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
		~~September~~June 30, ~~2021~~2022
		OR
	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 - ~~138,377,187~~136,496,962 shares at ~~November 8, 2021~~August 1, 2022

HOSTESS BRANDS, INC.

FORM 10-Q

For the ~~Three~~Six Months Ended ~~September~~June 30, ~~2021~~2022

INDEX


		Page
PART I - Financial Information
Item 1.	C ~~ondensed~~ C ~~onsolidated~~Condensed Consolidated Financial Statements
	C ~~ondensed~~ C ~~onsolidated~~Condensed Consolidated Balance Sheets (Unaudited)	4
	C ~~ondensed Consolidated~~Condensed Consolidated Statements of Operations (Unaudited)	5
	C ~~ondensed~~ C ~~onsolidated~~Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	6
	C ~~ondensed Consolidated~~Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	7
	C ~~ondensed Consolidated~~Condensed Consolidated Statements of Cash Flows (Unaudited)	98
	Notes to C ~~ondensed Consolidated~~Condensed Consolidated Financial Statements (Unaudited)	109
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1817
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2220
Item 4.	Controls and Procedures	2220
PART II - Other Information
Item 1.	Legal Proceedings	2321
Item 1A.	Risk Factors	2321
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2321
Item 3.	Default Upon Senior Securities	2321
Item 4.	Mine Safety Disclosures	2321
Item 5.	Other Information	2321
Item 6.	Exhibits	2422

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,~~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.~~otherwise, except to the extent required by law.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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


		September 30,		December 31,			June 30,		December 31,
		2021		2020			2022		2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	228,096	$	173,034	Cash and cash equivalents	$	206,831	$	249,159
Short-term investments						Short-term investments	20,918		—
Accounts receivable, net	Accounts receivable, net	156,720		125,550		Accounts receivable, net	178,769		148,180
Inventories	Inventories	49,309		49,348		Inventories	60,809		52,813

Prepaids and other current assets	Prepaids and other current assets	7,624		21,614		Prepaids and other current assets	10,540		10,564
Total current assets	Total current assets	441,749		369,546		Total current assets	477,867		460,716
Property and equipment, net	Property and equipment, net	318,492		303,959		Property and equipment, net	359,444		335,305
Intangible assets, net	Intangible assets, net	1,950,270		1,967,903		Intangible assets, net	1,932,636		1,944,392
Goodwill	Goodwill	706,615		706,615		Goodwill	706,615		706,615
Other assets, net	Other assets, net	17,861		17,446		Other assets, net	52,645		19,283
Total assets	Total assets	$	3,434,987	$	3,365,469	Total assets	$	3,529,207	$	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	$	14,171	$	13,811	Long-term debt and lease obligations payable within one year	$	14,009	$	14,170
Tax receivable agreement payments payable within one year	Tax receivable agreement payments payable within one year	10,000		11,800		Tax receivable agreement payments payable within one year	11,100		11,600
Accounts payable	Accounts payable	71,139		61,428		Accounts payable	84,147		68,104
Customer trade allowances	Customer trade allowances	55,157		46,779		Customer trade allowances	60,668		52,746
Warrant liabilities		1,249		861
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	46,541		55,715		Accrued expenses and other current liabilities	42,079		47,009

Total current liabilities	Total current liabilities	198,257		190,394		Total current liabilities	212,003		193,629
Long-term debt and lease obligations	Long-term debt and lease obligations	1,103,327		1,113,037		Long-term debt and lease obligations	1,092,797		1,099,975
Tax receivable agreement obligations	Tax receivable agreement obligations	137,274		144,744		Tax receivable agreement obligations	125,452		134,265
Deferred tax liability	Deferred tax liability	315,544		295,009		Deferred tax liability	336,587		317,847
Other long-term liabilities	Other long-term liabilities	1,595		1,560		Other long-term liabilities	1,635		1,605
Total liabilities	Total liabilities	1,755,997		1,744,744		Total liabilities	1,768,474		1,747,321

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

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 132,741,603 shares issued and 129,170,487 shares outstanding as of September 30, 2021 and 130,791,908 shares issued and 130,347,464 shares outstanding as of December 31, 2020		13		13
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,546,549 shares issued and 136,486,712 shares outstanding as of June 30, 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, 142,546,549 shares issued and 136,486,712 shares outstanding as of June 30, 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	1,300,329		1,281,018		Additional paid in capital	1,304,970		1,303,254
Accumulated other comprehensive loss		(4,161)		(10,407)
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	22,993		(506)
Retained earnings	Retained earnings	438,872		356,101		Retained earnings	540,434		475,400
Treasury stock	Treasury stock	(56,063)		(6,000)		Treasury stock	(107,678)		(59,172)
Stockholders’ equity	Stockholders’ equity	1,678,990		1,620,725		Stockholders’ equity	1,760,733		1,718,990

Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,434,987	$	3,365,469	Total liabilities and stockholders’ equity	$	3,529,207	$	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				Nine Months Ended					Three Months Ended				Six Months Ended
		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020			June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021

Net revenue	Net revenue	$	287,969	$	260,855	$	844,875	$	760,566	Net revenue	$	340,472	$	291,485	$	672,523	$	556,906
Cost of goods sold	Cost of goods sold	188,990		169,700		545,271		500,700		Cost of goods sold	227,772		186,379		444,199		356,281
Gross profit	Gross profit	98,979		91,155		299,604		259,866		Gross profit	112,700		105,106		228,324		200,625
Operating costs and expenses:	Operating costs and expenses:									Operating costs and expenses:
Advertising and marketing	Advertising and marketing	14,767		11,762		39,692		32,983		Advertising and marketing	15,587		13,144		27,537		24,925
Selling expense		8,166		8,675		26,250		39,173
Selling										Selling	10,137		9,454		19,914		18,084
General and administrative	General and administrative	23,565		21,913		69,254		71,261		General and administrative	30,127		23,504		59,799		45,689
Amortization of customer relationships	Amortization of customer relationships	5,877		6,739		17,633		20,333		Amortization of customer relationships	5,878		5,878		11,756		11,756
Business combination transaction costs		—		—		—		4,282
Other operating expense		—		729		—		756

Total operating costs and expenses	Total operating costs and expenses	52,375		49,818		152,829		168,788		Total operating costs and expenses	61,729		51,980		119,006		100,454
Operating income	Operating income	46,604		41,337		146,775		91,078		Operating income	50,971		53,126		109,318		100,171
Other expense (income):	Other expense (income):									Other expense (income):
Interest expense, net	Interest expense, net	9,928		10,265		29,899		32,570		Interest expense, net	9,741		9,954		19,407		19,971

