UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


			(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the three months ended
			March 31, ~~2020~~2021
			OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 001-37540

HOSTESS BRANDS, INC.

(Exact name of registrant as specified in its charter)


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

(816) 701-4600

Registrant’s telephone number, including area code

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


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

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

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

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

Large accelerated filer

☒

Accelerated
filer

☐

Non‑accelerated
filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Shares of Class A common stock outstanding - ~~123,202,917~~131,294,192 shares at May ~~5, 2020~~10, 2021

~~Shares of Class B common stock outstanding - 7,440,587 shares at May 5, 2020~~

HOSTESS BRANDS, INC.

FORM 10-Q

For the ~~Quarter~~Three Months Ended March 31, ~~2020~~2021

INDEX

Page

PART I - Financial Information

Item 1.

Consolidated Financial Statements

Consolidated Balance Sheets (Unaudited)

Consolidated Statements of Operations (Unaudited)

Consolidated Statements of Comprehensive Income ~~(Loss)~~ (Unaudited)

Consolidated Statements of Stockholders’ Equity (Unaudited)

Consolidated Statements of Cash Flows (Unaudited)

Notes to Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1916

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

2320

Item 4.

Controls and Procedures

2320

PART II - Other Information

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2421

Item 3.

Default Upon Senior Securities

2421

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute forward-looking statements are generally identified through the inclusion of words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language. Statements addressing ~~our future operating performance and statements addressing~~ events and developments that we expect or anticipate will occur are also considered forward-looking statements. All forward-looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019~~2020 and herein, as updated by subsequent filings. The impact of COVID-19 may also exacerbate these risks, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that the Company is not aware of currently.All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

HOSTESS BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

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

March 31, December 31,
ASSETS 2020 2019

Current assets:
Cash and cash equivalents $ 96,167 $ 285,087
Accounts receivable, net 147,064 104,892
Inventories 50,737 47,608
Prepaids and other current assets 12,321 15,569
Total current assets 306,289 453,156
Property and equipment, net 276,628 242,384
Intangible assets, net 1,987,931 1,853,315
Goodwill 701,905 535,853
Other assets, net 16,824 12,993
Total assets $ 3,289,577 $ 3,097,701
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and lease obligations payable within one year $ 14,437 $ 11,883
Tax receivable agreement payments payable within one year 10,800 12,100
Accounts payable 67,105 68,566
Customer trade allowances 48,876 45,715
Accrued expenses and other current liabilities 43,808 21,661
Total current liabilities 185,026 159,925
Long-term debt and lease obligations 1,112,388 975,405
Tax receivable agreement obligations 129,400 126,096
Deferred tax liability 290,342 256,051
Other long-term liabilities 1,320 —
Total liabilities 1,718,476 1,517,477
Commitments and Contingencies (Note 13)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 123,186,308 and 122,108,086 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively 12 12
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 7,440,587 and 8,409,834 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively 1 1
Additional paid in capital 1,163,263 1,152,055
Accumulated other comprehensive income (loss) (9,583) (756)
Retained earnings 336,828 334,480
Stockholders’ equity 1,490,521 1,485,792
Non-controlling interest 80,580 94,432
Total liabilities and stockholders’ equity $ 3,289,577 $ 3,097,701


	March 31,		December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	197,846	$	173,034
Accounts receivable, net	159,492		125,550
Inventories	52,144		49,348

Prepaids and other current assets	8,468		21,614
Total current assets	417,950		369,546
Property and equipment, net	306,995		303,959
Intangible assets, net	1,962,025		1,967,903
Goodwill	706,615		706,615
Other assets, net	17,166		17,446
Total assets	$	3,410,751	$	3,365,469

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Long-term debt and lease obligations payable within one year	$	13,508	$	13,811
Tax receivable agreement payments payable within one year	10,200		11,800
Accounts payable	76,106		61,428
Customer trade allowances	47,514		46,779
Warrant liabilities	785		861
Accrued expenses and other current liabilities	38,855		55,715

Total current liabilities	186,968		190,394
Long-term debt and lease obligations	1,110,101		1,113,037
Tax receivable agreement obligations	144,744		144,744
Deferred tax liability	303,880		295,009
Other long-term liabilities	1,575		1,560
Total liabilities	1,747,268		1,744,744

Commitments and Contingencies (Note 10)	0		0

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 131,184,826 and 130,347,464 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	13		13

Additional paid in capital	1,290,882		1,281,018
Accumulated other comprehensive loss	(4,245)		(10,407)
Retained earnings	382,833		356,101
Treasury stock	(6,000)		(6,000)
Stockholders’ equity	1,663,483		1,620,725

Total liabilities and stockholders’ equity	$	3,410,751	$	3,365,469

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended
March 31,
2020 March 31,
2019
Net revenue $ 243,485 $ 222,738
Cost of goods sold 164,148 147,550
Gross profit 79,337 75,188
Operating costs and expenses:
Advertising and marketing 10,063 8,863
Selling expense 18,120 8,520
General and administrative 25,195 17,471
Amortization of customer relationships 6,484 5,985
Business combination transaction costs 4,282 —
Other operating expense (income) 27 (1,761)
Total operating costs and expenses 64,171 39,078
Operating income 15,166 36,110
Other expense:
Interest expense, net 11,725 10,236
Other expense 553 440
Total other expense 12,278 10,676
Income before income taxes 2,888 25,434
Income tax expense (benefit) 248 (1,178)
Net income 2,640 26,612
Less: Net income attributable to the non-controlling interest 292 5,486
Net income attributable to Class A stockholders $ 2,348 $ 21,126
Earnings per Class A share:
Basic $ 0.02 $ 0.21
Diluted $ 0.02 $ 0.21
Weighted-average shares outstanding:
Basic 123,123,656 100,085,141
Diluted 126,075,126 100,777,609


	Three Months Ended
	March 31, 2021		March 31, 2020

Net revenue	$	265,421	$	243,485
Cost of goods sold	169,902		164,148
Gross profit	95,519		79,337
Operating costs and expenses:
Advertising and marketing	11,781		10,063
Selling expense	8,630		18,120
General and administrative	22,185		25,195
Amortization of customer relationships	5,878		6,484
Business combination transaction costs	0		4,282
Other operating expense	0		27
Total operating costs and expenses	48,474		64,171
Operating income	47,045		15,166
Other expense (income):
Interest expense, net	10,017		11,725


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

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

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, amounts in thousands)

Three Months Ended
March 31, 2020 March 31, 2019
Net income $ 2,640 $ 26,612
Other comprehensive loss:
Unrealized loss on interest rate swap contracts designated as cash flow hedges (12,708) (2,165)
Tax benefit 3,169 447
Comprehensive income (loss) (6,899) 24,894
Less: Comprehensive income (loss) attributed to non-controlling interest (437) 4,984
Comprehensive income (loss) attributed to Class A stockholders $ (6,462) $ 19,910


	Three Months Ended
	March 31, 2021		March 31, 2020

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

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in thousands except share data)


	Class A Voting Common Stock			Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount									Shares	Amount
Balance–December 31, 2020	130,347	$	13		$	1,281,018	$	(10,407)	$	356,101	444	$	(6,000)	$	1,620,725
Comprehensive income	—	—			—		6,162		26,732		—	—		32,894
Share-based compensation	146	—			2,723		—		—		—	—		2,723


Exercise of employee stock options	20	—			262		—		—		—	—		262
Exercise of public warrants	672	—			7,722		—		—		—	—		7,722
Payment of taxes for employee stock awards	—	—			(843)		—		—		—	—		(843)
Reclassification of public warrants	—	—			—		—		—		—	—		—

