UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021March 31, 2022
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-38880
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| Whole Earth Brands, Inc. |
| (Exact name of registrant as specified in its charter) |
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Delaware (State or other jurisdiction of incorporation or organization) | | 38-4101973 (I.R.S. Employer Identification No.) |
125 S. Wacker Drive, Suite 3150 Chicago, Illinois | | 60606 |
| (Address of Principal Executive Offices) | | (Zip Code) |
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| (312) 840-6000 |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which
registered |
| Common stock, par value $0.0001 per share | | FREE | | The NASDAQ Stock Market LLC |
| Warrants to purchase one-half of one share of common stock | | FREEW | | 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐ | | Accelerated filer | ☒ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of AugustMay 6, 2021,2022, there were 38,485,61341,912,356 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.
WHOLE EARTH BRANDS, INC.
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Whole Earth Brands, Inc.
Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Quarter Ended June 30, 2021March 31, 2022
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Condensed Consolidated and Combined Financial Statements | |
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| | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. |
| Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets |
| (In thousands of dollars, except for share and per share data) | (In thousands of dollars, except for share and per share data) | (In thousands of dollars, except for share and per share data) |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| Assets | Assets | | | | Assets | | | |
| Current Assets | Current Assets | | Current Assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 24,054 | | | $ | 16,898 | | Cash and cash equivalents | $ | 29,365 | | | $ | 28,296 | |
| Accounts receivable (net of allowances of $817 and $955, respectively) | 76,088 | | | 56,423 | | |
| Accounts receivable (net of allowances of $1,340 and $1,285, respectively) | | Accounts receivable (net of allowances of $1,340 and $1,285, respectively) | 73,089 | | | 69,590 | |
| Inventories | Inventories | 195,976 | | | 111,699 | | Inventories | 215,058 | | | 212,930 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 16,632 | | | 5,045 | | Prepaid expenses and other current assets | 8,289 | | | 7,585 | |
| Total current assets | Total current assets | 312,750 | | | 190,065 | | Total current assets | 325,801 | | | 318,401 | |
| | Property, Plant and Equipment, net | Property, Plant and Equipment, net | 52,544 | | | 47,285 | | Property, Plant and Equipment, net | 59,330 | | | 58,503 | |
| | Other Assets | Other Assets | | Other Assets | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 19,890 | | | 12,193 | | Operating lease right-of-use assets | 24,678 | | | 26,444 | |
| Goodwill | Goodwill | 241,717 | | | 153,537 | | Goodwill | 241,535 | | | 242,661 | |
| Other intangible assets, net | Other intangible assets, net | 277,912 | | | 184,527 | | Other intangible assets, net | 261,592 | | | 266,939 | |
| Deferred tax assets, net | Deferred tax assets, net | 2,481 | | | 2,671 | | Deferred tax assets, net | 1,876 | | | 1,993 | |
| Other assets | Other assets | 7,072 | | | 6,260 | | Other assets | 8,747 | | | 7,638 | |
| Total Assets | Total Assets | $ | 914,366 | | | $ | 596,538 | | Total Assets | $ | 923,559 | | | $ | 922,579 | |
| | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | |
| Current Liabilities | Current Liabilities | | Current Liabilities | |
| Accounts payable | Accounts payable | $ | 34,176 | | | $ | 25,200 | | Accounts payable | $ | 55,426 | | | $ | 55,182 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 37,852 | | | 29,029 | | Accrued expenses and other current liabilities | 34,503 | | | 30,733 | |
| Contingent consideration payable | Contingent consideration payable | 53,149 | | | 0 | | Contingent consideration payable | — | | | 54,113 | |
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | 5,334 | | | 3,623 | | Current portion of operating lease liabilities | 8,101 | | | 7,950 | |
| Current portion of long-term debt | Current portion of long-term debt | 3,750 | | | 7,000 | | Current portion of long-term debt | 3,750 | | | 3,750 | |
| Total current liabilities | Total current liabilities | 134,261 | | | 64,852 | | Total current liabilities | 101,780 | | | 151,728 | |
| Non-Current Liabilities | Non-Current Liabilities | | Non-Current Liabilities | |
| Long-term debt | Long-term debt | 384,659 | | | 172,662 | | Long-term debt | 412,895 | | | 383,484 | |
| Warrant liabilities | Warrant liabilities | 8,240 | | | 0 | | Warrant liabilities | 587 | | | 2,053 | |
| Deferred tax liabilities, net | Deferred tax liabilities, net | 51,255 | | | 23,297 | | Deferred tax liabilities, net | 33,883 | | | 35,090 | |
| Operating lease liabilities, less current portion | Operating lease liabilities, less current portion | 18,437 | | | 11,324 | | Operating lease liabilities, less current portion | 20,437 | | | 22,575 | |
| Other liabilities | Other liabilities | 15,366 | | | 15,557 | | Other liabilities | 14,003 | | | 13,778 | |
| Total Liabilities | Total Liabilities | 612,218 | | | 287,692 | | Total Liabilities | 583,585 | | | 608,708 | |
Commitments and Contingencies (Note 8) | Commitments and Contingencies (Note 8) | 0 | | | 0 | | Commitments and Contingencies (Note 8) | — | | | — | |
| Stockholders’ Equity | Stockholders’ Equity | | Stockholders’ Equity | |
| Preferred shares, $0.0001 par value; 1,000,000 shares authorized; 0ne issued and outstanding at June 30, 2021 and December 31, 2020 | 0 | | | 0 | | |
| Common stock, $0.0001 par value; 220,000,000 shares authorized; 38,455,759 and 38,426,669 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively. | 4 | | | 4 | | |
| Preferred shares, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021 | | Preferred shares, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021 | — | | | — | |
| Common stock, $0.0001 par value; 220,000,000 shares authorized; 41,677,664 and 38,871,646 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Common stock, $0.0001 par value; 220,000,000 shares authorized; 41,677,664 and 38,871,646 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 4 | | | 4 | |
| Additional paid-in capital | Additional paid-in capital | 325,150 | | | 325,679 | | Additional paid-in capital | 356,220 | | | 330,616 | |
| Accumulated deficit | Accumulated deficit | (34,849) | | | (25,442) | | Accumulated deficit | (23,710) | | | (26,436) | |
| Accumulated other comprehensive income | Accumulated other comprehensive income | 11,843 | | | 8,605 | | Accumulated other comprehensive income | 7,460 | | | 9,687 | |
| Total stockholders’ equity | Total stockholders’ equity | 302,148 | | | 308,846 | | Total stockholders’ equity | 339,974 | | | 313,871 | |
| Total Liabilities and Stockholders’ Equity | Total Liabilities and Stockholders’ Equity | $ | 914,366 | | | $ | 596,538 | | Total Liabilities and Stockholders’ Equity | $ | 923,559 | | | $ | 922,579 | |
See Notes to Unaudited Consolidated and Combined Financial Statements
5
| | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. |
| Condensed Consolidated and Combined Statements of Operations | |
| Condensed Consolidated Statements of Operations | | Condensed Consolidated Statements of Operations |
| (In thousands of dollars, except for share and per share data) | (In thousands of dollars, except for share and per share data) | (In thousands of dollars, except for share and per share data) |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | | (Successor) | | | (Predecessor) | | | Three Months Ended |
| | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | | | March 31, 2022 | | March 31, 2021 |
| Product revenues, net | Product revenues, net | $ | 126,493 | | | $ | 232,318 | | | $ | 4,478 | | | | $ | 62,356 | | | $ | 128,328 | | Product revenues, net | | $ | 130,592 | | | $ | 105,825 | |
| Cost of goods sold | Cost of goods sold | 85,138 | | | 155,312 | | | 2,708 | | | | 37,515 | | | 77,627 | | Cost of goods sold | | 91,034 | | | 70,174 | |
| Gross profit | Gross profit | 41,355 | | | 77,006 | | | 1,770 | | | | 24,841 | | | 50,701 | | Gross profit | | 39,558 | | | 35,651 | |
| | Selling, general and administrative expenses | Selling, general and administrative expenses | 27,828 | | | 60,735 | | | 1,946 | | | | 27,307 | | | 43,355 | | Selling, general and administrative expenses | | 27,788 | | | 32,907 | |
| Amortization of intangible assets | Amortization of intangible assets | 4,706 | | | 8,857 | | | 141 | | | | 2,393 | | | 4,927 | | Amortization of intangible assets | | 4,705 | | | 4,151 | |
| Asset impairment charges | 0 | | | 0 | | | 0 | | | | 0 | | | 40,600 | | |
| | Restructuring and other expenses | Restructuring and other expenses | 2,846 | | | 4,503 | | | 0 | | | | 0 | | | 0 | | Restructuring and other expenses | | — | | | 1,657 | |
| | Operating income (loss) | Operating income (loss) | 5,975 | | | 2,911 | | | (317) | | | | (4,859) | | | (38,181) | | Operating income (loss) | | 7,065 | | | (3,064) | |
| | Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | (241) | | | (2,603) | | | 0 | | | | 0 | | | 0 | | Change in fair value of warrant liabilities | | 861 | | | (2,362) | |
| Interest expense, net | Interest expense, net | (6,396) | | | (11,474) | | | (116) | | | | (66) | | | (238) | | Interest expense, net | | (6,032) | | | (5,078) | |
| Loss on extinguishment and debt transaction costs | Loss on extinguishment and debt transaction costs | 0 | | | (5,513) | | | 0 | | | | 0 | | | 0 | | Loss on extinguishment and debt transaction costs | | — | | | (5,513) | |
| Other income (expense), net | 190 | | | 500 | | | (62) | | | | (920) | | | 801 | | |
| Loss before income taxes | (472) | | | (16,179) | | | (495) | | | | (5,845) | | | (37,618) | | |
| (Benefit) provision for income taxes | (4,167) | | | (7,849) | | | 10 | | | | (364) | | | (3,482) | | |
| Other income, net | | Other income, net | | 1,956 | | | 310 | |
| Income (loss) before income taxes | | Income (loss) before income taxes | | 3,850 | | | (15,707) | |
| Provision (benefit) for income taxes | | Provision (benefit) for income taxes | | 1,124 | | | (3,682) | |
| Net income (loss) | Net income (loss) | $ | 3,695 | | | $ | (8,330) | | | $ | (505) | | | | $ | (5,481) | | | $ | (34,136) | | Net income (loss) | | $ | 2,726 | | | $ | (12,025) | |
| | Net earnings (loss) per share: | Net earnings (loss) per share: | | | | Net earnings (loss) per share: | | |
| Basic | Basic | $ | 0.10 | | | $ | (0.22) | | | $ | (0.01) | | | | | Basic | | $ | 0.07 | | | $ | (0.31) | |
| Diluted | Diluted | $ | 0.09 | | | $ | (0.22) | | | $ | (0.01) | | | | | Diluted | | $ | 0.07 | | | $ | (0.31) | |
See Notes to Unaudited Consolidated and Combined Financial Statements
6
| | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. |
| Condensed Consolidated and Combined Statements of Comprehensive Income (Loss) | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) | | Condensed Consolidated Statements of Comprehensive Income (Loss) |
| (In thousands of dollars) | (In thousands of dollars) | (In thousands of dollars) |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | | (Successor) | | | (Predecessor) | | | Three Months Ended |
| | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From
January 1, 2020 to June 25, 2020 | | | March 31, 2022 | | March 31, 2021 |
| Net income (loss) | Net income (loss) | $ | 3,695 | | | $ | (8,330) | | | $ | (505) | | | | $ | (5,481) | | | $ | (34,136) | | Net income (loss) | | $ | 2,726 | | | $ | (12,025) | |
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | | | Other comprehensive income (loss), net of tax: | | |
| Net change in pension benefit obligations recognized, net of taxes of $(13), $(13), $0, $65 and $65 | (46) | | | (37) | | | 0 | | | | 270 | | | 318 | | |
| Net change in pension benefit obligations recognized, net of taxes of $(71) and $0, respectively | | Net change in pension benefit obligations recognized, net of taxes of $(71) and $0, respectively | | (224) | | | 9 | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 5,322 | | | 3,275 | | | 15 | | | | (402) | | | (2,286) | | Foreign currency translation adjustments | | (2,003) | | | (2,047) | |
| Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | 5,276 | | | 3,238 | | | 15 | | | | (132) | | | (1,968) | | Total other comprehensive income (loss), net of tax | | (2,227) | | | (2,038) | |
| Comprehensive income (loss) | Comprehensive income (loss) | $ | 8,971 | | | $ | (5,092) | | | $ | (490) | | | | $ | (5,613) | | | $ | (36,104) | | Comprehensive income (loss) | | $ | 499 | | | $ | (14,063) | |
See Notes to Unaudited Consolidated and Combined Financial Statements
7
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Whole Earth Brands, Inc. |
Condensed Consolidated and Combined Statements of Equity |
(In thousands of dollars) |
(Unaudited) |
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| Total Equity |
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Balance at December 31, 2019 | $ | 487,750 | |
Funding to Parent, net | (12,262) | |
Net loss | (28,655) | |
Other comprehensive loss, net of tax | (1,836) | |
Balance at March 31, 2020 | $ | 444,997 | |
Funding to Parent, net | 338 | |
Net loss | (5,481) | |
Other comprehensive loss, net of tax | (132) | |
Balance at June 25, 2020 | $ | 439,722 | |
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| Whole Earth Brands, Inc. |
| Condensed Consolidated Statements of Equity |
| (In thousands of dollars) |
| (Unaudited) |
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| Common Stock | | Additional
Paid-in | | Accumulated | | Accumulated
Other
Comprehensive | | Total
Stockholders’ |
| Shares | | Amount | | Capital | | Deficit | | Income | | Equity |
| Balance at December 31, 2020 | 38,426,669 | | | $ | 4 | | | $ | 325,679 | | | $ | (25,442) | | | $ | 8,605 | | | $ | 308,846 | |
| Reclassification of Private Warrants (Note 1) | — | | | — | | | (7,062) | | | (1,077) | | | — | | | (8,139) | |
| Transfer of Private Warrants to Public Warrants | — | | | — | | | 2,502 | | | — | | | — | | | 2,502 | |
| Net loss | — | | | — | | | — | | | (12,025) | | | — | | | (12,025) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (2,038) | | | (2,038) | |
| Stock-based compensation | — | | | — | | | 1,639 | | | — | | | — | | | 1,639 | |
| Balance at March 31, 2021 | 38,426,669 | | | $ | 4 | | | $ | 322,758 | | | $ | (38,544) | | | $ | 6,567 | | | $ | 290,785 | |
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| Common Stock | | Preferred Stock | | Additional
Paid-in | | Accumulated | | Accumulated
Other
Comprehensive | | Total
Stockholders’ |
| Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Income | | Equity |
| Balance at June 26, 2020 (Successor) | 30,926,669 | | | $ | 3 | | | 0 | | | $ | 0 | | | $ | 250,366 | | | $ | (16,703) | | | $ | 0 | | | $ | 233,666 | |
| Issuance of warrants | — | | | — | | | — | | | — | | | 7,895 | | | — | | | — | | | 7,895 | |
| Issuance of common stock | 7,500,000 | | | 1 | | | — | | | — | | | 67,104 | | | — | | | — | | | 67,105 | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 15 | | | 15 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (505) | | | — | | | (505) | |
| Balance at June 30, 2020 (Successor) | 38,426,669 | | | $ | 4 | | | 0 | | | $ | 0 | | | $ | 325,365 | | | $ | (17,208) | | | $ | 15 | | | $ | 308,176 | |
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| Balance at December 31, 2020 (Successor) | 38,426,669 | | | $ | 4 | | | 0 | | | $ | 0 | | | $ | 325,679 | | | $ | (25,442) | | | $ | 8,605 | | | $ | 308,846 | |
| Reclassification of Private Warrants (Note 1) | — | | | — | | | — | | | — | | | (7,062) | | | (1,077) | | | — | | | (8,139) | |
| Transfer of Private Warrants to Public Warrants (Note 6) | — | | | — | | | — | | | — | | | 2,502 | | | — | | | — | | | 2,502 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (12,025) | | | — | | | (12,025) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (2,038) | | | (2,038) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,639 | | | — | | | — | | | 1,639 | |
| Balance at March 31, 2021 (Successor) | 38,426,669 | | | $ | 4 | | | 0 | | | $ | 0 | | | $ | 322,758 | | | $ | (38,544) | | | $ | 6,567 | | | $ | 290,785 | |
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| Net income | — | | | — | | | — | | | — | | | — | | | 3,695 | | | — | | | 3,695 | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 5,276 | | | 5,276 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 2,392 | | | — | | | | | 2,392 | |
| Net share settlements of stock-based awards | 29,090 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance at June 30, 2021 (Successor) | 38,455,759 | | | $ | 4 | | | 0 | | | $ | 0 | | | $ | 325,150 | | | $ | (34,849) | | | $ | 11,843 | | | $ | 302,148 | |
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| Common Stock | | Additional
Paid-in | | Accumulated | | Accumulated
Other
Comprehensive | | Total
Stockholders’ |
| Shares | | Amount | | Capital | | Deficit | | Income | | Equity |
| Balance at December 31, 2021 | 38,871,646 | | | $ | 4 | | | $ | 330,616 | | | $ | (26,436) | | | $ | 9,687 | | | $ | 313,871 | |
| Transfer of Private Warrants to Public Warrants | — | | | — | | | 605 | | | — | | | — | | | 605 | |
| Net income | — | | | — | | | — | | | 2,726 | | | — | | | 2,726 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (2,227) | | | (2,227) | |
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| Stock-based compensation | — | | | — | | | 1,354 | | | — | | | — | | | 1,354 | |
| Net share settlements of stock-based awards | 146,444 | | | — | | | (291) | | | — | | | — | | | (291) | |
| Shares issued for payment of contingent consideration | 2,659,574 | | | — | | | 23,936 | | | — | | | — | | | 23,936 | |
| Balance at March 31, 2022 | 41,677,664 | | | $ | 4 | | | $ | 356,220 | | | $ | (23,710) | | | $ | 7,460 | | | $ | 339,974 | |
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See Notes to Unaudited Consolidated and Combined Financial Statements
8
| | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. | Whole Earth Brands, Inc. |
| Condensed Consolidated and Combined Statements of Cash Flows | |
| Condensed Consolidated Statements of Cash Flows | | Condensed Consolidated Statements of Cash Flows |
| (In thousands of dollars) | (In thousands of dollars) | (In thousands of dollars) |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | | (Successor) | | | (Predecessor) | | Three Months Ended |
| | Six Months Ended June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From January 1, 2020 to June 25, 2020 | | March 31, 2022 | | March 31, 2021 |
| Operating activities | Operating activities | | | | | | | Operating activities | | | |
| Net loss | $ | (8,330) | | | $ | (505) | | | | $ | (34,136) | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
| Net income (loss) | | Net income (loss) | $ | 2,726 | | | $ | (12,025) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| Stock-based compensation | Stock-based compensation | 4,464 | | | 0 | | | | 0 | | Stock-based compensation | 1,650 | | | 1,639 | |
| Depreciation | Depreciation | 2,120 | | | 43 | | | | 1,334 | | Depreciation | 1,460 | | | 969 | |
| Amortization of intangible assets | Amortization of intangible assets | 8,857 | | | 141 | | | | 4,927 | | Amortization of intangible assets | 4,705 | | | 4,151 | |
| Deferred income taxes | Deferred income taxes | 808 | | | 9 | | | | (5,578) | | Deferred income taxes | (905) | | | 3,402 | |
| Asset impairment charges | 0 | | | 0 | | | | 40,600 | | |
| | Amortization of inventory fair value adjustments | Amortization of inventory fair value adjustments | 1,727 | | | 0 | | | | 0 | | Amortization of inventory fair value adjustments | (1,599) | | | 1,619 | |