Change in fair value of warrant liabilities	Change in fair value of warrant liabilities	228		(2,260)		683		(64,978)		Change in fair value of warrant liabilities	—		531		—		455
Other expense		378		818		1,808		2,503
Total other expense (income)		10,534		8,823		32,390		(29,905)
Other expense (income)										Other expense (income)	(507)		1,067		(71)		1,430
Total other expense										Total other expense	9,234		11,552		19,336		21,856
Income before income taxes	Income before income taxes	36,070		32,514		114,385		120,983		Income before income taxes	41,737		41,574		89,982		78,315
Income tax expense	Income tax expense	9,878		6,281		31,614		12,022		Income tax expense	11,261		11,727		24,948		21,736
Net income	Net income	26,192		26,233		82,771		108,961		Net income	$	30,476	$	29,847	$	65,034	$	56,579
Less: Net income attributable to the non-controlling interest		—		1,368		—		2,860
Net income attributable to Class A stockholders		$	26,192	$	24,865	$	82,771	$	106,101

Earnings per Class A share:	Earnings per Class A share:									Earnings per Class A share:
Basic	Basic	$	0.20	$	0.20	$	0.63	$	0.86	Basic	$	0.22	$	0.23	$	0.47	$	0.43
Diluted	Diluted	$	0.19	$	0.18	$	0.60	$	0.33	Diluted	$	0.22	$	0.21	$	0.47	$	0.41
Weighted-average shares outstanding:	Weighted-average shares outstanding:									Weighted-average shares outstanding:
Basic	Basic	129,846,551		124,905,538		130,679,974		123,889,306		Basic	137,909,156		131,354,059		138,255,803		131,096,686
Diluted	Diluted	138,058,866		127,586,881		138,036,371		126,079,472		Diluted	138,958,242		138,925,489		139,263,303		138,026,854

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 Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net income $ 26,192 $ 26,233 $ 82,771 $ 108,961
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap and foreign currency contracts designated as a cash flow hedge (192) (1,197) 5,058 (16,992)
Reclassification into net income 962 1,352 3,441 2,530
Income tax benefit (expense) (203) (39) (2,253) 3,611
Comprehensive income (loss) 26,759 26,349 89,017 98,110
Less: Comprehensive loss attributed to non-controlling interest — 1,375 — 2,034
Comprehensive income (loss) attributed to Class A stockholders $ 26,759 $ 24,974 $ 89,017 $ 96,076


	Three Months Ended				Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021

Net income	$	30,476	$	29,847	$	65,034	$	56,579
Other comprehensive income:
Unrealized gain (loss) on interest rate swap and foreign currency contracts designated as a cash flow hedge	6,327		(1,810)		29,983		5,251
Reclassification into net income	823		1,152		1,885		2,479
Income tax expense	(1,877)		175		(8,369)		(2,051)
Comprehensive income	$	35,749	$	29,364	$	88,533	$	62,258

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in 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)
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
Comprehensive income (loss)		—	—			—		(483)		29,847		—	—		29,364
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
Comprehensive income																		Comprehensive income		—		—				—		5,273		30,476		—		—		35,749
Share-based compensation	Share-based compensation	22	—			1,640		—		—		—	—		1,640				Share-based compensation		23		—				2,648		—		—		—		—		2,648

Exercise of employee stock options	Exercise of employee stock options	220	—			3,135		—		—		—	—		3,135				Exercise of employee stock options		37		—				579		—		—		—		—		579
Exercise of public warrants		209	—			2,405		—		—		—	—		2,405

Payment of taxes for employee stock awards	Payment of taxes for employee stock awards	—	—			(392)		—		—		—	—		(392)				Payment of taxes for employee stock awards		—		—				(296)		—		—		—		—		(296)
Repurchase of common stock	Repurchase of common stock	(1,176)	—			—		—		—		1,176	(16,691)		(16,691)				Repurchase of common stock		(1,848)		—				—		—		—		1,848		(38,826)		(38,826)

Balance–June 30, 2021		130,460	$	13		$	1,297,670	$	(4,728)	$	412,680	1,620	$	(22,691)	$	1,682,944
Comprehensive income (loss)		—	—			—		567		26,192		—	—		26,759
Share-based compensation		—	—			2,642		—		—		—	—		2,642
Balance–June 30, 2022																		Balance–June 30, 2022		136,487		$	14			$	1,304,970	$	22,993	$	540,434	6,060		$	(107,678)	$	1,760,733

Exercise of employee stock options		19	—			255		—		—		—	—		255
Exercise of public warrants, net of fees of $500		643	—			(494)		—		—		—	—		(494)
Payment of taxes for employee stock awards		—	—			(42)		—		—		—	—		(42)
Reclassification of warrants		—	—			298		—		—		—	—		298

Repurchase of common stock		(1,952)	—			—		—		—		1,952	(33,372)		(33,372)

Balance–September 30, 2021		129,170	$	13		$	1,300,329	$	(4,161)	$	438,872	3,572	$	(56,063)	$	1,678,990

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, including 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
Comprehensive income (loss) — — — — — (1,324) (212) (1,536) 1,096
Share-based compensation, net of income taxes of $496 46 — — — 1,929 — — 1,929 —
Exchanges 1,140 — (1,140) — 13,803 (127) — 13,676 (13,676)
Distributions — — — — — — — — (365)
Exercise of employee stock options and warrants 37 — — — 408 — — 408 —
Payment of taxes for employee stock awards — — — — (32) — — (32) —
Tax receivable agreement arising from exchanges, net of income taxes of $952 — — — — (2,556) — — (2,556) —
Balance–June 30, 2020 124,408 $ 12 6,302 $ 1 $ 1,148,565 $ (11,034) $ 332,661 $ 1,470,205 $ 67,635
Comprehensive income (loss) — — — — — 109 24,865 24,974 1,375
Share-based compensation, net of income taxes of $361 60 — — — 1,720 — — 1,720 —
Distributions — — — — — — — — (1,445)
Exercise of employee stock options and warrants 1 — — — 2 — — 2 —
Exchanges 680 — (680) — 8,244 (79) — 8,165 (8,165)
Payment of taxes for employee stock awards — — — — (347) — — (347) —
Tax receivable agreement arising from exchanges, net of income taxes of $754 — — — — (1,431) — — (1,431) —
Balance–September 30, 2020 125,149 $ 12 5,622 $ 1 $ 1,156,753 $ (11,004) $ 357,526 $ 1,503,288 $ 59,400


	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
Comprehensive income (loss)	—	—			—		(483)		29,847		—	—		29,364
Share-based compensation	22	—			1,640		—		—		—	—		1,640
Exercise of employee stock options	220	—			3,135		—		—		—	—		3,135
Exercise of public warrants	209	—			2,405		—		—		—	—		2,405
Payment of taxes for employee stock awards	—	—			(392)		—		—		—	—		(392)
Repurchase of common stock	(1,176)	—			—		—		—		1,176	(16,691)		(16,691)
Balance–June 30, 2021	130,460	$	13		$	1,297,670	$	(4,728)	$	412,680	1,620	$	(22,691)	$	1,682,944

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)