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

Class A Voting
Common Stock Class B Voting
Common Stock Additional
Paid-in Capital Accumulated
Other Comprehensive Income (Loss) Retained
Earnings Total
Stockholders’
Equity Non-controlling
Interest
Shares Amount Shares Amount
Balance–December 31, 2018 100,046,392 $ 10 30,255,184 $ 3 $ 925,902 $ 2,523 $ 271,365 $ 1,199,803 $ 350,454
Comprehensive income (loss) — — — — — (1,216) 21,126 19,910 4,984
Share-based compensation, net of income taxes of $613 — — — — 1,668 — — 1,668 —
Distributions — — — — — — — — (457)
Exercise of public warrants 50 — — — — — — — —
Balance–March 31, 2019 100,046,442 $ 10 30,255,184 $ 3 $ 927,570 $ 1,307 $ 292,491 $ 1,221,381 $ 354,981
Balance–December 31, 2019 122,108,086 $ 12 8,409,834 $ 1 $ 1,152,055 $ (756) $ 334,480 $ 1,485,792 $ 94,432
Comprehensive income — — — — — (8,810) 2,348 (6,462) (437)
Share-based compensation, including income taxes of $103 106,770 — — — 2,180 — — 2,180 —
Exchanges 969,247 — (969.247) — 11,819 (17) — 11,802 (11,802)
Distributions — — — — — — — — (1,613)
Exercise of employee stock options 2,030 — — — 153 — — 153 —
Payment of taxes for employee stock awards — — — — (1,004) — — (1,004) —
Exercise of public warrants 175 — — — 2 — — 2 —
Tax receivable agreement arising from exchanges, net of income taxes of $1,341 — — — — (1,942) — — (1,942) —
Balance–March 31, 2020 123,186,308 $ 12 7,440,587 $ 1 $ 1,163,263 $ (9,583) $ 336,828 $ 1,490,521 $ 80,580


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

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)



			Three Months Ended
			March 31, 2021		March 31, 2020

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

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


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

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

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

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

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

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

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


	Proceeds from long-term debt origination, net of fees paid		0		136,888
	Distributions to non-controlling interest		0		(1,614)

	Tax payments related to issuance of shares to employees		(843)		(1,004)
	Cash received from exercise of options and warrants		7,984		155
	Payments on tax receivable agreement		(1,600)		(1,279)

	Net cash used in financing activities		2,749		130,354
	Effect of exchange rate changes on cash and cash equivalents		95		(873)
Net increase (decrease) in cash and cash equivalents			24,812		(188,920)
Cash and cash equivalents at beginning of period			173,034		285,087
Cash and cash equivalents at end of period			$	197,846	$	96,167

Three Months Ended
March 31, 2020 March 31, 2019
Operating activities
Net income $ 2,640 $ 26,612
Depreciation and amortization 12,821 10,878
Debt discount (premium) amortization 338 (228)
Tax receivable agreement remeasurement — (1,761)
Unrealized foreign exchange losses 286 —
Non-cash lease expense 590 —
Share-based compensation 2,077 2,281
Deferred taxes (649) (2,882)
Loss on sale of assets 27 —
Change in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable (17,463) (23,552)
Inventories 5,180 (4,578)
Prepaids and other current assets 3,270 2,917
Accounts payable and accrued expenses 864 16,594
Customer trade allowances 3,161 2,104
Net cash provided by operating activities 13,142 28,385
Investing activities
Purchases of property and equipment (11,323) (9,493)
Acquisition of business, net of cash acquired (318,427) —
Acquisition and development of software assets (1,793) (1,342)
Net cash used in investing activities (331,543) (10,835)
Financing activities
Repayments of long-term debt and lease obligations (2,792) (2,530)
Proceeds from long-term debt origination, net of fees paid 136,888 —
Distributions to non-controlling interest (1,614) (457)
Tax payments related to issuance of shares to employees (1,004) —
Cash received from exercise of options and warrants 155 —
Payments on tax receivable agreement (1,279) (457)
Net cash provided by (used in) financing activities 130,354 (3,444)
Effect of exchange rate changes on cash and cash equivalents (873) —
Net increase (decrease) in cash and cash equivalents (188,920) 14,106
Cash and cash equivalents at beginning of period 285,087 146,377
Cash and cash equivalents at end of period $ 96,167 $ 160,483


Supplemental Disclosures of Cash Flow Information:	Supplemental Disclosures of Cash Flow Information:							Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:	Cash paid during the period for:							Cash paid during the period for:
		Interest	$	10,758	$	11,087	Interest		$	9,807	$	10,758
		Net taxes refunded	$	(586)	$	(10)	Net taxes paid (refunded)		$	(8,191)	$	(586)
Supplemental disclosure of non-cash investing:	Supplemental disclosure of non-cash investing:							Supplemental disclosure of non-cash investing:
		Accrued capital expenditures	$	2,014	$	1,436	Accrued capital expenditures		$	4,026	$	2,014

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Hostess Brands, Inc. is a Delaware corporation headquartered in Lenexa, Kansas. The consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing snack products, including sweet baked goods, cookies and wafers in North America. The Hostess® brand dates back to 1919 when Hostess® CupCake was introduced to the public, followed by Twinkies® in 1930.

Basis of Presentation

The Company’s operations are conducted through ~~indirect~~ operating subsidiaries that are wholly-owned by ~~Hostess Holdings, L.P. (“Hostess Holdings”), a direct subsidiary of Hostess Brands, Inc. Hostess Brands, Inc. holds 100% of~~ the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidates Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings are held by the holders of the outstanding shares of Class B common stock of Hostess Brands, Inc. These limited partnership interests in Hostess Holdings are reflected in the consolidated financial statements as a non-controlling interest. In January 2020, the Company acquired Voortman Cookies, Limited (“Voortman”) a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies.

~~Basis of Presentation~~

Company. The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). ~~In the opinion of management, the unaudited~~The accompanying consolidated financial statements include ~~all adjustments necessary for~~ the ~~fair presentation~~accounts of the ~~Company’s financial position~~Company and ofits wholly-owned, majority-owned or controlled subsidiaries, collectively referred to as the results of operations and cash flows for the periods presented, and all such adjustments were of a normal and recurring nature. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2019.

Company.

For the periods presented, the Company has ~~2 reportable segments: Snacking and In-Store Bakery. The Company sold its In-Store Bakery operations on August 30, 2019. Subsequent to the sale, Snacking is the Company’s single~~1 reportable segment.

Adoption of New Accounting Standards

In ~~June 2016,~~March 2020, the FASB issued ASU ~~2016-13, Financial Instruments-Credit Losses: Measurement~~No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of ~~Credit Losses~~the Effects of Reference Rate Reform on Financial ~~Instruments~~Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected, this ASU must be applied prospectively for all eligible contract modifications. We will adopt Topic ~~326”).~~848 when our relevant contracts are modified upon transition to alternative reference rates. We do not expect our adoption of Topic 848 to have a material impact on our consolidated financial statements.