| Non-cash loss on extinguishment of debt | Non-cash loss on extinguishment of debt | 4,435 | | | 0 | | | | 0 | | Non-cash loss on extinguishment of debt | — | | | 4,435 | |
| Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | 2,603 | | | 0 | | | | 0 | | Change in fair value of warrant liabilities | (861) | | | 2,362 | |
| Changes in current assets and liabilities: | Changes in current assets and liabilities: | | | | Changes in current assets and liabilities: | |
| Accounts receivable | Accounts receivable | (4,891) | | | (1,834) | | | | 7,726 | | Accounts receivable | (3,821) | | | (1,341) | |
| Inventories | Inventories | (8,142) | | | 311 | | | | 3,576 | | Inventories | (878) | | | (4,903) | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 762 | | | (29) | | | | 3,330 | | Prepaid expenses and other current assets | (842) | | | 665 | |
| Accounts payable, accrued liabilities and income taxes | Accounts payable, accrued liabilities and income taxes | (14,895) | | | (2,161) | | | | 507 | | Accounts payable, accrued liabilities and income taxes | 4,833 | | | (7,052) | |
| Other, net | Other, net | 1,028 | | | 28 | | | | (2,378) | | Other, net | (2,022) | | | 482 | |
| Net cash (used in) provided by operating activities | (9,454) | | | (3,997) | | | | 19,908 | | |
| Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | 4,446 | | | (5,597) | |
| | Investing activities | Investing activities | | | | Investing activities | |
| Capital expenditures | Capital expenditures | (4,624) | | | (10) | | | | (3,532) | | Capital expenditures | (3,276) | | | (1,544) | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | (186,601) | | | (376,674) | | | | 0 | | Acquisitions, net of cash acquired | — | | | (186,601) | |
| Proceeds from the sale of fixed assets | Proceeds from the sale of fixed assets | 4,257 | | | 0 | | | | 0 | | Proceeds from the sale of fixed assets | 50 | | | — | |
| Transfer from trust account | 0 | | | 178,875 | | | | 0 | | |
| Net cash used in investing activities | Net cash used in investing activities | (186,968) | | | (197,809) | | | | (3,532) | | Net cash used in investing activities | (3,226) | | | (188,145) | |
| | Financing activities | Financing activities | | | | Financing activities | |
| Proceeds from revolving credit facility | Proceeds from revolving credit facility | 25,000 | | | 0 | | | | 3,500 | | Proceeds from revolving credit facility | 30,000 | | | 25,000 | |
| Repayments of revolving credit facility | Repayments of revolving credit facility | (47,855) | | | 0 | | | | (8,500) | | Repayments of revolving credit facility | — | | | (47,855) | |
| Long-term borrowings | Long-term borrowings | 375,000 | | | 140,000 | | | | 0 | | Long-term borrowings | — | | | 375,000 | |
| Repayments of long-term borrowings | Repayments of long-term borrowings | (137,438) | | | 0 | | | | 0 | | Repayments of long-term borrowings | (938) | | | (136,500) | |
| Debt issuance costs | Debt issuance costs | (11,589) | | | (7,139) | | | | 0 | | Debt issuance costs | — | | | (11,589) | |
| Proceeds from sale of common stock and warrants | 0 | | | 75,000 | | | | 0 | | |
| Funding to Parent, net | 0 | | | 0 | | | | (11,924) | | |
| Net cash provided by (used in) financing activities | 203,118 | | | 207,861 | | | | (16,924) | | |
| Payment of contingent consideration | | Payment of contingent consideration | (29,108) | | | — | |
| | Tax withholdings related to net share settlements of stock-based awards | | Tax withholdings related to net share settlements of stock-based awards | (291) | | | — | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (337) | | | 204,056 | |
| | Effect of exchange rate changes on cash and cash equivalents | | Effect of exchange rate changes on cash and cash equivalents | 186 | | | 594 | |
| Net change in cash and cash equivalents | | Net change in cash and cash equivalents | 1,069 | | | 10,908 | |
| Cash and cash equivalents, beginning of period | | Cash and cash equivalents, beginning of period | 28,296 | | | 16,898 | |
| Cash and cash equivalents, end of period | | Cash and cash equivalents, end of period | $ | 29,365 | | | $ | 27,806 | |
| | Supplemental disclosure of cash flow information | | Supplemental disclosure of cash flow information | |
| Interest paid | | Interest paid | $ | 5,567 | | | $ | 4,491 | |
| Taxes paid, net of refunds | | Taxes paid, net of refunds | $ | 993 | | | $ | 3,535 | |
|
See Notes to Unaudited Consolidated and Combined Financial Statements
9
| | | | | | | | | | | | | | | | | | | | |
| Whole Earth Brands, Inc. |
| Condensed Consolidated and Combined Statements of Cash Flows (Continued) |
| (In thousands of dollars) |
| (Unaudited) |
| | | | | | |
| (Successor) | | | (Predecessor) |
| Six Months Ended June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From January 1, 2020 to June 25, 2020 |
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | 460 | | | 17 | | | | 215 | |
| Net change in cash and cash equivalents | 7,156 | | | 6,072 | | | | (333) | |
| Cash and cash equivalents, beginning of period | 16,898 | | | 55,535 | | | | 10,395 | |
| Cash and cash equivalents, end of period | $ | 24,054 | | | $ | 61,607 | | | | $ | 10,062 | |
| | | | | | |
| Supplemental disclosure of cash flow information | | | | | | |
| Interest paid | $ | 10,037 | | | $ | 113 | | | | $ | 798 | |
| Taxes paid, net of refunds | $ | 4,364 | | | $ | 0 | | | | $ | 2,244 | |
| Supplemental disclosure of non-cash investing | | | | | | |
| Non-cash capital expenditure | $ | 3,554 | | | $ | 0 | | | | $ | 0 | |
See Notes to Unaudited Consolidated and Combined Financial Statements
10
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Whole Earth Brands, Inc. and its consolidated subsidiaries (“Whole Earth Brands” or the “Company”) is a global industry-leading platform, focused on the “better for you” consumer packaged goods (“CPG”) and ingredients space. The Company has a global platform of branded products and ingredients, focused on the consumer transition towards natural alternatives and clean label products.
On June 24, 2020, Act II Global Acquisition Corp., a Cayman Islands exempted company (“Act II”), domesticated into a Delaware corporation (the “Domestication”), and on June 25, 2020 (the “Closing”), consummated the indirect acquisition (the “Business Combination”) of (i) all of the issued and outstanding equity interests of Merisant Company (“Merisant”), Merisant Luxembourg Sarl (“Merisant Luxembourg”), Mafco Worldwide LLC (“Mafco Worldwide”), Mafco Shanghai LLC (“Mafco Shanghai”), EVD Holdings LLC (“EVD Holdings”), and Mafco Deutschland GmbH (together with Merisant, Merisant Luxembourg, Mafco Worldwide, Mafco Shanghai, and EVD Holdings, and their respective direct and indirect subsidiaries, “Merisant and Mafco Worldwide”), and (ii) certain assets and liabilities of Merisant and Mafco Worldwide included in the Transferred Assets and Liabilities (as defined in the Purchase Agreement (as hereafter defined)), from Flavors Holdings Inc. (“Flavors Holdings”), MW Holdings I LLC (“MW Holdings I”), MW Holdings III LLC (“MW Holdings III”), and Mafco Foreign Holdings, Inc. (“Mafco Foreign Holdings,” and together with Flavors Holdings, MW Holdings I, and MW Holdings III, the “Sellers”), pursuant to that certain Purchase Agreement (the “Purchase Agreement”) entered into by and among Act II and the Sellers dated as of December 19, 2019, as amended. In connection with the Domestication, Act II changed its name to “Whole Earth Brands, Inc.”
Upon the completion of the Domestication, each of Act II’s then-issued and outstanding ordinary shares converted, on a 1-for-one basis, into shares of common stock of Whole Earth Brands. In conjunction with the Business Combination, the Company issued an aggregate of 7,500,000 shares of Whole Earth Brands common stock and 5,263,500 private placement warrants (the “Private Warrants”) exercisable for 2,631,750 shares of Whole Earth Brands common stock to certain investors. On the date of Closing, the Company’s common stock and warrants began trading on The Nasdaq Stock Market under the symbols “FREE” and “FREEW,” respectively.
As a result of the Business Combination, for accounting purposes, Act II was deemed to be the acquirer and Mafco Worldwide and Merisant Company were deemed to be the acquired parties and, collectively, the accounting predecessor. The Company’s financial statement presentation includes the combined financial statements of Mafco Worldwide and Merisant Company as the “Predecessor” for periods prior to the completion of the Business Combination and includes Whole Earth Brands, Inc. and its subsidiaries for periods after the Closing (referred to as the “Successor”).parties.
Basis of Presentation—The accompanying unaudited condensed consolidated and combined interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. The balance sheet data as of December 31, 20202021 was derived from the audited consolidated financial statements. These unaudited condensed consolidated and combined interim financial statements should be read in conjunction with the Company’s audited consolidated and combined financial statements for the year ended December 31, 20202021 included in the Company’s Annual Report on Form 10-K.
In the opinion of management, the financial statements contain all adjustments necessary to state fairly the financial position of the Company as of June 30, 2021March 31, 2022 and the results of operations and cash flows for all periods presented. All adjustments reflected in the accompanying unaudited condensed consolidated and combined financial statements, which management believes are necessary to state fairly the financial position, results of operations and cash flows, have been reflected and are of a normal recurring nature. Results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.
Principles of Consolidation—The condensed consolidated and combined financial statements include the accounts of Whole Earth Brands, Inc., and its indirect and wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Recently Adopted Accounting Pronouncements—The Company qualifies as an emerging growth company (an “EGC”) and as such, has elected the extended transition period for complying with certain new or revised accounting pronouncements. During the extended transition period, the Company is not subject to certain new or revised accounting standards applicable to public companies. The accounting pronouncements pending adoption below reflect effective dates for the Company as an EGC with the extended transition period.
In March 2017,December 2019, the FinancialFASB issued ASU 2019-12, “Income Taxes (Accounting Standards Codification “ASC” 740) - Simplifying the Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-7, “Compensation - Retirement Benefits (Topic 715).for Income Taxes.” Under the new guidance, employers are required to present the service cost component of net periodic benefit cost in the same statement of operations caption as other employee compensation costs arising from services rendered during the period. Employers are required to present the other componentsThe standard enhances and simplifies various aspects of the net periodic benefit cost separately fromincome tax accounting guidance. For public entities, the caption that includesstandard is effective for annual periods and interim periods beginning after December 15, 2020. This standard is effective for the service costs and outside of any subtotal of operating profit and are required to discloseCompany as an EGC for the caption used to present the other components of net periodic benefit cost, if not presented separately on the statement of operations.fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company adopted ASU 2017-7 effective in the second quarter of 2020.this standard on January 1, 2022. The adoption of this standard did not have an effecta material impact on the Company’s historically reported net income (loss) but resulted in a presentation reclassification which increased the Company’s historically reported operating profit by $0.1 million for the six months ended June 25, 2020.consolidated financial statements and related disclosures.
New Accounting Standards Not Yet Adopted—In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. The amendments in ASU 2020-4 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The new standard was effective upon issuance and upon adoption can be applied prospectively to applicable contract modifications made on or before December 31, 2022. The Company is currently evaluating the impact of adopting this standard but does not expect it to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes.” The standard enhances and simplifies various aspects of the income tax accounting guidance. For public entities, the standard is effective for annual periods and interim periods beginning after December 15, 2020. This standard is effective for the Company as an EGC for the fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20).” The standard modifies certain disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans by removing disclosures that are no longer considered cost beneficial, clarifying specific requirements of disclosures, and adding disclosure requirements identified as relevant. This standard is effective for the Company as an EGC for the fiscal years beginning after December 15, 2021. Early adoption is permitted. The amendments in ASU 2018-14 should be applied retrospectively to each period presented. The Company is currently evaluating the impact of adopting ASU 2018-14 on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The standard requires entities to estimate losses on financial assets measured at amortized cost, including trade receivables, debt securities and loans, using an expected credit loss model. The expected credit loss differs from the previous incurred losses model primarily in that the loss recognition threshold of “probable” has been eliminated and that expected loss should consider reasonable and supportable forecasts in addition to the previously considered past events and current conditions. Additionally, the guidance requires additional disclosures related to the further disaggregation of information related to the credit quality of financial assets by year of the asset’s origination for as many as five years. Entities must apply the standard provision as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This standard is effective for the Company as an EGC for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
Restructuring and Employee Termination Benefits—During 2020, the Company adopted restructuring plans to streamline processes and realize cost savings by consolidating facilities and eliminating various positions in operations and general and administrative areas.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
In connection with the restructuring plans, the Company recognized restructuring and other expenses of $2.8$1.7 million and $4.5 million, respectively, for the three and six months ended June 30, 2021. This includedMarch 31, 2021, primarily consisting of facility exit and other related costs of $2.3 million and $3.9 million incosts. During the three and six months ended June 30, 2021, respectively, and employee termination benefits of $0.6 million in the three and six months ended June 30, 2021. During the six months ended June 30, 2021,March 31, 2022, the Company paid employee termination benefits of $0.1 million. The Company hashad accrued severance expense related to the restructuring plans of $1.5$0.7 million and $1.0$0.8 million at June 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, which is recorded in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets.
Warrant Liabilities—The Company accounts for the Private Warrants in accordance with Accounting Standards Codification “ASC”ASC Topic 815, “Derivatives and Hedging.” Under the guidance contained in ASC Topic 815-40, the Private Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the Private Warrants as liabilities at their fair value and adjusts the warrants to fair value at each reporting period. The liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s statement of operations. The Private Warrants are valued using a Black-Scholes option pricing model.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Based on the views expressed in the SEC’s Staff Statement of April 12, 2021 in which the SEC staff clarified its interpretations of certain generally accepted accounting principles related to certain terms common in warrants issued by Special Purpose Acquisition Companies (“SPACs”), the Company determined that the Private Warrants should be treated as derivative liabilities rather than as components of equity, as previously presented as of December 31, 2020. Accordingly, the Company recorded out of period adjustments to the unaudited Condensed Consolidated Balance Sheet at January 1, 2021 to reclassify warrant liabilities of $8.1 million and transaction costs incurred by Act II of $1.1 million related to the issuance of the Private Warrants. Additionally, during the first quarter of 2021, the Company recognized the cumulative effect of the error on prior periods by recording a $1.2 million gain in the Statement of Operations to reflect the cumulative decrease in the fair value of the Private Warrants from the date of issuance through December 31, 2020. The Company concluded that this misstatement was not material to the current period or the previously filed financial statements.
NOTE 2: BUSINESS COMBINATIONS
On June 25, 2020, pursuant to the Business Combination, the Company indirectly acquired Merisant and Mafco Worldwide in a transaction accounted for as a business combination under ASC Topic 805, “Business Combinations,” and was accounted for using the acquisition method. Under the acquisition method, the acquisition date fair value of the consideration paid by the Company was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.
The following summarizes the purchase consideration (in thousands):
| | | | | |
Base cash consideration | $ | 387,500 | |
Closing adjustment | (764) | |
Total Purchase Price | $ | 386,736 | |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The Company recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):
| | | | | |
Cash and cash equivalents | $ | 10,062 | |
Accounts receivable | 45,769 | |
Inventories | 106,436 | |
Prepaid expenses and other current assets | 2,461 | |
Property, plant and equipment, net | 43,554 | |
Operating lease right-of-use assets | 12,541 | |
Intangible assets | 148,750 | |
Deferred tax assets, net | 1,065 | |
Other assets | 1,398 | |
Total assets acquired | 372,036 | |
Accounts payable | 18,590 | |
Accrued expenses and other current liabilities | 35,063 | |
Current portion of operating lease liabilities | 3,007 | |
Operating lease liabilities, less current portion | 12,208 | |
Deferred tax liabilities, net | 24,630 | |
Other liabilities | 16,227 | |
Total liabilities assumed | 109,725 | |
Net assets acquired | 262,311 | |
Goodwill | 124,425 | |
Total Purchase Price | $ | 386,736 | |
The values allocated to identifiable intangible assets and their estimated useful lives are as follows:
| | | | | | | | | | | | | | |
| Identifiable intangible assets | | Fair Value
(in thousands) | | Useful Life
(in years) |
| Customer relationships | | $ | 47,359 | | | 0.5 to 10 |
| Tradenames | | 90,691 | | | 25 |
| Product formulations | | 10,700 | | | Indefinite |
| | $ | 148,750 | | | |
Goodwill represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities. Of the purchase price allocated to goodwill, a total of $2.5 million will be deductible for income tax purposes pursuant to Internal Revenue Code (“IRC”) Section 197 over a 15-year period.
The Company’s allocation of purchase price was based upon valuations performed to determine the fair value of the net assets as of the acquisition date and was subject to adjustments for up to one year after the closing date of the acquisition to reflect final valuations. The allocation of purchase price was finalized in the second quarter of 2021.
