UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


						(Mark One)
			☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
						For the three months ended
						March 31, ~~2021~~2022
						OR
			☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission file number 001-37540

HOSTESS BRANDS, INC.

(Exact name of registrant as specified in its charter)


Delaware		47-4168492
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
7905 Quivira Road		66215
Lenexa,	KS	(Zip Code)
(Address of principal executive offices)

(816) 701-4600

Registrant’s telephone number, including area code

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


Title of each Class	Ticker Symbol	Name of each exchange on which registered
Class A Common Stock, Par Value of $0.0001 per share	TWNK	The Nasdaq Stock Market LLC
~~Warrants, each exercisable for a half share of Class A Common Stock~~	~~TWNKW~~	~~The Nasdaq Stock Market LLC~~

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

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer

☒

Accelerated
filer

☐

Non‑accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Shares of Class A common stock outstanding - ~~131,294,192~~138,286,747 shares at May ~~10, 2021~~2, 2022

HOSTESS BRANDS, INC.

FORM 10-Q

For the Three Months Ended March 31, ~~2021~~2022

INDEX


		Page
PART I - Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Operations (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2019
Item 4.	Controls and Procedures	2019
PART II - Other Information
Item 1.	Legal Proceedings	2120
Item 1A.	Risk Factors	2120
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2120
Item 3.	Default Upon Senior Securities	2120
Item 4.	Mine Safety Disclosures	2120
Item 5.	Other Information	2120
Item 6.	Exhibits	2221

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute forward-looking statements are generally identified through the inclusion of words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language. Statements addressing events and developments that we expect or anticipate will occur are also considered 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 any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2020 and herein,~~2021, as updated by subsequent filings. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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


		March 31,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	197,846	$	173,034	Cash and cash equivalents	$	238,431	$	249,159
Accounts receivable, net	Accounts receivable, net	159,492		125,550		Accounts receivable, net	193,085		148,180
Inventories	Inventories	52,144		49,348		Inventories	59,867		52,813

Prepaids and other current assets	Prepaids and other current assets	8,468		21,614		Prepaids and other current assets	6,972		10,564
Total current assets	Total current assets	417,950		369,546		Total current assets	498,355		460,716
Property and equipment, net	Property and equipment, net	306,995		303,959		Property and equipment, net	354,055		335,305
Intangible assets, net	Intangible assets, net	1,962,025		1,967,903		Intangible assets, net	1,938,514		1,944,392
Goodwill	Goodwill	706,615		706,615		Goodwill	706,615		706,615
Other assets, net	Other assets, net	17,166		17,446		Other assets, net	42,821		19,283
Total assets	Total assets	$	3,410,751	$	3,365,469	Total assets	$	3,540,360	$	3,466,311

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:	Current liabilities:					Current liabilities:
Long-term debt and lease obligations payable within one year	Long-term debt and lease obligations payable within one year	$	13,508	$	13,811	Long-term debt and lease obligations payable within one year	$	14,126	$	14,170
Tax receivable agreement payments payable within one year	Tax receivable agreement payments payable within one year	10,200		11,800		Tax receivable agreement payments payable within one year	10,200		11,600
Accounts payable	Accounts payable	76,106		61,428		Accounts payable	90,591		68,104
Customer trade allowances	Customer trade allowances	47,514		46,779		Customer trade allowances	63,329		52,746
Warrant liabilities		785		861
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	38,855		55,715		Accrued expenses and other current liabilities	36,873		47,009

Total current liabilities	Total current liabilities	186,968		190,394		Total current liabilities	215,119		193,629
Long-term debt and lease obligations	Long-term debt and lease obligations	1,110,101		1,113,037		Long-term debt and lease obligations	1,096,867		1,099,975
Tax receivable agreement obligations	Tax receivable agreement obligations	144,744		144,744		Tax receivable agreement obligations	134,222		134,265
Deferred tax liability	Deferred tax liability	303,880		295,009		Deferred tax liability	331,658		317,847
Other long-term liabilities	Other long-term liabilities	1,575		1,560		Other long-term liabilities	1,615		1,605
Total liabilities	Total liabilities	1,747,268		1,744,744		Total liabilities	1,779,481		1,747,321

Commitments and Contingencies (Note 10)		0		0
Commitments and Contingencies (Note 9)						Commitments and Contingencies (Note 9)	0		0

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 131,184,826 and 130,347,464 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		13		13
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,487,326 shares issued and 138,275,493 shares outstanding as of March 31, 2022 and 142,031,329 shares issued and 138,278,573 shares outstanding as of December 31, 2021						Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,487,326 shares issued and 138,275,493 shares outstanding as of March 31, 2022 and 142,031,329 shares issued and 138,278,573 shares outstanding as of December 31, 2021	14		14

Additional paid in capital	Additional paid in capital	1,290,882		1,281,018		Additional paid in capital	1,302,039		1,303,254
Accumulated other comprehensive loss		(4,245)		(10,407)
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	17,720		(506)
Retained earnings	Retained earnings	382,833		356,101		Retained earnings	509,958		475,400
Treasury stock	Treasury stock	(6,000)		(6,000)		Treasury stock	(68,852)		(59,172)
Stockholders’ equity	Stockholders’ equity	1,663,483		1,620,725		Stockholders’ equity	1,760,879		1,718,990

Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,410,751	$	3,365,469	Total liabilities and stockholders’ equity	$	3,540,360	$	3,466,311

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


		Three Months Ended				Three Months Ended
		March 31, 2021		March 31, 2020				March 31, 2022		March 31, 2021

Net revenue	Net revenue	$	265,421	$	243,485		Net revenue	$	332,051	$	265,421
Cost of goods sold	Cost of goods sold	169,902		164,148			Cost of goods sold	216,427		169,902
Gross profit	Gross profit	95,519		79,337			Gross profit	115,624		95,519
Operating costs and expenses:	Operating costs and expenses:						Operating costs and expenses:
Advertising and marketing	Advertising and marketing	11,781		10,063			Advertising and marketing	11,950		11,781
Selling expense	Selling expense	8,630		18,120			Selling expense	9,777		8,630
General and administrative	General and administrative	22,185		25,195			General and administrative	29,672		22,185
Amortization of customer relationships	Amortization of customer relationships	5,878		6,484			Amortization of customer relationships	5,878		5,878
Business combination transaction costs		0		4,282
Other operating expense		0		27