In December 2019, ASU 2019-12 “Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740)” was issued. This ASU ~~requires entities~~simplifies the accounting for certain income tax related items, including intraperiod tax allocations, deferred taxes related to ~~measure the impairment~~foreign subsidiaries and step-up in tax basis of ~~certain financial instruments, including trade receivables, based on expected losses rather than incurred losses.~~goodwill. The ASU ~~2016-13~~ is effective for fiscal years beginning after December 15, ~~2019, including interim periods within those fiscal years.~~2020 and early adoption is permitted. The ~~Company~~company adopted the standard effective January 1, ~~2020.~~2021. Adoption of Topic ~~326~~740 did not have a material impact on the Company’s consolidated financial statements.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity). All intercompany balances and transactions have been eliminated in consolidation.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and for the reported amounts of revenues and expenses during the reporting period. Management utilizes estimates, including, but not limited to, valuation and useful lives of tangible and intangible assets, valuation of expected future payments under the tax receivable agreement, and reserves for trade and promotional allowances. Actual results could differ from these estimates.

Accounts Receivable

Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company’s accounts receivable were ~~$147.1~~$159.5 million and ~~$104.9~~$125.6 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of ~~$3.7~~$3.5 million at both March 31, 2021 and ~~$2.7 million, respectively.~~December 31, 2020.

Inventories

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

The components of inventories are as follows:


(In thousands)	(In thousands)	March 31, 2020		December 31, 2019		(In thousands)	March 31, 2021		December 31, 2020

Ingredients and packaging	Ingredients and packaging	$	22,726	$	21,439	Ingredients and packaging	$	24,557	$	22,965
Finished goods	Finished goods	24,709		22,513		Finished goods	23,483		23,583
Inventory in transit to customers	Inventory in transit to customers	3,302		3,656		Inventory in transit to customers	4,104		2,800
		$	50,737	$	47,608		$	52,144	$	49,348

Software Costs

Capitalized software is included in “Other assets, net” in the consolidated balance sheets in the amount of $14.4 million and ~~$11.9~~$14.7 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Capitalized software costs are amortized over their estimated useful life of five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative operating expense was $0.9 million for the three months ended March 31, 2021, compared to $1.3 million for the three months ended March 31, ~~2020, compared to $0.7 million for the three months ended March 31, 2019.~~2020.

Disaggregation of Revenue

Net revenue consists of sales of packaged food products in the United States primarily within the Sweet Baked Goods category. ~~Beginning with the acquisition of Voortman on January 3, 2020, (see Note 2. Business Combinations) the~~The Company also sells products in the United States and Canada within the Cookies category.

~~The following tables disaggregate revenues by geographical market.~~

Three Months Ended March 31, 2020
(In thousands) Sweet Baked Goods In-Store Bakery Cookies Total
United States $ 226,361 $ — $ 13,307 $ 239,668
Canada — — 3,817 3,817
$ 226,361 $ — $ 17,124 $ 243,485

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following tables disaggregate revenue by geographical market and category.


	Three Months Ended March 31, 2021
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	237,700	$	23,803	$	261,503
Canada	0		3,918		3,918
	$	237,700	$	27,721	$	265,421

Three Months Ended March 31, 2019
(In thousands) Sweet Baked Goods In-Store Bakery Cookies Total
United States $ 212,879 $ 9,859 $ — $ 222,738
Canada — — — —
$ 212,879 $ 9,859 $ — $ 222,738


	Three Months Ended March 31, 2020
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	226,361	$	13,307	$	239,668
Canada	0		3,817		3,817
	$	226,361	$	17,124	$	243,485

Concentrations

The Company has one customer (together with its affiliates) that accounted ~~for 10% or more of the Company’s total net revenue. The percentage~~20.5% and 21.1% of total net ~~revenues~~revenue for ~~this customer is presented below by segment:~~

Three Months Ended
(% of Consolidated Net Revenues) March 31, 2020 March 31, 2019
Snacking 21.1 % 23.5 %
In-Store Bakery 0.0 % 0.6 %
Total 21.1 % 24.1 %

the three months ended March 31, 2021 and 2020, respectively.

Foreign Currency Remeasurement

Certain ~~activity~~Voortman Cookies Limited (“Voortman”) sales and ~~balances related to the operations of Voortman originate from transactions~~costs are denominated in the Canadian dollar ~~(CAD)~~(“CAD”). CAD transactions have been remeasured into U.S. dollars ~~(USD)~~(“USD”) on the consolidated statement of operations using the average exchange rate for the reporting period. Balances expected to be settled in CAD have been remeasured into USD on the consolidated ~~balances~~balance sheet using the exchange rate at the end of the period. ~~During~~The Company recognized losses on remeasurement of less than $0.1 million during both the three months ended March 31, 2021 and 2020, ~~the Company recognized a loss on remeasurement of less than $0.1 million,~~ reported within other expense on the consolidated statement of operations.

2. ~~Business Combinations~~Property and Equipment

~~On January 3, 2020, the Company completed the previously announced acquisition of all~~Property and equipment consists of the ~~shares of the parent company of Voortman, a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies~~following:


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

Land and buildings	$	61,594	$	59,774
Right of use assets, operating	31,169		31,354
Machinery and equipment	265,615		255,821
Construction in progress	20,385		25,041
	378,763		371,990
Less accumulated depreciation and amortization	(71,768)		(68,031)
	$	306,995	$	303,959

Depreciation expense was $5.8 million for approximately $325.8 million ($423.2 million CAD), pending final working capital and other closing statement adjustments. This purchase price was reduced by a net gain on a related foreign currency contract of $6.9 million, cash acquired of $1.6 million and a receivable for certain purchase price adjustments of $1.1 million, resulting in a net cash outflow of $318.4 million.

The acquisition of Voortman diversifies and expands the Company’s product offerings and manufacturing capabilities in the adjacent cookie category. The acquisition also leverages the Company’s customer reach and lean and agile business model. The combined Company expects to realize additional benefits of scale via sharing established, efficient infrastructure and strengthening of collaborative retail partnerships in the United States and Canada.

An aggregate of $10.8 million CAD was deposited into an escrow account to satisfy amounts in respect of post-closing adjustments and to provide for payment to the Company of indemnity claims, if any. There were no working capital or other adjustments made to the escrow balance during the three months ended March 31, ~~2020. The Company continues~~2021, compared to ~~work through post-closing working capital and other adjustments in accordance with~~$5.0 million for the ~~terms of the share purchase agreement, as well as other contractual rights it has under the transaction documents.~~three months ended March 31, 2020.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Accrued Expenses and Other Current Liabilities

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


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

Payroll, vacation and other compensation	$	12,606	$	9,886
Interest rate swap contract	5,307		13,694
Incentive compensation	5,216		16,199
Accrued interest	4,724		4,815
Other	11,002		11,121





	$	38,855	$	55,715

~~Included in other non-current liabilities in~~4. Debt and Lease Obligations

A summary of the ~~table below~~carrying value of the debt and lease obligations is ~~a $1.3 million liability for an uncertain tax position acquired in~~as follows:


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

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

At March 31, 2021, minimum debt repayments under the ~~transaction. It is offset by a non-current receivable balance of $1.3 million representing expected recovery through seller or insurance policy indemnification.~~term loan are due as follows:


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

Leases

The Company recorded a preliminary allocation of the purchase price to tangible and identified intangible assets acquired and liabilities assumed, based on their fair values as of the closing date. The final allocation of the purchase price is pending the final valuation ofentered into operating leases for certain ~~assets acquired and liabilities assumed and finalization of customary closing adjustments to the final purchase price.~~properties which expire at various times through 2026. The Company ~~expects~~determines if an arrangement is a lease at inception.

