~~GORES HOLDINGS, INC.~~

~~CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~For the Nine Months Ended September 30, 2016 and the Period from June 1, 2015 (inception) to September 30, 2015~~

~~(Unaudited)~~

Common Stock

Additional

Deficit
Accumulated
During the
Development

Retained

Stockholders’

Shares

Amount

Paid-in Capital

Stage

Earnings

Equity

Balance at January 1, 2016

11,110,204

1,112

5,468,811

—

(469,919
)

5,000,004

Change in proceeds subject to possible redemption; 35,331,596 shares at redemption value

433,200

43

4,331,957

—

—

4,332,000

Net loss

—

—

—

(4,332,000
)

—

(4,332,000
)
Balance at September 30, 2016

11,543,404

1,155

9,800,768

(4,332,000
)

(469,919
)

5,000,004

Common Stock

Additional

Deficit
Accumulated
During the
Development

Retained

Stockholders’

Shares

Amount

Paid-in Capital

Stage

Earnings

Equity

Balance at June 1, 2015 (inception)

—

$
—

$
—

$
—

$
—

$
—

Sale of Class F common stock to Sponsor in June 2015⁽¹⁾

9,375,000

938

24,062

—

—

25,000

Sale of 37,500,000 units at $10.00 per unit on August 19, 2015

37,500,000

3,750

374,996,250

—

—

375,000,000

Sale of 19,000,000 Private Placement Warrants to Sponsor on August 19, 2015 at $0.50 per Private Placement Warrant

—

—

9,500,000

—

—

9,500,000

Underwriters' discounts and commissions and offering expenses

—

—

(8,282,116
)

—

—

(8,282,116
)
Deferred underwriting compensation

—

—

(13,125,000
)

—

—

(13,125,000
)
Class A common stock subject to possible redemption; 35,789,907 shares at a redemption value of $10.00 per share

(35,789,907
)

(3,579
)

(357,895,491
)

—

—

(357,899,070
)
Net loss

—

—

—

(218,807
)

—

(218,807
)
Balance at September 30, 2015

11,085,093

1,109

5,217,705

(218,807
)

—

5,000,007

~~(1) Reflects the forfeiture of 2,125,000 shares of Class F common stock. See Note 4.~~

~~See accompanying notes to condensed financial statements (unaudited).~~

~~GORES HOLDINGS, INC.~~

~~CONDENSED STATEMENT OF CASH FLOWS~~

~~(Unaudited)~~

For the Nine

For the period from June

months ended

1, 2015 (inception) to

Cash flows from operating activities:
September 30, 2016

September 30, 2015

Net loss
$
(4,332,000
)

$
(218,807
)
Changes in prepaid expenses

103,911

(292,921
)
Changes in state franchise tax accrual

23,175

135,000

Changes in accounts payable and accrued expenses

3,630,219

—

Changes in deferred offering costs associated with proposed public offering

—

—

Changes in accrued expenses, formation and offering costs

—

15,000

Net cash used by operating activities

(574,695
)

(361,728
)

Cash flows from investing activities:

Cash deposited in Trust Account

—

(375,000,000
)
Interest reinvested in Trust Account

(384,850
)

(1,130
)

Net cash used in investing activities

(384,850
)

(375,001,130
)

Cash flows from financing activities:

Proceeds from notes and advances payable – related party

175,000

300,000

Proceeds from sale of Class F common stock to Sponsor

—

25,000

Proceeds from sale of units in initial public offering

375,000,000

Proceeds from sale of Private Placement Warrants to Sponsor

9,500,000

Repayment of notes and advances payable – related party

(300,000
)
Payment of underwriters’ discounts and commissions

(7,500,000
)
Payment of accrued offering costs

—

(357,116
)

Net cash provided by financing activities

175,000

376,667,884

Increase in cash

(784,545
)

1,305,026

Cash at beginning of period

790,635

—

Cash at end of period
$
6,090

$
1,305,026

Supplemental disclosure of non-cash financing activities:

Deferred underwriting compensation
$
13,125,000

$
13,125,000

Offering costs included in accrued expenses
$
—

$
425,000

Cautionary Note Regarding Forward Looking Statements

~~See accompanying notes to condensed financial~~

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains statements ~~(unaudited).~~

~~GORES HOLDINGS, INC.~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Note 1 — Organization and Business Operations~~

~~Organization and General~~

Gores Holdings, Inc. (the “Company”) was incorporated in Delaware on June 1, 2015. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). The Company has neither engaged in any significant operations nor generated any revenue to date. The Company’s management has broad discretion with respect to the Business Combination. The Company’s sponsor is Gores Sponsor LLC, a Delaware limited liability company (the “Sponsor”). The Company has selected December 31 as its fiscal year-end.

At September 30, 2016, the Company had not commenced any significant operations. All activity for the period from June 1, 2015 (inception) through September 30, 2016 relates to the Company’s formation, initial public offering (“Public Offering”) described below and efforts directed toward locating and pursuing a Business Combination. The Company will not generate any operating revenues until after the completion of its Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the Public Offering and the sale of the Private Placement Warrants (as defined below) held in the Trust Account (as defined below).

~~Financing~~

The Company intends to finance the cash portion of the Transaction consideration with the net proceeds from its $375,000,000 Public Offering held in the Trust Account and the proceeds from its sale of $9,500,000 of Private Placement Warrants.

Upon the closing of the Public Offering on August 19, 2015 (the “Public Offering Closing Date”) and the sale of the Private Placement Warrants, an aggregate of $375,000,000 was placed in a trust account with Continental Stock Transfer & Trust Company (the “Trust Account”) acting as Trustee. The remaining proceeds held outside the Trust Account may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.

~~Trust Account~~

Funds held in the Trust Account can be invested only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, as amended,reflecting our views about our future performance that ~~invest only in direct U.S. government obligations. As of September 30, 2016 and December 31, 2015, the Trust Account consisted solely of money market funds.~~

The Company’s amended and restated certificate of incorporation provides that, other than the withdrawal of interest to pay income taxes, if any, none of the funds held in trust will be released until the earliest of: (i) the completion of the Business Combination; or (ii) the redemption of any public shares of common stock properly tendered in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation to modify the substance or timing of the Company’s obligation to redeem 100% of such public shares of common stock if the Company does not complete the Business Combination within 24 months from the closing of the Public Offering; or (iii) the redemption of 100% of the public shares of common stock if the Company is unable to complete a Business Combination within 24 months from the closing of the Public Offering, subject to the requirements of law and stock exchange rules.

~~Business Combination~~

The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering, although substantially all of the net proceeds of the Public Offering are intended to be generally applied toward consummating a Business Combination. The Business Combination must be with one or more target businesses that together have a fair market value equal to at least 80% of the balance in the Trust Account (less any deferred underwriting commissions and taxes payable on interest income earned) at the time of the Company signing a definitive agreement in connection with the Business Combination. Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination.

The Company, after signing a definitive agreement for a Business Combination, will either (i) seek stockholder approval of the Business Combination at a meeting called for such purpose in connection with which stockholders may seek to redeem their shares, regardless of whether they vote for or against the Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the Business Combination, including interest income but less taxes payable, or (ii) provide stockholders with the opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the Business Combination, including interest income but less taxes payable. The decision as to whether the Company will seek stockholder approval of the Business Combination or will allow stockholders to sell their shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek stockholder approval, unless a vote is required by law or under the rules of the National Association of Securities Dealers Automated Quotations Capital Market (“NASDAQ”). If the Company seeks stockholder approval, it will complete its Business Combination only if a majority of the outstanding shares of common stock voted are voted in favor of the Business Combination. However, in no event will the Company redeem its public shares of common stock in an amount that would cause its net tangible assets to be less than $5,000,001. In such case, the Company would not proceed with the redemption of its public shares of common stock and the related Business Combination, and instead may search for an alternate Business Combination.

As a result of the foregoing redemption provisions, the public shares of common stock have been recorded at redemption amount and classified as temporary equity, in accordance with ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”).

The Company only has 24 months from the closing date of the Public Offering to complete its Business Combination. If the Company does not complete a Business Combination within this period of time, it shall (i) cease all operations except for the purposes of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter, redeem the public shares for a per share pro rata portion of the Trust Account, including interest income, but less taxes payable (less up to $50,000 of such net interest income to pay dissolution expenses) and (iii) as promptly as possible following such redemption, dissolve and liquidate the balance of the Company’s net assets to its remaining stockholders, as part of its plan of dissolution and liquidation. The Sponsor and the Company’s officers and directors have entered into a letter agreement with the Company, pursuant to which they waived their rights to participate in any redemption with respect to their Founder Shares (as defined below); however, if the Sponsor or any of the Company’s officers, directors or affiliates acquire public shares, they will be entitled to a pro rata share of the Trust Account in the event the Company does not complete a Business Combinationconstitute “forward-looking statements” within the ~~required time period.~~

~~In the event~~meaning of ~~such distribution, it is possible that the per share value~~Section 27A of ~~the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per Unit (as defined below) in the Public Offering.~~

~~Emerging Growth Company~~

Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement pursuant to the Securities Act of 1933, as amended (the “Securities Act”) ~~declared effective or do not have a class~~and Section 21E of ~~securities registered under~~ the Securities Exchange Act of 1934, as amended (the “Exchange Act”)~~) are required to comply with the new or revised financial accounting standards. The JOBS Act provides~~, that ~~a company can elect to opt out of the extended transition period~~involve substantial risks and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

~~Note 2 — Significant Accounting Policies~~

~~Basis of Presentation~~

~~The accompanying financial~~uncertainties. All statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”), and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position as of September 30, 2016 and the results of operations and cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the full year in any other period.

The accompanying unaudited condensed financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2016.

~~Net Loss Per Common Share~~

Net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, plus to the extent dilutive the incremental number of shares of common stock to be issued in connection with the conversion of Class F common stock or to settle warrants, as calculated using the treasury stock method. At September 30, 2016, the Company did not have any dilutive securities or other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company under the treasury stock method. As a result, diluted net loss per common share is the same as basic net loss per common share for the period.

~~Concentration of Credit Risk~~

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution as well as the Trust Account, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

~~Financial Instruments~~

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet.

~~Offering Costs~~

The Company complies with the requirements of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses of Offering.” Offering costs consist principally of professional and registration fees incurred through the balance sheet date that are related to the Public Offering and were charged to stockholders’ equity upon the completion of the Public Offering. Accordingly, at September 30, 2016 and December 31, 2015, offering costs totaling approximately $21,407,116 and $21,407,116 respectively (including $20,625,000 in underwriters’ fees), have been charged to stockholders’ equity.

~~Redeemable Common Stock~~

As discussed in Note 3, all of the 37,500,000 common shares sold as part of the Units in the Public Offering contain a redemption feature which allows for the redemption of such public shares in connection with the Company’s liquidation, if there is a stockholder vote or tender offer in connection with the Business Combination and in connection with certain amendments to the Company’s charter. In accordance with ASC 480, redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although the Company did not specify a maximum redemption threshold, its charter provides that currently, the Company will not redeem its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001.

The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against additional paid in capital.

~~Accordingly, at September 30, 2016 and December 31, 2015, 35,331,596 and 35,764,796, respectively, of the 37,500,000 public shares are classified outside of permanent equity at its redemption value.~~

~~Use of Estimates~~

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~Income Taxes~~

The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period

~~that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.~~

For those liabilities or benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax liabilities as income tax expense. No amounts were accrued for the payment of interest and penalties at September 30, 2016.

The Company may be subject to potential examination by U.S. federal, states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income amounts various tax jurisdictions and compliance with U.S. federal, states or foreign tax laws.

~~The Company is incorporated in the State of Delaware and is required to pay franchise taxes to the State of Delaware on an annual basis.~~

~~Cash and Cash Equivalents~~

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with and the credit quality of the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.

~~Trust Account~~

~~At September 30, 2016 and December 31, 2015, the Company had $375,395,331~~ and $375,010,481, respectively, in the Trust Account which may be utilized for Business Combinations. At September 30, 2016 and December 31, 2015, the Trust Account consisted of solely money market funds.

~~Recently Adopted Accounting Pronouncements~~

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-10 to Topic 915, which eliminated certain financial reporting requirements of companies previously identified as “Development Stage Entities” (Topic 915). The amendments in ASU No. 2014-10 simplify the accounting guidance by removing all incremental financial reporting requirements for development stage entities. The amendments also reduce data maintenance and, for those entities subject to audit, audit costs, by eliminating the requirement for development stage entities to present inception-to-date information in the statements of operations, cash flows and stockholders’ equity. The adoption of ASU No. 2014-10 did not have a significant impact on the financial statements.

The Company adopted FASB ASU No. 2014-15, which provided guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued and to provide related footnote disclosures. The adoption of this guidance did not have a significant impact on the financial statements.

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Income Taxes - Balance Sheet Classification of Deferred Taxes~~ (Topic 740). The amendments under the new guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for consolidated financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendmentscontained in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has early adopted this guidance effective December 31, 2015 on a retrospective basis, the impact of which was not significant to the financial statements.

~~The Company adopted~~ ~~FASB issued ASU 2016-09,~~ ~~Compensation - Stock Compensation~~ (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance simplifies several aspects of accounting for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. The Company adopted this standard during the three months ended September 30, 2016 on a prospective basis and its adoption did not have a material impact on the Company’s financial statements.

~~Going Concern Consideration~~

If the Company does not complete its Business Combination by August 19, 2017, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem 100% of the common stock sold as part of the units in the Public Offering, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (which interest shall be net of franchise and income taxes payable and less up to $50,000 of such net interest which may be distributed to the Company to pay dissolution expenses), divided by the number of then

outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the Company’s remaining stockholders and the Company’s Board of Directors, dissolve and liquidate, subject in each case to the Company’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.

In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per unit in the Public Offering. In addition if the Company fails to complete its Business Combination by August 19, 2017, there will be no redemption rights or liquidating distributions with respect to the warrants, which will expire worthless.

In addition, at September 30, 2016, the Company had current liabilities of $4,115,696 and working capital of ($3,954,367), largely due to amounts owed to professionals, consultants, advisors and others who are working on seeking a Business Combination as described in Note 1. Such work is continuing after September 30, 2016 and amounts are continuing to accrue. This working capital deficit will be funded at the time of closing of the transaction discussed in Note 10.

~~Note 3 — Public Offering~~

~~Public Units~~

On August 19, 2015, the Company sold 37,500,000 units at a price of $10.00 per unit (the “Units”), including 2,500,000 Units as a result of the underwriters’ partial exercise of their over-allotment option, generating gross proceeds of $375,000,000. Each Unit consists of one share of the Company’s Class A common stock, $0.0001 par value, and one redeemable Class A common stock purchase warrant (the “Warrants”). Each Warrant entitles the holder to purchase one-half of one share of Class A common stock for $5.75 per half share. Each Warrant will become exercisable on the later of 30 days after the completion of the Business Combination or 12 months from the closing of the Public Offering and will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. However, if the Company does not complete the Business Combination on or prior to the 24-month period allotted to complete the Business Combination, the Warrants will expire at the end of such period. The Warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and the Company. The Company did not register the shares of common stock issuable upon exercise of the Warrants under the Securities Act or any state securities law. Under the terms of the warrant agreement, the Company has agreed to use its best efforts to file a registration statement under the Securities Act following the completion of the Business Combination covering the shares of common stock issuable upon exercise of the Warrants.

The Company paid an upfront underwriting discount of 2.00% ($7,500,000) of the per Unit offering price to the underwriters at the closing of the Public Offering, with an additional fee (the “Deferred Discount”) of 3.50% of the per Unit offering price payable upon the Company’s completion of a Business Combination. The Deferred Discount will become payable to the underwriters from the amounts held in the Trust Account solely in the event the Company completes its Business Combination.

~~Note 4 — Related Party Transactions~~

~~Founder Shares~~

On June 12, 2015, the Sponsor purchased 11,500,000 shares of Class F common stock (the “Founder Shares”) for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, the Sponsor transferred an aggregate of 75,000 Founder Shares to the Company’s independent directors (together with the Sponsor, the “Initial Stockholders”). On August 13, 2015, the Sponsor forfeited 1,437,500 Founder Shares, and following the expiration of the unexercised portion of underwriters’ over-allotment option, the Sponsor forfeited an additional 687,500 Founder Shares, so that the Founder Shares held by the Initial Stockholders would represent 20.0% of the outstanding shares of common stock following completion of the Public Offering. Such forfeitures were retroactively applied as indicated in the condensed statement of changes in stockholders’ equity to reflect an initial sale of 9,375,000 Founder Shares to the Sponsor in June 2015. The Founder Shares are identical to the common stock included in the Units sold in the Public Offering except that the Founder Shares will automatically convert into shares of Class A common stock at the time of the Business Combination on a one-for-one basis, subject to adjustment as described in the Company’s amended and restated certificate of incorporation.