Total operating costs and expenses	Total operating costs and expenses	48,474		64,171			Total operating costs and expenses	57,277		48,474
Operating income	Operating income	47,045		15,166			Operating income	58,347		47,045
Other expense (income):	Other expense (income):						Other expense (income):
Interest expense, net	Interest expense, net	10,017		11,725			Interest expense, net	9,666		10,017

Change in fair value of warrant liabilities	Change in fair value of warrant liabilities	(76)		(79,100)			Change in fair value of warrant liabilities	—		(76)
Other expense	Other expense	363		553			Other expense	436		363
Total other expense (income)		10,304		(66,822)
Total other expense							Total other expense	10,102		10,304
Income before income taxes	Income before income taxes	36,741		81,988			Income before income taxes	48,245		36,741
Income tax expense	Income tax expense	10,009		248			Income tax expense	13,687		10,009
Net income	Net income	26,732		81,740			Net income	$	34,558	$	26,732
Less: Net income attributable to the non-controlling interest		—		292
Net income attributable to Class A stockholders		$	26,732	$	81,448

Earnings per Class A share:	Earnings per Class A share:						Earnings per Class A share:
Basic	Basic	$	0.20	$	0.66		Basic	$	0.25	$	0.20
Diluted	Diluted	$	0.19	$	0.02		Diluted	$	0.25	$	0.19
Weighted-average shares outstanding:	Weighted-average shares outstanding:						Weighted-average shares outstanding:
Basic	Basic	130,839,313		123,123,656			Basic	138,602,451		130,839,313
Diluted	Diluted	137,186,889		126,075,126			Diluted	139,565,136		137,186,889

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(Unaudited, amounts in thousands)

Three Months Ended
March 31, 2021 March 31, 2020
Net income $ 26,732 $ 81,740
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap designated as a cash flow hedge 7,060 (12,789)
Reclassification into net income 1,327 81
Income tax benefit (expense) (2,225) 3,169
Comprehensive income 32,894 72,201
Less: Comprehensive loss attributed to non-controlling interest 0 (437)
Comprehensive income attributed to Class A stockholders $ 32,894 $ 72,638


	Three Months Ended
	March 31, 2022		March 31, 2021

Net income	$	34,558	$	26,732
Other comprehensive income:
Unrealized gain on interest rate swap and foreign currency contracts designated as a cash flow hedge	23,656		7,060
Reclassification into net income	1,062		1,327
Income tax expense	(6,492)		(2,225)
Comprehensive income	$	52,784	$	32,894

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in ~~thousands except share data)~~thousands)


		Class A Voting Common Stock			Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity				Class A Voting Common Stock							Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock				Total Stockholders’ Equity
		Shares	Amount									Shares	Amount								Shares		Amount										Shares		Amount
Balance–December 31, 2020		130,347	$	13		$	1,281,018	$	(10,407)	$	356,101	444	$	(6,000)	$	1,620,725
Balance–December 31, 2021																		Balance–December 31, 2021		138,279		$	14			$	1,303,254	$	(506)	$	475,400	3,753		$	(59,172)	$	1,718,990
Comprehensive income	Comprehensive income	—	—			—		6,162		26,732		—	—		32,894				Comprehensive income		—		—				—		18,226		34,558		—		—		52,784
Share-based compensation	Share-based compensation	146	—			2,723		—		—		—	—		2,723				Share-based compensation		350		—				2,339		—		—		—		—		2,339

Exercise of employee stock options	Exercise of employee stock options	20	—			262		—		—		—	—		262				Exercise of employee stock options		105		—				1,662		—		—		—		—		1,662
Exercise of public warrants		672	—			7,722		—		—		—	—		7,722

Payment of taxes for employee stock awards	Payment of taxes for employee stock awards	—	—			(843)		—		—		—	—		(843)				Payment of taxes for employee stock awards		—		—				(5,216)		—		—		—		—		(5,216)
Reclassification of public warrants		—	—			—		—		—		—	—		—
Repurchase of Common Stock																		Repurchase of Common Stock		(459)		—				—		—		—		459		(9,680)		(9,680)

Balance–March 31, 2021		131,185	$	13		$	1,290,882	$	(4,245)	$	382,833	444	$	(6,000)	$	1,663,483
Balance–March 31, 2022																		Balance–March 31, 2022		138,275		$	14			$	1,302,039	$	17,720	$	509,958	4,212		$	(68,852)	$	1,760,879

Class A Voting
Common Stock Class B Voting
Common Stock Additional
Paid-in Capital Accumulated
Other Comprehensive Income (Loss) Retained
Earnings Total
Stockholders’
Equity Non-controlling
Interest
Shares Amount Shares Amount
Balance–December 31, 2019 122,107 $ 12 8,411 $ 1 $ 1,123,805 $ (756) $ 251,425 $ 1,374,487 $ 94,432
Comprehensive income (loss) — — — — — (8,810) 81,448 72,638 (437)
Share-based compensation, net of income taxes of $103 106 — — — 2,180 — — 2,180 —
Exchanges 969 — (969) — 11,819 (17) — 11,802 (11,802)
Distributions — — — — — — — — (1,613)
Exercise of employee stock options 2 — — — 153 — — 153 —
Payment of taxes for employee stock awards — — — — (1,004) — — (1,004) —
Exercise of public warrants 1 — — — 2 — — 2 —
Tax receivable agreement arising from exchanges, net of income taxes of $1,341 — — — — (1,942) — — (1,942) —
Balance–March 31, 2020 123,185 $ 12 7,442 $ 1 $ 1,135,013 $ (9,583) $ 332,873 $ 1,458,316 $ 80,580


	Class A Voting Common Stock			Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount									Shares	Amount
Balance–December 31, 2020	130,347	$	13		$	1,281,018	$	(10,407)	$	356,101	444	$	(6,000)	$	1,620,725
Comprehensive income	—	—			—		6,162		26,732		—	—		32,894
Share-based compensation	146	—			2,723		—		—		—	—		2,723
Exercise of employee stock options	20	—			262		—		—		—	—		262
Payment of taxes for employee stock awards	—	—			(843)		—		—		—	—		(843)
Exercise of public warrants	672	—			7,722		—		—		—	—		7,722

Balance–March 31, 2021	131,185	$	13		$	1,290,882	$	(4,245)	$	382,833	444	$	(6,000)	$	1,663,483

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)


				Three Months Ended								Three Months Ended
				March 31, 2021		March 31, 2020						March 31, 2022			March 31, 2021