				Nine Months Ended								Six Months Ended
				September 30, 2021		September 30, 2020						June 30, 2022			June 30, 2021

Operating activities	Operating activities								Operating activities
		Net income		$	82,771	$	108,961			Net income		$	65,034		$	56,579
		Depreciation and amortization		37,992		40,999				Depreciation and amortization		27,951			25,223

		Debt discount amortization		931		977				Debt discount amortization		615			621
		Change in fair value of warrant liabilities		683		(64,978)				Change in fair value of warrant liabilities		—			455
		Tax receivable agreement remeasurement		—		610

		Unrealized foreign exchange losses		(177)		1,392				Unrealized foreign exchange losses (gains)		(217)			73
		Non-cash lease expense		971		358				Non-cash lease expense		247			659
		Share-based compensation		7,005		6,583				Share-based compensation		4,987			4,363

		Deferred taxes		18,280		8,575				Deferred taxes		10,374			13,932
		Loss on sale of assets		—		317
		Change in operating assets and liabilities, net of acquisitions and dispositions:								Change in operating assets and liabilities:
			Accounts receivable	(31,240)		(7,106)					Accounts receivable	(30,600)			(23,194)
			Inventories	39		7,462					Inventories	(7,996)			(2,816)
			Prepaids and other current assets	13,991		(4,334)					Prepaids and other current assets	(131)			8,844

			Accounts payable and accrued expenses	7,949		2,186					Accounts payable and accrued expenses	8,967			1,735
			Customer trade allowances	8,441		5,989					Customer trade allowances	7,934			827

		Net cash provided by operating activities		147,636		107,991				Net cash provided by operating activities		87,165			87,301

Investing activities	Investing activities								Investing activities
		Purchases of property and equipment		(33,360)		(33,382)				Purchases of property and equipment		(36,302)			(20,051)
		Acquisition of business, net of cash acquired		—		(316,013)
								Acquisition of short-term investments			(20,918)			—
		Acquisition and development of software assets		(3,330)		(4,994)				Acquisition and development of software assets		(5,607)			(2,129)
		Net cash used in investing activities		(36,690)		(354,389)				Net cash used in investing activities		(62,827)			(22,180)

Financing activities	Financing activities								Financing activities
		Repayments of long-term debt and lease obligations		(8,375)		(8,375)				Repayments of long-term debt and lease obligations		(5,584)			(5,584)

		Proceeds from long-term debt origination, net of fees paid		—		136,888
		Distributions to non-controlling interest		—		(3,423)
		Repurchase of common stock		(50,063)		—				Repurchase of common stock		(48,506)			(16,691)
		Tax payments related to issuance of shares to employees		(1,277)		(1,383)				Tax payments related to issuance of shares to employees		(5,512)			(1,235)
		Cash received from exercise of options and warrants, net of fees		13,285		565				Cash received from exercise of options and warrants		2,241			13,524
		Payments on tax receivable agreement		(9,270)		(10,327)				Payments on tax receivable agreement		(9,313)			(9,270)

		Net cash provided by (used in) financing activities		(55,700)		113,945				Net cash provided by (used in) financing activities		(66,674)			(19,256)
		Effect of exchange rate changes on cash and cash equivalents		(184)		(337)				Effect of exchange rate changes on cash and cash equivalents		8			(92)
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents			55,062		(132,790)			Net increase (decrease) in cash and cash equivalents			(42,328)			45,773
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			$	228,096	$	152,297		Cash and cash equivalents at end of period			$	206,831		$	218,807


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	$	29,019	$	31,883		Interest, net of amounts capitalized	$	18,599	$	19,451
		Net taxes paid	$	1,568	$	5,403		Net taxes paid (refunded)	$	11,489	$	(1,506)
Supplemental disclosure of non-cash investing:	Supplemental disclosure of non-cash investing:						Supplemental disclosure of non-cash investing:
		Accrued capital expenditures	$	5,603	$	3,124		Accrued capital expenditures	$	6,358	$	5,046

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 sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in the U.S. under the Hostess® brands and in North America under ~~the Hostess® and Voortman®~~theVoortman® brands. The Company produces a variety of new and classic treats including iconic Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers®, as well as a variety of Voortman® branded cookies and wafers.

Basis of Presentation

The Company’s operations are conducted through wholly-owned operating 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 results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year. ~~The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.~~ For the periods presented, the Company has 1 reportable segment.

Adoption of New Accounting Standards

In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options”. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.

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. ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022. Once elected, this ASU must be applied prospectively for all eligible contract modifications. The Company will adopt Topic 848 when its relevant contracts are modified upon transition to alternative reference rates. The Company does not expect the adoption of Topic 848 to have a material impact on its ~~condensed~~ consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740)”. 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 condensed consolidated financial statements.

Principles of Consolidation

~~The accompanying condensed consolidated financial statements include the accounts of~~All intercompany balances and transactions related to activity between the Company and its wholly-owned ~~subsidiaries. All intercompany balances and transactions~~subsidiaries have been eliminated in consolidation.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONDENSED 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,~~

Held-to-Maturity Debt Securities

The Company classifies its investments in debt securities where it has positive intent and ability to hold until maturity as held-to-maturity. As of June 30, 2022, the Company’s held-to-maturity investments included $55.6 million of commercial paper and $17.0 million of U.S. treasury securities classified as cash and cash equivalents and $12.9 million of U.S. treasury securities and $8.0 million of U.S. agency bonds classified as short-term investments on the condensed consolidated balance sheet. As of December 31, 2021, the Company had no held-to-maturity investments. Held-to-maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in interest expense, net on the condensed consolidated statements of operations. For the three and six months ended June 30, 2022, the Company recognized less than $0.1 million in realized gains and losses. The Company’s held-to-maturity investments are classified as Level 2 in the fair value hierarchy because they are valued using inputs other than quoted prices, which are directly or indirectly observable in the market, including ~~but~~prices for similar assets in active markets as well as quoted prices for identical or similar assets in markets that are 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.active.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s accounts receivable were ~~$156.7~~$178.8 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 ~~$2.6~~$4.3 million and ~~$3.5~~$3.0 million for the periods ending ~~September~~June 30, ~~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.

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) September 30,
2021 December 31,
2020
Ingredients and packaging $ 22,785 $ 22,965
Finished goods 23,798 23,583
Inventory in transit to customers 2,726 2,800
$ 49,309 $ 49,348


(In thousands)	June 30, 2022		December 31, 2021

Ingredients and packaging	$	29,286	$	22,607
Finished goods	27,570		26,988
Inventory in transit to customers	3,953		3,218
	$	60,809	$	52,813

Capitalized Interest

The Company capitalizes a portion of the interest on its term loan (see Note 4. Debt and Lease Obligations) related to certain property and equipment during its construction period. The capitalized interest is recorded as part of the asset to which it relates and depreciated over the asset’s estimated useful life. The Company capitalized interest of $0.2 million during the three and six months ended June 30, 2022. No interest was capitalized during the three and six months ended June 30, 2021. Capitalized interest is included in property and equipment, net on the condensed consolidated balance sheets.