~~Private Placement Warrants~~

The Sponsor purchased from the Company an aggregate of 19,000,000 warrants at a price of $0.50 per warrant (a purchase price of $9,500,000) in a private placement that occurred prior to the Public Offering (the “Private Placement Warrants”). Each Private Placement Warrant entitles the holder to purchase one-half of one share of Class A common stock at $5.75 per half share. A portion of the purchase price of the Private Placement Warrants was added to the proceeds from the Public Offering to be held in the Trust

Account pending completion of the Business Combination. The Private Placement Warrants have terms and provisions that are identical to those of the Warrants sold as part of the Units in the Public Offering, except that the Private Placement Warrants may be net cash settled and are not redeemable so long as they are held by the Sponsor or its permitted transferees

If the Company does not complete a Business Combination, then the Private Placement Warrants proceeds will be part of the liquidation distribution to the public stockholders and the Private Placement Warrants will expire worthless.

~~Registration Rights~~

The holders of Founder Shares, Private Placement Warrants and warrants issued upon conversion of working capital loans, if any, have registration rights (in the case of the Founder Shares, only after conversion of such shares to common shares) pursuant to a registration rights agreement entered into by the Company, the Sponsor and the other security holders named therein on August 13, 2015. These holders will also have certain demand and “piggy back” registration rights. The Company will bear the expenses incurred in connection with the filing of any such registration statements.

~~Promissory Note~~

On July 27, 2016, the Sponsor made available to the Company a loan of up to $500,000 pursuant to a promissory note issued by the Company to the Sponsor. The proceeds from the note will be used for on-going operational expenses and certain other expenses in connection with the Acquisition. The note is unsecured, non-interest bearing and matures on the earlier of: (i) December 31, 2016 or (ii) the date on which the Company consummates the proposed Acquisition. As of September 30, 2016, the amount advanced by Sponsor to the Company was $175,000.

~~Administrative Services Agreement~~

The Company entered into an administrative services agreement on August 13, 2015, pursuant to which it agreed to pay to an affiliate of the Sponsor $10,000 a month for office space, utilities and secretarial support. Services commenced on the date the securities were first listed on the NASDAQ Capital Market and will terminate upon the earlier of the consummation by the Company of a Business Combination or the liquidation of the Company. For the three and nine months ended September 30, 2016, the Company paid an affiliate of the Sponsor $30,000 and $90,000, respectively, for such services.

~~Note 5 — Deferred Underwriting Compensation~~

The Company is committed to pay the Deferred Discount totaling $13,125,000, or 3.50% of the gross offering proceeds of the Public Offering, to the underwriters upon the Company’s consummation of a Business Combination. The underwriters are not entitled to any interest accrued on the Deferred Discount, and no Deferred Discount is payable to the underwriters if there is no Business Combination.

~~Note 6 — Income Taxes~~

~~Components of the Company’s deferred tax asset at September 30, 2016 are as follows:~~

~~Net operating loss~~		~~1,824,729~~
~~Valuation allowance~~		~~(1,824,729)~~
	—

~~Components of the Company’s deferred tax asset at December 31, 2015 are as follows:~~

~~Net operating loss~~		~~178,569~~
~~Valuation allowance~~		~~(178,569)~~
	—

The Company established a valuation allowance of approximately $1,824,729 as of September 30, 2016 and $178,569 as of December 31, 2015, which fully offsets the deferred tax asset as of September 30, 2016 and December 31, 2015 of approximately $1,824,729 and $178,569, respectively. The deferred tax asset results from applying an effective combined federal and state tax rate of 38% to net operating carryforwards of approximately $4,801,919 as of September 30, 2016 and $469,919 as of December 31, 2015, respectively. The Company’s net operating losses will expire beginning 2035.

The Company has evaluated tax positions taken or expected to be taken in the course of preparing the financial statements to determine if the tax positions are “more likely than not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more likely than not” threshold would be recorded as a tax benefit or expense in the current year. The Company has concluded that there was no impact related to uncertain tax positions on the results of its operations for the three months ended

September 30, 2016. As of September 30, 2016, the Company has no accrued interest or penalties related to uncertain tax positions. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company’s conclusions regarding tax positions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, ongoing analyses of tax laws, regulations, and interpretations thereof.

~~Note 7 — Investments and Cash Held in Trust~~

~~At September 30, 2016 and December 31, 2015, funds in the Trust Account totaled $375,395,331 and $375,010,481, respectively, and were held in a money market fund.~~

~~Note 8 — Fair Value Measurement~~

The Company complies with FASB ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. ASC 820 determines fair value to be the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date.

The following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:

Significant

Significant

Other

Other

Quoted Prices in

Observable

Unobservable

September 30,

Active Markets

Inputs

Inputs

Description

2016

(Level 1)

(Level 2)

(Level 3)

Investments in money market funds held in Trust Account

375,395,331

375,395,331

—

—

Total

$
375,395,331

$
375,395,331

$
—

$
—

Significant

Significant

Other

Other

Quoted Prices in

Observable

Unobservable

December 31,

Active Markets

Inputs

Inputs

Description

2015

(Level 1)

(Level 2)

(Level 3)

Investments in money market funds held in Trust Account

375,010,481

375,010,481

—

—

Total

$
375,010,481

$
375,010,481

$
—

$
—

~~Note 9 — Stockholders’ Equity~~

~~Common Stock~~

The Company is authorized to issue 220,000,000 shares of common stock, consisting of 200,000,000 shares of Class A common stock, par value $0.0001 per share and 20,000,000 shares of Class F common stock, par value $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share of common stock and vote together as a single class. At September 30, 2016, there were 37,500,000 shares of Class A common stock and 9,375,000 shares of Class F common stock issued and outstanding.

~~Preferred Stock~~

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At September 30, 2016, there were no shares of preferred stock issued and outstanding.

~~Note 10 — Subsequent Events~~

~~Proposed Business Combination~~

On July 5, 2016, Gores Holdings, Inc. (the “Company”) entered into a Master Transaction Agreement (the “Master Transaction Agreement”), by and among the Company, Merger Sub, the Sellers and the Sellers’ Representative (each as defined in the Master Transaction Agreement), pursuant to which the Company intends to acquire Hostess Brands, LLC and related entities (the “Acquisition”). The transactions set forth in the Master Transaction Agreement (the “Transactions”) will result in a “Business Combination” involving the Company, as defined in the Company’s charter. A meeting of the Company’s stockholders was held on November 3, 2016 for purposes of approving the Transactions. At the meeting, the requisite number of the Company’s shareholders approved the Acquisition and the other Transactions.

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and the notes related thereto which are included in “Item 1. Financial Statements” of this Quarterly Report ~~on Form 10-Q.~~

~~Cautionary note regarding forward-looking statements~~

~~All statements~~ other than statements of historical fact, ~~included in this Quarterly Report on Form 10-Q~~ including ~~without limitation,~~ statements ~~under this “Management’s Discussion~~regarding our future results of operations and ~~Analysis of Financial Condition and Results of Operations” regarding the Company’s~~ financial position, our business strategy and ~~the~~ plans, and our objectives ~~of management~~ for future operations, are forward-looking statements. ~~When used in~~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‑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 Quarterly Report are cautioned not to place undue reliance on ~~Form 10-Q, words~~any such ~~as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or the Company’s management, identify~~ forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. Actual results could differ materially from those contemplated by the forward-looking statements asAs a result of ~~certain factors detailed~~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 under “Risk Factors” in our ~~filings with~~Annual Report on Form 10-K for the ~~Securities and Exchange Commission (the “SEC”).~~year ended December 31, 2016, as updated by subsequent filings. All subsequent written or oral forward-looking statements attributable to us or persons acting on ~~the Company’s~~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 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 1 of this ~~paragraph.~~

~~Overview~~

~~We are a blank check company incorporated~~Quarterly Report on ~~June 1, 2015 as~~Form 10-Q.

HOSTESS BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except shares and per share data)



	September 30,			December 31,
ASSETS	2017			2016
	(Successor)			(Successor)
Current assets:
Cash and cash equivalents	$	101,171		$	26,855
Accounts receivable, net	100,733			89,237
Inventories	33,812			30,444
Prepaids and other current assets	6,791			4,827
Total current assets	242,507			151,363
Property and equipment, net	166,931			153,224
Intangible assets, net	1,929,082			1,946,943
Goodwill	580,349			588,460
Other assets, net	7,804			7,902
Total assets	$	2,926,673		$	2,847,892

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Long-term debt and capital lease obligation payable within one year	$	11,357		$	11,496
Accounts payable	53,451			34,083
Customer trade allowances	35,150			36,691
Accrued expenses and other current liabilities	11,051			21,656
Total current liabilities	111,009			103,926
Long-term debt and capital lease obligation	988,476			993,374
Tax receivable agreement	175,487			165,384
Deferred tax liability	366,457			353,797
Total liabilities	1,641,429			1,616,481
Commitments and Contingencies (Note 14)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 99,992,183 and 98,250,917 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	10			10
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 30,398,777 and 31,704,988 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	3			3
Additional paid in capital	923,739			912,824
Accumulated other comprehensive loss	(43		)	—
Retained earnings (accumulated deficit)	28,593			(15,618		)
Stockholders’ equity	952,302			897,219
Non-controlling interest	332,942			334,192
Total liabilities and stockholders’ equity	$	2,926,673		$	2,847,892

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except shares and per share data)



	Three Months Ended					Nine Months Ended
	September 30, 2017		September 30, 2016			September 30, 2017		September 30, 2016
	(Successor)		(Predecessor)			(Successor)		(Predecessor)
Net revenue	$	192,250	$	196,197		$	579,967	$	548,757
Cost of goods sold	113,885		113,618			333,861		309,427
Gross profit	78,365		82,579			246,106		239,330
Operating costs and expenses:
Advertising and marketing	8,871		10,381			24,304		27,529
Selling expense	7,606		8,271			24,418		23,175
General and administrative	14,494		10,784			43,416		32,015
Amortization of customer relationships	5,994		156			17,860		468
Business combination transaction costs	—		4,049			—		7,065
Impairment of property and equipment	1,003		—			1,003		7,267
Related party expenses	92		1,058			284		3,431
Tax receivable agreement liability remeasurement	1,589		—			1,589		—
Recall and other costs (recoveries)	—		(3,787		)	—		473
Total operating costs and expenses	39,649		30,912			112,874		101,423
Operating income	38,716		51,667			133,232		137,907
Other expense:
Interest expense, net	9,966		18,004			29,831		53,746
Loss on modification of debt	2,122		—			1,948		—
Other expense	182		173			1,309		2,344
Total other expense	12,270		18,177			33,088		56,090
Income before income taxes	26,446		33,490			100,144		81,817
Income tax expense (benefit)	10,316		(23		)	31,608		294
Net income	16,130		33,513			68,536		81,523
Less: Net income attributable to the non-controlling interest	6,581		2,329			24,325		4,110
Net income attributable to Class A shareholders/partners	$	9,549	$	31,184		$	44,211	$	77,413

Earnings per Class A share:
Basic	$	0.10				$	0.45
Diluted	$	0.09				$	0.42
Weighted-average shares outstanding:
Basic	99,557,183					98,920,808
Diluted	105,418,566					105,840,673

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, amounts in thousands)



	Three Months Ended					Nine Months Ended
	September 30, 2017			September 30, 2016		September 30, 2017			September 30, 2016
	(Successor)			(Predecessor)		(Successor)			(Predecessor)
Net income	$	16,130		$	33,513	$	68,536		$	81,523
Other comprehensive loss:
Unrealized income (loss) on interest rate swap contract designated as a cash flow hedge	565			—		(100		)	—
Income tax (expense) benefit	(172		)	—		31			—
Comprehensive income	16,523			33,513		68,467			81,523
Less: Comprehensive income attributed to non-controlling interest	6,712			2,329		24,299			4,110
Comprehensive income attributed to class A shareholders/partners	$	9,811		$	31,184	$	44,168		$	77,413

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited, amounts in thousands, except shares data)



Partners’ Equity (Deficit) Hostess Holdings, LP (Predecessor)
	Class A			Class C			Total Partners’ Equity (Deficit)			Non-controlling Interest
Balance – December 31, 2015	$	(276,084	)	$	(346,046	)	$	(622,130	)	$	(37,991	)
Distributions to partners	(2,439		)	(8,134		)	(10,573		)	(555		)
Unit based compensation	345			344			689			—
Net income	38,707			38,706			77,413			4,110
Balance – September 30, 2016	$	(239,471	)	$	(315,130	)	$	(554,601	)	$	(34,436	)



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–December 31, 2016	98,250,917	$	10	31,704,988		$	3	$	912,824		$	—		$	(15,618	)	$	897,219		$	334,192
Comprehensive income	—	—		—		—		—			(43		)	44,211			44,168			24,299
Share-based compensation	435,000	—		—		—		7,990			—			—			7,990			—
Exchanges	1,306,211	—		(1,306,211	)	—		12,609			—			—			12,609			(12,609		)
Distributions	—	—		—		—		—			—			—			—			(12,940		)
Exercise of public warrants	55	—		—		—		1			—			—			1			—
Tax receivable agreement arising from exchanges, net of income taxes of $1,845	—	—		—		—		(9,685		)	—			—			(9,685		)	—
Balance–September 30, 2017	99,992,183	$	10	30,398,777		$	3	$	923,739		$	(43	)	$	28,593		$	952,302		$	332,942

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)



			Nine Months Ended
			September 30, 2017			September 30, 2016
			(Successor)			(Predecessor)
Operating activities
	Net income		$	68,536		$	81,523
	Depreciation and amortization		28,576			9,054
	Impairment of property and equipment		1,003			7,267
	Debt discount (premium) amortization		(647		)	2,486
	Non-cash loss on debt modification		1,729			—
	Non-cash change in tax receivable agreement liability		1,589			—
	Gain on sale of property and equipment		(10		)	(153		)
	Share-based compensation		7,990			689
	Deferred taxes		19,993			237
	Change in operating assets and liabilities
		Accounts receivable	(11,496		)	(13,555		)
		Inventories	(3,368		)	(1,850		)
		Prepaids and other current assets	(1,950		)	(9,397		)
		Accounts payable and accrued expenses	7,369			17,098
		Customer trade allowances	(1,541		)	(4,316		)
		Other	—			430
	Net cash provided by operating activities		117,773			89,513

Investing activities
	Purchases of property and equipment		(22,755		)	(23,995		)
	Acquisition of Superior		—			(50,091		)
	Proceeds from sale of assets		85			4,350
	Acquisition of software assets		(1,728		)	(1,917		)
	Net cash used in investing activities		(24,398		)	(71,653		)

Financing activities
	Repayments of long-term debt and capital lease obligation		(5,103		)	(6,985		)
	Debt fees		(1,017		)	—
	Distributions to partners		—			(10,573		)
	Distributions to non-controlling interest		(12,940		)	(555		)
	Proceeds from the exercise of warrants		1			—
	Net cash used in financing activities		(19,059		)	(18,113		)
Net increase in cash and cash equivalents			74,316			(253		)
Cash and cash equivalents at beginning of period			26,855			64,473
Cash and cash equivalents at end of period			$	101,171		$	64,220



Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
	Interest	$	35,085	$	50,799
	Taxes paid	$	12,902	$	—
Supplemental disclosure of non-cash investing:
	Purchases of property and equipment funded by accounts payable	$	932	$	2,072

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Hostess Brands, Inc. is a Delaware corporation headquartered in Kansas City, Missouri. The consolidated financial statements include the accounts of Hostess Brands, Inc. and ~~formed~~its wholly owned subsidiaries (collectively, the “Company”). The Company is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing fresh sweet baked goods in the United States. 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 the Hostess® and Dolly Madison® group of brands, including Twinkies®, CupCakes, Ding Dongs®, HoHos®, Donettes® and Fruit Pies.

On November 4, 2016 (the “Closing Date”), in a transaction referred to as the “Business Combination,” the Company, then known as Gores Holdings, Inc. 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. prior to the Business Combination, and the “The Gores Group” refers to The Gores Group 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.” and its trading symbols on NASDAQ from “GRSH” and “GRSHW,” to “TWNK” and “TWNKW”.

As a result of the Business Combination, for accounting purposes, Hostess Brands, Inc. 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 (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.

In the consolidated statements of operations, amortization of customer relationships (previously reported in the Predecessor’s unaudited quarterly financial statements within general and administrative) has been presented separately from general and administrative in the current period presentation, with conforming reclassifications made for the ~~purpose~~prior period presentation; recall and other costs (recoveries) (previously reported in the Predecessor‘s unaudited quarterly financial statements as a reduction of ~~effecting~~gross profit) have been presented as recall and other expenses along with amounts previously reported as loss on sale of property and equipment and bakery shutdown costs.

