, energy, and other input costs to our customers by raising prices. In the event we increase our prices, customers and consumers may choose to purchase competing products or may shift purchases to private label or other lower-priced offerings, which may adversely affect our financial condition and operating results.
We may realize a decrease in sales volume in the event price increases are implemented.
Consumers may be less willing or able to pay a price differential for our branded products, and may increasingly purchase lower-priced offerings and may forego some purchases altogether. Retailers may also increase levels of promotional activity for lower-priced offerings as they seek to maintain sales volumes. Accordingly, sales volumes
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of our branded products could be reduced or lead to a shift in sales mix toward our lower-margin offerings. As a result, decreased demand for our products may adversely affect our financial condition and operating results.
We may be unable to correctly predict, identify and interpret changes in consumer preferences and demand and offer new products or methods of distribution to meet those changes.
Consumer preferences for food and snacking products continually change. Our success will depend on our ability to predict, identify and interpret the tastes, dietary habits, purchasing behavior and other preferences of consumers and to offer products that appeal to these preferences. Moreover, weak economic conditions, recession or other factors could affect consumer preferences and demand. If we do not offer products that appeal to consumers or if we misjudge consumer preferences and demand for our products, our sales and market share will decrease and our financial condition and operating results could suffer.
We continually introduce new products or product extensions and our operating results and growth will depend upon the market reception of such new products. There can be no assurance that new products will find widespread acceptance among consumers, and unsuccessful product launches may decrease our profitability and damage our brands’ reputation.
The continued prevalence of e-commerce and other methods of distribution outside of traditional retail shopping could also impact our sales and profitability if we are unable to adequately modify the marketing and distribution of our products in response.
In addition, prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. For example, consumers are increasingly focused on health and wellness and are aware of product ingredients such as added sugar and artificial flavors or colors. We might be unsuccessful in our efforts to effectively respond to changing consumer preferences and social expectations.
Our intellectual property rights are valuable, and our failure to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, including our trademarks, trade names, copyrights, trade secrets and trade dress, to be a significant and valuable part of our business. We attempt to protect our intellectual property rights by taking advantage of a combination of applicable laws, copyright registrations trademark registrations and/or applications forof our trademarks,intellectual property, third-party agreements (including non-disclosures, assignments, distribution and/or manufacturing, licenses, consents and co-existence) and policing and enforcement of third-party misuse or infringement of our intellectual property. Our failure to obtain or adequately protect our intellectual property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business. In addition, third-party claims of intellectual property infringement might require us to pay monetary damages or enter into costly license agreements. We also may be subject to injunctions against development and sale of certain of our products.
Any litigation regarding intellectual property (including third-party infringement claims or litigation initiated by us to protect our intellectual property rights) could be costly and time-consuming and could divert management’s and other key personnel’s attention from our business operations. Any of the occurrences outlined above could materially and adversely affect our reputation, product sales, financial condition and operating results.
We may be unable to leverage our brand value to compete against lower-priced alternative brands.
In nearly all of our product categories, we compete with lower-priced alternative products. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and retailer or other economy brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers choose the lower-priced brands, then we could lose market share or sales volumes, which could materially and adversely affect our product sales, financial condition, and operating results.
We may be unable to correctly predict, identify and interpret changes in consumer preferences and demand and offer new products or methods of distribution to meet those changes.
Consumer preferences for food and snacking products change continually. Our success will depend on our ability to predict, identify and interpret the tastes, dietary habits, purchasing behavior and other preferences of consumers and to offer products that appeal to these preferences. Moreover, weak economic conditions, recession or other factors could affect consumer preferences and demand. If we do not offer products that appeal to consumers or if we misjudge consumer demand for our products, our sales and market share will decrease and our profitability could suffer.

We continually introduce new products or product extensions and our operating results and growth will depend upon the market reception of such new products. There can be no assurance that new products will find widespread acceptance among consumers, and unsuccessful product launches may decrease our profitability and damage our brands’ reputation.
The continued prevalence of e-commerce and other methods of distribution outside of traditional retail shopping could also impact our sales and profitability if we are unable to adequately modify the marketing and distribution of our product in response.
In addition, prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. For example, consumers are increasingly focused on health and wellness, and aware of product ingredients such as added sugar and artificial flavors or colors. We might be unsuccessful in our efforts to effectively respond to changing consumer preferences and social expectations. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our reputation, product sales, financial condition and operating results.
We operate in a highly competitive industry.
The sweet baked goods (“SBG”)snacking industry is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, brand recognition and loyalty, price, trade promotion, consumer promotion, customer service, and the ability to identify and satisfy emerging consumer preferences. We face competition from other large national bakeries,brands, smaller regional operators, supermarket chains with their own private labeled brands grocery stores with their own in-store bakery departments and diversified food companies. Our competitors include a significant number of companies of varying sizes, including divisions, subdivisions, or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them, and may be substantially less leveraged than us.them. We may not be able to compete successfully with these companies. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures, or increase the use of discounting or
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promotional campaigns, each of which could materially and adversely affect our margins and could result in a decrease inan adverse effect to our financial condition and operating results and profitability.results.
RISKS RELATED TO OUR GROWTH STRATEGIES
Our growth may be limited by our inability to get, maintain or add additional shelf or retail space for our products.
Our results will depend on our ability to drive revenue growth, in part, by expanding the distribution channels for our products. However, our ability to do so may be limited by our inability to secure additional shelf, display, or other retail space for our products. Retail space for sweet baked goodssnacks is limited and subject to competitive and other pressures, and there can be no assurance that retail operators will provide us sufficient space for our products to enable us to meet our growth objectives. If we are unable to get, maintain or increase our retail space we could experience an adverse impact on our product sales, financial condition and operating results.
Our success will depend onWe may not successfully identify or complete strategic acquisitions, alliances, divestitures or joint ventures.
From time to time, we may evaluate acquisition candidates, alliances or joint ventures that may strategically fit our continued abilitybusiness objectives, or we may consider divesting businesses that no longer meet our strategic objectives, growth or profitability targets. These activities may present financial, managerial, and operational risks, including, but not limited to, producediversion of management’s attention from existing core businesses. In addition, to the extent we undertake acquisitions, alliances or joint ventures or other developments outside our core geography or in new categories, we may face additional risks related to such developments. Any of these factors could materially and successfully market products with extended shelf life.
We have invested to extend our product shelf life, while maintaining our products’ taste, texture and quality. Extended shelf life, or ESL, is an important component of our DTW model. Our ability to produce and successfully market existing and new products with this extended shelf life, while maintaining taste, texture and quality, is essential to our success. If we are unable to continue to produce products with extended shelf life or if the products are not accepted by consumers, we could be forced to make changes to our distribution model and that could have an adverse effect onadversely affect our product sales, financial condition, and operating results.

If we doWe may not successfully integrate and manage our acquired businesses or brands, our operating results may adversely be affected.brands.
From time to time, we acquire businesses or brands to expand our product portfolio and distribution. We may incur unforeseen liabilities and obligations in connection with the acquisition, integration, or management of the acquired businesses or brands and may encounter unexpected difficulties and costs in integrating them into our operating and internal control structures. We may also experience delays in extending our internal control over financial reporting to a newly acquired business, which may increase the risk of failure to prevent misstatements in their financial records and in our consolidated financial statements. Our financial performance depends in large part on how well we can manage and improve the performance of acquired businesses or brands. We cannot assure you;you, however, that we will be able to achieve our strategic and financial objectives for such acquisitions. If we are unable to achieve such objectives or successfully integrate acquired businesses or brands, our financial condition and operating results could be negatively affected.
We may not successfully integrate and manage capital investments, including new bakery facilities in order to achieve anticipated growth.
We face risks in starting up new bakery facilities, including with respect to expanding our overall production capacity as well as moving production to such new facilities, that could increase costs, divert management attention and reduce our operating results. The establishment and operation of a new bakery facility, and any capacity expansion project, involves significant risks and challenges, including, but not limited to, design and construction delays and cost overruns. There can be no assurance that a new bakery facility will contribute the incremental production capacity that we anticipate and in a manner suitable to our goals or that any other expansion project will be operational on the timeline or contribute the incremental production capacity that we anticipate, and we cannot guarantee that any such facility will operate at costs acceptable to us or that demand for our products will remain at levels high enough to meet the return on investment necessary to justify our investment in these projects.
Our growth may be limited if we do not manage changes in our manufacturing processes resulting from the expansion of our business and operations, including with respect to cost-savings initiatives and the introduction of new technologies and products.
We continually review our operations in an effort to achieve increased efficiencies, to integrate new technologies and to address changes in our product lines and in market demand. Periodic realignments and cost-savings programs and other changes could in the future adversely affect, our operating efficiency and results of operations during the periods in which such programs are being implemented. Such programs may include the addition of production lines
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and the consolidation, integration and upgrading of facilities, functions, systems and procedures, including the introduction of new technologies and product innovations. These programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. Our ability to achieve cost savings or other benefits within the time frames we anticipate is subject to many estimates and assumptions, a number of which are subject to significant economic, competitive and other uncertainties. If we are unable to achieve our objectives, our financial condition and operating results could be negatively affected.
We may be unable to drive revenue growth in our key products or add products that are faster-growing and more profitable.
The SBGsnacking industry’s overall growth is linked to population growth. Our future results will depend on our ability to drive revenue growth in our key products. Because our operations are concentrated in the United States where growth in the SBGNorth American snacking industry, has been moderate, our success also depends in part on our ability to enhance our portfolio by adding innovative new products. There can be no assurance that we will be able to effectively manufacture or source new products or that new products will find widespread acceptance among consumers. Our failure to drive revenue growth in our key products or develop innovative new products could materially and adversely affect our profitability, financial condition and operating results.
RISKS RELATED TO OUR OPERATIONS
The cost to manufacture our products is subject to pricing volatility.volatility, including that related to input cost inflation.
We purchase and use large quantities of commodities, including cooking oil, sugar, coatings, flour sweeteners, edible oils and compound coatingeggs to manufacture our products. In addition, we purchase and use significant quantities of corrugate and films to package our products.
Prices for commodities, labor, energy, transportation and other inputs are volatile and can fluctuate due to conditionsinflationary pressures that are difficult to predict, including global competition for resources, currency fluctuations, severe weather, or globalthe potential effects of climate change, consumer, industrial or investment demand, and changes in governmental regulation andregulatory, trade, alternative energy, andor agricultural programs.policies. Rising commodity, energy, transportation and other input costs could materially and adversely affect our cost of operations, which could materially and adversely affect our financial condition and operating results.
Although weWe monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to utilize forward buying strategies through short-term and long-term advance purchase contracts, to lock in prices for certain high-volume raw materials, packaging components and fuel inputs, theseinputs. These strategies, however, may not protect us from increases in specific raw materials costs.
Damage or disruption to our supply chain, including third-party manufacturing or transportation and distribution capabilities, due to weather, including any potential effects of climate change, natural disaster, fire or explosion, terrorism, pandemics or other infectious diseases, strikes, government action, or other reasons beyond our control or the control of our suppliers and business partners, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single supplier or location, could adversely affect our business, financial condition and operating results.
In addition, disputes with significant suppliers, including disputes regarding pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition, and results of operations.
We source the significant majority of our ingredients, raw materials and packaging within North America. However, global supply may become constrained, which may cause the price of certain ingredients, raw materials and packaging used in our products to increase, such ingredients may become unavailable and/or we may experience disruptions to our operations.
Continued volatility or sustained increases in the prices of commodities, transportation and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes. If we are not successful in
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our buying strategies and production efficiencies, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and operating results.
The loss of one or more of our current co-manufacturing arrangements could adversely affect our business.
We use independent contract manufacturers, or co-manufacturers, to manufacture a portion of our products. In some cases, an individual co-manufacturer may produce all of our requirements for a particular product. There are a limited number of qualified co-manufacturers in the industry. Therefore, if we lose or need to change one or more co-manufacturers or fail to retain co-manufacturers for newly acquired or developed products or brands, production of our products may be delayed or postponed and/or the availability of some of our products may be reduced or eliminated, which could have a material adverse effect on our business, financial condition and operating results.
The ability to distribute our products is subject to significant changes in the availability and pricing of transportation.
We utilize third-party carriers to ship our productproducts to our distribution centers and to customers. The availability of timely and reliable transportation and the associated costs are subject to market demand, carrier capacity, fuel prices and regulatory oversight. Our procurement of transportation services from a diversified group of carriers and continuous monitoring of carrier usage and pricing could be insufficient to protect us from changes in market demand or carrier capacity. The inability to distribute our products in a cost-effective manner could have a material adverse effect on our business, financial condition and operating results.

Climate change may negatively affect our business and operations.
There is concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as sugar and wheat. Adverse weather conditions and natural disasters can reduce crop size and crop quality, which in turn could reduce our supplies of raw materials, lower recoveries of usable raw materials, increase the prices of our raw materials, increase our cost of transporting and storing raw materials, or disrupt our production schedules. As a result of climate change, we may also be subjected to decreased availability of water, deteriorated quality of water or less favorable pricing for water, which could adversely affect our financial condition and operating results.
If we lose one or more of our major customers, or if any of our major customers experience significant business interruption, our operating results could be adversely affected.
We have several large customers that account for a significant portion of our sales. Wal-Mart andtogether with its affiliates is our largest customer and represented approximately 20.4%19.6% of our net revenue for the year ended December 31, 2017.2022. Cumulatively, including Wal-Mart, our top ten customers, including Wal-Mart, accounted for 59.9%59.4% of total net revenue for the year ended December 31, 2017.2022.
We do not have long-term supply contracts with any of our major customers. The loss of one or more major customers, or a material reduction in sales to these customers for any reason, or the occurrence ofincluding, but not limited to, a significant business interruption of our customers’ operations or our inability to forecast demand and plan production to fulfill customer orders, would result in a decrease in our revenue, operating results, and earnings.
Our geographic focus makes us particularly vulnerable to economic and other events and trends in North America.
We operate in the United States and, therefore, are particularly susceptible to adverse United States regulations, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages of our key ingredients, and other adverse events. The concentration of our businesses in United States could present challenges and may increase the likelihood that an adverse event in United States would materially and adversely affect our product sales, financial condition and operating results.
The consolidation of retail customers could adversely affect us.
Retail customers may continue to consolidate, resulting in fewer customers for our business. Consolidation also produces larger retail customers that may seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs, or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition, and operating results.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases, which could materially and adversely affect our product sales, financial condition and operating results.
Our results could be adversely impacted as a result of increased labor and employee-related expenses.
Inflationary pressures and any shortages in the labor market couldhave increased and may continue to increase labor costs or constrain production capacity, which could have a material adverse effect on our consolidated operating results or financial condition. While we have historically experienced some level of ordinary course turnover of employees, the COVID-19 pandemic and resulting actions and impacts have exacerbated labor shortages and increased turnover. A number of factors have had and may continue to have adverse effects on the labor force available to us, including reduced employment pools, federal unemployment subsidies and other government regulations, which include laws and regulations related to workers’ health and safety, wage and hour practices and immigration. A sustained labor shortage or increased turnover rates within our employee base (or within the employee base of key suppliers or
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third-party manufacturers), could negatively affect our supply chain or our ability to efficiently operate our manufacturing and distribution facilities and overall business.
Our labor costs include the cost of providing employee benefits, including health and welfare, and severance benefits. The annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements. Labor shortages and increased turnover rates within our team members have led to and could in the future lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and could negatively affect our ability to efficiently operate our bakeries or otherwise operate at full capacity. An overall or prolonged labor shortage, lack of skilled labor, increased turnover or labor inflation could have a material adverse impact on our financial condition and operating results.
Various federal and state labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, overtime, family leave, safety standards, payroll taxes, citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. As our employees are paid at rates set above, but related to, the applicable minimum wage, further increases in the minimum wage could increase our labor costs. Significant additional government regulations could materially and adversely affect our business, financial condition and operating results.
Higher health care costs and labor costs due to statutory and regulatory changes could adversely affect our business.
Under the United States Patient Protection and Affordable Care Act (the “ACA”), we are required to provide affordable coverage, as defined in the ACA, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the ACA. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have a material adverse effect on our business, financial condition and operating results. In addition, changes in federal or state workplace regulations could adversely affect our business, financial condition and operating results.

A portion of our workforce belongs to unions. Failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages could cause our business to suffer.
Approximately 26.9%44% of our employees, as of December 31, 2017,2022, are covered by collective bargaining agreements and other employees may seek to be covered by collective bargaining agreements. Strikes or work stoppages or other business interruptions could occur if we are unable to renew these agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could impair manufacturing and distribution of our products or result in a loss of sales, which could adversely impact our business, financial condition or operating results. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.strategy, which could have an adverse effect to our financial condition and operating results.
We may be subject to product liability claims should the consumption of any of our products cause injury, illness or death.
We sell food products for human consumption, which involves risks such as product contamination or spoilage, mislabeling,misbranding, product tampering and other adulteration of food products. Consumption of a mislabeled,misbranded, adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or law suitslawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or exceed our insurance coverage. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming and may require our management to spend time defending the claims rather than operating the business. In addition, publicity regarding these claims could adversely affect our reputation and brands.
Our success will depend on our continued ability to produce and successfully market products with extended shelf life.
We have invested to extend our product shelf life, while maintaining our products’ taste, texture and quality. Extended shelf life, or ESL, is an important component of our DTW model. Our ability to produce and successfully market existing and new products with ESL, while maintaining taste, texture and quality, is essential to our success. If we are unable to continue to produce products with ESL or if the products are not accepted by consumers, we could be forced to make changes to our distribution model or products that could have an adverse effect on our product sales, financial condition and operating results.
Product recalls may increase our costs, negatively impact our brands’ reputation, and adversely affect our business.
A product that has beenis actually or allegedly misbranded or becomes adulterated could result in product withdrawals or recalls, destruction of product inventory, negative publicity, temporary plant closings, substantial cost of compliance or
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remediation, and potentially significant product liability judgments against us. Any of these events could result in a loss of demand for our products, which would have a material adverse effect on our financial condition and operating results or cash flows.results. While we carry insurance to cover the direct costs of such events, we cannot guarantee that these costs will be recovered. We could also be adversely affected if consumers lose confidence in our productproducts’ quality, safety and integrity generally.
Unanticipated business disruptions could adversely affect our ability to provide our products to our customers.
Factors that are hard to predict or beyond our control, like weather, natural disasters, fire, explosions, terrorism, political unrest, generalized labor unrest or health pandemics could damage or disrupt our operations. In addition, our operations could be disrupted by a material equipment failure. We do not have significant redundant operating equipment to allow for such disruptions. Accordingly, if we do not effectively respond to disruptions in our operations, for example, by replacing capacity at our manufacturing locations, or cannot quickly repair damage to our information, production or supply systems, we may be late in delivering or unable to deliver products to our customers. If that occurs, we may lose our customers’ confidence, and long-term consumer demand for our products could decline. These events could materially and adversely affect our product sales, financial condition and operating results.
We rely on third parties for significant services that are importantrelated to our business,sales, marketing and their failure to perform could adversely affect our business, financial condition and operating results.distribution.
We operate a DTW distribution system that utilizesutilize third-party centralized distribution centersbrokerage and merchandising services and common carriers to transport a substantialexecute order fulfillment for the majority of our products. While this hasthese services have increased our market penetration and expanded our distribution reach, and reduced delivery costs, we are dependent upon these third parties to effectively market and distribute our products. Any failure by us to deliver our products in a timely manner would have an adverse impact on our sales and our reputation. In addition, we rely on third parties for sales and marketing services. We do not have long-term contracts with any of these third-party service providers. Accordingly, any termination by a third partythird-party provider of their services to us, or any failure by these third parties to perform their obligations to us, would have a material adverse impact on our businessfinancial condition and operating results.

Pandemics or outbreaks of other highly infectious or contagious diseases, including the COVID-19 pandemic, could adversely impact or cause disruption to our business, financial condition, results of operations and cash flows. Further, the COVID-19 pandemic, which has caused severe disruptions in the U.S. and global economy, may further disrupt financial markets and could potentially create widespread business continuity issues.
Public health crises, including the COVID-19 pandemic, and measures that have been and may in the future be taken by governments, businesses, including us, and individuals in response to such crises have had, are having and could continue to have impacts on our financial and operational performance.
The impact of the COVID-19 pandemic on our operations and the operations of third parties in our supply chain has included, and may in the future include, employee absenteeism and labor shortages, failure of third parties on which we rely to meet their obligations to us or disruptions in their ability to do so, increases in the costs, or reductions in the availability and timely delivery, of ingredients, packaging and other materials used to manufacture our products, operational delays, increases in the cost of freight, lack of adequate manufacturing capacity and delays in repairs at our facilities.
The impacts of the COVID-19 pandemic or other public health crises could exacerbate conditions in our other risk factors noted in this Item 1A, “Risk Factors.” If we are unable to successfully manage our business through the challenges and uncertainties created by the COVID-19 pandemic, many of which are not within our control, our business, financial condition and operating results could be materially adversely affected.
RISKS RELATED TO OUR INDUSTRY AND ECONOMIC CONDITIONS
Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine or other geopolitical conflict.
The global economy has been negatively impacted by the military conflict between Russia and Ukraine. Furthermore, governments in the U.S., United Kingdom, and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. Although we have no operations in Russia, Belarus or Ukraine, our supply chain has been, and may continue to be, adversely impacted by the Russia-Ukraine conflict. Further escalation of geopolitical tensions related to the military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. In addition, the effects of the ongoing conflict could heighten many of our known risks described in this Item 1A, Risk Factors.
Our geographic focus makes us particularly vulnerable to economic and other events and trends in North America.
We operate in North America and are particularly susceptible to adverse United States regulations, trade policies, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages of our ingredients and other production inputs, and other adverse events. The concentration of our businesses in North America could present challenges and may not successfully identify or complete strategic acquisitions, alliances, divestitures or joint ventures.increase the likelihood that an adverse event in the United States would materially and adversely affect our product sales, financial condition and operating results.
From time
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The consolidation of retail customers could adversely affect us.
Retail customers may continue to time, we may evaluate acquisition candidates, alliances or joint venturesconsolidate, resulting in fewer customers for our business. Consolidation also produces larger retail customers that may strategically fit our business objectives,seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs, or we may consider divesting businesses that do not meet our strategic objectives or growth or profitability targets. These activities may present financial, managerial, and operational risks, including, but not limited to, diversion of management’s attention from existing core businesses.specifically tailored products. In addition, larger retailers have the scale to the extent we undertake acquisitions, alliancesdevelop supply chains that permit them to operate with reduced inventories or joint ventures or other developments outside our core geography or in new categories, we may face additional risks related to such developments. Any of these factorsdevelop and market their own retailer brands. Retail consolidation and increased retailer power could materially and adversely affect our product sales, financial condition, and operating results.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases, which could materially and adversely affect our product sales, financial condition, and operating results.
OTHER GENERAL RISKS RELATED TO OUR BUSINESS
Unsuccessful implementation of business strategies to reduce costs may adversely affect our business, financial condition, results of operations and cash flows.
Many of our costs, such as freight, raw materials and energy, are subject to factors outside of our control. Therefore, we must seek to reduce costs in other areas, such as through operating efficiency. If we are not able to complete projects designed to reduce costs and increase operating efficiency on time or within budget, our business, financial condition, results of operations and cash flows may be adversely impacted. In addition, if the cost-saving initiatives we have implemented, or any future cost-saving initiatives, do not generate the expected cost savings and synergies, our business, financial condition and operating results may be adversely affected.
Legal claims or other regulatory enforcement actions could subject us to civil and criminal penalties.
As a large food company, we operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Various laws and regulations govern food production, storage, distribution, sales, labeling, advertising and marketing, as well as licensing, trade, labor, tax and environmental matters, and health and safety practices. Government authorities regularly changepass new and amend existing laws and regulations and may change their interpretations.interpretations of existing laws and regulations. Consequently, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition and operating results.
Our insurance may not provide adequate levels of coverage against claims.
We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and operating results.
We are subject to laws and regulations relating to protection of the environment, worker health, and workplace safety. Costs to comply with these laws and regulations, or claims with respect to environmental, health and safety matters, could have a significant negative impact on our business.
Our operations are subject to various federal, state or provincial, and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace and the cleanup of contaminated sites. We are required to obtain and comply with environmental permits for many of our operations, and sometimes we are required to install pollution control equipment or to implement operational changes to limit air emissions or wastewater discharges and/or decrease the likelihood of accidental releases of hazardous materials.
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We could incur substantial costs, including cleanup costs, civil or criminal fines or penalties, and third-party claims for property damage or personal injury as a result of any violations of environmental laws and regulations, noncompliance with environmental permit conditions or contamination for which we may be responsible that is identified or that may occur in the future. SuchThe increasing concern over climate change also may result in more regional, federal, and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases and replenish water. If such laws are enacted, we may experience significant increases in our costs may be material.of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products.
Under federal and state (or provincial) environmental laws, we may be liable for the costs of investigation, removal or remediation of certain hazardous or toxic substances, as well as related costs of investigation and damage to natural resources, at various properties, including our current and former properties and the former properties of our predecessors, as well as off-site waste handling or disposal sites that we or our predecessors have used. Liability may be imposed upon us without regard to whether we knew of or caused the presence of such hazardous or toxic substances. Any such locations we currently own or occupy, or locations that we may acquire in the future, may result in liability to us under such laws or expose us to third-party actions such as tort suits based on alleged conduct or environmental conditions. In addition, we may be liable if hazardous or toxic substances migrate from properties for which we may be responsible to other properties.

In addition to regulations applicable to our operations, failure by any of our suppliers to comply with regulations, or allegations of compliance failure, may disrupt their operations and could result in potential liability. Even if we were able to obtain insurance coverage or compensation for any losses or damages resulting from the noncompliance of a supplier with applicable regulations, our brands and reputation may be adversely affected by negative perceptions of our brands stemming from such compliance failures.
We cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted. We also cannot predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to environmental claims. These potential expenses could have a material adverse effect on our financial condition and operating results.
Our operations are subject to regulation by the FDA, FTC and other governmental entities, and such regulations are subject to change from time to time which could impact how we manage our production and sale of products.
Our and our contract manufacturers’ operations are subject to extensive regulation by the FDA, the FTC and other national, state, and local authorities.authorities in the U.S., as well as the CFIA and provincial and local authorities in Canada. For example, we are subject to the FDCAFood, Drug and Cosmetic Act (“FDCA”) and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the registration of all food facilities in the food supply chain, manufacturing, processing, composition and ingredients, labeling, packaging, holding, distribution and safety of food. Under this program, the FDA regulates manufacturing practices for foods through, among other things, its current “good manufacturing practices”CGMP regulations, or CGMPs, and specifies the recipesingredients for certain foods. Our processing facilitiesbakeries and products are subject to periodic inspection by federal, state, and local authorities. In January 2011, the FSMA was signed into law. The lawFood Safety Modernization Act (“FSMA”) increased the number of inspections at food facilities in the United States in an effort to enhancemonitor compliance with preventive control standards to reduce the detectionrisk of food-borne illness outbreaks and orderprovided the FDA with the authority to issue mandatory recalls of tainted food products. It also imposesproducts in certain situations. FSMA, therefore, imposed greater responsibility upon factorsparties throughout the food chain to design and implement effective preventive control programs, including risk-based end-to-end supply chain programs. Failure to follow CGMPs or to have an adequate food safety programs.program could result in the adulteration of food and could require product recalls.The FDCA requires reports of certain unsafe food products to be submitted to the FDA and provides the FDA with the authority to take corrective action, which may include, for certain unsafe foods, mandating the recall of adulterated or misbranded food products.
Similarly, the bakery in Burlington, Ontario is subject to the Canadian Food and Drugs Act (“CFDA”) and the Safe Food for Canadian’s Act (“SFCA”) and regulations promulgated thereunder by Health Canada and the CFIA. The CFDA and SFCA govern the import, export, manufacture, distribution, composition, packaging, labeling, advertising, and sale of food products in Canada. Under the SFCA, the CFIA, among other things, issues licenses for the importation, manufacturing, processing, packaging and labeling of foods, and enforces requirements for food
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safety, preventive controls, traceability, and product complaints, investigations and recalls. Failure to implement appropriate preventive controls and have an adequate food safety program may result in food being unsafe and could require product recalls. Under the SFCA, companies are required to report to the CFIA if a food presents a risk of injury to human health, whether due to adulteration or misbranding, and CFIA has authority to take corrective action, which may include, for certain unsafe foods, ordering the recall of the affected food products.
The FDA also has extensive and specific regulations concerning food labeling, including use of certain terms such as sugar free, healthy, low sodium and low fat. Improper labeling of a food causes it to be misbranded and could result in a recall. Under the FDCA, the FDA can issue a Warning Letter or Untitled Letter, or take other regulatory action such as a product seizure and detention, product recall, refuse to allow the export of the product, or with the Department of Justice, criminal or civil penalties, injunction against or restriction of product manufacture or distribution, consent decrees, disgorgement, restitution, against misbranded or adulterated food products. The FTC and otherstate authorities regulate how we market and advertise our products, and we could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations. In Canada, the CFIA enforces the detailed labelling and advertising requirements and restrictions promulgated under the CFDA and the SFCA, and has broad authority to take regulatory action such as product seizure and detention, stop sale, product recall, license suspension, impose administrative monetary penalties or pursue criminal prosecution for noncompliant food product or food advertising that is allegedly false or deceptive. Changes in these laws or regulations or the introduction of new laws or regulations could increase the costs of doing business for us or our customers or suppliers or restrict our actions, causing our financial condition and operating results to be adversely affected.
We seek to comply with applicable laws and regulations through a combination of employing internal personnel to ensure quality-assurance and food safety programs compliance and contracting with third-party laboratories that conduct analysis of products for the nutritional-labeling requirements.laboratories. Compliance with regulations is costly and time-consuming. FailureFrom time to time, we have been subject to civil claims alleging that we failed to comply with applicable laws and regulationsregulations. Any failure to comply or maintain permits and licenses relating to our operations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions or suspensions or revocations of our registration, permits or licenses, which could result in increased operating costs resulting inthat have a material adverse effect on our business, financial condition and operating results.
Significant additional labeling or warning requirements or limitations on the marketing or sale of our products may reduce demand for such products and could adversely affect our business or operating results.
Certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, product labeling or warning requirements or limitations on the marketing or sale of certain of our products as a result of ingredients or substances contained in such products. These types of provisions have required that we provide a label that highlights perceived concerns about a product or warns consumers to avoid consumption of certain ingredients or substances present in our products.products and have also prohibited or limited the use of certain words or phrases in connection with describing a product’s qualities. For example, in California, Proposition 65 requires a specific warning on any product that contains a substance listed by the State of California as having been found to cause cancer or birth defects, unless the level of such substance in the product is below a safe harbor level. We have been subject to civil claims alleging non-compliance with these requirements and may be subject to such claims in the future.
In addition, the United States has imposed new nutrition labeling regulations that requirerequired large food manufacturers to declare the quantity of added sugar by January 1, 2020, as well as update serving sizes and labeling requirements for certain package sizes. As we transition our packaginga national bio-engineered food disclosure standard that required food manufacturers to comply with the proposeddisclose bio-engineered food ingredients by January 1, 2020 compliance deadline,2022. Our new product labeling may impact the consumption and public perception of our products.
Additionally, Health Canada has imposed a new requirement for food manufacturers to add front-of-pack nutrition labeling by December 31, 2025 to pre-packaged foods that contain sugars, saturated fats, and/or sodium at or above certain thresholds. The new product labeling may impact the consumption and public perception of our products.
The imposition or proposed imposition of additional product labeling or warning requirements could reduce overall consumption of our products, lead to negative publicity (whether based in scientific fact or not) or leave consumers with the perception (whether or not valid) that our products do not meet their health and wellness needs. Such factors could adversely affect our business, financial conditions and operating results.

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ChangesA material impairment in laws, regulationsthe carrying value of acquired goodwill or rules, or a failure to comply with any laws, regulations or rules, may adverselyother intangible assets could negatively affect our business, investmentsconsolidated operating results and resultsnet worth.
A significant portion of operations.
Weour assets are subject to laws, regulations and rules enacted by national, regional and local governments and NASDAQ. In particular, we are required to comply with certain SEC, NASDAQgoodwill and other legal or regulatory requirements. Compliance with,intangible assets, the majority of which are not amortized but are reviewed for impairment at least annually and monitoringmore often if indicators of applicable laws, regulationsimpairment exist. If the carrying value of these assets exceeds the current estimated fair value, the asset is considered impaired, and rules maythis would result in a non-cash charge to earnings, which could be difficult, time consumingmaterial. Events and costly. Those laws, regulations or rules and their interpretation and application may also change from time to time and those changesconditions that could haveresult in impairment include a material adverse effect on our business and operating results. In particular,sustained drop in the new presidential administration has indicated its intent to pursue comprehensive regulatory reform. In addition, a failure to comply with applicable laws, regulations or rules, as interpreted and applied, could have a material adverse effect on our business and operating results.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examinationmarket price of our incomeClass A common stock, increased competition or other tax returns could adversely affect ourloss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial condition and results of operations.
We are subjectperformance in comparison to income taxes in the United States, and our domestic tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
•changes in the valuation of our deferred tax assets and liabilities;
•expected timing and amount of the release of any tax valuation allowances;
•tax effects of stock-based compensation;
•costs related to intercompany restructurings;
•changes in tax laws, regulations or interpretations thereof; and
lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other transaction taxes by United States federal and state authorities. Outcomes from these audits could have an adverse effect on our financial condition and results of operations.

projected results.
Our business operations could be disrupted if our information technology systems fail to perform adequately.
The efficient operation of our business depends on our information technology systems, somemost of which are managed by third-party service providers. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and operating results to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, the potential effects of climate change, power outages, systems failures, security breaches, cyber-attacks and viruses. Any such damage or interruption could have a material adverse effect on our business, financial condition and operating results.
We continuously monitor and update our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, and other events that could have a security impact. We invest to protect our data and business processes against risk of data security breach and cyber-attacks. We believe our security processes provide adequate measures of protection against security breaches. Nevertheless, despite continued vigilance in these areas, disruptions in information technology systems, including unauthorized use of data, are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our operations, our employees and those with whom we do business. This in turn could have a negative impact on our financial condition and operating results.
We occasionally implement new and upgrade our existing information technology systems. We may not be able to implement or upgrade the systems successfully without experiencing delays, increased costs and other difficulties, including potential design defects, miscalculations, testing requirements, and the diversion of management’s attention from day-to-day business operations. If we are unable to implement or upgrade the systems as planned, the effectiveness of our internal control over financial reporting could be adversely affected, our ability to assess those controls adequately could be delayed, and our financial condition, results of operations and cash flows could be negatively impacted.

We may be unable to hire or retain and develop key personnel or a highly skilled and diverse workforce or manage changes in our workforce.
We must hire, retain and develop a highly skilled and diverse workforce. We compete to hire new personnel in the many regions in which we manufacture and market our products and then to develop and retain their skills and competencies. Unplanned turnover or failure to develop adequate succession plans for leadership positions or hire and retain a diverse workforce with the skills and in the locations we need to operate and grow our business could deplete our institutional knowledge base and erode our competitiveness. With our CEO Bill Toler’s expected retirement, Dean Metropoulos has expanded his duties as Executive Chairman to ensure continuity of leadership.
Our inability to find a permanent CEO or the loss of our other senior managers or other key personnel, or our inability to identify, recruit and retain highly skilled personnel, could materially and adversely affect our business, operating results and financial condition.