At March 31, 2021 and 2020, right of use assets related to ~~finalize~~operating leases are included in property and equipment, net on the ~~allocation~~consolidated balance sheet (see Note 2. Property and Equipment). As of ~~the purchase consideration as soon as practicable. The preliminary purchase price allocation is as follows:~~


~~(In thousands)~~
~~Cash~~	$	~~1,639~~
~~Accounts receivable~~	~~24,848~~
~~Inventory~~	~~8,309~~
~~Income tax receivable~~	~~6,079~~
~~Other current assets~~	~~420~~
~~Property and equipment~~	~~32,371~~
~~Customer relationships~~	~~11,100~~
~~Trade names~~	~~130,000~~
~~Goodwill~~	~~166,052~~
~~Other non-current assets~~	~~1,320~~
~~Accounts payable and accrued expenses~~	~~(4,317)~~
~~Customer trade allowances~~	~~(4,762)~~
~~Lease liabilities~~	~~(6,420)~~
~~Deferred taxes~~	~~(39,554)~~
~~Other non-current liabilities~~	~~(1,320)~~
~~Assets acquired and liabilities assumed~~	$	~~325,765~~

~~During the three months ended~~ March 31, 2021 and 2020, the Company ~~incurred $4.3 million~~has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of ~~expenses related to this acquisition. These expenses are classified as business combination transaction costs~~long-term debt and lease obligations on the consolidated ~~statements of operations.~~

The following unaudited pro forma combined financial information presents the Company’s results as though the acquisition of Voortman had occurred at January 1, 2019. The unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting in accordance with U.S. GAAP:

Three Months Ended
(In thousands) March 31, 2020 March 31, 2019
(unaudited, pro forma)
Net revenue $ 243,485 $ 243,060
Net income $ 2,640 $ 24,859

~~3. Exit Costs~~

Subsequent to the Company’s acquisition of Voortman, activities were initiated to transition Voortman’s distribution model to the Company’s direct-to-warehouse distribution model. The Company is incurring costs to exit Voortman’s direct-store-delivery model, including severance and contract termination costs, which includes termination of third-party distributor relationships. Total costs are expected to be approximately $10 million through completion of the transition in 2020. During the three months ended March 31, 2020, contract termination costs of $6.4 million andbalance sheet.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The table below shows the composition of lease expenses:


	Three Months Ended
(In thousands)	March 31, 2021		March 31, 2020


Operating lease expense	1,653		1,795
Short-term lease expense	203		1,014
Variable lease expense	357		554
	$	2,213	$	3,363

~~severance costs~~5.Derivative Instruments

Warrants

As of ~~$2.2~~March 31, 2021 and December 31, 2020, there were 52,594,188 and 53,936,776 public warrants outstanding, respectively, and 541,658 private placement warrants outstanding. Each warrant entitles its holder to purchase one-half of one share of Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of Class A common stock. The warrants expire on November 4, 2021, or earlier upon redemption or liquidation. The Company may call the outstanding public warrants for redemption at a price of $0.01 per warrant, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by Gores Sponsor, LLC or its permitted transferees. The potential resale of the private placement warrants to the public warrants has been registered with the SEC. When sold to the public, the private placement warrants will become public warrants.

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

~~Reserves for these activities are reported within accrued expenses on the consolidated balance sheet and had the following activity during the three months ended March 31, 2020:~~

(In thousands) Severance Contract Termination Total
Charges recorded $ 2,171 $ 6,440 $ 8,611
Payments made (97) (176) (273)
Impact of change in exchange rates on CAD denominated liability (222) (429) (651)
Reserve balance as of March 31, 2020 $ 1,852 $ 5,835 $ 7,687

~~4. Property and Equipment~~

~~Property and equipment consists of the following:~~

(In thousands) March 31,
2020 December 31, 2019
Land and buildings $ 56,106 $ 53,683
Right of use assets, operating 30,190 23,771
Machinery and equipment 230,313 209,382
Construction in progress 15,802 5,878
332,411 292,714
Less accumulated depreciation (55,783) (50,330)
$ 276,628 $ 242,384

~~Depreciation expense was $5.0 million for the three months ended March 31, 2020, compared to $4.2 million for the three months ended March 31, 2019.~~

~~5. Segment Reporting~~

~~For the periods presented, the Company has 2 reportable segments: Snacking and In-Store Bakery.~~ The Company’s Snacking segment consists of sweet baked goods, cookies, wafers and bread products that are sold under the Hostess®, Dolly Madison®, Cloverhill® Big Texas®, and Voortman® brands. During the three months ended March 31, 2020, the Company added the newly acquired Voortman operations into the reportable segment previously known as Sweet Baked Goods and renamed the segment as “Snacking”. The In-Store Bakery segment consists primarily of Superior on Main® branded and private label products sold through the in-store bakery section of grocery and club stores. The Company divested its In-Store Bakery operations on August 30, 2019. Subsequent to the sale, Snacking is the Company’s single reportable segment.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The Company evaluates performance and allocates resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:~~

Three Months Ended
(In thousands) March 31, 2020 March 31, 2019
Net revenue:
Snacking $ 243,485 $ 212,879
In-Store Bakery — 9,859
Net revenue $ 243,485 $ 222,738
Depreciation and amortization:
Snacking $ 12,821 $ 10,180
In-Store Bakery — 698
Depreciation and amortization $ 12,821 $ 10,878
Gross profit:
Snacking $ 79,337 $ 73,145
In-Store Bakery — 2,043
Gross profit $ 79,337 $ 75,188
Capital expenditures (1):
Snacking $ 12,152 $ 4,262
In-Store Bakery — 152
Capital expenditures $ 12,152 $ 4,414

~~(1)~~Capital expenditures consists of purchases of property and equipment and acquisition and development of software assets paid in cash or acquired through accounts payable. For the three months ended March 31, 2020 and 2019, capital expenditures in accounts payable decreased by $0.9 million and $6.4 million, respectively.

After the August 30, 2019 divestiture of the In-Store Bakery operations, the Company retained 0 assets related to the In-Store Bakery segment. All Assets at March 31, 2020 and December 31, 2019 were attributed to the Snacking segment.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~6. Goodwill and Intangible Assets~~

The Company recognized goodwill during the three months ended March 31, 2020 related to its acquisition of Voortman, which was incorporated into the Company’s Snacking reporting unit. At March 31, 2020, there is no goodwill associated with the In-Store Bakery reporting segment, which the Company divested in 2019. Goodwill activity is presented below.


~~(In thousands)~~	~~Snacking~~
~~Balance as of December 31, 2019~~	$	~~535,853~~
~~Acquisition of Voortman~~	~~166,052~~
~~Balance as of March 31, 2020~~	$	~~701,905~~

~~Intangible assets consist of the following:~~

(In thousands) March 31,
2020 December 31,
2019
Intangible assets with indefinite lives (Trademarks and Trade Names) $ 1,538,630 $ 1,408,630
Intangible assets with definite lives (Customer Relationships) 526,813 515,713
Less accumulated amortization (Customer Relationships) (77,512) (71,028)
Intangible assets, net $ 1,987,931 $ 1,853,315

The Company recognized additional trade names and customer relationships intangible assets during the three months ended March 31, 2020 related to the acquisition of Voortman. See Note 2. Business Combinations for additional details.

Amortization expense was $6.5 million for the three months ended March 31, 2020, and $6.0 million for the three months ended March 31, 2019. The unamortized portion of customer relationships will be expensed over their remaining useful lives, from 1 to 23 years. The weighted-average amortization period as of March 31, 2020 for customer relationships was 19.4 years.