In the consolidated balance sheets, customer trade allowances (previously netted as an allowance against trade accounts receivable) are presented in current liabilities, with conforming reclassifications made for the prior period presentation.

For the three and nine months ended September 30, 2017, the Company recorded adjustments to previously reported gains on debt modifications, resulting in a ~~merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination~~pre-tax charge of $2.1 million and $1.6 million, respectively. The Company has determined that these corrections of errors are immaterial to the current and prior reported periods.

The Company has two reportable segments: Sweet Baked Goods and Other.

Basis of Presentation

The consolidated financial statements included herein have been prepared in accordance with ~~one or more businesses (the “Business Combination”) with one or more target businesses. We intend to effectuate our Business Combination using cash from~~generally accepted accounting principles in the ~~proceeds~~United States of ~~our initial public offering~~America (“~~Public Offering”~~U.S. GAAP”) and the ~~sale~~rules and regulations of ~~an aggregate~~Securities and Exchange Commission (“SEC”). In the opinion of ~~19,000,000 warrants at~~management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented, all such adjustments were of a ~~price~~normal and recurring nature. The results of ~~$0.50 per warrant (a purchase price~~operations are not necessarily indicative of ~~$9,500,000)~~the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in ~~a private placement that occurred prior to~~conjunction with the ~~Public Offering (the “Private Placement Warrants”), our capital stock, debt, or a combination~~audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016.

Principles of ~~cash, stock and debt.~~

~~As indicated in the~~Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity), collectively referred to as the Company. All intercompany balances and transactions have been eliminated in ~~“Item 1. Financial Statements,”~~consolidation.

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, reserves for trade and promotional allowances, workers’ compensation and self-insured medical claims. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with current year presentation.

Accounts Receivable

Accounts receivable represents amounts invoiced to customers for goods that have been received by the customer. As of September 30, 2017 and December 31, 2016, the Company’s accounts receivable were $100.7 million and $89.2 million, respectively, which have been reduced by allowances for damages occurring during shipment, quality claims and doubtful accounts in the amount of $2.5 million and $1.9 million, respectively. In addition, there are customer trade allowances of $35.2 million and $36.7 million as of September 30, 2017 and December 31, 2016, respectively, in current liabilities in the consolidated balance sheets.

Inventories

Inventories are stated at the lower of cost or market 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)	September 30, 2017		December 31, 2016
	(Successor)		(Successor)
Ingredients and packaging	$	14,474	$	12,712
Finished goods	16,441		14,229
Inventory in transit to customers	2,897		3,503
	$	33,812	$	30,444

Impairment of Property and Equipment

For the three and nine months ended September 30, 2017 (Successor), the Company recorded an impairment loss of $1.0 million related to a production line that was idled when the related production was transitioned to a third party. During the first quarter of 2016 (Predecessor), the Company recorded an impairment loss of $7.3 million when it closed multiple production lines at the Indianapolis, Indiana bakery and transitioned production to other facilities. The measurement of this loss was based on Level 3 inputs within the fair value measurement hierarchy.

Software Costs

Included in the caption “Other assets” in the consolidated balance sheets is capitalized software in the amount of $7.3 million and $7.4 million at September 30, 2017 and December 31, 2016, ~~we had approximately $6,000~~respectively. Capitalized software costs are amortized over their estimated useful life of five years commencing when such assets are ready for their intended use. Software amortization expense included in ~~cash~~general and ~~deferred offering~~administrative was $0.6 million and $1.8 million for the three and nine months ended September 30, 2017 (Successor), respectively, compared to $0.5 million and $1.4 million for the three and nine months ended September 30, 2016 (Predecessor), respectively.

Concentrations

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:



	Three Months Ended				Nine Months Ended
(% of Consolidated Net Revenues)	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
	(Successor)		(Predecessor)		(Successor)		(Predecessor)
Sweet Baked Goods	18.8	%	18.1	%	18.9	%	20.3	%
Other	0.9	%	3.1	%	0.8	%	1.5	%
Total	19.7	%	21.2	%	19.7	%	21.8	%

Advertising Costs

Advertising costs, ~~of $13,125,000. We expect to continue to incur significant costs~~through both national and regional media, are expensed in the ~~pursuit~~period in which the advertisements are run. These costs totaled $0.3 million and $0.6 million for the three and nine months ended September 30, 2017 (Successor), and $0.4 million and $1.5 million for the three and nine months ended September 30, 2016 (Predecessor), respectively. These costs are recorded within advertising and marketing expense on the consolidated statement of ~~our acquisition plans. We cannot assure you~~operations.

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 loss 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 in earnings 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.

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 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 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 ~~our~~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 has early adopted ASU 2017-9 for the three months ended September 30, 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 and does not expect adoption to have a material impact on its consolidated financial position, results of operations or cash flows. Our goodwill impairment tests have not proceeded to Step 2 in any measurement period.

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 standard permits adoption retrospectively to each prior report period presented, retrospectively to each prior report period presented utilizing practical expedient(s), or retrospectively with the cumulative effect of initially applying the standard at the date of initial application. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which clarifies the implementation guidance on principal versus agent considerations and also identifies performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The Company is in the process of completing its review of customer contracts to determine the impact that Topic 606 will have on the Company's consolidated financial statements. The Company plans to ~~complete our Business Combination will be successful.~~

~~Recent Developments~~

~~Proposed Hostess Business Combination~~

~~On July 5, 2016, Gores Holdings, Inc. (the “Company”) entered into a Master Transaction Agreement (the “Master Transaction Agreement”), by and among~~adopt the ~~Company, Merger Sub, the Sellers and the Sellers’ Representative (each as defined~~standard in the ~~Master Transaction Agreement), pursuant to which~~first quarter of 2018 retrospectively with the ~~Company intends to acquire Hostess Brands, LLC and related entities (the “Acquisition”).~~ cumulative effect of initially applying the standard as of January 1, 2018.

The ~~transactions set forth in~~planned adoption dates for all standards not yet implemented are based on the ~~Master Transaction Agreement (the “Transactions”)~~Company’s assessment that it will ~~result in a “Business Combination” involving the~~lose its status as an Emerging Growth Company, as defined in the Jumpstart Our Business Startups Act (JOBS Act), as of December 31, 2017.

2. Business Combination

The purchase price for the Business Combination was allocated to the fair value of the assets acquired and liabilities assumed based on the preliminary valuations performed by the Company as of the Closing Date. During the nine months ended September 30, 2017 the Company revised its estimate of the future cash tax savings under the tax receivable agreement. This resulted in a $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.

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 grant 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.

Restricted Stock Units

During the nine months ended September 30, 2017, the following RSUs were granted under the 2016 Plan:

22,732 RSUs to directors of the Company. The units vest on November 4, 2017. These awards only contain service conditions.

297,500 RSUs to certain members of management. One-third of the units vest at each of the following dates: January 1, 2018, November 4, 2018, and November 4, 2019. Vesting is dependent upon 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.

18,116 RSUs to certain members of management. One-third of the units vest at each of the following dates: June 1 of each of 2018, 2019, and 2020.These awards only contain service conditions.

372,036 RSUs to certain members of management. One-third of the units vest at each of the following dates; November 4 of each of 2017, 2018 and 2019. These awards only contain service conditions.

715,406 RSUs to certain members of management. The units vest on December 31, 2019. At the end of each of three annual performance periods ending December 31, 2017, 2018 and 2019, a portion of the units will be banked if the Company achieves certain EBITDA targets. Banked shares continue to be subject to continued service through the December 31, 2019 vesting date. Management has determined it is probable that a portion of the EBITDA target will be met for the 2017 annual performance period. Depending on actual performance during each performance period, award recipients have the opportunity to receive up to 225% of the granted units.

For the three and nine months ended September 30, 2017 (Successor), $1.8 million and $4.1 million of compensation expense related to the RSUs was recognized within general and administrative expenses on the consolidated statement of operations, respectively.

The following table summarizes the activity of the Company’s ~~charter.~~ unvested RSUs for the nine months ended September 30, 2017:



	Restricted Stock Units		Weighted Average Grant Date Fair Value
Unvested units as of December 31, 2016 (Successor)	—		$	—
Total Granted	1,425,790		15.77
Forfeited	(79,543	)	15.78
Vested	—		—
Unvested as of September 30, 2017 (Successor)	1,346,247		$	15.77

As of September 30, 2017, there was $17.1 million of total unrecognized compensation cost related to non-vested RSUs granted under the 2016 Plan; that cost is expected to be recognized over the vesting periods as described above.

Restricted Stock Awards

On March 23, 2017, the Company granted 435,000 shares of restricted stock to the Company’s Chief Executive Officer under the 2016 Plan. One-third of the shares vest on each of the following dates: January 1, 2018 and November 4 of each of 2018 and 2019. Vesting at each date is also dependent upon positive earnings per share for the fiscal year ending immediately prior to the vesting date. Each restricted stock award had a grant date fair value based on the closing price of the Company’s common stock on the grant date and management’s assumption that there will be no forfeitures.

Management has determined that the shares of restricted stock are unvested stock awards as defined by accounting standards. If the vesting requirements of a restricted stock award are not satisfied, or the performance conditions 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 September 30, 2017, there was $4.1 million of total unrecognized compensation cost related to the non-vested restricted stock; that cost is expected to be recognized over the vesting periods described above. For the three and nine months ended September 30, 2017 (Successor), the Company recognized expense of $1.3 million and $2.8 million related to the restricted stock awards within general and administrative expenses on the consolidated statement of operations, respectively.

The following table summarizes the activity of the Company’s restricted stock awards for the nine months ended September 30, 2017:



	Shares of Restricted Stock	Weighted Average Grant Date Fair Value
Unvested units as of December 31, 2016 (Successor)	—	$	—
Granted	435,000	15.78
Forfeited	—	—
Vested	—	—
Unvested as of September 30, 2017 (Successor)	435,000	$	15.78

Stock Options

During the nine months ended September 30, 2017, the Company granted 1,155,788 stock options to certain members of management under the Plan. The weighted average grant date fair value of $5.03 per option was estimated using the Black-Scholes option-pricing model (level 3) with the following assumptions:



	Nine Months Ended September 30, 2017
Expected volatility ⁽¹⁾	27.53%
Expected dividend yield ⁽²⁾	—%
Expected option term ⁽³⁾	6.25 years
Risk-free rate ⁽⁴⁾	2.1%


(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 September 30, 2017, we have not paid any dividends on our common stock. As of the stock option grant date, we did not anticipate paying any dividends on our common stock over the term of the stock options. Option holders have no right to dividends prior to the exercise of the options.


(3)	We utilized the simplified method to determine the expected term of the stock options since we do 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 June 2021. As of September 30, 2017, there was $4.5 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 three and nine months ended September 30, 2017 (Successor), there was $0.6 million and $1.1 million, respectively, 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 nine months ended September 30, 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)	—		—	$	—	$	—
Granted	1,155,788		5.77	15.85		5.03
Exercised	—		—	—		—
Forfeited	(44,371	)	5.75	15.78		5.03
Outstanding as of September 30, 2017 (Successor)	1,111,417		5.77	$	15.85	$	5.03
Exercisable as of September 30, 2017 (Successor)	—		—	—		—

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 $0.3 million and $0.7 million for the three and nine months ended September 30, 2016 (Predecessor), within general and administrative expense on the consolidated statement of operations, respectively. All outstanding units under the 2013 Plan were redeemed and the 2013 Plan was terminated on November 4, 2016. As of December 31, 2016, there were no outstanding units.

Related Party Stock Awards

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

4. Property and Equipment

Property and equipment consists of the following:



(In thousands)	September 30, 2017			December 31, 2016
	(Successor)			(Successor)
Land and buildings	$	31,296		$	30,275
Machinery and equipment	130,778			112,221
Construction in progress	15,363			12,334
	177,437			154,830
Less accumulated depreciation	(10,506		)	(1,606		)
	$	166,931		$	153,224

Depreciation expense was $3.1 million and $8.9 million for the three and nine months ended September 30, 2017 (Successor), and $2.5 million and $6.7 million for the three and nine months ended September 30, 2016 (Predecessor), respectively.

5. Segment Reporting

The Company has two reportable segments: Sweet Baked Goods and Other. The Company’s Sweet Baked Goods segment consists of sweet baked goods that are sold under the Hostess® and Dolly Madison® brands. Other consists of Hostess® branded bread and buns, frozen retail (which consists of deep-fried Twinkies®, launched in August 2016), “In-Store Bakery,” or “ISB” (which includes Superior) and licensing.

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)	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016
	(Successor)		(Predecessor)		(Successor)		(Predecessor)
Net revenue:
Sweet Baked Goods	$	173,552	$	174,473	$	524,731	$	508,288
Other	18,698		21,724		55,236		40,469
Net revenue	$	192,250	$	196,197	$	579,967	$	548,757

Depreciation and amortization:
Sweet Baked Goods	$	8,703	$	2,585	$	25,587	$	8,119
Other	1,019		583		2,989		935
Depreciation and amortization	$	9,722	$	3,168	$	28,576	$	9,054

Gross profit:
Sweet Baked Goods	$	72,965	$	76,777	$	230,217	$	227,322
Other	5,400		5,802		15,889		12,008
Gross profit	$	78,365	$	82,579	$	246,106	$	239,330

Capital expenditures (1):
Sweet Baked Goods	$	9,109	$	9,312	$	24,772	$	25,701
Other	205		161		643		211
Capital expenditures	$	9,314	$	9,473	$	25,415	$	25,912


(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 three and nine months ended September 30, 2017 (Successor) and 2016 (Predecessor).

Total assets by reportable segment are as follows:



(In thousands)	September 30, 2017		December 31, 2016
	(Successor)		(Successor)
Total segment assets:
Sweet Baked Goods	$	2,719,743	$	2,633,758
Other	206,930		214,134
Total segment assets	$	2,926,673	$	2,847,892

6. Goodwill and Intangible Assets

Goodwill and intangible assets as of September 30, 2017 and December 31, 2016 were recognized as part of the purchase price allocation of the Business Combination as of the Closing Date. The amount allocated to goodwill and other intangible assets is subject to final valuation adjustments. These adjustments could have a material impact on goodwill and other intangible assets. During the nine months ended September 30, 2017, the purchase price allocation for the Business Combination was adjusted, resulting in a $8.1 million decrease to goodwill.

Activity of goodwill is presented below by reportable segment:



(In thousands)	Sweet Baked Goods			Other		Total
Balance as of December 31, 2016 (Successor)	$	518,759		$	69,701	$	588,460
Measurement period adjustment of the Business Combination	(8,111		)	—		(8,111		)
Balance as of September 30, 2017 (Successor)	$	510,648		$	69,701	$	580,349

Intangible assets consist of the following:



(In thousands)	September 30, 2017			December 31, 2016
	(Successor)			(Successor)
Intangible assets with indefinite lives (Trademarks and Trade Names)	$	1,408,848		$	1,408,848
Intangible assets with definite lives (Customer Relationships)	542,011			542,011
Less accumulated amortization (Customer Relationships)	(21,777		)	(3,916		)
Intangible assets, net	$	1,929,082		$	1,946,943

Amortization expense was $6.0 million and $17.9 million for the three and nine months ended September 30, 2017 (Successor) and $0.2 million and $0.5 million for the three and nine months ended September 30, 2016 (Predecessor), respectively. The unamortized portion of customer relationships will ~~create~~be expensed over their remaining useful life, from 18 to 23 years. The weighted-average amortization period as of September 30, 2017 for customer relationships was 21.8 years. Future expected amortization expense is as follows:



(In thousands)
Remainder of 2017	$	5,994
2018	23,977
2019	23,977
2020	23,977
2021	23,977
2022 and thereafter	418,332

7. Accrued Expenses

Included in accrued expenses are the following:



(In thousands)	September 30, 2017		December 31, 2016
	(Successor)		(Successor)
Annual incentive bonuses	$	4,141	$	5,997
Payroll, vacation and other compensation	3,496		5,121
Self-insurance reserves	1,310		2,091
Accrued interest	224		4,885
Current income taxes payable	113		2
Workers compensation reserve	1,650		1,321
Interest rate swap contract	99		—
Litigation (Note 14)	—		1,100
Other	18		1,139
	$	11,051	$	21,656

8.Debt

On May 19, 2017, the Company’s subsidiary, Hostess Brands, LLC, and its lenders amended the New First Lien Term Loan (Second Amended First Lien Term Loan). The Second Amended First Lien Term Loan requires quarterly payments of interest at a ~~new class~~rate of the greater of the applicable LIBOR or 0.75% per annum (LIBOR Floor) plus an applicable margin of 2.50% per annum or the base rate plus an applicable margin of 1.50% per annum. The principal is paid quarterly 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 Amended First Lien Term Loan is secured by substantially all the Company’s present and future assets through a guarantor agreement. The interest rate charged to the Company on the New First Lien Term Loan from January 1, 2017 through May 18, 2017 was 4.00%. From May 19, 2017 through September 30, 2017, the interest rate charged to the Company on the Second Amended First Lien Term Loan was 3.73%.