In the six months ended June 30, 2021, the Company recorded measurement period adjustments to its allocation of purchase price resulting in an increase in deferred tax liabilities, net of $1.5 million, other liabilities of $0.7 million and goodwill of $2.2 million.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Direct transaction-related costs consist of costs incurred in connection with the Business Combination. Act II incurred transaction costs of $18.1 million prior to the Business Combination which are reflected within the accumulated deficit within the Consolidated Statement of Equity. During the three months ended March 31, 2021, the Company reclassified $1.1 million of Act II transaction costs related to the issuance of the Private Warrants that had been previously recorded in additional paid-in capital in connection with the Business Combination to accumulated deficit (See Note 1).
Swerve Acquisition—On November 10, 2020, the Company executed and closed a definitive Equity Purchase Agreement (the “Purchase Agreement”) with RF Development, LLC (“RF Development”), Swerve, L.L.C. (“Swerve LLC”) and Swerve IP, L.L.C. (“Swerve IP” and together with Swerve LLC, “Swerve”). Swerve is a manufacturer and marketer of a portfolio of zero sugar, keto-friendly, and plant-based sweeteners and baking mixes. The Company purchased all of the issued and outstanding equity interests of both Swerve LLC and Swerve IP from RF Development for $80 million in cash, subject to customary post-closing adjustments. In connection with the acquisition of Swerve, the Company incurred transaction-related costs of $0.3 million in the six months ended June 30, 2021. Swerve is included within the Company’s Branded CPG reportable segment. Swerve’s results are included in the Company’s consolidated statement of operations from the date of acquisition.
The following summarizes the purchase consideration (in thousands):
| | | | | |
Base cash consideration | $ | 80,000 | |
Closing adjustment | (968) | |
Total Purchase Price | $ | 79,032 | |
The Company recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):
| | | | | |
| |
Accounts receivable | $ | 3,223 | |
Inventories | 6,824 | |
Prepaid expenses and other current assets | 223 | |
Property, plant and equipment, net | 143 | |
Operating lease right-of-use assets | 76 | |
Intangible assets | 36,300 | |
| |
Other assets | 3 | |
Total assets acquired | 46,792 | |
Accounts payable | 3,477 | |
Accrued expenses and other current liabilities | 288 | |
Current portion of operating lease liabilities | 48 | |
Operating lease liabilities, less current portion | 28 | |
| |
| |
Total liabilities assumed | 3,841 | |
Net assets acquired | 42,951 | |
Goodwill | 36,081 | |
Total Purchase Price | $ | 79,032 | |
The values allocated to identifiable intangible assets and their estimated useful lives are as follows:
| | | | | | | | | | | |
| Identifiable intangible assets | Fair Value (in thousands) | | Useful Life (in years) |
| Customer relationships | $ | 3,200 | | | 10 |
| Tradenames | 33,100 | | | 25 |
| $ | 36,300 | | | |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Goodwill represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities. The entire amount of the purchase price allocated to goodwill will be deductible for income tax purposes pursuant to IRC Section 197 over a 15-year period.
The Company’s allocation of purchase price was based upon valuations performed to determine the fair value of the net assets as of the acquisition date and is subject to adjustments for up to one year after the closing date of the acquisition to reflect final valuations.
Wholesome Acquisition—On December 17, 2020, the Company entered into a stock purchase agreement (the “Wholesome Purchase Agreement”) with WSO Investments, Inc. (“WSO Investments” and together with its subsidiaries, “Wholesome” and affiliates). WSO Investments is the direct parent of its wholly-owned subsidiary Wholesome Sweeteners, Incorporated, which was formed to import, market, distribute, and sell organic sugars, unrefined specialty sugars, and related products. Wholesome is included within the Company’s Branded CPG reportable segment. Wholesome’s results are included in the Company’s consolidated statement of operations from the date of acquisition.
On February 5, 2021, pursuant to the terms of the Wholesome Purchase Agreement, the Company purchased and acquired all of the issued and outstanding shares of capital stock for an initial cash purchase price of $180 million plus up to an additional $55 million (the “Earn-Out Amount”) upon the satisfaction of certain post-closing financial metrics. Subject to the terms and conditions of the Wholesome Purchase Agreement payment of the Earn-Out Amount, in whole or in part, iswas subject to Wholesome achieving certain EBITDA thresholds at or above approximately $30 million during the period beginning August 29, 2020, and ending December 31, 2021 and is expected to be paid by March 31, 2022.(the “Earn-Out Period”). A portion of the Earn-Out Amount (up to $27.5 million) maycould be paid, at the Company’s election, in freely tradeable, registered shares of Company common stock. The fair valuestock calculated using the 20-day volume weighted average trading price per share as of the date of determination. Calculation of the achievement of the Earn-Out Amount assumes a full payout.was subject to certain adjustments more thoroughly described in the Wholesome Purchase Agreement. In connection with the acquisition of Wholesome, the Company incurred transaction-related costs of $0.2 million and $4.6$4.4 million in the three and six months ended June 30,March 31, 2022 and 2021, respectively.
Following the completion of the Earn-Out Period, the Company determined, in accordance with the terms of the Purchase Agreement, that the sellers were entitled to receive the Earn-Out Amount in full. The Company elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under the Company’s revolving credit facility. The settlement of the earn-out resulted in a non-cash gain of $1.1 million that was recorded in the first quarter of 2022 which represents the difference in the value of the common stock issued using the 20-day volume weighted average trading price per share as compared to the trading price on the date of issuance.
The following summarizes the preliminary purchase consideration (in thousands):
| | | | | |
| Base cash consideration | $ | 180,000 | |
Estimated closingClosing adjustment | 13,29413,863 | |
| Fair value of Earn-Out Amount | 52,395 | |
| Total Purchase Price | $ | 245,689246,258 | |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The Company preliminarily recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):
| | | | | |
| Cash and cash equivalents | $ | 2,664 | |
| Accounts receivable | 15,868 | |
| Inventories | 78,52276,879 | |
| Prepaid expenses and other current assets | 1,2711,322 | |
| Property, plant and equipment, net | 3,134 | |
| Operating lease right-of-use assets | 7,585 | |
| Intangible assets | 104,500 | |
| |
| Other assets | 1,189 | |
| Total assets acquired | 214,733213,141 | |
| Accounts payable | 5,251 | |
| Accrued expenses and other current liabilities | 10,576 | |
| Current portion of operating lease liabilities | 1,435 | |
| Operating lease liabilities, less current portion | 6,150 | |
| Deferred tax liabilities, net | 26,68524,234 | |
| |
| Total liabilities assumed | 50,09747,646 | |
| Net assets acquired | 164,636165,495 | |
| Goodwill | 81,05380,763 | |
| Total Purchase Price | $ | 245,689246,258 | |
The preliminary values allocated to identifiable intangible assets and their estimated useful lives are as follows:
| | | | | | | | | | | |
| Identifiable intangible assets | Fair Value (in thousands) | | Useful Life (in years) |
| Customer relationships | $ | 55,700 | | | 10 |
| Tradenames | 48,800 | | | 25 |
| $ | 104,500 | | | |
Goodwill represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities. Of the purchase price allocated to goodwill, a total of $4.7 million will be deductible for income tax purposes pursuant to IRC Section 197 over a 9-year period.
The Company’s preliminary allocation of purchase price was based upon preliminary valuations performed to determine the fair value of the net assets as of the acquisition date and iswas subject to adjustments for up to one year after the closing date of the acquisition to reflect final valuations. The accounting for the Wholesome acquisition is not complete as the valuation for certain acquired assets and liabilities have not been finalized. These final valuationsallocation of the assets and liabilities could have a material impact on the preliminary purchase price allocation disclosed above.was finalized in the first quarter of 2022.
In the second quarter of 2021, the Company recorded measurement period adjustments to its initial allocation of purchase price as a result of ongoing valuation procedures on assets and liabilities assumed, including (i) an increase in purchase price of $3.1$3.6 million due to a change inthe finalization of the closing adjustment estimate;adjustment; (ii) a decrease to inventory of $0.2$1.8 million; (iii) an increase in prepaid expenses and other current assets of $0.5 million; (iv) an increase in property, plant and equipment of $0.4 million; (v) a decrease to intangible assets of $1.9 million; (vi) a decrease to other assets of $0.1 million; (vii) a decrease to accrued expenses and other current liabilities of $2.7 million; (viii) a decrease to deferred tax liabilities, net of $0.3$2.8 million; and (ix) an increase to goodwill of $1.3$1.0 million due to the incremental measurement period adjustments discussed in items (i) through (viii). The impact of measurement period adjustments to the results of operations was immaterial.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The results of the Company’s operations for the three and six months ended June 30,March 31, 2021 includes the results of Wholesome since February 5, 2021. Product revenues, net and operating income of Wholesome included in the Company’s condensed consolidated statement of operations for the three months ended June 30,March 31, 2021 was $44.6$27.7 million and $3.4 million, respectively, and for the six months ended June 30, 2021 was $72.2 million and $5.1$1.7 million, respectively.
Pro Forma Financial Information—The following unaudited pro forma financial information summarizes the results of operations of the Company for the Companythree months ended March 31, 2021 as though the Business Combination and Swerve acquisition had occurred on January 1, 2019 and the Wholesome acquisition had occurred on January 1, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pro Forma
Statements of Operations |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| Revenue | $ | 126,493 | | | $ | 128,297 | | | $ | 252,698 | | | $ | 246,182 | |
| Net income (loss) | $ | 5,828 | | | $ | 3,043 | | | $ | 4,468 | | | $ | (44,173) | |
| | | | | | | | | | | |
| | | | | | | Pro Forma Statement of Operations |
| | | | | |
| | | | | | | Three Months Ended
March 31, 2021 |
| Revenue | | | | | | | $ | 126,205 | |
| Net loss | | | | | | | $ | (3,862) | |
The unaudited pro forma financial information does not assume any impacts from revenue, cost or other operating synergies that could be generated as a result of the acquisitions.acquisition. The unaudited pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved had the Business Combination and Swerve acquisitions been consummated on January 1, 2019 and the Wholesome acquisition been consummated on January 1, 2020.
The Successor and Predecessor periods have been combined in the pro forma financial information for the three and six months ended June 30,March 31, 2021 and 2020 and includeincludes adjustments to reflect intangible asset amortization based on the economic values derived from definite-lived intangible assets, interest expense on the new debt financing, depreciation expense for certain property, plant and equipment that have been adjusted to fair value, and the release of the inventory fair value adjustments into cost of goods sold. These adjustments are net of taxes. The results of the Company’s operations for the three months ended March 31, 2022 includes Wholesome for the entire period and therefore pro forma financial information is not required.
NOTE 3: INVENTORIES
Inventories consisted of the following (in thousands):
| | | | June 30, 2021 | | | December 31, 2020 | | March 31, 2022 | | | December 31, 2021 |
| Raw materials and supplies | Raw materials and supplies | $ | 113,204 | | | | $ | 66,487 | | Raw materials and supplies | $ | 134,961 | | | | $ | 129,712 | |
| Work in process | Work in process | 1,227 | | | | 562 | | Work in process | 2,145 | | | | 1,480 | |
| Finished goods | Finished goods | 81,545 | | | | 44,650 | | Finished goods | 77,952 | | | | 81,738 | |
| Total inventories | Total inventories | $ | 195,976 | | | | $ | 111,699 | | Total inventories | $ | 215,058 | | | | $ | 212,930 | |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
| | | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Gross
Amount | | Accumulated
Amortization | | Net
Amount | | Gross
Amount | | Accumulated
Amortization | | Net
Amount | | Gross
Amount | | Accumulated
Amortization | | Net
Amount | | Gross
Amount | | Accumulated
Amortization | | Net
Amount |
| Other intangible assets subject to amortization | Other intangible assets subject to amortization | | | | | | | | | | | | | Other intangible assets subject to amortization | | | | | | | | | | | | |
| Customer relationships (useful life of 5 to 10 years) | Customer relationships (useful life of 5 to 10 years) | | $ | 106,113 | | | $ | (8,453) | | | $ | 97,660 | | | $ | 50,877 | | | $ | (3,020) | | | $ | 47,857 | | Customer relationships (useful life of 5 to 10 years) | | $ | 105,930 | | | $ | (17,435) | | | $ | 88,495 | | | $ | 106,013 | | | $ | (14,478) | | | $ | 91,535 | |
| Tradenames (useful life of 25 years) | Tradenames (useful life of 25 years) | | 174,950 | | | (5,398) | | | 169,552 | | | 128,155 | | | (2,185) | | | 125,970 | | Tradenames (useful life of 25 years) | | 172,900 | | | (10,503) | | | 162,397 | | | 173,522 | | | (8,818) | | | 164,704 | |
| Total | Total | | $ | 281,063 | | | $ | (13,851) | | | $ | 267,212 | | | $ | 179,032 | | | $ | (5,205) | | | $ | 173,827 | | Total | | $ | 278,830 | | | $ | (27,938) | | | 250,892 | | | $ | 279,535 | | | $ | (23,296) | | | 256,239 | |
| Other intangible assets not subject to amortization | Other intangible assets not subject to amortization | | | | | | | | | | | | | Other intangible assets not subject to amortization | | | | | | | | | |
| Product formulations | Product formulations | | 10,700 | | | 10,700 | | Product formulations | | 10,700 | | | 10,700 | |
| Total other intangible assets, net | Total other intangible assets, net | | 277,912 | | | 184,527 | | Total other intangible assets, net | | 261,592 | | | 266,939 | |
| Goodwill | Goodwill | | 241,717 | | | 153,537 | | Goodwill | | 241,535 | | | 242,661 | |
| Total goodwill and other intangible assets | Total goodwill and other intangible assets | | $ | 519,629 | | | $ | 338,064 | | Total goodwill and other intangible assets | | $ | 503,127 | | | $ | 509,600 | |
At June 30, 2021March 31, 2022 and December 31, 2020,2021, goodwill at Branded CPG was $237.9$237.7 million and $150.3$238.9 million, respectively, and goodwillrespectively. Goodwill at Flavors & Ingredients was $3.8 million at both March 31, 2022 and $3.2 million, respectively.December 31, 2021.
The Successor’s amortization expense for intangible assets was $4.7 million and $8.9$4.2 million for the three and six months ended June 30,March 31, 2022 and 2021, and $0.1 million for the period from June 26, 2020 through June 30, 2020. The Predecessor’s amortization expense for intangible assets was $2.4 million and $4.9 million for the periods from April 1, 2020 to June 25, 2020 and January 1, 2020 to June 25, 2020, respectively.
Amortization expense relating to amortizable intangible assets as of June 30, 2021March 31, 2022 for the next five years is expected to be as follows (in thousands):
| | Remainder of 2021 | $ | 9,358 | | |
| 2022 | 18,717 | | |
| Remainder of 2022 | | Remainder of 2022 | $ | 14,041 | |
| 2023 | 2023 | 18,717 | | 2023 | 18,721 | |
| 2024 | 2024 | 18,717 | | 2024 | 18,721 | |
| 2025 | 2025 | 18,483 | | 2025 | 18,488 | |
| 2026 | 2026 | 18,263 | | 2026 | 18,267 | |
| 2027 | | 2027 | 17,040 | |
NOTE 5: DEBT
Debt consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Term loan, due 2028 | $ | 371,250 | | | $ | 372,187 | |
| Revolving credit facility, due 2026 | 55,000 | | | 25,000 | |
| Less: current portion | (3,750) | | | (3,750) | |
| Less: unamortized discount and debt issuance costs | (9,605) | | | (9,953) | |
| Total long-term debt | $ | 412,895 | | | $ | 383,484 | |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
NOTE 5: DEBT
Debt consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Term loan | $ | 374,063 | | | $ | 136,500 | |
| Revolving credit facility | 25,000 | | | 47,855 | |
| Less: current portion | (3,750) | | | (7,000) | |
| Less: unamortized discount and debt issuance costs | (10,654) | | | (4,693) | |
| Total long-term debt | $ | 384,659 | | | $ | 172,662 | |
OnAt both March 31, 2022 and December 31, 2020,2021, the Company’s senior secured loan agreement consisted of a senior secured first lien term loan facility of $140 million and a first lien revolving credit facility of up to $50 million. As of December 31, 2020, there were $2.1 million of outstanding letters of credit that reduced the Company’s availability under the revolving credit facility.
As of December 31, 2020, term loan borrowings were $131.8 million, net of debt issuance costs of $4.7 million. There were $47.9 million of borrowings under the revolving credit facility as of December 31, 2020. Additionally, as of December 31, 2020, the Company’s unamortized debt issuance costs related to the revolving credit facility were $1.7 million which are included in other assets in the condensed consolidated balance sheet.
In connection with the closing of the Wholesome Transaction, on February 5, 2021, further discussed in Note 2, the Company and certain of its subsidiaries entered into an amendment and restatement agreement (the “Amendment Agreement”) with Toronto Dominion (Texas) LLC, which amended and restated its existing senior secured loan agreement dated as of June 25, 2020 (as amended on September 4, 2020, the “Existing Credit Agreement,” and as further amended by the Amendment Agreement, the “Amended and Restated Credit Agreement”), by and among Toronto Dominion (Texas) LLC, as administrative agent, certain lenders signatory thereto and certain other parties.
The Amended and Restated Credit Agreement provides for senior secured financing consisting of the following credit facilities: (a) a senior secured term loan facility in the aggregate principal amount of $375 million (the “Term Loan Facility”); of $375 million and (b) a revolving credit facility in an aggregate principal amount of up to $75 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”). The Revolving Facility has a $15 million sub-facility for the issuance of letters of creditAt both March 31, 2022 and a $15 million sublimit for swing line loans. The Company used the proceeds under the Term Loan Facility to (i) repay and refinance existing indebtedness of WSO Investments; (ii) pay the cash consideration for the Wholesome Transaction; (iii) repay and refinance outstanding borrowings under the Existing Credit Agreement; and (iv) pay fees and expenses incurred in connection with the foregoing. The proceeds of the Revolving Facility can be used to finance working capital needs, for general corporate purposes, and for working capital adjustments payable under the Wholesome Purchase Agreement.