Software Costs

Capitalized software is included in ~~“other~~other assets ~~net”~~ in the condensed consolidated balance sheets in the amount of ~~$15.1~~$18.3 million and $14.7 million as of ~~September~~June 30, ~~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 in the condensed consolidated statements of operations was $1.0 million and ~~$2.9~~$2.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$1.4~~$1.0 million and ~~$4.0~~$1.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

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~~(“SBG”) category in the United States, as well as in the Cookie category in the United States and ~~Canada within the Cookies category.~~Canada.

1110

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following tables disaggregate revenue by geographical market and category.
Three Months Ended September 30, 2021
(In thousands)
Sweet Baked Goods Cookies Total
United States $ 258,818 $ 25,185 $ 284,003
Canada — 3,966 3,966
$ 258,818 $ 29,151 $ 287,969


		Three Months Ended September 30, 2020				Three Months Ended June 30, 2022
(In thousands)	(In thousands)	Sweet Baked Goods		Cookies			Total		(In thousands)	Sweet Baked Goods		Cookies		Total
United States	United States	$	234,103	$	22,328		$	256,431	United States	$	303,437	$	32,348	$	335,785
Canada	Canada	—		4,424			4,424		Canada	—		4,687		4,687
		$	234,103	$	26,752		$	260,855		$	303,437	$	37,035	$	340,472


		Nine Months Ended September 30, 2021							Three Months Ended June 30, 2021
(In thousands)		Sweet Baked Goods		Cookies		Total
(In thousands)								(In thousands)	Sweet Baked Goods		Cookies		Total
United States	United States	$	759,010	$	73,394	$	832,404	United States	$	262,491	$	24,407	$	286,898
Canada	Canada	—		12,471		12,471		Canada	—		4,587		4,587
		$	759,010	$	85,865	$	844,875		$	262,491	$	28,994	$	291,485


		Nine Months Ended September 30, 2020							Six Months Ended June 30, 2022
(In thousands)		Sweet Baked Goods		Cookies		Total
(In thousands)								(In thousands)	Sweet Baked Goods		Cookies		Total
United States	United States	$	693,085	$	56,094	$	749,179	United States	$	599,809	$	63,264	$	663,073
Canada	Canada	—		11,387		11,387		Canada	—		9,450		9,450
		$	693,085	$	67,481	$	760,566		$	599,809	$	72,714	$	672,523


	Six Months Ended June 30, 2021
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	500,191	$	48,210	$	548,401
Canada	—		8,505		8,505
	$	500,191	$	56,715	$	556,906

Concentrations

~~For the three months ended September 30, 2021 and 2020, the~~The Company ~~has~~had one customer (together with its affiliates) that accounted for ~~18.0%~~20.1% and ~~19.7%~~20.4% of total net revenue ~~and~~ for the ~~nine~~three and six months ended ~~September~~June 30, 2022, and 18.1% and 19.3% for the three and six months ended June 30, 2021, ~~and 2020, 18.8% and 21.0% of total net revenue,~~ 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 US dollars (“USD”) on the condensed consolidated statement 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 using the exchange rate at the end of the period. During both the three and nine months ended September 30, 2021, the Company recognized a gain on remeasurement of $0.2 million, which is reported within other expense on the condensed consolidated statement of operations. During the three and nine months ended September 30, 2020, the Company recognized losses on remeasurement of $0.4 million and $1.1 million, respectively, reported within other expense on the condensed consolidated statement of operations.

1211

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Property and Equipment

Property and equipment consists of the following:


(In thousands)	(In thousands)	September 30, 2021		December 31, 2020		(In thousands)	June 30, 2022		December 31, 2021

Land and buildings	Land and buildings	$	64,663	$	59,774	Land and buildings	$	73,729	$	70,692
Right of use assets, operating	Right of use assets, operating	32,192		31,354		Right of use assets, operating	32,192		32,192
Machinery and equipment	Machinery and equipment	272,971		255,821		Machinery and equipment	301,313		299,071
Construction in progress	Construction in progress	34,071		25,041		Construction in progress	59,486		26,027
		403,897		371,990			466,720		427,982
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	(85,405)		(68,031)		Less accumulated depreciation and amortization	(107,276)		(92,677)
		$	318,492	$	303,959		$	359,444	$	335,305

Depreciation expense was ~~$5.9~~$7.7 million and ~~$17.4~~$14.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$6.3~~$5.7 million and ~~$16.6~~$11.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

3. Accrued Expenses and Other Current Liabilities

Included in accrued expenses and other current liabilities are the following:
(In thousands) September 30,
2021 December 31,
2020
Incentive compensation $ 14,239 $ 16,199
Payroll, vacation and other compensation 10,447 9,886
Interest rate swap and foreign currency contracts 5,229 13,694
Accrued interest 4,768 4,815
Other 11,858 11,121
$ 46,541 $ 55,715

~~4. Debt and Lease Obligations~~

~~A summary of the carrying value of the debt and lease obligations are as follows:~~
(In thousands) September 30,
2021 December 31,
2020
Term Loan (3.0% as of September 30, 2021)
Principal $ 1,094,388 $ 1,102,763
Unamortized debt premium and issuance costs (3,987) (4,917)
1,090,401 1,097,846
Lease obligations 27,097 29,002
Total debt and lease obligations 1,117,498 1,126,848
Less: Current portion of long term debt and lease obligations (14,171) (13,811)
Long-term portion $ 1,103,327 $ 1,113,037


(In thousands)	June 30, 2022		December 31, 2021

Payroll, vacation and other compensation	$	8,704	$	7,791
Incentive compensation	14,706		21,172
Accrued interest	5,295		4,828
Interest rate swap and foreign currency contracts	157		2,042
Other	13,217		11,176





	$	42,079	$	47,009

1312

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Debt and Lease Obligations

A summary of the carrying value of the debt and lease obligations are as follows:


(In thousands)	June 30, 2022		December 31, 2021

Term loan (3.6% as of June 30, 2022)
Principal	$	1,086,013	$	1,091,596
Unamortized debt premium and issuance costs	(3,380)		(3,679)
	1,082,633		1,087,917
Lease obligations	24,173		26,228
Total debt and lease obligations	1,106,806		1,114,145
Less: Current portion of long term debt and lease obligations	(14,009)		(14,170)
Long-term portion	$	1,092,797	$	1,099,975

At ~~September~~June 30, ~~2021,~~2022, minimum debt repayments under the term loan are due as follows:

(In thousands)
2021 $ 2,792
2022 11,167
2023 11,167
2024 11,167
2025 1,058,095


(In thousands)
2022	$	5,584
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 ~~September~~June 30, ~~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 ~~September~~June 30, ~~2021~~2022 and ~~2020,~~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 Nine Months Ended
(In thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Operating lease expense $ 1,504 $ 1,209 $ 4,928 $ 4,273
Short-term lease expense 501 456 1,083 2,014
Variable lease expense 367 445 1,109 1,466
$ 2,372 $ 2,110 $ 7,120 $ 7,753


	Three Months Ended				Six Months Ended
(In thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021


Operating lease expense	$	1,585	$	1,771	$	3,188	$	3,424
Short-term lease expense	461		379		834		582
Variable lease expense	391		385		773		742
	$	2,437	$	2,535	$	4,795	$	4,748

5.~~Derivative Instruments~~

~~Warrants~~

As of September 30, 2021 and December 31, 2020, there were 40,866,087 and 53,936,776 public warrants outstanding, and 419,011 and 541,658 private placement warrants outstanding, respectively. 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, which would result in a conversion to public warrants, has been registered with the SEC. When sold to the public, the private placement warrants will become public warrants.