Operating activities	Operating activities								Operating activities
		Net income		26,732		$	81,740			Net income		$	34,558		$	26,732
		Depreciation and amortization		12,691		12,821				Depreciation and amortization		13,297			12,691

		Debt discount amortization		311		338				Debt discount amortization		308			311
		Change in fair value of warrant liabilities		(76)		(79,100)				Change in fair value of warrant liabilities		—			(76)

		Unrealized foreign exchange losses		123		286				Unrealized foreign exchange losses		317			123
		Non-cash lease expense		329		590				Non-cash lease expense		125			329
		Share-based compensation		2,723		2,077				Share-based compensation		2,339			2,723

		Deferred taxes		6,646		(649)				Deferred taxes		7,322			6,646
		Loss on sale of assets		0		27
		Change in operating assets and liabilities, net of acquisitions and dispositions:								Change in operating assets and liabilities:
			Accounts receivable	(34,204)		(17,463)					Accounts receivable	(44,848)			(34,204)
			Inventories	(2,796)		5,180					Inventories	(7,054)			(2,796)
			Prepaids and other current assets	13,112		3,270					Prepaids and other current assets	3,735			13,112

			Accounts payable and accrued expenses	6,582		864					Accounts payable and accrued expenses	10,866			6,582
			Customer trade allowances	680		3,161					Customer trade allowances	10,561			680

		Net cash provided by operating activities		32,853		13,142				Net cash provided by operating activities		31,526			32,853

Investing activities	Investing activities								Investing activities
		Purchases of property and equipment		(10,251)		(11,323)				Purchases of property and equipment		(23,034)			(10,251)
		Acquisition of business, net of cash acquired		0		(318,427)

		Acquisition and development of software assets		(634)		(1,793)				Acquisition and development of software assets		(1,825)			(634)
		Net cash used in investing activities		(10,885)		(331,543)				Net cash used in investing activities		(24,859)			(10,885)

Financing activities	Financing activities								Financing activities
		Repayments of long-term debt and lease obligations		(2,792)		(2,792)				Repayments of long-term debt and lease obligations		(2,792)			(2,792)

		Proceeds from long-term debt origination, net of fees paid		0		136,888
		Distributions to non-controlling interest		0		(1,614)
								Repurchase of common stock			(9,680)			—
		Tax payments related to issuance of shares to employees		(843)		(1,004)				Tax payments related to issuance of shares to employees		(5,216)			(843)
		Cash received from exercise of options and warrants		7,984		155				Cash received from exercise of options and warrants		1,662			7,984
		Payments on tax receivable agreement		(1,600)		(1,279)				Payments on tax receivable agreement		(1,443)			(1,600)

		Net cash used in financing activities		2,749		130,354				Net cash provided by (used in) financing activities		(17,469)			2,749
		Effect of exchange rate changes on cash and cash equivalents		95		(873)				Effect of exchange rate changes on cash and cash equivalents		74			95
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents			24,812		(188,920)			Net increase (decrease) in cash and cash equivalents			(10,728)			24,812
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period			173,034		285,087			Cash and cash equivalents at beginning of period			249,159			173,034
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period			$	197,846	$	96,167		Cash and cash equivalents at end of period			$	238,431		$	197,846


Supplemental Disclosures of Cash Flow Information:	Supplemental Disclosures of Cash Flow Information:						Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:	Cash paid during the period for:						Cash paid during the period for:
		Interest	$	9,807	$	10,758		Interest	$	9,678	$	9,807
		Net taxes paid (refunded)	$	(8,191)	$	(586)		Net taxes paid (refunded)	$	(514)	$	(8,191)
Supplemental disclosure of non-cash investing:	Supplemental disclosure of non-cash investing:						Supplemental disclosure of non-cash investing:
		Accrued capital expenditures	$	4,026	$	2,014		Accrued capital expenditures	$	5,433	$	4,026

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Hostess Brands, Inc. is a Delaware corporation headquartered in Lenexa, Kansas. The condensed consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading ~~packaged food~~sweet snacks company focused on developing, manufacturing, marketing, selling and distributing ~~snack products,~~snacks in North America under the Hostess® and Voortman® brands. The Company produces a variety of new and classic treats including ~~sweet baked goods,~~iconic Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers®, as well as a variety of Voortman® branded cookies and ~~wafers in North America. The Hostess® brand dates back to 1919 when Hostess® CupCake was introduced to the public, followed by Twinkies® in 1930.~~wafers.

Basis of Presentation

The Company’s operations are conducted through wholly-owned operating ~~subsidiaries that are wholly-owned by the Company.~~subsidiaries. The condensed consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The ~~accompanying consolidated financial statements include the accounts~~results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the ~~Company and its wholly-owned, majority-owned~~results to be expected for other periods or ~~controlled subsidiaries, collectively referred to as~~ the ~~Company.~~

full fiscal year. For the periods presented, the Company has 1 reportable segment.

Adoption of New Accounting Standards

In March 2020, the FASB issued ASU No. 2020-04, ~~“Reference~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. ~~These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.~~ ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020.2022. Once elected, this ASU must be applied prospectively for all eligible contract modifications. WeThe Company will adopt Topic 848 when ~~our~~its relevant contracts are modified upon transition to alternative reference rates. ~~We do~~The Company does not expect ~~our~~the adoption of Topic 848 to have a material impact on ~~our~~its condensed consolidated financial statements.

In December 2019, ASU 2019-12 “Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740)” was issued. This ASU simplifies the accounting for certain income tax related items, including intraperiod tax allocations, deferred taxes related to foreign subsidiaries and step-up in tax basis of goodwill. The ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The company adopted the standard effective January 1, 2021. Adoption of Topic 740 did not have a material impact on the Company’s consolidated financial statements.

Principles of 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). All intercompany balances and transactions related to activity between the Company and its wholly-owned subsidiaries have been eliminated in consolidation.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Use of Estimates

The preparation of condensed 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, valuation of expected future payments under the tax receivable agreement, and reserves for trade and promotional allowances. Actual results could differ from these estimates.

Accounts Receivable

Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s accounts receivable were ~~$159.5~~$193.1 million and ~~$125.6~~$148.2 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of ~~$3.5~~$4.4 million ~~at both~~and $3.0 million for the periods ending March 31, ~~2021~~2022 and December 31, ~~2020.~~2021, respectively.

The allowance for doubtful accounts represents the Company’s estimate of expected credit losses related to trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventories

Inventories are stated at the lower of cost or net-realizable value on a first-in first-out basis. Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.