Loans outstanding under the Credit Facilities accrue interest at a rate per annum equal to (i) with respect to the Revolving Facility and letters of credit, (A) 2.75%, in the case of base rate advances, and (B) 3.75% in the case of LIBOR advances, and (ii) with respect to the Term Loan Facility, (A) 3.50%, in the case of base rate advances, and (B) 4.50% in the case of LIBOR advances, with a LIBOR floor of 1.00% with respect to the Term Loan Facility, and 0.00% with respect to the Revolving Facility and letters of credit, and base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, LIBOR for a one-month interest period plus 1.00%, and with respect to the Revolving Facility and letters of credit, 0.00%, or with respect to the Term Loan Facility, 2.00%, and undrawn amounts under the Revolving Facility will accrue a commitment fee at a rate per annum equal to 0.50% on the average daily undrawn portion of the commitments thereunder. As of June 30,December 31, 2021, there were $2.1 million of outstanding letters of credit that reduced the Company’s availability under the revolving credit facility. The Company’s unamortized discounts and debt issuance costs related to the revolving credit facilityTerm Loan Facility were $2.0$9.6 million as of June 30,and $10.0 million at March 31, 2022 and December 31, 2021, respectively. The unamortized debt issuance costs related to the Revolving Facility were $1.7 million and $1.8 million at March 31, 2022 and December 31, 2021, respectively, and are included in other assets in the condensed consolidated balance sheet.
The obligations under the Credit Facilities are guaranteed by certain direct or indirect wholly-owned domestic subsidiaries of the Company, other than certain excluded subsidiaries, including, but not limited to, immaterial subsidiaries and foreign subsidiaries. The Credit Facilities are secured by substantially all of the personal property of the Company and the guarantor subsidiaries (in each case, subject to certain exclusions and qualifications).
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The Credit Facilities require the Company to make certain mandatory prepayments, with (i) 100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property in excess of $5 million in any fiscal year, subject See Note 7 to the ability to reinvest such proceedsCompany’s consolidated and certain other exceptions, (ii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the definitive agreements (but excluding debt incurred to refinance the Credit Facilities) and (iii) 50% of “Excess Cash Flow,” as definedcombined financial statements in the Amended and Restated Credit Agreement, with a reduction to 25% if the total net leverage ratioits Annual Report on Form 10-K for the fiscal year is less than or equal to 3.50 to 1.00 but greater than 3.00 to 1.00,ended December 31, 2021 for further information and a reduction to 0% if the total net leverage ratio for the fiscal year is less than or equal to 3.00 to 1.00. The Company also is required to make quarterly amortization payments equal to 0.25% per annum of the original principal amount ofsignificant terms and conditions associated with the Term Loan Facility (subject to reductions by optional and mandatory prepaymentsRevolving Facility.
In connection with the closing of the loans).
Wholesome Transaction, on February 5, 2021, the Company and certain of its subsidiaries entered into an amendment and restatement agreement (the “Amended and Restated Agreement”) which amended and restated its then existing senior secured loan agreement dated as of June 25, 2020. As of the date of the amendment of the credit facilities, the aggregate unamortized debt issuance costs totaled $6.2 million, of which $4.4 million was expensed as a loss on extinguishment of debt.debt in the first quarter of 2021. Additionally, in connection with the Amended and Restated Credit Agreement, the Company paid fees to certain lenders of $3.8 million, which was considered a debt discount, all of which was deferred, and incurred transaction costs of $8.9 million, of which $7.8 million was deferred and $1.1 million was expensed as part of loss on extinguishment and debt transaction costs.costs in the first quarter of 2021.
NOTE 6: WARRANTS
As of the date of the Business Combination, the Company had approximately 20,263,500 warrants outstanding, consisting of (i) 15,000,000 public warrants originally sold as part of the units issued in Act II'sII’s initial public offering (the “Public Warrants”) and (ii) 5,263,500 Private Warrants that were sold by Act II to the PIPE Investors in conjunction with the Business Combination (collectively with the Public Warrants, the “Warrants”). Each warrant is exercisable for one-half of one share of the Company’s common stock at a price of $11.50 per whole share, subject to adjustment. Warrants may only be exercised for a whole number of shares as no fractional shares will be issued. As of June 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had 17,256,30019,491,320 and 15,982,52018,929,880 Public Warrants outstanding, respectively, and 3,007,200771,980 and 4,280,9801,333,420 Private Warrants outstanding, respectively.
The exercise price and number of ordinaryThere were no Warrants exercised for shares issuable upon exercise of the Warrants may be adjusted in certain circumstances includingCompany’s common stock in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. If the number of shares of Common Stock purchasable upon the exercise of the Warrants is adjusted, the Warrant price shall be adjusted proportionally. In no event will the Company be required to net cash settle the Warrants. Additionally, the Warrants became exercisable as of July 27, 2020three months ended March 31, 2022 and expire five years from the date of the Business Combination or earlier upon redemption or liquidation.
There were 0 Warrants exercised as of June 30, 2021.
Public Warrants—The Public Warrants are subject to redemption by the Company:
•in whole and not in part;
•at a price of $0.01 per public warrant;
•upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
•if, and only if, the reported last sale price of the ordinary shares for any 20 trading days within a 30-day trading period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders equals or exceeds $18 per share (as adjusted).
The Company may not redeem the warrants as described above unless a registration statement under the Securities Act covering the issuance of the ordinary shares issuable upon exercise of the warrants is then effective and a current prospectus relating to those ordinary shares is available throughout the 30-day redemption period. If any such registration statement does not remain effective after closing of the Business Combination, the Company has the right to redeem the warrants on a “cashless” exercise basis. The public warrant holders only have the right to exercise their warrants pursuant to a “cashless” exercise if the Company does not maintain an effective registration statement.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Private Warrants—The Private Warrants are identical to the Public Warrants, except that so long as they are held by the PIPE Investors or any permitted transferees, as applicable, the Private Warrants: (i) may be exercised for cash or on a cashless basis, (ii) were not allowed to be transferred, assigned or sold until thirty (30) days after the closing of the Business Combination, and (iii) shall not be redeemable by the Company. Upon the transfer of a Private Warrant to a party other than a PIPE Investor or a permitted transferee, the Private Warrants become Public Warrants and the fair market value of the Private Warrants at the date of transfer is reclassified to equity. See Note 1 for additional discussion.
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and records in its consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820 “Fair Value Measurement and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:
•Level 1 – Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market.
•Level 2 – Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data.
•Level 3 – Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Current Assets and Other Financial Assets and Liabilities—Cash and cash equivalents, trade accounts receivable and trade accounts payable are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.
Contingent Consideration Payable—The Company measuresmeasured the contingent consideration payable at fair value. The fair value of the contingent consideration utilized Level 3 inputs as it is based on significant inputs not observable in the market as of June 30,December 31, 2021, such as projected financial information and discount rate.
Debt—The Company measures its term loan and revolving facilities at original carrying value including accrued interest, net of unamortized deferred financing costs and fees. The fair value of the credit facilities approximates carrying value, as they consist of variable rate loans.
Warrant Liabilities—The Company classifies its Private Warrants as liabilities in accordance with ASC Topic 815. The Company estimates the fair value of the Private Warrants using a Black-Scholes options pricing model. The fair value of the Private Warrants utilized Level 3 inputs as it is based on significant inputs not observable in the market as of June 30,March 31, 2022 and December 31, 2021.
The fair value of the Private Warrants was estimated at June 30,March 31, 2022 and December 31, 2021 using a Black-Scholes options pricing model and the following assumptions:
| | | | | | | | |
Input | | June 30, 2021 |
Asset price | | $ | 14.50 | |
Exercise price | | $ | 11.50 | |
Risk-free interest rate | | 0.66 | % |
Expected volatility | | 36.0 | % |
Expected term (years) | | 3.99 |
Dividend yield | | 0.0 | % |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
| | | | | | | | | | | | | | |
| Input | | March 31, 2022 | | December 31, 2021 |
| Asset price | | $ | 7.16 | | $ | 10.74 |
| Exercise price | | $ | 11.50 | | $ | 11.50 |
| Risk-free interest rate | | 2.45% | | 1.04% |
| Expected volatility | | 48.0% | | 41.0% |
| Expected term (years) | | 3.24 | | 3.49 |
| Dividend yield | | 0.0% | | 0.0% |
The fair value of warrant liabilities as of June 30, 2021March 31, 2022 was $8.2$0.6 million. The changes in the warrant liabilities during the sixthree months ended June 30, 2021March 31, 2022 were as follows (in thousands):
| | | | | | | | |
| | |
Reclassification of fairFair value of Private Warrants to warrant liabilities as of January 1,December 31, 2021 | | $ | 8,139 | |
Cumulative impact of change in fair value of Private Warrants in 2020 | | (1,161)2,053 | |
| Transfer of Private Warrants to Public Warrants | | (2,502)(605) | |
Change in fair value of warrant liabilities in Q1 20212022 | | 3,523 (861) | |
Fair value of warrant liabilities as of March 31, 20212022 | | $ | 7,999587 | |
| | |
Change in fair value of warrant liabilities in Q2 2021 | | 241 | |
Fair value of warrant liabilities as of June 30, 2021 | | $ |
| 8,240 | |
| | |
| | |
NOTE 8: COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims, pending and possible legal actions for product liability and other damages, and other matters arising out of the conduct of the business. The Company believes, based on current knowledge and consultation with counsel, that the outcome of such claims and actions will not have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.
As of June 30, 2021, the Company had obligations to purchase $27.5 million of raw materials through 2026; however, it is unable to make reasonably reliable estimates of the timing of such payments.
NOTE 9: INCOME TAXES
For the Successor period, theThe Company’s provision for income taxes consists of U.S., state and local, and foreign taxes. The Company has significant operations in various locations outside the U.S. The annual effective tax rate is a composite rate reflecting the earnings in the various locations at their applicable statutory tax rates.
For the Predecessor period, income taxes as presented herein attribute current and deferred income taxes of the Company’s financial statements in a manner that is systematic, rational, and consistent with the asset and liability method described by ASC Topic 740, “Income Taxes.” Accordingly, the Company’s income tax provision during the predecessor period was prepared following the separate return method. The separate return method applies ASC Topic 740 to the stand-alone financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a stand-alone enterprise. Use of the separate return method may result in differences when the sum of the amounts allocated to stand-alone tax provisions are compared with amounts presented in consolidated financial statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein. The consolidated financial statements reflect the Company’s portion of income taxes payable as if the Company had been a separate taxpayer.
The Successor’s income tax benefit was $4.2 million for the three months ended June 30, 2021, which includes a discrete income tax benefit of $4.2 million related to the receipt of a beneficial tax ruling in Switzerland which allows for future amortization deductions, the reversal of uncertain tax position liabilities as a result of the lapse of applicable statute of limitations, partially offset by a deferred tax provision related to a tax law change in the United Kingdom which was enacted during the quarter ended June 30, 2021. The effective tax rate for the three months ended June 30, 2021 was an income tax benefit of 882.8% on a pretax loss of $0.5 million which differs from the statutory federal rate of 21% primarily due to these discrete tax items.
The Successor’s income tax benefit was $7.8 million for the six months ended June 30, 2021, which includes a discrete income tax benefit of $4.3 million including the $4.2 million benefit recorded in the three months ended June 30, 2021 described above. The effective tax rate for the six months ended June 30, 2021 was an income tax benefit of 48.5% on a pretax loss of $16.2 million. The effective tax rate differs from the federal rate of 21% primarily due to these discrete tax benefits.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The Successor’sCompany’s income tax provision was $0.01$1.1 million for the period from June 26, 2020 through June 30, 2020.three months ended March 31, 2022. The effective tax rate for the three months ended March 31, 2022 was (2.0)% from June 26, 2020 through June 30, 2020 andan income tax provision of 29.2% on pre-tax income of $3.9 million which differs from the statutory federal tax rate of 21% primarily due to state and local taxes, non-deductible permanent differences, limited benefit on current year interest deductions and losses in certain jurisdictions, the change in the fair value of warrant liabilities, foreign income at different rates and the U.S. tax effect of international operations including Global Intangible Low-Taxed Income (“GILTI”) recorded during the period and U.S. state taxes. period.
The Predecessor’sCompany’s income tax benefit was $0.4 million and $3.5$3.7 million for the periods from April 1, 2020 through June 25, 2020 and January 1, 2020 through June 25, 2020, respectively, resulting in effective tax rates of 6.2% and 9.3%, respectively.three months ended March 31, 2021. The effective tax ratesrate for the periodsthree months ended June 25, 2020 differMarch 31, 2021 was an income tax benefit of 23.4% on a pre-tax loss of $15.7 million. The effective tax rate differs from the statutory federal rate of 21% primarily due to certain non-deductible expenses including transaction costs, the impactchange in the fair value of the impairment charges of non-deductible goodwillwarrant liabilities, stock-based compensation expense and the U.S. tax effect of international operations including GILTI.GILTI recorded during the period.
As of June 30, 2021At both March 31, 2022 and December 31, 2020,2021, the Company had an uncertain tax position liability of $0.2 million, and $1.2 million, respectively, including interest and penalties. The unrecognized tax benefits include amounts related primarily to various state and foreign tax issues.
NOTE 10: PENSION BENEFITS
Certain current and former employees of the Company are covered under a funded qualified defined benefit retirement plan. Plan provisions covering certain of the Company’s salaried employees generally provide pension benefits based on years of service and compensation. Plan provisions covering certain of the Company’s union members generally provide stated benefits for each year of credited service. The Company’s funding policy is to contribute annually the statutory required amount as actuarially determined. The Company froze the pension plan on December 31, 2019. In addition, the Company has unfunded non-qualified plans covering certain salaried employees with additional retirement benefits in excess of qualified plan limits imposed by federal tax law. The Company uses December 31 as a measurement date for the plans.
In February 2021, the Compensation Committee approved the termination of the Company’s qualified defined benefit retirement plan at Flavors & Ingredients. During the fourth quarter of 2021, the Company expectsoffered the option of receiving a lump sum payment to offer a lump-sum payoutcertain participants with vested benefits in lieu of receiving monthly annuity payments. Approximately 125 participants elected to receive the settlement, and lump sum payments of approximately $16.8 million were paid from plan assets to these participants in December 2021. The benefit obligation settled approximated payments to plan participants prior to completingand a pre-tax settlement gain of $0.5 million was recorded in the purchasefourth quarter of 2021. On February 11, 2022, the Company purchased non-participating annuity contracts that will transferto settle the remaining pension obligationliabilities of the plan for approximately $9.5 million which was fully funded by plan assets. The annuity contracts purchased resulted in a settlement gain of approximately $1.0 million that was recorded in the first quarter of 2022. The remaining surplus of the plan will be used, as prescribed in the applicable regulations, to an insurance company.fund future contributions to the defined contribution plan at Flavors & Ingredients.
The components of net periodic benefit (credit) cost for the Company’s defined benefit pension plans for the Successor and Predecessor were was as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 31, 2022 | | March 31, 2021 |
| Service cost | | | | | $ | 10 | | | $ | 16 | |
| Interest cost | | | | | 127 | | | 259 | |
| Expected return on plan assets | | | | | (53) | | | (399) | |
| Recognized actuarial loss | | | | | — | | | 9 | |
| | | | | | | |
| Settlement gain | | | | | (1,017) | | | — | |
| Net periodic benefit credit | | | | | $ | (933) | | | $ | (115) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 |
| Service cost | $ | 16 | | | $ | 32 | | | $ | 0 | | | | $ | 27 | | | $ | 41 | |
| Interest cost | 260 | | | 519 | | | 0 | | | | 542 | | | 593 | |
| Expected return on plan assets | (400) | | | (799) | | | 0 | | | | (817) | | | (817) | |
| Recognized actuarial loss | 9 | | | 18 | | | 0 | | | | 236 | | | 276 | |
| Amortization of prior service cost | 0 | | | 0 | | | 0 | | | | 33 | | | 33 | |
| Net periodic benefit (credit) cost | $ | (115) | | | $ | (230) | | | $ | 0 | | | | $ | 21 | | | $ | 126 | |
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net periodic benefit (credit) cost is reflected in the Company’s condensed consolidated financial statements as follows for the Successor and Predecessor periods presented (in thousands):
| | | (Successor) | | | (Predecessor) | | | Three Months Ended |
| | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | | | March 31, 2022 | | March 31, 2021 |
| | Selling, general and administrative expense | Selling, general and administrative expense | $ | 16 | | | $ | 32 | | | $ | 0 | | | | $ | 27 | | | $ | 41 | | Selling, general and administrative expense | | $ | 10 | | | $ | 16 | |
| Other income, net | Other income, net | (131) | | | (262) | | | 0 | | | | (6) | | | 85 | | Other income, net | | (943) | | | (131) | |
| Net periodic benefit (credit) cost | $ | (115) | | | $ | (230) | | | $ | 0 | | | | $ | 21 | | | $ | 126 | | |
| Net periodic benefit credit | | Net periodic benefit credit | | $ | (933) | | | $ | (115) | |
The Company currently does not expect to make contributions to its funded defined benefit pension plan in 20212022 due to the funded status.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
NOTE 11: STOCK-BASED COMPENSATION
On June 24, 2020, the Whole Earth Brands, Inc. 2020 Long-Term Incentive Plan (the “Plan”) was approved for the purpose of promoting the long-term financial interests and growth of the Company and its subsidiaries by attracting and retaining management and other personnel and key service providers. The Plan provides for the granting of stock options (“SOs”), stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares, performance share units (“PSUs”) and other stock-based awards to officers, employees and non-employee directors of, and certain other service providers to, the Company and its subsidiaries. These awards are settled in shares of the Company’s stock and therefore classified as equity awards. Under the terms of the Plan an aggregate of 9,300,000 shares of common stock are authorized for issuance under the Plan.
RSUs granted in 2021generally vest ratably on the anniversary of the grant date over a period of one to three years, depending on the specific terms of each RSU agreement.
PSU awards generally cliff vest subsequent to the completion of thea cumulative three-year performance period, depending on the period specified in each respective PSU agreement. The number of PSUs that ultimately vest depends on the Company’s performance relative to a specified three-year cumulative financial targettargets established for fiscal years 2021, 2022 and 2023 (the “cumulative performance target”)each grant and are expected to be settled in stock.