In July 2021, the agreement governing the Company’s public and private placement warrants was amended. Subsequent to the amendment, the exercise price for all outstanding warrants is payable through a “cashless exercise” with a premium of $0.25 added to the valuation price of each share for purposes of calculating the number of shares issuable upon exercise of the warrants.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended September 30, 2021, 4,389,288 warrants were exercised on a cashless basis, resulting in the issuance of 642,199 shares of the Company’s Class A common stock, under the terms of the amended warrant agreement.

From October 1, 2021 through the expiration of the warrants on November 4, 2021, an additional 47.2 million warrants were exercised on a cashless basis, resulting in the issuance of 9.2 million shares of the Company’s Class A common stock.

Derivative Instruments

Interest Rate Swap and Foreign Currency Contracts

The Company entered into interest rate swap contracts with ~~counter parties~~counterparties 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 ~~September~~June 30, ~~2021~~2022 notional amount of ~~$600~~$700 million, ~~reducing by $100 million each year, until $500 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 ~~September~~June 30, ~~2021,~~2022, the interest on the Company’s variable rate debt hedged by these contracts is effectively fixed at rates ranging from 3.36% to ~~4.03%~~4.31%.

To reduce the effect of fluctuations in ~~CAD~~Canadian dollar (“CAD”) denominated expenses relative to their U.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 ~~$13.8~~$13.0 million USD for ~~$17.3~~$16.5 million CAD at varying defined settlement dates through ~~September 2022.~~June 2023. The Company has designated these contracts as cash flow hedges.

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


(In thousands)	(In thousands)		September 30, 2021		December 31, 2020		(In thousands)		June 30, 2022		December 31, 2021
Asset derivatives							Asset derivatives	Location
Interest rate swap contracts (1)							Interest rate swap contracts (1)	Other non-current assets	$	31,925	$	1,803

Liability derivatives	Liability derivatives	Location					Liability derivatives	Location
Interest rate swap contracts (1)	Interest rate swap contracts (1)	Accrued expenses	$	4,973	$	13,688	Interest rate swap contracts (1)	Accrued expenses	$	—	$	1,798
Foreign currency contracts (2)	Foreign currency contracts (2)	Accrued expenses	256		6		Foreign currency contracts (2)	Accrued expenses	157		244
			$	5,229	$	13,694			$	157	$	2,042

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

(2) The fair values of foreign currency contracts are measured 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				Nine Months Ended						Three Months Ended				Six Months Ended
(In thousands)	(In thousands)		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(In thousands)		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Loss on derivative contracts designated as cash flow hedges	Loss on derivative contracts designated as cash flow hedges	Location									Loss on derivative contracts designated as cash flow hedges	Location
Interest rate swap contracts	Interest rate swap contracts	Interest expense, net	$	962	$	1,352	$	3,441	$	2,530	Interest rate swap contracts	Interest expense, net	$	823	$	1,152	$	1,885	$	2,479

Loss on other derivative contracts		Location

Foreign currency contracts		Other expense	$	—	$	—	$	—	$	255

~~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.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Below are basic and diluted net income per share:
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Numerator:
Net income (loss) attributable to Class A stockholders (in thousands) - basic $ 26,192 $ 24,865 $ 82,771 $ 106,101
Less: Change in fair value of warrant liabilities — (2,260) — (64,978)
Numerator - diluted 26,192 22,605 82,771 41,123
Denominator:
Weighted-average Class A shares outstanding - basic 129,846,551 124,905,538 130,679,974 123,889,306
Dilutive effect of warrants 7,462,176 2,394,619 6,700,256 1,938,355
Dilutive effect of RSUs 564,237 286,724 515,334 251,811
Dilutive effect of stock options 185,902 — 140,807 —
Weighted-average shares outstanding - diluted 138,058,866 127,586,881 138,036,371 126,079,472
Net income per Class A share - basic $ 0.20 $ 0.20 $ 0.63 $ 0.86
Net income per Class A share - diluted $ 0.19 $ 0.18 $ 0.60 $ 0.33


	Three Months Ended				Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Numerator:
Net income (in thousands)	$	30,476	$	29,847	$	65,034	$	56,579


Denominator:
Weighted-average Class A shares outstanding - basic	137,909,156		131,354,059		138,255,803		131,096,686
Dilutive effect of warrants	—		6,867,024		—		6,319,296
Dilutive effect of RSUs	559,426		555,050		522,424		486,250
Dilutive effect of stock options	489,660		149,356		485,076		124,622
Weighted-average shares outstanding - diluted	138,958,242		138,925,489		139,263,303		138,026,854

Net income per Class A share - basic	$	0.22	$	0.23	$	0.47	$	0.43

Net income per Class A share - diluted	$	0.22	$	0.21	$	0.47	$	0.41

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. ~~During the three and nine months ended September 30, 2021, the diluted weighted-average shares outstanding includes the dilutive impact~~All warrants were exercised or expired as of ~~equity-classified warrants.~~

Stock options that were excluded from the computation of diluted weighted average shares, because their effect was anti-dilutive, for the three and nine months ended September 30, 2021, were 1,841 and 36,451 compared to 490,557 and 571,230 for the three and nine months ended September 30, 2020, respectively.December 31, 2021.

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 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 ~~27.5%~~27.2% prior to taking into account any discrete items. ~~As of September 30, 2021, and December 31, 2020, income taxes receivable were $1.4 million and $12.3 million, respectively.~~

1615

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 for the ~~nine~~six months ended ~~September~~June 30, ~~2021:~~2022:


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



Payments	~~(9,270)~~(9,313)
Balance ~~September~~June 30, ~~2021~~2022	$	~~147,274~~136,552

As of ~~September~~June 30, ~~2021~~2022 the future expected payments under the tax receivable agreement are as follows:
(In thousands)
2021 $ 2,400
2022 9,000
2023 9,700
2024 9,900
2025 9,800
Thereafter 106,474


(In thousands)
2022	$	2,300
2023	10,300
2024	10,100
2025	9,400
2026	9,600
Thereafter	94,852

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.