We also face increased personnel-related risks. These risks could lead to operational challenges, including increased competition for employees with the skills we require to achieve our business goals, and higher employee turnover, including employees with key capabilities. Furthermore, we might be unable to manage changes in, or that affect, our workforce appropriately or satisfy the legal requirements associated with how we manage and compensate our employees.
These risks could materially and adversely affect our reputation, ability to meet the needs of our customers, product sales, financial condition and operating results.
Risks Related to Our Capital Structure
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RISKS RELATED TO OUR CAPITAL STRUCTURE
Our substantial leverage couldexisting and future debt may adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our indebtedness.
We are highly leveraged. As of December 31, 2017,2022, our total balance on long term debt, excluding deferred financing charges, discount, premium, and capital lease obligations, was approximately $993$983.2 million. Our high degree of leveragecurrent or future debt could have important consequences, including:
•requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities or to pay dividends;
•exposing us to the risk of increased interest rates because allthe portion of our borrowings including our borrowings under our credit facilities,not hedged by swap agreements are atsubject to variable rates;
•making it more difficult for us to make payments on our indebtedness;
•increasing our vulnerability to general economic and industry conditions;
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•subjecting us to restrictive covenants that may limit our flexibility in operating our business;
•limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

Despite our significant leverage,existing debt, we may be able to incur significant additional amounts of debt, which could further exacerbate the risks associatedrisk.
Changes in interest rates may adversely affect our earnings and/or cash flows.
Our term loan and revolving line of credit bear interest at variable interest rates that use the London Inter-Bank Offered Rate (“LIBOR”) as a benchmark rate. The United Kingdom’s Financial Conduct Authority and the administrator of LIBOR have announced that the publication of the most commonly used U.S. dollar LIBOR setting will cease to be published or cease to be representative after June 30, 2023 and the publication of all other LIBOR settings ceased to be published as of December 31, 2021. While we have sought to reduce future interest rate volatility by entering into floating interest rate to fixed interest rate swap agreements with respect to a portion of our significant leverage.outstanding indebtedness, the transition away from LIBOR may nonetheless cause us to incur increased costs and additional risk.

Starting January 1, 2022, banks in the United States have ceased entering into new credit and other contractual agreements using U.S. dollar LIBOR as a reference rate, and instead began incorporating alternative reference rates such as the Secured Overnight Financing Rate (“SOFR”), within such agreements. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). Although our credit agreement provides for the transition to successor base rates the consequences of any potential cessation, modification or other reform of LIBOR cannot be predicted at this time. Our interest expense may increase, and our financial condition and operating results may be adversely affected.
We may be unable to obtain additional financing to fund our operations and growth.
We may require additional financing to fund our operations or growth. The failure to secure additional financing could have a material adverse effect on our continued development or growth. None of our officers, directors or stockholders isare required to provide any financing to us.

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The Metropoulos Entities and The Gores Group have significant influence over us.

As of February 23, 2018, The Gores Group (and related entities) and the Metropoulos Entities beneficially own approximately 28% of our common stock, including approximately 6% of our Class A common stock and 100% of our Class B common stock. Holders of our Class B stock are entitled to vote on all matters presented to the Company’s stockholders, but do not have any economic rights to the distributions of the Company. As long as the Metropoulos Entities and The Gores Group own or control a significant percentage of our outstanding voting power, they will have the ability to significantly influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of our board, any amendment to our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets.
Pursuant to the Executive Chairman Director Agreement entered into with Mr. Metropoulos, Mr. Metropoulos serves as the Executive Chairman of our board. The Executive Chairman Director Agreement provides that, for so long as the Metropoulos Entities in the aggregate hold at least 7.5% of the capital stock of the Company on a fully-diluted basis, Mr. Metropoulos will have the right to designate one member for election to the board, which designee will be Mr. Metropoulos himself so long as he is employed as Executive Chairman.

The Metropoulos Entities’ and The Gores Group’s interests may not align with the interests of our other stockholders. The Metropoulos Entities and The Gores Group are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. The Metropoulos Entities and The Gores Group may also pursue acquisition opportunities that may be complementary to our business.

We are required to pay the Metropoulos Entities for a significant portion of the tax benefit relating to any additional tax depreciation or amortization deductions we claim as a result of any step up in the tax basis of the assets of our operating subsidiaries resulting from the Metropoulos Entities’ exchange of shares of Class B common stock and Class B units of Hostess Holdings for shares of our Class A common stock.
Class B units in Hostess Holdings may be exchanged (together with the cancellation of shares of our Class B common stock) by the holders thereof for, at the Company’s election, shares of Class A common stock, on a one-for-one basis (subject to customary anti-dilution adjustments), or the cash equivalent of such shares. The exchanges may result in increases to our share of the tax basis of the tangible and intangible assets of our operating subsidiaries that otherwise would not have been available, although the United States Internal Revenue Service may challenge all or part of that tax basis increase, and a court could sustain such a challenge by the United States Internal Revenue Service. These increases in tax basis, if sustained, may reduce the amount of tax that we would otherwise be required to pay in the future.
We are party to a Tax Receivable Agreement that provides for the payment by us of approximately 85% of the net cash savings, if any, in United States federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of: (i) certain increases in tax basis resulting from the Business Combination; (ii) certain tax attributes of Hostess Holdings and its subsidiaries existing prior to the Business Combination and prior to subsequent exchanges of Class B units; (iii) certain increases in tax basis resulting from exchanges of Class B units; (iv) imputed interest deemed to be paid by the Company as a result of payments that it makes under the Tax Receivable Agreement; and (v) certain increases in tax basis resulting from payments that the Company makes under the Tax Receivable Agreement.
In addition, in January 2018, we entered into an agreement with the Apollo Funds terminating all future payment obligations to the Apollo Funds in exchange for a payment of $34.0 million. However, if the Company enters into a definitive agreement on or before January 26, 2019 and that agreement results in a change in control (as defined in the Tax Receivable Agreement), the Company would be required to make an additional payment of $10.0 million to the Apollo Funds.
If our dividend policy is materially different than the distribution policy of Hostess Holdings, upon the exchange of any Class B units, the limited partners of Hostess Holdings could receive a disproportionate interest in the aggregate distributions by our operating subsidiaries that have not been distributed by us.
We and the Metropoulos Entities are limited partners of Hostess Holdings. To the extent Hostess Holdings distributes to its limited partners a greater share of income received from our operating subsidiaries than we distribute to our stockholders, then any of the Metropoulos Entities who participate in such distribution by Hostess Holdings and subsequently exercise their rights to exchange limited partnership units in Hostess Holdings for Class A common stock may receive a disproportionate interest in the aggregate distributions by our operating subsidiaries that have not been distributed by us. The reason is that such Metropoulos Entity could receive both (i) the benefit of a distribution by Hostess Holdings to its limited partners, including such Metropoulos Entity, and (ii) the benefit of a distribution by the Company to the holders of Class A common stock, including such Metropoulos Entity. Consequently, if our dividend policy does not match the distribution policy of Hostess Holdings, other holders of Class A common stock as of the date of an exchange could experience a reduction in their interest in the profits previously distributed by our operating subsidiaries that have not been distributed by us. Our current dividend policy could result in distributions to our common stockholders that are different from the distributions made by Hostess Holdings to its limited partners.

Our only significant asset is our ownership interest in our operating subsidiaries and such ownership may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.tax receivable agreement.
We have no direct operations and no significant assets other than our ownership interest in our operating subsidiaries. We depend on our operating subsidiaries for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, to pay any dividends with respect to our common stock, and to satisfy our obligations under the tax receivable agreement. See Note 8. Tax Receivable Agreement.Agreement to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, for information on the tax receivable agreement. The financial condition and operating requirements of our operating subsidiaries may limit our ability to obtain cash from our operating subsidiaries. The earnings from, or other available assets of, our operating subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.tax receivable agreement.
The ability of our operating subsidiaries (other than subsidiaries which have been designated as unrestricted pursuant to our ability to do so in certain limited circumstances) to make distributions, loans and other payments to us for the purposes described above and for any other purpose are governed by the terms of our credit facilities and will be subject to the negative covenants set forth therein. Any loans or other extensions of credit will be subject to the investment covenants contained therein, which provide for several exceptions including, among others (i) a general investment basket equal to the greater of a fixed dollar amount and a percentage of EBITDA and (ii) an unlimited investment basket based on satisfying a total net leverage ratio on a pro forma basis. Similarly, any dividends, distributions or similar payments will be subject to the dividends and distributions covenant under such credit facilities, which also provide for several exceptions including, among others (i) for payment of overhead and certain fees and expenses of parent companies, (ii) for tax distributions, subject to certain limitations, (iii) a general dividend and distribution basket equal to the greater of a fixed dollar amount and a percentage of EBITDA and (iv) an unlimited dividend and distribution basket based on satisfying a total net leverage ratio on a pro forma basis.

RISKS RELATED TO OUR CLASS A COMMON STOCK
Risks Related to Our Class A Common Stockstock price may be volatile.
Resales of the shares of Class A common stock issued in the Business Combination could depress theThe market price of our Class A common stock.
Therestock could be subject to wide fluctuations in response to various factors, many of which are beyond our control. Purchases or sales of large quantities of our stock, or significant short positions in our stock could have an unusual or adverse effect on our market price. These fluctuations may be a large number of shares of Class A common stock sold inalso cause short sellers to periodically enter the market in the near future. These sales, or the perceptionbelief that we will have poor results in the future. Abnormal trading activity, including activity that is considered market thatmanipulation, can lead to irrational and/or temporary movements in the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock. Asstock, which, in turn, may increase its risk and volatility. We cannot predict the actions of February 27, 2018,market participants and, therefore, can offer no assurances that the Metropoulos Entities held approximately 23% of our Common Stock, including 100% of our Class B common stock, and The Gores Group held approximately 5% of our Common Stock. All such shares of Class A common stock held by or obtainable in exchange for Class B common stock and Class B units held by the Metropoulos Entities have been registered for resale under the Securities Act pursuant to a shelf registration statement filed in November 2016.
We have approximately 99,855,625 shares of Class A common stock outstanding as of February 23, 2018. There are also remaining registered shares of Class A common stock that we may issue under the Hostess Brands, Inc. 2016 Equity Incentive Plan, which shares may be freely sold in the public market upon issuance, subject to compliance with stock ownership guidelines and volume limitations applicable to affiliates.
In addition, as of December 31, 2017, there were 44,182,889 public warrants and 12,317,001 private warrants outstanding. Each warrant entitles its holder to purchase one half of one share of our Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of our Class A common stock.
Such sales of shares of Class A common stock or the perception of such sales may depress the market price of our Class A common stock.

A market for our securities may not continue, which would adversely affect the liquidity and price of our securities.
The price of our securities may fluctuate significantly due to general market and economic conditions. An active trading market for our securities may not be sustained. In addition, the price of our securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our securities become delisted from NASDAQ for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on NASDAQ or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.
If securities or industry analysts cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our Class A common stock adversely, then the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industrystable or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts may cease to publish research on us.  If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.appreciate over time.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.
We are required to comply with Section 404 of the Sarbanes Oxley Act, which requires, among other things, that companies maintain disclosure controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness of those controls on a quarterly basis. Effective internal controls are necessary for us to provide reliable financial reports and to help prevent fraud, and our management and other personnel devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations increased our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act. Section 404 of the Sarbanes-Oxley Act also requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. If we fail to maintain the adequacy of our internal controls, we cannot assure you that we will be able to conclude in the future that we have effective internal control over financial reporting and/or we may encounter difficulties in implementing or improving our internal controls, which could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain effective internal controls, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and may also result in delayed filings with the SEC.
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Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of seasonality and several other factors, including:
labor availability and costs for hourly and management personnel;
profitability of our products, especially in new markets and due to seasonal fluctuations;
changes in interest rates;
impairment of long-lived assets;
macroeconomic conditions, both nationally and locally;
disruption in production by us or a co-manufacturer;
negative publicity relating to products we sell;
changes in consumer preferences and competitive conditions;
expansion to new markets;
fluctuations in commodity prices; and
actions by our competitors (e.g., pricing promotions).

Fluctuations in our operating results due to the foregoing or other factors could cause our results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. These provisions include:
a staggered board providing for three classes of directors, which limits the ability of a stockholder or group to gain control of our board;
•no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
•the right of our board to elect a director to fill a vacancy created by the expansion of our board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our board;
•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
•a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at least two-thirds of our common stock; and
•advance notice procedures that stockholders must comply with in order to nominate candidates to our board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

RISKS RELATED TO THE AMENDMENT OF PREVIOUSLY ISSUED REPORTS
The restatement of certain of our financial statements may subject us to risks and uncertainties, including the increased possibility of legal proceedings.
On April 30, 2021, management and the audit committee of our Board of Directors determined that our previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020 and our audited consolidated financial statements for the years ending December 31, 2020, 2019 and 2018 should no longer be relied upon. In addition, we determined that the related press releases, earnings releases, and investor communications describing our financial statements for these periods should no longer be relied upon. The errors identified were non-cash and related to our classification of certain outstanding warrants. Accordingly, we restated the annual, quarterly and year-to-date audited and unaudited consolidated financial statements for the foregoing periods on May 17, 2021.
As a result of our restatement, we may become subject to additional risks and uncertainties, including, among others, the increased possibility of legal proceedings or a review by the SEC and other regulatory bodies. The costs of defending against such legal proceedings or administrative actions could be significant. In addition, we could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and operating results.

Item 1B. Unresolved Staff Comments


None.
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Item 2. Properties.Properties


As of December 31, 2017, Hostess2022, we operated five bakingthe following facilities, and three distribution centers and occupied corporate headquarters,supporting our Snacking reportable segment’s operations, as shown in the chart below.

TypeLocationOwned/LeasedSize (Sq. Ft.)Segment
Baking FacilityBakeryEmporia, KansasOwned278,500
SBG
Baking FacilityBakeryColumbus, Georgia
Leased(1)
313,700
SBG
Baking FacilityBakeryIndianapolis, IndianaOwned195,000
SBG
Baking FacilityBakerySouthbridge, MassachusettsChicago, IllinoisOwned37,850137,000 
Other
Baking FacilityBakery, under constructionSouthbridge, MassachusettsArkadelphia, Arkansas
Leased(1)
47,640330,000 
Other
Bakery and Distribution CenterShorewood, IllinoisBurlington, OntarioLeased507,187250,000 
SBG
Distribution CenterCarthage, MissouriChicago, Illinois
Other(2)
Leased		—65,416 
SBG/Other
Distribution CenterWorcester, MassachusettsEdgerton, Kansas
Other(2)
Leased		—765,000 
Other
Distribution CenterEmporia, KansasLeased24,112 
Office SpaceChicago, IllinoisLeased9,325 
Office SpaceNashville, TennesseeLeased1,860 
Corporate HeadquartersLenexa, KansasOwned50,200 
Third-Party WarehouseKansas City, MissouriLeased
Other(2)
40,450— 
Third-Party WarehouseSBG/Carthage, Missouri
Other(2)
— 
Third-Party WarehouseHobart, Indiana
Other(2)
— 
Third-Party WarehouseEdgerton, Kansas
Other(2)
— 
Third-Party WarehouseBolingbrook, IL
Other(2)
— 


(1) The Columbus, GA facility isGeorgia and Arkadelphia, Arkansas bakery are subject to bond and lease agreements in which we have elected the right of setoff, and therefore are treated as if the properties were owned. Additionally, the facilities are available to purchase by the Company for the purchase amount of $100.a nominal amount.
(2)Variable usage fees related to the third-party distribution center include storage and pallet-related charges.are charged on a per-pallet basis.



Item 3. Legal Proceedings


We are involved in lawsuits, claims and proceedings arising in the ordinary course of business. These matters may involve personnel and employment issues, personal injury, contractcontracts and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date.business. Although we do not expect the outcome of these proceedings to have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements or claims that could materially impact our results.

The information required to be furnished by us under this Part I, Item 3 (Legal Proceedings) is incorporated by reference to the information contained in Note 14--Commitments14. Commitments and Contingencies to the Consolidated Financial Statementsconsolidated financial statements included in Part II, Item 8 on this Annual Report on Form 10-K.




Item 4. Mine Safety Disclosures.Disclosures


Not applicable.





28

PART II





Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information
Our Class A common stock and warrants areis currently quoted on NASDAQNasdaq under the symbolssymbol “TWNK” and “TWNKW,” respectively..
Information as to the high and low sales prices of our stock and warrants for the two years ended December 31, 2017 and 2016 is set forth in Note 16--Unaudited Quarterly Financial Data to the Consolidated Financial Statements included in Part II, Item 8 on this Annual Report on Form 10-K
Holders of Common Stock
As of February 23, 2018,17, 2023, there were approximately 22 stockholders5 stockholders of record of our Class A common stock and one stockholderno stockholders of record of our Class B common stock.
Dividend Policy Our Board of Directors periodically reviews our capital return policy to determine whether the payment of cash dividends or repurchases of securities are in the best interests of the Company and our stockholders.
We currently do not pay dividends and have not paid any cash dividends on our common stock to date.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan Category
(A)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(B)
Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights
(C)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (A))
Equity Compensation Plans approved by stockholders2,647,741 (1)$13.25 (2)8,180,342 (3)
Equity Compensation Plans not approved by stockholders— —— 
Total2,647,741 $13.25 8,180,342 
(1)Consists of shares subject to outstanding stock options, restricted stock units and performance restricted stock units under the Amended and Restated Hostess Brands, Inc. 2016 Equity Incentive Plan (the “2016 Plan”), some of which are vested and some of which remain subject to the vesting and/or performance criteria relating to the respective equity award.
Plan Category 
(A)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
(B)
Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights
 
(C)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plan (excluding securities reflected in column (A))
 
Equity Compensation Plans approved by stockholders 1,841,246(1)15.74
(2)5,188,682
(3)
Equity Compensation Plans not approved by stockholders — — — 
Total       
(2)Represents the weighted average exercise price of 1,202,867 stock options and excludes the impact of 1,444,874 shares of restricted stock units for which no exercise price is payable under the 2016 Plan.
(1)Consists of shares subject to outstanding stock options, restricted stock units and performance restricted stock units under the Hostess Brands, Inc. 2016 Equity Incentive Plan (the “2016 Plan”), some of which are vested and some of which remain subject to the vesting and/or performance criteria of the respective equity award.
(2)Represents the weighted average exercise price of 827,620 stock options and excludes the impact of 1,448,736 shares of restricted stock units for which no exercise price is payable
(3)Consists of shares available for future issuance under the 2016 Plan.
(3)Of these shares, 5,180,342 remain available for future issuance under the 2016 Plan and 3,000,000 remain available for future issuance under the 2022 Employee Stock Purchase Plan (“ESPP”).
For additional information, refer to Item 1211 of Part III of this Annual Report on Form 10-K.


Unregistered Sales of Equity Securities and Use of Proceeds
29


Issuer Purchase of Equity Securities
PeriodTotal number of securities repurchasedAverage price paid per shareTotal number of securities purchased as part of publicly announced plans or programs
Approximate dollar value of securities that may yet be purchased under the program (in millions) (1)
October 1 - 31, 2022 (2)688,304 $23.77 688,304 $41.3 
November 1 - 30, 2022— — — 41.3 
December 1 - 31, 2022 (2)847,126 23.20 847,126 21.7 
1,535,430 1,535,430 
The Company did not have any repurchases
(1)In February 2022, our Board of common stock for the year ended December 31, 2017.
Earn-out Obligation
In connection with the Business Combination, we agreedDirectors approved a securities repurchase program of up to grant additional shares to certain$150 million of the Legacy Hostess Equityholders contingent on the Company attaining certain EBITDA targets for the years ended December 31, 2016 and December 31, 2017. The Company did not meet the EBITDA target for the year ended December 31, 2016 or December 31, 2017.

In addition, we agreed to grant additional shares to Mr. Metropoulos as part of the Executive Chairman Agreement if certain EBITDA targets are met for the year ending December 31, 2018. The potential grants range from zero to 2.7 million shares. No amounts were accrued for this earn-out as of December 31, 2017, as management determined that it was not probable these thresholds would be met.

Warrants
our outstanding securities. As of December 31, 2017,2022, there were 44,182,889 public warrantswas $21.7 million remaining under this program. The program has no expiration date. The program may be amended, suspended or discontinued at any time at our discretion and 12,317,001 private warrants outstanding. Each warrant entitles its holderdoes not commit us to purchase one halfrepurchase our securities.
(2)Repurchase of one shareshares of our Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of our Class A common stock. The warrants became exercisable on December 4, 2016 and expire five years after that date or earlier upon redemption or liquidation. The Company may redeem the outstanding warrants at a price $0.01 per warrant, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30 trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by Gores Sponsor, LLC or its permitted transferees. During the the year ended December 31, 2017, the private warrants were registered with the SEC for future potential sales to the public. When sold to the public, the private placement warrants will become public warrants.



30

Performance Graph
The following graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the Commission, nor shall such information be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by reference into such filing.
The following stock performance graph compares, for the period November 30, 2015 (the first day our common stock was traded following our initial public offering)December 29, 2017 through December 29, 201731, 2022 (the last trading day of our fiscal year), the cumulative total stockholder return for (1) the Company’s common stock, (2) the Standard & Poor’s 500S&P SmallCap 600 and (3) the Standard & Poor’s 500S&P composite 1500 Packaged Foods and Meats Index.Sub-Index. The graph assumes the value of the investment in our common stock and each index was $100.00 on November 30, 2015December 29, 2017 and assumes reinvestment of any dividends.
The stock price performance below is not necessarily indicative of future stock price performance.
twnk-20221231_g4.jpg

31



Item 6. Selected Financial Data[RESERVED]


The following table sets forth our net revenues, operating costs and expenses attributable to our operations.

As a result of the Business Combination, we are the acquirer for accounting purposes and Hostess Holdings is the acquiree and accounting predecessor. Our financial statement presentation includes the financial statements of Hostess Holdings as “Predecessor” for periods prior to the Closing Date and of us for periods after the Closing Date, including the consolidation of Hostess Holdings. Also see “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Supplemental Unaudited Pro Forma Combined Financial Information” for supplemental pro forma combined information for 2016 that gives effect to the Business Combination as if such transaction had been consummated on January 1, 2016.

Statement of Operations Data
(In thousands except for share and per share data)
Year Ended
December 31, 2017
 From November 4, 2016
through December 31, 2016		  From January 1, 2016
through November 3, 2016		  
Year Ended
December 31, 2015
 Year Ended
December 31, 2014		 
February 6, 2013
(Inception)
through December 31, 2013
 (Successor) (Successor)  (Predecessor)  (Predecessor) (Predecessor) (Predecessor)
Net revenue$776,188
 $111,998
  $615,588
  $620,815
 $554,695
 $237,418
Gross profit326,898
 38,714
  266,529
  262,203
 233,932
 91,920
Operating income (loss)233,992
 (9,607)  122,872
  155,908
 119,467
 23,330
Income (loss) before income taxes190,904
 (16,247)  60,864
  88,760
 81,464
 (5,594)
Net income (loss)258,108
 (8,485)  60,425
  88,760
 81,464
 (5,594)
Net income (loss) attributable to the non-controlling interest34,211
 (4,081)  3,214
  4,507
 4,267
 —
Net income (loss) attributable to Class A shareholders$223,897
 $(4,404)  $57,211
  $84,253
 $77,197
 $(5,594)
Earnings (loss) per Class A share:

            
Basic$2.26
 $(0.05)          
Diluted$2.13
 $(0.05)          
Weighted-average shares outstanding:             
Basic99,109,629
 97,791,658
          
Diluted105,307,293
 97,791,658
          


Cash Flow Data
(In thousands) 
Year Ended
December 31, 2017
 
 From November 4, 2016
through December 31, 2016
  
 From January 1, 2016
through November 3, 2016
 
 Year Ended
December 31, 2015
 
 Year Ended
December 31, 2014
 
February 6, 2013
(Inception)
through December 31, 2013
  (Successor) (Successor)  (Predecessor) (Predecessor) (Predecessor) (Predecessor)
Net cash provided by (used in)
operating activities
 $163,685
 $13,611
  $102,221
 $132,972
 $108,329
 $(29,672)
Net cash provided by (used in) investing activities (35,209) (428,196)  (76,579) 17,880
 (91,393) (422,498)
Net cash provided by (used in) financing activities (19,630) (232,345)  (31,596) (296,002) (9,769) 654,626

Balance Sheet Data
(In thousands) 
December 31,
2017
 
December 31,
2016
  
December 31,
2015
 
December 31,
2014
 
February 6, 2013
(Inception)
through December 31, 2013
 
  (Successor) (Successor)  (Predecessor) (Predecessor) (Predecessor) 
Cash and cash equivalents $135,701
 $26,855
  $64,473
 $209,623
 $202,456
 
Property and equipment, net 174,121
 153,224
  128,078
 112,732
 88,269
 
Total assets 2,966,275
 2,847,892
  643,529
 765,494
 683,678
 
Long-term debt and capital lease obligation 987,920
 993,374
  1,193,667
 473,175
 479,602
 
Non-controlling interest 342,240
 334,192
  (37,991) 4,267
 —
 

Other Financial Data (1)
(In thousands) 
Year Ended
December 31, 2017
 
 From
November 4, 2016
through
December 31, 2016
  
 From
January 1, 2016
through November 3, 2016
  Year Ended
December 31, 2015		  Year Ended
December 31, 2014		 
February 6, 2013
(Inception)
through December 31, 2013
  (Successor) (Successor)  (Predecessor) (Predecessor) (Predecessor) (Predecessor)
Adjusted EBITDA $230,212
 $31,894
  $183,409
 $177,930
 $145,343
 $40,285


Adjusted Gross Profit and Adjusted Gross Margin
(In thousands)
Year Ended
December 31, 2017
 
From
November 4, 2016
through December 31, 2016
  From
January 1, 2016
through November 3, 2016		 
Year Ended
December 31, 2015
 Year Ended
December 31, 2014		 
February 6, 2013
(Inception)
through December 31, 2013
 (Successor) (Successor)  (Predecessor) (Predecessor) (Predecessor) (Predecessor)
Net revenue$776,188
 $111,998
  $615,588
 $620,815
 $554,695
 $237,418
Cost of goods sold449,290
 73,284
  346,864
 355,963
 320,763
 145,498
Special employee incentive compensation—
 —
  2,195
 2,649
 —
 —
Gross Profit$326,898
 $38,714
  $266,529
 $262,203
 $233,932
 $91,920
             
Add back:            
Special employee incentive compensation (i)—
 —
  2,195
 2,649
 —
 —
Inventory fair value adjustment (ii)—
 8,914
  —
 —
 —
 —
Adjusted Gross Profit$326,898
 $47,628
  $268,724
 $264,852
 $233,932
 $91,920
             
Gross Margin - GAAP42.1% 34.6%  43.3% 42.2% 42.2% 38.7%
             
Adjusted Gross Margin42.1% 42.5%  43.7% 42.7% 42.2% 38.7%

(i) For the Predecessor period January 1, 2016 through November 3, 2016, a special bonus payment of $2.2 million was paid to employees at the bakery facilities as compensation for their efforts in the Business Combination. For the year ended December 31, 2015, a special bonus payment of $2.6 million was paid to employees at the bakery facilities as compensation for their efforts in the recapitalization of Hostess.

(ii) For the Successor period November 4, 2016 through December 31, 2016, the Company remeasured inventory at fair value at the Business Combination date, resulting in additional non-cash cost of goods sold of $8.9 million.

















(1) Adjusted EBITDA is defined and explained in more detail in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which contains a reconciliation to the most comparable GAAP measure. Adjusted EBITDA is a non-GAAP financial measures commonly used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. However, Adjusted EBITDA should not be construed as an alternative to net income as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We have included Adjusted EBITDA because we believe it provides management and investors with additional information to measure our performance.

Adjusted Gross Profit and Adjusted Gross Margin are non-GAAP financial measures commonly used in our industry, however they should not be construed as an alternative to gross profit and gross margin as an indicator of operating performance. Adjusted Gross Profit and Adjusted Gross Margin may not be comparable to similarly titled measures reported by other companies. We have included Adjusted Gross Profit and Adjusted Gross Margin because we believe they provide management and investors with additional information to measure our performance. We believe the presentation of Adjusted Gross Profit and Adjusted Gross Margin is useful to investors because it is consistent with our definition of Adjusted EBITDA.

See Item 7-Management’s Discussion and Analysis of financial Condition and Results of Operations-Adjusted EBITDA Reconciliation.





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


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statementsconsolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A “Risk Factors” of this Annual Report on Form 10-K.


For a comparison of our results of operations for the fiscal years ended December 31, 2021 and December 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022.

Overview

We are a leading United States packaged foodsweet snacks company focused on developing, manufacturing, marketing, selling and distributing fresh sweet baked goods coast-to-coast,snacks in North America, providing a wide range of snack cakes, donuts, sweet rolls, breakfast pastries, cookies, snack pies and related products. We acquired the Hostess® brand and certain strategic assets out of the bankruptcy liquidation proceedings of Old HB Inc., its prior owner, free and clear of all past liabilities, in April 2013, and relaunched the brand later that year.

As of December 31, 2017,2022, we operate five bakeriesbaking facilities and three centralizedutilize distribution centers.centers and third-party warehouses to distribute our products. Our direct-to-warehouse (“DTW”)Direct-to-Warehouse product distribution system allows us to deliver to our customers’ warehouses. Our customers in turn distribute to their retail stores and/or distributors.

We have two reportable segments: “Sweet Baked Goods” In 2022, we purchased a facility in Arkadelphia, Arkansas. The facility will become our sixth bakery upon completion of capital investments to install production lines and “In-Store Bakery”. A changeother necessary improvements needed to make the facility operational. The facility is expected to open in the Company’s internal reporting structure during the lastfourth quarter of 2017 caused the2023.
The Company to reassess itshas one reportable segments. Sweet Baked Goodssegment: Snacking. The Snacking segment consists of fresh and frozen sweet baked goods, cookies, bread and bread productsbuns that are sold under the Hostess®, Voortman®, Dolly Madison®, Cloverhill® and Dolly Madison®Big Texas® brands. In-Store Bakery consists of certain Superior and Hostess® branded eclairs, madeleines, brownies, and iced cookies sold in the bakery section of grocery and club stores.

Hostess® is the second leading brand by market share within the Sweet Baked Goods (“SBG”(“SBG”) category, according to Nielsen U.S. total universe. For the 52-week period ended December 30, 201731, 2022 our branded SBG products’ (which include Hostess®, Dolly Madison®, Cloverhill®, and Big Texas®) market share was 17.2%21.2% per Nielsen’s U.S. SBG category data. We have aOur Hostess® branded products include the #1 leading market positioncupcake and mini donut products within the two largest SBG Segments; Donut Segmentcategory and Snack Cake Segment, The Donutour Voortman® branded products include the #1 creme wafer and Snack Cake Segments together account for 49% ofsugar free cookie products within the Sweet Baked Goods category’s total dollar sales.

Cookie category.
Principal Components of Operating Results
Net Revenue
We generate revenue primarily through selling sweet baked goods and other products under the Hostess® group of brands,packaged snacks, which includesinclude iconic products such as Donettes®, Twinkies®, CupCakes, Ding Dongs®, Zingers®, HoHos®Danishes, Honey Buns and Donettes®,Coffee Cakes under the Hostess® brand, as well as cookies, wafers and sugar free products under the Voortman® brand. We also sell products under the Dolly Madison® brand , Cloverhill® and the Superior on Main® brand (e.g., eclairs, madeleines, brownies and iced cookies).Big Texas® brands along with private label products. Our product assortment is solddelivered to customers’ warehouses and distribution centers by the case or in display readydisplay-ready corrugate units. Retailers display and sell our products to the end consumer in single-serve, multi-pack or club-pack formats. We sell our products primarily to supermarket chains, national mass merchandisersretailers and convenience stores, along with a smaller portion of our product sales going to club, dollar and drug stores, the vending club,channel, and other retail outlets.

Our revenues are driven by average net price and total volume of products sold. Factors that impact unit pricing and sales volume include product mix, the cost of ingredients, theinputs, promotional activities, implemented by the Company and its competitors, industry capacity, new product initiatives and quality and consumer preferences. We do not keep a significant backlog of finished goods inventory, as our fresh baked products are promptly shipped to our distribution centers after being produced and then distributed to customers.

Cost of Goods Sold

Cost of goods sold consists of ingredients, packaging, labor, energy, and other production costs, as well as warehousing and transportation costs for theincluding in-bound freight, inter-plant transportation and distribution of our products to our customers. The cost of ingredients and packaging represent the majority of our total costs of goods sold. All costs that are incurred at the bakeries, including the depreciation of bakery facilities and equipment, are included in cost of goods sold. We do not allocate any corporate functions into cost of goods sold.

Our cost of ingredients consists principally of cooking oil, sugar, coatings, flour sweeteners, edible oils and cocoa,eggs, which are subject to substantial price fluctuations, as is the cost of paper, corrugate, films and plastics used to package our products. The prices for raw materials are influenced by a number of factors, including the weather, crop production, transportation and processing costs, inflation,
32

government regulation and policies and worldwide market supply and demand. We also rely on fuel products, such as natural gas, diesel, propane and electricity, to operate our bakeries and produce our products. Fluctuations in the prices of the raw materials or fuel products used in the production, packaging or transportation of our products affect the cost of products sold and our product pricing strategy. We utilize forward buying strategies through short-term and long-term advance purchase contracts to lock in prices for certain high-volume raw materials, packagedpackaging components and certain fuel inputs. Through these initiatives, we believe we are able to obtain competitive pricing.

Advertising and Marketing

Our advertising and marketing expenses relate to our advertising campaigns, which include social media, print, online advertising, local promotional events and monthly agency fees. We also invest in wire racks and corrugate displays delivered to customers to display our products off shelf, field marketing and merchandising services to reset and check theour store inventory on a regular basisbasis. We also invest in advertising campaigns, which include social media, print, online advertising, local promotional events, monthly agency fees and marketing employmentpayroll costs.

Selling Expense

Selling expenses primarily include sales management, employment,sales employee-related expenses, travel, and related expenses, as well as broker fees. We utilize brokers for sales support, including managing promotional activities and order processing.

General and Administrative

General and administrative expenses primarily include employee and related expenses for the accounting, planning,finance, customer service, legal, human resources, corporate operations, research and development, purchasing, logistics and executive functions. Also included are professional service fees related to audit and tax, legal, outsourced information technology functions, transportation planning, headquarters and corporate siteother office sites and insurance costs.costs, as well as the depreciation and amortization of corporate assets.

Other Expense
Related Party Expenses

Related party expenses consistedOther expense primarily includes interest paid on our term loan offset by interest income earned on investments as well as a gain in 2022 from receipt of insurance proceeds under the normal annual cash payments associatedrepresentation and warranty insurance policy purchased in connection with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman.

Non-Controlling Interest

Mr. Metropoulosthe Voortman acquisition and the Metropoulos Entities hold their equity investmentchange in us primarily through Class B limited partnership units in the Company’s subsidiary, Hostess Holdings (“Class B Units”),fair value of our liability-classified public and an equal number of shares of the Company’s Class B common stock (“Class B Stock”). Our Class B Stock has voting, but no economic rights, while Hostess Holdings’ Class B Units have economic, but no voting rights. Each Class B Unit, together with a share of Class B Stock held by the Metropoulos Entities, is exchangeable for a share of the Company’s Class A common stock (or at the option of the Company, the cash equivalent thereof). The Company holds 100% of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests and consolidates Hostess Holdings in the Company’s consolidated financial statements. The interest of the Metropoulos Entities in Hostess Holdings’ Class B Units is reflected in our consolidated financial statements as a non-controlling interest.

For periods prior to the Business Combination, Hostess Holdings consolidated the financial position and results of operations of New Hostess Holdco, LLC. The portion of New Hostess Holdco, LLC not owned by Hostess Holdings (which constituted a profits interest plan for management) was recognized as a non-controlling interest in its consolidated financial statements.


Factors Impacting Recent Results

Long-term Debt Refinancing and Interest Rate Risk Management

To manage the risk related to our variable rate debt, during the year ended December 31, 2017, we entered into an interest rate swap contract with a counter party to make a series of payments based on a fixed interest rate of 1.78% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based on a notional amount of $500 million at the inception of the contract and will be reduced by $100 million each year of the five year contract.

On November 20, 2017 and May 19, 2017, our first lien term loan was amended resulting in a decrease of 0.25% and 0.50%, respectively, to the margin applied to our variable rate. The maturity date of August 3, 2022 remained unchanged.
Seasonality
Sweet baked goods revenues tend to be moderately seasonal, with declines during the early winter period, which we believe are attributable to altered consumption patterns during the holiday season. We expect this trend to continue and continue to be applicable to our business. We strive to mitigate the seasonality by running certain targeted promotional campaigns.