~~7. Accrued Expenses and Other Current Liabilities~~

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

(In thousands) March 31,
2020 December 31,
2019
Payroll, vacation and other compensation $ 5,730 $ 3,389
Incentive compensation 4,862 6,840
Exit costs 7,687 —
Accrued interest 5,506 4,870
Workers compensation reserve 2,938 2,665
Self-insurance reserves 2,100 1,938
Taxes 1,575 1,255
Interest rate swap contract 13,410 704
$ 43,808 $ 21,661

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

8.~~Debt and Lease Obligations~~

In January 2020, the Company originated a $140.0 million incremental term loan through an amendment to its existing credit agreement. The Company received proceeds of $136.9 million, net of fees incurred of $3.1 million. The proceeds, together with cash on hand, financed the purchase of Voortman (see Note 2. Business Combinations). The terms, conditions and covenants applicable to the incremental term loan are the same as the terms, conditions and covenants applicable to the existing term loans. The term loan requires quarterly payments of interest at a rate of the greater of the applicable LIBOR or 0.75% per annum plus a margin of 2.25% per annum and principal at a rate of 0.25% of the aggregate principal balance with the remaining principal amount due upon maturity on August 3, 2025.

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

(In thousands) March 31,
2020 December 31,
2019
Term Loan (3.6% as of March 31, 2020)
Principal $ 1,111,139 $ 973,930
Unamortized debt premium and issuance costs (5,892) (3,094)
1,105,247 970,836
Lease obligations 21,578 16,452
Total debt and lease obligations 1,126,825 987,288
Less: Current portion of long term debt and lease obligations (14,437) (11,883)
Long-term portion $ 1,112,388 $ 975,405

~~At March 31, 2020, minimum debt repayments under the term loan are due as follows:~~

(In thousands)
2020 $ 8,373
2021 11,164
2022 11,164
2023 11,164
2024 11,164
2025 1,058,110

9.~~Derivative Contracts~~

~~To reduce the effect of interest rate fluctuations, in 2017 the~~ Company entered into an interest rate swap ~~contract~~contracts with a counter ~~party~~parties to make a series of payments based on a fixed ~~interest rate of~~rates ranging from 1.11% to 1.78% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based on athe March 31, 2021 notional amount of ~~$500~~$700 million ~~at the inception of the contract and are reduced~~reducing by $100 million each year, ~~of the~~ ~~five-year contract. As of March 31, 2020 and March 31, 2019, the notional amount was $300~~until $500 million ~~and $400 million, respectively. At March 31, 2020, the effective interest rate on the long-term debt hedged by this contract was 4.03%.~~

~~In February 2020, the Company entered into additional~~ ~~five~~-year interest rate swap contracts to further reduce the effect of interest rate fluctuations on its variable-rate Term Loan. The notional value of these contracts was $500 million. Under the terms of the contracts, the Company will make quarterly payments based on fixed interest rates ranging from 1.11% to 1.64% and receive quarterly payments based on the greater of LIBOR or 0.75%. These contracts become effective as of April 30, 2020, at which time the effective interest rate on the long-term debt hedged by interest rate swap contracts will be 3.79%.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

remains outstanding through August 2025. The Company entered into these transactions to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges.

~~As of~~ At March 31, ~~2020~~2021, the effective fixed interest rate on the long-term debt hedged by these contracts ranged from 3.76% to 4.03%.

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

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In connection with the agreement to purchase Voortman, the Company entered into a deal-contingent foreign currency contract to hedge the $440 million CAD forecasted purchase price and ~~December 31, 2019,~~a portion of the subsequent expected conversion costs. The contract was settled in cash following the completion of the purchase on January 3, 2020.

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


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



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

(1) The fair values of ~~the interest rate swap~~these contracts of $13.4 million and $0.7 million, respectively, were reported within accrued expenses and other current liabilities on the consolidated balance sheet. The fair value of the interest rate swap contract isare measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from ~~observable~~observed market interest rate curves (Level 2).

~~In connection with the agreement to purchase Voortman as described in Note 2. Business Combinations, the Company entered into a~~(2) The fair values of foreign currency ~~contract~~contracts are measure on a recurring basis by comparison to hedge $440 million CAD to be used for the forecasted purchase price and a portion of the subsequent expected conversion costs. At December 31, 2019, the contract had a value of $7.1 million recognized within other current assets on the consolidated balance sheet based on available market information on similar contracts (Level 2).

A summary of the gains and ~~a corresponding gain of $7.1 million was recognized in gain on~~losses related to interest rate and foreign currency contract within the consolidated statements of operations. Through settlement of the contracts during the three months ended March 31, 2020, a loss of $0.2 million was recognized within other expense oninstruments in the consolidated statement of ~~operations.~~operations is as follows:


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

Loss on other derivative contracts	Location

Foreign currency contracts	Other expense	$	0	$	(255)

~~10.~~6. Earnings per Share

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

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Below are basic and diluted net income per share:


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

Net income per Class A share - basic	$	0.20	$	0.66

Net income per Class A share - diluted	$	0.19	$	0.02

Three Months Ended
March 31, 2020 March 31, 2019
Numerator:
Net income attributable to Class A stockholders (in thousands) $ 2,348 $ 21,126
Denominator:
Weighted-average Class A shares outstanding - basic 123,123,656 100,085,141
Dilutive effect of warrants 2,662,441 421,297
Dilutive effect of RSAs and RSUs 289,029 271,171
Weighted-average shares outstanding - diluted 126,075,126 100,777,609
Net income per Class A share - basic $ 0.02 $ 0.21
Net income per Class A share - diluted $ 0.02 $ 0.21

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

For the three months ended March 31, 2021 and 2020, there were 123,998 and ~~2019, the dilutive effect of~~523,643 stock options ~~was~~that were excluded from the computation of diluted ~~earnings per share~~weighted average shares because the ~~assumed proceeds from the awards’ exercise were greater than the average market price of the common shares.~~effect was anti-dilutive.

~~Weighted average Class A shares outstanding reflect~~

7. Income Taxes

The Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on its controlled foreign subsidiaries. The income tax provision is determined based on the ~~weighted impact of~~estimated full year effective tax rate, adjusted for infrequent or unusual items, which are recognized on a discrete basis in the ~~exchange of 1.0 million Class B shares~~period they occur. The Company’s estimated annual effective tax rate is approximately 27% prior to taking into account any discrete items.

The effective tax rate was 27.2% and 0.3% for ~~Class A shares during~~ the three months ended March 31, ~~2020.~~

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

1715

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~11. Income Taxes~~

The Company is subject to U.S. federal, state and local taxes on its allocable portion of the income of Hostess Holdings, a partnership for U.S. federal and most applicable state and local taxes. As a partnership, Hostess Holdings is itself not subject to U.S. federal and certain state and local income taxes. The operations of Hostess Holdings include those of its controlled foreign corporation subsidiaries. The Company intends to indefinitely reinvest earnings outside the United States and, thus, is not recording deferred taxes on its investment in foreign subsidiaries.

The Company’s estimated annual effective tax rate is 24.1% prior to taking into account any discrete items. The effective tax rate was an expense of 8.6% and a benefit of 4.6% for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, the effective tax rate was impacted by the write-off of deferred taxes related to Voortman, which resulted in a discrete tax benefit of $0.5 million. During the three months ended March 31, 2019, the effective tax rate was impacted by the remeasurement of deferred tax balances arising from the update to state apportionment factors that occurred in connection with the relocation of the Company’s primary distribution center from Illinois to Kansas, which resulted in a discrete tax benefit of $6.0 million.