Stock-based compensation expense for the three and six months ended June 30,March 31, 2022 and 2021 was $2.8$1.7 million and $4.5$1.6 million, respectively, and no expense was recognized for the same periods in the prior year.respectively. Stock-based compensation expense for the three and six months ended June 30, 2021March 31, 2022 includes $0.4$0.3 million of expense related to 2021 management bonuses expected to be settled in stock and accounted for as a liability.
A summary of activity and weighted average fair values related to the RSUs is as follows:
| | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Shares | | Weighted Average Fair Value |
| Outstanding at December 31, 2020 | 633,057 | | | $ | 8.34 | |
| Granted | 541,260 | | | 13.58 | |
| Vested | (16,248) | | | 8.34 | |
| Forfeited | (17,920) | | | 8.34 | |
| Outstanding and nonvested at June 30, 2021 | 1,140,149 | | | $ | 10.83 | |
A summary of activity and weighted average fair values related to the RSAs is as follows:
| | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Shares | | Weighted Average Fair Value |
| Outstanding at December 31, 2020 | 68,946 | | | $ | 8.34 | |
| Granted | 0 | | | 0 | |
| | | |
| | | |
| Outstanding and nonvested at June 30, 2021 | 68,946 | | | $ | 8.34 | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Shares | | Weighted Average Grant Date Fair Value (per share) |
| Outstanding at December 31, 2021 | 484,744 | | | $ | 13.46 | |
| Granted | 564,485 | | | 7.42 | |
| Vested | (206,368) | | | 13.14 | |
| Forfeited | (4,075) | | | 13.58 | |
| Outstanding and nonvested at March 31, 2022 | 838,786 | | | $ | 9.45 | |
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
A summary of activity and weighted average fair values related to the RSAs is as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Shares | | Weighted Average Grant Date Fair Value (per share) |
| Outstanding at December 31, 2021 | 117,801 | | | $ | 9.76 | |
| Granted | — | | | — | |
| | | |
| | | |
| Outstanding and nonvested at March 31, 2022 | 117,801 | | | $ | 9.76 | |
A summary of activity and weighted average fair values related to the PSUs is as follows:
| | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Shares | | Weighted Average Fair Value |
| Outstanding at December 31, 2020 | 0 | | | $ | 0 | |
| Granted | 322,533 | | | 13.65 | |
| | | |
| | | |
| Outstanding and nonvested at June 30, 2021 | 322,533 | | | $ | 13.65 | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Shares | | Weighted Average Grant Date Fair Value (per share) |
| Outstanding at December 31, 2021 | 282,141 | | | $ | 13.65 | |
| Granted | 527,871 | | | 7.24 | |
| | | |
| Forfeited | (1,818) | | | 13.65 | |
| Outstanding and nonvested at March 31, 2022 | 808,194 | | | $ | 9.46 | |
As of June 30, 2021,March 31, 2022, the Company had not yet recognized compensation costs on nonvested awards as follows (in thousands):
| | | | | | | | | | | |
| Unrecognized Compensation Cost | | Weighted Ave. Remaining Recognition Period (in years) |
| Nonvested awards | $ | 12,474 | | | 1.29 |
| | | | | | | | | | | |
| Unrecognized Compensation Cost | | Weighted Avg. Remaining Recognition Period (in years) |
| Nonvested awards | $ | 15,331 | | | 2.07 |
NOTE 12: STOCKHOLDERS' EQUITY
Common Stock Repurchase Plan—On September 8, 2020, the Company announced that its board of directors had authorized a stock repurchase plan of up to $20 million of shares of the Company’s common stock. The shares may be repurchased from time to time over a 12-month period expiring on September 15, 2021 (or upon the earlier completion of all purchases contemplated by the repurchase plan or the earlier termination of the repurchase plan), in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with U.S. federal securities laws. There were 0 repurchases of the Company’s common stock under the stock repurchase plan.
NOTE 13:12: EARNINGS PER SHARE
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Warrants issued are not considered outstanding at the date of issuance. RSUs and RSAs also are not considered outstanding until they have vested. Contingently issuable shares associated with outstanding PSUs that have cliff vesting based on achievement of a performance condition were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average shares outstanding assuming dilution. Dilutive common shares outstanding is computed using the treasury stock method and reflects the additional shares that would be outstanding if dilutive warrants were exercised and restricted stock units and restricted stock awards were settled for common shares during the period.
For warrants that are liability-classified, during the 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 the fair value of warrant liability and adjusts the denominator to include the dilutive shares using the treasury stock method.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The computation of basic and diluted earnings (loss) per common share for the three and six months ended June 30, 2021 and from June 26, 2020 to June 30, 2020 is shown below (in thousands, except for share and per share data):
| | | (Successor) | | | | Three Months Ended |
| | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | | March 31, 2022 | | March 31, 2021 |
| EPS numerator: | EPS numerator: | | | | | | | EPS numerator: | | | | |
| Net income (loss) attributable to common shareholders | Net income (loss) attributable to common shareholders | $ | 3,695 | | | $ | (8,330) | | | $ | (505) | | | Net income (loss) attributable to common shareholders | | $ | 2,726 | | | $ | (12,025) | |
| | | EPS denominator: | EPS denominator: | | | EPS denominator: | | |
| Weighted average shares outstanding - basic | Weighted average shares outstanding - basic | 38,458,278 | | | 38,444,590 | | | 38,426,669 | | | Weighted average shares outstanding - basic | | 40,017,296 | | | 38,430,742 | |
| Effect of dilutive securities | Effect of dilutive securities | 1,697,471 | | 0 | | 0 | | Effect of dilutive securities | | 53,157 | | — |
| Weighted average shares outstanding - diluted | Weighted average shares outstanding - diluted | 40,155,749 | | | 38,444,590 | | | 38,426,669 | | | Weighted average shares outstanding - diluted | | 40,070,453 | | | 38,430,742 | |
| | Net earnings (loss) per share: | Net earnings (loss) per share: | | | Net earnings (loss) per share: | | |
| Basic | Basic | $ | 0.10 | | | $ | (0.22) | | | $ | (0.01) | | | Basic | | $ | 0.07 | | | $ | (0.31) | |
| Diluted | Diluted | $ | 0.09 | | | $ | (0.22) | | | $ | (0.01) | | | Diluted | | $ | 0.07 | | | $ | (0.31) | |
For the three months ended June 30, 2021, 415,896March 31, 2022, 20,263,300 warrants and 839,126 RSUs were excluded from the diluted EPS calculation because they were determined to be anti-dilutive. For the sixthree months ended June 30,March 31, 2021, 20,263,500 warrants, 1,140,1491,152,443 RSUs and 68,946 RSAs were excluded from the diluted EPS calculation they were determined to be anti-dilutive. For the period from June 26, 2020 to June 30, 2020, 20,263,500 warrants were excluded from the diluted EPS calculation because they were determined to be anti-dilutive.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
NOTE 14:13: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes accumulated other comprehensive income (loss) (“AOCI”), net of taxes, by component (in thousands):
| | | | | | | | | | | | | | | | | |
| Net Currency Translation Gains (Losses) | | Funded Status of
Benefit Plans | | Total Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2019 (Predecessor) | $ | 2,885 | | | $ | (10,944) | | | $ | (8,059) | |
| Other comprehensive loss before reclassifications | (1,884) | | | 0 | | | (1,884) | |
| Amounts reclassified from AOCI | 0 | | | 48 | | | 48 | |
| Balance at March 31, 2020 (Predecessor) | 1,001 | | | (10,896) | | | (9,895) | |
| Other comprehensive loss before reclassifications | (402) | | | 0 | | | (402) | |
| Amounts reclassified from AOCI | 0 | | | 270 | | | 270 | |
| Balance at June 25, 2020 (Predecessor) | 599 | | | (10,626) | | | (10,027) | |
| Purchase accounting adjustments to eliminate Predecessor’s accumulated other comprehensive loss (income) | (599) | | | 10,626 | | | 10,027 | |
| Balance at June 26, 2020 (Successor) | 0 | | | 0 | | | 0 | |
| | | | | |
| Amounts reclassified from AOCI | 15 | | | 0 | | | 15 | |
| Balance at June 30, 2020 (Successor) | $ | 15 | | | $ | 0 | | | $ | 15 | |
| | | | | |
| Balance at December 31, 2020 (Successor) | $ | 7,774 | | | $ | 831 | | | $ | 8,605 | |
| Other comprehensive loss before reclassifications | (2,047) | | | 0 | | | (2,047) | |
| Amounts reclassified from AOCI | 0 | | | 9 | | | 9 | |
| Balance at March 31, 2021 (Successor) | 5,727 | | | 840 | | | 6,567 | |
| Other comprehensive income (loss) before reclassifications | 5,322 | | | (55) | | | 5,267 | |
| Amounts reclassified from AOCI | 0 | | | 9 | | | 9 | |
| Balance at June 30, 2021 (Successor) | $ | 11,049 | | | $ | 794 | | | $ | 11,843 | |
| | | | | | | | | | | | | | | | | |
| Net Currency Translation Gains (Losses) | | Funded Status of
Benefit Plans | | Total Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2020 | $ | 7,774 | | | $ | 831 | | | $ | 8,605 | |
| Other comprehensive loss before reclassifications | (2,047) | | | — | | | (2,047) | |
| Amounts reclassified from AOCI | — | | | 9 | | | 9 | |
| Balance at March 31, 2021 | $ | 5,727 | | | $ | 840 | | | $ | 6,567 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at December 31, 2021 | $ | 8,758 | | | $ | 929 | | | $ | 9,687 | |
| Other comprehensive loss before reclassifications | (2,003) | | | — | | | (2,003) | |
| Amounts reclassified from AOCI | — | | | (224) | | | (224) | |
| Balance at March 31, 2022 | $ | 6,755 | | | $ | 705 | | | $ | 7,460 | |
| | | | | |
NOTE 15:14: RELATED PARTY TRANSACTIONS
The Predecessor participated in MacAndrews & Forbes’ (“MacAndrews”) directors and officers’ insurance program, which covered the Predecessor along with MacAndrews and its other affiliates. The limits of coverage are available on aggregate losses to any or all of the participating companies and their respective directors and officers. For the period January 1, 2020 to June 25, 2020, the Predecessor reimbursed MacAndrews an immaterial amount for its allocable portion of the premiums for such coverage, which the Predecessor believed was more favorable than the premiums that it could have secured were it to secure its own coverage. The Predecessor also participated in certain other insurance programs with MacAndrews under which it paid premiums directly to the insurance broker.
In March 2018, the Predecessor entered into a revolving credit agreement with Wesco US LLC, an indirect and wholly-owned subsidiary of Merisant. This revolving credit facility, as amended, had a maturity date of January 3, 2022 and provided for maximum outstanding borrowings of up $9.0 million. The revolving credit facility was unsecured and bore interest at 3-month LIBOR plus 4.0% and provided for periodic interest payments with all principal due upon maturity. MacAndrews had the right to accept or reject any borrowing request made by the Predecessor pursuant to the revolving credit agreement in its sole discretion. The outstanding balance on the revolving credit agreement at June 25, 2020 was $3.4 million and was forgiven by MacAndrews in connection with the Business Combination. The interest expense for the period from April 1, 2020 to June 25, 2020 and January 1, 2020 to June 25, 2020 was approximately $0.1 million and $0.2 million, respectively.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
In July 2020, the Company entered into an agreement with Watermill Institutional Trading LLC, a registered broker-dealer (“Watermill”), to act as one of the Company’s financial advisors for a 12-month period commencing July 22, 2020 for total consideration of $0.9 million, of which $0.2 million and $0.5 million was expensed during the three and six months ended June 30, 2021, respectively.March 31, 2021. Additionally, the Company incurred additional expense of $2.0 million during the sixthree months ended June 30,March 31, 2021 related to services provided by Watermill in connection with the acquisition of Wholesome. A former director of Act II is a registered representative of Watermill and is providingprovided services directly to the Company under the agreement.
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In December 2019, Wholesome entered into a partnership agreement to form WS Services, LLC (“WS Services”). As of March 31, 2022, Wholesome had a 50% interest in the partnership and accounts for the partnership as an equity method investment. Wholesome’s investment in the partnership, which is classified as other assets in the condensed consolidated balance sheets, was $0.7 million as of both March 31, 2022 and December 31, 2021. Wholesome utilizes a warehouse leased by WS Services for storage of raw materials. During the three months ended March 31, 2022 and the period from February 5, 2021 through March 31, 2021, Wholesome expensed $0.3 million and $0.1 million, respectively, related to the use of the warehouse space. Wholesome recorded a payable to WS Services for $0.2 million and $0.3 million as of March 31, 2022 and December 31, 2021, respectively.
NOTE 16:15: BUSINESS SEGMENTS
The Company has 2 reportable segments: Branded CPG and Flavors & Ingredients. In addition, beginning with the first quarter of 2021, the Company’s corporate office functions are now reported and included under Corporate. Corporate is not a reportable or operating segment but is included for reconciliation purposes and includes the costs for the corporate office administrative activities as well as transaction-related and other costs. Certain prior year amounts have been reclassified to conform to the current presentation. The Company does not present assets by reportable segments as they are not reviewed by the Chief Operating Decision Maker for purposes of assessing segment performance and allocating resources.
The following table presents selected financial information relating to the Company’s business segments (in thousands):
| | | (Successor) | | | (Predecessor) | | | Three Months Ended |
| | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | | | March 31, 2022 | | March 31, 2021 |
| Product revenues, net | Product revenues, net | | | | | | | | | | | Product revenues, net | | | | |
| Branded CPG | Branded CPG | $ | 99,095 | | | $ | 180,892 | | | $ | 2,551 | | | | $ | 40,530 | | | $ | 80,749 | | Branded CPG | | $ | 103,761 | | | $ | 81,797 | |
| Flavors & Ingredients | Flavors & Ingredients | 27,398 | | | 51,426 | | | 1,927 | | | | 21,826 | | | 47,579 | | Flavors & Ingredients | | 26,831 | | | 24,028 | |
| Total product revenues, net | Total product revenues, net | $ | 126,493 | | | $ | 232,318 | | | $ | 4,478 | | | | $ | 62,356 | | | $ | 128,328 | | Total product revenues, net | | $ | 130,592 | | | $ | 105,825 | |
| | Operating income (loss) | Operating income (loss) | | | | Operating income (loss) | | |
| Branded CPG | Branded CPG | $ | 10,258 | | | $ | 20,417 | | | $ | 77 | | | | $ | 1,700 | | | $ | (5,055) | | Branded CPG | | $ | 6,460 | | | $ | 10,159 | |
| Flavors & Ingredients | Flavors & Ingredients | 3,738 | | | 4,710 | | | (211) | | | | 292 | | | (23,718) | | Flavors & Ingredients | | 7,827 | | | 972 | |
| | 13,996 | | | 25,127 | | | (134) | | | | 1,992 | | | (28,773) | | | | 14,287 | | | 11,131 | |
| Corporate | Corporate | (8,021) | | | (22,216) | | | (183) | | | | (6,851) | | | (9,408) | | Corporate | | (7,222) | | | (14,195) | |
| Total operating income (loss) | Total operating income (loss) | $ | 5,975 | | | $ | 2,911 | | | $ | (317) | | | | $ | (4,859) | | | $ | (38,181) | | Total operating income (loss) | | $ | 7,065 | | | $ | (3,064) | |
The following table presents geographic information based upon revenues of the Company’s major geographic markets (in thousands):
| | | (Successor) | | | (Predecessor) | | | Three Months Ended |
| | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | | | March 31, 2022 | | March 31, 2021 |
| Branded CPG: | Branded CPG: | | | | | | | | | | | Branded CPG: | | | | |
| North America | North America | $ | 66,444 | | | $ | 118,414 | | | $ | 872 | | | | $ | 14,679 | | | $ | 29,927 | | North America | | $ | 73,080 | | | $ | 51,970 | |
| Europe | Europe | 20,524 | | | 39,938 | | | 882 | | | | 15,867 | | | 31,837 | | Europe | | 18,008 | | | 19,414 | |
| India, Middle East and Africa | India, Middle East and Africa | 3,612 | | | 6,255 | | | 231 | | | | 1,722 | | | 3,778 | | India, Middle East and Africa | | 3,579 | | | 2,643 | |
| Asia-Pacific | Asia-Pacific | 5,594 | | | 10,820 | | | 369 | | | | 5,156 | | | 9,328 | | Asia-Pacific | | 6,062 | | | 5,226 | |
| Latin America | Latin America | 2,921 | | | 5,465 | | | 197 | | | | 3,106 | | | 5,879 | | Latin America | | 3,032 | | | 2,544 | |
| Flavors & Ingredients | Flavors & Ingredients | 27,398 | | | 51,426 | | | 1,927 | | | | 21,826 | | | 47,579 | | Flavors & Ingredients | | 26,831 | | | 24,028 | |
| Total product revenues, net | Total product revenues, net | $ | 126,493 | | | $ | 232,318 | | | $ | 4,478 | | | | $ | 62,356 | | | $ | 128,328 | | Total product revenues, net | | $ | 130,592 | | | $ | 105,825 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 (“Annual Report”) and our unaudited condensed consolidated and combined financial statements and the related notes appearing elsewhere in this Quarterly Report. For purposes of this section, “Whole Earth Brands,” the “Company,” “we,” or “our” refer to (i) Mafco Worldwide & Merisant and their subsidiaries (“Predecessor”) for the Period from January 1, 2020 through June 25, 2020 (each referred to herein as a “Predecessor Period”) prior to the consummation of the Business Combination and (ii) Whole Earth Brands, Inc. and its subsidiaries (the “Successor”) for the period from January 1, 2021 through June 30, 2021 (the “Successor Period”) after the Business Combination, unless the context otherwise requires.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act (the “Exchange Act”) concerning us and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of management, as well as assumptions made by, and information currently available to, management.