A summary of the carrying value of the debt and the capital lease obligation is as follows:



(In thousands)	September 30, 2017			December 31, 2016
	(Successor)			(Successor)
Second Amended First Lien Term Loan (3.7% as of September 30, 2017)
Principal	$	993,763		$	—
Unamortized debt premium and issuance costs	5,462			—
	999,225			—
New First Lien Term Loan (4.0%)
Principal	—			998,750
Unamortized debt premium and issuance costs	—			5,396
	—			1,004,146
Capital lease obligation (6.8%)	608			724
Total debt and capital lease obligation	999,833			1,004,870
Less: Amounts due within one year	(11,357		)	(11,496		)
Long-term portion	$	988,476		$	993,374

At September 30, 2017, minimum debt repayments under the Second Amended First Lien Term Loan are due as follows:



(In thousands)
Remainder of 2017	$	2,491
2018	9,963
2019	9,963
2020	9,963
2021	9,963
2022 and thereafter	951,420

Revolving Credit Facility

The Company had no outstanding borrowings under its Revolving Credit Agreement (the “Revolver”) as of September 30, 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 $0.1 million and $0.3 million for the three and nine months ended September 30, 2016 (predecessor), respectively.

9.Interest Rate Swap

In April 2017, the Company 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 September 30, 2017, the effective fixed interest rate on the long-term debt hedged by this contract was 4.28%.

For the three and nine months ended September 30, 2017, no amounts were recorded in the consolidated statements of operations for ineffectiveness and there were no reclassifications from accumulated other comprehensive loss into earnings. As of September 30, 2017, the fair value of the interest rate swap contract of $0.1 million was reported within accrued expenses and other liabilities on the consolidated balance sheet. $1.5 million of unrealized losses recognized in accumulated other comprehensive income as of September 30, 2017 are expected to be reclassified into interest expense through September 30, 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).

10.Equity

The Company’s authorized common shares consist of three classes: 200,000,000 shares of Class A common stock, in connection with the Acquisition designated as the Class B common stock, par value $0.0001 per share. The Class B common stock will be issued to effect an “Up-C” structure following the Acquisition, and each holder50,000,000 shares of Class B common stock, ~~will hold an equivalent number~~and 10,000,000 shares of Class ~~B units~~F common stock (none of ~~Hostess Holdings, L.P. The~~which were issued and outstanding at September 30, 2017 or December 31, 2016). As of September 30, 2017 and December 31, 2016, there were 99,992,183 and 98,250,917 shares of Class A common stock issued and outstanding, respectively. At September 30, 2017 and December 31, 2016 there were 30,398,777 and 31,704,988 shares of Class B common stock ~~will have no economic interest, but will vote as a single class with the Class A common stock.~~

A meeting of the Company’s stockholders was held on November 3, 2016 for purposes of approving the Transactions. At the meeting, the requisite number of the Company’s shareholders approved the Acquisitionissued and ~~the other Transactions. The Transactions~~

outstanding, respectively.

~~are expected to close on November 4, 2016, subject to customary closing conditions. No stockholders elected to have their public shares redeemed in connection with the Acquisition.~~

~~The Master Transaction Agreement~~

As a result of the Acquisition, the Sellers and the Executive Chairman of the Board (the “Chairman”) will receive cash and/or shares of common stock of the Company, as calculated pursuant to the terms of the Master Transaction Agreement and certain other transaction documents contemplated thereby. In order to facilitate the Acquisition, the Sponsor has agreed to the cancellation of a portion of its Founder

Shares ~~and the purchase of 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 ~~Sellers (pursuant to~~holders thereof for, at the ~~Master Transaction Agreement) and~~election of the Company, shares of Class A common stock byor the ~~participants in~~cash equivalent of such shares. During the ~~Private Placement (as defined below) (pursuant~~three months ended September 30, 2017, there was no activity. During the nine months ended September 30, 2017, 1,306,211 Class B shares were exchanged for Class A common shares.

As of September 30, 2017 and December 31, 2016, there were 37,499,890 and 37,500,000 public warrants, respectively, and 19,000,000 private placement warrants outstanding. Each warrant entitles its holder to ~~the subscription agreements entered into in connection therewith)~~purchase one-half of one share of our Class A common stock at ~~a discount.~~

~~Pursuant to the Master Transaction Agreement, the aggregate consideration~~an exercise price of $5.75 per half share, to be ~~paid to the Sellers will consist of (i) an amount in cash equal to the Closing Cash Payment Amount (as defined in the Master Transaction Agreement), (ii)~~exercised only for a whole number of shares of our Class A common ~~stock~~stock. The warrants became exercisable on December 4, 2016 (30 days after the completion of the Business Combination on November 4, 2016) and ~~Class B~~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 ~~equal~~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 ~~Closing Number of Securities (as defined in~~warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by the Master Transaction Agreement) and (iii) approximately 5.4 million shares of Class B common stock issued as part of a partial rollover of one Seller’s existing equity investment. Based upon assumed net indebtedness of approximately $992 million (after giving effectCompany’s Sponsor or its permitted transferees. During the three months ended September 30, 2017, the private placement warrants were registered with the SEC for future potential sales to the ~~partial repayment of existing indebtedness),~~public. When sold to the ~~purchase price~~public, the private placement warrants will become public warrants.

11.Earnings per Share

Basic earnings per share is calculated by dividing net income attributable to ~~be paid~~the Company’s Class A shareholders for the period by the ~~Company is expected to be approximately $2.3 billion.~~

In addition to the consideration to be paid at the Closing of the transactions contemplated by the Master Transaction Agreement, the Sellers will be entitled to receive an additional earn-out payment from the Company of up to 5.5 million sharesweighted 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 ~~Class B common~~private placement warrants, RSUs, restricted stock ~~subject to~~awards, and stock options.

Below are basic and diluted net income per share:



	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017
	(Successor)		(Successor)
Numerator:
Net income attributable to Class A shareholders (in thousands)	$	9,549	$	44,211
Denominator:
Weighted-average Class A shares outstanding - basic (excluding non-vested restricted stock awards)	99,557,183		98,920,808
Dilutive effect of warrants	5,717,416		6,844,613
Dilutive effect of restricted stock awards and RSUs	143,967		75,252
Weighted-average shares outstanding - diluted	105,418,566		105,840,673

Net income per Class A share - basic	$	0.10	$	0.45

Net income per Class A share - dilutive	$	0.09	$	0.42

For both the ~~achievement~~three and nine months ended September 30, 2017, stock options were excluded from the computation of ~~a specified adjusted EBITDA level for each of fiscal years 2016 and 2017.~~

~~The Company and C. Dean Metropoulos will be parties to certain employment arrangements, pursuant to which Mr. Metropoulos will serve as Executive Chairman~~diluted net income per share because the assumed proceeds from the awards’ exercise was greater than the average market price of the ~~Board of Directors. Mr. Metropoulos will receive approximately 2.5 million shares of Class B~~ common ~~stock under the employment arrangements at the closing of the Transactions. In addition, Mr. Metropoulos will be entitled to receive an additional earn-out payment from the~~shares.

12. Income Taxes

The Company ~~of up to 2.75 million shares (which may be paid in either Class A common stock or Class B common stock), subject to the achievement of a specified adjusted EBITDA level for fiscal year 2018.~~

~~Consummation of the transactions contemplated by the Master Transaction Agreement~~ is subject to ~~customary closing conditions~~U.S. federal, state and local taxes on its allocable portion of the income of Hostess Holdings, a partnership for U.S. federal and most applicable state and local taxes. As a partnership, Hostess Holdings is itself not subject to U.S. federal and certain state and local income taxes. The operations of Hostess Holdings include those of its C Corporation subsidiaries.

The income tax expense in the accompanying consolidated statement of operations is based on an estimate of the Company’s annual effective income tax rate and adjusted for discrete items, if any. The Company’s estimated annual effective tax rate based on annual projected earnings for the year ending December 31, 2017 is projected to be 29.6% prior to adjusting for discrete items. During the three months ended September 30, 2017, the Company recorded a nonrecurring discrete charge of approximately $2.2 million related to a change in state tax law. The Company’s effective tax rate differs from the statutory rate primarily due to the portion of net income attributed to the non-controlling interest which represents an ownership interest in a partnership for income tax purposes.

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. 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 is in an overall net deferred tax liability position of $366.5 million and $353.8 million as ~~well~~of September 30, 2017 and December 31, 2016, respectively, primarily due to temporary differences in the book basis as ~~specified cash availability conditions.~~ compared to the tax basis of its investment in Hostess Holdings.

The ~~Master Transaction~~Company does not believe it has any significant uncertain tax positions and therefore has no unrecognized tax benefits at September 30, 2017, that if recognized, would affect the annual effective tax rate. Interest and penalties related to income tax liabilities, if incurred, are included in income tax expense in the consolidated statement of operations.

13. Tax Receivable Agreement ~~also contains customary representations and warranties and may be terminated~~

The tax receivable agreement was entered into by the ~~parties thereto as specified therein.~~

~~Private Placement Subscription Agreements~~

~~On July 5, 2016, the~~ Company ~~entered into subscription agreements with certain investors, including the Sponsor, pursuant to which the investors have agreed to purchase~~ in the aggregate approximately 32.7 million shares of Class A common stock on a private placement basis for approximately $9.18 per share (the “Private Placement”). The proceeds from the Private Placement will be used to partially fund the cash consideration to be paid to the Sellers at the Closing of the transactions contemplated by the Master Transaction Agreement. The Private Placement is conditioned on, among other things, the closing of the Transactions. The subscription agreements also contain customary representations and warranties and may be terminated by the parties thereto as specified therein.

~~Tax Receivable Agreement~~

~~At the closing of the transactions contemplated by the Master Transaction Agreement, the Company will enter into a Tax Receivable Agreement~~connection with the ~~Sellers~~Business Combination (the “Tax Receivable Agreement”) and ~~C. Dean Metropoulos. The Tax Receivable Agreement will~~ generally ~~provide~~provides for the payment by the Company to the ~~Sellers~~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 ~~Transactions,~~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 ~~specified therein.~~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 Sellers~~Legacy Hostess Equityholders in accordance with specified percentages, regardless of the source of the applicable tax attribute. ~~Although~~Significant inputs used to preliminarily estimate the ~~amount and timing~~future expected payments include a tax savings rate of ~~any~~approximately 37%.

The following table summarizes activity related to the tax receivable agreement for the nine months ended September 30, 2017:



(In thousands)
Balance December 31, 2016 (Successor)	$	165,384
Measurement period adjustment of the Business Combination	(3,016		)
Balance arising from exchanges of Class B units for Class A shares	11,530
Remeasurement due to change in state tax rate	1,589
Balance September 30, 2017 (Successor)	$	175,487

During the three months ended September 30, 2017, the Company remeasured the Tax Receivable Agreement due to a change in a state tax law. This resulted in $1.6 million of expense on the consolidated statement of operations.

As of September 30, 2017 the future expected payments under the Tax Receivable Agreement are as follows:



(In thousands)
Remainder of 2017	$	—
2018	14,165
2019	10,375
2020	10,097
2021	9,845
Thereafter	131,005

14. Commitments and Contingencies

Accruals and the Potential Effect of Litigation

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 minimum amount 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.

During the three months ended September 30, 2017, the Company paid an award in the National Frozen Distribution Consultants, Inc. (NFDC) arbitration of approximately $2.0 million.

From time to time, the Company is subject to various other legal actions, lawsuits, claims and proceedings related to products, employment, environmental regulations, and other matters incidental to its businesses.

Based upon information presently known, the Company does not believe that the ultimate resolution of such matters will ~~vary depending~~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.

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, packaging components and fuel 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; therefore, the purchases under these contracts are included as a ~~number~~component of ~~factors, including~~cost of goods sold.

Contractual commitments were as follows:



(In millions)	Total Committed		Commitments within 1 year		Commitments beyond 1 year
Ingredients	$	82.4	$	69.2	$	13.2
Packaging	$	44.3	$	39.1	$	5.2

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 million and ~~timing~~$1.7 million, respectively. The arrangements support the collateral requirements for insurance. The Letters of Credit are 100% secured through our ~~income, we expect that the payments that we may make thereunder could be substantial. The Tax Receivable Agreement may be terminated by the parties thereto as specified therein.~~

Revolver.

~~Results~~

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 ~~Operations~~

an annual salary, a performance bonus at the discretion of the board of directors, and expenses related to the use of his personal aircraft. For the three and nine months ended September 30, 2016 ~~we had a net loss of $2,141,234~~(Predecessor), $1.1 million and ~~$4,332,000, respectively. Our business activities during~~$3.4 million was expensed by the ~~three and nine month periods mainly consisted of identifying and evaluating prospective acquisition candidates~~Company for ~~a Business Combination and pursuing~~this compensation agreement. The agreement with Mr. Metropoulos was terminated in connection with the Transactions. We believe that we have sufficient funds available to complete our efforts to effect a Business Combination with an operating business by August 19, 2017. However, if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination.

As indicated in the accompanying unaudited consolidated financial statements, at September 30, 2016, we had approximately $6,000 in cash and deferred offering costs of $13,125,000. We cannot assure you that our plans to complete our Business Combination will be successful.

~~Liquidity and Capital Resources~~

In June 2015, the Company’s sponsor, Gores Sponsor LLC, (the “Sponsor”) purchased an aggregate of 11,500,000 shares of Class F common stock (the “Founder Shares”) for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, our Sponsor transferred an aggregate of 75,000 Founder Shares to each of our independent directors. Immediately

For periods prior to the ~~Public Offering, our Sponsor forfeited 1,437,500 Founder Shares, and following the expiration~~Business Combination, related party expenses consisted of the ~~unexercised portion of~~normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman. In connection with the underwriters’ over-allotment option, our Sponsor forfeited an additional 687,500 Founder Shares, so that the remaining Founder Shares held by our Sponsor and the Company’s independent directors (together, the “Initial Stockholders”) represented 20.0% of the outstanding shares upon completion of our Public Offering. On August 19, 2015, we consummated our Public Offering of 37,500,000 units at a price of $10.00 per unit (the “Units”), including 2,500,000 Units as a result of the underwriters’ partial exercise of their over-allotment option, and generating gross proceeds of $375,000,000. Prior to the Public Offering Closing Date, we completed the private sale of an aggregate of 19,000,000 Private Placement Warrants, each exercisable to purchase one-half of one share of Class A common stock at $5.75 per half share, to our Sponsor, at a price of $0.50 per Private Placement Warrant, generating gross proceeds, before expenses, of $9,500,000. After deducting the underwriting discounts and commissions (excluding the additional fee of 3.50% of the per Unit offering price payable upon the Company’s completion of a Business Combination, ~~(the “Deferred Discount”), which amount will be payable upon~~Mr. Metropoulos became party to new employment arrangements with the Company and its subsidiaries. Following the consummation of the Business Combination, ~~if consummated) and~~ the expense associated with Mr. Metropoulos’s employment arrangements is estimated ~~offering expenses, the total net proceeds from our Public Offering and the sale~~to be approximately $0.3 million annually.

As part of the Private Placement Warrants were $376,100,000, of which $375,000,000 (or $10.00 per share sold in the Public Offering) was placed in a trust account with Continental Stock Transfer & Trust Company (the “Trust Account”) acting as Trustee. The amount of proceeds not deposited in the Trust Account was $1,100,000 at the closing of our Public Offering. In addition, interest income on the funds held in the Trust Account may be released to us to pay our franchise and income tax obligations. As of September 30, 2016 and December 31, 2015, the Trust Account consisted solely of money market funds.

On July 27, 2016, the Sponsor made available to the Company a loan of up to $500,000 pursuant to a promissory note issued by the Company to the Sponsor. The proceeds from the note will be used for on-going operational expenses and certain other expenses in connection with the Acquisition. The note is unsecured, non-interest bearing and matures on the earlier of: (i) December 31, 2016 or (ii) the date on which the Company consummates the proposed Acquisition. As of September 30, 2016, the amount advanced by Sponsor to the Company was $175,000.

As of September 30, 2016 and December 31, 2015, we had cash held outside of the Trust Account of approximately $6,000 and $790,000, respectively, which is available to fund our working capital requirements.