~~12.~~8. Tax Receivable Agreement Obligations

The following table summarizes activity related to the Tax Receivable Agreement for the three months ended March 31, ~~2020:~~

2021:


(In thousands)
Balance December 31, ~~2019~~2020	$	~~138,196~~156,544
~~Exchange of Class B units for Class A shares~~	~~3,283~~


Payments	~~(1,279)~~(1,600)
Balance March 31, ~~2020~~2021	$	~~140,200~~154,944

As of March 31, ~~2020~~2021 the future expected payments under the tax receivable agreement are as follows:

2020 $ 10,800
2021 7,600
2022 7,600
2023 7,500
2024 7,600
Thereafter 99,100


(In thousands)
2021	$	10,200
2022	9,000
2023	9,700
2024	9,900
2025	9,800
Thereafter	106,344

~~13.~~9. Commitments and Contingencies

Liabilities related to legal proceedings are recorded when it is probable that a liability has been incurred and the associated amount can be reasonably estimated. Where the estimated amount of loss is within a range of amounts and no amount within the range is a better estimate than any other amount, the minimum amount is accrued. As additional information becomes available, potential liabilities are reassessed and the estimates revised, if necessary. Any accrued liabilities are subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material effect on the Company’s financial condition and results of operations.

~~Leases~~

The Company entered into operating leases for the buildings in which it operates that expire at various times through 2026, including those entered by Voortman. The Company determines if an arrangement is a lease at inception.

~~HOSTESS BRANDS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

At March 31, 2020 and December 31, 2019, right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheet (see Note 4. Property and Equipment). As of March 31, 2020 and December 31, 2019, the Company has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease obligations on the consolidated balance sheet (see Note 8. Debt and Lease Obligations).

~~The table below shows the composition of lease expenses:~~

Three Months Ended
(In thousands) March 31, 2020 March 31, 2019
Amortization of right of use asset, financing lease — $ 44
Interest, financing lease — 7
Operating lease expense 1,795 641
Short-term lease expense 1,014 400
Variable lease expense 554 188
$ 3,363 $ 1,280

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

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Hostess Brands, Inc. This discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included herein, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019.~~2020. The terms “our”, “we,” “us,” and “Company” as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.

Overview

We are a leading ~~United States~~North America packaged food company ~~historically operating in two reportable segments: Snacking,~~ which ~~includes~~produces several types of sweet baked goods (“SBG”) as well as ~~our~~ cookie and wafer ~~products and In-Store Bakery (“ISB”).~~products. Our direct-to-warehouse (“DTW”) product distribution system allows us to deliver to our customers’ warehouses. Our customers in turn distribute to the retail stores.

Hostess® is the second leading brand by market share within the SBG category, according to Nielsen U.S. total universe. For the 13-week period ended ~~March 28, 2020,~~April 3, 2021, our branded SBG products (which include Hostess®, Dolly Madison®, Cloverhill^® and Big Texas^®) market share was ~~18.5%~~20.7% per Nielsen’s U.S. SBG category data.

Factors Impacting Recent Results

Acquisition

On January 3, 2020, ~~the Company~~we completed the ~~previously announced~~ acquisition of all of the shares of the parent company of Voortman Cookies Limited (“Voortman”), a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies. By adding the Voortman® brand, we expect to have greater growth opportunities provided by a more diverse portfolio of brands and products. Our consolidated statement of operations includes the operation of these assets from January 3, 2020 through March 31, ~~2020. During the quarter, we started transitioning from Voortman’s legacy direct-store-delivery distribution model into our centralized DTW model.~~

~~Divestiture~~

On August 30, 2019, the Company sold the ISB operations, including relevant trademarks and licensing agreements, to an unrelated party. The ISB operations provided products that were primarily sold in the in-store bakery section of U.S. retail channels. The Company divested the operations to focus more on future investment in areas of our business that better leverage our core competencies.

2021.

COVID-19

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

~~We have~~At the start of the pandemic, we established a task force ~~in place monitoring~~to monitor the rapidly evolving situation and ~~recommending~~recommend risk mitigation actions as deemed necessary.

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

WeStarting in late 2020, several vaccines have ~~adequate liquidity~~been authorized for use against COVID-19 in the United States and internationally. As a result of the distribution of these vaccines, various federal state and local governments have begun to ~~pay for~~ease the ~~additional costs associated with these programs~~movement restrictions and initiatives while ~~servicing our on-going operating~~continuing to require social distancing and ~~capital needs.~~face mask protocols. However, ~~we continue~~uncertainty continues to ~~actively monitor~~exist regarding the severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and deployment, potential variants of COVID-19, and the effect of actions taken and that will ~~take action, as necessary,~~be taken to ~~preserve adequate liquidity and ensure that our business can continue to operate in this dynamic environment.~~contain COVID-19 or treat its effect, among others.

~~On March 27, 2020,~~Under the provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, ~~was signed into law. The~~we were able to defer the payment of $5.6 million of 2020 employer payroll taxes until the second quarter of 2021. Apart from this deferral and their impact on the general economy, including the labor market and consumer demand, neither the CARES Act, ~~provides a substantial stimulus and assistance package~~the American Rescue Plan enacted in the first quarter of 2021, nor any other government program intended to address ~~the impact of the~~ COVID-19 ~~pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a~~had any material impact on our consolidated financial statements for the three months ended March 31, 2021 or 2020. We continue to monitor any effects that may result from the CARES ~~Act.~~Act and other stimulus programs.

~~Operating Results~~

Three Months Ended
(In thousands, except per share data)
March 31, 2020 March 31, 2019
Net revenue $ 243,485 $ 222,738
Gross profit 79,337 75,188
As a % of net revenue 32.6 % 33.8 %
Operating costs and expenses $ 64,171 $ 39,078
Operating income 15,166 36,110
As a % of net revenue 6.2 % 16.2 %
Other expense $ 12,278 $ 10,676
Income tax expense (benefit) 248 (1,178)
Net income 2,640 26,612
Net income attributable to Class A stockholders $ 2,348 $ 21,126
Earnings per Class A share:
Basic $ 0.02 $ 0.21
Diluted $ 0.02 $ 0.21

2017

Operating Results


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

Operating costs and expenses	$	48,474		$	64,171
Operating income	47,045			15,166


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

Income tax expense	10,009			248
Net income	26,732			81,740

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

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

Results of Operations

Net Revenue

Net revenue for the three months ended March 31, ~~2020~~2021 was ~~$243.5~~$265.4 million, an increase of ~~9.3%~~9.0%, or ~~$20.8~~$21.9 million, compared to ~~$222.7~~$243.5 million for the three months ended March 31, ~~2019. Excluding ISB,~~2020. Sweet baked goods net revenue increased ~~14.4%. The acquisition of Voortman contributed net revenue of $17.1~~$11.3 million, ~~in the quarter and 8.1% of growth. The remaining increase was from the $13.5 million or 6.3% growth from sweet baked goods~~ primarily driven by higher volume of core Hostess® branded ~~multi-pack~~ products partially offset by lower sales of private label and non-Hostess® branded products. Cookies net revenue increased $10.6 million due to the strong demand ~~particularly in~~and expanded distribution of Voortman® branded products following the ~~grocery and dollar channels generated in part from increased store traffic in response~~transition of the Voortman business to ~~COVID-19.~~the warehouse distribution model during the first quarter of 2020.