Note on Financial Presentation

As a result of the completion of the Business Combination on November 4, 2016, our Consolidated Financial Statements included elsewhere in the Annual Report are presented: (i) as of December 31, 2017 andprivate placement warrants for the year ended December 31, 2017 (Successor); (ii) as2021.
Factors Impacting Recent Results
Supply Chain
We believe volatility in certain aspects of the global supply chain have had a continued impact on our operations, including the cost and availability of labor, transportation and raw materials. Various macro factors, including, but not limited to, the COVID-19 pandemic, labor market trends, rising fuel and transportation costs, currency exchange rate, the conflict in Ukraine, the Avian Influenza and overall elevated demand for goods, have led to fragility in the supply chain.
We continue to experience increased labor costs, raw materials costs and transportation costs in the current economic climate. Given the fragility of the global supply-chain environment, our ability to source raw materials for our production facilities or produce and ship products to meet the needs of our customers may be materially impacted. We continue to work closely with all of our vendors, distributors, contract manufacturers, and other external business partners to ensure availability of our products for our customers and consumers.
In response to the inflationary costs described above, we have implemented price increases and may implement additional price increases in the future. Customers may not accept price increases or we may face competitive pressure that leads to price reductions for certain products.

33

Acquisition
On January 3, 2020, we completed the acquisition of all of the shares of the parent company of Voortman Cookies Limited (“Voortman”), a manufacturer of premium, branded wafers and cookies, including sugar free products. By adding the Voortman® brand, we believe we have greater growth opportunities provided by a more diverse portfolio of brands and products.
In December 31, 20162020, the Company asserted claims for indemnification against the sellers under the terms of the Share Purchase Agreement pursuant to which the Company acquired Voortman (the “Agreement”). The claims arose out of alleged breaches by the sellers of certain representations, warranties and forcovenants contained in the period November 4, 2016Agreement relating to December 31, 2016 (Successor); (iii) forperiods prior to the period January 1, 2016closing of the acquisition. The Company also submitted claims relating to November 3, 2016 (Predecessor);these alleged breaches under the representation and (iv) forwarranty insurance policy (“RWI”) it purchased in connection with the acquisition. In June 2022, the RWI insurers agreed to pay the Company $42.5 million CAD (the RWI coverage limit) (the “Proceeds”) related to these breaches. During the year ended December 31, 2015 (Predecessor). For comparative purposes, we also present supplemental unaudited pro forma combined Statements2022, the Company received the Proceeds and recognized a gain of Operations$42.5 million CAD ($33.0 million) in other expense (income) on our consolidated statement of operations. Per agreement with the RWI insurers, under no circumstances will the Company be required to return the Proceeds.
On November 3, 2022, pursuant to the agreement with the RWI insurer, Voortman brought claims in the Ontario (Canada) Superior Court of Justice (the “Claim”), related to the breaches against certain of the sellers from whom Voortman was acquired. The Claim alleges the seller defendants made certain non-disclosures and misrepresentations to induce the Company to overpay for Voortman. The Company is seeking damages of $109 million CAD representing the yearamount of the aggregate liability of the sellers for indemnification under the Agreement, $5.0 million CAD in punitive or aggravated damages, interest, proceedings fees and any other relief the presiding court deems appropriate. A portion of any recovery will be shared with the RWI insurers. Although the Company strongly believes that its Claim against the sellers is meritorious, no assurance can be given as to whether the Company will recover all, or any part, of the amounts it is pursuing.
Change in Fair Value of Warrant Liabilities
During the years ended December 31, 20162021 and 2020, there were fluctuations in the table belowmarket price of our publicly traded warrants. These fluctuations created significant gains and losses on the discussion that follows. See “-Supplemental Unaudited Pro Forma Combined Financial Information.”remeasurement of certain warrants which are recognized as “change in fair value of warrant liabilities” within other expense on our consolidated statement of operations. The warrants expired on November 4, 2021 and are no longer outstanding.

34


















Results of Operations
Comparison of Results of Operations for the Year Ended December 31, 2017 (Successor), From November 4, 2016 through December 31, 2016 (Successor), From January 1, 2016 through November 3, 2016 (Predecessor) and the Year Ended December 31, 2015 (Predecessor)
           
 2017 2016   2015
(In thousands, except share and per share data)
Year
Ended
December 31
 %
of Net Revenues		 
From November 4
through
December 31
 %
of Net Revenues		  
From January 1
through
November 3
 %
of Net Revenues		 
Year
Ended
December 31
 %
of Net Revenues
 (Successor)   (Successor)    (Predecessor)   (Predecessor)  
Net revenue$776,188
 100.0 % $111,998
 100.0 %  $615,588
 100.0% $620,815
 100.0 %
Cost of goods sold449,290
 57.9
 73,284
 65.4
  346,864
 56.3
 355,963
 57.3
Special employee incentive compensation—
 —
 —
 —
  2,195
 0.4
 2,649
 0.4
Gross profit326,898
 42.1
 38,714
 34.6
  266,529
 43.3
 262,203
 42.2
Operating costs and expenses:      —
    —
   —
Advertising and marketing33,004
 4.3
 5,245
 4.7
  30,626
 5.0
 31,967
 5.1
Selling expense32,086
 4.1
 5,033
 4.5
  25,730
 4.2
 29,484
 4.7
General and administrative52,943
 6.8
 7,322
 6.5
  38,391
 6.2
 31,531
 5.1
Special employee incentive compensation—
 —
 —
 —
  2,503
 0.4
 1,274
 0.2
Amortization of customer relationships23,855
 3.1
 3,922
 3.5
  1,185
 0.2
 851
 0.1
Impairment on property and equipment1,003
 0.1
 —
 —
  7,300
 1.2
 2,700
 0.4
Loss on sale/abandonment of property and equipment, and bakery shutdown costs (recoveries)(144) —
 —
 —
  2,551
 0.4
 4,182
 0.7
Business combination transaction costs—
 —
 —
 —
  31,832
 5.2
 —
 —
Related party expenses381
 —
 26,799
 23.9
  3,539
 0.6
 4,306
 0.7
Tax receivable agreement liability remeasurement(50,222) (6.5) —
 —
  —
 —
 —
 —
Total operating costs and expenses92,906
 12.0
 48,321
 43.1
  143,657
 23.3
 106,295
 17.1
Operating income233,992
 30.1
 (9,607) (8.6)  122,872
 20.0
 155,908
 25.1
Other expense:      —
    

   

Interest expense, net39,174
 5.0
 6,649
 5.9
  60,384
 9.8
 50,011
 8.1
Loss (gain) on modification of debt2,554
 0.3
 (763) (0.7)  —
 —
 25,880
 4.2
Other expense (income)1,360
 0.2
 754
 0.7
  1,624
 0.3
 (8,743) (1.4)
Total other expense43,088
 5.6
 6,640
 5.9
  62,008
 10.1
 67,148
 10.8
Income before income taxes190,904
 24.6
 (16,247) (14.5)  60,864
 9.9
 88,760
 14.3
Income tax expense (benefit)(67,204) (8.7) (7,762) (6.9)  439
 0.1
 —
 —
Net income (loss)258,108
 33.3
 (8,485) (7.6)  60,425
 9.8
 88,760
 14.3
Less: Net income attributable to the non-controlling interest34,211
 4.4
 (4,081) (3.6)  3,214
 0.5
 —
 —
Net income attributable to Class A shareholders$223,897
 28.8 % $(4,404) (3.9)%  $57,211
 9.3% $88,760
 14.3 %
                 
Earnings per Class A share:                
Basic$2.26
   $(0.05)           
Diluted$2.13
   $(0.05)           
                 
Weighted-average shares outstanding:                
Basic99,109,629
   97,791,658
           
Diluted105,307,293
   97,791,658
           

As discussed above, the financial information presented herein for periods prior to the completion of the Business Combination is of our accounting Predecessor, Hostess Holdings, and, for periods from and after the Business Combination, is of Hostess Brands, Inc.

The financial information for the year ended December 31, 2016 is divided into Predecessor and Successor periods and is not comparable to the full year ended December 31, 2017 (Successor) and the full year ended December 31, 2015 (Predecessor). Accordingly, such periods are presented on a historical stand-alone basis without comparison. In addition, we have presented comparative results of operations for the year ended December 31, 2017 (Successor) compared to the pro forma combined year ended December 31, 2016 and of such pro forma combined year ended December 31, 2016 compared to the year ended December 31, 2015 (Predecessor).

(In thousands, except per share data)
Year Ended December 31, 2022Year Ended
December 31,
2021
Net revenue$1,358,207 $1,142,036 
Gross profit465,679 409,983 
As a % of net revenue34.3 %35.9 %
Total operating costs and expenses$245,401 $209,245 
Operating income220,278 200,738 
Total other expense8,994 40,926 
Income tax expense47,089 40,513 
Net income$164,195 $119,299 
Earnings per Class A share:
Basic$1.20 $0.91 
Diluted1.19 0.86 
Results for the Year Ended December 31, 2017 (Successor)2022 Compared to Results for the Year Ended December 31, 2021
Net Revenue Cost of Goods Sold and Gross Profit
Net revenue was $776.2 million for the year ended December 31, 2017 (Successor), with cost of goods sold of $449.3 million and gross profit of $326.92022 increased $216.2 million, or 42.1% as a percentage18.9%, compared to the year ended December 31, 2021. Contribution from pricing actions and favorable product mix provided 16.3% of the growth, while higher volumes accounted for 2.6% of the growth. Sweet baked goods revenue increased $185.0 million or 18.0%, while cookies net revenue increased $31.2 million or 26.8%.
Gross Profit
Gross profit increased 13.6% and was 34.3% of net revenue.
Net revenue for the Sweet Baked Goods segment was $733.8 million for the year ended December 31, 2017 (Successor), with2022, a decrease of 161 basis points from a gross profitmargin of $316.9 million, or 43.2% of net revenue, while net revenue for the In-Store Bakery segment was $42.4 million35.9% for the year ended December 31, 2017, with2021. The decrease in gross profit of $10.0 million, or 23.6% of net revenue.margin was due to inflation and supply-chain inefficiencies, partially offset by favorable price/mix, including revenue growth management initiatives, and productivity initiatives.
Operating Costs and Expenses
AdvertisingOperating costs and Marketing, Selling Expense, and General and Administrative
For the year ended December 31, 2017, advertising and marketing expenses were $33.0 million, selling expenses were $32.1 million, while general and administrative expenses were $52.9 million.
Amortization of Customer Relationships
Amortization of customer relationships was $23.9 million for the year ended December 31, 2017.
Impairment, Loss on Sale/Abandonment of Property and Equipment, and Bakery Shutdown Costs
During2022 increased by 17.3% from the year ended December 31, 2017, we idled a production line2021. The increase was primarily attributed to higher investments in our Columbus, Georgia facilityworkforce, as well as higher advertising and transitioned the production to a third party. We recognized an impairment loss of $1.0 million.
Related Party Expenses
Related party expenses were $0.4 million for the year ended December 31, 2017. These expenses represent payments made to Mr. Metropoulos under the terms of his employment arrangements.
Tax Receivable Agreement Liability Remeasurement
For the year ended December 31, 2017, we adjusted the value of the Tax Receivable Agreement due to a lower projected future cash tax savings rate as a result of the Tax Cuts and Jobs Act. This adjustment resulted in a gain of $51.8 million. A similar adjustment was made due to a change in a state tax law and resulted in a loss of $1.6 million.depreciation expense.
Operating Income
Operating income for the year ended December 31, 20172022 was $234.0 million.
Interest Expense, net
Our interest expense was $39.2$220.3 million compared to $200.7 million for the year ended December 31, 2017.2021. The increase in gross profit contributed to the higher operating income in the current year partially offset by higher operating costs.

35

Loss on Modification of debtOther Expense
DuringOther expense for the year ended December 31, 2017, we expensed $1.62022 was $9.0 million of previously capitalized debt financing charges for a total loss of $2.6 million. The remaining loss of $1.0 million was relatedcompared to the May and November 2017 repricing transactions. See Note 1- “Summary of Significant Accounting Policies” to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Income Taxes
The income tax benefit of $67.2$40.9 million for the year ended December 31, 2017 includes a benefit of approximately $111.3 million2021. The decrease in other expense was primarily due to a revaluationgain from receipt of insurance proceeds of $33.0 million under the representation and warranty insurance policy (purchased in connection with the Voortman acquisition). Interest expense related to our term loan was $42.4 million and $38.6 million for the years ended December 31, 2022 and December 31, 2021, respectively.
Income Taxes
Our effective tax rate was 22.3% for the year ended December 31, 2022 compared to 25.4% for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2022 was impacted favorably by the $33.0 million non-taxable gain related to receipt of proceeds under the representation and warranty insurance policy. Additionally, the effective tax rate for both periods reflect a tax benefit related to revaluing our deferred tax liabilityliabilities due to reflect lower future U.S. corporate income tax rates caused by the Tax Cuts and Jobs Act. The tax provision also includes a $1.7 million expense caused by a change in the estimated state tax rates. The remaining tax expense of $42.4 million represents an effective tax rate of 30.1%, giving effect to the non-controlling interest, a partnership for income tax purposes and excluding the impact of the remeasurement of the tax receivable agreement.rate.
Net Income
For the year ended December 31, 2017, the Company had2022, net income of $258.1 million.
Earnings Per Share
For the year ended December 31, 2017, earnings per class A share was $2.26 (basic) and $2.13 (dilutive).

Results for the Successor period November 4, 2016 through December 31, 2016 and Predecessor period January 1, 2016 through November 3, 2016
Net Revenue
Net revenues in the Successor period from November 4, 2016 through December 31, 2016 were $112.0$164.2 million compared to $615.6 million for the Predecessor period from January 1, 2016 through November 3, 2016. During the Predecessor period, we acquired Superior on May 10, 2016 and reported net revenues of $19.9 million from Superior from the date of acquisition through November 3, 2016. During the Successor period, the net revenues for Superior were $6.8 million.

Cost of Goods Sold
In the Successor period, as a result of the Business Combination, we recorded a one-time inventory fair value step-up of $8.9 million that was charged to cost of goods sold. Excluding the impact of the inventory fair value step-up, cost of goods sold in the Successor period would have been 57.5% of net revenues.
Special Employee Incentive Compensation
For the Predecessor period January 1, 2016 through November 3, 2016, we made a special bonus payment to certain employees at our bakery facilities as compensation for their efforts in connection with the Business Combination. Payment of $2.2 million of this special bonus was recorded as a separate line item reducing gross profit.

Gross Profit
For the Predecessor period January 1, 2016 through November 3, 2016, gross profit, including the effect of the special employee incentive compensation discussed above, was $266.5 million, or 43.3% of net revenue. Excluding this item, gross profit would have been $268.7 million, or 43.7% of net revenue.

For the Successor period November 4, 2016 through December 31, 2016, gross profit was $38.7 million, or 34.6% of net revenue. Excluding the impact of the inventory fair value step up discussed above, adjusted gross margin for the Successor period was 42.5% of net revenue. Adjusted gross margin for the Successor period compared to the gross margin for the Predecessor period declined slightly due to overall changes in mix of products sold.


Operating Costs and Expenses

Advertising and Marketing

For the Predecessor period January 1, 2016 through November 4, 2016, advertising and marketing expenses were $30.6 million, or 5.0% of net revenue.

For the Successor period November 4, 2016 through December 31, 2016, advertising and marketing expenses were $5.2 million, or 4.7% in net
revenue.

Advertising and marketing expenses as a percentage of net revenue were lower in the Successor period primarily due to higher field marketing costs in the Predecessor Period.

Selling Expense
For the Predecessor period January 1, 2016 through November 4, 2016, selling expenses were $25.7 million, or 4.2% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, selling expenses were $5.0 million, or 4.5% in net revenue.

General and Administrative

For the Predecessor period January 1, 2016 through November 4, 2016, general and administrative expenses were $38.4 million, or 6.2%, of net revenue.


For the Successor period November 4, 2016 through December 31, 2016, general and administrative expenses were $7.3 million, or 6.5% of net revenue.

Special Employee Incentive Compensation

For the Predecessor period January 1, 2016 through November 3, 2016, we paid a special bonus payment of $2.5 million to certain corporate
employees as compensation for their efforts in connection with the Business Combination. This payment to corporate employees was recorded under operating costs and expenses.

Amortization of Customer Relationships
For the Predecessor period January 1, 2016 through November 3, 2016, amortization of customer relationships was $1.2 million, or 0.2% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, amortization of customer relationships was $3.9 million, or 3.5% of net revenue.
Amortization of customer relationships in the Successor period was significantly higher than in the Predecessor period primarily due to the higher fair value measurement at November 4, 2016 as a result of the Business Combination compared to the overall fair value of the customer relationships in the Predecessor period. There were no significant changes in the nature of the customer relationships, including overall useful lives in the comparative periods.
Impairment of Property and Equipment
For the Predecessor period January 1, 2016 through November 3, 2016, impairment of property and equipment was $7.3 million, or 1.2% of net revenue. During the Predecessor period, we closed multiple production lines at our Indianapolis, Indiana bakery, and transitioned production to other facilities.
There were no such impairments in the Successor period November 4, 2016 through December 31, 2016.

Loss on Sale/Abandonment of Property and Equipment and Bakery Shutdown Costs

For the Predecessor period January 1, 2016 through November 3, 2016, we recorded a charge for loss on sale/abandonment of property and bakery shutdown costs of $2.6 million, or 0.4% of net revenue, primarily due to utilities, insurance, taxes and maintenance expenses related to the Schiller Park, Illinois bakery.

For the Successor period November 4, 2016 through December 31, 2016, there were no such charges.

Business Combination Transaction Costs

For the Predecessor period January 1, 2016 through November 3, 2016, business combination transaction costs were $31.8 million, or 5.2% of net revenue. This consisted of professional and legal costs associated with the Business Combination, and transactional costs attributable to the acquisition of Superior in May 2016.

For the Successor period November 4, 2016 through December 31, 2016, there were no such charges.

Related Party Expenses

For the Predecessor period January 1, 2016 through November 3, 2016, related party expenses were $3.5 million, or 0.6% of net revenue. These amounts represent the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman.

For the Successor period November 4, 2016 through December 31, 2016, the Company expensed $26.8 million, or 23.9% of net revenue, as a result of a grant of stock awarded to Mr. Metropoulos as required under his new employment arrangements.

Operating Income (Loss)
For the Predecessor period January 1, 2016 through November 3, 2016, total operating costs and expenses were $143.7 million, or 23.3% of net revenue, and operating income was $122.9 million, or 20.0% of net revenue.

For the Successor period November 4, 2016 through December 31, 2016, total operating costs and expenses were $48.3 million, or 43.1% of net revenue, and operating loss was $9.6 million or 8.6% of net revenue.
Operating loss for the Successor period was significantly impacted by the related party expense discussed above.

Interest Expense, net
For the Predecessor period January 1, 2016 through November 3, 2016, interest expense, net was $60.4 million, or 9.8% of net revenue. For the Successor period November 4, 2016 through December 31, 2016, interest expense, net was $6.6 million, or 5.9% of net revenue.

The lower interest expense in the Successor period is a result of the reduced applicable interest rates following the debt refinancing discussed below.
Gain on Debt Extinguishment
For the Successor period November 4, 2016 through December 31, 2016, in connection with the refinancing of existing debt with the new first lien term loan we recorded a net gain on a partial extinguishment of debt in the amount of $0.8 million. The gain consisted of the write-off of approximately $4.0 million of debt premium and deferred financing costs, partially offset by prepayment penalties of $3.0 million and the write-off of deferred financing costs of $0.2 million.
Other Expense
For the Predecessor period January 1, 2016 through November 3, 2016, other expense was $1.6 million, or 0.3% of net revenue. This consisted of professional and transactional costs for acquisition activity which has since been abandoned, partially offset by a gain from the settlement in connection with product recall matter with one of our suppliers of approximately $0.8 million.
For the Successor period November 4, 2016 through December 31, 2016, other expense was $0.8 million, or 0.7% of net revenue.
Income (Loss) Before Income Taxes
For the Predecessor period January 1, 2016 through November 3, 2016, income before income taxes was $60.9 million, or 9.9% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, loss before income taxes was $16.2 million or 14.5% of net revenue.
Income Tax Expense
For the Predecessor period January 1, 2016 through November 3, 2016, the Company was a series of limited liability companies and, therefore, had no tax expense or benefit, except insignificant amounts for Superior, a C corporation.
For the Successor period November 4, 2016 through December 31, 2016, income tax benefit was $7.8 million or 6.9% of net revenue. This represented an effective tax rate of 47.8% which exceeds the statutory rates primarily due to the reversal of a previously recorded valuation allowance.


Results for the Year Ended December 31, 2015 (Predecessor)
Net Revenue, Gross Profit and Cost of Goods Sold
Net revenue was $620.8$119.3 million for the year ended December 31, 2015, with cost of goods sold of $356.0 million, and gross profit of $264.9 million, excluding the impact of a $2.6 million special employee incentive compensation payment. Cost of goods sold was impacted by higher ingredient costs2021. Net income increased due to an outbreakhigher gross profits and the $33.0 million gain from receipt of avian influenza which led to reduced availability of eggs, which increased egg ingredient prices to record high levels.
Special Employee Incentive Compensation
Forinsurance proceeds under the year ended December 31, 2015, a special bonus payment was paid to employees at our bakery facilities as compensation for their effortsrepresentation and warranty insurance policy purchased in connection with the recapitalization of our Company of which $2.6 million was recorded on a separate line in our Consolidated Statements of Operations as a deduction from gross profit.

Operating Costs and Expenses
Advertising and Marketing
Advertising and marketing expenses were $32.0 million, selling expenses were $29.5 million, and general and administrative expenses were $31.5 millionVoortman acquisition for the year ended December 31, 2015.2022, partially offset by higher operating costs and higher interest expense.
Special Employee Incentive CompensationEarnings Per Share
For the year ended December 31, 2015, a special bonus payment of $1.3 millionOur earnings per Class A share was paid to corporate employees as compensation for their efforts in the recapitalization of the Company.
Amortization of Customer Relationships
Amortization of customer relationships was $0.9 million$1.20 (basic) and $1.19 (dilutive) for the year ended December 31, 2015.
Loss on Sale/Abandonment of Property2022, compared to $0.91 (basic) and Equipment and Bakery Shutdown Costs
For the year ended December 31, 2015, we incurred a loss on sale/abandonment of property and equipment and bakery shutdown costs of $4.2 million.
Related Party Expenses
Related party expenses were $4.3 million$0.86 (dilutive) for the year ended December 31, 2015. Mr. Metropoulos serves as our Executive Chairman and expenses associated with his employment agreements are recorded in related party expenses.
Operating Income (Loss)
For the year ended December 31, 2015, total operating costs and expenses were $106.3 million. Operating income was $155.9 million for the year ended December 31, 2015.
Interest Expense, net
Interest expense for the year ended December 31, 2015 was 50.0 million.
Loss on Debt Extinguishment
We extinguished the Term Loan dated April 9, 2013 (the “2013 Term Loan”) through early principal payments of $343.8 million and $150.0 million on August 3, 2015 and June 4, 2015, respectively. As part of this debt extinguishment and in accordance with its contractual terms, we expensed 2% prepayment penalties of $9.9 million, as well as $16.0 million of amortization to write-off the remaining deferred financing costs. For the year ended December 31, 2015, the total loss on debt extinguishment was $25.9 million.

Other Income
For the year ended December 31, 2015, other income consisted of $12.0 million of proceeds from the sale of foreign trademark rights and certain “know how” in certain countries in the Middle East, partially offset by $3.3 million for professional service fees related to the pursuit of potential sale transactions.
Income Taxes
For the year ended December 31, 2015, the Company was a series of limited partnerships and, therefore, had no income tax expense or benefit.

Supplemental Unaudited Pro Forma Combined Financial Information

For comparative purposes, we are presenting a supplemental unaudited pro forma combined statement of operations for the year ended December 31, 2016, and we discuss such pro forma combined results compared to the Successor’s full year 2017, and the Predecessor’s full year 2015 results below.
The unaudited pro forma combined statements of operations for the year ended December 31, 2016 presents our consolidated results of operations giving pro forma effect to the Business Combination as if it had occurred as of January 1, 2016. The pro forma combined adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma combined basis, the impact of these transactions on the historical financial information of our Predecessor and Successor entities, as applicable.
The Business Combination was accounted for using the acquisition method of accounting. The final fair values of the acquired assets and assumed liabilities as of the Closing Date, which are based on the consideration paid and our estimates and assumptions, are reflected herein. As explained in more detail in Note 2 in the accompanying Notes to the Consolidated Financial Statements, the total purchase price to acquire Hostess Holdings has been allocated to the assets acquired and assumed liabilities of Hostess Holdings, based upon the fair values at the Closing Date. We utilized third-party valuation specialists to assist our management in determining the fair values of the acquired assets and liabilities assumed. As of November 3, 2017, management determined that the allocation of the purchase price for the Business Combination is final.
The unaudited pro forma combined financial information contains a variety of adjustments, assumptions and estimates, is subject to numerous other uncertainties and the assumptions and adjustments as described in the accompanying notes hereto and should not be relied upon as being indicative of our results of operations had the Business Combination occurred on January 1, 2016. The unaudited pro forma combined financial information also does not project our results of operations for any future period or date. The unaudited pro forma combined financial information for the year ended December 31, 2016 includes results of the Superior acquisition and its related operations from May 10, 2016, the date of acquisition, through December 31, 2016. We evaluated the impact of the Superior acquisition on the Company’s financial statements and concluded that the impact was not significant and did not require nor separately warrant the inclusion of pro forma combined financial results assuming the acquisition of Superior at January 1, 2016 under applicable SEC rules and regulations or under GAAP. In addition, we evaluated the impact of the refinancing of existing debt pursuant to the New First Lien Term Loan, completed on November 18, 2016, and concluded that the impact was not significant and did not require nor separately warrant the inclusion of pro forma combined financial results assuming the completion of the refinancing on January 1, 2016. The pro forma combined adjustments give effect to the items identified in the pro forma combined table below in connection with the Business Combination.

Results of Operations
Comparison of Results of Operations for the Year Ended December 31, 2017 (Successor), Unaudited Pro Forma Combined Year Ended December 31, 2016, and the Year Ended December 31, 2015 (Predecessor)
   
Historical(i)
        
 2017 2016   2016   2015
(In thousands, except share and per share data)
Year
Ended
December 31
 
From November 4
through
December 31
  
From January 1
through
November 3
 
Pro Forma
Adjustments
 
(Unaudited)
Year Ended
December 31
 
%
of
Net Revenues
 
Year
Ended
December 31
 (Successor) (Successor)  (Predecessor)   Pro Forma
Combined		   (Predecessor)
Net revenue$776,188
 $111,998
  $615,588
 $—
 $727,586
 100.0 % 620,815
Cost of goods sold449,290
 73,284
  346,864
 (8,541)ii411,607
 56.6
 355,963
Special employee incentive compensation—
 —
  2,195
 (2,195)iii—
 —
 2,649
Gross profit326,898
 38,714
  266,529
 10,736
 315,979
 43.4
 262,203
Operating costs and expenses:           —
  
Advertising and marketing33,004
 5,245
  30,626
 —
 35,871
 4.9
 31,967
Selling expense32,086
 5,033
  25,730
 —
 30,763
 4.2
 29,484
General and administrative52,943
 7,322
  38,391
 (3,902)iv41,811
 5.7
 31,531
Special employee incentive compensation—
 —
  2,503
 (2,503)iii—
 —
 1,274
Amortization of customer relationships23,855
 3,922
  1,185
 20,050
v25,157
 3.5
 851
Impairment on property and equipment1,003
 —
  7,300
 —
 7,300
 1.0
 2,700
Loss on sale/abandonment of property and equipment, and bakery shutdown costs (recoveries)(144) —
  2,551
 —
 2,551
 0.4
 4,182
Business combination transaction costs—
 —
  31,832
 (31,257)vi575
 0.1
 —
Related party expenses381
 26,799
  3,539
 (26,747)vii3,591
 0.5
 4,306
Tax receivable agreement liability remeasurement(50,222) —
  —
 —
 —
 —
 —
Total operating costs and expenses92,906
 48,321
  143,657
 (44,359) 147,619
 20.3
 106,295
Operating income233,992
 (9,607)  122,872
 55,095
 168,360
 23.1
 155,908
Other expense:           —
  
Interest expense, net39,174
 6,649
  60,384
 (15,592)viii51,441
 7.1
 50,011
Loss (gain) on modification of debt2,554
 (763)  —
 —
 (763) (0.1) 25,880
Other expense1,360
 754
  1,624
 —
 2,378
 0.3
 (8,743)
Total other expense43,088
 6,640
  62,008
 (15,592) 53,056
 7.3
 67,148
Income before income taxes190,904
 (16,247)  60,864
 70,687
 115,304
 15.8
 88,760
Income tax expense (benefit)(67,204) (7,762)  439
 40,185
ix32,862
 4.5
 —
Net income (loss)258,108
 (8,485)  60,425
 30,502
 82,442
 11.3
 88,760
Less: Net income attributable to the non-controlling interest34,211
 (4,081)  3,214
 29,565
x28,698
 3.9
 4,507
Net income attributable to Class A shareholders$223,897
 $(4,404)  $57,211
 $937
 $53,744
 7.4 % $84,253
               
Earnings per Class A share:              
Basic$2.26
 $(0.05)      $0.55
    
Diluted$2.13
 $(0.05)      $0.54
    
               
Weighted-average shares outstanding:              
Basic99,109,629
 97,791,658
    (180,000)xi97,611,658
    
Diluted105,307,293
 97,791,658
    2,393,000
xii100,184,658
    


i.The amounts in these columns represent the Successor’s and Predecessor’s historical results of operations for the periods reflected.
ii.Approximately $8.9 million of this adjustment reflects the non-cash impact of the remeasurement of inventory at fair value as a result of the Business Combination. In addition, the adjustment reflects the incremental depreciation expense associated with the allocation of purchase price to property and equipment and is recorded in cost of goods sold.
iii.For cost of goods sold, this adjustment represents special payments we made to certain employees at our bakery facilities of $2.2 million and for the operating costs this adjustment represents special payments to corporate employees of $2.5 million as compensation for their efforts in connection with the Business Combination.
iv.Represents compensation for management profits interest plan of approximately $3.9 million that was recognized as part of the Business Combination. See Note 3 to the Consolidated Financial Statements for additional information.
v.Represents additional amortization expense associated with the fair value recognized for customer relationships in connection with the Business Combination.
vi.This adjustment consists primarily of legal and professional fees, and other costs associated with the Business Combination.
vii.Represents non-cash expenses incurred by Successor for stock awarded to Mr. Metropoulos as required under his new employment arrangements.
viii.Represents the reduction in interest expense due to the repayment of a portion of Hostess Holdings debt as part of the Business Combination.
ix.Represents the effective income tax rate of 28.5% for the Successor, giving effect to the non-controlling interest, and not giving effect to the adjustment made to the valuation allowance on the Company’s historical deferred tax assets.
x.Represents the elimination of historical income attributable to the non-controlling interest and attributes a portion of the pro forma income to the non-controlling interest created in the Business Combination. Income is allocated to the non-controlling interest based on its pro rata share of the total equity of Hostess Holdings.
xi.This adjustment annualized the basic weighted average number of Class A shares outstanding.
xii.This adjustment includes the dilutive impact of the outstanding warrants that are considered anti-dilutive on a historical basis.


Results for the Year Ended December 31, 2017 compared to the Pro Forma Combined Year Ended December 31, 2016

Net Revenue
Net revenue was $776.2 million for the year ended December 31, 2017, compared to $727.6 million for the pro forma combined year ended December 31, 2016, an increase of 6.7%, or $48.6 million. Growth in net revenue for the year ended December 31, 2017 from current year new product initiatives was $62.5 million, led by Chocolate Cake Twinkies®, Golden Cupcakes, White Fudge Ding Dongs®, and Peanut Butter HoHo’s®. Additionally, there was an $11.9 million increase in net sales attributed to the acquisition of Superior in May 2016. These increases were offset primarily by a decrease in net revenue from 2016 product innovations and discontinued items.
Cost of Goods Sold and Gross Profit
Cost of goods sold for the year ended December 31, 2017 of $449.3 million represents an increase of $37.7 million, or 9.2%, from the pro forma combined cost of goods sold of $411.6 million for the year ended December 31, 2016. The increase for the year ended December 31, 2017 from the pro forma combined year ended December 31, 2016 is primarily attributed to higher shipping costs and increased sales volume.
Gross profit was $326.9 million for the year ended December 31, 2017, an increase of $10.9 million, or 3.5%, compared to pro forma gross profit of $316.0 million for the year ended December 31, 2016. The increase for the year ended December 31, 2017 from pro forma combined year ended December 31, 2016 was primarily attributed to an increase in sales.
Gross margin was 42.1% for the year ended December 31, 2017, compared to gross margin of 43.4% for the pro forma combined year ended December 31, 2016 . The decrease in margin for the year ended December 31, 2017 from pro forma combined gross margin for the year ended December 31, 2016 was primarily due to higher shipping costs which caused a 70 basis point decrease in gross margin. The decrease in margin was also attributed to a shift in our product mix due to higher growth in multi-pack, club-pack than other pack types, and additional In-Store Bakery sales.
Gross profit for the Sweet Baked Goods segment for the year ended December 31, 2017 was $316.9 million or 43.2% of net revenue, compared to gross profit of $309.8 million, or 44.2% of net revenue, for the pro forma combined year ended December 31, 2016. Gross margin decreased 120 basis points due to higher shipping costs. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.
Gross profit for the In-Store Bakery segment for the year ended December 31, 2017 was $10.0 million, or 23.6% of net revenue, compared to pro forma combined gross profit of $6.1 million, or 23.0% of net revenue, for the year ended December 31, 2016. Gross profit increased primarily due to increased revenue.
Operating Costs and Expenses
Advertising and Marketing
Advertising and marketing expenses for the year ended December 31, 2017 of $33.0 million represent a decrease from pro forma combined advertising and marketing expenses of $35.9 million, or 8.0% for the year ended December 31, 2016 as a result of reduced permanent wire display deployment.
Selling Expense
Selling expense was $32.1 million, or 4.1% of revenue for the year ended December 31, 2017, compared to $30.8 million, or 4.2% of revenue on a pro forma combined basis for the year ended December 31, 2016.2021. The increase in selling expense is reflective of the increase in sales volume during the year.
Generalbasic and Administrative
General and administrative expenses for the year ended December 31, 2017 of $52.9 million represent an increase of $11.1 million, or 26.6%, over the pro forma combined general and administrative expenses of $41.8 million for the year ended December 31, 2016. The increase is attributed to increased non-cash share-based compensation of $7.4 million, additional professional and administrative costs of $3.5 million due to public company compliance, and a $2.0 million litigation settlement.