The components of inventories are as follows:
(In thousands) March 31,
2021 December 31,
2020
Ingredients and packaging $ 24,557 $ 22,965
Finished goods 23,483 23,583
Inventory in transit to customers 4,104 2,800
$ 52,144 $ 49,348


(In thousands)	March 31, 2022		December 31, 2021

Ingredients and packaging	$	27,369	$	22,607
Finished goods	28,825		26,988
Inventory in transit to customers	3,673		3,218
	$	59,867	$	52,813

Software Costs

Capitalized software is included in ~~“Other~~other assets ~~net”~~ in the condensed consolidated balance sheets in the amount of ~~$14.4~~$15.6 million and $14.7 million atas of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Capitalized software costs are amortized over their estimated useful life of up to five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative operating expense was $1.0 million for the three months ended March 31, 2022, compared to $0.9 million for the three months ended March 31, ~~2021, compared to $1.3 million for the three months ended March 31, 2020.~~2021.

Disaggregation of Revenue

Net revenue consists of sales of packaged food products ~~in the United States~~ primarily within the Sweet Baked Goods ~~category. The Company also sells products~~category in the United States, as well as in the Cookie category in the United States and ~~Canada within the Cookies category.~~Canada.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

The following tables disaggregate revenue by geographical market and category.
Three Months Ended March 31, 2021
(In thousands)
Sweet Baked Goods Cookies Total
United States $ 237,700 $ 23,803 $ 261,503
Canada 0 3,918 3,918
$ 237,700 $ 27,721 $ 265,421


		Three Months Ended March 31, 2020				Three Months Ended March 31, 2022
(In thousands)	(In thousands)	Sweet Baked Goods		Cookies			Total		(In thousands)	Sweet Baked Goods		Cookies		Total
United States	United States	$	226,361	$	13,307		$	239,668	United States	$	296,372	$	30,916	$	327,288
Canada	Canada	0		3,817			3,817		Canada	—		4,763		4,763
		$	226,361	$	17,124		$	243,485		$	296,372	$	35,679	$	332,051


	Three Months Ended March 31, 2021
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	237,700	$	23,803	$	261,503
Canada	—		3,918		3,918
	$	237,700	$	27,721	$	265,421

Concentrations

~~The~~For the three months ended March 31, 2022 and 2021, the Company ~~has~~had one customer (together with its affiliates) that accounted ~~20.5%~~for 20.7% and ~~21.1%~~20.5% of total net revenue, ~~for the three months ended March 31, 2021 and 2020,~~ respectively.

Foreign Currency Remeasurement

Certain Voortman Cookies Limited (“Voortman”) sales and costs are denominated in the Canadian dollar (“CAD”). CAD transactions have been remeasured into U.S. dollars (“USD”) on the condensed consolidated ~~statement~~statements of operations using the average exchange rate for the reporting period. Balances expected to be settled in CAD have been remeasured into USD on the condensed consolidated balance ~~sheet~~sheets using the exchange rate at the end of the

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

period. ~~The~~During the three months ended March 31, 2022 and 2021, the Company recognized losses on remeasurement of ~~less than~~$0.3 million and $0.1 million, ~~during both the three months ended March 31, 2021 and 2020,~~respectively, which is reported within other expense on the condensed consolidated statement of operations.

2. Property and Equipment

Property and equipment consists of the following:


(In thousands)	(In thousands)	March 31, 2021		December 31, 2020		(In thousands)	March 31, 2022		December 31, 2021

Land and buildings	Land and buildings	$	61,594	$	59,774	Land and buildings	$	72,110	$	70,692
Right of use assets, operating	Right of use assets, operating	31,169		31,354		Right of use assets, operating	32,192		32,192
Machinery and equipment	Machinery and equipment	265,615		255,821		Machinery and equipment	300,658		299,071
Construction in progress	Construction in progress	20,385		25,041		Construction in progress	49,024		26,027
		378,763		371,990			453,984		427,982
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	(71,768)		(68,031)		Less accumulated depreciation and amortization	(99,929)		(92,677)
		$	306,995	$	303,959		$	354,055	$	335,305

Depreciation expense was $6.4 million for the three months ended March 31, 2022, compared to $5.8 million for the three months ended March 31, ~~2021, compared to $5.0 million for the three months ended March 31, 2020.~~2021.

3. Accrued Expenses and Other Current Liabilities

Included in accrued expenses and other current liabilities are the following:


(In thousands)	March 31, 2022		December 31, 2021

Payroll, vacation and other compensation	$	10,575	$	7,791
Incentive compensation	7,041		21,172
Accrued interest	4,528		4,828
Interest rate swap and foreign currency contracts	185		2,042
Other	14,544		11,176





	$	36,873	$	47,009

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~3. Accrued Expenses and Other Current Liabilities~~

~~Included in accrued expenses and other current liabilities are the following:~~
(In thousands) March 31,
2021 December 31,
2020
Payroll, vacation and other compensation $ 12,606 $ 9,886
Interest rate swap contract 5,307 13,694
Incentive compensation 5,216 16,199
Accrued interest 4,724 4,815
Other 11,002 11,121
$ 38,855 $ 55,715

4. Debt and Lease Obligations

A summary of the carrying value of the debt and lease obligations isare as follows:
(In thousands) March 31,
2021 December 31,
2020
Term Loan (3.0% as of March 31, 2021)
Principal $ 1,099,972 $ 1,102,763
Unamortized debt premium and issuance costs (4,607) (4,917)
1,095,365 1,097,846
Lease obligations 28,244 29,002
Total debt and lease obligations 1,123,609 1,126,848
Less: Current portion of long term debt and lease obligations (13,508) (13,811)
Long-term portion $ 1,110,101 $ 1,113,037


(In thousands)	March 31, 2022		December 31, 2021

Term loan (3.0% as of March 31, 2022)
Principal	$	1,088,804	$	1,091,596
Unamortized debt premium and issuance costs	(3,371)		(3,679)
	1,085,433		1,087,917
Lease obligations	25,560		26,228
Total debt and lease obligations	1,110,993		1,114,145
Less: Current portion of long term debt and lease obligations	(14,126)		(14,170)
Long-term portion	$	1,096,867	$	1,099,975

At March 31, ~~2021,~~2022, minimum debt repayments under the term loan are due as follows:

(In thousands)
2021 $ 8,376
2022 11,167
2023 11,167
2024 11,167
2025 1,058,095


(In thousands)
2022	$	8,375
2023	11,167
2024	11,167
2025	1,058,095

Leases

The Company has entered into operating leases for certain properties which expire at various times through 2026. The Company determines if an arrangement is a lease at inception.