Gross Profit

Gross profit for the three months ended March 31, ~~2020~~2021 was ~~$79.3~~$95.5 million, or ~~32.6%~~36.0% of net revenue, compared to ~~$75.2~~$79.3 million, or ~~33.8%~~32.6% of net revenue for the three months ended March 31, ~~2019. Excluding ISB, gross profit increased 8.5%. Gross profit increased due to increased~~ ~~sales partially offset~~2020. The increase was driven primarily by higher ~~distribution~~volume of Hostess® branded products and ~~labor costs as well as higher costs~~favorable mix. Additionally, the increase was driven by ~~the turnover~~the realization of ~~inventory acquired through~~Voortman synergies and productivity efficiencies as the Voortman ~~acquisition which~~business was ~~recorded at fair value.~~not yet transitioned to the warehouse distribution model and fully integrated in the first quarter of 2020.

Operating Costs and Expenses

Operating costs and expenses for the three months ended March 31, ~~2020~~2021 were ~~$64.2~~$48.5 million, ~~or 26.4% of net revenue,~~ compared to ~~$39.1~~$64.2 million ~~or 17.5% of net revenue~~ for the three months ended March 31, ~~2019. These costs increased~~2020. The decrease was primarily ~~due~~attributed to ~~transition costs~~prior year expenses incurred ~~to shift Voortman from a direct-to-store delivery operating model to a warehouse model including contract termination costs~~ for the ~~independent distributors~~integration and ~~severance costs for terminated employees, as well as normal~~conversion of Voortman's operations and the realization of operating ~~costs of the Voortman operations.~~cost synergies.

Other (Income) Expense

Other expense for the three months ended March 31, ~~2020~~2021 was ~~$12.3~~$10.3 million compared to ~~$10.7 million for the three months ended March 31, 2019, in each case consisting primarily~~other income of ~~interest expense. Interest expense on our term loans was $11.5 million and $11.1~~$66.8 million for the three months ended March 31, 2020 primarily as a result of the $79.1 million gain on change in fair value of our liability-classified warrants in the three months ended March 31, 2020. Interest expense on our term loans was $9.7 million and ~~2019,~~$11.5 million for the three months ended March 31, 2021 and 2020, respectively. Interest expense on our term loan decreased in the current year due to the fluctuations in LIBOR.

Income Taxes

Our effective tax rate for the three months ended March 31, ~~2020~~2021 was ~~8.6%~~27.2% compared to ~~a benefit of 4.6%~~0.3% for the three months ended March 31, ~~2019.~~2020. The ~~current year effective~~increase in tax rate is primarily attributed to the $79.1 million change in fair value of warrant liabilities in the prior-year period, which is a non-taxable gain. The effective rate was also impacted by the ~~write off~~removal of the non-controlling interest in the current-year period and a write-off of deferred taxes in the prior-year period related to Voortman, which resulted in a discrete tax benefit of $0.5 million. Our prior year effective tax rate was impacted by the remeasurement of deferred taxes as a result of the relocation of our primary distribution center from Illinois to Kansas, which resulted in a discrete tax benefit of $6.0 million.

~~Segments~~

For the reporting periods presented, we have two reportable segments: Snacking and In-Store Bakery. Our Snacking segment consists of baked goods, cookies, wafers and bread products that are sold under the Hostess®, Dolly Madison®, Cloverhill® Big Texas®, and Voortman® brands. During the three months ended March 31, 2020, we added the newly acquired Voortman operations into the reportable segment previously known as Sweet Baked Goods and renamed the segment as “Snacking”. The In-Store Bakery segment consists primarily of Superior on Main® branded and private label products sold through the in-store bakery section of grocery and club stores. We divested our In-Store Bakery operations on August 30, 2019.

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

Unaudited Segment Financial Data Three Months Ended
(In thousands) March 31, 2020 March 31, 2019

Net revenue:
Snacking $ 243,485 $ 212,879
In-Store Bakery — 9,859
Net revenue $ 243,485 $ 222,738
Gross profit:
Snacking $ 79,337 $ 73,145
In-Store Bakery — 2,043
Gross profit $ 79,337 $ 75,188
Voortman.

Liquidity and Capital Resources

Our primary sources of liquidity are from cash on hand, future cash flow generated from operations, and availability under our revolving credit agreement (“Revolver”). We believe that cash flows from operations and the current cash and cash equivalents on the balance sheet will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. Our future cash requirements include the purchase commitments for certain raw materials and packaging used in our productions process, scheduled rent on leased facilities, scheduled debt service payments on our term loan and settlements on related interest rate swap contracts, payments on our Tax Receivable Agreement, settlements on our outstanding foreign currency contracts and outstanding purchase orders on capital projects.

Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, our future acquisitions and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we undertake, including acquisitions. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

We had working capital, excluding cash, as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 of ~~$25.1~~$33.1 million and ~~$8.1~~$6.1 million, respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As of March 31, ~~2020,~~2021, we had approximately ~~$95.8~~$94.5 million available for borrowing, net of letters of credit, under the Revolver.

Cash Flows from Operating Activities

Cash flows provided by operating activities for the three months ended March 31, 2021 and 2020 were $32.9 million and ~~2019 were~~ $13.1 million, ~~and $28.4 million,~~ respectively. ~~During the current year quarter, we used~~Operating cash ~~to fund transaction expenses related~~flow increased primarily due to the ~~purchase of~~ Voortman ~~and certain non-capitalizable~~transition costs ~~related to the transition of Voortman into our warehouse distribution model. We also made certain non-capitalizable investments~~paid in ~~the transition of our centralized distribution center to Kansas.~~2020, partially offset by an increase in accounts receivable.

Cash Flows from Investing Activities

Cash used in investing activities for the three months ended March 31, 2021 and 2020 ~~and 2019~~ were ~~$331.5~~$10.9 million and ~~$10.8~~$331.5 million, respectively. During the ~~current year quarter,~~three months ended March 31, 2020, we funded the CAD $423 million purchase price of Voortman with cash on hand and the proceeds from an incremental term loan on our existing credit facility. ~~We also invested~~Cash used for purchase of property and equipment reflects continued innovation through investments in ~~our bakeries~~new bakery lines and ~~new centralized distribution center.~~equipment.

2219

Cash Flows from Financing Activities

Cash flows from financing activities were ~~an inflow of~~$2.7 million and $130.4 million for the three months ended March 31, 2021 and 2020, ~~and an outflow of $3.4 million~~respectively. Financing activity for the ~~three months ended March 31, 2019. Cash~~current year primarily consists of cash received from the exercise of warrants partially offset by regular debt service payments. During 2020, cash proceeds of $140.0 million from the incremental term loan used to finance the purchase of Voortman were offset by related charges of $3.1 million.

Long-Term Debt

~~We had no outstanding borrowings under our Revolver as of March 31, 2020.~~

In January 2020, we entered into $140.0 million of incremental term loans through an amendment to our existing credit agreement. The proceeds, together with cash on hand were used to settle a forward purchase contract for Canadian Dollars utilized to finance the CAD $425 million purchase of Voortman.

As of March 31, ~~2020, $1,111.1~~2021, $1,100.0 million aggregate principal amount of the Term Loan was outstanding and letters of credit worth up to ~~$4.2~~$5.5 million aggregate principal amount were available, reducing the amount available under the Revolver. We had no outstanding borrowings under our Revolver as of March 31, 2021. As of March 31, ~~2020,~~2021, we were in compliance with the covenants under the Term Loan and the Revolver.