Forward-looking statements may be accompanied by words such as “achieve,” “aim,” “anticipate,” “believe,” “can,” “continue,” “could,” “drive,” “estimate,” “expect,” “forecast,” “future,” “grow,” “improve,” “increase,” “intend,” “may,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or similar words, phrases or expressions. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, which could cause actual results to differ materially from the results contemplated by the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to achieve or maintain profitability; the extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on overall demand for our products; local, regional, national, and international economic conditions that have deteriorated as a result of the COVID-19 pandemic including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and management’s assessment of that impact; the projected financial information, anticipated growth rate, and market opportunity of our Branded CPG and Flavors & Ingredients business segments; the ability to maintain the listing of our securities on Nasdaq; the potential liquidity and trading of our public securities; our expected capital requirements and the availability of additional financing; our ability to attract or retain highly qualified personnel, including in accounting and finance roles; extensive and evolving government regulations that impact the way we operate; the effect of the reclassification and treatment of warrants pursuant to ASC Topic 815-40; the impact of the COVID-19 pandemic on our suppliers, including disruptions and inefficiencies in the supply chain; factors relating to the business, operations and financial performance of our Branded CPG and Flavors & Ingredients segments; our success in integrating the various operating companies constituting Merisant and MAFCO; our ability to integrate our acquisitions and achieve the anticipated benefits of the transactions in a timely manner or at all; the ongoing conflict in Ukraine and related economic disruptions and new governmental regulations on our business, including but not limited to the potential impact on our sales, operations and supply chain; adverse changes in the global or regional general business, political and economic conditions, including the impact of continuing uncertainty and instability in certain countries, that could materially affect our global markets and the potential adverse economic impact and related uncertainty caused by these items; our ability to continue to use, maintain, enforce, protect and defend its owned and licensed intellectual property, including the Whole Earth®Earth® brand; and such other factors as discussed throughout, including in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited, and we cannot guarantee future results. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
Overview
We are a global food company enabling healthier lifestyles and providing access to high-quality, plant-based sweeteners, flavor enhancers and other foods through our diverse portfolio of trusted brands and delicious products. We operate a proven platform organized into two reportable segments.
•Branded CPG, comprised of our Merisant division of operating companies, Wholesome and Swerve, is a global CPG business focused on building a branded portfolio oriented toward serving customers seeking zero-calorie, low-calorie, natural, no-sugar-addedbetter-for-you sweeteners across the zero calorie, plant-based, organic, non GMO, and plant-based products.Fair Trade spaces in zero/low calorie sweeteners, honey, agave and baking mix segments. Our Branded CPG products are sold under both our global flagship brands, as well as local and private label brands. Our global flagship brands include Whole Earth®, Pure Via®, Wholesome®, Swerve®, Canderel®, Equal® and existing branded adjacencies.
•Flavors & Ingredients, comprised of our Mafco Worldwide division of operating companies, is a global, business-to-business focused operation with a long history as a trusted supplier of essential, functional ingredients to some of the CPG industry’s largest and most demanding customers. Our products provide a variety of solutions to itsfor our customers including flavor enhancement, flavor / aftertaste masking, moisturizing, product mouth feelmouthfeel modification and skin soothing characteristics. Our Flavors & Ingredients segment operates our licorice-derived products business.
In addition, beginning with the first quarter of 2021, our corporate office functions are now reported and included under Corporate. Corporate is not a reportable segment. Certain prior year amounts have been reclassified to conform to the current presentation.
Acquisition
On December 17, 2020, we entered into a stock purchase agreement (the “Wholesome Purchase Agreement”) with WSO Investments, Inc. (“WSO Investments” and together with its subsidiaries “Wholesome”), WSO Holdings, LP (“WSO Partnership”), Edwards Billington and Son, Limited (“EBS”), WSO Holdings, LLC (“WSO LLC,” and together with WSO Partnership and EBS, the “WSO Sellers”), and WSO Partnership, in its capacity as representative for the WSO Sellers. WSO Investments is the direct parent of its wholly-owned subsidiary Wholesome Sweeteners, Incorporated, which was formed to import, market, distribute, and sell organic sugars, unrefined specialty sugars, and related products.
On February 5, 2021, pursuant to the terms of the Wholesome Purchase Agreement, (i) the Companywe purchased and acquired all of the issued and outstanding shares of capital stock of WSO Investments from the WSO Sellers, for (x) an initial cash purchase price of $180 million (subject to customary post-closing adjustments), plus (y) as more thoroughly described below, up to an additional $55 million (the “Earn-Out Amount”) upon the satisfaction of certain post-closing financial metrics by Wholesome; and (ii) WSO Investments became an indirect wholly-owned subsidiary of the Company (collectively, the “Wholesome Transaction”). Subject to the terms and conditions of the Wholesome Purchase Agreement, and as more thoroughly described therein, payment of the Earn-Out Amount, in whole or in part, iswas subject to Wholesome achieving certain EBITDA thresholds at or above approximately $30 million during the period beginning August 29, 2020, and ending December 31, 2021. A portion of the Earn-Out Amount (up to $27.5 million) maycould be paid, at the Company’sour election, in freely tradeable, registered shares of Company common stock.stock calculated using the 20-day volume weighted average trading price per share as of the date of determination. Calculation of the achievement of the Earn-Out Amount iswas subject to certain adjustments more thoroughly described in the Wholesome Purchase Agreement. While
Following the completion of the Earn-Out Period, we determined, in accordance with the terms of the Purchase Agreement, that the sellers were entitled to receive the Earn-Out Amount is currently expectedin full. We elected to be payablesatisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under our revolving credit facility. The settlement of the earn-out resulted in a non-cash gain of $1.1 million that was recorded in the first quarter of 2022 which represents the payment could accelerate upon the breach by the Company of certain covenants more thoroughly describeddifference in the Wholesome Purchase Agreement.value of the common stock issued using the 20-day volume weighted average trading price per share as compared to the trading price on the date of issuance.
In connection with the closing of the Wholesome Transaction, on February 5, 2021, the Companywe and certain of itsour subsidiaries entered into an amendment and restatement agreement (the “Amendment Agreement”) with Toronto Dominion (Texas) LLC, as administrative agent, and certain lenders signatory thereto, which amended and restated itsour existing senior secured loan agreement dated as of June 25, 2020 (as amended on September 4, 2020, the “Existing Credit Agreement,” and as further amended by the Amendment Agreement, the “Amended and Restated Credit Agreement”), by and among Toronto Dominion (Texas) LLC, as administrative agent, certain lenders signatory thereto and certain other parties. See “LiquidityNote 7 to our consolidated and Capital Resources” belowcombined financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for a further description of the Amended and Restated Credit Agreement.
Covid-19 Impact
COVID-19 surfaced in Wuhan, China in late 2019 and has since spread throughout the rest of the world. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government. The pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and resulted in significant travel restrictions, including mandated facility closures and shelter-in-place orders.
COVID-19 Impact
The COVID-19 pandemic has caused and continues to cause economic disruption and uncertainty in the U.S. and globally, including in our business. We have taken measurescontinue to protectclosely monitor the impacts of the COVID-19 pandemic and remain focused on protecting the health and safety of our employees and implemented work from home arrangements, where possible, social distancing where working from home is not feasible, including inmaintaining our manufacturing facilities, deep cleaning protocols at all of our facilitiessupply chain and travel restrictions, among other measures. We have also taken appropriate measuresinventory levels to work with our customersmeet customer demand. COVID-19 and its impacts are unprecedented and continue to minimize potential disruption and to support the communities that we serve to address the challenges posed by the pandemic.
While we have experienced a net increase in the overall demand for our products, we are unable to fully determine the future impact of COVID-19 on demand for our products or our ability to supply our products. The full extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related containment and mitigation actions taken by national, state and local government officials across the world to prevent disease spread. While vaccines to prevent COVID-19 were approved by health agencies in the U.S. and other countries in which the Company operates and began to be administered near the end of calendar year 2020, distribution of the vaccines has been slower than anticipated. In addition, new strains of the virus appear to have increased transmissibility, which could complicate treatment and vaccination programs.evolve. The extent of the pandemic’s impact on us will alsocontinue to depend upon our employees’ ability to work safely in our facilities, our customers’ ability to continue to operate or receive our products, the ability of our suppliers to continue to operate, and the level of activity and demand for the ultimate product and services of our customers or their customers.
During the three months ended March 31, 2022, we have continued to experience inflationary cost increases in raw materials and transportation costs, as well as supply chain challenges. We expect to continue to see these cost pressures and supply chain challenges through the remainder of 2022. These cost increases have resulted in and could continue to result in negative impacts to our results of operations. However, we have taken measures to mitigate the impact of these inflationary pressures by implementing pricing actions during the first quarter of 2022.
There continues to be an increasingly competitive labor market at certain of our manufacturing facilities. This has resulted in increased employee turnover and changes in the availability of our workers, including as a result of COVID-19 related absences, which has resulted in and could continue to result in increased costs and could negatively impact our ability to meet customer demand. However, we expect we will be able to deliver products to fulfill customer orders on a timely basis and we intend to continue to monitor customer demand along with our supply chain and logistics capabilities to drive our business and meet our obligations.
Results of Operations
Consolidated
| | | (Successor) | | | (Predecessor) | | | Three Months Ended | |
| (In thousands) | (In thousands) | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | (In thousands) | | March 31, 2022 | | March 31, 2021 | | Change |
| Product revenues, net | Product revenues, net | $ | 126,493 | | | $ | 232,318 | | | $ | 4,478 | | | | $ | 62,356 | | | $ | 128,328 | | Product revenues, net | | $ | 130,592 | | | $ | 105,825 | | | +23.4 | % |
| Cost of goods sold | Cost of goods sold | 85,138 | | | 155,312 | | | 2,708 | | | | 37,515 | | | 77,627 | | Cost of goods sold | | 91,034 | | | 70,174 | | | +29.7 | % |
| Gross profit | Gross profit | 41,355 | | | 77,006 | | | 1,770 | | | | 24,841 | | | 50,701 | | Gross profit | | 39,558 | | | 35,651 | | | +11.0 | % |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 27,828 | | | 60,735 | | | 1,946 | | | | 27,307 | | | 43,355 | | Selling, general and administrative expenses | | 27,788 | | | 32,907 | | | -15.6 | % |
| Amortization of intangible assets | Amortization of intangible assets | 4,706 | | | 8,857 | | | 141 | | | | 2,393 | | | 4,927 | | Amortization of intangible assets | | 4,705 | | | 4,151 | | | +13.3 | % |
| Asset impairment charges | — | | | — | | | — | | | | — | | | 40,600 | | |
| | Restructuring and other expenses | Restructuring and other expenses | 2,846 | | | 4,503 | | | — | | | | — | | | — | | Restructuring and other expenses | | — | | | 1,657 | | | * |
| Operating income (loss) | Operating income (loss) | 5,975 | | | 2,911 | | | (317) | | | | (4,859) | | | (38,181) | | Operating income (loss) | | 7,065 | | | (3,064) | | | * |
| Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | (241) | | | (2,603) | | | — | | | | — | | | — | | Change in fair value of warrant liabilities | | 861 | | | (2,362) | | | * |
| Interest expense, net | Interest expense, net | (6,396) | | | (11,474) | | | (116) | | | | (66) | | | (238) | | Interest expense, net | | (6,032) | | | (5,078) | | | +18.8 | % |
| Loss on extinguishment and debt transaction costs | Loss on extinguishment and debt transaction costs | — | | | (5,513) | | | — | | | | — | | | — | | Loss on extinguishment and debt transaction costs | | — | | | (5,513) | | | * |
| Other income (expense), net | 190 | | | 500 | | | (62) | | | | (920) | | | 801 | | |
| Loss before income taxes | (472) | | | (16,179) | | | (495) | | | | (5,845) | | | (37,618) | | |
| (Benefit) provision for income taxes | (4,167) | | | (7,849) | | | 10 | | | | (364) | | | (3,482) | | |
| Other income, net | | Other income, net | | 1,956 | | | 310 | | | * |
| Income (loss) before income taxes | | Income (loss) before income taxes | | 3,850 | | | (15,707) | | | * |
| Provision (benefit) for income taxes | | Provision (benefit) for income taxes | | 1,124 | | | (3,682) | | | * |
| Net income (loss) | Net income (loss) | $ | 3,695 | | | $ | (8,330) | | | $ | (505) | | | | $ | (5,481) | | | $ | (34,136) | | Net income (loss) | | $ | 2,726 | | | $ | (12,025) | | | * |
* Represents positive or negative change equal to, or in excess of 100%
Three Months Ended June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020March 31, 2021
Product revenues, net. Product revenues, net for the three months ended June 30, 2021March 31, 2022 were $126.5 million. Product revenues, net for the combined three months ended June 30, 2020 totaled $66.8$130.6 million, including $4.5 million for the period from June 26, 2020 through June 30, 2020 and $62.4 million from April 1, 2020 through June 25, 2020. Product revenues, net increased $59.7an increase of $24.8 million, or 89.3%23.4%, infrom $105.8 million for the three months ended June 30,March 31, 2021 due to a $56.0$22.0 million
increase in product revenues in the Branded CPG segment and a $3.6$2.8 million increase in product revenues at Flavors & Ingredients. The increase in Branded CPG revenues was due to $52.0 million of revenues related to the acquisitionsdriven by a full quarter of Wholesome, and Swerve, $1.0 million ofwhich was acquired on February 5, 2021, partially offset by organic Branded CPG growth,declines and $3.0 million impactunfavorable impacts from foreign exchange, as further described below.
Cost of goods sold. Cost of goods sold for the three months ended June 30, 2021March 31, 2022 was $85.1 million. Cost$91.0 million, an increase of goods sold for the combined three months ended June 30, 2020 totaled $40.2$20.9 million, including $2.7or 29.7%, from $70.2 million for the period from June 26, 2020 through June 30, 2020 and $37.5 million from April 1, 2020 through June 25, 2020. Cost of goods sold increased $44.9 million in the three months ended June 30, 2021,March 31, 2021. The increase was primarily driven by $41.0due to a $19.8 million related to the acquisitionsincrease as a result of a full quarter of Wholesome (acquired on February 5, 2021), as well as costs associated with new production operations and Swerve (including $0.9 million of purchase accounting adjustments related to inventory), higher volumes at Branded CPG and Flavors & Ingredients, partially offset by $0.8a $3.2 million favorable change in the amortization of favorable purchase accounting adjustments related to inventory revaluations at Flavors & Ingredients.(benefit of $1.6 million in the first quarter of 2022 compared to expense of $1.6 million in the first quarter of 2021).
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2021March 31, 2022 were $27.8 million. Selling, general and administrative expenses for the combined three months ended June 30, 2020 totaled $29.3 million, including $1.9a decrease of $5.1 million, or 15.6%, from $32.9 million for the period from June 26, 2020 through June 30, 2020 and $27.3 million from April 1, 2020 through June 25, 2020. Selling, general and administrative expenses decreased $1.4 million, primarily due to transaction bonuses of $10.6 million in 2020 and lower bonus expense of $1.6 million, partially offset by $4.8 million of selling, general and administrative expenses from the acquisitions of Wholesome and Swerve, $2.0 million of stock-based compensation expense and $2.9 million for public company costs including both one-time costs as well as ongoing costs to operate as a public company in the three months ended June 30, 2021.March 31, 2021 primarily due to a $7.4 million decline in acquisition related transaction expenses, partially offset by a $1.3 million increase in costs driven by a full quarter of Wholesome, and higher bonus expense.
Amortization of intangible assets. Amortization of intangible assets for the three months ended June 30, 2021March 31, 2022 was $4.7 million. Amortizationmillion, an increase of intangible assets for the combined three months ended June 30, 2020 was $2.5 million, including $0.1 million for the period from June 26, 2020 through June 30, 2020 and $2.4 million from April 1, 2020 through June 25, 2020. Amortization of intangible assets increased $2.2$0.6 million, or 85.7%13.3%, from $2.5$4.2 million for the three months ended June 30, 2020March 31, 2021 primarily due to higher amortization expense related to the intangible assets acquired as part of the Wholesome and Swerve acquisitions.
Restructuring and other expenses. Restructuring and other expenses for the three months ended June 30, 2021 were $2.8 million and relate primarily to certain disposal costs at our Camden, New Jersey facility, as well as termination benefits related to the elimination and restructuring of positions at Flavors & Ingredients.acquisition on February 5, 2021.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities for the three months ended June 30, 2021March 31, 2022 was a non-operating gain of $0.9 million, an increase of $3.2 million, from a non-operating loss of $0.2 million.$2.4 million for the three months ended March 31, 2021.
Interest expense, net. Interest expense, net for the three months ended June 30, 2021March 31, 2022 was $6.4 million. Interest expense, net for the combined three months ended June 30, 2020 totaled $0.2$6.0 million, including $0.1an increase of $1.0 million, or 18.8%, from $5.1 million for the period from June 26, 2020 through June 30, 2020 and $0.1 million from April 1, 2020 through June 25, 2020. Interest expense, net increased $6.2 million in the three months ended June 30, 2021March 31, 2021. The increase was primarily due to interest expensehigher debt levels under our new credit facilities beginning February 5, 2021 and the amortization of debt issuance costs.
Other income, (expense), net. Other income, net for three months ended June 30, 2021 was $0.2 million. Other expense, net for the combined three months ended June 30, 2020 was $1.0 million, including $0.1 million for the period from June 26, 2020 through June 30, 2020 and $0.9 million from April 1, 2020 through June 25, 2020. Other income, net increased $1.2 million in the three months ended June 30, 2021,March 31, 2022 was $2.0 million compared to $0.3 million for the three months ended March 31, 2021. The increase was primarily due to foreign exchange gains ina $1.0 million non-cash settlement gain related to the second quartertermination of 2021 comparedour qualified defined benefit pension plan at Flavors & Ingredients and a $1.1 million non-cash gain related to foreign exchange losses in the second quartersettlement of 2020.the Wholesome acquisition earn-out as further described above.