At March 31, ~~2021~~2022 and ~~2020,~~December 31, 2021, right of use assets related to operating leases are included in property and equipment, net on the condensed consolidated balance ~~sheet~~sheets (see Note 2. Property and Equipment). As of March 31, ~~2021~~2022 and ~~2020,~~December 31 2021, the Company has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease obligations on the condensed consolidated balance ~~sheet.~~sheets.

The table below shows the composition of lease expense:


	Three Months Ended
(In thousands)	March 31, 2022		March 31, 2021


Operating lease expense	$	1,603	$	1,653
Short-term lease expense	373		203
Variable lease expense	382		357
	$	2,358	$	2,213

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The table below shows the composition of lease expenses:~~
Three Months Ended
(In thousands) March 31, 2021 March 31, 2020
Operating lease expense 1,653 1,795
Short-term lease expense 203 1,014
Variable lease expense 357 554
$ 2,213 $ 3,363

5. Derivative Instruments

~~Warrants~~

~~As of March 31, 2021~~Interest Rate Swap and December 31, 2020, there were 52,594,188 and 53,936,776 public warrants outstanding, respectively, and 541,658 private placement warrants outstanding. Each warrant entitles its holder to purchase one-half of one share of Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of Class A common stock. The warrants expire on November 4, 2021, or earlier upon redemption or liquidation. The Company may call the outstanding public warrants for redemption at a price of $0.01 per warrant, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by Gores Sponsor, LLC or its permitted transferees. The potential resale of the private placement warrants to the public warrants has been registered with the SEC. When sold to the public, the private placement warrants will become public warrants.

The warrant agreement contains a tender offer provision that when paired with a two-class equity structure causes all warrants to be precluded from equity classification. Subsequent to the collapse of the two-class structure in November 2020 when all remaining Class B shares were exchanged for Class A shares, the tender offer provision no longer precludes the public warrants from being equity-classified. As a result, the $68.0 million liability related to the public warrants was reclassified to equity in November 2020. There are provisions specific to the private warrants which cause them to continue to be liability-classified subsequent to the exchange. As of March 31, 2021, the outstanding private warrants remain liability classified and subject to fair value measurement. The value of the each public warrant up until they were no longer classified as liabilities was based on the public trading price of warrant (Level 1 fair value measure). The fair value of each private warrant was evaluated and determined to be substantially the same as that of a public warrant and therefore considered to be a Level 2 fair value measure. The fair value of the warrants is measured on a recurring basis by comparison to available market information. Gains and losses related to the warrants are reflected in the change in fair value of warrant liabilities in the consolidated statement of operations.Foreign Currency Contracts

The Company entered into interest rate swap contracts with counter parties to make a series of payments based on fixed rates ranging from 1.11% to ~~1.78%~~2.06% in addition to the term loan margin of 2.25% 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 the March 31, ~~2021~~2022 notional amount of ~~$700~~$800 million ~~reducing~~which will reduce by $100 million ~~each year, until $500~~in May 2022, with the remaining $700 million ~~remains~~ outstanding through August 2025. The Company entered into these transactions to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges. At March 31, ~~2021,~~2022, the ~~effective fixed~~ interest ~~rate~~ on the ~~long-term~~Company’s variable rate debt hedged by these contracts ~~ranged~~is effectively fixed at rates ranging from ~~3.76%~~3.36% to ~~4.03%~~4.31%.

To reduce the effect of fluctuations in CAD denominated expenses relative to their USU.S. dollar equivalents originating from its Canadian operations, the Company entered into CAD purchase contracts. The contracts provide for the Company to sell a total of ~~$8.6~~$13.4 million USD for ~~$11.0~~$16.8 million CAD at varying defined settlement dates through ~~the end of 2021.~~March 2023. The Company has designated these contracts as cash flow hedges.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

In connection with the agreement to purchase Voortman, the Company entered into a deal-contingent foreign currency contract to hedge the $440 million CAD forecasted purchase price and a portion of the subsequent expected conversion costs. The contract was settled in cash following the completion of the purchase on January 3, 2020.

A summary of the fair value of interest rate and foreign currency instruments is as follows:


(In thousands)	(In thousands)		March 31, 2021		December 31, 2020		(In thousands)		March 31, 2022		December 31, 2021

Asset derivatives							Asset derivatives	Location
Interest rate swap contracts (1)							Interest rate swap contracts (1)	Other non-current assets	$	24,516	$	1,803
Foreign currency contracts (2)							Foreign currency contracts (2)	Other current assets	194		—
									$	24,710	$	1,803

Liability derivatives	Liability derivatives	Location					Liability derivatives	Location
Interest rate swap contracts (1)	Interest rate swap contracts (1)	Accrued expenses	$	5,307	$	13,688	Interest rate swap contracts (1)	Accrued expenses	$	80	$	1,798
Foreign currency contracts (2)	Foreign currency contracts (2)	Accrued expenses	$	0	$	6	Foreign currency contracts (2)	Accrued expenses	105		244
			$	5,307	$	13,694			$	185	$	2,042

(1) The fair values of ~~these~~interest rate swap contracts are measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).

(2) The fair values of foreign currency contracts are ~~measure on a recurring basis~~measured at each reporting period by comparison to available market information on similar contracts (Level 2).

A summary of the gains and losses related to interest rate and foreign currency instruments in the condensed consolidated ~~statement~~statements of operations is as follows:

Three Months Ended
(In thousands) March 31,
2021 March 31,
2020
Gain on derivative contracts designated as cash flow hedges Location
Interest rate swap contracts Interest expense, net $ 1,327 $ 81
Loss on other derivative contracts Location
Foreign currency contracts Other expense $ 0 $ (255)

Three Months Ended

(In thousands)

March 31,
2022

March 31,
2021

Loss on derivative contracts designated as cash flow hedges

Location

Interest rate swap contracts

Interest expense, net

1,062

1,327

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Earnings per Share

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

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Below are basic and diluted net income per share:
Three Months Ended
March 31, 2021 March 31, 2020
Numerator:
Net income attributable to Class A stockholders (in thousands) - basic $ 26,732 $ 81,448
Less: Change in fair value of warrant liabilities (76) (79,100)
Numerator - diluted 26,656 2,348
Denominator:
Weighted-average Class A shares outstanding - basic 130,839,313 123,123,656
Dilutive effect of warrants 5,830,238 2,662,441
Dilutive effect of RSUs 414,314 289,029
Dilutive effect of stock options 103,024 0
Weighted-average shares outstanding - diluted 137,186,889 126,075,126
Net income per Class A share - basic $ 0.20 $ 0.66
Net income per Class A share - diluted $ 0.19 $ 0.02