At September 30, 2016 and December 31, 2015, the Company had current liabilities of $4,115,696 and $287,301, respectively, and working capital of ($3,954,367) and $762,484, respectively, largely due to amounts owed to professionals, consultants, advisors and others who are working on seeking a Business Combination. Such work is continuing after September 30, 2016 and amounts are continuing to accrue. This working capital deficit will be funded at the time of closing of the transaction discussed in Note 10.

We intend to use substantially all of the funds held in our Trust Account, including interest (which interest shall be net of taxes payable) to consummate our Business Combination. Moreover, we may need to obtain additional financing either to complete a Business Combination or because we become obligated to redeem a significant number of shares of our Class A common stock upon completion of a Business Combination. To the extent that our capital stock or debt is used, in whole or in part, as consideration to consummate our Business Combination, the ~~remaining proceeds held in our Trust Account, if any, will be used as working capital~~Company agreed to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategy. We intend to use the funds held in the Trust Account, after payment of the Deferred Discount, and the proceeds from the Private Placement to fund the Transactions.

~~Off-balance sheet financing arrangements~~

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial agreements involving assets.

~~Contractual obligations~~

As of September 30, 2016 and December 31, 2015, we did not have any long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or long-term liabilities other than an administrative services agreement to pay monthly recurring expenses of $10,000 to The Gores Group LLC, an affiliate of our Sponsor, for office space, utilities and secretarial support. The administrative services agreement terminates upon the earlier of the completion of a Business Combination or the liquidation of the Company.

The underwriters are entitled to underwriting discounts and commissions of 5.5%, of which 2.0% ($7,500,000) was paid at the closing of the Public Offering, and 3.5% ($13,125,000) was deferred. The Deferred Discount will become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a Business Combination, subject to the terms of the underwriting agreement. The underwriters are not entitled to any interest accrued on the Deferred Discount.

~~Critical Accounting Policies~~

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

~~Offering Costs~~

We comply with the requirements of the Accounting Standards Codification (the “ASC”) 340-10-S99-1 and SEC Staff Accounting Bulletin Topic 5A — “Expenses of Offering.” Offering costs consist principally of professional and registration fees incurred through the balance sheet date that are related to our Public Offering and were charged to stockholders’ equity upon the completion of our Public Offering. Accordingly, at September 30, 2016 and December 31, 2015, offering costs totaling approximately $21,407,116 and $21,407,116, respectively, (including $20,625,000 in underwriters’ fees), have been charged to stockholders’ equity.

~~Redeemable Common Stock~~

~~All of the 37,500,000~~grant shares of Class A common stock ~~sold as part~~or Class B units of Hostess Holdings and equivalent shares of Class B common stock of the ~~Units in our Public Offering contain a redemption feature which allows~~Company to an entity owned by Mr. Metropoulos if certain EBITDA thresholds are met for the ~~redemption~~year ended December 31, 2017. The potential grants under this arrangement are between zero and 5.5 million shares. Based on the nature of ~~such~~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 ~~our liquidation, if there is a stockholder vote or tender offer in connection with our~~the Business Combination, ~~and in connection with certain amendments to our charter. In accordance with ASC 480, “Distinguishing Liabilities from Equity”~~ (“~~ASC 480”~~MTA EBITDA”), ~~redemption provisions~~for the year ended December 31, 2017 must be greater than $240.5 million. If MTA EBITDA is greater than $245.5 million, an additional 2.75 million shares will be awarded. As of September 30, 2017, management determined it was not solely within our control require common stock subject to redemption to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although we did not specify a maximum redemption threshold, our charter providesprobable that the Company ~~will not redeem our public shares in an amount that~~ would ~~cause our net tangible assets (stockholders’ equity)~~meet the 2017 MTA EBITDA thresholds.

Under the terms of Mr. Metropoulos’ employment agreement, the Company is obligated to ~~be less than $5,000,001.~~

~~We recognize changes in redemption value immediately as they occur and adjust~~grant additional equity (in the ~~carrying value~~form of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against accumulated deficit.

~~Net loss per common share~~

Net loss per common share is computed by dividing net loss applicable to stockholders by the weighted average number of common shares outstanding during the period, plus to the extent dilutive the incremental number ofeither shares of Class A common stock ~~to be issued in connection with the conversion~~ of the Company, or Class FB units of Hostess Holdings and equivalent shares of Class B common stock orof the Company) to ~~settle Warrants (as defined below), as calculated using the treasury stock method. At September 30, 2016, we did not have any dilutive securities or other contracts that could, potentially, be~~

~~exercised or converted into common stock and then share in our earnings under the treasury stock method. As a result, diluted net loss per common share is the same as basic net loss per common share~~Mr. Metropoulos if MTA EBITDA thresholds are met for the ~~period.~~

~~Income taxes~~

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

~~Recent accounting pronouncements~~

The Company adopted FASB ASU No. 2014-15, which provided guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern within one year ~~from the date the financial statements are issued and to provide related footnote disclosures. The adoption of this guidance did not have a significant impact on the financial statements.~~

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740).~~ The amendments under the new guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for consolidated financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted this guidance effectiveended December 31, ~~2015 on a retrospective basis,~~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 ~~impact of which was not significant to the financial statements.~~

~~The Company adopted FASB ASU No. 2014-15, which provided guidance on management’s responsibility in evaluating whether there~~year ended December 31, 2018 must be greater than $257.8 million. If MTA EBITDA is ~~substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued and to provide related footnote disclosures.~~

greater than $262.8 million, an additional 1.375 million shares will be awarded. As of September 30, 2017, management determined it was not probable that the Company would meet the 2018 MTA EBITDA thresholds.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

We operate five bakeries and three centralized distribution centers. Our direct-to-warehouse (“DTW”) 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” and “Other”. Sweet Baked Goods consists of sweet baked goods that are sold under the Hostess® and Dolly Madison® brands. Other consists of Hostess® branded bread and buns, frozen retail (which includes deep-fried Twinkies®, launched in August 2016), “In-Store Bakery,” or “ISB” (which includes Superior Cake Products, Inc. (“Superior”), which we purchased in May 2016, and which manufactures and distributes eclairs, madeleines, brownies, and iced cookies in the ~~Company’s~~ISB section of retailers) and licensing.

Hostess® is the second leading brand by market share within the Sweet Baked Goods (“SBG”) category, according to Nielsen U.S. total universe. For the 52-week period ended October 7, 2017 our market share was 17.0% per Nielsen’s U.S. SBG category data. We have a #1 leading market position within the two largest SBG Segments; Donut Segment and Snack Cake Segment, The Donut and Snack Cake Segments together account for 49.6% of the Sweet Baked Goods category’s total dollar sales.

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. consummated its initial public offering (the “IPO”), following which its shares began trading on the Nasdaq Capital Market (“NASDAQ”).

On November 4, 2016 (the “Closing Date”), in a transaction referred to as the “Business Combination,” Gores Holdings, Inc. 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”). 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.

In connection with the closing of the Business Combination, Gores Holdings, Inc. changed its name to “Hostess Brands, Inc.” and its trading symbols on NASDAQ from “GRSH” and “GRSHW,” to “TWNK” and “TWNKW”.

Following the Business Combination, Mr. Metropoulos and the Apollo Funds continued as stockholders and Mr. Metropoulos became Executive Chairman of Hostess Brands, Inc. On April 19, 2017, the Apollo Funds completed the public sale of substantially all of their holdings of Class A common stock. Other equityholders also sold shares of Class A common stock through the public sale.

~~Item 3. Quantitative~~Business Combination and ~~Qualitative Disclosures About Market Risk~~

~~Market risk is a broad term~~of Hostess Brands, Inc., including the consolidation of Hostess Holdings and its subsidiaries, for periods from and after the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices and/or equity prices. Our business activitiesClosing Date. For convenience, we have also included supplemental pro forma information for the three and nine months ended September 30, 2016 ~~consisted solely~~that gives effect to the Business Combination as if such transaction had been consummated on January 1, 2016. References in this Quarterly Report to information provided for 2016 on a pro forma basis refer to such supplemental pro forma financial information.

Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer, for periods prior to the completion of ~~organizational activities~~the Business Combination, to Hostess Holdings and ~~activities relating~~its subsidiaries and, for periods upon or after the completion of the Business Combination, to ~~our Public Offering,~~Hostess Brands, Inc. and its subsidiaries, including Hostess Holdings and its subsidiaries. Our “Sponsor” refers to Gores Sponsor, LLC, a Delaware limited liability company and the ~~identification~~principal stockholder of ~~a target company for our~~Gores Holdings, Inc. prior to the Business Combination, and ~~pursuing~~ the ~~Transactions. As~~“The Gores Group” refers to The Gores Group LLC, an affiliate of ~~September 30, 2016, $375,395,331 (including accrued interest~~our Sponsor. “Metropoulos Entities” refer to Mr. Metropoulos and entities controlled by him that continue to hold an equity stake in us. “Legacy Hostess Equityholders” refer to the Apollo Funds and the Metropoulos Entities, collectively.

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, which includes iconic products such as Twinkies®, CupCakes, Ding Dongs®, Zingers®, HoHo’s® and Donettes® and the Dolly Madison® brand and the group of products under the Superior on Main® brand (e.g., eclairs, madeleines, brownies and iced cookies). Our product assortment, which includes snack cakes, muffins, donuts and pies, is sold to customers’ warehouses and distribution centers by the case or in display 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 merchandisers and convenience stores, along with a smaller portion of our product sales going to dollar stores, vending, club, 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, the promotional activities implemented by our Company and our 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, other production costs, warehousing and transportation costs for the 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 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 flour, sweeteners, edible oils and cocoa, which are subject to ~~reduction~~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 ~~Deferred Discount due at~~weather, crop production, transportation and processing costs, 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, packaged 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 primarily relate to our advertising campaigns, which include social media, print, online advertising, local promotional events and monthly agency fees. We also invest in wire and corrugate displays delivered to customers to display our products off shelf, field marketing and merchandising to reset and check the store inventory on a regular basis and marketing employment costs.

Selling Expense

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

General and Administrative

General and administrative expenses primarily include employee and related expenses for the accounting, planning, 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, and corporate site and insurance costs.

The majority of our research and development spend is dedicated to enhancing and expanding our product lines responding to changing consumer preferences and trends and continuing to enhance the taste of our products. In addition, our research and development organization provides technical support to ensure that our core products are consistently produced in accordance with our high quality standards and specifications. Finally, this department is charged with developing processes to reduce our costs without adversely affecting the quality of our products.

Related Party Expenses

For periods prior to the Business Combination, related party expenses consisted of the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman. Following the consummation of the Business ~~Combination) was held~~Combination, the cash expenses associated with Mr. Metropoulos’s employment arrangements are approximately $0.3 million annually.

Non-Controlling Interest

Subsequent to the Business Combination, Hostess Brands, Inc. consolidated the financial position and results of operations of Hostess Holdings. Mr. Metropoulos and the Metropoulos Entities hold their equity investment in us primarily through Class B limited partnership units in the ~~Trust Account~~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”). 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

On November 18, 2016, we refinanced our first and second lien term loans (the “Former First and Second Lien Term Loans”) into one new first lien term loan in the aggregate principal amount of $998.8 million and with a maturity date of August 3, 2022 (the “New First Lien Term Loan”).

To manage the risk related to our variable rate debt, on April 7, 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 May 19, 2017, the New First Lien Term Loan was amended resulting in a 0.5% decrease to the margin applied to our variable rate (the “Second Amended First Lien Term Loan”). The maturity date of August 3, 2022 remained unchanged.

Acquisition of Superior

On May 10, 2016, we acquired the stock of Superior for $51.0 million, including cash. The purchase price was subject to working capital and other purchase price adjustments as described in the stock purchase agreement. Superior is located in Southbridge, Massachusetts and manufactures eclairs, madeleines, brownies, and iced cookies. We acquired Superior to expand our market and product offerings in the “In-Store Bakery” section of retailers.

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.

Unaudited Statement of Operations

Historical and Pro Forma*



	(Successor)				Historicalⁱ (Predecessor)								Pro Forma
(In thousands, except per share data)	Three Months Ended September 30, 2017		% of Net Revenues		Three Months Ended September 30, 2016				Pro Forma Adjustments				Three Months Ended September 30, 2016				% of Net Revenues
Net revenue	$	192,250	100.0	%	$	196,197			$	—			$	196,197			100.0	%
Cost of goods sold	113,885		59.2		113,618				(185		)	ii	113,433				57.8
Gross profit	78,365		40.8		82,579				185				82,764				42.2

Operating costs and expenses:
Advertising and marketing	8,871		4.6		10,381				—				10,381				5.3
Selling expense	7,606		4.0		8,271				—				8,271				4.2
General and administrative	14,494		7.5		10,784				(346		)	ii	10,438				5.3
Amortization of customer relationships	5,994		3.1		156				5,938			iii	6,094				3.1
Impairment of property and equipment	1,003		0.5		—				—				—				—
Business combination transaction costs	—		—		4,049				(4,049		)	iv	—				—
Related party expenses	92		—		1,058				—				1,058				0.5
Tax receivable agreement liability remeasurement	1,589		0.8		—				—				—				—
Recall and other costs (recoveries)	—		—		(3,787		)		—				(3,787		)		(1.9	)
Total operating costs and expenses	39,649		20.5		30,912				1,543				32,455				16.5
Operating income	38,716		20.1		51,667				(1,358		)		50,309				25.7
Other expense:
Interest expense, net	9,966		5.2		18,004				(4,623		)	v	13,381				6.8
Loss on modification of debt	2,122		1.1		—			—	—				—			—	—
Other expense	182		0.1		173				—				173				0.1
Total other expense	12,270		6.4		18,177				(4,623		)		13,554				6.9
Income before income taxes	26,446		13.7		33,490				3,265				36,755				18.7
Income tax expense (benefit)	10,316		5.4		(23		)		10,496			vi	10,473				5.3
Net income	16,130		8.3		33,513				(7,231		)		26,282				13.4
Less: Net income attributable to the non-controlling interest	6,581		3.4		2,329				6,852			vii	9,181				4.7
Net income attributable to Class A shareholders	$	9,549	4.9	%	$	31,184			$	(14,083	)		$	17,101			8.7	%

Earnings per Class A share:
Basic	$	0.10											$	0.18
Diluted	$	0.09											$	0.18

Weighted-average shares outstanding:
Basic	99,557,183								97,589,217			viii	97,589,217
Diluted	105,418,566								97,589,217			viii	97,589,217

*For convenience, we have included this supplemental pro forma information for the ~~purposes of consummating our Business Combination. As of such date, the Trust Account consisted solely of money market funds. Due~~three months ended September 30, 2016 that gives effect to the ~~short-term nature~~Business Combination as if such information had been consummated on January 1, 2016.

The unaudited pro forma statements of operations for the three months ended September 30, 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 adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma 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 estimated fair values of the ~~money market fund’s investments,~~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. The total purchase price to acquire Hostess Holdings has been allocated to the assets acquired and assumed liabilities of Hostess Holdings, based upon preliminary estimated 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.

The unaudited pro forma 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 financial information also does not project our results of operations for any future period or date. The acquisition of Superior Cake Products, Inc. (“Superior”) occurred in May 2016. The unaudited pro forma consolidated financial information for the three and nine months ended September 30, 2016 does not include the results of the Superior acquisition and its related operations prior to the acquisition. 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 separately warrant the inclusion of pro forma financial results assuming the acquisition of Superior on January 1, 2016 under SEC rules and regulations or under GAAP. The pro forma adjustments give effect to the items identified in the pro forma table above in connection with the Business Combination.


i.	The amounts in these columns represent our Hostess Holdings historical results of operations for the period reflected. Certain amounts previously reported within the 2016 Hostess Holdings quarterly financial statements have been reclassified to conform with the current financial statement presentation.


ii.	Represents the adjustment to depreciation expense associated with the allocation of purchase price to property and equipment.


iii.	Represents additional amortization expense associated with the fair value recognized for customer relationships in connection with the Business Combination.


iv.	This adjustment consists primarily of legal and professional fees and other costs associated with the Business Combination.


v.	Represents the reduction in interest expense due to the repayment of Hostess Holdings debt pursuant to the terms of the Business Combination.


vi.	Represents the effective income tax rate of 28.5%, giving effect to the non-controlling interest, a partnership for income tax purposes.


vii.	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.


viii.	Represents the basic and diluted weighted average number of Class A shares that would have been outstanding had the Business Combination occurred on January 1, 2016. The outstanding warrants were determined not to be dilutive.

Reconciliation of Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and 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). This measure may not be comparable to similarly titled measures reported by other companies. We have included these measures because we believe they provide management and investors with additional information to measure our performance and liquidity, estimate our value and evaluate our ability to service debt.