Contractual Obligations and Commitments

There were no material changes, outside the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019.~~2020.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A ~~‘Quantitative~~“Quantitative and Qualitative Disclosures About Market ~~Risk’~~Risk” of our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019.~~2020. Our exposures to market risk have not changed materially since December 31, ~~2019.~~2020.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities and Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, ~~2020,~~2021, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ~~effective as~~ineffective due to the material weakness described below. A material weakness is a deficiency, or a combination of ~~March 31, 2020~~deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

Subsequent to ~~ensure that information required to be disclosed~~the filing of our annual report filed on February 24, 2021, management identified a material weakness in our ~~reports filed or submitted under~~internal control over financial reporting related to the ~~Exchange Act is recorded, processed, summarized~~accounting for and ~~reported within~~classification of our warrant agreements, due to the ~~time periods specified~~lack of an effectively designed control over the evaluation of the underlying clauses of the warrant agreement, and an insufficient understanding of the warrant agreement and accounting literature to reach a correct conclusion.

We are in the ~~rules~~process of remediating the material weakness identified by standardizing our controls over accounting and ~~forms of the Securities and Exchange Commission, and that information relating~~financial reporting related to the ~~Company is accumulated~~accounting for and ~~communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.~~classification of warrants.

During the three months ended March 31, ~~2020,~~2021, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Our risk factors are set forth in the “Risk Factors” section of our Annual Report on Form ~~10-K~~10-K/A filed on ~~February 26, 2020. Other than as noted below, there~~May 17, 2021. There have been no material changes to our risk factors since the filing of the Form ~~10-K.~~

The current COVID-19 pandemic, or the future outbreak of other highly infectious or contagious diseases, could adversely impact or cause disruption to our business, financial condition, results of operations and cash flows. Further, the COVID-19 pandemic has caused severe disruptions in the U.S. and global economy, may further disrupt financial markets and could potentially create widespread business continuity issues.

With novel coronavirus (COVID-19) infections reported throughout the world, certain governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the pandemic. Additional, more restrictive proclamations and/or directives may be issued in the future. As a food producer, we are an essential service and the majority of our employees continue to work within our production and distribution facilities. However, we have had increased labor costs resulting from the payment of overtime to certain of our employees while other employees have been on paid sick leave or unpaid leaves of absence. We have also incurred expenses related to additional sanitization and safety measures we have instituted throughout our facilities. Although the temporary reductions in production at our facilities to enable sanitization and implementation of our other safety and employee welfare programs have not materially affected our operations, other food producers have experienced significant shutdowns of production. We cannot assure you that our health and safety measures will prevent a widespread outbreak of COVID-19 at our facilities. Such an outbreak could lead to a suspension of production or increased labor and other costs, each of which could have a material adverse effect on our business, financial condition and results of operations.

We are also actively monitoring the potential impact of the pandemic on our supply chain, operations and distribution. Our products are manufactured in North America and we source the significant majority of our ingredients, raw materials and packaging within North America. However, global supply may become constrained, which may cause the price of certain ingredients, raw materials and packaging used in our products to increase, such ingredients may become unavailable and/or we may experience disruptions to our operations. While we do not expect that the virus will have a material adverse effect on our business or financial results at this time, we are unable to accurately predict the impact that the coronavirus will have due to various uncertainties, including the severity of the disease, the duration of the outbreak, the economic impact on our customers, and actions that may be taken by governmental authorities.10-K/A.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

2521

Item 6. Exhibits

Exhibit No.

Description

~~10.1~~

Incremental Assumption and Amendment Agreement No. 5, dated as of January 3, 2020, by and among HB Holdings, LLC, Hostess Brands, LLC, certain of Hostess Brands, LLC’s subsidiaries, the lenders party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2020)

~~10.2~~

Fourth Amended and Restated First Lien Credit Agreement, dated of January 3, 2020 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2020)

~~10.3~~

10.1

Hostess Brands ~~2020~~2021 Incentive Compensation Plan

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

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

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

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XBRL Taxonomy Extension Label Linkbase Document

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XBRL Taxonomy Extension Presentation Linkbase Document

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2020,~~2021, formatted in Inline XBRL

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Lenexa, Kansas on May ~~8, 2020.~~

17, 2021.


HOSTESS BRANDS, INC.

By			/s/ Brian T. Purcell
			Brian T. Purcell Executive Vice President, Chief Financial Officer


	Three Months Ended
	March 31, 2020		March 31, 2019

Net revenue	$	243,485	$	222,738
Cost of goods sold	164,148		147,550
Gross profit	79,337		75,188
Operating costs and expenses:
Advertising and marketing	10,063		8,863
Selling expense	18,120		8,520
General and administrative	25,195		17,471
Amortization of customer relationships	6,484		5,985
Business combination transaction costs	4,282		—
Other operating expense (income)	27		(1,761)
Total operating costs and expenses	64,171		39,078
Operating income	15,166		36,110
Other expense:
Interest expense, net	11,725		10,236


Other expense	553		440
Total other expense	12,278		10,676
Income before income taxes	2,888		25,434
Income tax expense (benefit)	248		(1,178)
Net income	2,640		26,612
Less: Net income attributable to the non-controlling interest	292		5,486
Net income attributable to Class A stockholders	$	2,348	$	21,126

Earnings per Class A share:
Basic	$	0.02	$	0.21
Diluted	$	0.02	$	0.21
Weighted-average shares outstanding:
Basic	123,123,656		100,085,141
Diluted	126,075,126		100,777,609


	Three Months Ended
	March 31, 2020		March 31, 2019

Net income	$	2,640	$	26,612
Other comprehensive loss:
Unrealized loss on interest rate swap contracts designated as cash flow hedges	(12,708)		(2,165)
Tax benefit	3,169		447
Comprehensive income (loss)	(6,899)		24,894
Less: Comprehensive income (loss) attributed to non-controlling interest	(437)		4,984
Comprehensive income (loss) attributed to Class A stockholders	$	(6,462)	$	19,910


	Three Months Ended March 31, 2019
(In thousands)	Sweet Baked Goods		In-Store Bakery		Cookies		Total
United States	$	212,879	$	9,859	$	—	$	222,738
Canada	—		—		—		—
	$	212,879	$	9,859	$	—	$	222,738


	Three Months Ended
(% of Consolidated Net Revenues)	March 31, 2020		March 31, 2019

Snacking	21.1	%	23.5	%
In-Store Bakery	0.0	%	0.6	%
Total	21.1	%	24.1	%


(In thousands)	Severance		Contract Termination		Total
Charges recorded	$	2,171	$	6,440	$	8,611
Payments made	(97)		(176)		(273)
Impact of change in exchange rates on CAD denominated liability	(222)		(429)		(651)
Reserve balance as of March 31, 2020	$	1,852	$	5,835	$	7,687


(In thousands)	March 31, 2020		December 31, 2019

Land and buildings	$	56,106	$	53,683
Right of use assets, operating	30,190		23,771
Machinery and equipment	230,313		209,382
Construction in progress	15,802		5,878
	332,411		292,714
Less accumulated depreciation	(55,783)		(50,330)
	$	276,628	$	242,384


(In thousands)
2020	$	8,373
2021	11,164
2022	11,164
2023	11,164
2024	11,164
2025	1,058,110


2020	$	10,800
2021	7,600
2022	7,600
2023	7,500
2024	7,600
Thereafter	99,100


Unaudited Segment Financial Data	Three Months Ended
(In thousands)	March 31, 2020		March 31, 2019

Net revenue:
Snacking	$	243,485	$	212,879
In-Store Bakery	—		9,859
Net revenue	$	243,485	$	222,738

Gross profit:
Snacking	$	79,337	$	73,145
In-Store Bakery	—		2,043
Gross profit	$	79,337	$	75,188