	Three Months Ended
	March 31, 2022		March 31, 2021
Numerator:
Net income (in thousands) - basic	$	34,558	$	26,732
Less: Change in fair value of warrant liabilities	—		(76)
Numerator - diluted	34,558		26,656
Denominator:
Weighted-average Class A shares outstanding - basic	138,602,451		130,839,313
Dilutive effect of warrants	—		5,830,238
Dilutive effect of RSUs	484,295		414,314
Dilutive effect of stock options	478,390		103,024
Weighted-average shares outstanding - diluted	139,565,136		137,186,889

Net income per Class A share - basic	$	0.25	$	0.20

Net income per Class A share - diluted	$	0.25	$	0.19

For warrants that are liability-classified, during periods when the impact would be dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method.

~~For the three months ended March 31, 2021 and 2020, there~~There were ~~123,998 and 523,643~~no stock options that were excluded from the computation of diluted weighted average shares for the three months ended March 31, 2022 compared to 123,998 excluded for the three months ended March 31, 2021, because ~~the~~their effect was anti-dilutive.

7. Income Taxes

The Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on its controlled foreign ~~subsidiaries.~~subsidiary. The income tax provision is determined based on the estimated full year effective tax rate, adjusted for infrequent or unusual items, which are recognized on a discrete basis in the period they occur. The Company’s estimated annual effective tax rate is ~~approximately 27%~~27.1% prior to taking into account any discrete items.

The effective tax rate was 27.2% and 0.3% for the three months ended March 31, 2021 and 2020, respectively. The effective tax rate for the three months ended March 31, 2021 aligned with the Company's estimated annual effective rate. The increase in tax rate is primarily attributed to the $79.1 million change in fair value of warrant liabilities in the prior-year period, which is a non-taxable gain. The effective rate was also impacted by the removal of the non-controlling interest in the current-year period and a write-off of deferred taxes in the prior-year period related to Voortman. As of March 31, ~~2021 and~~2022 income taxes payable were $3.5 million as compared to income taxes receivable as of December 31, ~~2020, prepaid income taxes~~2021 were ~~$0.9 million and $12.3 million, respectively.~~$3.1 million.

1514

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Tax Receivable Agreement Obligations

The following table summarizes activity related to the ~~Tax Receivable Agreement~~tax receivable agreement for the three months ended March 31, ~~2021:~~2022:


(In thousands)
Balance December 31, ~~2020~~2021	$	~~156,544~~145,865



Payments	~~(1,600)~~(1,443)
Balance March 31, ~~2021~~2022	$	~~154,944~~144,422

As of March 31, ~~2021~~2022 the future expected payments under the tax receivable agreement are as follows:
(In thousands)
2021 $ 10,200
2022 9,000
2023 9,700
2024 9,900
2025 9,800
Thereafter 106,344


(In thousands)
2022	$	10,200
2023	9,600
2024	10,100
2025	9,400
2026	9,600
Thereafter	95,522

9. Commitments and Contingencies

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, potential liabilities are reassessed and the estimates revised, if necessary. Any 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.

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

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Hostess Brands, Inc. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2020.~~2021. The terms “our”, “we,” “us,” and “Company” as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.

Overview

We are a leading North America ~~packaged food~~sweet snacks company ~~which~~that produces ~~several types of~~ sweet baked goods (“SBG”) ~~as well as~~and cookie and wafer ~~products.~~products, primarily under the Hostess® and Voortman® brands. Our direct-to-warehouse (“DTW”) product distribution system allows us to deliver to our customers’ warehouses. Our customers in turn distribute to the retail stores.

Hostess® is the second leading brand by market share within the SBG category, according to Nielsen U.S. total universe. For the 13-week period ended April ~~3, 2021,~~2, 2022, our branded SBG ~~products~~ (which ~~include~~includes Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was ~~20.7%~~22.0% per Nielsen’s U.S. SBG category data.

Factors Impacting Recent Results

There have been constraints in certain aspects of the global supply chain that have and continue to impact our operations, including cost and availability of labor, transportation and raw materials. These constraints have resulted from various macro factors, including, but not limited to, the COVID-19 pandemic, trends in labor markets, the conflict in Ukraine, the Avian Influenza and overall elevated demand for goods. We manage the impact of cost increases, wherever possible, by locking in prices on ingredients and packaging. We expect to partially mitigate the inflationary cost increases through pricing actions implemented in 2021 and the first quarter of 2022, as well as those we plan to implement throughout the remainder of 2022.

While these constraints have not significantly disrupted our operations to date, it is possible that they could materially impact our ability to source ingredients and packaging for our production facilities or our ability to ship products to our customers. We continue to work closely with all of our vendors, distributors, contract manufacturers, and other external business partners to maintain availability of our products for our customers and consumers.

~~Factors Impacting Recent~~Operating Results

~~Acquisition~~

On January 3, 2020, we completed the acquisition of all of the shares of the parent company of Voortman Cookies Limited (“Voortman”), a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies. By adding the Voortman® brand, we expect to have greater growth opportunities provided by a more diverse portfolio of brands and products. Our consolidated statement of operations includes the operation of these assets from January 3, 2020 through March 31, 2021.

~~COVID-19~~

The acute and far-reaching impact of the COVID-19 pandemic and actions taken by governments to contain the spread of the virus have impacted our operations during the three months ended March 31, 2021 and 2020. As consumers prepared for extended stays at home, we experienced an increase in consumption during the first and second quarter, particularly in our multi-pack products sold through grocery and mass retailer channels. Conversely, we experienced lower consumption of single-serve products, which are often consumed away from home. This trend moderated during the remainder of 2020, and in the first quarter of 2021 we have experienced continued strong demand in our multi-pack products as well as an increase in our immediate consumption single-serve business as mobility increases. However, we cannot predict if these trends will sustain or reverse in future periods.