Amortization of Customer Relationships
Amortization of customer relationshipsdiluted earnings per share was $23.9 million for the year ended December 31, 2017, compared to pro forma combined customer relationships amortization of $25.2 million for the year ended December 31, 2016. For the year ended December 31, 2016 on a historical basis, amortization expense was based on the valuation of customer relationships acquired from Old HB Inc. in 2013. The amortization expense for the year ended December 31, 2017 and the year ended December 31, 2016 on a pro forma combined basis reflects the new valuation of the customer relationships acquired through the Business Combination.
Impairment, Loss on Sale/Abandonment of Property and Equipment, and Bakery Shutdown Costs
During the year ended December 31, 2017, an impairment loss of $1.0 million was recognized when we idled a production line in our Columbus, Georgia facility and transitioned the production to a third party. During the pro forma combined year ended December 31, 2016, we recorded an impairment of $7.3 million when we closed multiple production lines at the Indianapolis, Indiana bakery and transitioned production to other facilities in preparation to convert the bakery to a nut facility. In addition, we incurred a loss on sale/abandonment of property and equipment, and bakery shutdown costs of $2.6 million primarily due to utilities, insurance, taxes and maintenance expenses related to the Schiller Park, Illinois bakery.
Related Party Expenses
Related party expenses were $0.4 million for the year ended December 31, 2017 compared to pro forma combined expenses of $3.6 million for the year ended December 31, 2016. These expenses represent payments made to Mr. Metropoulos under the terms of his employment arrangements, which changed as part of the Business Combination.
Tax Receivable Agreement Liability Remeasurement
For the year ended December 31, 2017, we adjusted the value of the Tax Receivable Agreement due to a lower projected future cash tax savings rate as a result of the Tax Cuts and Jobs Act. This adjustment resulted in a gain of $51.8 million. A similar adjustment was made due to a change in a state tax law and resulted in a loss of $1.6 million.
Operating Income
The $65.6 million increase in operating income from pro forma combined operating income of $168.4 million for the year ended December 31, 2016 to $234.0 million for the year ended December 31, 2017 is primarily attributed to the gain on the remeasurement of the tax receivable agreement, higher sales volume, and lower impairment/abandonment costs.
Interest Expense, net
Our interest expense decreased $12.3 million from $51.4 million for the pro forma combined year ended December 31, 2016 to $39.2 million for the year ended December 31, 2017 primarily due to the pay down of our Second Lien Term Loan in November 2016, and three repricing transactions between November of 2016 and November of 2017 which collectively reduced the effective interest rate on our first lien term loan by 1.25%.net income impacts noted above.
Loss on Modification of debt
36

During the year ended December 31, 2017, we recognized $2.6 million of losses related to the repricing transactions on our first lien term loan, of which $1.6 million was attributed to previously capitalized charges. See Note 1- “Summary of Significant Accounting Policies” to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Income Taxes
The income tax benefit of $67.2 million for the year ended December 31, 2017 includes a benefit of approximately $126.4 million due to a revaluation of our deferred tax liability to reflect lower future U.S. corporate income tax rates caused by the Tax Cuts and Jobs Act (“Tax Reform”). This benefit was partially offset by a tax expense of $15.1 million due to the remeasurement of the tax receivable agreement also due to Tax Reform. The tax provision also includes a $1.7 million expense caused by a change in state tax rates. The remaining tax expense of $42.4 million represents an effective tax rate of 30.1%, giving effect to the non-controlling interest, a partnership for income tax purposes and excluding the impact of the remeasurement of the tax receivable agreement. Income tax expense for the pro forma combined year ended December 31, 2016 was $32.9 million, representing an effective tax rate of 28.5%. After accounting for tax law changes, our effective tax rate for 2017 was higher than the pro forma combined 2016 due to a higher statutory rate for one of the states in which we operate.

Results of Operations for the Pro Forma Combined Year Ended December 31, 2016 compared to the Year Ended December 31, 2015 (Predecessor)

Net Revenue
Net revenue increased $106.8 million, or 17.2%, to $727.6 million, for the pro forma combined year ended December 31, 2016, compared to $620.8 million for the year ended December 31, 2015, primarily due to new product launches in 2016 of $44.0 million and contribution of Superior net revenue of $26.7 million from the date of its acquisition. New products in 2016 included Deep Fried Twinkies®, Hostess Sweet Shop™ brownies, plus the relaunch of Suzy Qs®
Cost of Goods Sold and Gross Profit
Cost of goods sold increased $55.6 million, to $411.6 million, for the pro forma combined year ended December 31, 2016, compared to $356.0 million, for the year ended December 31, 2015, primarily due to the increase in volume.
As a percentage of net revenue, pro forma combined cost of goods sold was 56.6%, compared to 57.3% of net revenue for the year ended December 31, 2015. The decrease in cost of goods sold from the year ended December 31, 2015 to the pro forma combined for the year ended December 31, 2016, is primarily due to higher ingredient costs in 2015. An outbreak of avian influenza in 2015 led to reduced availability of eggs, which increased egg ingredient prices to record high levels.
Pro Forma combinedAdjusted gross profit, was $316.0 million for the year ended December 31, 2016, compared to $262.2 million for the year ended December 31, 2015.
Gross margin was 43.4% for the pro forma combined year ended December 31, 2016, compared to historicaladjusted gross margin, of 42.2% for the year ended December 31, 2015. The increase in gross profit was driven primarily by commodity cost decreases and improved bakery costs.
Operating Costs and Expenses
Advertising and Marketing
Advertising and marketing expenses for the year increased 12.2% on a pro forma combined basis for the year ended December 31, 2016, to $35.9 million, compared to $32.0 million for the year ended December 31, 2015. The increase was primarily attributable to planned expansion of field marketing activities.
Selling Expense
Selling expense increased $1.3 million, or 4.3%, to $30.8 million, during the pro forma combined year ended December 31, 2016, compared to $29.5 million for the year ended December 31, 2015, primarily due to increases in sales management expense and broker fees.
General and Administrative
General and administrative expenses increased 32.6%, to $41.8 million, on a pro forma combined basis for the year ended December 31, 2016, compared to $31.5 million for the year ended December 31, 2015. The increase is primarily due to increased incentive compensation related to improvedadjusted operating performance and the addition of Superior’s operations.
Special Employee Incentive Compensation
A special bonus payment of $1.3 million was paid during the year ended December 31, 2015 to corporate employees as compensation for their efforts in the recapitalization of the Company. There was no special employee incentive compensation for the pro forma combined year ended December 31, 2016.
Amortization of Customer Relationships
Amortization of customer relationships was $25.2 million for the pro forma combined year ended December 31, 2016, compared to $0.9 million, for the year ended December 31, 2015. The increase is primarily due to an increase in intangible assets with definite lives as a result of the Business Combination, as well as the acquisition of Superior during 2016.
Impairment, Loss on Sale/Abandonment of Property and Equipment, and Bakery Shutdown Costs
For the pro forma combined year ended December 31, 2016, we recorded an impairment of $7.3 million. We closed multiple production lines at Indianapolis, Indiana bakery and transitioned production to other facilities resulting in a loss of $7.3 million, compared to a similar loss of $2.7 million for the year ended December 31, 2015.

For the pro forma combined year ended December 31, 2016, we incurred a loss of $2.6 million for the year ended December 31, 2016, compared to $4.2 million for the year ended December 31, 2015, for the sale/abandonment of property and equipment and bakery shutdown costs.
Related Party Expenses
Related party expenses for the pro forma combined year ended December 31, 2016 were $3.6 million, a decrease of $0.7 million, compared to $4.3 million for the year ended December 31, 2015. Mr. Metropoulos serves as our Executive Chairman and expenses associated with his employment agreements are recorded in related party expenses. After the Business Combination, payments to Mr. Metropoulos were reduced to approximately $0.3 million annually.
Operating Income
Operating income, increased from $155.9 million, for the year ended December 31, 2015 by $12.5 million, to $168.4 million on a pro forma combined basis for the year ended December 31, 2016.
Interest Expense,adjusted net
Our interest expense increased $1.4 million to $51.4 million for the pro forma combined year ended December 31, 2016, compared to $50.0 million for the year ended December 31, 2015 (Predecessor). The Company completed the refinancing of existing debt with the new first lien term loan on November 18, 2016.
(Gain) Loss on Modification of debt
For the pro forma combined year ended December 31, 2016, in connection with the refinancing of the first and second lien term loan, we recorded a income, adjusted net gain on a partial extinguishment of debt in the amount of $0.8 million. The gain consisted of the write-off of approximately $4.0 million of debt premium and deferred financing costs, partially offset by prepayment penalties of $3.0 million and the write-off of deferred financing costs of $0.2 million.
We extinguished the Term Loan dated April 9, 2013 (the “2013 Term Loan”) through early principal payments of $343.8 million and $150.0 million on August 3, 2015 and June 4, 2015, respectively. As part of this debt extinguishment and in accordance with its contractual terms, we expensed 2% prepayment penalties of $9.9 million, as well as $16.0 million of amortization to write-off the remaining deferred financing costs. For the year ended December 31, 2015, (Predecessor), the total loss of debt extinguishment was $25.9 million.
Other (Income) Expense
For the pro forma combined year ended December 31, 2016, the Company recorded expenses of $2.4 million which primarily consisted of legal and professional fees related to post-Business Combination activities. For the year ended December 31, 2015, other income consisted of $12.0 million of proceeds from the sale of foreign trademark rights and certain “know how” in certain countries in the Middle East, partially offset by $3.3 million for professional service fees related to the pursuit of potential sale transactions.
Income Taxes
For the pro forma combined year ended December 31, 2016, income tax expense was $32.9 million, which represents the effective rate of 28.5%, giving effect to the noncontrolling interest, a partnership for income tax purposes. This is compared to a zero tax liability for the year ended December 31, 2015, due to the Company’s status of a series of limited partnerships.











Adjusted EBITDA Reconciliation
Adjusted EBITDA was $230.2 million for the year ended December 31, 2017, an increase of $14.9 million, or 6.9%, compared to pro forma combinedmargin, adjusted EBITDA, of $215.3 million for the year ended December 31, 2016, and an increase of $52.3 million, or 29.4% compared to adjusted EBITDA of $177.9 million for the year ended December 31, 2015. As a percentage of net revenue,margin, and adjusted EBITDA was 29.7% for the year ended December 31, 2017, which was comparableEPS collectively referred to pro forma combined adjusted EBITDA of 29.6% of net revenues for the year ended December 31, 2016, and 28.7% for the year ended December 31, 2015.
Adjusted EBITDA is a non-GAAP financial measureas “Non-GAAP Financial Measures,” are commonly used in our industry and should not be construed as an alternative to gross profit, gross margin, operating income, net income, net income margin, or earnings per share as an indicatorindicators of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as(as determined in accordance with GAAP). This measureThese Non-GAAP Financial Measures may not be comparable to similarly titled measures reported by other companies. We have included these measuresNon-GAAP Financial Measures because we believe theythe measures provide management and investors with additional information to measure ourthe Company’s performance, and liquidity, estimate ourthe Company’s value and evaluate ourthe Company’s ability to service debt.
We define adjusted EBITDA as net incomeNon-GAAP Financial Measures are adjusted to exclude (i)income taxes, (ii) interest expense, net (iii) depreciation and amortization and (iv) as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These furtheraffect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reasonsreason we consider them appropriate for supplemental analysis. In evaluating adjusted EBITDA,adjustments, you should be aware that in the future wethe Company may incur expenses that are the same as or similar to some of the adjustments set forth below. OurThe presentation of adjusted EBITDANon-GAAP Financial Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurringrecurring items.
For example, we define adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization (iii) income taxes and (iv) share-based compensation, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of ourthe Company’s results as reported under GAAP. For example, adjusted EBITDA:
•does not reflect ourthe Company’s capital expenditures, future requirements for capital expenditures or contractual commitments;
•does not reflect changes in, or cash requirements for, ourthe Company’s working capital needs;
•does not reflect the significant interest expenses,expense, or the cash requirements necessary to service interest or principal payments, on ourthe Company’s debt; and
does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; and
•does not reflect payments related to income taxes or the tax receivable agreement or distributions toagreement.
37

Year Ended December 31, 2022
($ and shares in thousands)Gross
 Profit		Gross MarginOperating IncomeNet
 Income		Net Income MarginDiluted
 EPS
GAAP results$465,679 34.3 %$220,278 $164,195 12.1 %$1.19 
Non-GAAP adjustments:
Foreign currency remeasurement— — — 630 — 0.01 
Project consulting costs (1)— — 3,887 3,887 0.3 0.03 
Tax receivable agreement remeasurement— — (860)(860)(0.1)(0.01)
Gain on Voortman insurance proceeds (2)— — — (32,970)(2.3)(0.24)
Accelerated depreciation related to network optimization1,908 0.1 1,908 1,908 0.1 0.02 
Other (3)161 — 265 650 — — 
Remeasurement of tax liabilities— — — (2,161)(0.2)(0.02)
Discrete income tax expense— — — 1,188 0.1 0.01 
Tax impact of adjustments— — — (1,910)(0.1)(0.01)
Adjusted Non-GAAP results$467,748 34.4 %$225,478 134,557 9.9 $0.98 
Income tax49,972 3.7 
Interest expense40,950 3.0 
Depreciation and amortization58,178 4.3 
Share-based compensation10,450 0.8 
Adjusted EBITDA$294,107 21.7 %

(1) Project consulting costs are included in general and administrative on the non-controlling interest to reimburse its tax liability.consolidated statement of operations.

Reconciliation of Adjusted EBITDA
(In thousands) 
Year Ended
December 31,
2017
 
From
November 4, 2016
through
December 31, 2016
  
From
January 1, 2016
through
November 3, 2016
 
Pro Forma
Combined
December 31, 2016 (1)
 
Year Ended
December 31,
2015
  (Successor) (Successor)  (Predecessor)   (Predecessor)
Net income $258,108
 $(8,485)  $60,425
 $82,442
 $88,760
Plus non-GAAP adjustments:           
Income tax provision (67,204) (7,762)  439
 32,862
 —
Interest expense, net 39,174
 6,649
  60,384
 51,441
 50,011
Depreciation and amortization 38,170
 5,843
  10,265
 36,520
 9,836
Executive chairman agreement termination and executioni.—
 26,747
  —
 —
 —
Share-based compensation 7,413
    3,891
 —
 1,381
Tax receivable agreement liability remeasurementii.(50,222) —
  —
 —
 —
Other (income) expenseiii.1,360
 751
  1,624
 2,375
 (8,743)
Loss (gain) on debt modificationiv.2,554
 (763)  —
 (763) 25,880
Impairment of property and equipmentv1,003
 —
  7,300
 7,300
 2,700
Loss on sale/abandonment of property and equipment and bakery shutdown costs (recovery)vi.(144) —
  2,551
 2,551
 4,182
Inventory fair value adjustmentvii.—
 8,914
  —
 —
 —
Special employee incentive compensationviii.—
 —
  4,698
 —
 3,923
Business combination transaction costsix.—
 —
  31,832
 575
 —
Adjusted EBITDA $230,212
 $31,894
  $183,409
 $215,303
 $177,930



i.For the Successor period November 4, 2016 through December 31, 2016, we expensed $26.7 million related to stock awarded to Mr. Metropoulos as required under his new employment arrangements.
ii.During the year ended December 31, 2017, we recognized a gain of $50.2 million related to the adjustment to the tax receivable agreement related to Tax Reform, slightly offset by a loss due a change in a state tax rate.
iii.For the year ended December 31, 2017, other expense primarily included professional fees incurred related to the secondary public offering of common stock and the registration of certain privately held warrants. For the Successor period November 4, 2016 through December 31, 2016, and the pro forma combined year ended December 31, 2016, we recorded expenses of $0.8 million which primarily consisted of legal and professional fees and other post-Business Combination costs such as fees related to securities filings. For the Predecessor period from January 1, 2016 through November 3, 2016, and the pro forma combined year ended December 31, 2016, other expense consisted of transaction costs attributable to the pursuit of a potential acquisition that has since been abandoned, offset partially by a gain from the settlement of a recall matter with one of our suppliers of approximately $0.8 million. For the year ended December 31, 2015, other income consisted of $12.0 million(2) Gain from receipt of insurance proceeds from the sale of foreign trademark rights and certain “know how” in certain countries in the Middle East, partially offset by $3.3 million for professional service fees related to the pursuit of a potential sale transactions.
iv.For the year ended December 31, 2017 and the period from November 4, 2016, through December 31, 2016, and the pro forma combined year ended December 31, 2016, the Company incurred losses on debt modification of $2.6 million resulting from refinancing transactions on its first lien term loan, and a $0.8 million gain on the extinguishment of the former first lien, respectively. For the year ended December 31, 2015, the Company recorded a loss on extinguishment related to its 2013 Term Loan of $25.9 million.
v.For the year ended December 31, 2017, we transitioned the production of one of our products to a third party and recognized an impairment loss resulting from the idling of the related production equipment. For the period January 1, 2016 through November 3, 2016, and for the pro forma combined year ended December 31, 2016, we closed multiple production lines at the Indianapolis, Indiana bakery and transitioned production to other facilities resulting in a loss of $7.3 million.
vi.For the Predecessor period January 1, 2016 through November 3, 2016 and the pro forma combined year ended December 31, 2016, we incurred a loss on a sale/abandonment of property and bakery shutdown costs, primarily due to utilities, insurance, taxes and maintenance expenses related to the Schiller Park, Illinois bakery. During the year ended December 31, 2017, we recovered $0.1 million of this cost.
vii.For the Successor period November 4, 2016 through December 31, 2016, we remeasured inventory at fair value at the Closing Date, resulting in additional non-cash cost of goods sold of $8.9 million.
viii.For the Predecessor period January 1, 2016 through November 3, 2016, a special bonus payment of $2.5 million and $2.2 million was paid to employees at the bakery facilities and corporate employees, respectively, as compensation for their efforts in the Business Combination. For the year ended December 31, 2015, a special bonus payment of $2.6 million and $1.3 million was paid to employees at the bakery facilities and corporate employees, respectively, as compensation for their efforts in the recapitalization of the Company.
ix.For the Predecessor period from January 1, 2016 through November 3, 2016, business combination transaction costs consisted primarily of professional and legal costs. For the pro forma combined year ended December 31, 2016, business combination transaction costs consisted primarily of transactional costs attributable to the acquisition of Superior in May 2016.













Segments

The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Company’s Sweet Baked Goods segment consists of fresh and frozen baked goods and bread products that are sold under the Hostess®representation and Dolly Madison® brands. The In-Store Bakery segment consists of Superior and Hostess branded products sold throughwarranty insurance policy purchased in connection with the in-store bakery section of grocery and club stores. During the fourth quarter of 2017, the Company reassessed its segment presentation. Previously, the “Other” categoryVoortman acquisition in 2020 included In-Store Bakery as well as bread and buns, and frozen retail products. The periods presented below reflect bread and buns and frozen retail products within the Sweet Baked Goods segment, while discretely presenting In-Store Bakery.
We evaluate performance and allocate resources basedin other expense (income) on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:

Audited Segment Financial Data
(In thousands)Year Ended
December 31,
2017		  From November 4
through December 31,
2016		  
From January 1
through
November 3, 2016
 
Year Ended
December 31,
2015

(Successor)  (Successor)  (Predecessor) (Predecessor)
  Net revenue:
         
Sweet Baked Goods$733,827
  $105,211
  $595,645
 $620,815
In-Store Bakery42,361
  6,787
  19,943
 —
Net revenue$776,188
  $111,998
  $615,588
 $620,815



  

     
Gross profit:         
Sweet Baked Goods$316,916
  $37,387
  $262,930
 $262,203
In-Store Bakery9,982
  1,327
  3,599
 —
Gross profit$326,898
  $38,714
  $266,529
 $262,203



  

     
  Capital expenditures (1):
         
Sweet Baked Goods$35,609
  $7,544
  $31,254
 $27,252
In-Store Bakery774
  83
  223
 —
Capital expenditures$36,383
  $7,627
  $31,477
 $27,252

(1)Capital expenditures consists of purchases of property and equipment and acquisition and development of software assets paid in cash or acquired through accounts payable during the year ended December 31, 2017 (Successor), from November 4, 2016 through December 31, 2016 (Successor), from January 1, 2016 through November 3, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor).


Customer Concentrations

See Note 1- “Summary of Significant Accounting Policies” to the consolidated financial statementsstatement of operations.
(3) Costs related to certain corporate initiatives, of which $0.2 million is included in Part II, Item 8cost of this Annual Reportgoods sold, $0.1 million is included in general and administrative and $0.4 million is included in other expense (income) on Form 10-K.the consolidated statement of operations.



38


Year Ended December 31, 2021
($ and shares in thousands)Gross
 Profit		Gross MarginOperating IncomeNet
 Income		Net Income MarginDiluted
 EPS
GAAP results$409,983 35.9 %$200,738$119,29910.4%$0.86
Non-GAAP adjustments:
Foreign currency remeasurement— —— (505)—— 
Project consulting costs (1)— —6,081 6,081 0.50.04 
Change in fair value of warrant liabilities— —— (566)—— 
Tax receivable agreement remeasurement— —(1,409)(1,409)(0.1)(0.01)
Other (2)704 0.12,107 4,338 0.40.03 
Remeasurement of tax liabilities— —— (3,357)(0.3)(0.03)
Tax impact of adjustments— —— (1,871)(0.2)(0.01)
Adjusted Non-GAAP results$410,687 36.0 %$207,517 122,010 10.7 $0.88 
Income tax45,741 4.0
Interest expense39,762 3.5
Depreciation and amortization51,681 4.5
Share-based compensation9,585 0.8
Adjusted EBITDA$268,779 23.5 %

(1) Project consulting costs are included within general and administrative on the consolidated statement of operations.
(2) Costs related to certain corporate initiatives, including $2.8 million of Voortman acquisition related costs. Of the total $4.3 million, $0.7 million is included in costs of goods sold, $1.4 million is included in general and administrative and $2.2 million is included in other non-operating expenses on the consolidated statement of operations.

39

Adjusted Gross Margin
Adjusted gross margin was 34.4% for the year ended December 31, 2022, a decrease of 152 basis points from an adjusted gross margin of 36.0% for the year ended December 31, 2021. The decrease in adjusted gross margin was due to inflation and supply-chain inefficiencies, partially offset by favorable price/mix, including revenue growth management initiatives. Adjusted gross profit increased 13.9% on pricing actions and productivity partially offset by inflation.
Adjusted EBITDA
Adjusted EBITDA was $294.1 million for the year ended December 31, 2022, compared to $268.8 million for the year ended December 31, 2021. The improvement in adjusted EBITDA was driven by higher gross profit, partially offset by higher operating costs including higher investments in our workforce and higher advertising expense.
Adjusted EPS
Adjusted EPS was $0.98 for the year ended December 31, 2022, compared to $0.88 for the year ended December 31, 2021. The improvement in adjusted EPS was driven by strong adjusted EBITDA performance partially offset by increased interest expense, depreciation expense and share-based compensation expense.
Liquidity and Capital Resources
Our primary sources of liquidity are from the cash and cash equivalents and short-term investments on the balance sheet, future cash flow generated from operations, and availability under our revolving credit agreement (“Revolver”). We believe that cash flows from operations and the current cash and cash equivalents and short-term investments on the balance sheet will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. Our future cash requirements include the purchase commitments for certain raw materials and packaging used in our production process, scheduled rent on leased facilities, scheduled debt service payments on our term loan and settlements on related interest rate swap contracts, payments on our tax receivable agreement, settlements on our outstanding foreign currency contracts and outstanding purchase orders on capital projects.
Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we undertake, including acquisitions. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
We had working capital, excluding cash and cash equivalents and short-term investments, as of December 31, 20172022 and December 31, 20162021 of $15.5$26.3 million and $20.6$17.9 million, respectively. We have the ability to borrow under our Revolver to meet obligations as they come due. As of December 31, 2017,2022, we had approximately $96.1 $94.1 million available for borrowing, net of letters of credit, under our Revolver.
Cash Flows from Operating Activities
Cash flows provided by operating activities for the yearyears ended December 31, 20172022 and 2021 were $163.7$248.8 million compared toand $203.0 million, respectively. Operating cash flowsflow benefited from current year improvement in profitability, including the insurance proceeds of $33.0��million, partially offset by an increase in tax payments and an increase in working capital.
Cash Flows provided by and used in Investing Activities
Investing activities used $147.9 million and $65.4 million of cash for the Successor period November 4, 2016 throughyears ended December 31, 20162022 and 2021, respectively. On February 22, 2022, we purchased a facility in Arkadelphia, Arkansas for a total purchase price of $13.6 million and for the Predecessor period January 1, 2016 through November 3, 2016 of $102.2 million, and $133.0 million for$11.5 million. Additional capital expenditures were incurred on this project during the year ended December 31, 2015. Cash flows provided by operating activities2022, and we expect elevated capital expenditures due to this project in 2023. Additionally, during 2017 was driven by an increase in income before taxes and benefits from accounts payable and customer trade allowances, offset by higher inventory, accounts receivable, and prepaid expense balances. Cash flow provided by operating activities for the 2016 periods was driven by the payment of transaction costs related to the Business Combination.
Cash Flows from Investing Activities
Cash flows used in investing activities for the year ended December 31, 2017 were $35.22022, we invested in short-term marketable securities of $80.4 million and received proceeds from maturity of short-term marketable securities of $63.0 million.
40

Cash flowsFlows used in investingFinancing Activities
Financing activities used $249.8 million and $61.3 million of cash for the period November 4, 2016 through December 31, 2016 were $428.2 million (Successor) and $76.6 million for the period January 1, 2016 through November 3, 2016 (Predecessor) and cash flows of $17.9 million were provided by investing activities for the yearyears ended December 31, 2015.2022 and 2021, respectively. The acquisition of Superior and Hostess during the Predecessor and Successor 2016 periods, respectively, represented a significant investing use of cash. Our property and equipment capital expenditures primarilynet outflow for 2022 consisted of strategic growth initiatives, maintenance and productivity improvements.
Cash Flows from Financing Activities
Cash flows used in financing activities were $19.6 million for the year ended December 31, 2017, $232.3 million for the Successor period November 4, 2016 through December 31, 2016, $31.6 million for the Predecessor period January 1, 2016 through November 3, 2016, and $296.0 million for the year ended December 31, 2015. For the year ended December 31, 2017 (Successor), financing activities were primarily attributed to scheduled principal payments on long term debt and distributions to partners/non-controlling interest in respect of their tax liability. For the Successor period of 2016, we had $13.1 million of deferred underwriting costs related to the Business Combination.
In November 2016, we extinguished the former second lien term loan through early principal payments and refinanced our first lien term loan which accounted for the primary use of cash used in financing activitiesto prepay $100.0 million of our term loan principal, repurchase 5.8 million shares of our Class A common stock under our existing share repurchase authorization for the Successor period. In June 2015 and August 2015 the Predecessor extinguished the 2013 Term Loan through early principal payments. In the period January 1, 2016 through November 3, 2016, and in the year ended December 31, 2015, the Predecessor paid distributionsan amount of $23.6$130.1 million and $952.9an average price per share of $22.50, offset by cash inflows from the proceeds on exercise of employee stock options. The net outflow for 2021 consisted of cash used to repurchase 3.3 million respectively,shares of our common stock under our existing securities repurchase authorization for an amount of $53.2 million and an average price per share of $16.17, offset by cash inflows from the proceeds on exercise of employee stock options and proceeds from the exercise of public warrants prior to partners,the amendment of the warrant agreement in July 2021. Both periods reflected similar activity on cash outflows related to scheduled payments under the tax receivable agreement and $1.0 million, $46.8 million to non-controlling interest, respectively.term loan.
Long-Term Debt
As of December 31, 2017, $993.82022, $983.2 million aggregate principal amount of the Third Amended First Lien Term Loanour term loan and $3.9 $5.9 million aggregate principal amount of letters of credit, reducing the amount available under the Revolver, were outstanding. See Note 14 - “Commitments14. Commitments and Contingencies”Contingencies to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information regarding the letters of credits.credit. We had no outstanding borrowings under our Revolver as of December 31, 2017.
2022. As of December 31, 2017,2022, we were in compliance with theall covenants under the Third Amended First Lien Term Loanour term loan and the Revolver.

Commitments The Revolver contains certain restrictive financial covenants. Based on our current and Contingencies
As of December 31, 2017, the Company has commitments and contingencies for tax receivable arrangements, debt, operating leases, and advance purchase commitments. Refer to Note 14--“Commitments and Contingencies” to the Consolidated Financial Statements included in Part II, Item 8 on this Annual Report on Form 10-K.
Contractual Commitments as of December 31, 2017
Total
Committed
 
Less than
1 year
 1 to 3 years 
3 to 5
years
 
More
than
5 years
(In thousands)         
Tax receivable agreement$124,360
 $14,200
 $15,000
 $14,400
 $80,760
First lien term loan993,762
 9,938
 19,876
 963,948
 —
Interest payments on term loan173,174
 35,344
 69,624
 68,206
 —
Operating leases2,610
 2,043
 567
 —
  
Capital lease633
 200
 400
 33
 —
Ingredient procurement64,235
 61,166
 3,069
 —
 —
Packaging procurement35,401
 35,401
 —
 —
 —
 $1,394,175
 $158,292
 $108,536
 $1,046,587
 $80,760
Tax receivable agreement
The tax receivable agreement entered into in connectionprojected financial performance, we believe that we will comply with the Business Combination (the “Tax Receivable Agreement”) generally providesthese covenants for the payment by the Company to the Legacy Hostess Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the closing of the Business Combination (which periods may extend, unless the Tax Receivable Agreement is terminated early in accordance with its terms, for more than 15 years following any exchange of Class B units of Hostess Holdings for shares of the Company’s Class A common stock or the cash equivalent thereof) as a result of (i) certain increases in tax basis resulting from the Business Combination; (ii) certain tax attributes of Hostess Holdings and its subsidiaries existing prior to the Business Combination and prior to subsequent exchanges of Class B units; (iii) certain increases in tax basis resulting from exchanges of Class B units; (iv) imputed interest deemed to be paid by the Company as a result of payments it makes under the Tax Receivable Agreement; and (v) certain increases in tax basis resulting from payments the Company makes under the Tax Receivable Agreement. The Company will retain the benefit of the remaining 15% of these cash savings. Certain payments under the Tax Receivable Agreement will be made to Legacy Hostess Equityholders in accordance with specified percentages, regardless of the source of the applicable tax attribute. The most significant estimate utilized by management to calculate the corresponding liability is the Company’s future cash tax savings rates, which are projected based on current tax laws and the Company’s historical and projected future tax profile.

In addition, in January 2018, we entered into an agreement with the Apollo Funds terminating all future payment obligations to the Apollo Funds in exchange for a payment of $34.0 million. However, if we enter into a definitive agreement on or before January 26, 2019 and that agreement results in a change in control (as defined in the Tax Receivable Agreement), we would be required to make an additional payment of $10.0 million to the Apollo Funds.
During the year ended December 31, 2017, we recognized a gain of $50.2 million related to the adjustment to the tax receivable agreement, partially offset by approximately $1.6 million of expense to reflect an increase to the estimated future cash tax savings rate attributed to a state tax law change. We recognized a corresponding gain on the consolidated statement of operations.foreseeable future.
Critical Accounting PoliciesEstimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of judgment, estimates and assumptions. We make such subjective determinations after careful consideration of our historical performance, management’s experience, current economic trends and events and information from outside sources. Inherent in this process is the possibility that actual results could differ from these estimates and assumptions for any particular period.

Our significant accounting policies are detailed in Note 11. Summary of Significant Accounting Policies of the notes to our Consolidated Financial Statements.consolidated financial statements within Item 8. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions. The following areas are the most important and require the most difficult, subjective judgments.

is a summary of certain accounting estimates considered critical by management.
Trade and consumer promotion programsConsumer Promotion Programs

We offer various sales incentive programs to customers, and consumers, such as feature price discounts, in-store display incentives, cooperative advertising programs and new product introduction fees, and coupons.allowances. The mix between promotional programs, which are classified as reductions in revenue in the Statementstatements of Operations,operations, and advertising or other marketing activities, which are classified as marketing and selling expenses in the Statementconsolidated statements of Operations,operations, fluctuates between periods based on our overall marketing plans, and such fluctuations have an impact on revenues.revenue. These trade programs also require management to make estimates about the expected total cost of the programs and related allocations amongst participants (who might have different levels of incentives based on various program requirements). These estimates are inherently uncertain and are generally based on historical experience, adjusted for any new facts or circumstances that might impact the ultimate cost estimate for a particular program or programs.

Goodwill and Indefinite-lived trade names

Trade Names
When evaluating goodwill and indefinite-lived intangible assets for impairment under U.S. GAAP, we may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit or the intangible asset is more-likely-than-notmore likely than not greater than the carrying amount. Such qualitative factors include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, competitive environment, share price fluctuations, overall financial performance and results of past impairment tests. If, basedBased on a review of the qualitative factors, if we determine it is not more-likely-than-notmore likely than not that the fair value is less than the carrying value, we may bypass the two-step quantitative impairment test. The first step (“Step 1”) ofWe also may elect not to perform the qualitative assessment for the reporting unit or intangible assets and perform a quantitative impairment test.
41

For our 2022 and 2021 annual goodwill impairment testing, we elected to perform qualitative assessments for our reporting unit. No indicators of impairment were noted. If a quantitative test calculateswere to be utilized for our reporting unit, it would estimate the estimated fair value of each of the reporting unitsunit and comparescompare it to theits carrying value. IfTo the extent the fair value iswas in excess of the carrying value, no impairment exists. If Step 1 does indicatewould be recognized. Otherwise, an impairment a second step (“Step 2”) must take place. Under Step 2,loss would be recognized for the fair value of the assets and liabilities of the reporting unit are estimated as if the reporting unit were acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill, to whichamount that the carrying value of theour reporting unit, including goodwill, must be adjusted.

exceeded its fair value. In performing the quantitative test of goodwill, we primarily use thefair value would be determined based on a calculation which would give consideration to an income approach method of valuation that includedutilizing the discounted cash flow method and the market approach using the market comparable and market transaction methods.
Our indefinite-lived intangible assets consist of trademarks and trade names. The $1,538.6 million balances at both December 31, 2022 and 2021, were recognized as well as other generally accepted valuation methodologiespart of the Hostess Business Combination and the Voortman and Cloverhill acquisitions. The trademarks and trade names are integral to determine the Company’s identity and are expected to contribute indefinitely to our corporate cash flows. Fair value for trademarks and trade names was determined using the income approach. The application of the income approach was premised on a royalty savings method, whereby the trademark and trade names are valued by reference to the amount of royalty income they could generate if they were licensed, in an arm’s-length transaction, to a third party. These assets have been assigned an indefinite life and therefore are not amortized but rather evaluated for impairment annually using the qualitative or quantitative methods similar to goodwill. For 2022 and 2021, we performed a qualitative test. No indicators of impairment were noted.
Changes in certain significant assumptions could have a significant impact on the estimated fair value, and therefore, a future impairment could result for a portion of goodwill andor long-lived intangible assets. Significant assumptions used
Long-lived Assets
We review long-lived assets, including property and equipment and amortizable identifiable intangible assets (e.g. customer relationships), to determine fair value under the discountedassess recoverability from projected undiscounted cash flow model included future trends in sales, operating expenses, overhead expenses, capital expenditures andflows whenever events or changes in working capital, along with an appropriate discount ratefacts and circumstances indicate that the carrying value of the assets may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. The cash flows are based on our estimated costbest estimate of equity capital and after-tax cost of debt.

Infuture cash flows derived from the process of our annualmost recent business projections. If this comparison indicates there is an impairment, reviewthe carrying value of the trade names, we primarily useasset is reduced to its estimated fair value. We also evaluate the relief of royalty method under the income approach method of valuation. Significant assumptions usedamortization periods assigned to our intangible assets to determine fair value underwhether events or changes in circumstances require a revised estimate of useful lives. There were no impairment losses for the relief of royalty method included future trends in sales, a royalty rateyears ended December 31, 2022 and a discount rate to be applied to the forecast revenue stream.

2021.
Business Combinations

We account for business acquisitions using the purchase method of accounting. Assets acquired, liabilities assumed, and non-controlling interests are recorded at their estimated fair values at the acquisition date. The excess of purchase price over fair value of the net assets acquired, including the amount assigned to identifiable intangible assets, is recorded as goodwill. Given the time it takes to obtain pertinent information to finalize the acquired company’s balance sheet, it may be multiple quarters before we are able to finalize those initial fair value estimates. Accordingly, it is not uncommon for the initial estimates to be subsequently revised.

Tax receivable agreement

See “-Commitments and Contingencies- Tax receivable agreement” above.

New Accounting Pronouncements

Refer to Note 1. Summary of Significant Accounting Policies of the Notesnotes to our Consolidated Financial Statements elsewherethe consolidated financial statements included in Part II, Item 8 of this filingAnnual Report on Form 10-K for further information regarding recently issued accounting standards.





Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks related to interest rate market risk.rates and foreign currency exchange rates.
Market risk on variable-rate financial instruments
Our Third Amended First Lien Term Loanterm loan and Revolver each bear interest on outstanding borrowings thereunder at variable interest rates. The rate in effect at December 31, 20172022 for the outstanding Third Amended First Lien Term Loanterm loan was a LIBOR-based rate of 3.60%6.7% per annum. At December 31, 2017, the subsidiary borrower2022, we had an aggregate principal balance of $993.8$983.2 million outstanding under the Third Amended First Lien Term Loan. At December 31, 2017, the subsidiary borrower had $96.1term loan and $94.1 million available for borrowing, net of letters of credit of $3.9$5.9 million, under itsthe Revolver. Increases in market interest rates would cause interest expense to increase and earnings before income taxes to decrease.
42

To manage the risk related to our variable rate debt, we have entered into an interest rate swap contractcontracts with a counter partyparties to make a series of payments based on a fixed interest rate of 1.78%rates ranging from 1.11% to 2.06% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based onAt December 31, 2022, a notional amount of $500$700.0 million atremained outstanding on the inception of the contractswap contracts and will be reduced by $100 million each yearremain outstanding through the maturity of the five year contract.our term loan in August 2025.
The change in interest expense and earnings before income taxes resulting from a change in market interest rates would be dependent upon the weighted average outstanding borrowings and the portion of those borrowings that are hedged by our swap contractcontracts during the reporting period following an increase in market interest rates.period. An increase or decrease in applicable interest rates of 1% would result in an increase or decrease in interest payableexpense of approximately $4.9$10.7 million and $11.0 million for the yearyears ended December 31, 2017,2022 and 2021, respectively, or approximately $3.8 million and $4.6 million after accounting for the impact of our swap contract.contracts for the years ended December 31, 2022 and 2021, respectively.
Foreign Currency Risk
We are exposed to fluctuations of the Canadian Dollar (“CAD”) relative to the U.S. Dollar (“USD”) due to the operations of our Burlington, Ontario bakery and distribution center and sales to customers denominated in CAD. Revenue generated from Canadian customers, offset by the related selling expense and the operations of this facility, including certain raw materials, production labor and overhead, creates a net exposure to CAD denominated expenses. We enter into contracts to purchase Canadian dollars at fixed exchange rates throughout the year. At December 31, 2022 and 2021, we had contracts to purchase a total of $9.2 million and $15.5 million Canadian dollars at fixed exchange rates and varying dates from January 2023 through June 2023 and January 2022 through December 2022, respectively. At December 31, 2022 and 2021, a 10% change in the USD to CAD exchange rate would change the aggregate fair value of these contracts by approximately $0.6 million and $0.9 million for the years ended December 31, 2022 and 2021.
43

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
5945
Consolidated Balance Sheets as of December 31, 20172022 and December 31, 20162021
6147
Consolidated Statements of Operations for the yearyears ended December 31, 2017 (Successor), from November 4, 2016 through December 31, 2016 (Successor),2022, 2021 and from January 1, 2016 through November 3, 2016 (Predecessor), and the year ended December 31, 2015 (Predecessor)2020
6348
Consolidated Statements of Comprehensive Income (Loss) for the yearyears ended December 31, 2017 (Successor), from November 4, 2016 through December 31, 2016 (Successor),2022, 2021 and from January 1, 2016 through November 3, 2016 (Predecessor), and the year ended December 31, 2015 (Predecessor)2020
6449
Consolidated Statements of Stockholders’ Equity for the yearyears ended December 31, 2017 (Successor), from November 4, 2016 through December 31, 2016 (Successor),2022, 2021 and Partners’ Equity (Deficit) from January 1, 2016 through November 3, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor)2020
6550
Consolidated Statements of Cash Flows for the yearyears ended December 31, 2017, November 4, 2016 through December 31, 2016 (Successor),2022, 2021 and from January 1, 2016 through November 3, 2016 (Predecessor), and the year ended December 31, 2015 (Predecessor)2020
6651
Notes to Consolidated Financial Statements
6752


44







Report of Independent Registered Public Accounting Firm



To the ShareholdersStockholders and Board of Directors
Hostess Brands, Inc.:



Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting


We have audited the accompanying consolidated balance sheets of Hostess Brands, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172022 and 2016, and2021, the related consolidated statements of operations, comprehensive income, (loss),stockholders’ equity, and cash flows for each of the yearyears in the three-year period ended December 31, 2017 and for the period November 4, 2016 through December 31, 2016, and the related notes. We have also audited the accompanying consolidated statements of operations, equity, and cash flows for the period January 1, 2016 through November 3, 2016 and the year ended December 31, 2015 of Hostess Holdings, L.P. and subsidiaries,2022, and the related notes (collectively, with the consolidated financial statements of Hostess Brands, Inc., the “consolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hostess Brands, Inc. and subsidiariesthe Company as of December 31, 20172022 and 2016,2021, and the results of theirits operations and theirits cash flows for each of the yearyears in the three-year period ended December 31, 2017 and for the period November 4, 2016 through December 31, 2016, in conformity with U.S. generally accepted accounting principles. It is also our opinion that the financial statements referred to above present fairly, in all material respects, the results of Hostess Holdings, L.P. and subsidiaries’ operations and cash flows for the period January 1, 2016 through November 3, 2016 and the year ended December 31, 2015,2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


Basis for Opinions


The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report onOn Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
45

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


(signed)Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of customer trade allowances

As discussed in Note 1 to the consolidated financial statements, the Company has recorded a provision for customer trade allowances, consisting primarily of pricing allowances and merchandising programs associated with sales to customers. The liability recorded for the estimated cost of these programs is dependent on factors such as the ultimate purchase volume activity, participation levels of customers, and the related settlement rates for these programs. The Company’s liability for customer trade allowances as of December 31, 2022 was $62.2 million.

We identified the evaluation of certain customer trade allowances as a critical audit matter because of the higher degree of auditor judgment required to evaluate the Company’s estimates. This is due to uncertainty around the amount of settlements, which typically occur in a period subsequent to the related sales transactions, and in particular, the estimate of purchase volumes made by retailers from distributors.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s trade process at disaggregated levels. This included controls related to the Company’s trade spend trending and lookback analyses based on final settlement. We analyzed the liability by trade allowance type to identify unusual trends. We assessed the Company’s historical ability to accurately estimate its customer trade allowances by comparing historical estimates to final settlements. We compared a sample of settlements subsequent to period end to the amount previously recognized by the Company.

/s/ KPMG LLP

We have served as the Company’s auditor since 2013.


Kansas City, Missouri
February 28, 201821, 2023


46






HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except shares and per share data)shares)


December 31, December 31,December 31,December 31,
ASSETS2017 2016ASSETS20222021

(Successor) (Successor)
Current assets:
 
Current assets:
Cash and cash equivalents$135,701
 $26,855
Cash and cash equivalents$98,584 $249,159 
Short-term investmentsShort-term investments17,914 — 
Accounts receivable, net101,012
 89,237
Accounts receivable, net168,783 148,180 
Inventories34,345
 30,444
Inventories65,406 52,813 
Prepaids and other current assets7,970
 4,827
Prepaids and other current assets16,375 10,564 
Total current assets279,028
 151,363
Total current assets367,062 460,716 
Property and equipment, net174,121
 153,224
Property and equipment, net425,313 335,305 
Intangible assets, net1,923,088
 1,946,943
Intangible assets, net1,920,880 1,944,392 
Goodwill579,446
 588,460
Goodwill706,615 706,615 
Other assets, net10,592
 7,902
Other assets, net72,329 19,283 
Total assets$2,966,275
 $2,847,892
Total assets$3,492,199 $3,466,311 
   
LIABILITIES AND STOCKHOLDERS’ EQUITY   LIABILITIES AND STOCKHOLDERS’ EQUITY
   
Current liabilities:   Current liabilities:
Long-term debt and capital lease obligation payable within one year$11,268
 $11,496
Tax receivable agreement payments payable within one year14,200
 —
Long-term debt and lease obligations payable within one yearLong-term debt and lease obligations payable within one year$3,917 $14,170 
Tax receivable agreement obligations payable within one yearTax receivable agreement obligations payable within one year12,600 11,600 
Accounts payable49,992
 34,083
Accounts payable85,667 68,104 
Customer trade allowances40,511
 36,691
Customer trade allowances62,194 52,746 
Accrued expenses and other current liabilities11,880
 21,656
Accrued expenses and other current liabilities59,933 47,009 
Total current liabilities127,851
 103,926
Total current liabilities224,311 193,629 
Long-term debt and capital lease obligation987,920
 993,374
Tax receivable agreement110,160
 165,384
Long-term debt and lease obligationsLong-term debt and lease obligations999,089 1,099,975 
Tax receivable agreement obligationsTax receivable agreement obligations123,092 134,265 
Deferred tax liability267,771
 353,797
Deferred tax liability347,030 317,847 
Other long-term liabilitiesOther long-term liabilities1,593 1,605 
Total liabilities1,493,702
 1,616,481
Total liabilities1,695,115 1,747,321 
Commitments and Contingencies (Note 14)
 
Commitments and Contingencies (Note 14)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 99,791,245 and 98,250,917 shares issued and outstanding at December 31, 2017 and 2016, respectively10
 10
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 30,319,564 and 31,704,988 shares issued and outstanding at December 31, 2017 and 2016, respectively3
 3
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,650,344 shares issued and 133,117,224 shares outstanding as of December 31, 2022 and 142,031,329 shares issued and 138,278,573 shares outstanding as of December 31, 2021Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,650,344 shares issued and 133,117,224 shares outstanding as of December 31, 2022 and 142,031,329 shares issued and 138,278,573 shares outstanding as of December 31, 202114 14 
Additional paid in capital920,723
 912,824
Additional paid in capital1,311,629 1,303,254 
Accumulated other comprehensive income1,318
 —
Retained earnings (accumulated deficit)208,279
 (15,618)
Accumulated other comprehensive income (loss)Accumulated other comprehensive income (loss)35,078 (506)
Retained earningsRetained earnings639,595 475,400 
Treasury stockTreasury stock(189,232)(59,172)
Stockholders’ equity1,130,333
 897,219
Stockholders’ equity1,797,084 1,718,990 
Non-controlling interest342,240
 334,192
Total liabilities, stockholders’ equity and non-controlling interest$2,966,275
 $2,847,892
Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity$3,492,199 $3,466,311 
See accompanying notes to the consolidated financial statements.

47

HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
Year Ended December 31, 2022Year Ended
December 31,
2021		Year Ended
December 31,
2020
Net revenue$1,358,207 $1,142,036 $1,016,609 
Cost of goods sold892,528 732,053 660,970 
Gross profit465,679 409,983 355,639 
Operating costs and expenses:
Advertising and marketing62,754 51,683 45,724 
Selling40,542 36,288 46,729 
General and administrative119,453 99,173 92,860 
Amortization of customer relationships23,512 23,510 26,510 
Business combination transaction costs— — 4,282 
Tax receivable agreement remeasurement(860)(1,409)760 
Other operating expense— — 3,464 
Total operating costs and expenses245,401 209,245 220,329 
Operating income220,278 200,738 135,310 
Other (income) expense:
Interest expense, net40,950 39,762 42,826 
Change in fair value of warrant liabilities— (566)(39,941)
Other expense (income)(31,956)1,730 3,723 
Total other expense8,994 40,926 6,608 
Income before income taxes211,284 159,812 128,702 
Income tax expense47,089 40,513 20,405 
Net income164,195 119,299 108,297 
Less: Net income attributable to the non-controlling interest— — 3,621 
Net income attributable to Class A stockholders$164,195 $119,299 $104,676 
Earnings per Class A share:
Basic$1.20 $0.91 $0.84 
Diluted$1.19 $0.86 $0.51 
Weighted-average shares outstanding:
Basic136,768,310 131,571,733 124,927,535 
Diluted137,924,471 138,198,176 127,723,488 


Year Ended
December 31, 2017		 From
November 4, 2016
through
December 31, 2016		  From
January 1, 2016
through
November 3, 2016		 Year Ended
December 31, 2015

(Successor) (Successor)  (Predecessor) (Predecessor)
Net revenue$776,188
 $111,998
  $615,588
 $620,815
Cost of goods sold449,290
 73,284
  346,864
 355,963
Special employee incentive compensation—
 —
  2,195
 2,649
Gross profit326,898
 38,714
  266,529
 262,203
         
Operating costs and expenses:        
Advertising and marketing33,004
 5,245
  30,626
 31,967
Selling expense32,086
 5,033
  25,730
 29,484
General and administrative52,943
 7,322
  38,391
 31,531
Special employee incentive compensation—
 —
  2,503
 1,274
Amortization of customer relationships23,855
 3,922
  1,185
 851
Impairment of property and equipment1,003
 —
  7,300
 2,700
Loss on sale/abandonment of property and equipment, and bakery shutdown costs (recoveries)(144) —
  2,551
 4,182
Business combination transaction costs—
 —
  31,832
 —
Related party expenses381
 26,799
  3,539
 4,306
Tax receivable agreement liability remeasurement(50,222) —
  —
 —
Total operating costs and expenses92,906
 48,321
  143,657
 106,295
Operating income (loss)233,992
 (9,607)  122,872
 155,908
Other (income) expense:
 
  
 
Interest expense, net39,174
 6,649
  60,384
 50,011
Loss (gain) on modification of debt2,554
 (763)  —
 25,880
Other expense (income)1,360
 754
  1,624
 (8,743)
Total other expense43,088
 6,640
  62,008
 67,148
Income (loss) before income taxes190,904
 (16,247)  60,864
 88,760
Income tax expense (benefit)(67,204) (7,762)  439
 —
Net income (loss)258,108
 (8,485)  60,425
 88,760
Less: Net income (loss) attributable to the non-controlling interest34,211
 (4,081)  3,214
 4,507
Net income (loss) attributable to Class A shareholders/partners$223,897
 $(4,404)  $57,211
 $84,253
Earnings (loss) per Class A share:
 
  
 
Basic$2.26 (0.05)  
 
Diluted$2.13 (0.05)  
 
Weighted-average shares outstanding:
 
  
 
Basic99,109,629
 97,791,658
  
 
Diluted105,307,293
 97,791,658
  
 



See accompanying notes to the consolidated financial statements.

48


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)

Year Ended
December 31,
2022		Year Ended
December 31,
2021		Year Ended
December 31,
2020
Net income$164,195 $119,299 $108,297 
Other comprehensive income:
Unrealized gain (loss) on interest rate swaps and foreign currency contracts designated as cash flow hedges51,566 8,973 (16,870)
Reclassification into net income(3,309)4,503 3,886 
Income tax benefit (expense)(12,673)(3,575)3,421 
Comprehensive income199,779 129,200 98,734 
Less: Comprehensive income attributed to non-controlling interest— — 2,749 
Comprehensive income attributed to Class A stockholders$199,779 $129,200 $95,985 



Year Ended
December 31,
2017		  From
November 4, 2016
through
December 31, 2016		  From
January 1, 2016
through
November 3, 2016		 Year Ended
December 31,
2015
 (Successor)  (Successor)  (Predecessor) (Predecessor)
Net income (loss)$258,108
  $(8,485)  $60,425
 $88,760
Other comprehensive income:
  
  
 
Unrealized income on interest rate swap designated as a cash flow hedge2,878
  —
  —
 —
Income tax expense(890)  —
  —
 —
Comprehensive income (loss)260,096
  (8,485)  60,425
 88,760
Less: Comprehensive income (loss) attributed to non-controlling interest34,881
  (4,081)  3,214
 4,507
Comprehensive income (loss) attributed to class A shareholders/partners$225,215
  $(4,404)  $57,211
 $84,253



See accompanying notes to the consolidated financial statements.

49


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Amounts in thousands, except shares data)
thousands)
Class A Voting
Common Stock		Class B Voting
Common Stock		Additional
Paid-in Capital		Accumulated Other Comprehensive Income (Losses)Retained EarningsTreasury StockTotal
Stockholders’
Equity		Non-controlling
Interest
SharesAmountSharesAmountSharesAmount
Balance–December 31, 2019122,107 $12 8,411 $1 $1,123,805 $(756)$251,425 — $— $1,374,487 $94,432 
Comprehensive income (loss)— — — — — (8,691)104,676 — — 95,985 2,749 
Share-based compensation, including income taxes of $2,167223 — — — 10,838 — — — — 10,838 — 
Exchanges8,411 1 (8,411)(1)94,719 (960)— — — 93,759 (93,759)
Distributions— — — — — — — — — — (3,422)
Exercise of employee stock options and warrants50 — — — 690 — — — — 690 — 
Payment of taxes for employee stock awards— — — — (1,440)— — — — (1,440)— 
Reclassification of public warrants— — — — 68,503 — — — — 68,503 — 
Repurchase of common stock(444)— — — — — — 444 (6,000)(6,000)— 
Tax receivable agreement arising from exchanges, net of income taxes of $11,818— — — — (16,097)— — — — (16,097)— 
Balance-December 31, 2020130,347 13 — — 1,281,018 (10,407)356,101 444 (6,000)1,620,725 — 
Comprehensive income— — — — — 9,901 119,299 — — 129,200 — 
Share-based compensation224 — — — 9,585 — — — — 9,585 — 
Exercise of employee stock options313 — — — 4,488 — — — — 4,488 — 
Exercise of public warrants881 — — — 9,632 — — — — 9,632 — 
Cashless exercise of public warrants, net of fees of $5009,823 1 — — — — — — — 1 — 
Payment of taxes for employee stock awards— — — — (1,767)— — — — (1,767)— 
Reclassification of warrants— — — — 298 — — — — 298 — 
Repurchase of common stock(3,309)— — — — — — 3,309 (53,172)(53,172)— 
Balance-December 31, 2021138,279 14 — — 1,303,254 (506)475,400 3,753 (59,172)1,718,990 — 
Comprehensive income— — — — — 35,584 164,195 — — 199,779 — 
Share-based compensation382 — — — 10,450 — — — — 10,450 — 
Exercise of employee stock options236 — — — 3,970 — — — — 3,970 — 
Payment of taxes for employee stock awards— — — — (6,045)— — — — (6,045)— 
Repurchase of common stock(5,780)— — — — — — 5,780 (130,060)(130,060)— 
Balance-December 31, 2022133,117 $14 — $— $1,311,629 $35,078 $639,595 9,533 $(189,232)$1,797,084 $— 
Partners’ Equity (Deficit)
Hostess Holdings, LP
(Predecessor)


Class A
Class C
Total Partners’
Equity (Deficit)
Non-controlling
Interest
Balance – January 1, 2015 $191,989  $53,100  $245,089
 $4,267
Distributions to partners (533,030) (419,823) (952,853) (46,765)
Unit based compensation 948  433  1,381
 —
Net income 64,009  20,244  84,253
 4,507
Balance – December 31, 2015
(276,084)
(346,046)
(622,130)
(37,991)
Distributions to partners
(9,817)
(13,765)
(23,582)
(1,027)
Unit based compensation
1,945 
1,945 
3,890

—
Net income
28,605 
28,606 
57,211

3,214
Balance – November 3, 2016
$(255,351)
$(329,260)
$(584,611)
$(35,804)

 
Stockholders’ Equity
Hostess Brands, Inc.
(Successor)
 
  Class A Voting
Common Stock		 Class B Voting
Common Stock		 Additional
Paid-in Capital		 Accumulated Other Comprehensive Loss Accumulated
Losses / Retained Earnings		 Total
Stockholders’
Equity		 Non-controlling
Interest
  Shares Amount Shares Amount          
 Balance–November 4, 201697,589,217
 $10
 29,870,688
 $3
 $901,157
 $—
 $(11,214) $889,956
 $326,601
 Comprehensive income—
 —
 —
 —
 —
 —
 (4,404) (4,404) (4,081)
 Share-based compensation—
 —
 2,496,000
 —
 5,718
 —
 —
 5,718
 17,889
 Exchanges661,700
 —
 (661,700) —
 6,217
 —
 —
 6,217
 (6,217)
 Tax receivable agreement arising from exchanges, net of income taxes of $420—
 —
 —
 —
 (268) —
 —
 (268) —
 Balance–December 31, 201698,250,917
 10
 31,704,988
 3
 912,824
 —
 (15,618) 897,219
 334,192
 Comprehensive income—
 —
 —
 —
 —
 1,318
 223,897
 225,215
 34,881
 Share-based compensation, net of income taxes of $2,610154,849
 —
 —
 —
 4,803
 —
 —
 4,803
 —
 Exchanges1,385,424
 —
 (1,385,424) —
 13,848
 —
 —
 13,848
 (13,848)
 Distributions—
 —
 —
 —
 —
 —
 —
 —
 (12,985)
 Payment of taxes for employee stock awards—
 —
 —
 —
 (436) —
 —
 (436) —
 Exercise of public warrants55
 —
 —
 —
 1
 —
 —
 1
 —
 Tax receivable agreement arising from exchanges, net of income taxes of $1,898—
 —
 —
 —
 (10,317) —
 —
 (10,317) —
 Balance–December 31, 201799,791,245
 $10
 30,319,564
 $3
 $920,723
 $1,318
 $208,279
 $1,130,333
 $342,240



See accompanying notes to the consolidated financial statements.

50

HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

Year Ended
December 31, 2017
November 4, 2016
through
December 31, 2016

January 1, 2016
through
November 3, 2016
Year Ended
December 31, 2015

(Successor)
(Successor)

(Predecessor)
(Predecessor)
Operating activities        
Net income (loss)$258,108

$(8,485)

$60,425

$88,760
Depreciation and amortization38,170

5,843


10,265

9,836
Impairment of property1,003

—


7,300

2,700
Non-cash loss (gain) on debt modification1,453

(3,974)

—

16,005
Debt discount (premium) amortization(925)
(197)

2,790

3,423
Tax receivable agreement remeasurement(50,222)
—


—

—
Stock-based compensation7,413

26,748


3,890

1,381
Loss on sale/abandonment of property and equipment11

—


2,551

3,001
Deferred taxes(81,270)
(7,815)

—

—
Change in operating assets and liabilities        
Accounts receivable(11,775)
3,705


(19,869)
(1,077)
Inventories(3,901)
8,895


(2,994)
(5,611)
Prepaids and other current assets(3,039)
(1,694)

(1,049)
(441)
Accounts payable and accrued expenses4,839

(11,296)

33,886

10,480
Customer trade allowances3,820

2,225


4,828

4,364
Other—

(344)

198

151
Net cash provided by operating activities163,685

13,611


102,221

132,972













Investing activities











Purchases of property and equipment(32,913)
(6,494)

(28,633)
(25,082)
Acquisition of business, net of cash—

(421,242)

(49,735)
—
Proceeds from sale of assets85

—


4,000

425
Proceeds from sale of marketable securities—

—


—

42,960
Restricted cash release—

—


—

1,762
Acquisition and development of software assets(2,381)
(460)

(2,211)
(2,185)
Net cash used in investing activities(35,209)
(428,196)

(76,579)
17,880













Financing activities











Repayments of long-term debt and capital lease obligation(5,144)
(217,400)

(6,987)
(498,565)
Proceeds from issuance of long-term debt—

—


—

1,225,000
Payment of deferred underwriting costs—

(13,125)

—

—
Debt fees(1,066)
(1,820)

—

(22,819)
Distributions to partners—

—


(23,582)
(952,853)
Distributions to non-controlling interest(12,985)
—


(1,027)
(46,765)
Payment of taxes related to the net issuance of employee stock awards(436) —
  —
 —
Proceeds from the exercise of warrants1

—


—

—
Net cash used in financing activities(19,630)
(232,345)

(31,596)
(296,002)
Net increase (decrease) in cash and cash equivalents108,846

(646,930)

(5,954)
(145,150)
Cash and cash equivalents at beginning of period26,855

673,785


64,473

209,623
Cash and cash equivalents at end of period$135,701

$26,855


$58,519

$64,473













Supplemental Disclosures of Cash Flow Information











Interest$45,431

$—


$68,606

$34,710
Taxes paid$16,617

$43


$—

$—
Supplemental disclosure of non-cash investing











Purchases of property and equipment funded by accounts payable$1,089

$673


$633

$(15)
Year Ended
December 31,
2022		Year Ended
December 31,
2021		Year Ended
December 31,
2020
Operating activities
Net income$164,195 $119,299 $108,297 
Depreciation and amortization60,086 51,681 54,940 
Impairment and loss on sale of assets— — 3,329 
Debt discount amortization1,514 1,238 1,289 
Tax receivable agreement remeasurement(860)(1,409)760 
Change in fair value of warrant liabilities— (566)(39,941)
Unrealized loss (gain) on foreign currency631 (503)2,061 
Non-cash lease expense462 1,247 571 
Share-based compensation10,450 9,585 8,671 
Realized and unrealized gains on short-term investments(490)— — 
Deferred taxes16,511 18,995 16,806 
Change in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable(20,763)(22,728)4,434 
Inventories(12,593)(3,465)5,824 
Prepaids and other current assets(5,959)9,876 (5,301)
Accounts payable and accrued expenses26,072 13,723 1,900 
Customer trade allowances9,546 6,056 (4,397)
Net cash provided by operating activities248,802 203,029 159,243 
Investing activities
Purchases of property and equipment(119,374)(60,803)(51,983)
Acquisition of short-term investments(80,424)— — 
Proceeds from maturity of short-term investments63,000 — — 
Acquisition of business, net of cash— — (316,013)
Acquisition and development of software assets(11,123)(4,622)(6,269)
Net cash used in investing activities(147,921)(65,425)(374,265)
Financing activities
Repayments of long-term debt and financing lease obligations(108,375)(11,167)(11,168)
Proceeds from long-term debt origination, net of fees paid— — 136,888 
Distributions to non-controlling interest— — (3,422)
Repurchase of warrants— — (2,000)
Repurchase of common stock(130,060)(53,172)(6,000)
Payment of taxes related to the net issuance of employee stock awards(6,045)(1,767)(1,440)
Payments on tax receivable agreement(9,313)(9,270)(10,327)
Cash received from exercise of options and warrants, net of fees3,970 14,121 690 
Net cash provided by (used in) financing activities(249,823)(61,255)103,221 
Effect of exchange rate changes on cash and cash equivalents(1,633)(224)(252)
Net increase (decrease) in cash and cash equivalents(150,575)76,125 (112,053)
Cash and cash equivalents at beginning of period249,159 173,034 285,087 
Cash and cash equivalents at end of period$98,584 $249,159 $173,034 
Supplemental Disclosures of Cash Flow Information
Interest paid, net of amounts capitalized$39,419 $38,567 $41,776 
Net taxes paid$28,003 $12,081 $5,825 
Supplemental disclosure of non-cash investing
Accrued capital expenditures$8,638 $2,244 $4,718 
See accompanying notes to the consolidated financial statements.

51

HOSTESS BRANDS, INC.
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1. Summary of Significant Accounting Policies
Description of Business

Hostess Brands, Inc. is a Delaware corporation headquartered in Kansas City, Missouri.Lenexa, Kansas. The consolidated financial statements include the accounts of Hostess Brands, Inc. and its wholly owned subsidiaries (collectively, the “Company”). The Company is a leading packaged foodsweet snacks company focused on developing, manufacturing, marketing, selling and distributing fresh sweet baked goodssnacks in North America under the United States.Hostess® and Voortman® brands. The Hostess brand dates to 1919 when the Hostess CupCake was introduced to the public, followed by Twinkies® in 1930. In 2013, the Legacy Hostess Equityholders (as defined below) acquired the Hostess brand out of the bankruptcy liquidation proceedings of its prior owners, free and clear of all past liabilities. After a brief hiatus in production, the Company began providing Hostess products to consumers and retailers across the nation in July 2013. Today, the Company produces a variety of new and classic treats primarily under theincluding iconic Hostess® and Dolly Madison® group of brands, includingDonettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers®, HoHos®, Donettes®as well as a variety of Voortman® cookies and Fruit Pies.
On November 4, 2016 (the “Closing Date”), in a transaction referredwafers. The Hostess® brand dates back to as1919 when the “Business Combination,” the Company, then known as Gores Holdings, Inc. (“Gores Holdings”), acquired a controlling interest in Hostess Holdings, L.P. (“Hostess Holdings”), an entity owned indirectly by C. Dean Metropoulos and certain equity funds managed by affiliates of Apollo Global Management, LLC (the “Apollo Funds”, and together with entities controlled by Mr. Metropoulos, the “Legacy Hostess Equityholders”). Our “Sponsor” refers to Gores Sponsor, LLC, a Delaware limited liability company and the principal stockholder of Gores Holdings, Inc. priorHostess® CupCake was introduced to the Business Combination, and the “The Gores Group” refers to public, followed by Twinkies® in 1930.
Basis of Presentation
The Gores GroupCompany’s operations are primarily conducted through its wholly-owned operating subsidiary, Hostess Brands, LLC an affiliate of our Sponsor. In connection with the closing of the Business Combination, Gores Holdings, Inc. changed its name to “Hostess Brands, Inc.”(“HBLLC”) and its trading symbols on NASDAQ from “GRSH” and “GRSHW,” to “TWNK” and “TWNKW”.
As a result of the Business Combination, for accounting purposes,subsidiary, Voortman Cookies Limited. Hostess Brands, Inc. is the acquirera holding company with no significant assets or operations other than cash and Hostess Holdings is the acquired partycash equivalents of $16.7 million and accounting predecessor. The Company’s financial statement presentation includes the financial statements of Hostess Holdings$56.2 million at December 31, 2022 and 2021, respectively, tax receivable agreement liability, investment in its subsidiaries as “Predecessor” for periods priorand current and deferred income tax assets and liabilities related to the completion of the Business Combination and of Hostess Brands, Inc., including the consolidation of Hostess Holdings and its subsidiaries, for periodsearnings from and after the Closing Date (referred to as the “Successor”). Unless the context requires otherwise, the “Company” refers to the Predecessor for periods prior to the Business Combination and to the Successor for periods after the Business Combination.
On May 10, 2016, the Company purchased the stock of Superior Cake Products, Inc. (“Superior”) located in Southbridge, Massachusetts. Superior manufactures and distributes eclairs, madeleines, brownies, and iced cookies sold in the “In-Store Bakery” section of retailers.
Basis of Presentation
HBLLC. The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the accounts of the CompanyHostess Brands, Inc. and its wholly-owned, majority-owned or controlled subsidiaries, collectively referred to as either Hostess or the Company.subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The operating subsidiaries are wholly-owned by Hostess Holdings, a direct subsidiary of Hostess Brands, Inc. Prior to the final exchange of Class B stock (as described below), Hostess Brands, Inc. held 100% of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidated Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings were held by the holders of Class B stock.

C. Dean Metropoulos and entities under his control (the “Metropoulos Entities”) held their equity investment in the Company primarily through Class B limited partnership units (“Class B Units”) in Hostess Holdings LP (“Hostess Holdings”) and an equal number of shares of the Company’s Class B common stock (“Class B Stock”). Each Class B Unit, together with a share of Class B Stock held by the Metropoulos Entities, was exchangeable for a share of the Company’s Class A common stock. The interest of the Class B Units was reflected in the consolidated financial statements as a non-controlling interest. During the year ended December 31, 2020, the Metropoulos Entities exchanged all of their remaining Class B Units and Class B Stock for Class A common stock. At December 31, 2022 and 2021, there were no outstanding Class B Units or Class B Stock and there is no non-controlling interest reported on the December 31, 2022 or 2021 consolidated balance sheets.

Subsequent to the Metropoulos Entities’ final exchange of Class B Units, all subsidiaries, including Hostess Holdings, are wholly owned by the Company.
ThePrior to the final exchange of Class B Units, the Company has determined that Hostess Holdings, a limited partnership, iswas a variable interest entity (“VIE”) and that the Company iswas the primary beneficiary of the VIE. The Company determined that, throughdue to its ownership of Hostess GP, it hasHoldings’ general partnership units, the Company had the power to direct all of the activities of Hostess Holdings, with no substantive kick-out rights or participating rights by the limited partners individually or as a group. Hostess Holdings constitutesconstituted the majority of the assets of the Company.

The Company has one reportable segment: Snacking.
Mr. Metropoulos and
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HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The accompanying consolidated financial statements include the Metropoulos Entities hold their equity investment in the company primarily through Class B limited partnership units in the Company’s subsidiary, Hostess Holdings (“Class B Units”) and an equal number of shares of the Company’s Class B common stock (“Class B Stock”). The Company’s Class B Stock has voting, but no economic, rights, while Hostess Holdings’ Class B Units have economic, but no voting, rights. Each Class B Unit, together with a share of Class B Stock held by the Metropoulos Entities, is exchangeable for a share of the Company’s Class A common stock (or at the optionaccounts of the Company and its majority-owned or controlled subsidiaries (including those for which the cash equivalent thereof). The interestCompany was the primary beneficiary of a VIE), collectively referred to as the Metropoulos EntitiesCompany. All intercompany balances and transactions have been eliminated in Hostess Holdings’ Class B Units is reflected in our Consolidated Financial Statements as a non-controlling interest. The non-controlling interest was recorded at fair value at November 4, 2016 as a result of the Business Combination.consolidation.

For the Predecessor periods, Hostess Holdings consolidated the financial position and results of operationsAdoption of New Hostess Holdco LLC. The portion of the New Hostess Holdco, LLC not owned by Hostess Holdings was recognized as a non-controlling interest in the Consolidated Financial Statements. The non-controlling interest presented in the accompanying consolidated balance sheet represents the amount of cash that would be payable to the non-controlling interest holders ifAccounting Standards
On January 1, 2021, the Company were liquidated at book value asadopted Accounting Standards Update (“ASU”), 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for certain income tax related items, including intraperiod tax allocations, deferred taxes related to foreign subsidiaries and step-up in tax basis of goodwill. The adoption of this standard did not have a material impact on the balance sheet date. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, is the share of the earnings or losses allocated to non-controlling interest for the period.consolidated financial statements.

For the year ended December 31, 2017,On January 1, 2020, the Company recorded adjustmentsadopted ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires entities to previously reported gainsmeasure the impairment of certain financial instruments, including trade receivables, based on debt modifications, resulting inexpected losses rather than incurred losses. The adoption of this standard did not have a pre-tax charge of $1.6 million. The Company has determined that this correction of an error is immaterial tomaterial impact on the current and prior reported periods.

The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. Previously, the Company’s reportable segments were Sweet Baked Goods and Other. A change in the Company’s internal reporting structure during the last quarter of 2017 caused the Company to reassess its reportable segments. Prior period segment disclosures have been reclassified to conform with current period presentation.consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and for the reported amounts of revenues and expenses during the reporting period. Management utilizes estimates, including, but not limited to, valuation and useful lives of tangible and intangible assets, valuationfuture cash tax savings rate, incremental borrowing rate and the allocation of expected future payments under the liability between short-term and long-term based on when the Company realizes certain tax receivable agreement,attributes and reserves for trade and promotional allowances. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less when purchased as cash equivalents and are recordedrecords these at cost. Under the Company’s cash management system, checks that have been issued and are out of the control of the Company, but which have not cleared the bank by the balance sheet date, are reported as a reduction of cash.

Investments
The Company considers all investments purchased with original maturities of greater than three months, but less than one year as short-term investments and all investments purchased with original maturities of greater than one year as long-term investments.
The Company classifies its investments in debt securities where it has positive intent and ability to hold until maturity as held-to-maturity investments. As of December 31, 2022, the Company’s held-to-maturity investments classified as cash equivalents on the consolidated balance sheet totaled $12.0 million, which consisted of $6.0 million of U.S. treasury securities, $6.0 million of U.S. agency bonds and held-to-maturity investments classified as short-term investments on the consolidated balance sheet of $17.9 million. The short-term investments consisted of $10.0 million of commercial paper and $7.9 million of U.S. agency bonds. As of December 31, 2021, the Company had no held-to-maturity investments. Held-to-maturity investments are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in interest expense, net on the consolidated statement of operations. For the year ended December 31, 2022, the Company recognized $1.1 million in realized gains and $0.2 million in unrealized gains. The Company's held-to-maturity investments are classified as Level 2 in the fair value hierarchy because they are valued using inputs other than quoted prices, which are directly or indirectly observable in the market, including prices for similar assets in active markets as well as quoted prices for identical or similar assets in markets that are not active.
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HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for goods that havewhich the Company’s obligation to the customer has been received by the customer.satisfied. As of December 31, 20172022 and December 31, 2016,2021, the Company’s accounts receivable were $101.0$168.8 million and $89.2$148.2 million, respectively, which have been reduced by allowances for damages occurring during shipment, quality claims and doubtful accounts in the amount of $2.1$5.8 million and $1.9$3.0 million, respectively.