BenefitProvision (benefit) for income taxes. The provision for income taxes for the three months ended March 31, 2022 was $1.1 million. The benefit for income taxes for the three months ended June 30,March 31, 2021 was $4.2 million, which includes a discrete tax benefit of $4.2 million related to the receipt of a beneficial tax ruling in Switzerland which allows for future amortization deductions, the reversal of uncertain tax position liabilities as a result of the lapse of applicable statute of limitations, partially offset by a deferred tax provision related to a tax law change in the United Kingdom which was enacted during the quarter ended June 30, 2021. The benefit for income taxes for the combined three months ended June 30, 2020 was $0.4 million, including income tax expense of $0.01 million for the period from June 26, 2020 through June 30, 2020 and an income tax benefit of $0.4 million from April 1, 2020 through June 25, 2020.$3.7 million. The effective tax rate for the three months ended June 30, 2021March 31, 2022 was an income tax benefitprovision of 882.8%29.2%, compared to an income tax provisionbenefit of 2%23.4% for the period from June 26, 2020 through June 30, 2020 and an income tax benefit of 6.2% for the period from April 1, 2020 to June 25, 2020.three months ended March 31, 2021. The effective tax rate for the three months ended June 30, 2021March 31, 2022 differs from the statutory federal rate of 21% primarily due to state and local taxes, non-deductible permanent differences, limited benefit on current year interest deductions and losses in certain jurisdictions, the discrete tax benefits. The effective tax rate forchange in the period from June 26, 2020 through June 30, 2020fair value of warrant liabilities, foreign income at different rates and for the period from April 1, 2020 through June 25, 2020 differ from the statutory federal rate of 21% primarily due to the U.S. tax effect of international operations including Global Intangible Low-Taxed Income (“GILTI”) recorded during the period and U.S. state taxes.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Product revenues, net. Product revenues, net for the six months ended June 30, 2021 was $232.3 million. Product revenues, net for the combined six months ended June 30, 2020 was $132.8 million, including $4.5 million for the period from June 26, 2020 through June 30, 2020 and $128.3 million from January 1, 2020 through June 25, 2020. Product revenues, net increased $99.5 million, or 74.9%, in the six months ended June 30, 2021 due to a $97.6 million increase in product revenues in the Branded CPG segment and a $1.9 million increase in product revenues at Flavors & Ingredients. The increase in Branded CPG revenues was due to $89.3 million of revenues related to the acquisitions of Wholesome and Swerve, $3.1 million of organic Branded CPG growth and $5.1 million impact from foreign exchange, as further described below.
Cost of goods sold. Cost of goods sold for the six months ended June 30, 2021 was $155.3 million. Cost of goods sold for the combined six months ended June 30, 2020 was $80.3 million, including $2.7 million for the period from June 26, 2020 through June 30, 2020 and $77.6 million from January 1, 2020 through June 25, 2020. Cost of goods sold increased $75.0 million, or 93.3%, in the six months ended June 30, 2021, primarily driven by $69.1 million related to the acquisitions of Wholesome and Swerve (including $1.9 million of purchase accounting adjustments related to inventory), higher volumes at Branded CPG and $0.6 million of stock-based compensation expense.
Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended June 30, 2021 was $60.7 million. Selling, general and administrative expenses for the combined six months ended June 30, 2020 was $45.3 million, including $1.9 million for the period from June 26, 2020 through June 30, 2020 and $43.4 million from January 1, 2020 through June 25, 2020. Selling, general and administrative expenses increased $15.4 million, in the six months ended June 30, 2021, primarily due to $9.1 million of acquisition related transaction expenses, $8.4 million of selling, general and administrative expenses from the acquisitions of Wholesome and Swerve, $5.0 million for public company costs including both one-time costs as well as ongoing costs to operate a public company and $3.4 million of stock-based compensation expense, partially offset by transaction bonuses of $10.6 million recorded in 2020.
Amortization of intangible assets. Amortization of intangible assets for the six months ended June 30, 2021 was $8.9 million. Amortization of intangible assets for the combined six months ended June 30, 2020 totaled $5.1 million, including $0.1 million for the period from June 26, 2020 through June 30, 2020 and $4.9 million from January 1, 2020 through June 25, 2020. Amortization of intangible assets increased $3.8 million, or 74.8%, in the six months ended June 30, 2021, primarily due to amortization expense related to the intangible assets acquired as part of the Wholesome and Swerve acquisitions.
Asset impairment charges. There were no asset impairment charges for the six months ended June 30, 2021. Asset impairment charges were $40.6 million for the combined six months ended June 30, 2020 and included an impairment charge recorded in the predecessor period of $22.9 million related to indefinite-lived intangible assets and a goodwill impairment charge of $17.7 million. The goodwill impairment charge of $17.7 million was the result of the Flavors & Ingredients and Branded CPG segments reporting units carrying values exceeding their fair value by $6.6 million and $11.1 million, respectively.
Restructuring and other expenses. Restructuring and other expenses for the six months ended June 30, 2021 were $4.5 million and relate primarily to certain disposal costs at our Camden, New Jersey facility.
Change in fair value of warrant liabilities.Change in fair value of warrant liabilities for the six months ended June 30, 2021 was a non-operating loss of $2.6 million, which is net of a $1.2 million non-operating gain that relates to the fiscal year ended December 31, 2020. See Notes 1, 6 and 7 to our unaudited condensed consolidated and combined financial statements for the six months ended June 30, 2021 for further discussion.
Interest expense, net. Interest expense, net for the six months ended June 30, 2021 was $11.5 million. Interest expense, net for the combined six months ended June 30, 2020 was $0.4 million, including $0.1 million for the period from June 26, 2020 through June 30, 2020 and $0.2 million from January 1, 2020 through June 25, 2020. Interest expense, net increased $11.1 million in the six months ended June 30, 2021 due to higher debt levels under our new credit facilities and the amortization of debt issuance costs.
Loss on extinguishment and debt transaction costs. Loss on extinguishment and debt transaction costs includes a $5.5 million pretax loss consisting of a write-off of unamortized debt issuance costs of $4.4 million and transaction costs of $1.1 million related to the amendment of our credit facilities on February 5, 2021.
Other income (expense), net. Other income, net for the six months ended June 30, 2021 was $0.5 million. Other income, net for the combined six months ended June 30, 2020 was $0.7 million, including $0.1 million of expense for the period from June 26, 2020 through June 30, 2020 and income of $0.8 million from January 1, 2020 through June 25, 2020. Other income, net fell $0.2 million, primarily due to lower foreign exchange gains in 2021 compared to 2020.
Benefit for income taxes. The benefit for income taxes for the six months ended June 30, 2021 was $7.8 million, which includes a discrete tax benefit of $4.3 million primarily related to the receipt of a beneficial tax ruling in Switzerland which allows for future amortization deductions, the reversal of uncertain tax position liabilities as a result of the lapse of applicable statute of limitations, partially offset by a deferred tax provision related to a tax law change in the United Kingdom which was enacted during the quarter ended June 30, 2021. The benefit for income taxes for the combined six months ended June 30, 2020 was $3.5 million, including a provision of $0.01 million for the period from June 26, 2020 through June 30, 2020 and an income tax benefit of $3.5 million from January 1, 2020 through June 25, 2020.period. The effective tax rate for the sixthree months ended June 30, 2021 was an income tax benefit of 48.5%, compared to an income tax provision of 2% for the period from June 26, 2020 through June 30, 2020 and an income tax benefit of 9.3% for the period from January 1, 2020 through June 25, 2020. The effective tax rate for the six months ended June 30,March 31, 2021 differs from the statutory federal rate of 21% primarily due to certain non-deductible expenses including transaction costs, the discrete tax benefits. The effective tax rate forchange in the period from June 26, 2020 through June 30, 2020 differs from the statutory federal ratefair value of 21% primarily due to the U.S. tax effect of international operations including GILTI recorded during the period and U.S. state taxes. The effective tax rate from January 1, 2020 through June 25, 2020 differs from the statutory federal rate of 21% primarily due to the impact of impairment charges on non-deductible goodwillwarrant liabilities, stock-based compensation expense and the U.S. tax effect of international operations including GILTI recorded during the period.
Branded CPG
| | | (Successor) | | | (Predecessor) | | | Three Months Ended | |
| (In thousands) | (In thousands) | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | (In thousands) | | March 31, 2022 | | March 31, 2021 | | Change |
| Product revenues, net | Product revenues, net | $ | 99,095 | | | $ | 180,892 | | | $ | 2,551 | | | | $ | 40,530 | | | $ | 80,749 | | Product revenues, net | | $ | 103,761 | | | $ | 81,797 | | | +26.9 | % |
| Operating income (loss) | $ | 10,258 | | | $ | 20,417 | | | $ | 77 | | | | $ | 1,700 | | | $ | (5,055) | | |
| Operating income | | Operating income | | $ | 6,460 | | | $ | 10,159 | | | -36.4 | % |
Three Months Ended June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020March 31, 2021
Segment product revenues, net. Product revenues, net for Branded CPG for the three months ended June 30, 2021March 31, 2022 were $99.1 million. Product revenues, net for Branded CPG for the combined three months ended June 30, 2020 totaled $43.1$103.8 million, including $2.6an increase of $22.0 million, or 26.9%, from $81.8 million for the period from June 26, 2020 through June 30, 2020 and $40.5 million from April 1, 2020 through June 25, 2020. Product revenues, net for Branded CPG increased $56.0 million in the three months ended June 30,March 31, 2021, primarily driven by $52.0 million of revenues related to the acquisitions of Wholesome and Swerve, $1.0a $26.0 million increase in revenues as a result of a full quarter of Wholesome which was acquired on February 5, 2021, partially offset by a $2.2 million decline in organic sales led by international regionsdue to the planned discontinuance of certain private label contracts and the $3.0a $1.8 million favorableunfavorable impact of foreign exchange, driven primarily by appreciating European currencies.exchange.
Segment operating income. Operating income for Branded CPG for the three months ended June 30, 2021March 31, 2022 was $10.3 million. Operating income$6.5 million, a decrease of $3.7 million, or 36.4%, from $10.2 million for Branded CPG for the combined three months ended June 30, 2020 totaled $1.8 million, including $0.1 million for the period from June 26, 2020 through June 30, 2020 and $1.7 million from April 1, 2020 through June 25, 2020. Operating income for Branded CPG increased $8.5 million, primarily due to additional operating income of $4.0 million related to the acquisitions of Wholesome and Swerve (which includes $0.9 million of amortization of inventory fair value adjustments), a $4.7 million decrease in bonus expense (including $2.7 million related to transaction bonuses in 2020), as well as increased product revenues and productivity gains, partially offset by $1.0 million of stock-based compensation expense.
Six Months Ended June 30,March 31, 2021 Compared to Six Months Ended June 30, 2020
Segment product revenues, net. Product revenues, net for Branded CPG for the six months ended June 30, 2021 were $180.9 million. Product revenues, net for Branded CPG for the combined six months ended June 30, 2020 totaled $83.3 million, including $2.6 million for the period from June 26, 2020 through June 30, 2020 and $80.7 million from January 1, 2020 through June 25, 2020. Product revenues, net for Branded CPG increased $97.6 million in the six months ended June 30, 2021, due to $89.3 million of revenues related to the acquisitions of Wholesome and Swerve, $3.1 million of global organic Branded CPG growth, led by retail and ecommerce growth and the $5.1 million impact of foreign exchange.
Segment operating income (loss). Operating income for Branded CPG for the six months ended June 30, 2021 was $20.4 million. Operating loss for Branded CPG for the combined six months ended June 30, 2020 totaled $5.0 million, including operating income of $0.1 million for the period from June 26, 2020 through June 30, 2020 and operating loss of $5.1 million from January 1, 2020 through June 25, 2020. Operating income for Branded CPG increased $25.4 million, primarily due to a goodwill impairment chargedeclines in natural products sales, costs associated with new production operations of $11.1$3.4 million, increased logistics and transaction bonuses of $2.7 million reflected in the prior year results that did not reoccur in 2021, additional operating income of $7.9 million relatedmaterials costs due to the acquisitions of Wholesomeinflationary pressures, and Swerve (which includes $1.9 million of amortization of inventory fair value adjustments), a $0.7 million decrease inhigher bonus expense, as well as increased product revenues and productivity, partially offset by $1.6a $4.8 million increase in operating income at Wholesome as a result of stock-based compensation expense.a full quarter of results (acquired on February 5, 2021) and growth in the business.
Flavors & Ingredients
| | | (Successor) | | | (Predecessor) | | | Three Months Ended | |
| (In thousands) | (In thousands) | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From January 1, 2020 to June 25, 2020 | (In thousands) | | March 31, 2022 | | March 31, 2021 | | Change |
| Product revenues, net | Product revenues, net | $ | 27,398 | | | $ | 51,426 | | | $ | 1,927 | | | | $ | 21,826 | | | $ | 47,579 | | Product revenues, net | | $ | 26,831 | | | $ | 24,028 | | | +11.7 | % |
| Operating income (loss) | $ | 3,738 | | | $ | 4,710 | | | $ | (211) | | | | $ | 292 | | | $ | (23,718) | | |
| Operating income | | Operating income | | $ | 7,827 | | | $ | 972 | | | * |
* Represents positive or negative change equal to, or in excess of 100%
Three Months Ended June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020March 31, 2021
Segment product revenues, net. Product revenues, net for Flavors & Ingredients for the three months ended June 30, 2021March 31, 2022 were $27.4 million. Product revenues, net for Flavors & Ingredients for the combined three months ended June 30, 2020 totaled $23.8$26.8 million, including $1.9 million for the period from June 26, 2020 through June 30, 2020 and $21.8 million from April 1, 2020 through June 25, 2020. Product revenues, net increased $3.6an increase of $2.8 million, or 15.3%11.7%, infrom $24.0 million for the three months ended June 30,March 31, 2021, primarily driven by strong increases across most product lines. The results for the second quarter of 2020 were soft as customers temporarily built inventory in the first quarter of 2020 in responselicorice extracts and pure derivatives primarily due to the COVID-19 pandemic.volume growth.
Segment operating income (loss).income. Operating income for Flavors & Ingredients for the three months ended June 30, 2021March 31, 2022 was $3.7 million. Operating income for Flavors & Ingredients for the combined three months ended June 30, 2020 totaled $0.1$7.8 million, including an operating lossincrease of $0.2 million for the period from June 26, 2020 through June 30, 2020 and operating income of $0.3$6.9 million, from April 1, 2020 through June 25, 2020. Operating income$1.0 million for Flavors & Ingredients increased $3.7 million in the three months ended June 30,March 31, 2021, primarily driven by increased product revenues. Operating expenses were flat as $2.8revenue of $2.8 million of facility closure and restructuring costs and $0.9 million in amortization expense were offset by transaction bonuses of $3.8 million recorded in 2020 that did not reoccur.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Segment product revenues, net. Product revenues, net for Flavors & Ingredients for the six months ended June 30, 2021 were $51.4 million. Product revenues, net for Flavors & Ingredients for the combined six months ended June 30, 2020 totaled $49.5 million, including $1.9 million for the period from June 26, 2020 through June 30, 2020 and $47.6 million from January 1, 2020 through June 25, 2020. Product revenues, net increased $1.9 million or 3.9%, in the six months ended June 30, 2021, primarily driven by growth in derivatives.
Segment operating income (loss). Operating income for Flavors & Ingredients for the six months ended June 30, 2021 was $4.7 million. Operating loss for Flavors & Ingredients for the combined six months ended June 30, 2020 totaled $23.9 million, including an operating loss of $0.2 million for the period from June 26, 2020 through June 30, 2020 and operating loss of $23.7 million from January 1, 2020 through June 25, 2020. Operating income for Flavors & Ingredients increased $28.6 million in the six months ended June 30, 2021, primarily due to asset impairment charges totaling $29.5a $2.0 million decrease in cost of goods sold and transaction bonuses of $3.8a $1.7 million bothdecrease in restructuring and other expenses included in the prior year results that did not reoccurre-occur in 2021, partially offset by $4.52022. The decrease in cost of goods sold was largely due to a $2.3 million of facility closure and restructuring costs and a $1.9 million increasefavorable change in amortization expense due toof purchase accounting adjustments related to inventory revaluations in the first quarter of intangible assets.2022 (benefit of $1.6 million in the first quarter of 2022 compared to expense of $0.7 million in the first quarter of 2021).
Corporate
Beginning with the first quarter of 2021, the Company’s corporate office functions are now reported and included under Corporate. Corporate is not a reportable or operating segment.
| | | (Successor) | | | (Predecessor) | | | Three Months Ended | |
| (In thousands) | (In thousands) | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From
April 1, 2020 to June 25, 2020 | | From
January 1, 2020 to June 25, 2020 | (In thousands) | | March 31, 2022 | | March 31, 2021 | | Change |
| Operating loss | Operating loss | $ | (8,021) | | | $ | (22,216) | | | $ | (183) | | | | $ | (6,851) | | | $ | (9,408) | | Operating loss | | $ | (7,222) | | | $ | (14,195) | | | -49.1 | % |
Three Months Ended June 30, 2021March 31, 2022 Compared to Three Months Ended June 30, 2020March 31, 2021
Operating loss. Operating loss for Corporate for the three months ended June 30, 2021March 31, 2022 was $8.0 million. Operating loss for Corporate for the combined three months ended June 30, 2020 totaled$7.2 million, a decrease of $7.0 million including $0.2from $14.2 million for the period from June 26, 2020 through June 30, 2020 and $6.9 million from April 1, 2020 through June 25, 2020. Operating loss for Corporate increased $1.0 million in the three months ended June 30,March 31, 2021, primarily driven by a $2.97.4 million for public company costs including both one-time costs as well as ongoing costs to operate as a public company and $1.1 million of stock-based compensation expense, partially offset by lower bonus expense of $3.8 million as 2020 included transaction bonuses of $4.5 million.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Operating loss. Operating loss for Corporate for the six months ended June 30, 2021 was $22.2 million. Operating loss for Corporate for the combined six months ended June 30, 2020 totaled $9.6 million, including $0.2 million for the period from June 26, 2020 through June 30, 2020 and $9.4 million from January 1, 2020 through June 25, 2020. Operating loss for Corporate rose $12.6 milliondecrease in the six months ended June 30, 2021, primarily driven by $9.1 million of acquisition related transaction expenses, $5.0 million in public company costs including both one-time costs as well as ongoing costs to operate as a public company and $1.8 million of stock-based compensation expense, partially offset by $3.3 millionhigher salaries from increased headcount in the second half of lower bonus expense as 2020 included 2021transaction bonuses of $4.5 million..
Liquidity and Capital Resources
We have historically funded operations with cash flow from operations and, when needed, with borrowings, which are described below.
We believe our sources of liquidity and capital, and our Credit Facilities will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months.