In December 2020, the Company asserted claims for indemnification against the sellers under the terms of the Share Purchase Agreement pursuant to which the Company acquired Voortman. The Company’s claims were for an aggregate of approximately $90 million CAD in damages arising out of alleged breaches by the sellers of certain representations, warranties and covenants contained in such agreement relating to periods prior to the closing of the acquisition. The Company also submitted claims relating to these alleged breaches under the representation and warranty insurance policy (“RWI”) it purchased in connection with the acquisition. In June 2022, the RWI insurers agreed to pay the Company $42.5 million CAD (the RWI coverage limit) related to these breaches. The Company expects to realize the proceeds as a gain in its condensed consolidated statement of operations when they are received in the third quarter of 2022. The Company, together with the RWI insurers, now intends to pursue claims against the sellers. Although the Company strongly believes that its claims against the sellers are meritorious, no assurance can be given as to whether the Company will recover all, or any part, of the amounts it pursues directly against the sellers.

1716

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~~ sweet snacks company ~~which produces sweet baked goods (“SBG”), as well as cookie~~focused on developing, manufacturing, marketing, selling and ~~wafer products~~distributing snacks in the U.S. under the Hostess® and in North America under the 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~~Sweet Baked Goods (SBG) category, according to Nielsen U.S. total universe. For the 13-week period ended ~~October~~July 2, ~~2021,~~2022, our branded SBG (which includes Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was ~~21.6%~~21.7% per Nielsen’s U.S. SBG category data.

Factors Impacting Recent Results

~~Acquisition~~

~~On January 3, 2020, we completed the acquisition of all~~We believe volatility in certain aspects 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. The addition of the Voortman® brand has created growth opportunities provided by a more diverse portfolio of brands and products. Our condensed consolidated statement of operations reflects the operation of these assets from January 3, 2020 through September 30, 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 first two quarters of 2020, as consumers prepared for extended stays at home, we experienced an increase in consumption, particularly in our multi-pack products sold through grocery and mass retailer channels. Conversely, during that same time frame, we experienced lower consumption of single-serve products, which are often consumed away from home. During 2021, we continued to experience strong demand in our multi-pack products, as well as an increase in our immediate consumption single-serve business as mobility increased. However, we cannot predict if these trends will sustain or reverse in future periods.

Since the start of the pandemic, our internal task force has monitored the rapidly evolving situation and implemented risk mitigation actions as deemed necessary. As a result, we have not experienced significant disruptions to ourglobal supply chain ~~and distribution network. However, it is possible that significant disruptions could still occur. Supply chain constraints seen elsewhere in~~have had a continued impact on our operations, including the ~~global economy due to~~cost and availability of labor, transportation and raw materials. Various macro factors, including, but not limited to, the COVID-19 pandemic, labor market trends, rising fuel and transportation costs, the conflict in Ukraine, the Avian Influenza and overall elevated demand for goods, have led to fragility in the supply chain. We have attempted to mitigate the impact of these cost increases on our business, to the extent possible, by locking in prices on certain raw materials ~~could impact~~and through pricing actions implemented with customers in 2021 and the first half of 2022.

Given the fragility of the global supply-chain environment, our ability to source ~~ingredients and packaging~~raw materials for our production facilities or ~~our ability to~~produce and ship products to meet the needs of our ~~customers.~~customers may be materially impacted. 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.

We have experienced no significant disruptions to our production and distribution facilities since the start of the pandemic. To protect our employees and ensure continuity of operations, we have implemented additional security and sanitation measures in all of our facilities. We continue to follow protocols that are consistent with, or ahead of CDC guidelines. As many of our non-production team members, including sales, marketing and corporate employees, return to the office after working remotely for many months, we continue to monitor employee health and safety and adhere to evolving CDC guidelines while supporting our ability to bring products to consumers.

1817

Despite the distribution of the COVID-19 vaccines, uncertainty continues to exist regarding the pandemic and its impact on our business, including uncertainty related to, among other things, the duration of the pandemic, vaccine deployment and acceptance, new variants of COVID-19 and vaccine effectiveness for new variants, and the effect of actions to contain COVID-19 or treat its effect, including the anticipated COVID-19 Vaccine and Testing Emergency Temporary Standard to be issued by Occupational Safety and Health Administration (OSHA).

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. Payments of $2.8 million continue to be deferred as of September 30, 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 condensed consolidated financial statements for the three and nine months ended September 30, 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 Nine Months Ended
(In thousands, except per share data)
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net revenue $ 287,969 $ 260,855 $ 844,875 $ 760,566
Gross profit 98,979 91,155 299,604 259,866
As a % of net revenue 34.4 % 35.0 % 35.5 % 34.2 %
Operating costs and expenses 52,375 49,818 152,829 168,788
Operating income 46,604 41,337 146,775 91,078
Other (income) expense 10,534 8,823 32,390 (29,905)
Income tax expense 9,878 6,281 31,614 12,022
Net income 26,192 26,233 82,771 108,961
Net income attributable to Class A stockholders $ 26,192 $ 24,865 $ 82,771 $ 106,101
Earnings per Class A share:
Basic $ 0.20 $ 0.20 $ 0.63 $ 0.86
Diluted $ 0.19 $ 0.18 $ 0.60 $ 0.33


	Three Months Ended						Six Months Ended
(In thousands, except per share data)	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Net revenue	$	340,472		$	291,485		$	672,523		$	556,906
Gross profit	112,700			105,106			228,324			200,625
As a % of net revenue	33.1		%	36.1		%	34.0		%	36.0		%

Operating costs and expenses	61,729			51,980			119,006			100,454
Operating income	50,971			53,126			109,318			100,171


Other expense	9,234			11,552			19,336			21,856

Income tax expense	11,261			11,727			24,948			21,736
Net income	30,476			29,847			65,034			56,579


Earnings per Class A share:
Basic	$	0.22		$	0.23		$	0.47		$	0.43
Diluted	$	0.22		$	0.21		$	0.47		$	0.41

Results of Operations

Net Revenue

Net revenue for the three months ended ~~September~~June 30, ~~2021 was $288.0~~2022 increased $49.0 million, ~~an increase of 10.4%,~~ or ~~$27.1 million,~~16.8%, compared to ~~$260.9~~the three months ended June 30, 2021. Contribution from previously taken pricing actions and product mix provided 13.8% of the growth, while higher volumes accounted for 3.0% of the quarterly growth. Compared to the same period last year, SBG net revenue increased $41.0 million or 15.6%, while cookies net revenue increased $8.0 million or 27.6%.

Net revenue for the six months ended June 30, 2022 increased $115.6 million, or 20.8%, compared to the six months ended June 30, 2021. Contribution from previously taken pricing actions and favorable product mix provided nearly 12.1% of the growth, while higher volumes accounted for 8.7% of the year-to-date growth. Compared to the same period last year, SBG net revenue increased $99.6 million or 19.9%, while cookies net revenue increased $16.0 million or 28.2%.