The allowance for doubtful accounts represents the Company’s estimate of expected credit losses related to trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible.
Inventories
Inventories are stated at the lower of cost or marketnet realizable value on a first-in first-out basis.
Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.
The components of inventories are as follows:
(In thousands)December 31,
2022		December 31,
2021
Ingredients and packaging$35,410 $22,607 
Finished goods26,133 26,988 
Inventory in transit to customers3,863 3,218 
$65,406 $52,813 
(In thousands)December 31,
2017		 December 31, 2016
 (Successor) (Successor)
Ingredients and packaging$14,826
 $12,712
Finished goods15,471
 14,229
Inventory in transit to customers4,048
 3,503
 $34,345
 $30,444
Capitalized Interest

The Company capitalizes a portion of the interest on its term loan (see Note 9. Debt ) related to certain property and equipment during its construction period. The capitalized interest is recorded as part of the asset to which it relates and depreciated over the asset’s estimated useful life. The Company capitalized interest of $1.2 million during the year ended December 31, 2022. No interest was capitalized during the year ended December 31, 2021. Capitalized interest is included in property and equipment, net on the consolidated balance sheet.
Property and Equipment

Property and equipment acquired in the Business Combination were assigned useful lives for purposes of depreciation that the Company believes to be the useful life of such assets. Additions to property and equipment are recorded at cost and depreciated straight linestraight-line over estimated useful lives of 1015 to 50 years for buildings and land improvements and 3 to 20 years for machinery and equipment. In order to maximize the efficiency of the Company’s operations and to operate the acquired equipment, occasionally the Company will remove and relocate equipment between bakeries. Such removal and relocation costs are expensed as incurred. Reinstallation costs are capitalized if the useful life is extended or the equipment is significantly improved. Otherwise, reinstallation costs are expensed as incurred. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing property and equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the capitalized cost and related accumulated depreciation are removed from the balance sheet and any resulting gain or loss is recognized in the Consolidated Statementsconsolidated statements of Operations.operations.

The Company assesses property, plant and equipment for impairment whenever events or changes in facts and circumstances indicate that the carrying amount of the asset may not be recoverable based on projected undiscounted cash flows. For the year ended December 31, 2017 (Successor),2020, the Company recorded an impairment losslosses of $1.0$2.9 million, inlocated within other operating expenses on the Sweet Baked Goods segment related to a production line that was idled whenconsolidated statements of operations. There were no impairment losses for the related production was transitioned to a third party. From January 1, 2016 through November 3, 2016 (Predecessor), the Company recorded an impairment loss of $7.3 million in the Sweet Baked Goods segment when it closed multiple production lines at the Indianapolis, Indiana bakeryyears ended December 31, 2022 and transitioned production to other facilities. The measurement of this loss was based on Level 3 inputs within the fair value measurement hierarchy.

2021.
Software Costs
Costs associated with computer software projects during the preliminary project stage are expensed as incurred. Once management authorizes and commits to funding a project, appropriate application development stage costs are capitalized. Capitalization ceases when the project is substantially complete and the software is ready for its intended use. Upgrades and enhancements to capitalized software are capitalized when such enhancements are determined to provide
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HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional functionality. Training and maintenance costs associated with software applications are expensed as incurred.



IncludedCapitalized software is included in other assets in the caption “Other assets” in the Consolidated Balance Sheets is capitalized softwareconsolidated balance sheets in the amount of approximately $7.3$21.4 million and $7.4$14.7 million, net of accumulated amortization of $22.6 million and $17.5 million at December 31, 20172022 and December 31, 2016,2021, respectively. Capitalized software costs are amortized over their estimated useful life of up to five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative expense in the consolidated statements of operations was $2.5$4.4 million, $4.7 million and $5.3 million for the yearyears ended December 31, 2017, $1.5 million from January 1, 2016 through November 3, 2016 (Predecessor), $0.3 million from November 4, 2016 through December 31, 2016 (Successor),2022, 2021 and $1.4 million (Predecessor), for the year ended December 31, 2015.


2020, respectively.
Goodwill and Intangible Assets
AtFor the years ended December 31, 20172022 and 2016,2021, the goodwill balancesbalance of $579.4$706.6 million and $588.5 million, respectively, representrepresents the excess of the amount the SuccessorCompany paid for the Business Combinationacquisition of Hostess Holdings from the Metropoulos Entities and other former equity holders in a 2016 transaction and the acquisition of Voortman in 2020 over the fair valuevalues of the assets acquired and liabilities assumed. Goodwill that resulted from the Business CombinationThe resulting goodwill was allocated to the Sweet Baked Goods segmentSnacking reportable segment.
Goodwill by reporting unit is tested for impairment annually by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect not to perform the qualitative assessment for some or all reporting units and the In-Store Bakery segment.perform a quantitative impairment test.
The Company’s indefinite-lived intangible assets consist of trademarks and trade names. The $1,408.8$1,538.6 million balance at both December 31, 20172022 and 2016,2021, was recognized as part of the 2016 acquisition of Hostess Holdings, the 2018 acquisition of the Cloverhill Business Combination.and the 2020 acquisition of Voortman. The trademarks and trade names are integral to the Company’s identity and are expected to contribute indefinitely to its corporate cash flows. Fair value for trademarks and tradenamestrade names was determined using the income approach, which is considered to be Level 3 within the fair value hierarchy. The application of the income approach was premised on a royalty savings method, whereby the trademark and tradenamestrade names are valued by reference to the amount of royalty income itthey could generate if it wasthey were licensed, in an arm’s‑lengtharm’s-length transaction, to a third party. These assets have been assigned an indefinite life and therefore are not amortized but rather evaluated for impairment annually.annually using the qualitative or quantitative methods, similar to goodwill. For the quantitative assessment, the valuation of trademarks and trade names are determined using the relief from royalty method. Significant assumptions used in this method include future trends in sales, a royalty rate and a discount rate to be applied to the forecasted revenue stream.
For the 2022, 2021 and 2020 annual impairment tests of goodwill and indefinite-lived intangible assets, the Company elected to perform the qualitative test. No indicators of impairment were noted.
Also, the Company has finite-lived intangible assets, that consistnet of customer relationships. The $514.2accumulated amortization, of $382.2 million and $538.1$405.8 million balances on December 31, 20172022 and 20162021 respectively, consisting of customer relationships that were recognized as part of the Business Combination.Hostess Holdings, Voortman and Cloverhill acquisitions. For customer relationships, the application of the income approach (Level 3) was premised on an excess earnings method, whereby the customer relationships are valued by the earnings expected to be generated from those customers after other capital charges. Definite-livedFinite-lived intangible assets are being amortized on a straight‑linestraight-line basis over the estimated remaining useful lives of the assets.assets, from 2 to 17 years. The weighted-average amortization period as of December 31, 2022 for customer relationships was 16.8 years.
DuringThe Company assesses finite-lived intangible assets for impairment whenever events or changes in facts and circumstances indicate that the yearcarrying amount of the asset may not be recoverable based on projected undiscounted cash flows, similar to property, plant and equipment. There were no impairment losses for the years ended December 31, 2017, the Company changed its policy2022, 2021 and will perform an impairment assessment each year as of October 1 (previously September 30).2020.
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HOSTESS BRANDS, INC.
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Reserves for Self-Insurance Benefits
The Company’s employee health plan is self-insured by the Company up to a stop-loss amount of $0.3 million for each participant per plan year. In addition, the Company maintains insurance programs covering its exposure to workers’ compensation. Such programs include the retention of certain levels of risks and costs through high deductibles and other risk retention strategies. Included in the accrued expenses in the Consolidated Balance Sheetsconsolidated balance sheets is a reserve for healthcare claims in the amount of approximately $1.1$2.6 million and $1.7$1.9 million at December 31, 20172022 and December 31, 2016,2021, respectively, and a reserve for workers’ compensation claims of $1.7$2.9 million and $1.3$3.1 million at December 31, 20172022 and 2021, respectively.
Leases
The Company recognizes a right of use asset and corresponding lease liability on the consolidated balance sheets for all lease transactions with terms of more than 12 months. Agreements are determined to contain a lease if they convey the use and control of an underlying physical asset. Based on the nature of the lease transaction, leases are either classified as financing or operating. Under both classifications, the right of use asset and liability are initially valued based on the present value of the future minimum lease payments using an effective borrowing rate at the inception of the lease. The Company determined the effective borrowing rate based on its expected incremental borrowing rate on collateralized debt. At December 31, 2016,2022, 2021 and 2020, the weighted average effective borrowing rate for outstanding operating leases was 3.7%, 3.6% and 3.6%, respectively.
Under a financing lease, interest expense related to the lease liability is recognized over the lease term using an effective interest rate method and right of use assets are amortized straight-line over the term of the lease. Under an operating lease, minimum lease payments are expensed straight-line over the lease term. Lease liabilities are amortized using an effective interest rate method and right of use assets are reduced based on the excess of the sum of the straight-line lease expense and the reduction of the lease liability over the actual lease payments. At December 31, 2022, 2021 and 2020, the weighted average remaining terms on operating leases were approximately six, seven and eight years, respectively.
Variable lease payments, such as taxes and insurance, are expensed as incurred. Expenses related to leases with original terms less than 12 months (short-term leases) are expensed as incurred. For all leases related to distribution, bakery and corporate facilities, the Company has elected not to separate non-lease components from lease components.
At December 31, 2022 and 2021, right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheets (see Note 5. Property and Equipment). Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease obligations on the consolidated balance sheets (see Note 9. Debt).
Revenue Recognition
Net revenue consists primarily of sales of packaged food products. The Company invoicesrecognizes revenue when the performance obligations under the terms of its agreements with customers have been satisfied. The Company’s obligation is satisfied when control of the product is transferred to its customers along with the title, risk of loss and rewards of ownership. Depending on the arrangement with the customer, these criteria are met either at the time the product is shipped or when the product is received by such customer.
Customers are invoiced at the time of shipment of its product, but only recognizes revenue upon delivery to retail customers and distributors as the Company arranges freight and is generally responsible, along with the Company’s common carriers, for any damage that occurs during transportation. The Company allows retail customers and distributors to return product that is damaged or defective at the time of delivery. A provision for payment discounts and product return allowances, which is estimatedcustomer pickup based upon the Company’s historical performance, management’s experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized.


The Company’s products are sold on credit terms established in accordance with industry practice, which typically requirespractice. Invoices generally require payment within 30 daysdays. As a result, revenue is not adjusted for the effects of invoice date. a significant financing component. Net revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for that product. Amounts billed to customers related to shipping and handling are classified as net revenue and accounted for as fulfillment activities, rather than separate performance obligations. The Company generally does not accept product returns and provides these allowances for anticipated expired or damaged products.
Trade promotions, consisting primarily of customer pricing allowances and merchandising funds and consumer coupons are offered through various programs to customers and consumers. Sales are recorded net ofcustomers. A provision for estimated trade promotion spending, whichpromotions is recorded as a reduction of revenue in the same period when the sale is recognized, with the liability for these allowances included within customer trade
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HOSTESS BRANDS, INC.
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allowances on the consolidated balance sheets. Differences between estimated and actual reductions to the transaction price are recognized as incurred at the time of sale.a change in estimate in a subsequent period.
The Company participates in a number of promotional activities including, but not limited to, offeringalso offers rebates for achieving various performancebased on purchase levels, offering incentives for product placement locationsproducts carried in retail stores offering pricing discounts for those customers electing to provide their own transportation for shipment of product and offering subsidies for advertising placed by customers. In lieu of accepting returns, the Company offers an allowance for anticipated expired and damaged products to certain customers.customers’ promotional activity. The ultimate cost of these programs dependsis dependent on retailervarious factors such as actual purchase volumes or promotional performance and is the subject of significant management estimates. Assumptions included in the development of these estimates are primarily based on historical performance adjusted for current trends. The Company recordsregularly reviews these assumptions and related estimates. The Company accounts for these programs as expensevariable consideration and recognizes a reduction in revenue in the estimated ultimate costsame period as the underlying program. Our recorded liability for allowances is included within customer trade allowances on the consolidated balance sheets.
For product produced by third parties, management evaluates whether the Company is the principal (i.e., report revenue on a gross basis) or agent (i.e., report revenue on a net basis). Management has determined that it is the principal in all cases, since it establishes its own pricing for such product, assumes the credit risk for amounts billed to its customers, and often takes physical control of the program at the later of the recognition of theproduct before it is shipped to customers.
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HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables disaggregate revenue for the underlying sale, or when the trade allowance is offered. In accordance with the authoritative guidance for revenue recognition, the cost of these programs is classified in the Consolidated Statements of Operations as a reduction of net sales. Also, in accordance with the guidance, coupon redemption costs are also recognized as reductions of net revenues when issued.by geographical market and category:
Year Ended December 31, 2022
(In thousands)Sweet Baked GoodsCookiesTotal
United States$1,210,507 $127,420 $1,337,927 
Canada— 20,280 20,280 
$1,210,507 $147,700 $1,358,207 
Year Ended December 31, 2021
(In thousands)Sweet Baked GoodsCookiesTotal
United States$1,025,541 $98,797 $1,124,338 
Canada— 17,698 17,698 
$1,025,541 $116,495 $1,142,036 
Year Ended December 31, 2020
(In thousands)Sweet Baked GoodsCookiesTotal
United States$920,388 $77,692 $998,080 
Canada— 18,529 18,529 
$920,388 $96,221 $1,016,609 
The Company has one customer that accounted for 10% or more of the Company’s total net revenue. The percentage of total net revenues for this customer is presented below by segment:was 19.6%, 18.9% and 20.2% for the years ended December 31, 2022, 2021 and 2020, respectively.
Advertising Costs
(% of Consolidated Net Revenues) 
December 31,
2017		  From
November 4, 2016
through
December 31, 2016		  From January 1, 2016
through
November 3, 2016		 
Year Ended
December 31,
2015
 (Successor)  (Successor)  (Predecessor) (Predecessor)
Sweet Baked Goods19.7%  19.3%  21.2% 21.0%
In-Store Bakery0.7%  0.7%  0.4% 0.0%
Total20.4%  20.0%  21.6% 21.0%

Advertising costs are expensed as incurred. Advertising expense included in advertising and marketing in the consolidated statements of operations was $21.3 million, $9.5 million and $6.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Equity Compensation

The grant date fair values of stock options are valued using the Black-Scholes option-pricing model, including a simplified method to estimate the number of periods to exercise date (i.e., the expected option term). Management has determined that the equity plan has not been in place for a sufficient amount of time to estimate the post vesting exercise behavior. Therefore, it will continue to use this simplified method until such time as it has sufficient history to provide a reasonable basis to estimate the expected term. Forfeitures are recognized as a reduction of expense as incurred.
For awards whichthat have performancemarket conditions, compensationthe grant date fair value is determined using a Monte Carlo simulation model with assumptions underlying the Black-Scholes option-pricing methodology. Compensation expense is calculated based on the number of shares expected to vest after assessing the probability that the performance or market criteria will be met. The equity-basedFor market-based awards, probability is not reassessed and compensation expense net of forfeitures, is recognized using a straight-line basis over the requisite service period of the awards, which correspondsnot remeasured subsequent to the vesting periodsinitial assessment on the grant date.
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HOSTESS BRANDS, INC.
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Shares issued for option exercises, restricted stock units and other share-based awards may be either authorized but unissued shares or shares of the awards.

treasury stock.
Collective Bargaining Agreements
As of December 31, 2017,2022, approximately 26.9%44%, of thethe Company’s employees are covered by these collective bargaining agreements. None of these agreements including 18.4% subject to collective bargaining agreements which will expire before December 31, 2018.2023.
Employee Benefit Plans

The Company provides several benefit plans for employees depending upon employee eligibility. The Company has a health care plan, a defined contribution retirement plan (401(k)), company-sponsored life insurance, employee stock purchase plan and other benefit plans. The Company’sFor the defined contribution retirement plan, the Company matches a percentage of employee contributions up to a specified amount. For the years ended December 31, 2022, 2021 and 2020, contributions to the defined contribution retirement plan were $1.1$3.0 million, for the year ended December 31, 2017, compared to no contributions for the period from November 4, 2016 through December 31, 2016 (Successor), $1.1$2.4 million for the period from January 1, 2016 through November 3, 2016 (Predecessor), and $1.0$2.0 million, of contributions for the year ended December 31, 2015.



respectively.
The Company offers an annual incentive plan based upon annual operating targets. Final payout is approved by the boardBoard of directors. The Company has accrued $4.3 million and $6.0 million at December 31, 2017 (Successor) and December 31, 2016 (Successor), respectively.

The Company has also hasDirectors or a long-term incentive plan for certain director-level employees, payment under which is contingent on changes in certain ownership levels. Amounts paid in the Predecessor period from January 1, 2016 through November 3, 2016 and the year ended December 31, 2015 are reported as special employee incentive compensation in the consolidated statement of operations. The total that could be payable due to any future qualifying changes in ownership levels under the plan is $0.6 million ascommittee thereof. As of December 31, 2017. In accordance with U.S. GAAP, the Company does not carry an accrual2022 and 2021 there was $29.0 million and $21.2 million accrued for the long-term incentive plan.

this plan, respectively.
Income Taxes
As a resultThe Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on certain subsidiaries.
Prior to the final exchange of Class B Units, the Business Combination, Hostess Brands, Inc. acquiredCompany owned a controlling interest in Hostess Holdings, which iswas treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Hostess Holdings iswas not directly subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Hostess Holdings iswas passed through to and included in the taxable income or loss of its partners, including the Company following the Business Combination. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income of Hostess Holdings following the Business Combination.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“Tax Reform”).  The SEC staff issued Staff Accounting Bulletin No. 119 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available to complete the accounting for Tax Reform.  The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities.  Further information on the tax impacts of Tax Reform is included in Note 13 of the Company’s consolidated financial statements. 

Derivatives
In April 2017, the Company entered into an interest rate swap contract to mitigate its exposure to changes in the variable interest rate on its long-term debt. This contract was designated as a cash flow hedge. Changes in the fair value of this instrument are recognized in accumulated other comprehensive income in the consolidated balance sheets and reclassified into earnings in the period in which the hedged transaction affects earnings. Hedging ineffectiveness, if any, is recognized as a component of interest expense in the consolidated statements of operations. Payments made under this contract are included in the supplemental disclosure of interest in the consolidated statement of cash flows.
Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the best extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
•Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date
•Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability
•Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date



Fair Value of Financial Instruments
The Company estimates that the carrying amount of its long-term debt reasonably approximates fair value. At December 31, 2017 and December 31, 2016, the approximate fair value of the Company’s debt was $998.7 million and $1,005.5 million, respectively. The fair value is calculated using current interest rates and pricing from financial institutions (Level 2 inputs).

New Accounting Pronouncements
In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (“ASU 2017-12”), Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The effective date for the standard is for fiscal years beginning after December 15, 2018. The Company plans to early adopt this standard in the first quarter of 2018 and does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued Accounting Standards Update No. 2017-9 (“ASU 2017-9”), Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about what changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Per ASU 2017-9, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-9. The Company early adopted ASU 2017-9 during the year ended December 31, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-4 (“ASU 2017-4”), Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-4 eliminates Step 2 from the goodwill impairment test. Step 2 required an entity to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in a business combination. Instead, an entity should perform its goodwill impairment test and recognize an impairment charge by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-4 will become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company early adopted ASU 2017-4 during the year ended December 31, 2017, the adoption did not have a material impact on the company’s consolidated financial position, results of operations or cash flows. The company’s goodwill impairment tests have not proceeded to Step 2 at any testing date.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial position, results of operations or cash flows.


In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018.
The Company plans to adopt the standard in the first quarter of 2018 retrospectively with the cumulative effect of initial application reported as of January 1, 2018. The Company is utilizing a comprehensive approach when reviewing its current accounting policies to identify potential differences that would result from applying the new requirements to its customer contracts. The approach includes the evaluation of sales terms, performance obligations, variable consideration, and costs to obtain and fulfill contracts. The Company has made significant progress on its process review. Based on the Company’s review, management does not currently expect the initial application of this guidance to have a material impact on its consolidated financial statements.
2. Business Combination

The following summarizes the fair value of the Business Combination:
(In thousands) 
Cash paid$479,761
Equity consideration paid (1)239,323
Tax receivable arrangement payable161,681
Total consideration880,765
Hostess Holdings debt assumed by Gores Holdings, Inc1,228,254
Noncontrolling interest (2)326,601
Fair value of the Business Combination$2,435,620



(1) Equity consideration paid to the Legacy Hostess Equityholders is summarized below:
(In thousands, except share data)  
Class A common shares of the Company subject to six month sales restriction 22,098,139
Fair value per share $10.83
  $239,323

(2) The class B units in Hostess Holdings, LP, which are not owned by the Company, represent the noncontrolling interest as provided below:

(In thousands except share data)  
Class B units of Hostess Holdings, LP subject to six month sales restriction 24,424,259
Fair value per unit $10.83

 $264,515
(In thousands except share data)  
Class B units of Hostess Holdings, LP not subject to sales restrictions 5,446,429
Fair value per unit $11.40

 $62,086




The fair value of these units was determined as follows:

Per share price based on average market price on the day of the Business Combination $11.40
Discount for lack of marketability 5.0%
  $10.83

The 5% discount for lack of marketability was determined by using an option pricing method (Finnerty Protective Put Model) to reflect a six month sales restriction.

The Company recorded an allocation of the purchase price to Predecessor’s tangible and identified intangible assets acquired and liabilities assumed, excluding long-term debt, based on their fair values as of the closing date. The purchase price allocation is as follows:
(In thousands)
Cash$58,519
Accounts receivable58,474
Inventories39,338
Prepaids and other assets2,998
Property and equipment155,076
Accounts payable and accrued expenses(56,559)
Deferred tax liabilities(352,531)
Trade name and trademarks1,408,848
Customer relationships542,011
Goodwill579,446
Total assets acquired and liabilities assumed
$2,435,620

Goodwill is attributed to intangible assets which do not qualify for separate recognition, and is partially deductible for income tax purposes.

From January 1, 2016 through November 3, 2016 (the Predecessor) approximately $31.3 million of expenses were incurred directly related to the Business Combination. From January 1, 2016 through the date of its last filing for the nine month period ending September 30, 2016, Gores Holdings incurred $4.0 million of transaction related expenses. From October 1, 2016 through the Closing Date, Gores Holdingsincurred $6.7 million of expenses related to the Business Combination. On the Closing Date, the Company paid $13.1 million of deferred underwriting costs related to Gores Holdings’initial public offering and repaid a working capital loan of $0.2 million.

During the measurement period which started on the Closing Date and ended on November 3, 2017, the Company revised its preliminary estimate of the future cash tax savings under the tax receivable agreement. This resulted in an $8.1 million decrease in goodwill, a decrease to the tax receivable agreement liability of $3.0 million, a $5.5 million decrease to deferred tax liabilities, and an increase to accrued expenses and other liabilities of $0.4 million. The Company also revised its estimate of deferred tax liabilities which decreased both deferred tax liabilities and goodwill by $0.9 million. As of November 3, 2017, the allocation of the purchase price for the Business Combination is final.



The following unaudited pro forma combined financial information presents the Company’s results as though the Business Combination had occurred at January 1, 2016. The unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting in accordance with U.S. GAAP:

  
Year Ended
December 31, 2016
(In thousands) (Pro Forma)
  (Unaudited)
Net Revenue $727,586
Net Income 82,442

On May 10, 2016, the Predecessor purchased the stock of Superior for $51.1 million, $49.7 million net of cash acquired. Superior is located in Southbridge, Massachusetts and manufactures eclairs, madeleines, brownies, and iced cookies. The Predecessor acquired Superior to expand its market and product offerings in the In-Store Bakery section of grocery and club retailers. The Company expects to realize synergies and cost savings related to this acquisition as a result of purchasing and procurement economies of scale and general and administrative expense savings, particularly with respect to the consolidation of corporate related functions and elimination of redundancies.
The acquisition of Superior was treated as a purchase in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. The allocation of purchase price is considered final. The following is a summary of the allocation of the purchase price:
(In thousands)  
Cash $1,009
Accounts receivable 2,122
Inventories 2,300
Prepaids and other current assets 112
Property and equipment (1) 7,075
Intangible assets (2) 29,370
Goodwill (3) 24,227
Accounts payable (2,920)
Accrued expenses (552)
Capital lease obligation (799)
Deferred tax liability (10,844)
Total assets acquired and liabilities assumed $51,100


(1)Amounts recorded for property and equipment includes land, building, plant machinery and equipment.
(2)Amounts recorded for intangible assets includes customer relationships, trade names and trademarks.
(3)Amounts recorded for goodwill are generally not expected to be deductible for tax purposes.
The fair value measurement of tangible and intangible assets and liabilities was based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows, appraisals, and market comparables.


From January 1, 2016 through November 3, 2016, the Predecessor incurred acquisition‑related costs for Superior of approximately $0.6 million. For the period from January 1, 2016 through November 3, 2016 (Predecessor) net revenue and net income for Superior was $19.9 million and $0.7 million, respectively. For the period from November 4, 2016 through December 31, 2016 (Successor), net revenue and net loss for Superior was $6.8 million, and $0.1 million, respectively.
The acquisition of Superior was deemed not material to the Company under Item 3-05 of Regulation S-X, and, therefore, separate financial statements are not required because Superior does not meet the definition of a “significant subsidiary”.


3. Stock-Based Compensation

Hostess Brands, Inc. 2016 Equity Incentive Plan (Successor)

The Hostess Brands, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) provides for the granting of various equity-based incentive awards to directors of the Company, certain members of Company management, and service providers to the Company. The types of equity-based awards that may be granted under the 2016 Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. There are 7,150,000 registered shares of Class A common stock reserved for issuance under the 2016 Plan. All awards issued under the 2016 Plan may only be settled in shares of Class A common stock. As of December 31, 2017, 5,188,682 shares were available for issuance under the 2016 Plan.

Equity-based compensation expense totaled approximately $7.4 million for the Successor year ended December 31, 2017. There was no equity-based compensation expense for either the Successor or Predecessor periods in 2016 related to the 2016 Plan.

Restricted Stock Units (“RSUs”)

The fair value of RSU awards is calculated based on the closing market price of the Company’s Class A Common Stock on the date of grant. Compensation expense is recognized straight-line over the requisite service period of the awards, ranging from one to three years.
The vesting of certain RSU awards is contingent upon the Company attaining positive earnings per share for the fiscal year ending immediately prior to the vesting date. Management has determined it is probable that these performance conditions will be met.
For certain RSU awards, a portion of the granted units are banked at each annual performance period if the Company achieves certain EBITDA targets. Banked shares continue to be subject to the requisite service period under the terms of the awards. Depending on actual performance during each of the three annual performance periods, award recipients have the opportunity to receive up to 225% of the granted units.
Upon an employee’s termination, all unvested awards will be forfeited and the shares of common stock underlying such award will become available for issuance under the 2016 Plan.



The following table summarizes the activity of the Company’s unvested RSUs for the successor year ended December 31, 2017:
 Restricted Stock
Units		 Weighted Average
Grant Date
Fair Value
Unvested units as of December 31, 2016 (Successor)—
 $—
Total Granted1,448,736
 15.73
Forfeited(390,038) 15.78
Vested(1)
(142,804) 15.55
Unvested as of December 31, 2017 (Successor)915,894
 $15.73
(1)Includes 40,223 shares withheld to satisfy $0.4 million employee tax obligations upon vesting.
As of December 31, 2017, there was $6.5 million of total unrecognized compensation cost related to non-vested RSUs granted under the 2016 Plan that are considered probable to vest; that cost is expected to be recognized over a weighted average remaining period of approximately 2.00 years. As of December 31, 2017, the grant date fair value of awards for which no compensation is recognized because it is not probable that the performance conditions will be met is $4.8 million.
For the year ended December 31, 2017 (Successor), $5.4 million of compensation expense related to the RSUs was recognized within general and administrative expenses on the consolidated statement of operations.

Restricted Stock Awards (“RSAs”)
On March 23, 2017, the Company granted 435,000 shares of restricted stock to the Company’s Chief Executive Officer under the 2016 Plan. The fair value of the RSAs is calculated based on the closing market price of the Company’s Class A common stock on the grant date. On October 12, 2017, with the announcement of the Company’s Chief Executive Officer’s retirement, the grant was modified so that the 435,000 unvested shares were forfeited and 75,000 replacement shares would vest on January 1, 2018, provided there was positive earnings per share for the year ended December 31, 2017.
If the vesting requirements of a restricted stock award are not satisfied, or the performance conditions are not attained, the award will be forfeited and the shares of Class A common stock subject to the award shall be returned to the Company.
As of December 31, 2017, there was no unrecognized compensation cost related to the non-vested restricted stock. For the year ended December 31, 2017 (Successor), the Company recognized expense of $1.0 million related to the restricted stock awards within general and administrative expenses on the consolidated statement of operations.
The following table summarizes the activity of the Company’s restricted stock awards for the year ended December 31, 2017:


Shares of
Restricted Stock		 Weighted Average
Grant Date Fair Value
Unvested units as of December 31, 2016 (Successor)
—
 —
Granted
510,000
 $15.73
Forfeited
(435,000) 15.78
Vested
—
 —
Unvested as of December 31, 2017 (Successor)
75,000
 $13.43


Stock Options
During the year ended December 31, 2017, the Company granted 1,202,613 stock options to certain members of management under the Plan. The weighted average grant date fair value was estimated using the Black-Scholes option-pricing model (level 3) with the following assumptions:
Year
Ended
December 31, 2017
Expected volatility (1)
0.2746%
Expected dividend yield (2)
—%
Expected option term (3)
6.24 years
Risk-free rate (4)
2.09%
(1)The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period based on the expected term and ending on the grant date.
(2)As of December 31, 2017, the Company has not paid any dividends on our common stock. As of the stock option grant date, the Company does not anticipate paying any dividends on common stock over the term of the stock options. Option holders have no right to dividends prior to the exercise of the options.
(3)The Company utilized the simplified method to determine the expected term of the stock options since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
(4)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant which corresponds to the expected term of the stock options.
The stock options vest in four equal annual installments on varying dates through December 2021. The maximum term under the grant agreement is ten years. As of December 31, 2017, there was $3.1 million of total unrecognized compensation cost related to non-vested stock options outstanding under the 2016 Plan; that cost is expected to be recognized over the vesting periods. For the year ended December 31, 2017 (Successor), there was $1.0 million of expense related to the stock options recognized within general and administrative costs on the consolidated statement of operations.
The following table summarizes the activity of the Company’s unvested stock options for the year ended December 31, 2017 (Successor):


Number
of
Options		 Weighted Average
Remaining
Contractual Life
(years)		 Weighted
Average
Exercise Price		 Weighted
Average Grant
Date Fair Value
Outstanding as of December 31, 2016 (Successor)—
 —
 $—
 $—
Granted1,202,613
 5.52
 15.75
 4.99
Exercised—
 —
 —
 —
Forfeited(374,993) 5.47
 15.78
 5.04
Outstanding as of December 31, 2017 (Successor)827,620
 5.54
 $15.74
 $4.97
Exercisable as of December 31, 2017 (Successor)241.931
 5.47
 15.78
 5.04

Related Party Stock Awards

See note 15 for information regarding additional equity awards not issued under the 2016 or 2013 Plans.



Hostess Management, LLC Equity Interest Plan (Predecessor)

The Company established a profits interest plan under the 2013 Hostess Management, LLC (“Hostess Management”) Equity Incentive Plan (“2013 Plan”) to allow members of the management team to participate in the success of the Company. The 2013 Plan consisted of an approximate 9% ownership interest in the Company’s subsidiary, New Hostess Holdco, LLC. Hostess Management had three classes of units and required certain returns to ranking classes before other classes participated in subsequent returns of Hostess Management.
The Company recognized unit-based compensation expense of $3.9 million from January 1, 2016 through November 3, 2016, including $3.2 million of expense due to a grant agreement provision which caused the accelerated vesting of units granted prior to January 1, 2016 upon consummation of the Business Combination and the accelerated vesting of units granted in 2016 based on the approval of the board of directors, and $1.4 million for the year ended December 31, 2015, (Predecessor), within general and administrative expense on the consolidated statement of operations. All outstanding units under the 2013 Plan were redeemed and the 2013 Plan was terminated on November 4, 2016.

4.    Property and Equipment
Property and equipment consists of the following:
(In thousands)
December 31,
2017
  
December 31,
2016
 (Successor)  (Successor)
Land and buildings$32,088
  $30,275
Machinery and equipment141,995
  112,221
Construction in progress13,489
  12,334
 187,572
  154,830
Less accumulated depreciation(13,451)  (1,606)
 $174,121
  $153,224

Depreciation expense was $11.8 million for the year ended December 31, 2017 (Successor), and was $1.6 million (Successor) and $7.6 million (Predecessor) for the year ended December 31, 2016 (Predecessor), respectively.















5.    Segment Reporting
The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. Previously, the Company’s reportable segments were Sweet Baked Goods and Other, which included In-Store Bakery, Hostess® branded bread and buns and frozen retail. A change in the Company’s internal reporting structure during the fourth quarter of 2017 caused the Company to reassess its reportable segments. The Company’s Sweet Baked Goods segment consists of fresh and frozen baked goods and bread products that are sold under the Hostess® and Dolly Madison® brands. The In-Store Bakery segment consists of Superior and Hostess branded products sold through the in-store bakery section of grocery and club stores.
The Company evaluates performance and allocates resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:
(In thousands)Year Ended
December 31,
2017		 
From November 4
through
December 31, 2016
  
From January 1
through
November 3, 2016
 Year Ended
December 31,
2015
 (Successor) (Successor)  (Predecessor) (Predecessor)
  Net revenue:

 

    

Sweet Baked Goods$733,827
 $105,211
  $595,645
 $620,815
In-Store Bakery42,361
 6,787
  19,943
 —
Net revenue$776,188
 $111,998
  $615,588
 $620,815
         
Depreciation and amortization (2):        
Sweet Baked Goods$35,441
 $5,245
  $9,221
 $9,836
In-Store Bakery2,729
 598
  1,044
 —
Depreciation and amortization$38,170
 $5,843
  $10,265
 $9,836
         
Gross profit:        
Sweet Baked Goods$316,916
 $37,387
  $262,930
 $262,203
In-Store Bakery9,982
 1,327
  3,599
 —
Gross profit$326,898
 $38,714
  $266,529
 $262,203
         
  Capital expenditures (1):        
Sweet Baked Goods$35,609
 $7,544
  $31,254
 $27,252
In-Store Bakery774
 83
  223
 —
Capital expenditures$36,383
 $7,627
  $31,477
 $27,252

(1)Capital expenditures consists of purchases of property and equipment and acquisition and development of software assets paid in cash or acquired through accounts payable during the year ended December 31, 2017 (Successor), from November 4, 2016 through December 31, 2016 (Successor), from January 1 through November 3, 2016 (Predecessor) and the year ended December 31, 2016 (Predecessor).
(2)Depreciation and amortization include charges to net income classified as costs of goods sold and general and administrative expenses on the consolidated statement of operations.