We define adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization, (iii) income taxes and (iv) as further adjusted to eliminate the impact of certain items that we do not ~~believe~~consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating adjusted EBITDA, you should be aware that ~~there~~in the future we may incur expenses that are the same as or similar to some of the adjustments set forth below. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, adjusted EBITDA:

does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;

does not reflect changes in, or cash requirements for, our working capital needs;

does not reflect the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt;

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, the tax receivable agreement or distributions to the non-controlling interest to reimburse its tax liability.

Our presentation of adjusted EBITDA does not exclude the normal annual cash payments associated ~~material exposure~~with our employment arrangements with Mr. Metropoulos as the Chief Executive Officer and/or Executive Chairman. These payments were $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, and $1.1 million and $3.4 million for the three and nine months ended September 30, 2016, respectively. Following completion of the Business Combination, these cash expenses will be approximately $0.3 million annually.



Reconciliation of Adjusted EBITDA (Unaudited)

(In thousands)		Three Months Ended September 30, 2017		Pro Forma Three Months Ended September 30, 2016

Net income		$	16,130	$	26,282
Plus non-GAAP adjustments:
Income tax provision		10,316		10,473
Interest expense, net		9,966		13,381
Depreciation and amortization		9,722		9,103
Share-based compensation	i.	3,630		—
Tax receivable agreement liability remeasurement	ii.	1,589		—
Recall and other	iii.	—		(3,787		)
Other expense	iv.	182		173
Loss on debt modification	v.	2,122		—
Impairment of property and equipment	vi.	1,003		—
Adjusted EBITDA		$	54,660	$	55,625


i.	For the three months ended September 30, 2017, the Company recognized expense related to stock compensation awarded under the Hostess Brands, Inc. 2016 Equity Incentive Plan.


ii.	For the three months ended September 30, 2017, the Company incurred a loss on the remeasurement of the tax receivable agreement due to a change in a state tax law.


iii.	For the pro forma three months ended September 30, 2016, the Company recovered costs previously incurred in the second quarter of 2016 related to the voluntary recall of product containing undeclared peanut residue attributed to one of the Company’s suppliers.


iv.	During the three months ended September 30, 2017, the Company incurred professional fees related to the registration of certain privately held securities. During the pro forma three months ended September 30, 2016, the Company incurred professional fees attributable to the pursuit of a potential acquisition that has since been abandoned, and other special projects.


v.	During the three months ended September 30, 2017, previously capitalized debt issuance costs were expensed.


vi.	During the three months ended September 30, 2017, the Company transitioned the production of one of its products to a third party and recognized an impairment loss resulting from the idling of the related production equipment.

Net Revenue

Net revenue of $192.3 million decreased 2.0%, or $3.9 million, compared to historical and pro forma net revenue of $196.2 million for the third quarter of 2016. The third quarter 2017 growth in net revenue from current year new product initiatives of $17.0 million, particularly Chocolate Cake Twinkies®, White Fudge Ding Dongs® and Golden Cupcakes was offset primarily by a decrease in net revenue from 2016 product innovations of $14.0 million, the impact of a co-manufacturer's production challenges of approximately $3.2 million and a decrease of revenue from discontinued items of $2.2 million. Net revenue for the quarter was also impacted by point of sale and shipment disruptions from hurricanes Harvey and Irma.

Cost of Goods Sold and Gross Profit

Cost of goods sold for the three months ended September 30, 2017 of $113.9 million represents an increase of$0.3 million or 0.2% from the historical costs of goods sold of $113.6 million for the three months ended September 30, 2016 and an increase of $0.5 million or 0.4% from the pro forma costs of goods sold of $113.4 million for the three months ended September 30, 2016. The increase in thethree months ended September 30, 2017 from both historical and pro forma three months ended September 30, 2016 is primarily attributed to additional cost of transportation due to the tightening of shipping capacity and an increase in the percentage of orders on a refrigerated class of transportation.

Gross profit was $78.4 million for the three months ended September 30, 2017, a decrease of $4.2 million, or 5.1%, compared to historical gross profit of $82.6 million for the three months ended September 30, 2016 and a decrease of $4.4 million, or 5.3% compared to pro forma gross profit of $82.8 million for the three months ended September 30, 2016. The decrease in the three months ended September 30, 2017 from both historical and pro forma three months ended September 30, 2016 was primarily attributed to the tightening of shipping capacity and an increase in the percentage of orders on a refrigerated class of transportation, which caused a 120 basis point increase in the cost of transportation as a percentage of revenue. In addition, there was a shift in product mix due to growth in multi-pack and club-pack sales.

Gross margin was 40.8% for the three months ended September 30, 2017, compared to historical gross margin of 42.1% for the three months ended September 30, 2016 and pro forma gross margin of 42.2% for the three months ended September 30, 2016. The decrease in margin for the three months ended September 30, 2017 from both historical and pro forma gross margin for the three months ended September 30, 2016 is primarily due to additional transportation costs and a shift in product mix.

Gross profit for the Sweet Baked Goods segment for the three months ended September 30, 2017 was $73.0 million, or 42.0% of net revenue, compared to gross profit of $76.8 million or 44.0% of net revenue for the historical three months ended September 30, 2016. Gross margin decreased due to the tightening of shipping capacity and an increase in the percentage of orders on a refrigerated class of transportation, which caused a 120 basis point increase in the cost of transportation as a percentage of revenue. In addition, there was a shift in product mix due to growth in multi-pack and club-pack sales.

Gross profit for the Other segment for the three months ended September 30, 2017 was $5.4 million, or 28.9% of net revenue, compared to historical gross profit of $5.8 million, or 26.7% of net revenue for the three months ended September 30, 2016. The increase in margin was attributed to efficiencies in In-Store Bakery operations.

Operating Costs and Expenses

Advertising and Marketing

Advertising and marketing expenses for the three months ended September 30, 2017 of $8.9 million represents a decrease of 14.5% over the historical and pro forma advertising and marketing expenses of $10.4 million for the three months ended September 30, 2016 as a result of lower packaging design costs and reduced permanent wire display deployment during the quarter.

Selling Expense

Selling expense of $7.6 million, or 4.0% of revenue for the three months ended September 30, 2017 was comparable to $8.3 million, or 4.2% of revenue on a historical and pro forma basis for the three months ended September 30, 2016.

General and Administrative

General and administrative expenses for the three months ended September 30, 2017 of $14.5 million represent an increase of $3.7 million or 34.4% over historical general and administrative expenses of $10.8 million for the three months ended September 30, 2016 and an increase of $4.1 million or 38.9% over the pro forma general and administrative expenses of $10.4 million for the three months ended September 30, 2016. The increase of the third quarter 2017 expenses over both the historical and pro forma third quarter 2016 expenses is attributed to increased non-cash share-based compensation of $3.6 million.

Amortization of Customer Relationships

Amortization of customer relationships was $6.0 million for the three months ended September 30, 2017, compared to historical customer relationships amortization of $0.2 million for the three months ended September 30, 2016 and pro forma customer relationships amortization of $6.1 million for the three months ended September 30, 2016. For the third quarter 2016 on a historical basis, amortization expense was based on the valuation of customer relationships acquired from Old Hostess in 2013. The amortization expense for the three months ended September 30, 2017 and the three months ended September 30, 2016 on a pro forma basis reflects the new valuation of the customer relationships acquired through the Business Combination.

Impairment of Property and Equipment

During the three months ended September 30, 2017, we idled a production line in our Columbus, Georgia facility and transitioned the production to a third party. We recognized an impairment loss of $1.0 million.

Related Party Expenses

Related party expenses were $0.1 million for the three months ended September 30, 2017 compared to historical and pro forma expenses of $1.1 million for the three months ended September 30, 2016. These expenses represent payments made to Mr. Metropoulos under the terms of his employment arrangements. Following the Business Combination, the expenses associated with Mr. Metropoulos’s employment arrangement are estimated to be $0.3 million annually.

Tax Receivable Agreement Liability Remeasurement

For the three months ended September 30, 2017, we recorded a loss of $1.6 million due to an adjustment to the tax receivable agreement resulting from a change in a state tax law.

Recall and Other Costs

During the three months ended September 30, 2016, we recovered approximately $4.0 million of previously recognized costs when it was determined that expenses incurred to recall 710,000 cases of snack cakes and donuts for undeclared peanut residue in certain lots of flour would be reimbursed by our flour supplier, Graincraft.

Operating Income

The 25.1% decrease in operating income from a historical basis of $51.7 million for the three months ended September 30, 2016 to $38.7 million for the three months ended September 30, 2017 is primarily from the increase in additional customer relationship amortization as well as share-based compensation, which is included within general and administrative expenses. The decrease was also attributed to lower gross profit due to a change in product mix and lower overall revenues.

Interest Expense, net

Our interest expense decreased 44.6% from $18.0 million for the historical three months ended September 30, 2016 to $10.0 million for the three months ended September 30, 2017 primarily from the refinancing of our Second Lien Term Loan in November 2016 and amendment of our First Lien Term Loan in May 2017. In both cases, the effective interest rate ~~risk.~~

on our outstanding debt was decreased. Additionally, $217 million of principal was repaid as part of the Business Combination. This was offset by the additional interest expense related to our interest rate swap contract, which was effective in May 2017. Excluding expense associated with the principal repayment, interest expense for the three months ended September 30, 2017 decreased 25.5% from pro forma interest expense of $13.4 million for the three months ended September 30, 2016, as a result of the lower effective interest rate offset by the interest rate swap settlement.

Loss on Modification of debt

During the three months ended September 30, 2017, we expensed $2.1 million of previously capitalized debt financing charges, which are offset by a slight gain in the prior period. See Note 1-Summary of Significant Accounting Policies to the consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Other Expense

For the three months ended September 30, 2017, we recorded other expenses of $0.2 million which primarily consisted of professional fees related to the registration of certain privately held securities.

Income Taxes

The income tax expense of $10.3 million for the three months ended September 30, 2017 includes an adjustment to our deferred tax liability of approximately $2.2 million caused by a change to a state tax rate. The remaining tax expense of $8.1 million represents an effective tax rate of 30.7%, giving effect to the non-controlling interest, a partnership for income tax purposes. Historical income tax benefit for the three months ended September 30, 2016 was less than $0.1 million as the Company was a partnership for income taxes prior to the Business Combination, with the exception of the loss attributed to Superior, which is taxed as a corporation. The increase from pro forma tax expense of $10.5 million for the three months ended September 30, 2016 is due to a change in state tax law offset by a decrease in pretax income before income taxes.

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2017, was $54.7 million, a decrease of $1.0 million, or (1.7)%, compared to pro forma adjusted EBITDA of $55.6 million for the three months ended September 30, 2016. As a percentage of net revenue, adjusted EBITDA was 28.4% for the three months ended September 30, 2017, compared to pro forma adjusted EBITDA of 28.4% of net revenues for the three months ended September 30, 2016.

Segments

We have two reportable segments: “Sweet Baked Goods” and “Other.” Sweet Baked Goods consists of sweet baked goods that are sold under the Hostess® and Dolly Madison® brands. Other consists of Hostess® branded bread and buns, which we launched in April 2015, frozen retail (which consists of deep-fried Twinkies®, launched in August 2016) and “In-Store Bakery,” or “ISB” (which consists of Superior, which we purchased in May 2016, and manufactures and distributes eclairs, madeleines, brownies, and iced cookies in the ISB section of retailers), and licensing.

We evaluate performance and allocate resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:



	Unaudited Segment Financial Data
(In thousands)	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016
	(Successor)		(Predecessor)
Net revenue:
Sweet Baked Goods	$	173,552	$	174,473
Other	18,698		21,724
Net revenue	$	192,250	$	196,197

Gross profit:
Sweet Baked Goods	$	72,965	$	76,777
Other	5,400		5,802
Gross profit	$	78,365	$	82,579

Capital expenditures (1):
Sweet Baked Goods	$	9,109	$	9,312
Other	205		161
Capital expenditures	$	9,314	$	9,473


(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 three months ended September 30, 2017 (Successor) and 2016 (Predecessor).

We have one customer that accounted for 10% or more of our net revenues. The percentage of net revenue from this customer is presented below by segment:



	Unaudited Segment Data
	Three Months Ended
(% of Consolidated Net Revenues)	September 30, 2017		September 30, 2016
Sweet Baked Goods	18.8	%	18.1	%
Other	0.9	%	3.1	%
Total	19.7	%	21.2	%

Unaudited Statement of Operations

Historical and Pro Forma*



	(Successor)				Historicalⁱ (Predecessor)					Pro forma
(In thousands, except per share data)	Nine Months Ended September 30, 2017		% of Net Revenues		Nine Months Ended September 30, 2016		Pro Forma Adjustments			Nine Months Ended September 30, 2016		% of Net Revenues
Net revenue	$	579,967	100.0	%	$	548,757	—			$	548,757	100.0	%
Cost of goods sold	333,861		57.6		309,427		315		ii	309,742		56.4
Gross profit	246,106		42.4		239,330		(315	)		239,015		43.6

Operating costs and expenses:
Advertising and marketing	24,304		4.2		27,529		—			27,529		5.0
Selling expense	24,418		4.2		23,175		—			23,175		4.2
General and administrative	43,416		7.5		32,015		(653	)	ii	31,362		5.7
Amortization of customer relationships	17,860		3.1		468		17,950		iii	18,418		3.4
Impairment of property and equipment	1,003		0.2		7,267		—			7,267		1.3
Business combination transaction costs	—		—		7,065		(6,490	)	iv	575		0.1
Related party expenses	284		—		3,431		—			3,431		0.6
Tax receivable agreement liability remeasurement	1,589		0.3		—		—			—		—
Recall and other costs (recoveries)	—		—		473		—			473		0.1
Total operating costs and expenses	112,874		19.5		101,423		10,807			112,230		20.4
Operating income	133,232		22.9		137,907		(11,122	)		126,785		23.1
Other expense:
Interest expense, net	29,831		5.1		53,746		(13,871	)	v	39,875		7.3
Loss on debt modification	1,948		0.3		—		—			—		—
Other expense	1,309		0.2		2,344		—			2,344		0.4
Total other expense	33,088		5.6		56,090		(13,871	)		42,219		7.7
Income before income taxes	100,144		17.3		81,817		2,749			84,566		15.4
Income tax expense	31,608		5.4		294		23,804		vi	24,098		4.4
Net income	68,536		11.8		81,523		(21,055	)		60,468		11.0
Less: Net income attributable to the non-controlling interest	24,325		4.2		4,110		16,954		vii	21,064		3.8
Net income attributable to Class A shareholders	$	44,211	7.6	%	$	77,413	(38,009	)		$	39,404	7.2	%

Earnings per Class A share:
Basic	$	0.45								$	0.40
Diluted	$	0.42								$	0.40

Weighted-average shares outstanding:
Basic	98,920,808						97,589,217		viii	97,589,217
Diluted	105,840,673						97,589,217		viii	97,589,217

* For convenience, we have included this supplemental pro forma information for the nine months ended September 30, 2016 that gives effect to the Business Combination as if such information had been consummated on January 1, 2016.

The unaudited pro forma statements of operations for the nine months ended September 30, 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 adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma 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 estimated 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. The total purchase price to acquire Hostess Holdings has been allocated to the assets acquired and assumed liabilities of Hostess Holdings, based upon preliminary estimated 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.

The unaudited pro forma 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 ~~engaged~~be relied upon as being indicative of our results of operations had the Business Combination occurred on January 1, 2016. The unaudited pro forma financial information also does not project our results of operations for any future period or date. The acquisition of Superior occurred in ~~any hedging activities during~~May 2016. The unaudited pro forma consolidated financial information for the three and nine months ended September 30, 2016 does not include the results of the Superior acquisition and its related operations prior to the acquisition. 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 separately warrant the inclusion of pro forma financial results assuming the acquisition of Superior on January 1, 2016 under SEC rules and regulations or under GAAP. The pro forma adjustments give effect to the items identified in the pro forma table above in connection with the Business Combination.


i.	The amounts in these columns represent our Hostess Holdings historical results of operations for the period reflected. Certain amounts previously reported within the 2016 Hostess Holdings quarterly financial statements have been reclassified to conform with the current financial statement presentation.


ii.	Represents the adjustment to depreciation expense associated with the allocation of purchase price to property and equipment.


iii.	Represents additional amortization expense associated with the fair value recognized for customer relationships in connection with the Business Combination.


iv.	This adjustment consists primarily of legal and professional fees and other costs associated with the Business Combination.


v.	Represents the reduction in interest expense due to the repayment of Hostess Holdings debt pursuant to the terms of the Business Combination.


vi.	Represents the effective income tax rate of 28.5%, giving effect to the non-controlling interest, a partnership for income tax purposes.


vii.	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.


viii.	Represents the basic and diluted weighted average number of Class A shares that would have been outstanding had the Business Combination occurred on January 1, 2016. The outstanding warrants were determined not to be dilutive.