Gross Profit

Gross profit increased 7.2% and was 33.1% of net revenue for the three months ended ~~September~~June 30, 2020. The increase in net revenue was driven by sweet baked goods net revenue, which increased $24.7 million or 10.6%, led by gains in the club, dollar, convenience, drug and grocery channels with continued momentum2022, a decrease of ~~single-serve products driving favorable product mix. Cookies net revenue increased $2.4 million or 9.0% due to expanded distribution and strong point~~295 basis points from a gross margin of ~~sale growth.~~

Net revenue for the nine months ended September 30, 2021 was $844.9 million, an increase of 11.1%, or $84.3 million, compared to $760.6 million for the nine months ended September 30, 2020. The increase in net revenue was driven by sweet baked goods net revenue, which increased $65.9 million or 9.5%. This growth was driven by increased sales volume across multiple channels along with continued momentum of single-serve products driving favorable product mix. Cookies net revenue increased by $18.4 million or 27.2% due to the strong demand and expanded distribution of Voortman® branded products following the transition of the Voortman business to the warehouse distribution model in the second quarter of 2020.

~~Gross Profit~~

~~Gross profit~~36.1% for the three months ended ~~September~~June 30, ~~2021 was $99.0 million, with gross margin of 34.4%, compared to $91.2 million, with gross margin of 35.0% for the three months ended September 30, 2020.~~2021. The decrease in gross margin was ~~primarily attributed~~due to ~~increased transportation~~inflation and ~~input cost inflation~~inefficiencies caused by supply-chain fragility, partially offset by favorable ~~product~~ price/mix and productivity benefits. The increase in gross profit was attributed to pricing actions and ~~productivity initiatives.~~ higher volume.

Gross profit increased ~~on higher volume~~13.8% and ~~expanded distribution.~~

~~Gross profit for the nine months ended September 30, 2021~~ was ~~$299.6 million, 35.5% of net revenue, compared to $259.9 million, or 34.2%~~34.0% of net revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2022, a decrease of 207 basis points from a gross margin of 36.0% for the six months ended June 30, 2021. The ~~increase~~decrease in gross margin was ~~driven primarily~~attributed to inflationary pressures, partially offset by favorable ~~product mix,~~price/mix. Gross profit increased from the benefit of pricing actions and ~~productivity initiatives as well as lapping Voortman acquisition and facility transition costs in the prior year. These benefits were partially offset by transportation and input cost inflation.~~higher volume.

Operating Costs and Expenses

Operating costs and expenses for the three months ended ~~September~~June 30, ~~2021~~2022 were ~~$52.4~~$61.7 million, compared to ~~$49.8~~$52.0 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The increase was primarily attributed to ~~increased~~higher advertising ~~spend.~~expense as well as higher investments in our workforce, depreciation expense and share-based compensation expense.

Operating costs and expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 were ~~$152.8~~$119.0 million, compared to ~~$168.8~~$100.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase was primarily attributed to ~~prior-year expenses incurred for the integration~~higher investments in our workforce as well as project consulting costs, higher advertising expense and conversion of Voortman's operations and the realization of operating cost synergies in the current year. This was partially offset by additional investment in advertising spend and increased headcount in the current-year period.depreciation expense.

Other ~~(Income)~~ Expense

Other expense for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$10.5~~$9.2 million compared to ~~other expense of $8.8~~$11.6 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The ~~increase~~decrease in other expense was ~~primarily as a result of the $2.3 million gain on change in fair value of our liability-classified warrants~~due to lapping costs related to certain corporate initiatives in the ~~three months ended September 30, 2020.~~prior year period and favorable remeasurement of foreign currency in the current year period. Interest expense on our term ~~loans~~loan was ~~$9.6~~$9.7 million and ~~$10.0~~$9.6 million for the three months ended ~~September~~June 30, 2022 and 2021, ~~and 2020,~~ respectively.

Other expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$32.4~~$19.3 million compared to ~~other income of $29.9~~$21.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~increase~~decrease in other expense was ~~primarily as a result of the $65.0 million gain on change in fair value of our liability-classified warrants~~due to lapping costs related to certain corporate initiative in the ~~nine months ended September 30, 2020. Interest expense on our term loans was $29.0 million and $31.9 million for the nine months ended September 30, 2021 and 2020, respectively.~~prior year period. Interest expense on our term loan ~~decreased in~~was $19.1 million and $19.3 million for the ~~current year due to the fluctuations in LIBOR.~~

six months ended June 30, 2022 and 2021, respectively.

Income Taxes

Our effective tax rate for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~27.4%~~27.0% compared to ~~19.3%~~28.2% for the three months ended ~~September~~June 30, ~~2020.~~2021. The effective tax rates for the respective periods were impacted by non-taxable losses of $0.2 million and non-taxable gains of $2.3 million from the change in fair value of warrant liabilities, respectively. The effective rate was also impacted by the removal of the non-controlling interestdecrease in the ~~current-year~~tax rate is attributed to discrete tax expense recognized in the prior-year period.

Our effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~27.6%~~27.7% compared to ~~9.9%~~27.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The tax rates in both current and prior-year periods reflect certain immaterial discrete tax items. Absent these items, the Company’s effective tax rate ~~for the respective periods were impacted by non-taxable losses of $0.7 million and non-taxable gains of $65.0 million from the change~~would have been approximately 27.0% in ~~fair value of warrant liabilities.~~

both periods.

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 and short-term investments on the balance sheet will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. Our future cash requirements include, but are not limited to, the purchase commitments for certain raw materials and packaging used in our ~~productions~~production process, scheduled rent on leased facilities, scheduled debt service payments on our term loan, ~~and~~ settlements on related interest rate swap contracts, payments on our tax receivable agreement, settlements on our outstanding foreign currency contracts and outstanding purchase orders on capital projects.

Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, future cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we undertake, such as ~~acquisitions.~~

acquisitions or bringing new production facilities on line. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

We had working capital, excluding cash and short-term investments, as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 of ~~$15.4~~$38.1 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 ~~September~~June 30, ~~2021,~~2022, we had approximately ~~$94.0~~$93.9 million available for borrowing, net of letters of credit, under ~~the~~our Revolver. ~~We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.~~

Cash Flows from Operating Activities

Cash flows provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ were ~~$147.6~~$87.2 million and ~~$108.0~~$87.3 million, respectively. ~~Operating cash flow benefited from current year improvement in profitability as well as lapping prior-year costs related to the integration and conversion of Voortman's operations, partially offset by~~Despite an increase in ~~working capital.~~earnings, operating cash flow remained relatively the same due to tax refunds of $7.7 million received in the prior-year period.