Total assets by reportable segment are as follows:
(In thousands)December 31,
2017		  December 31,
2016

(Successor)  (Successor)
Total segment assets:

  

Sweet Baked Goods$2,884,642
  $2,754,514
In-Store Bakery81,633
  93,378
Total segment assets$2,966,275
  $2,847,892

6.    Goodwill and Intangible Assets
Goodwill and intangible assets as of December 31, 2017 and December 31, 2016 were recognized as part of the purchase price allocation of the Business Combination as of the Closing Date. During the year ended December 31, 2017, the purchase price allocation for the Business Combination was adjusted, resulting in a $9.0 million decrease to goodwill as of December 31, 2017, the purchase price allocation for the business combination is considered final.
Activity of goodwill is presented below by reportable segment:
(In thousands)Sweet Baked Goods In-Store Bakery Total
Balance as of December 31, 2015$56,992
 $—
 $56,992
Acquisition of Superior—
 24,227
 24,227
Elimination of Predecessor goodwill(56,992) (24,227) (81,219)
Business combination542,410
 46,050
 588,460
Balance as of December 31, 2016 (Successor)542,410
 46,050
 588,460
Measurement period adjustments(12,987) 3,973
 (9,014)
Balance as of December 31, 2017 (Successor)$529,423
 $50,023
 $579,446
Intangible assets consist of the following:
(In thousands)
December 31,
2017
 
December 31,
2016
 (Successor) (Successor)
Intangible assets with indefinite lives (trademarks and tradenames)$1,408,848
 $1,408,848
Intangible assets with definite lives (customer relationships)542,011
 542,011
Less accumulated amortization (customer relationships)(27,771) (3,916)
Intangible assets, net$1,923,088
 $1,946,943


Amortization expense was $23.9 million for the year ended December 31, 2017, and $3.9 million (Successor) and $1.2 million (Predecessor) for the periods from November 4, 2016 through December 31, 2016 and from January 1, 2016 through November 3, 2016, respectively, and $0.9 million (Predecessor) for the year ended December 31, 2015. The unamortized portion of customer relationships will be expensed over their remaining useful life, from18 to 23 years. The weighted-average amortization period as of December 31, 2017 for customer relationships was 21.5 years. Future expected amortization expense is as follows:
(In thousands) 
2018$23,977
201923,977
202023,977
202123,977
202223,977
2023 and thereafter394,355

7.    Accrued Expenses
Included in accrued expenses are the following:
(In thousands)December 31, 2017

December 31, 2016
 (Successor)  (Successor)
Annual incentive compensation$4,259
  $5,997
Payroll, vacation and other compensation4,342
  5,121
Self-insurance reserves1,192
  2,091
Accrued interest338
  4,885
Current income taxes payable99
  2
Workers compensation reserve1,650
  1,321
Litigation—
  1,100
Other—
  1,139
 $11,880
  $21,656


8.Tax Receivable Agreement
The tax receivable agreement was entered into by the Company in connection with the Business Combination (the “Tax Receivable Agreement”) and generally provides for the payment by the Company to the Legacy Hostess Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income taxes that the Company realizes (or is deemed to realize in certain circumstances) in periods after the closing of the Business Combination (which periods may extend, unless the Tax Receivable Agreement is terminated early in accordance with its terms, for more than 15 years following any exchange of Class B Units of Hostess Holdings for shares of the Company’s Class A common stock or the cash equivalent thereof) as a result of (i) certain increases in tax basis resulting from the Business Combination; (ii) certain tax attributes of Hostess Holdings and its subsidiaries existing prior to the Business Combination and prior to subsequent exchanges of Class B Units; (iii) certain increases in tax basis resulting from exchanges of Class B Units; (iv) imputed interest deemed to be paid by the Company as a result of payments it makes under the Tax Receivable Agreement; and (v) certain increases in tax basis resulting from payments the Company makes under the Tax Receivable Agreement. The Company will retain the benefit of the remaining 15% of these cash savings. Certain payments under the Tax Receivable Agreement will be made to Legacy Hostess Equityholders in accordance with specified percentages, regardless of the source of the applicable tax attribute. Significant inputs used to estimate the future expected payments include a cash tax savings expressed as a rate of approximately 27.5%.

The following table summarizes activity related to the tax receivable agreement for the year ended December 31, 2017:

(In thousands)  
Balance December 31, 2016 (Successor) $165,384
Measurement period adjustments (3,017)
Exchanges of Class B units for Class A shares 12,215
Remeasurement due to change in state tax rate 1,589
Remeasurement due to Tax Cuts and Jobs Act (51,811)
Balance December 31, 2017 (Successor) $124,360

During the year ended December 31, 2017, the Company remeasured the Tax Receivable Agreement due to changes in federal and state law.  The Company remeasured the Tax Receivable Agreement due to a change in state tax rate that resulted in approximately $1.6 million of expense on the consolidated statement of operations. The Company remeasured the Tax Receivable Agreement due to the Tax Reform. Tax Reform decreased the Company’s estimated cash tax savings rate from approximately 37.4% to 27.5%, primarily due to a permanent Federal tax rate reduction. This resulted in $51.8 million of benefit on the consolidated statement of operations which was reported as a component of operating income.

As of December 31, 2017 the future expected payments under the Tax Receivable Agreement are as follows:

(In thousands) 
2018$14,200
20197,600
20207,400
20217,200
20227,200
Thereafter80,760


9.Debt
A term loan was originated on November 20, 2017 through the Company’s subsidiary, Hostess Brands, LLC (referred to below as the Third New First Lien Term Loan). It requires quarterly payments of interest at a rate of the greater of the applicable LIBOR or 0.75% per annum (“New LIBOR Floor”) plus a margin of 2.25% per annum and principal at a rate of 0.25% of the aggregate principal balance with the remaining principal amount due upon maturity on August 3, 2022. The Third New First Lien Term Loan is secured by substantially all of Hostess Brands, LLC’s present and future assets. The interest rate charged to the Company on the Third New First Lien Term Loan from its origination through December 31, 2017 was 3.57%.

The Third New First Lien Term Loan refinanced the remaining balance of $993.8 million on the Second New First Lien Term Loan through a non-cash refinancing transaction. The Second New First Lien Term Loan was originated by Hostess Brands, LLC on May 19, 2017 and required quarterly payments of interest at a rate equal to the the New Libor Floor plus a margin of 2.50% per annum and principal at a rate of 0.25% of the aggregate principal balance with the remaining principal amount due upon maturity on August 3, 2022. The Second New First Lien Term Loan was secured by substantially all of Hostess Brands’ present and future assets. The interest rate charged to the company on the Second New First Lien Term loan from its origination to refinancing was 3.67%.

The Second New First Lien Term Loan refinanced the remaining balance of $996.3 million on the New First Lien Term Loan through a non-cash refinancing transaction. The New First Lien Term Loan was originated by Hostess Brands, LLC on November 18, 2016 and required quarterly payments of interest at a rate of the greater of the applicable LIBOR or 1% per annum (“LIBOR Floor”) plus a margin of 3.0% per annum and principal at a rate of 0.25% of the aggregate principal balance with the remaining principal amount due upon maturity on August 3, 2022. The New First Lien Term Loan was secured by substantially all of Hostess Brands’ present and future assets. The interest rate charged to the company on the New First Lien Term loan from January 1, 2017 through refinancing was 4.00%.

The New First Lien Term Loan refinanced the remaining balance on the First and Second Lien Term Loans (referred to below as the Former First Lien Term Loan and Former Second Lien Term Loan, respectively) previously incurred by Hostess Brands, LLC of $915.7 million and $83.0 million, respectively, through a non-cash refinancing transaction in November of 2016. The Company expensed prepayment penalties of $3.0 million as part of the deleverage and refinancing, in accordance with the contractual terms of Former First and Second Lien Term loans.

Prior to its refinancing, required quarterly payments on the Former First Lien Term Loan included interest at a rate of the greater of the LIBOR Floor plus an applicable margin of 3.50% per annum or the base rate plus an applicable margin of 2.25% or 2.50% per annum, based on the net first lien leverage ratio, and principal at a rate of 0.25% of the aggregate principal amount through August 3, 2022, at which time all remaining principal was due.

In connection with the Business Combination, the Company recognized $8.9 million of premiums for the Former First and Former Second Lien Term Loans. Lender debt discount costs, premium, and deferred financing costs are presented net of the long-term debt balance on the Consolidated Balance Sheets and will be amortized to interest expense utilizing the effective interest method over the term of the debt. Portions of the lender debt discount costs, premium, and deferred financing costs have been adjusted through the recognition of gains or losses on the statement of operations along with a portion of other fees incurred with each of the aforementioned refinancing transactions.


A summary of the carrying value of the debt and the capital lease obligation is as follows:
(In thousands)
December 31,
2017
  December 31,
2016
 (Successor)  (Successor)
Third First Lien Term Loan (3.6% as of December 31, 2017)    
Principal$993,762
  $998,750
Unamortized debt premium and issuance costs4,857
  5,396

998,619
  1,004,146
Capital lease obligation (6.8% as of December 31, 2017)569
  724
Total debt and capital lease obligation999,188
  1,004,870
Less: Amounts due within one year(11,268)  (11,496)
Long-term portion$987,920
  $993,374
At December 31, 2017, minimum debt repayments under the Third First Lien Term Loan are due as follows:
(In thousands) 
2018$9,938
20199,938
20209,938
20219,938
2022954,010

Revolving Credit Facility
Hostess Brands, LLC entered into a Revolving Credit Agreement (the “Revolver”) on August 3, 2015 that provides for borrowings up to $100.0 million. The Revolver has a stated maturity date of August 3, 2020 and is secured by liens on substantially all of Hostess Brands LLC’s present and future assets, including accounts receivable and inventories, as defined in the Revolver. The Revolver is pari passu, or ranked equally, with the Third New First Lien Term Loan in regards to secured liens. The Revolver has an annual commitment fee on the unused portion of between 0.375% and 0.50% annually based upon the unused percentage. Interest on borrowings under the Revolver is, at Hostess Brands LLC’s option, either the applicable LIBOR plus a margin of between 3.00% and 3.50% per annum or the base rate plus a margin of 2.00% to 2.50% per annum.

The Company had no outstanding borrowings under its Revolving Credit Agreement (the “Revolver”) as of December 31, 2017. See Note 14 -- “Commitments and Contingencies” for information regarding the letters of credits, which reduce the amount available for borrowing under the Revolver. Interest expense from the Revolver debt fee amortization was $0.3 million (Predecessor) for the year ended December 31, 2016, and $0.1 million for the year ended December 31, 2015, respectively.
10.Interest Rate Swap

During the year ended December 31, 2017, Hostess Brands, LLC entered into an interest rate swap contract with a counter party to make a series of payments based on a fixed interest rate of 1.78% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based on a notional amount of $500 million at the inception of the contract and will be reduced by $100 million each year of the five-year contract. The Company entered into this transaction to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated this derivative as a cash flow hedge. At December 31, 2017, the effective fixed interest rate on the long-term debt hedged by this contract was 4.03%.

For the year ended December 31, 2017, less than $0.1 million was recorded within interest expense in the consolidated statements of operations for ineffectiveness and there were no reclassifications from accumulated other comprehensive loss into earnings. As of December 31, 2017, the fair value of the interest rate swap contract of $2.9 million was reported within other assets, net on the consolidated balance sheet. The$0.1 million of unrealized losses recognized in accumulated other comprehensive income as of December 31, 2017 are expected to be reclassified into interest expense through December 31, 2018. The fair value of the interest rate swap contract is measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).

11.Equity
The Company’s authorized common shares consist of three classes: 200,000,000 shares of Class A common stock, 50,000,000 shares of Class B common stock, and 10,000,000 shares of Class F common stock (none of which were issued and outstanding at December 31, 2017 or December 31, 2016). As of December 31, 2017 and December 31, 2016, there were 99,791,245 and 98,250,917 shares of Class A common stock issued and outstanding, respectively. At December 31, 2017 and 2016 there were 30,319,564 and 31,704,988 shares of Class B common stock issued and outstanding, respectively.
Shares of Class A common stock and Class B common stock have identical voting rights. However, shares of Class B common stock do not participate in earnings or dividends of the Company. Ownership of shares of Class B common stock is restricted to owners of Class B units in Hostess Holdings. Class B units in Hostess Holdings may be exchanged (together with the cancellation of an equivalent number of shares of Class B common stock) by the holders thereof for, at the election of the Company, shares of Class A common stock or the cash equivalent of such shares.
As of December 31, 2017 and December 31, 2016, there were 44,182,889 and 37,500,000 public warrants, and 12,317,001 and 19,000,000 private placement warrants outstanding, respectively. Each warrant entitles its holder to purchase one-half of one share of our Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of our Class A common stock. The warrants expire on December 4, 2021, or earlier upon redemption or liquidation. The Company may call the outstanding warrants for redemption at a price of $0.01 per warrant, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30 trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by the Company’s Sponsor or its permitted transferees. During the year ended December 31, 2017, the private placement warrants were registered with the SEC for future potential sales to the public. When sold to the public, the private placement warrants will become public warrants.

12.Earnings Per Share

Basic earnings per share is calculated by dividing net income attributable to the Company’s Class A shareholders for the period by the weighted average number of Class A common shares outstanding for the period excluding non-vested restricted stock awards. In computing dilutive earnings per share, basic earnings per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including: public and private placement warrants, RSUs, restricted stock awards, and stock options.


Below are basic and diluted earnings (loss) per share:

 Year Ended
December 31,
2017		 From November 4, 2016
through
December 31, 2016

 (Successor) (Successor)
Numerator: 
 
Net income (loss) attributable to Class A shareholders (in thousands) $223,897
 $(4,404)
Denominator: 
 
Weighted-average Class A shares outstanding - basic (excluding non-vested restricted stock awards) 99,109,629
 97,791,658
Dilutive effect of warrants 6,113,053
 —
Dilutive effect of RSAs and RSUs 84,611
 —
Weighted-average shares outstanding - diluted 105,307,293
 97,791,658
Earnings (loss) per Class A share - basic $2.26
 $(0.05)
Earnings (loss) per Class A share - dilutive $2.13
 $(0.05)

For the year ended December 31, 2017, all stock options were excluded from the computation of diluted net income per share because the assumed proceeds from the awards’ exercise were greater than the average market price of the common shares.


13. Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Additionally, the impact of changes in the enacted tax rates and laws on deferred taxes, if any, is reflected in the financial statements in the period of enactment.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs (see Note 13. Income Taxes).
Derivatives
Prior to November 4, 2021, the Company had outstanding public and private placement warrants which were originated in the 2015 initial public offering of a special purpose acquisition company (“SPAC”), which subsequently acquired Hostess Holdings in 2016 in a transaction that resulted in the Company becoming the parent company of Hostess Holdings. Due to certain provisions in the warrant agreement, the Company concluded that certain warrants do not meet the criteria to be classified in stockholders’ equity. In periods in which the public and private warrants meet the definition of a liability-classified derivative under Accounting Standards Codification (“ASC”) 815, the Company recognized these warrants within current liabilities on the consolidated balance sheets at fair value, with subsequent changes in fair value recognized in the consolidated statements of operations at each reporting date. The warrants expired on November 4, 2021 and are no longer outstanding.
59

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into interest rate swap contracts to mitigate its exposure to changes in the variable interest rate on its long-term debt. The Company has also entered into Canadian Dollar (CAD) purchase contracts to mitigate its exposure to foreign currency exchange rates on its CAD denominated production costs. Both interest rate swap contracts and CAD purchase contracts are designated as cash flow hedges. Changes in the fair value of these instruments are recognized in accumulated other comprehensive income in the consolidated balance sheets and reclassified into earnings in the period in which the hedged transaction affects earnings. Hedging ineffectiveness, if any, is recognized as a component of interest expense for interest rate swap contracts and costs of goods sold for CAD purchase contracts in the consolidated statements of operations. Payments made under the interest rate swap contracts are included in the supplemental disclosure of interest paid in the consolidated statements of cash flows.
See Note 10. Derivative Instruments for more information on our derivative instruments.
Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the best extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
•Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
•Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. In December 2022, the FASB issued ASU No 2022-06, “Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848”, which extends the optional transition relief to ease the potential burden in accounting for reference rate reform on financial reporting. The transition relief is provided through December 31, 2024 based on the expectation that the London Interbank Offered Rate (LIBOR) will cease to be published as of June 30, 2023. The Company is evaluating the impact the new standard will have on the consolidated financial statements and related disclosures but does not anticipate a material impact.

2. Business Combinations
Voortman Acquisition
On January 3, 2020, the Company completed the acquisition of all of the shares of the parent company of Voortman, a manufacturer of premium, branded wafers as well as sugar free and specialty cookies for approximately $328.7 million ($427.0 million CAD), reflecting final working capital and other closing statement adjustments.
Net cash outflow related to the purchase price during the year ended December 31, 2020 was $316.0 million. This net cash outflow reflects a non-cash gain on a related foreign currency contract of $6.9 million, cash acquired of $1.6 million. As of December 31, 2022 and 2021, the outstanding liability for certain purchase price adjustments was $4.1 million and $4.3 million, respectively.
60

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2020, the Company incurred $4.3 million of expenses related to this acquisition. These expenses are classified as business combination transaction costs on the consolidated statements of operations.

3.Exit Costs
Subsequent to the Company’s acquisition of Voortman, activities were initiated to transition Voortman’s distribution model to the Company’s direct-to-warehouse distribution model. The Company incurred costs to exit Voortman’s direct-store-delivery model, including severance and contract termination costs related to third-party distributor and leasing relationships. Total costs were $12.9 million through completion of the transition in 2020. During the year ended December 31, 2020, contract termination costs of $8.3 million were recognized in selling expense on the consolidated statement of operations and $4.6 million of severance costs were recognized within general and administrative expenses on the consolidated statement of operations.

4. Share-Based Compensation
The Company provides compensation benefits to employees under the Amended and Restated Hostess Brands, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) and the Hostess Brands, Inc. 2022 Employee Stock Purchase Plan (“ESPP”).
Hostess Brands, Inc. 2016 Equity Incentive Plan
The 2016 Plan provides for the granting of various equity-based incentive awards to members of the Board of Directors of the Company, employees and service providers to the Company. The types of equity-based awards that may be granted under the 2016 Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other share-based awards. There are 11,150,000 registered shares of Class A common stock reserved for issuance under the 2016 Plan. All awards issued under the 2016 Plan may only be settled in shares of Class A common stock. As of December 31, 2022, 5,180,342 shares remained available for issuance under the 2016 Plan.
Restricted Stock Units (“RSUs”)
The fair value of RSU awards is calculated based on the closing market price of the Company’s Class A common stock on the date of grant. Compensation expense is recognized straight-line over the requisite service period of the awards, ranging from one to three years. The weighted average grant date fair value of RSU awards granted in 2022, 2021, and 2020 was $20.55, $14.78 and $12.99, respectively.
The vesting of certain RSU awards is contingent upon the Company’s Class A common stock achieving a certain total stockholder return (“TSR”) in relation to a group of its peers, measured over a three year period. Depending on the actual performance over the measurement period, an award recipient has the opportunity to receive up to 200% of the granted awards. At December 31, 2022, 2021 and 2020, there were 437,041, 359,388, and 411,549 RSU awards with TSR performance conditions outstanding, respectively.
The fair value of RSUs with a TSR component granted during the years ended December 31, 2022, 2021 and 2020, were estimated on the date of grant using the Monte Carlo simulation model using the following assumptions:
 Year Ended
December 31,
2022		Year Ended
December 31,
2021		Year Ended
December 31,
2020
Expected volatility (1)24.0%29.0%30.0%
Expected dividend yield (2)—%—%—%
Performance period (years)3.0 years3.0 years3.0 years
Risk-free rate (3)1.3%0.2%1.5%
61

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)The expected volatility assumption was calculated based on the actual volatility of Hostess Brands’ daily closing share price over the three year period to the valuation date.
(2)From its inception through December 31, 2022, the Company has not paid any dividends on its common stock. As of the RSU grant date, it was assumed that no dividends would be paid on common stock over the performance period.
(3)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant which corresponds to the performance period.
Upon an employee’s termination, certain RSU awards provide that unvested awards will be forfeited and the shares of common stock underlying such awards will become available for issuance under the 2016 Plan. Other RSU awards provide for accelerated vesting upon an employee’s termination under certain circumstances.
The following table summarizes the activity of the Company’s unvested RSUs:
Restricted Stock
Units		 Weighted Average
Grant Date
Fair Value
Unvested as of December 31, 20211,139,527 $14.62 
Total Granted714,118 20.55 
Forfeited(91,573)16.73 
Vested (1)(508,906)14.47 
Unvested as of December 31, 20221,253,166 $17.90 
(1) Includes 256,528 shares withheld to satisfy $5.2 million of employee tax obligations upon vesting.

As of December 31, 2022, there was $13.1 million of total unrecognized compensation cost, related to non-vested RSUs granted under the 2016 Plan; that cost is expected to be recognized over a weighted average remaining period of approximately 1.8 years. The total fair value of shares vested during the years ended December 31, 2022, 2021 and 2020 was $10.6 million, $8.3 million and $3.7 million. As of December 31, 2022 there were no awards outstanding for which it was not probable that the performance conditions would be met.
For the years ended December 31, 2022, 2021 and 2020, $9.6 million, $7.9 million and $6.3 million, respectively, of compensation expense related to the RSUs was recognized within general and administrative expenses on the consolidated statements of operations.
Stock Options
The following table includes the significant inputs used to determine the fair value of options issued under the 2016 plan.
Year Ended
December 31,
2020
Expected volatility (1)26.3%
Expected dividend yield (2)—%
Expected option term (3)6.0 years
Risk-free rate (4)1.6%
(1)The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period based on the expected term and ending on the grant date.
(2)From its inception through December 31, 2022, the Company has not paid any dividends on its common stock. As of the stock option grant date, it was assumed that no dividends would be paid on common stock over the term of the stock options. Option holders have no right to dividends prior to the exercise of the options.
(3)The Company utilized the simplified method to determine the expected term of the stock options since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
(4)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant which corresponds to the expected term of the stock options.
62

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The stock options vest in equal annual installments on varying dates through 2023. The maximum term under the grant agreement is ten years. For the years ended December 31, 2022, 2021 and 2020, there was $0.7 million, $1.7 million and $2.4 million, respectively, of expense related to the stock options recognized within general and administrative costs on the consolidated statements of operations. No options were granted in the years ended December 31, 2022 and 2021. The weighted average grant-date fair value of options granted in the year ended December 31, 2020 was $4.04.
The following table summarizes the activity of the Company’s unvested stock options:
Number
of
Options		Weighted Average
Remaining
Contractual Life
(years)		Weighted
Average
Exercise Price		Aggregate Intrinsic Value
Outstanding as of December 31, 20211,461,885 6.98$13.26 $10,467,312 
Exercised(236,422)— 13.34 2,487,634 
Forfeited(22,596)— 12.72 
Outstanding as of December 31, 20221,202,867 6.02$13.25 11,048,766 
Exercisable as of December 31, 20221,050,089 5.86$13.18 9,718,721 
2022 Employee Stock Purchase Plan
The ESPP is intended to provide employees with an opportunity to purchase the Company’s common stock through accumulated payroll deductions at the end of a specified purchase period. Each of the Company’s employees (including officers) is eligible to participate in the ESPP, subject to certain limitations set forth in the ESPP. The ESPP operates with six-month offering periods commencing on the first trading day on or after April 1 and October 1 of each year (“Offering Period”), with the first Offering Period commencing on October 1, 2022. Class A common stock may be purchased under the ESPP at the end of each six-month Offering Period unless the participant withdraws or terminates employment earlier. Shares of the Company’s common stock may be purchased under the ESPP at a price not less than 85% of the lesser of the fair market value of our Class A common stock on the first or last trading day of each Offering Period.
There are 3,000,000 registered shares of Class A common stock reserved for issuance under the ESPP. All awards issued under the ESPP may only be settled in shares of Class A common stock. As of December 31, 2022, 3,000,000 shares remained available for issuance under the ESPP.
For the year ended December 31, 2022, $0.1 million of compensation expense related to the ESPP was recognized within general and administrative expenses on the consolidated statements of operations.
All Share-Based Payment Arrangements
Share-based compensation expense totaled approximately $10.5 million, $9.6 million and $8.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
63

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Property and Equipment
Property and equipment consists of the following:
(In thousands)December 31,
2022		December 31,
2021
Land and buildings$81,405 $70,692 
Right of use assets - operating32,170 32,192 
Machinery and equipment315,149 299,071 
Construction in progress118,679 26,027 
547,403 427,982 
Less accumulated depreciation(122,090)(92,677)
$425,313 $335,305 
Depreciation expense was $32.2 million, $23.5 million and $23.1 million for the years ended December 31, 2022, 2021, 2020, respectively.

6. Goodwill and Intangible Assets
Goodwill and intangible assets as of December 31, 2022 and 2021 were recognized as part of the Hostess Business Combination and the Voortman and Cloverhill Business acquisitions.
Goodwill was $706.6 million for the years ended December 31, 2022 and 2021, respectively, and is recognized at the Snacking reportable segment. There were no changes to goodwill during the years ended December 31, 2022 and 2021.
Intangible assets consist of the following:
(In thousands)December 31,
2022		December 31,
2021
Intangible assets with indefinite lives (Trademarks and Trade Names)$1,538,631 $1,538,631 
Intangible assets with definite lives (Customer Relationships)526,813 526,813 
Less accumulated amortization (Customer Relationships)(144,564)(121,052)
Intangible assets, net$1,920,880 $1,944,392 
The Company recognized additional trade names and customer relationships intangible assets during the year ended December 31, 2020 related to the acquisition of Voortman. See Note 2. Business Combinations for additional details.
Amortization expense was $23.5 million, $23.5 million and $26.5 million for the years ended December 31, 2022, 2021 and 2020 respectively.
Future expected amortization expense is as follows:
(In thousands)
2023$23,512 
202423,512 
202522,752 
202622,752 
202722,752 
2028 and thereafter266,969 

64

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Accrued Expenses
Included in accrued expenses are the following:
(In thousands)December 31,
2022		December 31,
2021
Incentive compensation$29,045 $21,172 
Accrued interest7,850 4,828 
Payroll, vacation and other compensation6,195 7,791 
Interest rate and foreign currency contracts423 2,042 
Other16,420 11,176 
$59,933 $47,009 

8.Tax Receivable Agreement
Concurrent with the Hostess Business Combination, the Company entered into a tax receivable agreement that generally provides for the payment by the Company to the legacy equity holders of Hostess Holdings of 85% of the net cash savings, if any, in U.S. federal, state and local income taxes that the Company realizes (or is deemed to realize in certain circumstances) in periods after the closing of the business combination (which periods may extend, unless the tax receivable agreement is terminated early in accordance with its terms, for more than 15 years following any exchange of Class B Units of Hostess Holdings for shares of the Company’s Class A common stock or the cash equivalent thereof) as a result of (i) certain increases in tax basis resulting from the 2016 acquisition; (ii) certain tax attributes of Hostess Holdings and its subsidiaries existing prior to the 2016 acquisition and prior to subsequent exchanges of Class B Units; (iii) certain increases in tax basis resulting from exchanges of Class B Units; (iv) imputed interest deemed to be paid by the Company as a result of payments it makes under the tax receivable agreement; and (v) certain increases in tax basis resulting from payments the Company makes under the tax receivable agreement. The Company will retain the benefit of the remaining 15% of these cash savings. Certain payments under the tax receivable agreement will be made to the Metropoulos Entities in accordance with specified percentages, regardless of the source of the applicable tax attribute. The Company recognizes a liability on the consolidated balance sheet based on the undiscounted estimated future payments under the tax receivable agreement. Significant inputs used to estimate the future expected payments include a 26.0% cash tax savings rate.
65

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity related to the tax receivable agreement obligations:
(In thousands)
Balance December 31, 2020$156,544 
Remeasurement due to change in estimated state tax rate(1,409)
Payments(9,270)
Balance December 31, 2021$145,865 
Remeasurement due to change in estimated state tax rate(860)
Payments(9,313)
Balance December 31, 2022$135,692 
As of December 31, 2022 the future expected payments under the tax receivable agreement are as follows:
(In thousands)
2023$12,600 
20246,700 
20258,500 
202611,200 
202711,500 
Thereafter85,192 

9.Debt
On January 3, 2020, the Company originated a $140.0 million incremental term loan through an amendment to its existing credit agreement. The Company received proceeds of $136.9 million, net of fees incurred of $3.1 million. The proceeds, together with cash on hand, financed the purchase of Voortman (see Note 2. Business Combinations). The terms, conditions and covenants applicable to the incremental term loan are the same as the terms, conditions and covenants applicable to the Fourth Term Loan, defined below. The term loan requires quarterly payments of interest at a rate of the greater of the applicable LIBOR or 0.75% per annum plus a margin of 2.25% per annum and principal payments at a rate of 0.25% of the aggregate principal balance per quarter with the remaining principal amount due upon maturity on August 3, 2025.
A term loan was originated on October 1, 2019 through an amendment to an existing credit agreement held by the Company’s subsidiary, Hostess Brands, LLC (referred to as the “Fourth Term Loan”). It requires quarterly payments of interest at a rate of the greater of the applicable LIBOR or 0.75% per annum (“New LIBOR Floor”) plus a margin of 2.25% per annum and principal at a rate of 0.25% of the aggregate principal balance with the remaining principal amount due upon maturity on August 3, 2025. The Fourth Term Loan is secured by substantially all of Hostess Brands, LLC’s present and future assets.
The Fourth Term Loan refinanced the remaining balance of $976.4 million on the Third New First Lien Term Loan (“Third Term Loan”) through a non-cash refinancing transaction. The Third Term Loan was originated through an amendment to an existing credit agreement held by Hostess Brands, LLC on November 20, 2017 and required quarterly payments of interest at a rate equal to the New LIBOR Floor plus a margin of 2.50% per annum and principal at a rate of 0.25% of the aggregate principal balance. Including the impact of the interest rate swap contracts, at December 31, 2022, the Company's aggregate term loans had an effective interest rate of 4.65%.
66

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 23, 2022, the Company prepaid, without penalty, $100.0 million of the remaining balance on its term loan.
A summary of the carrying value of the debt and the lease obligations is as follows:
(In thousands)December 31,
2022		December 31,
2021
Term loan (6.7% as of December 31, 2022)
Principal$983,221 $1,091,596 
Unamortized debt premiums, discounts and issuance costs(2,563)(3,679)
980,658 1,087,917 
Lease obligations22,348 26,228 
Total debt and lease obligations1,003,006 1,114,145 
Less: Amounts due within one year(3,917)(14,170)
Long-term portion$999,089 $1,099,975 
At December 31, 2022 and 2021, the approximate fair value of the Company’s aggregate term loan balance was $979.1 million and $1,090.2 million, respectively. The fair value is calculated using current interest rates and pricing from financial institutions (Level 2 inputs).
At December 31, 2022, there are no principal payments due under the Fourth Term loan until maturity on August 3, 2025.
Revolving Credit Facility
On October 1, 2019, Hostess Brands, LLC amended its Revolving Credit Agreement (the “Revolver”), providing for borrowings up to $100.0 million, a stated maturity date of August 3, 2024 and secured by liens on substantially all of Hostess Brands, LLC’s present and future assets, as defined in the Revolver. The Revolver is ranked equally with the Fourth Term Loan in regards to secured liens. The Revolver has an annual commitment fee on the unused portion of between 0.375% and 0.50% annually based upon the unused percentage. Interest on borrowings under the Revolver is, at Hostess Brands, LLC’s option, either the applicable LIBOR plus a margin of 2.25% per annum or the base rate plus a margin of 1.25% per annum.
Prior to the amendment, the Revolver originated on August 3, 2015 had interest on borrowings at Hostess Brands, LLC’s option, of either the applicable LIBOR plus a margin of between 3.00% and 3.50% per annum or the base rate plus a margin of 2.00% to 2.50% per annum.
The Company had no outstanding borrowings under the Revolver as of December 31, 2022 or 2021. See Note 14. Commitments and Contingencies for information regarding the letters of credit, which reduce the amount available for borrowing under the Revolver. The Revolver contains certain restrictive financial covenants. As of December 31, 2022, the Company was in compliance with these covenants.

67

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.Derivative Instruments
Warrants
As part of its initial public offering in 2015, the Company issued public and private placement warrants. Each warrant entitled its holder to purchase one-half of one share of Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of Class A common stock. No warrants were outstanding as of December 31, 2022 or 2021.
In July 2021, the agreement governing the Company’s public and private placement warrants was amended. Subsequent to the amendment, the exercise price for all outstanding warrants was payable through a “cashless exercise” with a premium of $0.25 added to the valuation price of each share for purposes of calculating the number of shares issuable upon exercise of the warrants. Subsequent to this amendment, 51,595,844 warrants were exercised on a cashless basis, resulting in the issuance of 9,822,909 shares of the Company’s Class A common stock. All remaining warrants expired on November 4, 2021.
The warrant agreement contained a tender offer provision that when paired with a two-class equity structure caused all warrants to be precluded from equity classification. Subsequent to the collapse of the two-class structure in November 2020 when all remaining Class B shares were exchanged for Class A shares, the tender offer provision no longer precluded the public warrants from being equity-classified. As a result, the $68.5 million liability related to the public warrants was reclassified to equity in November 2020. There were provisions specific to the private warrants which caused them to continue to be liability classified subsequent to the exchange, through their final expiration in November 2021. The fair value of the warrants is measured on a recurring basis by comparison to available market information. The value of each public warrant up until they were no longer classified as liabilities was based on the public trading price of the warrant (Level 1 fair value measurement). The fair value of each private warrant was evaluated and determined to be substantially the same as that of a public warrant and therefore considered to be a Level 2 fair value measurement. Gains and losses related to the warrants are reflected in the change in fair value of warrant liabilities in the consolidated statements of operations.
Interest Rate Swaps
In 2020, the Company entered into five-year interest rate swap contracts to reduce the effect of interest rate fluctuations on its variable-rate debt. The notional value of these contracts was $500 million. In February 2022, the Company entered into a three-year interest rate swap contract with a notional value of $200 million to further reduce the effect of interest rate fluctuations on its variable-rate term loan. At December 31, 2022, a total notional amount of $700.0 million remained outstanding on the swap contracts which have a maturity date aligned with the maturity of the term loan in August 2025. Under the terms of the contracts, the Company makes quarterly payments based on fixed interest rates ranging from 1.11% to 2.06% and receives quarterly payments based on the greater of LIBOR or 0.75%. The Company has designated these contracts as cash flow hedges. At December 31, 2022, the interest on the Company’s variable rate debt hedged by these contracts is effectively fixed at rates ranging from 3.36% to 4.31%, which includes the term loan margin of 2.25%.
68

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Contracts
To reduce the effect of fluctuations in CAD denominated expenses relative to their U.S. dollar equivalents originating from its Canadian operations, the Company entered into CAD purchase contracts during the years ended December 31, 2022 and 2021. The contracts that remain outstanding at December 31, 2022 provide for the Company to sell a total of $7.2 million USD for $9.2 million of CAD at varying defined settlement dates throughout 2023. The Company has designated these contracts as cash flow hedges.
A summary of the fair value of foreign currency and interest rate contracts is as follows:
(In thousands)December 31,
2022		December 31,
2021
Asset derivativesLocation
Interest rate swap contracts (1)Other non-current assets$48,539 $1,803 
Liability derivativesLocation
Interest rate swap contracts (1)Accrued expenses$— $1,798 
Foreign currency contracts (2)Accrued expenses423 244 
$423 $2,042 
(1) The fair values of interest rate swap contracts are measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).
(2) The fair values of foreign currency contracts are measured on a recurring basis by comparison to available market information on similar contracts (Level 2).

A summary of the gains and losses related to foreign currency and interest rate contracts in the consolidated statements of operations is as follows:
(In thousands)Year Ended
 December 31,
 2022		Year Ended
December 31,
2021		Year Ended
December 31,
2020
(Gain) Loss on derivative contracts designated as cash flow hedgesLocation
Interest rate swap contractsInterest expense, net$(3,557)$4,563 $3,886 
Foreign currency contractsCost of goods sold248 (60)— 
$(3,309)$4,503 $3,886 
Gain (loss) on other derivative contractsLocation
Foreign currency contractsOther expense$— $— $(274)
For interest rate swap contracts, unrealized income recognized in accumulated other comprehensive income as of December 31, 2022 of $23.4 million is expected to be reclassified into interest expense on the consolidated statement of operations through December 31, 2023.
For foreign currency contracts, unrealized expense recognized in accumulated other comprehensive income as of December 31, 2022 of $0.5 million is expected to be reclassified into cost of goods sold on the consolidated statement of operations through December 31, 2023.