Reconciliation of Adjusted EBITDA

We define adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization, (iii) income taxes and (iv) as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments set forth below. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;

does not reflect changes in, or cash requirements for, our working capital needs;

does not reflect the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt;

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, the tax receivable agreement or distributions to the non-controlling interest to reimburse its tax liability.

Our presentation of adjusted EBITDA does not exclude the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as the Chief Executive Officer and/or Executive Chairman. These payments were $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, and $1.1 million and $3.4 million for the three and nine months ended September 30, 2016, respectively. Following completion of the Business Combination, these cash expenses will be approximately $0.3 million annually.



Reconciliation of Adjusted EBITDA (Unaudited)

(In thousands)		Nine Months Ended September 30, 2017		Pro Forma Nine Months Ended September 30, 2016

Net income		$	68,536	$	60,468
Plus non-GAAP adjustments:
Income tax provision		31,608		24,098
Interest expense, net		29,831		39,875
Depreciation and amortization		28,576		27,352
Share-based compensation	i.	7,990		—
Tax receivable agreement liability remeasurement	ii.	1,589		—
Recall and other	iii.	—		473
Other expense	iv.	1,309		2,342
Loss on debt modification	v.	1,948		—
Impairment of property and equipment	vi.	1,003		7,267
Business combination transaction costs	vii.	—		575
Adjusted EBITDA		$	172,390	$	162,450


i.	For the nine months ended September 30, 2017, the Company recognized expense related to stock compensation awarded under the Hostess Brands, Inc. 2016 Equity Incentive Plan.


ii.	For the nine months ended September 30, 2017, the Company incurred a loss on the remeasurement of the tax receivable agreement due to a change in state tax law.


iii.	For the nine months ended September 30, 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.

iv.

For the nine months ended September 30, 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 pro forma nine months ended September 30, 2016, other expense primarily consisted of professional fees attributed to the pursuit of a potential acquisition that has since been abandoned, and other special projects.


v.	During the nine months ended September 30, 2017, previously capitalized debt issuance costs were expensed.

vi.

During the nine months ended September 30, 2017, the Company transitioned the production of one of its products to a third party and recognized an impairment loss resulting from the idling of the related production equipment. During the pro forma nine months ended September 30, 2016, the Company closed multiple production lines in Indianapolis, Indiana bakery and transitioned production to other facilities resulting in an impairment loss.


vii.	For the pro forma nine months ended September 30, 2016, business combination transaction costs consisted of professional and legal costs for the acquisition of Superior.

Net Revenue

Net revenue was $580.0 million, an increase of $31.2 million, or 5.7%, compared to historical and pro forma net revenue of $548.8 million for the nine months ended September 30, 2016. ~~We do not expect~~The increase was primarily due to ~~engage in any hedging activities~~2017 new product initiatives along with ~~respect~~white space opportunities growth led by In-Store Bakery (which contributed $15.0 million due to the ~~market risk~~acquisition of Superior and In-Store Bakery product innovation), and other developing sales channels. These amounts were partially offset by lower prior year innovation revenue and discontinued items.

Cost of Goods Sold and Gross Profit

Cost of goods sold for the nine months ended September 30, 2017 of $333.9 million represents an increase of $24.4 million or 7.9% from the historical costs of goods sold of $309.4 million for the nine months ended September 30, 2016 and an increase of $24.1 million or 7.8% from the pro forma costs of goods sold of $309.7 million for the nine months ended September 30, 2016. The increase in the nine months ended September 30, 2017 from both historical and pro forma nine months ended September 30, 2016 is primarily attributed to the increase in revenue.

Gross profit was $246.1 million for the nine months ended September 30, 2017, an increase of $6.8 million, or 2.8%, compared to historical gross profit of $239.3 million for the nine months ended September 30, 2016 and an increase of $7.1 million, or 3.0% compared to pro forma gross profit of $239.0 million for the nine months ended September 30, 2016. The increase in the nine months ended September 30, 2017 from both historical and pro forma nine months ended September 30, 2016 is primarily attributed to the increase in revenue.

Gross margin was 42.4% for the nine months ended September 30, 2017, compared to historical gross margin of 43.6% for the nine months ended September 30, 2016 and pro forma gross margin of 43.6% for the nine months ended September 30, 2016. The decrease in margin for the nine months ended September 30, 2017 from both historical and pro forma gross margin for the nine months ended September 30, 2016 is primarily due to a shift in product mix to include the Company’s In-Store Bakery operations and growth in multi-pack and club-pack product sales as a percentage of total revenue. In addition, the cost of transportation as a percentage of net revenue increased 60 basis points due to tightening of shipping capacity and an increase in the percentage of orders on a refrigerated class of transportation.

Gross profit for the Sweet Baked Goods segment for the nine months ended September 30, 2017 was $230.2 million, or 43.9% of net revenue, compared to gross profit of $227.3 million or 44.7% of net revenue for the historical nine months ended September 30, 2016. Gross margin decreased due to larger growth in our multi-pack and club-pack product sales as a percentage of total sales growth. In addition, the cost of transportation as a percentage of revenue increased by approximately 60 basis points due to tightening of shipping capacity and an increase in the percentage of orders on a refrigerated class of transportation.

Gross profit for the Other segment for the nine months ended September 30, 2017 was $15.9 million, or 28.8% of net revenue, compared to historical gross profit of $12.0 million, or 29.7% of net revenue for the nine months ended September 30, 2016. The decrease in margin was attributed to In-Store Bakery sales.

Operating Costs and Expenses

Advertising and Marketing

Advertising and marketing expenses for the nine months ended September 30, 2017 of $24.3 million represents a decrease of 11.7% over the historical and pro forma advertising and marketing expenses of $27.5 million for the nine months ended September 30, 2016, as a result of lower packaging design costs and reduced permanent display deployment during the year.

Selling Expense

Selling expense of $24.4 million, or 4.2% of revenue for the nine months ended September 30, 2017 was comparable to $23.2 million, or 4.2% of revenue on a historical and pro forma basis for the nine months ended September 30, 2016 due to the addition of In-Store Bakery operations and an adjustment to our bad debt expense.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2017 of $43.4 million represents an increase of $11.4 million or 35.6% over historical general and administrative expense of $32.0 million for the nine months ended September 30, 2016 and an increase of$12.1 million or 38.6% over the pro forma general and administrative expenses of $31.4 million for the nine months ended September 30, 2016. The increase of the 2017 expenses over both the historical and pro forma 2016 expenses is attributed to increased non-cash share-based compensation of $8.0 million and increased professional fees related to public company compliance of $2.6 million.

Amortization of Customer Relationships

Amortization of customer relationships was $17.9 million for the nine months ended September 30, 2017, compared to historical customer relationships amortization of $0.5 million for the nine months ended September 30, 2016 and pro forma customer relationships amortization of $18.4 million for the nine months ended September 30, 2016. For the third quarter 2016 on a historical basis, amortization expense was based on the valuation of customer relationships acquired from Old Hostess in 2013. The amortization expense for the nine months ended September 30, 2017 and the nine months ended September 30, 2016 on a pro forma basis reflects the new valuation of the customer relationships acquired through the Business Combination.

Impairment of Property and Equipment

During the nine months ended September 30, 2017, we idled a production line in our Columbus, Georgia facility and transitioned the production to a third party. We recognized an impairment loss of $1.0 million.

For the nine months ended September 30, 2016 on a historical and pro forma basis, we recorded an impairment loss of $7.3 million resulting from the closure of multiple production lines at the Indianapolis, Indiana bakery and the transition of those production lines to other facilities. There was no such activity for the the nine months ended September 30, 2017.

Tax Receivable Agreement Liability Remeasurement

For the nine months ended September 30, 2017, we recognized a loss of $1.6 million related to a remeasurement of the tax receivable agreement due to a change in state tax law.

Recall and Other Costs

For the nine months ended September 30, 2016, other costs, on both a historical and pro forma basis, are attributed to utilities, insurance, taxes, and maintenance expenses related to the closure of our Schiller Park, Illinois bakery.

Related Party Expenses

Related party expenses were $0.3 million for the nine months ended September 30, 2017 compared to historical and pro forma expenses of $3.4 million for the nine months ended September 30, 2016. These expenses represent payments made to Mr. Metropoulos under the terms of his employment arrangements. Following the Business Combination, the expenses associated with Mr. Metropoulos’s employment arrangement are estimated to be $0.3 million annually.

Operating Income

The 3.4% decrease in operating income from historical operating income of $137.9 million for the nine months ended September 30, 2016 to $133.2 million for the nine months ended September 30, 2017 attributed to additional depreciation and amortization and stock-based compensation in 2017 offset by an increase in sales. When considering the additional depreciation and amortization expense resulting from the Business Combination, operating income for the nine months ended September 30, 2017 increased$6.4 million or 5.0% compared to pro forma operating income for the nine months ended September 30, 2016.

Interest Expense, net

Our interest expense decreased 44.5% from $53.7 million for the historical nine months ended September 30, 2016 to $29.8 million for the nine months ended September 30, 2017 primarily from the refinancing of our Second Lien Term Loan in November 2016 and the amendment of our First Lien Term Loan in May 2017. In both cases, our effective interest rate on outstanding debt was decreased. Additionally, $217 million of principal was repaid as part of the Business Combination. This was offset by the additional interest expense related to our interest rate swap, which was effective in May 2017. Excluding expense associated with the principal repayment, interest expense for the nine months ended September 30, 2017 decreased 25.1% from pro forma interest expense of $39.9 million for the nine months ended September 30, 2016, as a result of the lower effective interest rate offset by the interest rate swap settlement.

Loss on Modification of Debt

During the nine months ended September 30, 2017, we expensed $2.1 million of previously capitalized debt financing charges. See Note 1-“Summary of Significant Accounting Policies” to the consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Other Expense

For the nine months ended September 30, 2017, we recorded other expenses of $1.3 million which primarily consisted of legal and professional fees related to a secondary public offering of common stock which was completed in April 2017 and the registration of certain privately held warrants which was completed in June 2017. For the nine months ended September 30, 2016, historical and pro forma other expense of $2.3 million was attributed to professional fees incurred in the pursuit of a potential acquisition that was subsequently abandoned, and other special projects.

Income Taxes

The income tax expense of $31.6 million for the nine months ended September 30, 2017 includes an adjustment to our deferred tax liability of approximately $2.2 million caused by a change to a state tax rate. The remaining tax expense of $29.4 million represents an effective tax rate of 29.4% giving effect to the non-controlling interest, a partnership for income tax purposes. There was no historical income tax expense until the acquisition of Superior in May 2016, as the Company was a partnership for income tax purposes prior to the Business Combination.

Adjusted EBITDA

Adjusted EBITDA was $172.4 million for the nine months ended September 30, 2017, an increase of $9.9 million, or 6.1%, compared to pro forma adjusted EBITDA of $162.5 million for the nine months ended September 30, 2016. As a percentage of net revenue, adjusted EBITDA was 29.7% for the first nine months of 2017, which was comparable to pro forma adjusted EBITDA of 29.6% of net revenues in the same period last year.

Segments

launched in April 2015, frozen retail (which consists of deep-fried Twinkies®, launched in August 2016) and “In-Store Bakery,” or “ISB” (which consists of Superior, which we purchased in May 2016, and manufactures and distributes eclairs, madeleines, brownies, and iced cookies in the ISB section of retailers), and licensing.

We evaluate performance and allocate resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:



	Unaudited Segment Financial Data
(In thousands)	Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016
	(Successor)		(Predecessor)
Net revenue:
Sweet Baked Goods	$	524,731	$	508,288
Other	55,236		40,469
Net revenue	$	579,967	$	548,757

Gross profit:
Sweet Baked Goods	$	230,217	$	227,322
Other	15,889		12,008
Gross profit	$	246,106	$	239,330

Capital expenditures (1):
Sweet Baked Goods	$	24,772	$	25,701
Other	643		211
Capital expenditures	$	25,415	$	25,912

(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 nine months ended September 30, 2017 (Successor) and 2016 (Predecessor).

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:



	Unaudited Segment Data
	Nine Months Ended
(% of Consolidated Net Revenues)	September 30, 2017		September 30, 2016
	(Successor)		(Predecessor)
Sweet Baked Goods	18.9	%	20.3	%
Other	0.8	%	1.5	%
Total	19.7	%	21.8	%

Liquidity and Capital Resources

Our primary sources of liquidity are from the cash 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 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 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, as of September 30, 2017 and December 31, 2016 of $30.3 million and $20.6 million, respectively. We have the ability to borrow under our Revolver to meet obligations as they come due. As of September 30, 2017, we had approximately $96.1 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 nine months ended September 30, 2017 (Successor) were $117.8 million and for the nine months ended September 30, 2016 (Predecessor) were $89.5 million. The increase in cash flows provided by operating activities between the two periods is due to an increase in income before taxes and the timing of vendor payments processed through accounts payable offset by higher inventory and prepaid expense balances.

Cash Flows from Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2017 (Successor) and 2016 (Predecessor) were $24.4 million and $71.7 million, respectively. Cash outflows from investing activities decreased from 2016 due to the acquisition of Superior in 2016.

Our property and equipment capital expenditures primarily consisted of strategic growth initiatives, maintenance and productivity improvements. We expect that our cash outflows for capital expenditures will be approximately $5.0 million to $15.0 million during the remainder of 2017.

Cash Flows from Financing Activities

Cash flows used in financing activities were $19.1 million for the nine months ended September 30, 2017 (Successor) and $18.1 million for the nine months ended September 30, 2016 (Predecessor). In both periods, 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.

Long-Term Debt

We had no outstanding borrowings under our Revolver as of September 30, 2017.

As of September 30, 2017, $993.8 million aggregate principal amount of the Second Amended First Lien Term Loan and $3.9 million aggregate principal amount of letters of credit, reducing the amount available under the Revolver, were outstanding. See Note 14 -- “Commitments and Contingencies” to the consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for information regarding the letters of credits.

As of September 30, 2017, the Company was in compliance with the covenants under the Second Amended First Lien Term Loan and the Revolver.

Commitments and Contingencies

As of September 30, 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 I, Item 1 of this Quarterly Report on Form 10-Q.



Contractual Commitments as of September 30, 2017	Total Committed		Commitments within 1 year		Commitments beyond 1 year
(In thousands)
Tax receivable agreement	$	175,487	$	—	$	175,487
Second Amended First Term Loan	993,763		9,963		983,800
Interest payments on Term Loan	180,924		36,928		143,996
Distribution Center (Shorewood, IL)	2,656		1,763		893
Corporate office lease (Kansas City, MO)	426		243		183
Corporate office lease (Dallas, TX)	6		6		—
Superior capital lease	683		200		483
Ingredient procurement	82,400		69,200		13,200
Packaging procurement	44,300		39,100		5,200
	$	1,480,645	$	157,403	$	1,323,242

Tax receivable agreement

The tax receivable agreement entered into in connection with the Business Combination (the “Tax Receivable Agreement”) 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 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.

During the three months ended September 30, 2017, we recognized approximately $1.6 million of expense to adjust the tax receivable agreement to reflect an increase to the estimated future cash tax savings rate attributed to a state tax law change. We recognized a corresponding loss on the consolidated statement of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate market risk.

Market risk on variable-rate financial instruments

Our Second Amended First Lien Term Loan and Revolver each bear interest on outstanding borrowings thereunder at variable interest rates. The rate in effect at September 30, 2017 for the outstanding Second Amended First Lien Term Loan was a LIBOR-based rate of 3.74% per annum. At September 30, 2017, the subsidiary borrower had an aggregate principal balance of $993.8 million outstanding under the Second Amended First Lien Term Loan.At September 30, 2017, the subsidiary borrower had $96.1 million available for borrowing, net of letters of credit of $3.9 million, under its Revolver. Increases in market interest rates would cause interest expense to increase and earnings before income taxes to decrease.

To manage the risk related to our variable rate debt, we have 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 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 contract during the reporting period following an increase in market interest rates. An increase or decrease in applicable interest rates of 1% would result in an increase or decrease in interest payable of approximately $1.3 million and $3.3 million for the three and nine months ended September 30, 2017, respectively, after accounting for the impact of our swap contract.


Item 4.	Controls and Procedures

~~Item 4. Controls~~Evaluation of Disclosure Controls and Procedures

~~Disclosure~~

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the three months covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective. Our disclosure controls and procedures are ~~controls and other procedures that are~~ designed to ~~ensure~~provide reasonable assurance that the information required to be disclosed by us in ~~our~~ reports ~~filed or submitted~~that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s~~ rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

~~As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation~~forms of the ~~effectiveness~~SEC.