Cash Flows from Investing Activities

~~Cash~~Investing activities used ~~in investing activities~~$62.8 million and $22.2 million of cash for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020 were $36.7 million and $354.4 million,~~ respectively. ~~During the nine months ended September 30, 2020,~~On February 22, 2022, we ~~funded the CAD $423 million~~purchased a facility in Arkadelphia, Arkansas for a total purchase price of ~~Voortman with cash~~$11.5 million. Additional capital expenditures were incurred on ~~hand~~this project during the six months ended June 30, 2022, and we expect elevated capital expenditures due to this project throughout the ~~proceeds from an incremental term loan on our existing credit facility. Cash used for purchase~~remainder of ~~property and equipment reflects continued investments~~2022. Additionally, during the six months ended June 30, 2022, we invested in ~~new bakery lines and equipment.~~short-term marketable securities of $20.9 million.

Cash Flows from Financing Activities

~~Cash outflows for financing~~Financing activities ~~were $55.7~~used $66.7 million and $19.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021 compared to cash inflows of $113.9 million for the nine months ended September 30, 2020.~~2022 and 2021. The net outflow ~~for~~in the current-year period consisted of cash used to repurchase ~~3.1~~2.3 million shares of our common stock under ~~our~~ existing securities repurchase ~~authorization~~authorizations, as well as scheduled payments under the tax receivable agreement and ~~Term Loan offset by cash inflows from~~term loan. The net outflow in the prior-year period reflects proceeds on exercise of employee stock options and ~~public warrants. The net inflow in the prior-year period reflects~~ proceeds from ~~debt originated~~the exercise of public warrants, offset by cash used to ~~fund~~repurchase 1.2 million shares of our common stock under existing securities repurchase authorizations and scheduled payments under the ~~purchase of Voortman.~~tax receivable agreement and term loan.

Long-Term Debt

As of ~~September~~June 30, ~~2021, $1,094.4~~2022, $1,086.0 million aggregate principal amount of the ~~Term Loan~~term loan was outstanding and letters of credit worth up to ~~$6.0~~$6.1 million aggregate principal amount were available, reducing the amount available under the Revolver. We had no outstanding borrowings under our Revolver as of ~~September~~June 30, ~~2021.~~2022, with a remaining borrowing capacity of $93.9 million. As of ~~September~~June 30, ~~2021,~~2022, we were in compliance with the covenants under the ~~Term Loan~~term loan and the Revolver.

Contractual Obligations, Commitments and ~~Commitments~~Contingencies

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.

During the three months ended June 30, 2022, we reached an agreement with the insurers of the representations and warranty insurance policy related to the acquisition of Voortman. Under the terms of this agreement, we expect to receive $42.5 million CAD in the third quarter of 2022. We expect to recognize this nonrecurring gain as a component of other income within our condensed consolidated statement of operations.

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 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 ~~September~~June 30, ~~2021,~~2022, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ~~ineffective due~~effective as of June 30, 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~~accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the ~~Company's annual or interim financial statements will not be prevented or detected on a 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.

Since the point at which we identified the material weakness, we have implemented the below changes to our processes to improve our internal control over financial reporting to remediate the control deficiency that gave rise to the material weakness:

•We clarified our understanding of the accounting of contracts that may be settled in the Company’s own stock, such as warrants, as equity of the entity or as an asset or liability as highlighted in the Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) issued by the SEC on April 12, 2021 (the “Staff Statement”).

•~~We enhanced our accounting for such contracts to be in accordance with U.S. GAAP as clarified by the Staff Statement.~~

•We have designed and implemented a new control to reassess events that may change the classification of liability – or equity – classified financial instruments consistent with the SEC Statement, which was executed by individuals with sufficient experience and training.

~~We believe we have remediated this material weakness and will test the operational effectiveness of the control during the fourth quarter of 2021.~~

~~Other than as noted above, during the nine~~six months ended ~~September~~June 30, ~~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.

2220

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.

2321

Item 6. Exhibits

Exhibit No.

Description

~~4.1~~10.1

~~Amendment No. 1, dated July 26, 2021, to the Warrant Agreement, dated as of August 13, 2015, by~~Hostess Brands, Inc. Amended and ~~between the Company and Continental~~Restated 2016 Equity Incentive Plan (1)

10.2

Hostess Brands, Inc. 2022 Employee Stock ~~Transfer & Trust Company~~Purchase Plan (1)

31.1

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

31.2

Certification of 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 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 ~~September~~June 30, ~~2021,~~2022, formatted in Inline XBRL

(1) Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2022 and incorporated herein by reference.

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, on ~~November 9, 2021.~~August 3, 2022.


HOSTESS BRANDS, INC.

By:			/s/ ~~Andrew P. Callahan~~
			~~Andrew P. Callahan~~ ~~President, Chief Executive Officer~~ ~~(Principal Executive Officer)~~

~~By:~~			~~/s/ Michael J. Gernigin~~Travis E. Leonard
			~~Michael J. Gernigin~~Travis E. Leonard ~~Senior~~Executive 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, including 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
Comprehensive income (loss)	—	—		—	—		—		(1,324)		(212)		(1,536)		1,096
Share-based compensation, net of income taxes of $496	46	—		—	—		1,929		—		—		1,929		—
Exchanges	1,140	—		(1,140)	—		13,803		(127)		—		13,676		(13,676)
Distributions	—	—		—	—		—		—		—		—		(365)
Exercise of employee stock options and warrants	37	—		—	—		408		—		—		408		—
Payment of taxes for employee stock awards	—	—		—	—		(32)		—		—		(32)		—
Tax receivable agreement arising from exchanges, net of income taxes of $952	—	—		—	—		(2,556)		—		—		(2,556)		—
Balance–June 30, 2020	124,408	$	12	6,302	$	1	$	1,148,565	$	(11,034)	$	332,661	$	1,470,205	$	67,635
Comprehensive income (loss)	—	—		—	—		—		109		24,865		24,974		1,375
Share-based compensation, net of income taxes of $361	60	—		—	—		1,720		—		—		1,720		—
Distributions	—	—		—	—		—		—		—		—		(1,445)
Exercise of employee stock options and warrants	1	—		—	—		2		—		—		2		—
Exchanges	680	—		(680)	—		8,244		(79)		—		8,165		(8,165)
Payment of taxes for employee stock awards	—	—		—	—		(347)		—		—		(347)		—
Tax receivable agreement arising from exchanges, net of income taxes of $754	—	—		—	—		(1,431)		—		—		(1,431)		—
Balance–September 30, 2020	125,149	$	12	5,622	$	1	$	1,156,753	$	(11,004)	$	357,526	$	1,503,288	$	59,400


	Three Months Ended September 30, 2021
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	258,818	$	25,185	$	284,003
Canada	—		3,966		3,966
	$	258,818	$	29,151	$	287,969


(In thousands)
2021	$	2,792
2022	11,167
2023	11,167
2024	11,167
2025	1,058,095


(In thousands)
2021	$	2,400
2022	9,000
2023	9,700
2024	9,900
2025	9,800
Thereafter	106,474