69

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Equity
The Company’s authorized common stock consists of three classes: 200,000,000 shares of Class A common stock, 50,000,000 shares of Class B Stock, and 1,000,000 shares of preferred stock. As of December 31, 2022, there were 142,650,344 shares of Class A common stock issued, 133,117,224 shares of Class A common stock outstanding and 9,533,120 shares of treasury stock. As of December 31, 2021 there were 142,031,329 shares of Class A common stock issued, 138,278,573 shares of Class A common stock outstanding and 3,752,756 shares of treasury stock. As of December 31, 2022, and 2021 there were no shares of Class B Stock or preferred stock issued or outstanding.
Shares of Class A common stock and Class B Stock have identical voting rights. However, shares of Class B Stock do not participate in earnings or dividends of the Company. During the year ended December 31, 2020, all remaining outstanding Class B Units were exchanged for Class A common stock. Ownership of shares of Class B Stock was restricted to owners of Class B Units in Hostess Holdings. Class B Units in Hostess Holdings could be exchanged (together with the cancellation of an equivalent number of shares of Class B Stock) by the holders thereof for, at the election of the Company, shares of Class A common stock or the cash equivalent of such shares.
During the year ended December 31, 2022, the Company’s Board of Directors approved a share repurchase program of up to $150 million of the Company’s outstanding Class A common stock. As of December 31, 2022, $21.7 million remained available for use under this program.


12.Earnings Per Share

Basic earnings per share is calculated by dividing net income attributable to the Company’s Class A stockholders for the period by the weighted average number of Class A common shares outstanding for the period. In computing dilutive earnings per share, basic earnings per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including: public and private placement warrants, RSUs, stock options and ESPP awards.
Below are basic and diluted earnings per share:
Year Ended December 31, 2022Year Ended
December 31,
2021		Year Ended
December 31,
2020
Numerator: (in thousands)
Net income attributable to Class A stockholders - basic$164,195 $119,299 $104,676 
Impact of change in fair value of warrant liabilities— (566)(39,941)
Numerator for diluted earnings per share$164,195 $118,733 $64,735 
Denominator:
Weighted-average Class A shares outstanding - basic136,768,310 131,571,733 124,927,535 
Dilutive effect of warrants— 5,841,062 2,525,863 
Dilutive effect of RSUs631,800 588,250 270,090 
Dilutive effect of stock options and ESPP awards524,361 197,131 — 
Weighted-average shares outstanding - diluted137,924,471 138,198,176 127,723,488 
Earnings per Class A share - basic$1.20 $0.91 $0.84 
Earnings per Class A share - dilutive$1.19 $0.86 $0.51 
For warrants that are liability-classified, during periods when the impact is dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method.
70

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options and ESPP shares that were excluded from the computation of diluted weighted average shares, because their effect was anti-dilutive, were 130, 2,010 and 477,923 for the years ended December 31, 2022, 2021 and 2020, respectively.

13. Income Taxes
The income tax expense (benefit) consisted of the following:
(In thousands)Year Ended December 31, 2022Year Ended
 December 31,
2021		Year Ended
 December 31,
2020
Current tax expense
Federal$20,213 $17,430 $2,120 
State and local5,334 4,088 1,479 
Foreign5,031 — — 
Total Current30,578 21,518 3,599 
Deferred tax expense (benefit)
Federal12,666 13,509 17,204 
State and local3,285 3,077 3,750 
Foreign560 2,409 (4,148)
Total Deferred16,511 18,995 16,806 
Income tax expense, net$47,089 $40,513 $20,405 
Income (loss) before income taxes consists of the following:
(In thousands)Year Ended December 31, 2022Year Ended
 December 31,
2021		Year Ended
 December 31,
2020
Earnings (losses) before income taxes
United States$156,357 $149,360 $144,075 
Foreign54,927 10,452 (15,373)
Income before income taxes$211,284 $159,812 $128,702 
71

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Year Ended
December 31,
2017
 
November 4, 2016
through
December 31, 2016
  
January 1, 2016
through
November 3, 2016
 (Successor) (Successor)  (Predecessor)
Current tax expense (benefit)      
   Federal$11,163
 $9
  $35
   State and local2,903
 43
  12
Total Current14,066
 52
  47
       
Deferred tax expense (benefit)      
   Federal(93,457) $(6,751)  343
   State and local12,187
 (1,063)  49
Total Deferred(81,270) (7,814)  392
Income tax expense (benefit), net$(67,204) $(7,762)  $439

The Company was a nontaxable partnership inFor the Predecessor yearyears ended December 31, 2015. In the Predecessor period January 1, 2016 through November 3, 2016, Superior, a C corporation, was subject to income taxes.
As a result of the Business Combination, the Company acquired a controlling interest in Hostess Holdings, which is treated as a partnership for U.S. federal2022, 2021, and most applicable state and local income tax purposes. As a partnership, Hostess Holdings is not itself subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Hostess Holdings is passed through and included in the taxable income or loss of its partners, including the Company in Successor periods. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income of Hostess Holdings following the Business Combination.
The operations of Hostess Holdings include those of its C corporation subsidiaries. These C corporation subsidiaries are subject to U.S. federal, state and local income taxes. The Company’s tax provision includes income taxes for the share of Hostess Holdings income or loss passed through to the Company, the income or loss of the Company’s C corporation subsidiaries and the deferred tax tax impact of outside basis differences in its investments in subsidiaries.
For the year ended December 31, 2017 (Successor) and the periods from November 4 through December 31, 2016 (Successor) and January 1 through November 3, 2016 (Predecessor),2020, the effective income tax rate differs from the federal statutory income tax rate as explained below:
Year Ended December 31, 2022Year Ended
 December 31,
2021		Year Ended
 December 31,
2020
U.S. federal statutory income tax rate21.0 %21.0 %21.0 %
Change in fair value of warrant liabilities— (0.1)(6.5)
State and local income taxes, net of federal benefit4.2 5.6 2.8 
Insurance proceeds(2.9)— — 
Income attributable to non-controlling interest— — (0.6)
Foreign rate differential0.5 0.3 (0.6)
Change in state tax rate(1.1)(1.9)0.6 
Tax law change— — (0.8)
Other0.6 0.5 — 
Effective income tax rate22.3 %25.4 %15.9 %
 
Year Ended
December 31,
2017
 
November 4, 2016
through
December 31, 2016
  
January 1, 2016
through
November 3, 2016
 (Successor) (Successor)  (Predecessor)
U. S. federal statutory income tax rate35.0 % 35.0 %  35.0 %
       
State and local income taxes, net of federal benefit3.8
 4.1
  0.1
Income attributable to non-controlling interest(6.3) (8.8)  —
Nontaxable partnerships—
 —
  (34.4)
Valuation allowance—
 17.2
  —
Tax Cuts and Jobs Act(66.2) —
  —
Change in state tax rate1.2
 —
  —
Other(2.7) 0.3
  —
Effective income tax rate(35.2)% 47.8 %  0.7 %

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying Consolidated Balance Sheets.consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years.
Details of the Company’s deferred tax assets and liabilities are summarized as follows:    
(In thousands)
Year Ended
December 31, 2017
 
Year Ended
December 31, 2016
 (In thousands)As of December 31, 2022As of
 December 31, 2021
(Successor) (Successor) 
Deferred tax assets    Deferred tax assets
Imputed interest$4,967
 $10,113
 Imputed interest$6,248 $6,478 
Tax creditsTax credits1,140 3,011 
Net operating loss carryforwards578
 9,574
 Net operating loss carryforwards122 — 
Tax credits2,337
 2,019
 
Accrued liabilitiesAccrued liabilities8,992 7,080 
Share-based compensationShare-based compensation2,804 3,588 
Other1,002
 1,472
 Other5,236 5,367 
Subtotal8,884
 23,178
 
Valuation allowance(242) (205) 
Total deferred tax assets8,642
 22,973
 Total deferred tax assets24,542 25,524 
    
Deferred tax liabilities    Deferred tax liabilities
Investment in partnership(266,900) (363,439) 
Goodwill and intangible assetsGoodwill and intangible assets(304,121)(291,024)
Property and equipment(1,394) (1,857) Property and equipment(53,456)(51,272)
Goodwill and intangible assets(7,512) (11,474) 
Other(607) —
 Other(13,995)(1,075)
Total deferred tax liabilities(276,413) (376,770) Total deferred tax liabilities(371,572)(343,371)
    
Total deferred tax assets and liabilities$(267,771) $(353,797) Total deferred tax assets and liabilities$(347,030)$(317,847)
The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company considers all positive and negative evidence, and all potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance.
Prior
72

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2022 and 2021, Hostess had gross state credit carryforwards of $1.4 million and $3.8 million respectively. The carryforwards in 2022 relate entirely to Kansas High Performance Incentive Program credits and will begin to expire in 2032 if not utilized.
At December 31, 2022, Hostess had gross state net operating losses of $1.6 million. Unless utilized, the acquisition of Hostess Holdings,state net operating losses expire in 2034.
The global intangible low-taxed income (“GILTI”) provisions require the Company did not have a significant sourceto include in its U.S. income tax return foreign subsidiary earnings in excess of taxable income to supportan allowable return on the realization of its deferred tax assets and therefore had a full valuation allowance booked on its deferred taxforeign subsidiary’s tangible assets. The Company re-evaluated its conclusion on November 4, 2016 dueis electing to account for GILTI tax in the acquisition of Hostess Holdings and concluded that the valuation allowance was no longer appropriate.period in which it is incurred.
The Company reversed $2.8recognizes in the consolidated financial statements the benefit of a tax position only if the impact is more likely than not of being sustained on audit based on the technical merits of the position. As of both December 31, 2022 and 2021, the Company had $1.6 million of valuation allowance in the fourth quarter of 2016. This reversal is reflected as a non-cash income tax benefit recorded in the accompanying consolidated statement of operations. The Company still maintains a valuation allowance of $0.2 million against deferred tax assets for state net operating loss carryforwards attributable to its C corporation subsidiaries.
The Company and its C corporation subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. For federal tax purposes, the Company’s and its C corporation subsidiaries’ 2014 through 2017 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. Generally, for state tax purposes, the Company’s and its C corporation subsidiaries’ 2014 through 2017 tax years remain open for examination by the tax authorities under a three year statute of limitations. Should the Company or its C corporation subsidiaries utilize any of their U.S. or state loss carryforwards, their carryforward losses, which date back to 2003, would be subject to examination.


At December 31, 2017, the Company’s C corporation subsidiaries had an available federal net operating loss carryforward of approximately $1.1 million. This carryforward expires in 2035. Of this NOL carryforward, $1.1 million is subject to annual limitations due to a change in ownership of the Company and its C corporation subsidiaries as defined in the Internal Revenue Code. The Company and its C corporation subsidiaries also had various state net operating loss carryforwards totaling approximately $2.5 million and $4.1 million, respectively. Of these NOL carryforwards, $2.5 million and $4.1 million, respectively, are subject to an annual limitation due to an ownership change of the Company and its C corporation subsidiaries. Unless utilized, the state carryforwards expire from 2022 to 2036. The Company does not believe that these limitations will prevent it from utilizing its pre-ownership change net operating loss carryforwards. The Company also has state income tax credit carryforwards of approximately $2.9 million which expire from 2028 to 2032.

The Company does not believe it has any significant uncertain tax positions and therefore has nogross unrecognized tax benefits, at December 31, 2017 or 2016, that if recognized,which would affecthave a net $1.6 million impact on the annual effective tax rate.

Tax Reform significantly changes U.S. tax law by lowering the corporate income tax rate, permanently fromif recognized. The following is a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a resultreconciliation of the reduction in the U.S. corporate incomebeginning and ending amount of unrecognized tax rate from 35% to 21% under Tax Reform, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $111.3 million non-cash tax benefit in the Company’s consolidated statement of income for the year ended December 31, 2017.benefits:

Tax Reform provides for considerable changes in the taxation of international operations by implementing a territorial tax system and imposing a repatriation tax on deemed earnings of foreign subsidiaries. The Company has determined that these changes will not have a material impact on its consolidated financial statements given the Company’s current tax profile and has recorded no provisional tax impact.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of Tax Reform. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the impact of changes in the tax receivable agreement due to the tax rate reduction and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of Tax Reform. The accounting is expected to be complete when the Company has had further time to analyze the tax law changes during the first half of 2018.

(In thousands)
Balance at December 31, 2020$1,560 
Additions for tax positions established in prior years45 
Balance at December 31, 20211,605 
Additions for tax positions acquired80 
Reductions for tax positions established in prior years(92)
Balance at December 31, 2022$1,593 
Interest and penalties related to income tax liabilities, if incurred, are included in income tax expense in the consolidated statementstatements.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and certain subsidiaries in Canada. For federal and state tax purposes, the Company and its subsidiaries are generally subject to examination for three years after the income tax returns are filed. As such, U.S. federal and state income tax returns filed for periods since 2017 remain open for examination by tax authorities. In Canada, tax returns are subject to examination for four years after the notice of operations. For the year endedassessment is issued. Canadian tax returns filed for periods since 2016 remain open for examination.
As of December 31, 2017 (Successor), the periods from January 1, 2016 through November 3, 2016 (Predecessor) and November 4, 2016 through December 31, 2016 (Successor), and the year ended December 31, 2015 (Predecessor),2022, the Company has approximately $45.9 million of undistributed foreign subsidiary earnings that are intended to be permanently reinvested outside of the United States. The Company does not recorded any penalties and interestprovide deferred taxes on the undistributed earnings and does not have any accrued balance of penalties and interest.expect withholding taxes or other foreign income taxes to apply should these earnings be distributed.



14. Commitments and Contingencies
Accruals and the Potential Effect of Litigation
From time to time, the Company is subject to lawsuits, claims and proceedings arising in the ordinary course of business. These matters may involve personnel and employment issues, personal injury, contracts and other proceedings. Based upon information presently known, the Company does not believe that the ultimate resolution of such matters will have a material effect on the Company’s financial position, although the final resolution of such matters could have a material effect on its results of operations or cash flows in the period of resolution.
73

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liabilities related to legal proceedings are recorded when it is probable that a liability has been incurred and the associated amount can be reasonably estimated. Where the estimated amount of loss is within a range of amounts and no amount within the range is a better estimate than any other amount, the low end of the range is accrued.
As additional information becomes available, the potential liabilities related to these matters are reassessed and the estimates revised, if necessary. These accrued liabilities are subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material effect on the Company’s financial condition and results of operations.
From time to time,In December 2020, the Company is subjectasserted claims for indemnification against the sellers under the terms of the Share Purchase Agreement pursuant to various other legal actions, lawsuits,which the Company acquired Voortman (the “Agreement”). The claims arose out of alleged breaches by the sellers of certain representations, warranties and proceedingscovenants contained in the Agreement relating to periods prior to the closing of the acquisition. The Company also submitted claims relating to these alleged breaches under the representation and warranty insurance policy (“RWI”) it purchased in connection with the acquisition. In June 2022, the RWI insurers agreed to pay the Company $42.5 million CAD (the RWI coverage limit) (the “Proceeds”) related to products, employment, environmental regulations, and other matters incidental to its businesses.
Based upon information presently known,these breaches. During the year ended December 31, 2022, the Company does not believe thatreceived the ultimate resolutionProceeds and recognized a gain of such matters will have a material effect on the Company’s financial position, although the final resolution of such matters could have a material effect$42.5 million CAD ($33.0 million) in other expense (income) on its resultsconsolidated statement of operations or cash flowsoperations. Per agreement with the RWI insurers, under no circumstances will the Company be required to return the Proceeds.
On November 3, 2022, pursuant to the agreement with the RWI insurer, Voortman brought claims in the periodOntario (Canada) Superior Court of resolution.Justice (the “Claim”), related to the breaches against certain of the sellers from whom Voortman was acquired. The Claim alleges the seller defendants made certain non-disclosures and misrepresentations to induce the Company to overpay for Voortman. The Company is seeking damages of $109 million CAD representing the amount of the aggregate liability of the sellers for indemnification under the Agreement, $5.0 million CAD in punitive or aggravated damages, interest, proceedings fees and any other relief the presiding court deems appropriate. A portion of any recovery will be shared with the RWI insurers. Although the Company strongly believes that its Claim against the sellers is meritorious, no assurance can be given as to whether the Company will recover all, or any part, of the amounts it is pursuing.
Lease Commitments
Operating Leases
The Company leases facilities for its headquarters, manufacturing, and distribution, under noncancelable operating lease arrangements. As of December 31, 2017,2022 the Company’s totalCompany has leases outstanding for certain office spaces, its Burlington, Ontario bakery and its primary distribution center under noncancellable operating lease arrangements. The future minimum lease payments under these operating leases were $2.6 million.
Rent expense under all operating leases was $2.0 million for the year endedagreements as of December 31, 2017, $0.32022 are shown below.
(In thousands)
2023$4,966 
20245,101 
20255,234 
20262,655 
20271,639 
Thereafter4,848 
Total lease payments24,443 
Reconciling impact from discounting(2,095)
Total lease liabilities$22,348 
74

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing Leases
The Company entered into bond and lease agreements with Clark County, Arkansas on October 4, 2022. The bond-lease transaction required the Company to exchange its property to the taxing jurisdiction for tax-exempt bonds issued in the name of the Company and not to exceed $160 million. The Company has used $11.5 million (Successor) for November 4, 2016 through December 31, 2016 and $1.3 million (Predecessor) for2022. As the period January 1, 2016 through November 3, 2016, comparedholder of the bonds, the Company is not required to $0.4 million for the year ended December 31, 2015 (Predecessor).
Future minimummake lease payments as the Company’s obligation to pay rent is equal to the county’s obligation to pay debt service on the bonds. Also on October 4, 2022, the Company entered into agreements for payments in lieu of taxes (PILOT) with Clark County, Arkansas, whereby the county granted ad valorem tax savings with respect to certain real and personal property in Arkadelphia, Arkansas through 2052. In accordance with the PILOT agreements, the Company will owe 35% of the ad valorem taxes on the Arkadelphia, Arkansas property that would have otherwise been due. The Company has elected to use the right of offset under operating leases were as follows:
(In thousands) 
2018$2,042
2019568
2020—
2021—
2022—
Thereafter—
Capital LeasesASC 210-20 to net the asset and the liability.
The Company entered into a bond-lease agreement with the Development Authority of Columbus, Georgia on December 1, 2013, which was amended in December 2016. The bond-lease transaction required the companyCompany to exchange its property to the taxing jurisdiction for tax-exempt bonds issued in the name of the Company and not to exceed $18 million. As the issuer and holder of the bonds, the Company is not required to make lease payments.payments as the Company’s obligation to pay rent is equal to the county’s obligation to pay debt service on the bonds. On December 16, 2013, the Company received an ad valorem tax agreement from the Columbus, Georgia Board of Tax Assessors granting tax abatement for the real and personal property located at the Company’s Columbus, Georgia bakery through 2023.

The Company has elected to use the right of setoffoffset under Accounting Standards CodificationASC 210-20 to net the asset and the liability.
The Company has a capitaltable below shows the composition of lease obligation of $0.6 millionexpense for the lease locatedperiod:
(In thousands)Year Ended
December 31,
2022		Year Ended
December 31,
2021		Year Ended
December 31,
2020
Operating lease expense6,372 6,420 5,722 
Short-term lease expense3,032 1,945 2,633 
Variable lease expense1,564 1,450 1,763 
$10,968 $9,815 $10,118 

For short-term leases, the Company records rent expense in its consolidated statements of operations on its Southbridge, Massachusetts bakery facility. The base term ofa straight-line basis over the lease is through February 2021.
Future minimumterm. Variable lease payments, under capital leases werewhich primarily include taxes, insurance and common area maintenance, are expensed as follows:incurred. Lease expenses are classified as operating activities within the consolidated statements of cash flows. During the year ended December 31, 2020, the Company amended the existing lease for its Burlington, Ontario bakery. The amendment extended the lease term through October 2030 and provided for two five-year extensions, at the Company’s option.
(In thousands) 
2018$200
2019200
2020200
202133
2022—
Thereafter—

Contractual Commitments

The Company is a party to various long-term arrangements through advance purchase contracts to lock in prices for certain high-volume raw materials and packaging components for normal product production requirements. These advance purchase arrangements are contractual agreements and can only be canceled with a termination penalty that is based upon the current market price of the commodity at the time of cancellation. These agreements qualify for the “normal purchase” exception under accounting standards; and the purchases under these contracts are included as a component of cost of goods sold.
Contractual
As of December 31, 2022, we had purchase commitments were as follows:for various ingredients with a remaining term in excess of one year of $5.2 million.
75
(In millions)Total CommittedCommitments within 1 yearCommitments beyond 1 year
Ingredients$64.2
$61.2
$3.0
Packaging35.4
35.4
—

HOSTESS BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Letters of Credit
The Company is a party to Letter of Credit arrangements to provide for the issuance of standby letters of credit in the amount of $2.2$5.9 million and $1.7 million.$6.0 million for the years ended 2022 and 2021, respectively. The arrangements support the collateral requirements for insurance. The Letters of Credit are 100% secured through our Revolver.


15.    Related Party Transactions
Prior to the Business Combination, the Company was party to an agreement to employ Mr. Metropoulos as the Executive Chairman. The agreement, dated April 2013, included payment of an annual salary, a performance bonus at the discretion of the board of directors, and expenses related to the use of his personal aircraft. From January 1, 2016 through November 3, 2016, $3.5 million was expensed by the Company for this compensation agreement. For the year ended December 31, 2015, the Company expensed $4.3 million. The agreement with Mr. Metropoulos was terminated in connection with the Business Combination.

In connection with the Business Combination, the Company entered into an Executive Chairman Employment Agreement with Mr. Metropoulos. Under the terms of this agreement, on November 4, 2016, Mr. Metropoulos was granted 2,496,000 fully vested units of Hostess Holdings and an equivalent number of shares of Class B common stock in the Company as compensation for his continuing service as Executive Chairman.

The Company determined the fair value of this compensation as follows:
(In thousands, except share data)  
Number of Class B units granted 2,496
Closing price of equivalent shares of Class A common stock on date of grant $11.40
  28,454
Discount for lack of marketability 6%
  $26,747
As these units are subject to certain sales restrictions, a discount for lack of marketability was determined by using an option pricing method (Finnerty Protective Put Model). The $26.7 million of compensation expense related to these awards is recognized as related party expenses on the consolidated statements of operations for the year ended December 31, 2016 along with less than $0.1 million of other payments under this employment agreement.
Also in connection to the Business Combination, the Company agreed to grant shares of Class A common stock or Class B units of Hostess Holdings and equivalent shares of Class B common stock of the Company to an entity owned by Mr. Metropoulos if certain EBITDA thresholds are met for the year ended December 31, 2017.  The potential grants under this arrangement are between zero and 5.5 million shares. Based on the nature of the arrangement, for U.S. GAAP purposes the potential grants are considered to be compensation for future services to be provided by Mr. Metropoulos. In order to receive 2.75 million shares under this agreement, adjusted EBITDA, as calculated pursuant to the terms of the Master Transaction Agreement entered into in connection with the Business Combination, (“MTA EBITDA”), for the year ended December 31, 2017 must be greater than $240.5 million. The minimum EBITDA threshold for the year ended December 31, 2017 was not met and no Class A common shares or Class B units were issued.
Under the terms of Mr. Metropoulos’ employment agreement, the Company is obligated to grant additional equity (in the form of either shares of Class A common stock of the Company, or Class B units of Hostess Holdings and equivalent shares of Class B common stock of the Company) to Mr. Metropoulos if MTA EBITDA thresholds are met for the year ended December 31, 2018. The potential grants range from zero to 2.75 million shares. In order to receive 1.375 million shares under this agreement, MTA EBITDA for the year ended December 31, 2018 must be greater than $257.8 million. If MTA EBITDA is greater than $262.8 million, an additional 1.375 million shares will be awarded. As of December 31, 2017, management determined it was not probable that the Company would meet the 2018 MTA EBITDA thresholds.



16.Unaudited Quarterly Financial Data

Summarized quarterly financial data:
  Three Months Ended
(In thousands) 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
  (Successor) (Successor) (Successor) (Successor)
Net revenue $196,221
 $192,250
 $203,178
 $184,538
Operating income 100,762
 38,716
 49,792
 44,723
Net income 189,574
 16,130
 28,207
 24,199
Net income (loss) attributable to Class A shareholders/partners 179,686
 9,549
 18,830
 15,832
Earnings (loss) per Class A share:        
Basic $1.80
 .10 .19 .16
Diluted $1.74
 .09 .18 .15

As a result of Tax Reform, the Company remeasured its net deferred tax liabilities and recognized a  $111.3 million non-cash tax benefit and also recognized a gain on the remeasurement of the tax receivable arrangement of $51.8 million during the three months ended December 31, 2017.

(In thousands) 
From
November 4, 2016
through
December 31, 2016
  
From
October 1, 2016
through
November 3, 2016
 
Three Months
Ended
September 30,
2016
 
Three Months
Ended
June 30,
2016
 
Three Months
Ended
March 31,
2016
  (Successor)  (Predecessor) (Predecessor) (Predecessor) (Predecessor)
Net revenue $111,998
  $66,831
 $196,197
 $192,343
 $160,217
Operating income (9,607)  (15,022) 51,667
 48,600
 37,640
Net income (loss) (8,485)  (21,084) 33,513
 29,472
 18,537
Income (Loss) per Class A share: 
  
 
 
 
Basic $(0.05)  
 
 
 
Diluted $(0.05)  
 
 
 


The following table sets forth the high and low sales prices for shares of our Class A common stock and warrants for the quarterly periods indicated, as reported on NASDAQ:
 Class A Common Stock Warrants
Year Ended December 31, 2017High Low High Low
First Quarter$16.48
 $12.75
 $3.00
 $1.73
Second Quarter17.18
 14.93
 3.57
 2.43
Third Quarter16.55
 13.00
 3.04
 1.69
Fourth Quarter15.40
 11.00
 2.49
 1.23
Year Ended December 31, 2016       
First Quarter$10.00
 $9.50
 $0.40
 $0.21
Second Quarter9.80
 9.50
 0.36
 0.16
Third Quarter11.16
 9.72
 1.38
 0.25
Fourth Quarter13.50
 10.67
 1.98
 1.13




17. Subsequent Events
Tax Receivable Agreement
On January 26, 2018, the Company entered into an agreement to terminate all future payments payable under the Tax Receivable Agreement to the Apollo Funds in exchange for a payment of $34.0 million. The agreement did not affect the portion of the rights under the Tax Receivable Agreement for the remaining Legacy Hostess Equity Holders. However, if the Company enters into a definitive agreement on or before January 26, 2019 and that agreement results in a change of control (as defined in the Tax Receivable Agreement), the Company would be required to make an additional payment of $10.0 million to the Apollo Funds. Prior to the buyout, the Company anticipated making its first payment under the Tax Receivable Agreement between $14.0 and $15.0 million in 2018. As a result of the buyout, the first estimated payment to be made in 2018 will be reduced to between $8 million and $9 million.
The summary of expected cash payments under the Tax Receivable Agreement after the buyout and reflecting the impact of Tax Reform is as follows:
(In millions)
Estimated Cash
Payments
2018$8.0 - $9.0
20194.0 - 5.0
20204.0 - 5.0
20214.0 - 5.0
Thereafter57.0 - 58.0
Total estimated payments$77.0 - $82.0


Acquisition

On February 1, 2018, the Company acquired certain U.S. breakfast assets of Aryzta, LLC, primarily including a bakery facility, inventory and the Big Texas ® and Cloverhill ® tradenames for a purchase price of approximately $25 million. A preliminary allocation of the purchase price to the net assets acquired for this business combination is expected to be made during the first quarter of 2018.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


None.


Item 9A.Controls and Procedures
Item 9A. Controls and Procedures

(a)    Evaluation Of Disclosure Controls And Procedures

We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures arewere effective as of December 31, 2022 at a level of reasonable assurance.

(b)    Management’s Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control - Integrated Framework(2013) by the Committee of Sponsoring Organization of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

Attestation Report Of The Registered Public Accounting Firm

2022. The effectiveness of the Company’s internal control ofover financial reporting as of December 31, 20172022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.

(c)     Changes in Internal Control over Financial Reporting
Changes In Internal Controls

During 2017, the Company completed its implementation of internal control over financial reporting in a manner commensurate with the scale of our operations subsequent to the November 4, 2016 Business Combination.

Except as disclosed above, there hasThere have been no changechanges in the Company’sour internal control over financial reporting during 2017the most recent calendar quarter that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.



Item 9B. Other Information


None.



Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

76

Item 10. Directors, Executive Officers and Corporate Governance


The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 20182023 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year, and is incorporated herein by reference.


Item 11. Executive Compensation


The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 20182023 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year, and is incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


The information required by this item will be contained in our definitive proxy statement to be filedfiled with the SEC in connection with our 20182023 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year, and is incorporated herein by reference.


Item 13. Certain Relationships and Related Transactions, and Director Independence


The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 20182023 Annual Meeting of Stockholders, which is expected to be filed not laterlater than 120 days after the end of our fiscal year, and is incorporated herein by reference.


Item 14. Principal AccountingAccountant Fees and Services


Our independent registered public accounting firm is KPMG LLP, Kansas City, MO, Auditor Firm ID: 185.

The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 20182023 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year, and is incorporated herein by reference.


Part IV.


Item 15. Exhibits, Financial Statement Schedules


Financial Statements and Financial Statement Schedules


See “Index to Consolidated Financial Statements”consolidated financial statements” in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notes.



77



Item 6. Exhibits
Exhibit No.Description
2.1*2.2*
3.1
3.2
4.1
4.2
4.310.1
10.1
Form of Subscription Agreement, dated July 5, 2016, between Gores Holdings, Inc. and the investors party thereto (1)
10.2
Subscription Agreement, dated July 5, 2016 by and between Gores Holdings, Inc. and Gores Sponsor LLC (1)
10.3
Subscription Agreement, dated July 5, 2016 by and between Gores Holdings, Inc. and Canyon Capital Advisors LLC (1)
10.4
Promissory Note, dated July 27, 2016, issued by Gores Holdings, Inc. to Gores Sponsor LLC (4)
10.5
Letter Agreement, dated August 10, 2016, between Gores Holdings, Inc. and Gores Sponsor LLC (5)
10.6
Amended and Restated Insider Letter Agreement, dated August 12, 2016, among Gores Holdings, Inc., its officers and directors, The Gores Group, LLC and Gores Sponsor LLC (5)
10.7
Exchange Agreement, dated as of November 4, 2016 by and among Gores Holdings, Inc., Hostess Holdings, L.P., Hostess CDM Co-Invest, LLC, CDM Hostess Class C, LLC , C. Dean Metropoulos, and such other holders of Class B Units from time to time party thereto (2)
10.8
Tax Receivable Agreement, dated November 4, 2016, by and among Gores Holdings, Inc., Hostess CDM Co-Invest, LLC, CDM Hostess Class C, LLC, AP Hostess Holdings, L.P., and C. Dean Metropoulos (2)(3)
10.8.110.2
10.9
Contribution and Purchase Agreement, dated as of November 4, 2016, by and among Gores Holdings, Inc., Hostess CDM Co-Invest, LLC and CDM Hostess Class C, LLC (2)
10.10
Amended and Restated Registration Rights and Lock-Up Agreement, dated as of November 4, 2016, by and among Hostess Brands, Inc., AP Hostess Holdings, L.P., Hostess CDM Co-Invest, LLC, CDM Hostess Class C, LLC, C. Dean Metropoulos, Gores Sponsor LLC, Randy Bort, William Patton and Jeffrey Rea (2)
10.11
Form of Indemnification Agreement (2)(3)
10.12
Executive Chairman Employment Agreement, dated as of July 28, 2016, by and among Hostess Brands, LLC, C. Dean Metropoulos, Hostess Holdings, L.P., and Gores Holdings, Inc. (2)
10.13
Executive Chairman Agreement, dated as of July 28, 2016, by and between Gores Holdings, Inc. and C. Dean Metropoulos (2)

10.1410.3
10.15
Letter Agreement, dated as of March 1, 2016, by and between Hostess Brands, LLC and Tom Peterson (2)
10.16
Restated Hostess Brands, Inc. 2016 Equity Incentive Plan (2)(11)
10.1710.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.1810.17
10.1921.1
21.1
Subsidiaries of the Company
23.1
31.1
31.2


32.1
32.2
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104.1The cover page from this Current Report on Form 8-K, formatted in Inline XBRL
*Schedules and exhibits to this Exhibit omitted pursuant to Regulation S-K Item 601(b)(2). The Company agrees to furnish supplementally a copy of any omitted schedules or exhibits to the SEC upon request.

(1)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on July 5, 2016 and incorporated herein by reference.
(2)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on November 9, 2016 and incorporated herein by reference.
(3)Filed as an exhibit of the Company’s Current Report on Form 8-K filed with the SEC on August 19, 2015 and incorporated herein by reference.
(4)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on July 27, 2016 and incorporated herein by reference.
(5)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2016 and incorporated herein by reference.
(6)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on January 29, 2018 and incorporated herein by reference.
(7)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2017 and incorporated herein by reference.



(1)Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 26, 2020 and incorporated herein by reference.

(2)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 filed with the SEC on August 5, 2020.
(3)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on November 9, 2016 and incorporated herein by reference.
(4)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2018 and incorporated herein by reference.
(5)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 6, 2018 and incorporated herein by reference.
(6)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed with the SEC on May 8, 2019 and incorporated herein by reference.
(7)Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on February 24, 2021 and incorporated herein by reference.
(8)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2020 and incorporated herein by reference.
(9)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed with the SEC on May 17, 2021 and incorporated herein by reference.
(10)Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 1, 2022 and incorporated herein by reference.
(11)Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 10, 2022 and incorporated herein by reference.
(12)Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2022 and incorporated herein by reference.
(13)Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on February 21, 2023 and incorporated herein by reference.

Pursuant to the requirements of Section 13 or 15(d) 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, in Lenexa, Kansas City, Missouri on February 28, 2018.

21, 2023.


HOSTESS BRANDS, INC.
HOSTESS BRANDS, INC.By/s/ Travis E. Leonard
By/s/ Thomas Peterson
Thomas Peterson
Travis E. Leonard
Executive Vice President, Chief Financial Officer











Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated.


SignatureTitleDate
/s/ Andrew P. Callahan
President, Chief Executive Officer
(principal executive officer) and Director
February 21, 2023
Andrew P. Callahan
/s/ Travis E. LeonardExecutive Vice President, Chief Financial Officer (principal financial officer and principal accounting officer)February 21, 2023
Travis E. Leonard
/s/ Jerry D. KaminskiChairman and DirectorFebruary 21, 2023
Jerry D. Kaminski
/s/ Olu BeckDirectorFebruary 21, 2023
Olu Beck
/s/ Laurence BodnerDirectorFebruary 21, 2023
Laurence Bodner
/s/ Gretchen R. CristDirectorFebruary 21, 2023
Gretchen R. Crist
/s/ Rachel P. CullenDirectorFebruary 21, 2023
Rachel P. Cullen
/s/ Hugh G. DineenDirectorFebruary 21, 2023
Hugh G. Dineen
/s/ Ioannis SkoufalosDirectorFebruary 21, 2023
Ioannis Skoufalos
/s/ Craig D. SteeneckDirectorFebruary 21, 2023
Craig D. Steeneck
SignatureTitleDate
/s/ William Toler
President and Chief Executive Officer
(principal executive officer)
February 28, 2018
William Toler
/s/ Thomas Peterson
Executive Vice President, Chief Financial Officer
(principal financial officer and principal accounting officer)
February 28, 2018
Thomas Peterson
/s/ C. Dean MetropoulosExecutive ChairmanFebruary 28, 2018
C. Dean Metropoulos
/s/ Mark StoneDirectorFebruary 28, 2018
Mark Stone
/s/ Laurence BodnerDirectorFebruary 28, 2018
Laurence Bodner
/s/ Neil P. DeFeoDirectorFebruary 28, 2018
Neil P. DeFeo
/s/ Jerry D. KaminskiDirectorFebruary 28, 2018
Jerry D. Kaminski
/s/ Craig D. SteeneckDirectorFebruary 28, 2018
Craig D. Steeneck