At the start of the pandemic, we established a task force to monitor the rapidly evolving situation and recommend risk mitigation actions as deemed necessary. To date, we have experienced minimal disruption to our supply chain or distribution network, including the supply of our ingredients, packaging or other sourced materials, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world. We are also working closely with all of our contract manufacturers, distributors and other external business partners. As a food producer, we are an essential service and our production and distribution facilities have continued to operate. To protect our employees and ensure continuity of operations, we have implemented additional security and sanitation measures in all of our facilities. We are monitoring our employees’ health and providing additional resources and protocols to enable effective social distancing and adherence to our stringent internal food safety guidelines, industry best practices and evolving CDC guidelines. Many non-production team members, including sales, marketing and corporate employees, are adhering to social distancing guidelines by working from home and reducing person-to-person contact while supporting our ability to bring products to consumers.

Starting in late 2020, several vaccines have been authorized for use against COVID-19 in the United States and internationally. As a result of the distribution of these vaccines, various federal state and local governments have begun to ease the movement restrictions and initiatives while continuing to require social distancing and face mask protocols. However, uncertainty continues to exist regarding the severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and deployment, potential variants of COVID-19, and the effect of actions taken and that will be taken to contain COVID-19 or treat its effect, among others.

Under the provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, we were able to defer the payment of $5.6 million of 2020 employer payroll taxes until the second quarter of 2021. Apart from this deferral and their impact on the general economy, including the labor market and consumer demand, neither the CARES Act, the American Rescue Plan enacted in the first quarter of 2021, nor any other government program intended to address COVID-19 had any material impact on our consolidated financial statements for the three months ended March 31, 2021 or 2020. We continue to monitor any effects that may result from the CARES Act and other stimulus programs.

~~Operating Results~~


		Three Months Ended						Three Months Ended
(In thousands, except per share data)	(In thousands, except per share data)	March 31, 2021			March 31, 2020				(In thousands, except per share data)	March 31, 2022			March 31, 2021
Net revenue	Net revenue	$	265,421		$	243,485			Net revenue	$	332,051		$	265,421
Gross profit	Gross profit	95,519			79,337				Gross profit	115,624			95,519
As a % of net revenue	As a % of net revenue	36.0		%	32.6		%		As a % of net revenue	34.8		%	36.0		%

Operating costs and expenses	Operating costs and expenses	$	48,474		$	64,171			Operating costs and expenses	57,277			48,474
Operating income	Operating income	47,045			15,166				Operating income	58,347			47,045

Other (income) expense		10,304			(66,822)
Other expense									Other expense	10,102			10,304

Income tax expense	Income tax expense	10,009			248				Income tax expense	13,687			10,009
Net income	Net income	26,732			81,740				Net income	34,558			26,732

Net income attributable to Class A stockholders		26,732			81,448

Earnings per Class A share:	Earnings per Class A share:								Earnings per Class A share:
Basic	Basic	0.20			0.66				Basic	$	0.25		$	0.20
Diluted	Diluted	0.19			0.02				Diluted	$	0.25		$	0.19

Results of Operations

Net Revenue

Net revenue for the three months ended March 31, ~~2021 was $265.4~~2022 increased $66.7 million, ~~an increase of 9.0%,~~ or ~~$21.9 million,~~25.1%, compared to $243.5 million for the three months ended March 31, 2020. Sweet baked goods net revenue increased $11.3 million, primarily driven by higher volume of core Hostess® branded products partially offset by lower sales of private label and non-Hostess® branded products. Cookies net revenue increased $10.6 million due to the strong demand and expanded distribution of Voortman® branded products following the transition of the Voortman business to the warehouse distribution model during the first quarter of 2020.

~~Gross Profit~~

~~Gross profit for~~ the three months ended March 31, 2021, ~~was $95.5~~with higher volumes accounting for approximately 15% of the quarterly growth and the remaining increase attributed to planned pricing action and favorable product mix. Compared to the same period last year, SBG net revenue increased $58.7 million or ~~36.0% of~~24.7%, while Cookies net revenue ~~compared to $79.3~~increased $8.0 million or ~~32.6%~~28.9%.

Gross Profit

Gross profit was 34.8% of net revenue for the three months ended March 31, ~~2020.~~2022, a decrease of 117 basis points from a gross margin of 36.0% for the three months ended March 31, 2021. The ~~increase~~decrease in gross margin was ~~driven primarily~~attributed to increased transportation, labor and other input cost inflation, partially offset by ~~higher volume of Hostess® branded products and favorable mix. Additionally, the increase was driven by the realization of Voortman synergies~~pricing actions and productivity ~~efficiencies as the Voortman business was not yet transitioned to the warehouse distribution model and fully integrated in the first quarter of 2020.~~ initiatives.

Operating Costs and Expenses

Operating costs and expenses for the three months ended March 31, ~~2021~~2022 were ~~$48.5~~$57.3 million, compared to ~~$64.2~~$48.5 million for the three months ended March 31, ~~2020.~~2021. The ~~decrease~~increase was primarily attributed to ~~prior year expenses incurred for the integration~~higher incentive compensation and ~~conversion of Voortman's operations and the realization of operating cost synergies.~~other investments in workforce as well as project consulting costs.

Other (Income) Expense

Other expense for the three months ended March 31, ~~2021~~2022 was ~~$10.3~~$10.1 million compared to other ~~income~~expense of ~~$66.8~~$10.3 million for the three months ended March 31, ~~2020~~2021. The decrease in other expense was primarily ~~as a result of the $79.1 million gain on change in fair value of our liability-classified warrants in the three months ended March 31, 2020. Interest~~due to interest expense on our term loans, which was ~~$9.7~~$9.4 million and ~~$11.5~~$9.7 million for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively. ~~Interest expense on our term loan decreased in the current year due to the fluctuations in LIBOR.~~

Income Taxes

Our effective tax rate for the three months ended March 31, ~~2021~~2022 was ~~27.2%~~28.4% compared to ~~0.3%~~27.2% for the three months ended March 31, ~~2020.~~2021. The increase in the tax rate is ~~primarily~~ attributed to a discrete expense of $0.6 million recognized during the $79.1 million change in fair value of warrant liabilities in the prior-year period, which is a non-taxable gain. The effective rate was also impacted by the removal of the non-controlling interest in the current-year period and a write-off of deferred taxes in the prior-year periodthree months ended March 31, 2022, related to ~~Voortman.~~share-based compensation..

Liquidity and Capital Resources

Our primary sources of liquidity are from cash on hand, 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 future cash requirements include, but are not limited to, the purchase commitments for certain raw materials and packaging used in our productions process, scheduled rent on leased facilities, scheduled debt service payments on our term loan and settlements on related interest rate swap contracts, payments on our ~~Tax Receivable Agreement,~~tax receivable agreement, settlements on our outstanding foreign currency contracts and outstanding purchase orders on capital projects.

Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, ~~our~~ future ~~acquisitions 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~~such as 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 March 31, ~~2021~~2022 and December 31, ~~2020~~2021 of ~~$33.1~~$44.8 million and ~~$6.1~~$17.9 million, respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As of March 31, ~~2021,~~2022, we had approximately ~~$94.5~~$94.0 million available for borrowing, net of letters of credit, under ~~the~~our Revolver.

Cash Flows from Operating Activities

Cash flows provided by operating activities for the three months ended March 31, 2022 and 2021 were $31.5 million and ~~2020 were~~ $32.9 million, ~~and $13.1 million,~~ respectively. ~~Operating cash flow increased primarily due to the Voortman transition costs paid in 2020, partially offset by~~Despite an increase in ~~accounts receivable.~~earnings, operating cash flow decreased slightly due to an increase in working capital in the current year and additional tax refunds of $7.7 million received in the prior-year period.

Cash Flows from Investing Activities

~~Cash~~Investing activities used ~~in investing activities~~$24.9 million and $10.9 million of cash for the three months ended March 31, 2022 and 2021, ~~and 2020~~respectively. On February 22, 2022, we purchased a facility in Arkadelphia, Arkansas for a total purchase price of $11.5 million. Additional capital expenditures were ~~$10.9 million and $331.5 million, respectively. During~~incurred on this project during the three months ended March 31, ~~2020,~~2022, and we ~~funded~~expect elevated capital expenditures due to this project throughout the ~~CAD $423 million purchase price~~remainder of Voortman with cash on hand and the proceeds from an incremental term loan on our existing credit facility. Cash used for purchase of property and equipment reflects continued innovation through investments in new bakery lines and equipment.

2022.

Cash Flows from Financing Activities

~~Cash flows from financing~~Financing activities ~~were $2.7 million and $130.4~~used $17.5 million for the three months ended March 31, ~~2021~~2022 and ~~2020, respectively. Financing activity~~provided $2.7 million for the ~~current year primarily consists~~three months ended March 31, 2021. The net outflow for the current-year period consisted of cash ~~received~~used to repurchase 0.5 million shares of our common stock under existing securities repurchase authorizations as well as scheduled payments under the tax receivable agreement and term loan. The net inflow in the prior-year period reflects proceeds on exercise of employee stock options and proceeds from the exercise of public warrants, ~~partially~~ offset by ~~regular debt service payments. During 2020, cash proceeds of $140.0 million from~~scheduled payments under the ~~incremental~~tax receivable agreement and term ~~loan used to finance the purchase of Voortman were offset by related charges of $3.1 million.~~loan.

Long-Term Debt

As of March 31, ~~2021, $1,100.0~~2022, $1,088.8 million aggregate principal amount of the ~~Term Loan~~term loan was outstanding and letters of credit worth up to ~~$5.5~~$6.0 million aggregate principal amount were available, reducing the amount available under the Revolver. We had no outstanding borrowings under our Revolver as of March 31, ~~2021.~~2022. As of March 31, ~~2021,~~2022, we were in compliance with the covenants under the ~~Term Loan~~term loan and the Revolver.

Contractual Obligations and Commitments

There were no material changes, outside the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2020.~~2021.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2020.~~2021. Our exposures to market risk have not changed materially since December 31, ~~2020.~~2021.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities and Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, ~~2021,~~2022, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were ~~ineffective due~~effective as of March 31, 2022 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the ~~material weakness described below. A material weakness~~Company is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on aaccumulated and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely ~~basis.~~

Subsequent to the filing of our annual report filed on February 24, 2021, management identified a material weakness in our internal control over financial reporting related to the accounting for and classification of our warrant agreements, due to the lack of an effectively designed control over the evaluation of the underlying clauses of the warrant agreement, and an insufficient understanding of the warrant agreement and accounting literature to reach a correct conclusion.

We are in the process of remediating the material weakness identified by standardizing our controls over accounting and financial reporting related to the accounting for and classification of warrants.

decisions regarding required disclosure.

During the three months ended March 31, ~~2021,~~2022, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Our risk factors are set forth in the “Risk Factors” section of our Annual Report on Form ~~10-K/A~~10-K filed on ~~May 17, 2021.~~March 1, 2022. There have been no material changes to our risk factors since the filing of the Form ~~10-K/A.~~10-K.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

2120

Item 6. Exhibits

Exhibit No.

Description

~~10.1~~

~~Hostess Brands 2021 Incentive Compensation Plan~~

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of ~~Chief~~Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

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

32.2

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

101.INS

XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021,~~2022, formatted in Inline XBRL

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, ~~in Lenexa, Kansas~~ on May ~~17, 2021.~~4, 2022.


HOSTESS BRANDS, INC.

ByBy:			/s/ ~~Brian T. Purcell~~Michael J. Gernigin
			~~Brian T. Purcell~~ ~~Executive~~Michael J. Gernigin Senior Vice President, Chief Accounting Officer and Interim Chief Financial Officer (Principal Financial Officer)


	Class A Voting Common Stock			Class B Voting Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Stockholders’ Equity		Non-controlling Interest
	Shares	Amount		Shares	Amount
Balance–December 31, 2019	122,107	$	12	8,411	$	1	$	1,123,805	$	(756)	$	251,425	$	1,374,487	$	94,432
Comprehensive income (loss)	—	—		—	—		—		(8,810)		81,448		72,638		(437)
Share-based compensation, net of income taxes of $103	106	—		—	—		2,180		—		—		2,180		—
Exchanges	969	—		(969)	—		11,819		(17)		—		11,802		(11,802)
Distributions	—	—		—	—		—		—		—		—		(1,613)
Exercise of employee stock options	2	—		—	—		153		—		—		153		—
Payment of taxes for employee stock awards	—	—		—	—		(1,004)		—		—		(1,004)		—
Exercise of public warrants	1	—		—	—		2		—		—		2		—
Tax receivable agreement arising from exchanges, net of income taxes of $1,341	—	—		—	—		(1,942)		—		—		(1,942)		—
Balance–March 31, 2020	123,185	$	12	7,442	$	1	$	1,135,013	$	(9,583)	$	332,873	$	1,458,316	$	80,580


(In thousands)
2021	$	8,376
2022	11,167
2023	11,167
2024	11,167
2025	1,058,095