Changes in Internal Control over Financial Reporting

As of September 30, 2017 we continue to engage in the process of the design and ~~operation~~implementation of our disclosure controls and procedures as of September 30, 2016. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

~~During the most recently completed fiscal quarter, there has been no change in~~ our internal control over financial reporting in a manner commensurate with the scale of our operations subsequent to the November 4, 2016 Business Combination. We have hired a third-party consultant to assist us with this effort.

Except as disclosed above related to design and implementation, there were no changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2017 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

PART II

~~PART II—OTHER INFORMATION~~

Item 1. Legal Proceedings

~~None.~~

~~Item 1A. Risk Factors~~

~~Factors that could cause our actual results~~

We are involved in lawsuits, claims and proceedings arising in the ordinary course of business. These matters involve personnel and employment issues, personal injury, contract and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to ~~differ materially from those in this report are any of~~date. Although we do not expect the ~~risks described in our Annual Report on Form 10-K filed with the SEC on March 17, 2016. Any~~outcome of these ~~factors could result in~~proceedings to have a ~~significant or~~ 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 II, Item 1 (Legal Proceedings) is incorporated by reference to the information contained in Note 14.--Commitments and Contingencies to the consolidated financial ~~condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.~~

~~As of the date~~statements included in Part I, Item 1 of this Quarterly Report on Form ~~10-Q, there have been no material changes to the~~10-Q.

Item 1A. Risk Factors

Our risk factors ~~disclosed~~are set forth in the “Risk Factors” section of our Annual Report on Form 10-K filed on March ~~17, 2016 with the SEC. However, we may disclose~~14, 2017. There have been no material changes to ~~such~~our risk factors ~~or disclose additional factors from time to time in our future filings with~~since the ~~SEC.~~

filing of the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Unregistered Sales~~

On June 12, 2015, our Sponsor purchased 11,500,000 Founder Shares for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, our Sponsor transferred an aggregate of 75,000 Founder Shares to our independent directors. On August 13, 2015, our Sponsor forfeited 1,437,500 Founder Shares, and following the expiration of the underwriters’ remaining over-allotment option, our Sponsor forfeited an additional 687,500 Founder Shares, so that the remaining Founder Shares held by the Initial Stockholders would represent 20.0% of the outstanding shares of Class A common stock and Class F common stock following the completion of our Public Offering. Our Public Offering was consummated on August 19, 2015.

Prior to the Public Offering Closing Date, we completed the private sale of an aggregate of 19,000,000 Private Placement Warrants to our Sponsor at a price of $0.50 per Private Placement Warrant, generating total proceeds, before expenses, of $9,500,000. The Private Placement Warrants are substantially similar to the Warrants underlying the Units issued in our Public Offering, except that the Private Placement Warrants may be net cash settled and are not redeemable so long as they are held by our Sponsor or its permitted transferees. If the Private Placement Warrants are held by holders other than our Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Warrants.

The sales of the above securities by the Company were exempt from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering.

~~Use of Proceeds~~

On August 13, 2015, our registration statement on Form S-1 (File No. 333-205734) was declared effective by the SEC for the Public Offering pursuant to which we sold an aggregate of 37,500,000 Units at an offering price to the public of $10.00 per Unit, including 2,500,000 Units as a result of the underwriters’ partial exercise of their over-allotment option, generating gross proceeds of $375,000,000.

Not applicable.

After deducting the underwriting discounts and commissions (excluding the Deferred Discount, which amount will be payable upon the consummation of our Business Combination, if consummated) and the estimated offering expenses, the total net proceeds from our Public Offering and the sale of the Private Placement Warrants were $376,100,000, of which $375,000,000 (or $10.00 per share sold in the Public Offering) was placed in the Trust Account in the United States maintained by the Trustee.

Through September 30, 2016, we incurred approximately $8,282,117 for costs and expenses related to the Public Offering. At the closing of the Public Offering, we paid a total of $7,500,000 in underwriting discounts and commissions. In addition, the underwriters agreed to defer $13,125,000 in underwriting commissions, which amount will be payable upon consummation of our Business Combination, if consummated. There has been no material change in the planned use of proceeds from our Public Offering as described in our final prospectus which was filed with the SEC on August 13, 2015.

Our Sponsor, executive officers and directors have agreed, and our amended and restated certificate of incorporation provides, that we will have only 24 months from the Public Offering Closing Date to complete our Business Combination. If we are unable to complete our Business Combination within such 24-month period, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in our Trust Account, including interest (which interest shall be net of taxes payable, and less up to $50,000 of interest to pay dissolution expenses) divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our Board of Directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.

As of September 30, 2016, after giving effect to our Public Offering and our operations subsequent thereto, approximately $375,395,331 was held in the Trust Account, and we had approximately $6,000 of unrestricted cash available to us for our activities in connection with identifying and conducting due diligence of a suitable Business Combination, and for general corporate matters.

Item 3. Defaults Upon Senior Securities

~~None~~

None.

Item 4. Mine Safety Disclosures

Not ~~Applicable.~~

applicable.

Item 5. Other Information

None.

Item 6. Exhibits

~~The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.~~

Exhibit Number		~~Description~~
~~2.1~~	~~Master Transaction Agreement,~~
Exhibit No.	Description


10.1	HB Key Executive Severance Benefit Plan, dated as of July 5, 2016, by and among Gores Holdings, Inc., Homer Merger Sub, Inc., AP Hostess Holdings, L.P., Hostess CDM Co-Invest, LLC, CDM Hostess Class C, LLC, and AP Hostess Holdings, L.P., in its capacity as the Sellers’ RepresentativeSeptember 12, 2017 (incorporated by reference to Exhibit ~~2.1 of~~10.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~July 5, 2016).~~ September 18, 2017)

~~10.1~~ 31.1	~~Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on July 5, 2016)~~

~~10.2~~	Subscription Agreement, dated July 5, 2016 by and between Gores Holdings, Inc. and Gores Sponsor LLC (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed with the SEC on July 5, 2016).

~~10.3~~	Subscription Agreement, dated July 5, 2016 by and between Gores Holdings, Inc. and Canyon Capital Advisors LLC (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed with the SEC on July 5, 2016).

~~10.4~~	Promissory Note, dated July 27, 2016, issued by Gores Holdings, Inc. to Gores Sponsor LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on July 28, 2016).

Exhibit Number		~~Description~~
~~10.5~~		Letter Agreement, dated August 10, 2016, between the Company and Gores Sponsor LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on August 15, 2016).

~~10.6~~		Amended and Restated Insider Letter Agreement, dated August 12, 2016, among the Company, its officers and directors, The Gores Group, LLC and Gores Sponsor LLC (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed with the SEC on August 15, 2016).

31.1*		Certification of ~~Principal~~Chief Executive Officer ~~Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted~~ Pursuant to Section 302 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of ~~2002.~~ 2002

31.2* 31.2		Certification of ~~Principal~~Chief Financial Officer ~~Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted~~ Pursuant to Section 302 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of ~~2002.~~ 2002

32.1* 32.1		Certification of ~~Principal~~Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as ~~Adopted Pursuant~~adopted pursuant to Section 906 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of ~~2002.~~ 2002

32.2* 32.2		Certification of ~~Principal~~Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as ~~Adopted Pursuant~~adopted pursuant to Section 906 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of ~~2002.~~ 2002

101.INS* 101.INS		XBRL Instance Document

101.SCH* 101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL* 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* 101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE* 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

~~_____________________~~

* Filed herewith

~~SIGNATURES~~

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.~~

authorized, in Kansas City, Missouri on November 8, 2017.

		~~GORES HOLDINGS, INC.~~ ~~(Registrant)~~

~~Date: November 3, 2016~~			HOSTESS BRANDS, INC.
	~~By:~~	~~/s/ Mark Stone~~
By	/s/ Thomas Peterson
	~~Mark Stone~~ Thomas Peterson Executive Vice President, Chief ~~Executive~~Financial Officer ~~(Duly Authorized Officer and Principal Executive Officer)~~

☐ For the three months ended September 30, 2017
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

~~Delaware~~		~~47-4168492~~

Delaware (State or ~~Other Jurisdiction~~other jurisdiction of ~~Incorporation~~ incorporation or ~~Organization)~~ organization)	47‑4168492 (I.R.S. Employer Identification ~~Number)~~ No.)

~~9800 Wilshire Blvd.~~ ~~Beverly Hills, CA~~	~~90212~~
1 East Armour Boulevard Kansas City, MO (Address of ~~Principal Executive Offices)~~ principal executive offices)	64111 (Zip Code)



Large accelerated filer o	☐ Accelerated filer x	~~Accelerated~~ Non‑accelerated filer o (Do not check if a smaller reporting company)	☐

~~Non-accelerated filer~~	☒	Smaller reporting company o	☐ Emerging growth company x

	For the Three months ended September 30, 2016			For the Three months ended September 30, 2015			For the Nine months ended September 30, 2016			For the period from June 1, 2015 (inception) to September 30, 2015
Revenues	$	—		$	—		$	—		$	—
Professional fees and other expenses		(2,257,304	)		(73,223	)		(4,583,139	)		(85,223	)
State franchise taxes, other than income tax		(45,000	)		(135,000	)		(135,000	)		(135,000	)
Loss from operations		(2,302,304	)		(208,223	)		(4,718,139	)		(220,223	)
Other income - Interest and dividend income		161,070			1,416			386,139			1,416
Net loss	$	(2,141,234	)	$	(206,807	)	$	(4,332,000	)	$	(218,807	)

Weighted average common shares outstanding		11,124,933			9,375,000			11,124,933			9,375,000
Basic and diluted

Net loss per common share:	$	(0.19	)	$	(0.02	)	$	(0.39	)	$	(0.02	)
Basic and diluted

☒

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

				~~Page~~
~~PART I—FINANCIAL INFORMATION~~	1
		Page
PART I - Financial Information
Item 1.	Financial Statements	1
	~~Condensed~~Consolidated Balance Sheets (Unaudited)	1 4
	~~Condensed Statement~~Consolidated Statements of Operations (Unaudited)	2 6
	~~Condensed Statement~~Consolidated Statements of ~~Changes in Stockholders’ Equity~~Comprehensive Income (Unaudited)	3 7
	~~Condensed Statement~~Consolidated Statements of Stockholders’ Equity (Unaudited)	8
	Consolidated Statements of Cash Flows (Unaudited)	4 9
	Notes to ~~Condensed~~Unaudited Consolidated Financial Statements ~~(Unaudited)~~	5 10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12 26

Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	16 47

Item 4.	Controls and Procedures	17 47
			PART II - Other Information
~~PART II—OTHER INFORMATION~~	17

Item 1.	Legal Proceedings	17 48

Item 1A.	Risk Factors	17 48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17 48

Item 3.	~~Defaults~~Default Upon Senior Securities	18 49

Item 4.	Mine Safety Disclosures	18 49

Item 5.	Other Information	18 49

Item 6.	Exhibits	18 49

	September 30, 2016			December 31, 2015
	(unaudited)			(audited)
CURRENT ASSETS:
Cash and cash equivalents	$	6,090		$	790,635
Prepaid expenses		155,239			259,149
Total current assets		161,329			1,049,785
Investments and cash held in Trust Account		375,395,331			375,010,481
Total assets	$	375,556,660		$	376,060,265

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses, formation and offering costs	$	3,847,603		$	217,384
Promissory Note		175,000			—
State franchise tax accrual		93,093			69,917
Total current liabilities		4,115,696			287,301
Deferred underwriting compensation		13,125,000			13,125,000
Total liabilities		17,240,696			13,412,301

Commitments and Contingencies
Shares of Class A common stock subject to possible redemption; 35,331,596 and 35,764,796 shares at September 30, 2016 and December 31, 2015, respectively, at a redemption value of $10.00 per share		353,315,960			357,647,960

Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, none issued or outstanding		—			—
Common stock
Class A common stock, $0.0001 par value; 200,000,000 shares authorized, 2,168,404 and 1,735,204 shares issued and outstanding (excluding 35,331,596 and 35,764,796 shares subject to possible redemption) at September 30, 2016 and December 31, 2015, respectively		217			174
Class F common stock, $0.0001 par value; 20,000,000 shares authorized, 9,375,000 shares issued and outstanding		938			938
Additional paid-in-capital		9,800,768			5,468,811
Deficit accumulated		(4,801,919	)		(469,919	)

Total stockholders’ equity		5,000,004			5,000,004

Total liabilities and stockholders’ equity	$	375,556,660		$	376,060,265

	Common Stock						Additional			Deficit Accumulated During the Development			Retained			Stockholders’
	Shares			Amount			Paid-in Capital			Stage			Earnings			Equity
Balance at January 1, 2016		11,110,204			1,112			5,468,811			—			(469,919	)		5,000,004
Change in proceeds subject to possible redemption; 35,331,596 shares at redemption value		433,200			43			4,331,957			—			—			4,332,000
Net loss		—			—			—			(4,332,000	)		—			(4,332,000	)
Balance at September 30, 2016		11,543,404			1,155			9,800,768			(4,332,000	)		(469,919	)		5,000,004


	Common Stock						Additional			Deficit Accumulated During the Development			Retained			Stockholders’
	Shares			Amount			Paid-in Capital			Stage			Earnings			Equity
Balance at June 1, 2015 (inception)		—		$	—		$	—		$	—		$	—		$	—
Sale of Class F common stock to Sponsor in June 2015⁽¹⁾		9,375,000			938			24,062			—			—			25,000
Sale of 37,500,000 units at $10.00 per unit on August 19, 2015		37,500,000			3,750			374,996,250			—			—			375,000,000
Sale of 19,000,000 Private Placement Warrants to Sponsor on August 19, 2015 at $0.50 per Private Placement Warrant		—			—			9,500,000			—			—			9,500,000
Underwriters' discounts and commissions and offering expenses		—			—			(8,282,116	)		—			—			(8,282,116	)
Deferred underwriting compensation		—			—			(13,125,000	)		—			—			(13,125,000	)
Class A common stock subject to possible redemption; 35,789,907 shares at a redemption value of $10.00 per share		(35,789,907	)		(3,579	)		(357,895,491	)		—			—			(357,899,070	)
Net loss		—			—			—			(218,807	)		—			(218,807	)
Balance at September 30, 2015		11,085,093			1,109			5,217,705			(218,807	)		—			5,000,007

	For the Nine			For the period from June
	months ended			1, 2015 (inception) to
Cash flows from operating activities:	September 30, 2016			September 30, 2015
Net loss	$	(4,332,000	)	$	(218,807	)
Changes in prepaid expenses		103,911			(292,921	)
Changes in state franchise tax accrual		23,175			135,000
Changes in accounts payable and accrued expenses		3,630,219			—
Changes in deferred offering costs associated with proposed public offering		—			—
Changes in accrued expenses, formation and offering costs		—			15,000

Net cash used by operating activities		(574,695	)		(361,728	)

Cash flows from investing activities:
Cash deposited in Trust Account		—			(375,000,000	)
Interest reinvested in Trust Account		(384,850	)		(1,130	)

Net cash used in investing activities		(384,850	)		(375,001,130	)

Cash flows from financing activities:
Proceeds from notes and advances payable – related party		175,000			300,000
Proceeds from sale of Class F common stock to Sponsor		—			25,000
Proceeds from sale of units in initial public offering					375,000,000
Proceeds from sale of Private Placement Warrants to Sponsor					9,500,000
Repayment of notes and advances payable – related party					(300,000	)
Payment of underwriters’ discounts and commissions					(7,500,000	)
Payment of accrued offering costs		—			(357,116	)

Net cash provided by financing activities		175,000			376,667,884

Increase in cash		(784,545	)		1,305,026
Cash at beginning of period		790,635			—

Cash at end of period	$	6,090		$	1,305,026

Supplemental disclosure of non-cash financing activities:
Deferred underwriting compensation	$	13,125,000		$	13,125,000
Offering costs included in accrued expenses	$	—		$	425,000

					Significant		Significant
					Other		Other
			Quoted Prices in		Observable		Unobservable
	September 30,		Active Markets		Inputs		Inputs
Description	2016		(Level 1)		(Level 2)		(Level 3)
Investments in money market funds held in Trust Account		375,395,331		375,395,331	—		—
Total	$	375,395,331	$	375,395,331	$	—	$	—

					Significant		Significant
					Other		Other
			Quoted Prices in		Observable		Unobservable
	December 31,		Active Markets		Inputs		Inputs
Description	2015		(Level 1)		(Level 2)		(Level 3)
Investments in money market funds held in Trust Account		375,010,481		375,010,481	—		—
Total	$	375,010,481	$	375,010,481	$	—	$	—