The following table shows summary cash flow information for the three months ended June 30,March 31, 2022 and March 31, 2021 and June 30, 2020 (in thousands):
| | | (Successor) | | | (Predecessor) | | Three Months Ended |
| | Six Months Ended June 30, 2021 | | From
June 26, 2020 to June 30, 2020 | | | From January 1, 2020 to June 25, 2020 | | March 31, 2022 | | March 31, 2021 |
| Net cash (used in) provided by operating activities | $ | (9,454) | | | $ | (3,997) | | | | $ | 19,908 | | |
| Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | $ | 4,446 | | | $ | (5,597) | |
| Net cash used in investing activities | Net cash used in investing activities | (186,968) | | | (197,809) | | | | (3,532) | | Net cash used in investing activities | (3,226) | | | (188,145) | |
| Net cash provided by (used in) financing activities | 203,118 | | | 207,861 | | | | (16,924) | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (337) | | | 204,056 | |
| Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | 460 | | | 17 | | | | 215 | | Effect of exchange rate changes on cash and cash equivalents | 186 | | | 594 | |
| Net change in cash and cash equivalents | Net change in cash and cash equivalents | $ | 7,156 | | | $ | 6,072 | | | | $ | (333) | | Net change in cash and cash equivalents | $ | 1,069 | | | $ | 10,908 | |
Operating activities.Net cash used in operating activities was $9.5 million for the six months ended June 30, 2021. Net cash provided by operating activities was $4.4 million for the combined sixthree months ended June 30, 2020 totaled $15.9 million, including netMarch 31, 2022 compared to cash used in operating activities of $4.0$5.6 million infor the period from June 26, 2020 through June 30, 2020 and net cash provided by operating activities of $19.9 million from January 1, 2020 through June 25, 2020.three months ended March 31, 2021. The decreaseincrease was primarily attributable to unfavorablehigher cash flows from operating results driven by lower transaction-related expenses, favorable working capital changes, and lower income tax payments, partially offset by higher interest and tax payments. Cash paid for interest forpayments during the sixthree months ended June 30, 2021 was $10.0 million compared to $0.9 million for the combined six months ended June 30, 2020.March 31, 2022. Cash paid for income taxes, net of income tax refunds increased $2.1 million to $4.4was $1.0 million for the sixthree months ended June 30, 2021March 31, 2022 compared to $2.2$3.5 million for the combined sixthree months ended June 30, 2020.March 31, 2021. Cash paid for interest for the three months ended March 31, 2022 was $5.6 million compared to $4.5 million for the three months ended March 31, 2021.
Investing activities. Net cash used in investing activities was $187.0$3.2 million for the sixthree months ended June 30,March 31, 2022 and primarily related to capital expenditures. Net cash used in investing activities was $188.1 million for the three months ended March 31, 2021 which included cash paid of $187.6 million, net of cash acquired, related to the acquisition of Wholesome, $1 million of cash received for the final working capital settlement related to the acquisition of Swerve and capital expenditures of $4.6 million and proceeds from the sale of one of our facilities of $4.3$1.5 million. Net cash used in investing activities was $197.8 million in the period from June 26, 2020 through June 30, 2020 which included cash paid of $376.7 million related to the Business Combination and $178.9 million of cash transferred from the trust account. Net cash used in investing activities was $3.5 million from January 1, 2020 through June 25, 2020 and was entirely related to capital expenditures.
Financing activities. Net cash used in financing activities was $0.3 million for the three months ended March 31, 2022 and reflects $30.0 million of proceeds from the revolving credit facility, repayments of long-term debt of $0.9 million, cash payment for the Wholesome acquisition earn-out of $29.1 million (amount is net of $0.9 million related to transaction bonuses paid in connection with the earn-out and reflected in operating activities) and payments of $0.3 million for employee tax withholdings related to net share settlements of share-based awards. Net cash provided by financing activities was $203.1$204.1 million for the sixthree months ended June 30,March 31, 2021 and reflects $400 million of proceeds from the Credit Facilities, (as defined and described below), repayment of the revolving credit facility of $47.9 million, repayments of long-term debt of $137.4$136.5 million and payments of debt issuance costs of $11.6 million. Net cash provided by financing activities was $207.9 million in the period from June 26, 2020 to June 30, 2020 which reflects $140 million of proceeds from the senior secured first lien term loan facility, net of debt issuance costs of $7.1 million and proceeds from the sale of common stock and warrants of $75 million. Net cash used in financing activities was $16.9 million from January 1, 2020 through June 25, 2020 due to $8.5 million of payments, offset by $3.5 million of borrowings related to the prior revolving credit facility and $11.9 million due to funding to the parent.
Indebtedness
On December 31, 2020, our senior secured loan agreement consisted of a senior secured first lien term loan facility of $140 million and a first lien revolving credit facility of up to $50 million. As of December 31, 2020, there were $2.1 million of outstanding letters of credit that reduced our availability under the revolving credit facility.Debt
As of DecemberMarch 31, 2020,2022, term loan borrowings were $131.8$361.6 million, net of debt issuance costs of $4.7$9.6 million. As of December 31, 2021, term loan borrowings were $362.2 million, net of debt issuance costs of $10.0 million. There were $47.9 million of borrowings under the revolving credit facilityRevolving Facility of $55.0 million and $25.0 million as of March 31, 2022 and December 31, 2020. Additionally, as of December 31, 2020, the Company’s2021, respectively. The unamortized debt issuance costs related to the revolving credit facilityRevolving Facility were $1.7 million whichand $1.8 million at March 31, 2022 and December 31, 2021, respectively, and are included in other assets in the condensed consolidated balance sheet.
In connection with the Wholesome Transaction, on February 5, 2021, we entered into an amendment At both March 31, 2022 and restatement agreement (the “Amendment Agreement”) with Toronto Dominion (Texas) LLC, which amended and restated our existing senior secured loan agreement dated as of June 25, 2020 (as amended on September 4, 2020, the “Existing Credit Agreement,” and as further amended by the Amendment Agreement, the “Amended and Restated Credit Agreement”), by Toronto Dominion (Texas), LLC, as administrative agent, certain lenders signatory thereto and certain other parties.
The Amended and Restated Credit Agreement provides for senior secured financing consisting of the following credit facilities: (a) a senior secured term loan facility in the aggregate principal amount of $375 million (the “Term Loan Facility”); and (b) a revolving credit facility in an aggregate principal amount of up to $75 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”). The Revolving Facility has a $15 million sub-facility for the issuance of letters of credit and a $15 million sublimit for swing line loans. We used the proceeds under the Term Loan Facility to (i) repay and refinance existing indebtedness of WSO Investments; (ii) pay the cash consideration for the Wholesome Transaction; (iii) repay and refinance outstanding borrowings under the Existing Credit Agreement; and (iv) pay fees and expenses incurred in connection with the foregoing. The proceeds of the Revolving Facility can be used to finance working capital needs, for general corporate purposes, and for working capital adjustments payable under the Wholesome Purchase Agreement.
Loans outstanding under the Credit Facilities accrue interest at a rate per annum equal to (i) with respect to the Revolving Facility and letters of credit, (A) 2.75%, in the case of base rate advances, and (B) 3.75% in the case of LIBOR advances, and (ii) with respect to the Term Loan Facility, (A) 3.50%, in the case of base rate advances, and (B) 4.50% in the case of LIBOR advances, with a LIBOR floor of 1.00% with respect to the Term Loan Facility, and 0.00% with respect to the Revolving Facility and letters of credit, and base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, LIBOR for a one-month interest period plus 1.00%, and with respect to the Revolving Facility and letters of credit, 0.00%, or with respect to the Term Loan Facility, 2.0%, and undrawn amounts under the Revolving Facility will accrue a commitment fee at a rate per annum equal to 0.50% on the average daily undrawn portion of the commitments thereunder. As of June 30,December 31, 2021, there were $2.1 million of outstanding letters of credit that reduced our availability under the revolving credit facility. Our unamortized debt issuance costs relatedSee Note 7 to the revolving credit facility were $2.0 million as of June 30, 2021our consolidated and are includedcombined financial statements in other assets in the condensed consolidated balance sheet.
The obligations under the Credit Facilities are guaranteed by certain direct or indirect wholly-owned domestic subsidiaries of the Company, other than certain excluded subsidiaries, including, but not limited to, immaterial subsidiaries and foreign subsidiaries. The Credit Facilities are secured by substantially all of the personal property of the Company and the guarantor subsidiaries (in each case, subject to certain exclusions and qualifications).
The Credit Facilities require us to make certain mandatory prepayments, with (i) 100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property in excess of $5 million in any fiscal year, subject to the ability to reinvest such proceeds and certain other exceptions, (ii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the definitive agreements (but excluding debt incurred to refinance the Credit Facilities) and (iii) 50% of “Excess Cash Flow,” as defined in the Amended and Restated Credit Agreement, with a reduction to 25% if the total net leverage ratioour Annual Report on Form 10-K for the fiscal year is less than or equal to 3.50 to 1.00 but greater than 3.00 to 1.00,ended December 31, 2021 for further information and a reduction to 0% if the total net leverage ratio for the fiscal year is less than or equal to 3.00 to 1.00. We are also required to make quarterly amortization payments equal to 0.25% per annum of the original principal amount ofsignificant terms and conditions associated with the Term Loan Facility (subject to reductions by optional and mandatory prepaymentsRevolving Facility.
As further described in the Acquisition section above, following the completion of the loans).
AsWholesome Earn-Out Period, we determined, in accordance with the terms of the date ofPurchase Agreement, that the amendment ofsellers were entitled to receive the credit facilities, the aggregate unamortized debt issuance costs totaled $6.2 million, of which $4.4 million was expensed as a loss on extinguishment of debt. Additionally, in connection with the Amended and Restated Credit Agreement, the Company paid fees to certain lenders of $3.8 million, which was considered a debt discount, all of which was deferred, and incurred transaction costs of $8.9 million, of which $7.8 million was deferred and $1.1 million was expensed as part of loss on extinguishment and debt transaction costs.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.Earn-Out
Contractual Obligations
Amount in full. We elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The table below includesremaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under our future payments for debt and interest as of June 30, 2021, which were materially affected by the Amended and Restated Credit Agreement, as further described under Indebtedness (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due for the 12-Month Period Ended June 30, |
| | Total | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
| Debt | $ | 399,063 | | | $ | 3,750 | | | $ | 3,750 | | | $ | 3,750 | | | $ | 3,750 | | | $ | 28,750 | | | $ | 355,313 | |
| Interest on debt | 137,927 | | | 21,765 | | | 21,555 | | | 21,405 | | | 21,137 | | | 20,537 | | | 31,528 | |
| Total | $ | 536,990 | | | $ | 25,515 | | | $ | 25,305 | | | $ | 25,155 | | | $ | 24,887 | | | $ | 49,287 | | | $ | 386,841 | |
Critical Accounting Policies and Recently Issued Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated and combined financial statements for the six months ended June 30, 2021 for discussion of our accounting policy regarding the accounting for Private Warrants.
Other than the addition of our accounting policy for Private Warrants, thereThere have been no changes to critical accounting policies and estimates from those disclosed in our audited consolidated and combined financial statements for the fiscal year ended December 31, 2020.2021. For information regarding our critical accounting policies and accounting pronouncements, see our unaudited condensed consolidated and combined financial statements and the related notes to those statements included under Item 1. hereof and our 20202021 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.There have been no significant changes in market risk from those addressed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 during the three months ended March 31, 2022. See the information set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed 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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). The Company’s management and the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2021 due solely to the previously identified material weakness associated with the accounting for Private Warrants reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
The Company’s remediation plan has been implemented. However, the material weakness cannot be considered remediated until the controls operate for a sufficient period and management has concluded, through testing, that our internal controls are operating effectively. In connection with correcting its accounting for the Private Warrants, the Company has implemented additional review procedures and training related to the accounting for equity and liability instruments (including those with warrants) to determine proper accounting in accordance with GAAP.
While management believes that the remedial efforts will resolve the identified material weakness, there is no assurance that management’s remedial efforts conducted to date will be sufficient or that additional remedial actions will not be necessary.
Notwithstanding such material weakness in internal controls over financial reporting, our management concluded that our condensed consolidated and combined financial statements in this report fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with GAAP.2022.
Changes in Internal Control over Financial Reporting
There have been no other changes in internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2021March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments in our legal proceedings since we filed our Annual Report on Form 10-K for the year ended December 31, 2020.2021. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 20202021 for additional information regarding legal proceedings.
Item 1A. Risk Factors.
We discuss in our filings with the SEC various risks that may materially affect our business. The materialization of any risks and uncertainties identified in forward-looking statements contained in this report together with those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 20202021 and our other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking Statements.” There have been no material changes in the risk factors previously disclosed in the section entitled “Item 1A-Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2020, and in the section entitled “Item 1A-Risk Factors” of the Quarterly Report on Form 10-Q for the quarter ended March, 31 2021, including the risk factors incorporated by reference therein, other than those listed in this section.
The ongoing novel coronavirus (COVID-19) outbreak and consequent travel and other restrictions could adversely affect our business.
The COVID-19 pandemic continues to create challenging and unprecedented conditions, and we continue our commitment to supporting the global response to the crisis. Although there are effective vaccines for COVID-19 that have been approved for use, distribution of the vaccines has only recently started and a majority of the public globally will likely not have access to a vaccination until sometime later in 2021 or 2022. Accordingly, there remains significant uncertainty about the duration and extent of the impact from the COVID-19 pandemic. To date, we have successfully implemented contingency plans overseen by our global leadership team to monitor the evolving needs of our global business.
From the outset of the pandemic, our first priority has been the well-being of our employees and consumers. We have consistently met or exceeded government guidelines for addressing the health and safety of our employees, including global travel restrictions, prohibitions against visitors, social distancing requirements, the use of thermal temperature scanners, and the provision of personal protective equipment to our employees. We have also enabled the use of new technology to allow many of our office-based employees to work from home effectively.
We may face operational challenges as well as potential increased operating costs in manufacturing our products and making them available to customers and consumers as a result of the COVID-19 pandemic. Shelter-in-place and social distancing behaviors, which are being mandated or encouraged by governments and practiced by businesses and individuals, create challenges for our manufacturing employees as well as for third parties on which we rely to make our products available to consumers. These third parties include our suppliers, contract manufacturers, distributors, logistics providers and other business partners, retailers that ultimately sell our Branded CPG products to consumers and customers of our Flavors and Ingredients business.
To date, consumer behaviors that have resulted from COVID-19 have increased overall demand for our Branded CPG products sold via retail or e-commerce channels. This demand has been partially offset by lower demand for Branded CPG products in the food service channel, working capital reductions by distributors and retailers in emerging markets and temporary impacts on demand for our Flavors and Ingredients products driven by disruptions in our customers’ supply chains or logistics networks.
While we have experienced a net increase in the overall demand for our products during the COVID-19 pandemic, the continued duration of that increased demand environment is uncertain. Additionally, deteriorating economic conditions arising from the COVID-19 pandemic, or future pandemics, could adversely affect future demand for our products. Factors such as increased unemployment, decreases in disposable income and declines in consumer confidence could cause a decrease in demand for our overall product set, particularly higher priced products. Further, vaccines to prevent COVID-19 were approved by health agencies in the U.S. and other countries in which the Company operates, which began to be administered near the end of calendar year 2020. Distribution of the vaccines has been slower than anticipated. In addition, new strains of the virus appear to have increased transmissibility, which could complicate treatment and vaccination programs. The COVID-19 pandemic is an unprecedented situation and the Company's understanding of and response to its impacts is changing and evolving. The additional risk factors identified here are based upon information known at this time. The COVID-19 pandemic may adversely impact our business, financial condition, and results of operations in one or more ways not identified to date.
We recently identified a material weakness in our internal control over financial reporting and determined that our disclosure controls and procedures were ineffective which, if not remediated, may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
We identified a material weakness in our controls over the accounting for the Private Warrants issued in connection with the Business Combination. Based on the material weakness, management concluded that, as of March 31, 2021, our internal control over financial reporting was not effective and our disclosure controls and procedures were not effective.
Although our remediation plan has been implemented and was completed as of the filing date of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, the material weakness cannot be considered remediated until the controls operate for a sufficient period and management has concluded, through testing, that our internal controls are operating effectively. While management believes that the remedial efforts will resolve the identified material weakness, there is no assurance that management’s efforts conducted to date will be sufficient or that additional actions will not be necessary. In addition, there can be no assurance that additional material weaknesses will not be identified in the future. If we are unsuccessful in remediating our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting or disclosure controls and procedures, our business, reputation, results of operations, liquidity, financial condition, ability to access the capital markets, perceptions of our creditworthiness, and stock price could be adversely affected.
Our Private Warrants are accounted for as liabilities and changes in the value of these warrants could have a material effect on our financial results.
At each reporting period, the fair value of the warrant liabilities for the Private Warrants will be re-measured and the change in the fair value of the liability will be recorded as other income (expense) in our statement of operations. Changes in the inputs and assumptions for the valuation model we use to determine the fair value of such liability may have a material impact on the estimated fair value of the derivative liability. The share price of our common stock represents the primary underlying variable that impacts the value of the derivative instruments. Additional factors that impact the value of the derivative instruments include the volatility of our stock price and publicly traded warrants and interest rates. As a result, our consolidated financial statements and results of operations will fluctuate quarterly, based on various factors, such as the share price of our common stock, many of which are outside of our control. In addition, we may change the underlying assumptions used in our valuation model, which could result in significant fluctuations in our results of operations. If our stock price is volatile, we expect that we will recognize non-cash gains or losses on the Private Warrants each reporting period and that the amount of such gains or losses could be material. The impact of changes in fair value on earnings may have an adverse effect on the market price of our common stock.therein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.Following the completion of the Earn-Out Period, we determined, in accordance with the terms of the Wholesome Purchase Agreement, that the WSO Sellers were entitled to receive the Earn-Out Amount in full. We elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under our revolving credit facility. The earn-out shares were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering. No underwriter participated in the offer and sale of the earn-out shares, and no commission or other remuneration was paid or given directly or indirectly in connection therewith. We did not receive any proceeds in connection with the issuance of the earn-out shares.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| | | | | | | | |
| No. | | Description of Exhibit |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 10.1* | | |
| 10.2* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1** | | |
| 32.2** | | |
| 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 Labels Linkbase Document |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104* | | The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 |
| | | | | |
| * | Filed herewith. |
| ** | Furnished herewith. |
| |
| |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Whole Earth Brands, Inc. |
| |
| | /s/ Albert Manzone |
Date: August 9, 2021May 10, 2022 | Name: | Albert Manzone |
| Title: | Chief Executive Officer |
| | (Principal Executive Officer) |
| |
| | /s/ Andrew RusieDuane Portwood |
Date: August 9, 2021May 10, 2022 | Name: | Andrew RusieDuane Portwood |
| Title: | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |