UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
o
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
hostesslogoa01.jpg
HOSTESS BRANDS, INC.

(f/k/a GORES HOLDINGS, INC.)
(Exact name of registrant as specified in its charter)
Delaware 
(State or other jurisdiction of
incorporation or organization)
47‑4168492 
(I.R.S. Employer
Identification No.)
1 East Armour Boulevard 
Kansas City, MO 
(Address of principal executive offices)
64111 
(Zip Code)
(816) 701‑4600
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Class A Common Stock, par value of $0.0001 per share
NASDAQ Capital Market
56,500,000 Warrants, each exercisable for half share of Class A Common Stock
 
Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x



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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non‑accelerated filer o 
(Do not check if a
smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes o No x
The aggregate market value of the voting and non‑voting common equity held by non‑affiliates of the registrant on June 30, 2016, computed by reference to the closing price reported on the NASDAQ Capital Market on such date was $365,250,000 (37,500,000 shares at a closing price per share of $9.74).

Shares of Class A common stock outstanding—98,250,917 shares at March 8, 2017
Shares of Class B common stock outstanding - 31,704,988 shares at March 8, 2017




DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive proxy statement, in connection with its 2017 annual meeting of stockholders, to be filed within 120 days of December 31, 2016, are incorporated by reference into Part III of this Annual Report on Form 10‑K.

 
 
 
 
 




HOSTESS BRANDS, INC.
Form 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016

INDEX
 
 
Page
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules




Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (“Annual Report”) 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 Annual 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 as forward-looking statements. All forward‑looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Annual 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 and discussed in Item 1A-Risk Factors in this Annual Report on Form 10-K. 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.
Explanatory Note
Hostess Brands, Inc. (f/k/a Gores Holdings, Inc.) was originally incorporated in Delaware on June 1, 2015 as a special purpose acquisition company (SPAC), formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On August 19, 2015, Gores Holdings, Inc. consummated its initial public offering (the “IPO”), following which its shares began trading on the Nasdaq Capital Market (“NASDAQ”).
On November 4, 2016 (the “Closing Date”), in a transaction referred to as the “Business Combination,” Gores Holdings, Inc. acquired a controlling interest in Hostess Holdings, L.P. (“Hostess Holdings”), an entity owned indirectly by C. Dean Metropoulos and certain equity funds managed by affiliates of Apollo Global Management, LLC (the “Apollo Funds”). Hostess Holdings had acquired the Hostess brand and certain strategic assets out of the bankruptcy liquidation proceedings of its prior owner (“Old Hostess”), free and clear of all past liabilities, in April 2013, and relaunched the Hostess brand later that year.
In connection with the closing of the Business Combination, Gores Holdings, Inc. changed its name to “Hostess Brands, Inc.” and its trading symbols on NASDAQ from “GRSH,” and “GRSHW,” to “TWNK” and “TWNKW”.
Following the Business Combination, Mr. Metropoulos and the Apollo Funds continue as stockholders and Mr. Metropoulos became Executive Chairman of Hostess Brands, Inc.
As a result of the Business Combination, for accounting purposes, Hostess Brands, Inc. is the acquirer and Hostess Holdings is the acquired party and accounting predecessor. Our financial statement presentation includes the financial statements of Hostess Holdings and its subsidiaries as “Predecessor” for periods prior to the completion of the Business Combination and of Hostess Brands, Inc., including the consolidation of Hostess Holdings and its subsidiaries, for periods from and after the Closing Date. For convenience, we have also included under “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations” supplemental pro forma combined information for 2016 that gives effect to the Business Combination as if such transaction had been consummated on January 1, 2016. References in this Annual Report to information provided for 2016 on a pro forma combined basis refer to such supplemental pro forma financial information.

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Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer, for periods prior to the completion of the Business Combination, to Hostess Holdings and its subsidiaries and, for periods upon or after the completion of the Business Combination, to Hostess Brands, Inc. and its subsidiaries, including Hostess Holdings and its subsidiaries. Our “Sponsor” refers to Gores Sponsor, LLC, a Delaware limited liability company and the principal stockholder of Gores Holdings, Inc. prior to the Business Combination, and the “The Gores Group” refers to The Gores Group LLC, an affiliate of our Sponsor. “Metropoulos Entities” refer to Mr. Metropoulos and entities controlled by him that continue to hold an equity stake in us. “Legacy Hostess Equityholders” refer to the Apollo Funds and the Metropoulos Entities, collectively.

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PART I
ITEM 1. Business
Company Overview
Hostess® has been an iconic American brand for generations. We offer a variety of new and classic treats under the Hostess® brand including Twinkies®, Cupcakes, Ding Dongs®, Ho Hos®, Donettes®, and Zingers® among others. In April 2013, we acquired the Hostess® and Dolly Madison® brands out of the bankruptcy liquidation proceedings of its prior owners, free and clear of all prior liabilities, contracts, deferred taxes and other “legacy” issues. After a brief hiatus in production, we began providing Hostess products to retailer partners and consumers nationwide in July 2013. By combining Hostess’ strong reputation with innovative technology and a Direct-To-Warehouse (“DTW”) business model, we rapidly recaptured market share. In nearly four years, we have invested approximately $160 million to upgrade our manufacturing footprint, implement new IT systems and enhance production efficiency through the installation of automated baking and packaging lines. These investments, combined with our DTW distribution model, have reestablished Hostess’ leading, premium brand position in the $6.5 billion U.S. Sweet Baked Goods (“SBG”) category¹ and have increased our distribution channels and paved new growth opportunities for the Company.

Our DTW distribution model uses centralized distribution centers and common carriers to fill orders, with products generally delivered to our customers’ warehouses. This model has eliminated the need for Direct-Store-Delivery (“DSD”) routes and drivers which has allowed us to expand our core distribution while gaining access to new channels (e.g., further penetration into convenience, drug store, dollar, foodservice, and cash & carry). We have both renewed and added relationships with trusted retailers around the country.

As a highly fragmented category in both the United States and internationally, SBG represents a significant opportunity for further consolidation. Our business model and efficient DTW route-to-market strategy, along with highly sophisticated and modern systems, provide an ideal platform for adding other branded snacks to our portfolio. We maintain a highly-disciplined outlook on acquisitions, focusing on opportunities with large addressable markets. In addition, we believe our expertise in managing brands (led by our Executive Chairman, Dean Metropoulos) and experience in operating packaged food businesses (under the leadership of our President and Chief Executive Officer, Bill Toler) gives us the specialized tools to position the Company as an attractive vehicle for future growth within the snacking universe.

We have been actively investing in new product development and pursuing acquisitions to further leverage our strong brand and to expand into new categories and markets to drive incremental growth. In April 2015, we launched Hostess® branded bread and buns to capitalize on the strength of our brand and to expand our product assortment in the small format channels, including convenience and drug channels.

In May 2016, we purchased 100% of the stock of Superior Cake Products, Inc. (“Superior”), to expand into the in-store bakery (“ISB”) section of grocery and club retailers. Retailers are increasingly utilizing in-store bakery goods to provide a differentiated shopping experience and to showcase product offerings. Superior manufactures eclairs, madeleines, brownies, and iced cookies, and also offers preservative-free and gluten-free products. We believe there is growth potential by expanding Hostess® product offerings within the ISB section of grocery and club retailers.












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¹Historically, we utilized Nielsen’s Total Universe data via the Nitro platform to gather U.S. retail sales and to measure our market share. In December 2016, we upgraded from Nielsen’s Nitro platform to Answers on Demand (“AOD”). Under AOD, certain products that were previously categorized as SBG in the Nitro platform database are now reported in the In-Store Bakery (“ISB”) category under the AOD platform. This change has resulted in lower total U.S. SBG category retail sales which were previously reported at $6.8 billion and is now reported at $6.5 billion. In addition, this switch has also resulted in certain Hostess items (primarily seasonal) being included in the overall results and our share of the market that previously were not part of the underlying data set.

As a result of these changes, our respective market share percentages previously reported have all been retroactively restated in this Annual Report on Form 10-K to reflect measurements from the AOD platform. In certain instances, our share of the market may appear to be higher than previously reported due to the change in the baseline (for example, lower total SBG retail sales).

These restatements are indicated by an asterisk (*) throughout this section, Item 1, Business, of the Company’s Annual Report on Form 10-K.



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The Industry Where Hostess Operates: Large and Attractive

Snacking is ubiquitous in the U.S. and continues to grow.

Nearly all U.S. consumers eat snacks at least once per day. According to Information Resources, Inc. (“IRI”), the average number of snacks consumed per person per day in the United States increased over 40%, from 1.9 to 2.7 between 2010 and 2015. The U.S. SBG category is one of the largest categories within the broader $110 billion U.S. snacking universe, with estimated retail sales of $6.5 billion in 2016 according to Nielsen* U.S. total universe for the 52 weeks ended December 31, 2016. The SBG category includes breakfast items (e.g., donuts, breakfast danishes, and muffins) and all-day snacking items (e.g., snack cakes, pies, bars, brownies, blondies, and cookies). According to The Nielsen Company, the Sweet Snacks category (Candy, Cookies, SBG) accounted for 50.4% of the Total Snacks category dollars, and is growing at 1.3% compared to Total Food & Beverage sales growth of 0.1% in 2016 vs the prior year. Hostess’ product offerings within the SBG category are characterized by highly impulse-driven purchase decisions, low price elasticity, and continued appeal across economic cycles. Hostess’ products benefit from increased snacking frequency driven by today’s busy lifestyles. According to IRI’s snacking survey, over 90% of consumers state that taste is important when looking for snacks, and Hostess is one of the leading providers of delectable and satisfying snack cakes in America. According to IRI’s 2016 “State of the Snack Food Industry” report, retail dollar sales of indulgent snacks in the U.S. grew 3.4% year over year, in-line with growth of the broader core snacks category and faster than the total retail food & beverage industry (2.9%). In fact, according to IRI, Hostess’ products participate in some of the fastest growing industry segments, such as Bakery Snacks (6.9% 2015 over 2014 growth) and donuts / pastries (6.7% 2015 over 2014 growth).
Hostess is a category and segment leader.
Hostess® is the second leading brand by market share within SBG. For the 52-week period ended December 31, 2016 our market share was 16.7% per Nielsen’s* U.S. SBG category data. We have a #1 leading market position within the two largest SBG Segments; Donut Segment and Snack Cake Segment, and have a #2 leading market position in total Sweet Baked Goods, according to Nielsen* U.S. total universe for the 52 weeks ended December 31, 2016. The Donut and Snack Cake Segments together account for 49% of the SBG categories’ total dollar sales. We believe that our importance to the SBG category is clearly evident through the sales decline the category experienced while Hostess® products were off store shelves. The U.S. SBG category contracted 8% during our hiatus, but subsequently grew to a 14% increase-a 22% point swing-during the 52 weeks ended December 31, 2016 period following our return. We have accounted for 72% of the category’s growth from the 52 weeks ending July 31, 2013 to the 52 weeks ending December 31, 2016. We account for 100.5% of the category’s growth in the latest 52 weeks ending December 31, 2016* vs the prior year. All other brands contributed (0.5)% vs. one year ago.

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Hostess $ share of SBG category1
 
U.S. SBG category growth
Since relaunch
 
Hostess hiatus2
 
Following relaunch3
draft1hostess_chart-00790.jpgdraft1hostess_chart-01639.jpg

1 Source: Nielsen U.S. total universe* 
2Source: Nielsen U.S. total universe, 12 weeks ended 10/13/2012 vs 12 weeks ended 1/26/13*
3 Source: Nielsen U.S. total universe, 52 weeks ended 07/06/2013 vs 52 weeks ended 12/31/16* 

Competitive landscape.
Hostess® is #2 in the U.S. SBG category. The top three brands account for 59% of the SBG retail sales according to Nielsen1, while the rest of the category remains fairly fragmented. With limited private label penetration within the category (4% market share1 vs. 18%1 for overall packaged food), consumers have shown a strong preference for trusted brands within the SBG category. The leading positions are solidified through extensive product portfolios, strong brand awareness, established distribution capabilities and long-standing relationships with critical high-volume retailers. Furthermore, high levels of capital investment are required to establish manufacturing and distribution capabilities of meaningful scale, providing additional barriers to entry.
Consumers favor on-the-go breakfast consumption.
Over 50% of the $6.5 billion SBG category is the breakfast sub-category, consisting of donuts ($1.5 billion), breakfast sweet goods ($1.3 billion) and muffins ($479 million) according to Nielsen* U.S. total universe for the 52 weeks ended December 31, 2016. Convenience and brand preference continue to influence snack selection, as over half of U.S. consumers rate portability as a key attribute in breakfast items as according to Mintel. These consumption trends play to our strengths as our products conveniently come packaged in both single-serve and multipack varieties. In addition, we have launched a line of Hostess whole grain mini muffins, jumbo muffins, danishes, and glazed donuts, which have been well-received as new breakfast offerings.


1 Source: Nielsen U.S. total universe, 52 weeks ended 12/31/16* 


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Our Competitive Strengths
Leading brands synonymous with American snacking.
We believe that we have maintained our brand power and category awareness for nearly a century by satisfying consumers’ need for fun, light-hearted treats. We believe our portfolio of highly recognized products is synonymous with American snacking, and there is perhaps no better indicator of this than our 90%+ brand awareness, according to a Harman Atchison study in 2014. We believe that we have established our leadership position in the SBG segment through the strength and quality of our products, developing and promoting a brand that unites our loyal consumer base and by pricing our products at a reasonable premium to other snacking alternatives.
We take great pride in baking an assortment of classic American treats such as Twinkies®, Donettes®, Cupcakes, Sno Balls ®, Ding Dongs ®, Zingers ®, Ho Hos ® and Suzy Qs ®. Each brand has established its own identity and fan base, with brands appearing in movies, TV shows and other pop culture venues. We believe the Hostess brand is perceived as fun, dynamic, innovative and part of American popular culture. Our most famous brand, Twinkies ®, continues to gain visibility as a cultural icon including through successful campaigns around movie releases including X-Men, The Minions and the 2016 summer movie release, Ghostbusters. We currently have over 1.1 million Facebook fans and approximately 92,800 Twitter followers as well as prominent visibility on YouTube and Instagram.
Strong position at retailers.
We believe consumers and retailers alike recognize Hostess, and our breadth of products, as a leading brand and umbrella for the whole category. Our broad product portfolio offers the unique opportunity to expand shelf space, particularly in newly obtained and newly accessible channels. While Old Hostess was limited by its DSD model, we have been able to leverage the DTW model to expand our core distribution while gaining access to other whitespace channels (i.e., certain convenience, drug, dollar, foodservice, and cash & carry). As a result, we have both renewed and added relationships with trusted retailers around the country, once again stocking shelves with our products. We believe that our DTW model, along with the strength of our premium positioning, allows us to offer retailers attractive margins that incentivize further distribution of our products.

The New Hostess is an innovation engine.
When we relaunched Hostess, we set out to challenge the status quo business model of our competitors. We established our innovative DTW distribution model and heavily invested in machinery and equipment at our bakeries, which has resulted in energy, labor and time savings, along with the ability to achieve efficiently made quality products. These investments paved the way for new product innovation. Unlike Old Hostess, whose DSD model required new products to be manufactured on various lines in multiple facilities in order to facilitate distribution across the country, we can now leverage our existing infrastructure and produce new products on one line in one facility. Centralized production allows us to continually innovate and bring new products to market while not disrupting the production of our existing product portfolio.

We are devoted to maintaining our iconic brands while contemporizing in order to stay relevant with consumers into the future. We believe that to support our premium position, we must continually evolve with changing consumer preferences and trends. As such, we have created an infrastructure that allows us to remain flexible. Our new pre-built, retail-ready corrugated displays allow retailers to take full or partial pallets of product through our warehouses and have them ready for display. We continue to develop new flavors and platforms, and have a robust innovation pipeline that expands the Hostess brand across categories. Recent product launches include whole grain mini muffins, Suzy Qs® snack cakes (a product re-launch), and Hostess Sweet Shop™ brownies. In August 2016, we launched a line of Deep Fried Twinkies® in the freezer aisle. Collectively, we believe our product launches have been successful and augmented our top line growth. Product launches in 2016 have resulted in pro forma combined net revenue of $44.0 million for the year ended December 31, 2016. In addition, the recent acquisition of Superior provides us a presence in the ISB category. Net revenue for Superior was $26.7 million for the period from the acquisition date of May 10, 2016 through December 31, 2016, and accounted for 4% of our pro forma combined net revenue for 2016.


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DTW Distribution Model.

We believe our DTW distribution model has created a substantial whitespace opportunity, which is one of the key drivers that we expect to fuel our future growth. We have greater access to convenience, drug and dollar stores. Distributing to these channels under a DSD model can be inefficient due to small average drop size. Similarly, we have an opportunity to continue building distribution in the drug store channel after having successfully established a strong presence. Historically, DSD snack cake companies have competed with candy and tobacco distributors; however, our DTW model has enabled us to partner with these third-party distributors who can profitably penetrate both the convenience store and drug store channels and who are looking for opportunities to gain share in the SBG category. For 2016, convenience and drug stores accounted for 34.4% of pro forma combined net revenues. We have established a strong presence and market share in the drug store channel and are focused on continuously expanding coverage of convenience stores. These partnerships further expand our distribution reach in a highly efficient manner and we believe they will add to our growth potential going forward.
Highly efficient and profitable business model.
The DTW distribution model is a significant change from Old Hostess’ DSD system, which utilized company owned trucks and company employed union drivers to serve over 5,500 routes. Today all transportation and shipping is done through third-parties to warehouse locations. Transportation and distribution costs as a percentage of net sales have been reduced by nearly 1800 basis points, historically ~34% and now running ~16% of net revenue.² We are investing heavily in automation, which allows for improved product quality, consistency and efficiency. However, the benefits of our industry redefining model are felt even after our products leave the bakery. By shipping products using prebuilt, shippable display cases through our DTW network, we believe we now offer retailers an enhanced merchandising asset and the ability to execute nationwide marketing campaigns with retail-ready displays placed in stores across the country all on the same day. Given the impulse driven nature of the category, in-store displays are a key differentiator in driving sales velocities.
Our new business model is supported by cost-advantaged manufacturing and distribution, expanded channel / retail store reach, enhanced in-store merchandising capabilities, and offers retailers attractive margins that incentivize further distribution of our products.












² Based on internal data, transportation and delivery costs include freight, brokerage, bracket and pickup allowance, distribution centers and stock transport order costs. Net revenue may not be directly comparable due to differences in pricing structure and levels at the Company compared to Old Hostess.


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Experienced team with an entrepreneurial spirit.
We believe our Company culture is an integral part of our strategy, built on entrepreneurship, innovation, collaboration and a competitive spirit. Embodying these tenets is a strong and experienced management team, led by our CEO, Bill Toler, and our Executive Chairman, Dean Metropoulos. Bill Toler has over 30 years of industry experience and previously served as CEO of AdvancePierre Foods. Dean Metropoulos has been involved in many successful transactions involving brands such as Chef Boyardee, Duncan Hines, Ghirardelli Chocolate, Bumble Bee Tuna, Pabst Blue Ribbon, Premier Foods (the biggest UK food company), and Mumm and Perrier Jouet Champagnes. Dean Metropoulos has over 30 years of experience revamping iconic brands throughout the consumer space. In addition, we believe we have a strong supporting cast of senior leaders working in tandem with our management team. Key team members have on average over 19 years of industry experience and expertise across all business functions.
Our management team is complimented by an experienced Board of Directors, of which all have senior executive leadership and bring with them extensive consumer products knowledge. Our board members include:
Dean Metropolous
Andrew Jhawar
Mark R. Stone
Laurence Bodner
Neil P. DeFeo
Jerry D. Kaminski
Craig D. Steeneck

A detailed biography of each of our board members and key management team members can be found at www.hostessbrands.com. Unless expressly stated otherwise, the information contained on or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K.
Our Growth Strategy
Our strategy is to be the premium sweet baked goods market leader in the United States by driving industry leading growth that outpaces our SBG peers.  This growth will be driven by rebuilding the core business, innovation and line extensions and taking advantage of whitespace opportunities.

Rebuilding the Core Business.

We plan to capitalize on the strength of the Hostess brand, positive market trends, and our attractive retailer economics in order to generate new customers and increase the number of stores carrying our products. Unlike Old Hostess, we now have the ability to unlock the potential afforded by the extended reach of warehouse distribution. Continued distribution and market share gains are expected to come from traditional channels (“core expansion”), with the remainder expected to come from untapped or under-developed whitespace channels (“whitespace opportunity”).
Our master brand strategy, combined with investments in highly effective marketing and brand-building, has resulted in what we believe to be one of the strongest brand equities in snacking.
While we have re-established and grown Hostess’ presence throughout the traditional channels in which Old Hostess previously operated, there remains further opportunity to close the gap in market share relative to Old Hostess’ penetration. By expanding points of distribution, increasing SKU assortments and recapturing shelf space in existing retailers, we plan to continue our sales growth. Our top three products (Donettes®, Twinkies® and Cupcakes) have All Commodity Volume (“ACV”) distribution rates in core channels that are 25% to 50% (based on Nielsen* 52 weeks ending December 31, 2016) higher than the average rate achieved by other products in our portfolio. These high levels are directly correlated to the focused approach we implemented on these three products during the relaunch. By applying this tailored and focused approach to our other existing product lines, we will work with retailers to expand the average number of SKUs offered and attempt to materially reduce this gap. The average number of products selling at core retailers today is approximately 22 and we have a number of retailers that have substantially larger shelf sets than the average.

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One area of focus is the previously under-served channel of independent convenience stores and small grocery stores. Similarly, we have an opportunity to continue to build distribution in the drug store and club channels. Importantly, the DTW model enables us to partner with third party distributors (e.g., McLane, Core-Mark) who can profitably penetrate both the convenience and drug store channels and who are looking for opportunities to gain share in the SBG category. Our transition to DTW has created a significant opportunity for distributors to enter the SBG category and partnerships with leading distributors are expected to add materially to our growth going forward.
We believe that impulse purchase decisions are another fundamental driver of retail sales in the SBG category, which makes prominent in-store placement an essential growth lever. The DTW model provides us with a competitive advantage through the ability to utilize retail-ready corrugated displays. These pre-built displays are visually impactful, produced economically, and require minimal in-store labor to assemble or load, thus providing cost-efficient display vehicles that benefit both the retailer and us alike. Preloaded displays also allow us full control over our brand marketing, which allows us to execute retailer-wide campaigns regionally or nationally in a consistent manner, providing a unique competitive advantage across the entire SBG category, which is predominantly DSD-served.

Innovation and Line Extensions.

We understand the need to continually evolve while maintaining the tradition and offerings our loyal consumer base has come to know and love. We have been actively investing in new product development and building our long-term pipeline, leveraging our innovation pipeline and commercialization process to bring new products to market in a timely fashion. Our product innovation strategy is organized around four key objectives:

Complementing our existing product offering by launching classic products not yet launched or entirely new products in SBG sub-segments where we currently do not compete;
Launching line extensions to drive sub-brand reach;
Unlocking new consumer segments with new benefits and / or occasions; and
Expanding into new categories and markets to drive highly incremental growth.

New product innovation is designed to further leverage our brand equity with consumers, while also further penetrating retailers’ shelves. For example, in 2015 we developed a portfolio of bread products under the Hostess label. The Hostess bread launch was designed for small format channels, (e.g., convenience, drug and dollar) that often cannot get full or consistent service and pricing across their total retail footprint from independent DSD drivers. With extended shelf life (“ESL”) bread via DTW, we can now provide a consistent branded solution to bread service and pricing. In just one year after launch, we have grown our bread share of total combined convenience and drug store channels to 21%, making us the number one selling bread brand, behind private label, in these combined channels for the 52 weeks ended December 31, 2016.

We continue to research “better-for-you” concepts, while being true to the indulgent nature of our products. We are exploring opportunities to remove certain negatives (e.g., partially hydrogenated oils, artificial flavors and colors) in our products while increasing the positive nutritional elements. In 2016, we launched Hostess® Mini Muffins with Whole Grain as a differentiator within the category.

Whitespace opportunity.
Our warehouse distribution model has created the potential for us to profitably distribute our products with a significantly further reach than Old Hostess. We are penetrating the grocery channel with our Frozen Retail business, supported by our Deep Fried Twinkies ® and licensing arrangements. We will seek to grow our business within food service through a relationship with a national distributor. We have products that are now packaged for sale in Mexico, the United Kingdom and Canada. Our products are also sold on various e-commerce platforms.
In May 2016, we acquired Superior in order to expand our market and product offerings in the In-Store Bakery (ISB) section of the grocery and club retailers. Retailers are increasingly utilizing in-store bakery goods to provide a differentiated shopping experience and to showcase product offerings. Superior manufactures eclairs, madeleines, brownies, and iced cookies, and also offers preservative free and gluten free products. We believe there is also a strong growth potential by expanding Superior’s product offerings within the ISB section of grocery and club retailers.



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Platform for future acquisitions.

We believe we serve as a platform for growth within the broader branded snacking universe. Within the highly fragmented SBG category, there exists the opportunity to drive value creation through acquisitions by leveraging our platform, infrastructure and performance driven management culture. Our highly skilled and seasoned leadership is committed to seeking-out opportunities that add new capabilities and product attributes (e.g., Better-for-you) to our already broad offerings. Our experienced management includes several individuals with a proven track-record of successfully managing and acquiring consumer businesses. We believe our scale, access to capital and management experience will allow us to consider both small and large acquisitions in the future and to integrate them in a seamless fashion.
 Products
The following is a summary of our principal product lines:
Twinkies®
 
Zingers®
Donettes®
 
Coffee Cakes
Cupcakes
 
Cinnamon Rolls
Ding Dongs®
 
Honey Buns
Fruit Pies
 
Sno Balls®
Mini Muffins
 
Chocodiles®
Ho Hos®
 
Brownies
Suzy Qs®
 
Bread and Buns
Danish
 
Jumbo Muffins
Iced Cookies
 
Eclairs
Madeleines
 
 

Production
We produce Hostess® and Dolly Madison® products at three baking facilities located in Emporia, Kansas; Columbus, Georgia; and Indianapolis, Indiana. Superior products are produced at two baking facilities located in Southbridge, Massachusetts. We have invested heavily in baking and packaging technology to improve productivity and efficiency, including installing two Autobake systems and a fully-automated packaging system. A portion of our products are co-manufactured and packaged under our brands and sold through our distribution facilities.
Our state of the art Autobake technologies have resulted in significant energy, labor and time savings. The technology provides fully-automated industrial baking ovens and systems, combining cost efficient, compact and continuous baking solutions that can be custom configured. The first Autobake, which exclusively produces Twinkies ®, was installed in Emporia, Kansas in July 2014. Its capabilities include equipment that fully-automates the packaging process (from wrapping to palletizing). We installed the second Autobake in Emporia in March 2015, which exclusively produces cupcakes.
We currently anticipate investing $30 million to $40 million during 2017 in support of consolidation of production lines, expanding capacity and expanding our flavor portfolio.
Raw Materials
Our principal raw materials are flour, sweeteners, edible oils and compound coating, as well as corrugate and films used to package our products. We utilize various buying strategies to lock in prices for various raw materials and packaging to reduce the impact of commodity price fluctuations.
In addition, we are dependent on natural gas as fuel for firing our ovens. Our third-party common carriers use gasoline and diesel as fuel for their trucks.

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We have strategic, long-term relationships with our key suppliers for our raw materials and packaging that help leverage our buying power. While the cost of some raw materials has, and may continue to, increase or decrease over time, we believe that we will be able to purchase an adequate supply of raw materials as needed. We also sole source certain raw materials. In addition, we have multiple vendors that meet the Company’s supply requirements with the sole sourced materials, except in the case of the enzymes used in our ESL technology. With respect to the enzymes, we are in the process of confirming a secondary vendor to maintain business and flexibility.
Distribution
We utilize a DTW distribution system, using centralized distribution centers and common carriers. From our five baking facilities, products are shipped to three distribution centers located in Shorewood, Illinois, Carthage, Missouri and Worcester, Massachusetts. Each distribution center is owned and operated by third parties. The distribution centers are able to fill customer orders and reduce inventory on hand as a result of this centralized consolidation of inventory. Products are delivered to customers’ warehouses from the distribution centers using common carriers. A small number of our customers pick up their orders directly from our distribution centers.
     The DTW model is enabled by our ESL technology. Some of our products are shipped frozen at the request of certain retailers. As a result of our DTW model, we do not keep a significant backlog of finished goods inventory, as our fresh bakery products are promptly shipped to our distribution centers after being produced.
Customers
Our top 10 customers in 2016 accounted for 60.6% of total pro forma combined net revenue. During 2016, our largest customer, Wal-Mart, represented 21.1% of our pro forma combined net revenue. No other customer accounted for more than 10% of our pro forma combined net revenue in 2016. The loss of, or a material negative change in, our relationship with Wal-Mart or any of our other top 10 customers could have a material adverse effect on our business. Our customers include mass merchandisers, supermarkets and other retailers, distributors, convenience, drug and dollar stores.
Competition
We face competition from other brands, large national bakeries, smaller regional operators, supermarket chains with their own private label brands, and grocery stores with their own in-store bakery departments. The key competitive factors in the industry include product quality, price, customer service, brand recognition and loyalty, promotional activities, access to retail outlets, sufficient shelf-space and ability to identify and satisfy consumer preferences. Some of our largest national competitors include Flowers Foods, Inc., Group Bimbo, S.A. and McKee Foods Corporation. In addition, we also compete with regional sweet goods branded manufacturers and other companies, including in the ISB space, that produce cookies, candies and other sweet snacks. At times, we experience pricing pressure in certain of our markets from competitor promotions and other pricing practices. However, we believe our brand recognition, product quality and innovation have generated consumer loyalty to many of our products help mitigate this impact.
Trademarks and Other Intellectual Property
We believe that our intellectual property has substantial value and has contributed to the success of our business. In particular, our trademarks, including our registered Hostess® and Dolly Madison® brand trademarks and our sub-brand trademarks, including Twinkies®, Ding Dongs®, Ho Hos®, Zingers®, Sno Balls®, and Donettes®, are valuable assets that we believe reinforces our consumers’ favorable perception of our products.
From time to time, third parties have used names similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property rights. Third parties have also, from time to time, opposed our trademarks and challenged our intellectual property rights. We respond to these actions on a case-by-case basis.
We rely on laws and regulations, as well as contractual restrictions, to protect our intellectual property and proprietary rights.

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Government Regulation
Our operations, including the manufacturing, processing, formulating, packaging, labeling and advertising of products, are subject to regulation by various federal agencies, including the Food and Drug Administration (the “FDA”), the Federal Trade Commission (the “FTC”), and the Environmental Protection Agency (the “EPA”). Our products are subject to various local, state, and federal laws, regulations and administrative practices affecting our business. We must comply with provisions regulating registrations and licensing, health and sanitation standards, current Good Manufacturing Practices and traceability, food labeling, equal employment, wage and hour requirements, and environmental protection, among others. We take compliance and the safety of our products seriously and take all steps that we consider necessary or appropriate to comply with all applicable laws, rules and regulations.
Food. The FDA has comprehensive authority to regulate the safety of food and food ingredients (other than meat and poultry products), as well as dietary supplements. Food additives and food contact substances are subject to pre-market approvals or notification requirements. The FDA’s overall food safety authority was dramatically enhanced in 2011 with the passage of the Food Safety Modernization Act (“FSMA”). FSMA required the FDA to issue regulations mandating hazard analyses and risk-based preventive controls for most food producers, implementation of science-based minimum standards for the safe growing, harvesting, packing, and holding of fruits and vegetables, development and implementation of hazard analyses and risk-based controls for ingredients and food products being imported, with adequate documentation to support the foreign facilities’ processes, and institution of procedures for the sanitary transportation of food and food products. To date, all of FSMA final rules have been implemented, with compliance dates for the hazard analysis final rule for human food already in effect. The broad authority to regulate food applies to domestic food facilities and, by way of imported food supplier verification requirements, to foreign facilities that supply food products to the U.S. market. In addition, FSMA requires the FDA to identify “high risk” foods and “high risk” facilities, and instructs the FDA to set goals for the frequency of FDA inspections of such facilities. Goals for inspection are also required for non-high risk facilities and foreign facilities from which food is imported into the United States. Though guidance for these programs is still under development, the FSMA has had a significant impact on the food industry in the past five years. We continue to develop our internal processes and procedures to comply with the FSMA requirements and ensure we are in line with industry practices.
For example, FSMA meaningfully augments the FDA’s ability to access foreign and domestic producers’ records and suppliers’ records. FSMA gives the FDA authority to require food producers, distributors, and sellers to recall adulterated or misbranded food if the FDA determines that there is a reasonable probability that the food will cause serious adverse health consequences to persons or animals. Additionally, the FSMA increases the FDA’s authority to institute administrative detentions of adulterated and misbranded foods. The FSMA also results in enhanced tracking and tracing of food requirements and, as a result, increases discipline of recordkeeping for our suppliers and contract manufacturers.
The FDA also exercises broad jurisdiction over the labeling and promotion of food. Labeling is a broad concept that, under certain circumstances, extends to product-related claims and representations made on a company’s website or similar printed or graphic medium. All foods must bear labeling that provides consumers with essential information with respect to ingredients and allergens, product weight, manufacturer/distributor location, etc. In May 2016, the FDA issued a Final Rule revising the nutrition and supplement facts panel (the “NFP” and “SFP” respectively) requirements on food products, as well as a related final rule updating serving sizes customarily consumed. Importantly for our products, one substantial new requirement is the inclusion of “Added Sugars” amounts within the NFP. The compliance date for the updated NFP labeling is May 2018.
FDA Enforcement. The FDA has broad authority to enforce the provisions of the Food, Drug and Cosmetic Act (the “FDCA”) applicable to the safety, labeling, manufacturing, distribution, and promotion of foods, including powers to issue a public warning letter to a company, publicize information about illegal products, institute an administrative detention of food, request or order a recall of illegal products from the market, and request the Department of Justice to initiate a seizure action, an injunction action, or a criminal prosecution in the U.S. courts. Pursuant to FSMA, the FDA also has the power to refuse the import of any food from a foreign supplier that is not appropriately verified as in compliance with all FDA laws and regulations. Moreover, the FDA has the authority to administratively suspend the registration of any facility producing food deemed to present a reasonable probability of causing serious adverse health consequences.

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Food Advertising. Since 1954, the FTC and the FDA have operated under a Memorandum of Understanding (“the MOU”) under which the FTC has assumed primary responsibility for regulating food advertising, while the FDA has taken primary responsibility for regulating food labeling. The FTC exercises jurisdiction over the advertising of foods under its statutory authority to prohibit deceptive acts or practices under Section 5, and prohibit any false advertisement that is misleading in any material respect under Sections 12 and 15, of the Federal Trade Commission Act (“the FTC Act”). The FTC has the power to institute monetary sanctions and the imposition of “consent decrees” and penalties that can severely limit a company’s business practices.
Current Events. There are a variety of regulatory reform initiatives within the FDA, FTC, EPA, and Congress that may affect regulations and/or respective effective or compliance dates applicable to our products.
Employees
As of December 31, 2016, we employed approximately 1,350 people. Of our total workforce, approximately 1,180 were located at our bakery facilities. The remaining workers comprised functions including operations management, sales and supply chain, among others. In early 2015, we entered into collective bargaining agreements with the local unions of the Bakery, Confectionary, Tobacco Workers and Grain Millers Union in Indianapolis, Indiana and Columbus, Georgia. Approximately 420 employees are covered by these collective bargaining agreements.
We consider our relations with employees to be good and have not experienced a strike or significant work stoppage.
Employee Safety and Environmental Sustainability
We are committed to keeping our employees safe, protecting the environment and providing developmental opportunities for our employees.  We endeavor to be a company of energized people and to be a good corporate citizen.

Our goal is to create a higher standard of living and quality of life for our employees and our communities.  New automation, safety investments and behavioral safety training have resulted in higher employee engagement and low workers’ compensation costs. We meet periodically with local and state leaders to discuss business planning and ways to become a better community partner with educational, municipal and regulatory agencies.  We promote participation in charitable organizations and make philanthropic donations in some of the communities where we operate.

We also routinely donate a portion of our excess production to food banks in areas we operate.

Available Information
The Company’s Internet website address is www.hostessbrands.com. The Company makes available free of charge (other than an investor’s own Internet access charges) through its Internet website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.


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Item 1A.
RISK FACTORS
You should carefully consider the following risk factors, together with all of the other information included in this Annual Report on Form 10-K. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also have an adverse effect on us. Any risk described below may have a material adverse impact on our business or financial condition. Under these circumstances, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
Maintaining, extending and expanding our reputation and brand image are essential to our business success.
We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain our brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We seek to maintain, extend, and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Increasing attention on the role of food marketing could adversely affect our brand image. It could also lead to stricter regulations and greater scrutiny of marketing practices. Existing or increased legal or regulatory restrictions on our advertising, consumer promotions and marketing, or our response to those restrictions, could limit our efforts to maintain, extend and expand our brands. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.
In addition, our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. The growing use of social and digital media increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our brands or our products on social or digital media, whether or not valid, could seriously damage our brands and reputation. If we do not maintain, extend, and expand our brand image, then our product sales, financial condition and operating results could be materially and adversely affected.
Our intellectual property rights are valuable, and our failure to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, including our trademarks, trade names, copyrights, trade secrets and trade dress, to be a significant and valuable part of our business. We attempt to protect our intellectual property rights by taking advantage of a combination of applicable laws, copyright registrations, trademark registrations and/or applications for our trademarks, third-party agreements (including non-disclosures, assignments, distribution and/or manufacturing, licenses, consents and co-existence) and policing and enforcement of third-party misuse or infringement of our intellectual property. Our failure to obtain or adequately protect our intellectual property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business. In addition, third-party claims of intellectual property infringement might require us to pay monetary damages or enter into costly license agreements. We also may be subject to injunctions against development and sale of certain of our products.
Any litigation regarding intellectual property (including third party infringement claims or litigation initiated by us to protect our intellectual property rights) could be costly and time-consuming and could divert management’s and other key personnel’s attention from our business operations. Any of the occurrences outlined above could materially and adversely affect our reputation, product sales, financial condition and operating results.



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We may be unable to leverage our brand value to compete against lower-priced alternative brands.
In nearly all of our product categories, we compete with lower-priced alternative products. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and retailer or other economy brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers choose the lower-priced brands, then we could lose market share or sales volumes, which could materially and adversely affect our product sales, financial condition, and operating results.We may be unable to correctly predict, identify and interpret changes in consumer preferences and demand and offer new products to meet those changes.
Consumer preferences for food and snacking products change continually. Our success will depend on our ability to predict, identify and interpret the tastes, dietary habits, packaging and other preferences of consumers and to offer products that appeal to these preferences. Moreover, weak economic conditions, recession or other factors could affect consumer preferences and demand. If we do not offer products that appeal to consumers or if we misjudge consumer demand for our products, our sales and market share will decrease and our profitability could suffer.
We continually introduce new products or product extensions and our operating results and growth will depend upon the market reception of such new products. There can be no assurance that new products will find widespread acceptance among consumers, and unsuccessful product launches may decrease our profitability and damage our brands’ reputation.
In addition, prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. For example, consumers are increasingly focused on health and wellness, including weight management and reducing sugar consumption. We might be unsuccessful in our efforts to effectively respond to changing consumer preferences and social expectations. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our reputation, product sales, financial condition and operating results.
We operate in a highly competitive industry.
The SBG business is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, brand recognition and loyalty, price, trade promotion, consumer promotion, customer service, and the ability to identify and satisfy emerging consumer preferences. We face competition from other large national bakeries, smaller regional operators, supermarket chains with their own private labeled brands, grocery stores with their own in-store bakery departments and diversified food companies. Our competitors include a significant number of companies of varying sizes, including divisions, subdivisions, or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them, and may be substantially less leveraged than us. We may not be able to compete successfully with these companies. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures, or increase the use of discounting or promotional campaigns, each of which could materially and adversely affect our margins and could result in a decrease in our operating results and profitability.
Our growth may be limited by our inability to maintain or add additional shelf or retail space for our products.
Our results will depend on our ability to drive revenue growth, in part, by expanding the distribution channels for our products. However, our ability to do so may be limited by our inability to secure additional shelf or retail space for our products. Shelf and retail space for sweet baked goods is limited and subject to competitive and other pressures, and there can be no assurance that retail operators will provide us sufficient shelf space for our products to enable us to meet our growth objectives. If we are unable to maintain or increase our shelf or retail space, we could experience an adverse impact on our financial conditions and operating results.

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Our success will depend on our continued ability to produce and successfully market products with extended shelf life.
We have invested to extend our product shelf life, while maintaining our products’ taste, texture and quality. Extended shelf life is an important component of our DTW model. Our ability to produce and successfully market existing and new products with this extended shelf life, while maintaining taste, texture and quality, is essential to our success. If we are unable to continue to produce products with extended shelf life or if the products are not accepted by consumers, we could be forced to make changes to our distribution model and that could have an adverse effect on product sales, financial condition and operating results.
We may be unable to drive revenue growth in our key products or add products that are faster-growing and more profitable.
The SBG industry’s overall growth is linked to population growth. Our future results will depend on our ability to drive revenue growth in our key products. Because our operations are concentrated in North America, where growth in the SBG industry has been moderate, our success also depends in part on our ability to enhance our portfolio by adding innovative new products. There can be no assurance that new products will find widespread acceptance among consumers. Our failure to drive revenue growth in our key products or develop innovative new products could materially and adversely affect our profitability, financial condition and operating results.
Commodity, energy, and other input prices are volatile and may rise significantly.
We purchase and use large quantities of commodities, including flour, sweeteners, edible oils and compound coating to manufacture our products. In addition, we purchase and use significant quantities of corrugate and films to package our products. We are also exposed to changes in energy prices, which impact both our manufacturing and distribution costs. Prices for commodities, other supplies and energy are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, severe weather or global climate change, consumer, industrial or investment demand, and changes in governmental regulation and trade, alternative energy, and agricultural programs. Rising commodity, energy, and other input costs could materially and adversely affect our cost of operations, including the manufacture, transportation, and distribution of our products, which could materially and adversely affect our financial condition and operating results.
Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to utilize forward buying strategies through short-term and long-term advance purchase contracts, to lock in prices for certain high-volume raw materials, packaging components and fuel inputs, these strategies may not protect us from increases in specific raw materials costs. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and operating results.
If we lose one or more of our major customers, or if any of our major customers experience significant business interruption, our operating results could be adversely affected.
We have several large customers that account for a significant portion of our sales. Wal-Mart and its affiliates are our largest customers and represented approximately 21.1% of our pro forma combined net revenue for the year ended December 31, 2016. Cumulatively, including Wal-Mart, our top ten customers accounted for 60.6% of pro forma combined net revenue for the year ended December 31, 2016.
We do not have long-term supply contracts with any of our major customers. The loss of one or more major customers, a material reduction in sales to these customers as a result of competition from other food manufacturers, or the occurrence of a significant business interruption of our customers’ operations would result in a decrease in our revenue, operating results, and earnings.

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Our geographic focus makes us particularly vulnerable to economic and other events and trends in North America.
We operate in North America and, therefore, are particularly susceptible to adverse regulations, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages of our key ingredients, and other adverse events. The concentration of our businesses in North America could present challenges and may increase the likelihood that an adverse event in North America would materially and adversely affect our product sales, financial condition and operating results.
The consolidation of retail customers could adversely affect us.
Retail customers may continue to consolidate, resulting in fewer customers for our business. Consolidation also produces larger retail customers that may seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs, or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition, and operating results.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases, which could materially and adversely affect our product sales, financial condition, and operating results.
Our results could be adversely impacted as a result of increased labor and employee-related expenses.
Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on our consolidated operating results or financial condition. Our labor costs include the cost of providing employee benefits, including health and welfare, and severance benefits. The annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements.
Higher health care costs and labor costs due to statutory and regulatory changes could adversely affect our business.
Under the U.S. Patient Protection and Affordable Care Act (the “ACA”), we are required to provide affordable coverage, as defined in the ACA, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the ACA. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have a material adverse effect on our business, financial condition and operating results. In addition, changes in federal or state workplace regulations could adversely affect our business, financial condition and operating results.
Various federal and state labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, overtime, family leave, safety standards, payroll taxes, citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. As our employees are paid at rates set above, but related to, the applicable minimum wage, further increases in the minimum wage could increase our labor costs. Significant additional government regulations could materially adversely affect our business, financial condition and operating results.
A portion of our workforce belongs to unions. Failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages could cause our business to suffer.
Approximately 31% of our employees, as of December 31, 2016, are covered by collective bargaining agreements and other employees may seek to be covered by collective bargaining agreements. Strikes or work stoppages or other business interruptions could occur if we are unable to renew these agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could impair manufacturing and distribution of our products or result in a loss of sales, which could adversely impact our business, financial condition or operating results. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.

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We may be subject to product liability claims should the consumption of any of our products cause injury, illness or death.
We sell food products for human consumption, which involves risks such as product contamination or spoilage, mislabeling, product tampering and other adulteration of food products. Consumption of a mislabeled, adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or law suits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or exceed our insurance coverage. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming and may require our management to spend time defending the claims rather than operating the business. In addition, publicity regarding these claims could adversely affect our reputation.
Our recent product recalls have increased our costs and may negatively impact our brands’ reputation, and future recalls could adversely affect our business.
On June 3, 2016, we announced the voluntary recall of approximately 710,000 cases of various products as a direct result of the recall by the Company’s supplier, Grain Craft, of certain lots of its flour for undeclared peanut residue. These products could have posed a risk to consumers with peanut allergies because the products potentially contained low levels of undeclared peanut residue. While we believe we have taken all appropriate steps to address this issue, the recall resulted in increased costs and could negatively affect our brands’ reputation. In addition, on January 9, 2017, we announced the voluntary recall of our Holiday White Peppermint Hostess® Twinkies® because of a recall of the milk powder ingredients used in the confectionary coating used in the product. The confectionary coating contained milk powder ingredient recalled due to a concern of Salmonella contamination. The recall could result in lost sales and negatively affect our brands’ reputation.
In the future, a product that has been actually or allegedly misbranded or becomes adulterated could result in product withdrawals or recalls, destruction of product inventory, negative publicity, temporary plant closings, substantial cost of compliance or remediation, and potentially significant product liability judgments against us. Any of these events could result in a loss of demand for our products, which would have a material adverse effect on our financial condition, operating results or cash flows. We could also be adversely affected if consumers lose confidence in our product quality, safety and integrity generally.
Unanticipated business disruptions could adversely affect our ability to provide our products to our customers.
Factors that are hard to predict or beyond our control, like weather, natural disasters, fire, explosions, terrorism, political unrest, generalized labor unrest or health pandemics could damage or disrupt our operations. In addition, our operations could be disrupted by a material equipment failure. We do not have significant redundant operating equipment to allow for such disruptions. Accordingly, if we do not effectively respond to disruptions in our operations, for example, by replacing capacity at our manufacturing locations, or cannot quickly repair damage to our information, production or supply systems, we may be late in delivering or unable to deliver products to our customers. If that occurs, we may lose our customers’ confidence, and long-term consumer demand for our products could decline. These events could materially and adversely affect our product sales, financial condition and operating results.
We rely on third parties for significant services that are important to our business, and their failure to perform could adversely affect our business, financial condition and operating results.
We operate a DTW distribution system that utilizes third-party centralized distribution centers and common carriers to transport a substantial majority of our products. While this has expanded our distribution reach and reduced delivery costs, we are dependent upon third parties to effectively distribute our products. Any failure by us to deliver our products in a timely manner would have an adverse impact on our sales and our reputation. In addition, we rely on third parties for sales and marketing services. We do not have long-term contracts with any of these third party service providers. Accordingly, any termination by a third party provider of their services to us, or any failure by these third parties to perform their obligations to us, would have a material adverse impact on our business and operating results.

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Legal claims or other regulatory enforcement actions could subject us to civil and criminal penalties.
As a large food company, we operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Various laws and regulations govern food production, storage, distribution, sales, advertising and marketing, as well as licensing, trade, labor, tax and environmental matters, and health and safety practices. Government authorities regularly change laws and regulations and their interpretations. Consequently, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition, and operating results.
Our insurance may not provide adequate levels of coverage against claims.
We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and operating results.
We are subject to laws and regulations relating to protection of the environment, worker health, and workplace safety. Costs to comply with these laws and regulations, or claims with respect to environmental, health and safety matters, could have a significant negative impact on our business.
Our operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace and the cleanup of contaminated sites. We are required to obtain and comply with environmental permits for many of our operations, and sometimes we are required to install pollution control equipment or to implement operational changes to limit air emissions or wastewater discharges and/or decrease the likelihood of accidental releases of hazardous materials. We could incur substantial costs, including cleanup costs, civil or criminal fines or penalties, and third-party claims for property damage or personal injury as a result of any violations of environmental laws and regulations, noncompliance with environmental permit conditions or contamination for which we may be responsible that is identified or that may occur in the future. Such costs may be material.
Under federal and state environmental laws, we may be liable for the costs of investigation, removal or remediation of certain hazardous or toxic substances, as well as related costs of investigation and damage to natural resources, at various properties, including our current and former properties and the former properties of our predecessors, as well as off-site waste handling or disposal sites that we or our predecessors have used. Liability may be imposed upon us without regard to whether we knew of or caused the presence of such hazardous or toxic substances. Any such locations, or locations that we may acquire in the future, may result in liability to us under such laws or expose us to third-party actions such as tort suits based on alleged conduct or environmental conditions. In addition, we may be liable if hazardous or toxic substances migrate from properties for which we may be responsible to other properties.
In addition to regulations applicable to our operations, failure by any of our suppliers to comply with regulations, or allegations of compliance failure, may disrupt their operations and could result in potential liability. Even if we were able to obtain insurance coverage or compensation for any losses or damages resulting from the noncompliance of a supplier with applicable regulations, our brands and reputation may be adversely affected by negative perceptions of our brands stemming from such compliance failures.
We cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted. We also cannot predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to environmental claims.

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Our operations are subject to regulation by the FDA, FTC and other governmental entities, and such regulations are subject to change from time to time which could impact how we manage our production and sale of products.
Our operations are subject to extensive regulation by the FDA, the FTC and other national, state, and local authorities. For example, we are subject to the FDCA and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging, and safety of food. Under this program, the FDA regulates manufacturing practices for foods through, among other things, its current “good manufacturing practices” regulations, or cGMPs, and specifies the recipes for certain foods. Our processing facilities and products are subject to periodic inspection by federal, state, and local authorities. In January 2011, the FSMA was signed into law. The law increased the number of inspections at food facilities in the U.S. in an effort to enhance the detection of food-borne illness outbreaks and order recalls of tainted food products. The FTC and other authorities regulate how we market and advertise our products, and we could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations. Changes in these laws or regulations or the introduction of new laws or regulations could increase the costs of doing business for us or our customers or suppliers or restrict our actions, causing our operating results to be adversely affected.
We seek to comply with applicable regulations through a combination of employing internal personnel to ensure quality-assurance compliance and contracting with third-party laboratories that conduct analysis of products for the nutritional-labeling requirements. Compliance with regulations is costly and time-consuming. Failure to comply with applicable laws and regulations or maintain permits and licenses relating to our operations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could result in increased operating costs resulting in a material adverse effect on our business and operating results.
Changes in laws, regulations or rules, or a failure to comply with any laws, regulations or rules, may adversely affect our business, investments and results of operations.
We are subject to laws, regulations and rules enacted by national, regional and local governments and NASDAQ. In particular, we are required to comply with certain SEC, NASDAQ and other legal or regulatory requirements. Compliance with, and monitoring of, applicable laws, regulations and rules may be difficult, time consuming and costly. Those laws, regulations or rules and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business and operating results. In particular, the new presidential administration has indicated its intent to pursue comprehensive regulatory reform. In addition, a failure to comply with applicable laws, regulations or rules, as interpreted and applied, could have a material adverse effect on our business and operating results.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.
We are subject to income taxes in the United States, and our domestic tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of our deferred tax assets and liabilities;
expected timing and amount of the release of any tax valuation allowances;
tax effects of stock-based compensation;
costs related to intercompany restructurings;
changes in tax laws, regulations or interpretations thereof; and
lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.
The new presidential administration has indicated its intent to propose comprehensive tax reform. We cannot predict whether such changes will be favorable or unfavorable to our tax position.
In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on our financial condition and results of operations.

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Our business operations could be disrupted if our information technology systems fail to perform adequately.
The efficient operation of our business depends on our information technology systems, some of which are managed by third-party service providers. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and operating results to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber-attacks and viruses. Any such damage or interruption could have a material adverse effect on our business.
We may not successfully identify or complete strategic acquisitions, alliances, divestitures or joint ventures.
From time to time, we may evaluate acquisition candidates, alliances or joint ventures that may strategically fit our business objectives or we may consider divesting businesses that do not meet our strategic objectives or growth or profitability targets. For example, on May 10, 2016, we acquired Superior. These activities may present financial, managerial, and operational risks including, but not limited to, diversion of management’s attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, inability to effectively and immediately implement control environment processes across a diverse employee population, adverse effects on existing or acquired customer and supplier business relationships, and potential disputes with buyers, sellers or partners. In addition, to the extent we undertake acquisitions, alliances or joint ventures or other developments outside our core geography or in new categories, we may face additional risks related to such developments. Any of these factors could materially and adversely affect our product sales, financial condition, and operating results.
We may be unable to hire or retain and develop key personnel or a highly skilled and diverse workforce or manage changes in our workforce.
We must hire, retain and develop a highly skilled and diverse workforce. We compete to hire new personnel in the many regions in which we manufacture and market our products and then to develop and retain their skills and competencies. Unplanned turnover or failure to develop adequate succession plans for leadership positions or hire and retain a diverse workforce with the skills and in the locations we need to operate and grow our business could deplete our institutional knowledge base and erode our competitiveness.
We also face increased personnel-related risks. These risks could lead to operational challenges, including increased competition for employees with the skills we require to achieve our business goals, and higher employee turnover, including employees with key capabilities. Furthermore, we might be unable to manage changes in, or that affect, our workforce appropriately or satisfy the legal requirements associated with how we manage and compensate our employees.
These risks could materially and adversely affect our reputation, ability to meet the needs of our customers, product sales, financial condition and operating results.

Risks Related to the Business Combination and Our Capital Structure
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our indebtedness.
We are highly leveraged. As of December 31, 2016, our total balance on long term debt, excluding deferred financing charges, discount, premium, and capital lease obligations, was approximately $1.0 billion. Our high degree of leverage could have important consequences, including:
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities or to pay dividends;
exposing us to the risk of increased interest rates because all of our borrowings, including our borrowings under our credit facilities, are at variable rates;

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making it more difficult for us to make payments on our indebtedness;
increasing our vulnerability to general economic and industry conditions;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
subjecting us to restrictive covenants that may limit our flexibility in operating our business;
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.
Despite our significant leverage, we may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our significant leverage.

We may be unable to obtain additional financing to fund our operations and growth.
We may require additional financing to fund our operations or growth. The failure to secure additional financing could have a material adverse effect on our continued development or growth. None of our officers, directors or stockholders is required to provide any financing to us.

The Gores Group, the Apollo Funds and the Metropoulos Entities have significant influence over us.
As of March 8, 2017, The Gores Group, the Apollo Funds, and the Metropoulos Entities beneficially own approximately 50% of our common stock, including approximately 33% of our Class A common stock and 100% of our Class B common stock. Holders of our Class B stock are entitled to vote on all matters presented to the Company’s stockholders, but do not have any economic rights to the distributions of the Company. As long as The Gores Group, the Apollo Funds and the Metropoulos Entities own or control a significant percentage of our outstanding voting power, they will have the ability to significantly influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of our board, any amendment to our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets.
Pursuant to the Executive Chairman Director Agreement entered into with Mr. Metropoulos, Mr. Metropoulos serves as the Executive Chairman of our board. The Executive Chairman Director Agreement provides that, for so long as the Metropoulos Entities in the aggregate hold at least 7.5% of the capital stock of the Company on a fully-diluted basis, Mr. Metropoulos will have the right to designate one member for election to the board, which designee will be Mr. Metropoulos himself so long as he is employed as Executive Chairman.

The Gores Group’s, the Apollo Funds’ and the Metropoulos Entities’ interests may not align with the interests of our other stockholders. The Gores Group, the Apollo Funds and the Metropoulos Entities are all in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. The Gores Group, the Apollo Funds and the Metropoulos Entities may also pursue acquisition opportunities that may be complementary to our business.

We are required to pay the Legacy Hostess Equityholders for a significant portion of the tax benefit relating to any additional tax depreciation or amortization deductions we claim as a result of any step up in the tax basis of the assets of our operating subsidiaries resulting from the Metropoulos Entities’ exchange of shares of Class B common stock and Class B units of Hostess Holdings for shares of our Class A common stock.
Class B units in Hostess Holdings may be exchanged (together with the cancellation of shares of our Class B common stock) by the holders thereof for, at the Company’s election, shares of Class A common stock, on a one-for-one basis (subject to customary anti-dilution adjustments), or the cash equivalent of such shares. The exchanges may result in increases to our share of the tax basis of the tangible and intangible assets of our operating subsidiaries that otherwise would not have been available, although the U.S. Internal Revenue Service may challenge all or part of that tax basis increase, and a court could sustain such a challenge by the U.S. Internal Revenue Service. These increases in tax basis, if sustained, may reduce the amount of tax that we would otherwise be required to pay in the future.

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We are party to a Tax Receivable Agreement that provides for the payment by us to the Legacy Hostess Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of: (i) certain increases in tax basis resulting from the Business Combination; (ii) certain tax attributes of Hostess Holdings and its subsidiaries existing prior to the Business Combination; (iii) certain increases in tax basis resulting from exchanges of Class B units; (iv) imputed interest deemed to be paid by the Company as a result of payments that it makes under the Tax Receivable Agreement; and (v) certain increases in tax basis resulting from payments that the Company makes under the Tax Receivable Agreement. It is expected that we will benefit from the remaining 15% cash savings, if any, in income tax that we realize.
If our dividend policy is materially different than the distribution policy of Hostess Holdings, upon the exchange of any Class B units, the limited partners of Hostess Holdings could receive a disproportionate interest in the aggregate distributions by our operating subsidiaries that have not been distributed by us.
We and the Metropoulos Entities are limited partners of Hostess Holdings. To the extent Hostess Holdings distributes to its limited partners a greater share of income received from our operating subsidiaries than we distribute to our stockholders, then any of the Metropoulos Entities who participate in such distribution by Hostess Holdings and subsequently exercise their rights to exchange limited partnership units in Hostess Holdings for Class A common stock may receive a disproportionate interest in the aggregate distributions by our operating subsidiaries that have not been distributed by us. The reason is that such Metropoulos Entity could receive both (i) the benefit of a distribution by Hostess Holdings to its limited partners, including such Metropoulos Entity, and (ii) the benefit of a distribution by the Company to the holders of Class A common stock, including such Metropoulos Entity. Consequently, if our dividend policy does not match the distribution policy of Hostess Holdings, other holders of Class A common stock as of the date of an exchange could experience a reduction in their interest in the profits previously distributed by our operating subsidiaries that have not been distributed by us. Our current dividend policy could result in distributions to our common stockholders that are different from the distributions made by Hostess Holdings to its limited partners.
Our only significant asset is our ownership interest in our operating subsidiaries and such ownership may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
We have no direct operations and no significant assets other than our ownership interest in our operating subsidiaries. We depend on our operating subsidiaries for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, to pay any dividends with respect to our common stock, and to satisfy our obligations under the Tax Receivable Agreement. The financial condition and operating requirements of our operating subsidiaries may limit our ability to obtain cash from our operating subsidiaries. The earnings from, or other available assets of, our operating subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
The ability of our operating subsidiaries (other than subsidiaries which have been designated as unrestricted pursuant to our ability to do so in certain limited circumstances) to make distributions, loans and other payments to us for the purposes described above and for any other purpose are governed by the terms of our credit facilities, and will be subject to the negative covenants set forth therein. Any loans or other extensions of credit will be subject to the investment covenants contained therein, which provide for several exceptions including, among others (i) a general investment basket equal to the greater of a fixed dollar amount and a percentage of EBITDA and (ii) an unlimited investment basket based on satisfying a total net leverage ratio on a pro forma basis. Similarly, any dividends, distributions or similar payments will be subject to the dividends and distributions covenant under such credit facilities, which also provide for several exceptions including, among others (i) for payment of overhead and certain fees and expenses of parent companies, (ii) for tax distributions, subject to certain limitations, (iii) a general dividend and distribution basket equal to the greater of a fixed dollar amount and a percentage of EBITDA and (iv) an unlimited dividend and distribution basket based on satisfying a total net leverage ratio on a pro forma basis.

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We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment.
Although we conducted due diligence in connection with the Business Combination, we cannot assure you that this diligence surfaced all material issues that may be present in our business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of our business and outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure operations, or incur impairment or other charges that could result in losses. Unexpected risks may arise and previously known risks may materialize in a manner not consistent with our risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the company or its securities. Accordingly, our stockholders could suffer a reduction in the value of their shares. Such stockholders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy statement relating to the Business Combination contained an actionable material misstatement or material omission.
If the Business Combination’s benefits do not meet the expectations of investors, stockholders or financial analysts, the market price of our securities may decline.
If the benefits of the Business Combination do not meet the expectations of investors or securities analysts, the market price of our securities may decline.
Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Immediately prior to the Business Combination, there was no public market for the equity of Hostess and trading in the shares of the Class A common stock of Gores Holdings was not active. As an active market for our securities develops and continues, the trading price of our securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of our securities may include:
actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of the companies perceived to be similar to us;
changes in the market’s expectations about our operating results;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
speculation in the press or investment community;
success of competitors;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning us or the market in general;
operating and stock price performance of other companies that investors deem comparable to us;
our ability to market new and enhanced products on a timely basis;
changes in laws and regulations affecting our business;
commencement of, or involvement in, litigation involving us;
changes in our capital structure, such as future issuances of securities or incurring additional debt;
the volume of shares of our Class A common stock available for public sale;
any major change in our board or management;
sales of substantial amounts of common stock by our directors, officers or significant stockholders or the perception that such sales could occur; and
general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.


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Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general and NASDAQ have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to the post-combination company could depress our stock price regardless of our business, prospects, financial conditions or operating results. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

Risks Related to Our Class A Common Stock
Resales of the shares of Class A common stock issued in the Business Combination could depress the market price of our Class A common stock.
There may be a large number of shares of Class A common stock sold in the market in the near future. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock. As of March 8, 2017, our Sponsor, as well as the Apollo Funds and the Metropoulos Entities held approximately 50% of our Common Stock, including approximately 33% of our Class A common stock and 100% of our Class B common stock. All such shares of Class A common stock held by, or obtainable in exchange for Class B common stock and Class B units held by The Gores Group, the Apollo Funds and the Metropoulos Entities have been registered for resale under the Securities Act pursuant to a shelf registration statement filed in November 2016. Pursuant to a registration rights agreement that we entered into with these stockholders in connection with the Business Combination, unless we and such stockholders otherwise agree, such stockholders are bound by restrictions on the transfer of their shares of Class A common stock and Class B common stock (subject to the exceptions set forth therein) until May 4, 2017. In addition, the Sponsor and certain of our other stockholders prior to the Business Combination entered into a letter agreement with us, pursuant to which, unless we otherwise agree, certain of the shares held thereby may not be transferred until the earlier to occur of (i) May 4, 2017 or (ii) the date on which the Company completes a liquidation, merger, stock exchange or other similar transaction after the closing of the Business Combination that results in all of the Company’s public stockholders having the right to exchange their shares of common stock for cash, securities or other property.
We have approximately 98,250,917 shares of Class A common stock outstanding as of March 8, 2017. We also registered 7,150,000 shares of Class A common stock that we may issue under the Hostess Brands, Inc. 2016 Equity Incentive Plan, which shares may be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.
Such sales of shares of Class A common stock or the perception of such sales may depress the market price of our Class A common stock.
A market for our securities may not continue, which would adversely affect the liquidity and price of our securities.
The price of our securities may fluctuate significantly due to general market and economic conditions. An active trading market for our securities may not be sustained. In addition, the price of our securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our securities become delisted from NASDAQ for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on NASDAQ or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.

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If securities or industry analysts cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our Class A common stock adversely, then the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts may cease to publish research on us.  If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a result, our stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year (a) following August 19, 2020, the fifth anniversary of our IPO, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, or (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. Because we had pro forma combined net revenues during our last calendar year of approximately $727.6 million, and we currently anticipate that the market value of our Class A common stock that is held by non-affiliates may exceed $700 million as of June 30, 2017, although we cannot assure that it will exceed such amount, if we expand our business, increase our revenues, or the value of our Class A common stock remains at current levels or increases, we may cease to be an emerging growth company prior to August 19, 2020.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is not an emerging growth company or is an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.
We are required to comply with Section 404 of the Sarbanes Oxley Act, which requires, among other things, that companies maintain disclosure controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness of those controls on a quarterly basis. Effective internal controls are necessary for us to provide reliable financial reports and to help prevent fraud, and our management and other personnel devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations increased our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act. Section 404 of the Sarbanes-Oxley Act also requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. As discussed in “Item 9A-Controls and Procedures,” the design of internal control over financial reporting for the Company following the Business Combination has required and will require significant time and resources from management and other personnel. Therefore, management was unable, without incurring unreasonable effort and expense, to conduct an assessment of our internal control over financial reporting, and accordingly, in compliance with SEC guidance we have not included a management report on internal control over financial reporting in this Annual Report on Form 10-K. If we fail to maintain the adequacy of our internal controls, we cannot assure you that we will be able to conclude in the future that we have effective internal control over financial reporting and/or we may encounter difficulties in implementing or improving our internal controls, which could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain effective internal controls, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and may also result in delayed filings with the SEC.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of seasonality and several other factors, including:
labor availability and costs for hourly and management personnel;
profitability of our products, especially in new markets and due to seasonal fluctuations;
changes in interest rates;
impairment of long-lived assets;
macroeconomic conditions, both nationally and locally;
negative publicity relating to products we serve;
changes in consumer preferences and competitive conditions;
expansion to new markets;
fluctuations in commodity prices; and
actions by our competitors (e.g., pricing promotions).
Fluctuations in our operating results due to the foregoing or other factors could cause our results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. These provisions include:
a staggered board providing for three classes of directors, which limits the ability of a stockholder or group to gain control of our board;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

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the right of our board to elect a director to fill a vacancy created by the expansion of our board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our board;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at least two-thirds of our common stock; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.


Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Properties
As of December 31, 2016, Hostess operated five baking facilities and three distribution centers and occupied corporate headquarters, as shown in the chart below.
Type
Location
Owned/Leased
Size (Sq. Ft.)
Segment
 
 
 
 
 
Baking Facility
Emporia, Kansas
Owned
278,500

SBG
Baking Facility
Columbus, Georgia
Leased(1)
313,700

SBG
Baking Facility
Indianapolis, Indiana
Owned
195,000

SBG
Baking Facility
Southbridge, Massachusetts
Owned
37,850

Other
Baking Facility
Southbridge, Massachusetts
Leased
47,640

Other
Distribution Center
Shorewood, Illinois
Leased
507,187

SBG
Distribution Center
Carthage, Missouri
Other(2)

SBG/Other
Distribution Center
Worcester, Massachusetts
Other(2)

Other
Corporate Headquarters
Kansas City, Missouri
Leased
40,450

SBG/Other

(1)
The Columbus, GA facility is available for the purchase amount of $100.
(2)
Variable fees related to the third-party distribution center include storage and pallet-related charges.

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Item 3. Legal Proceedings.
We are involved in lawsuits, claims and proceedings arising in the ordinary course of business. These matters involve personnel and employment issues, personal injury, contract and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although we do not expect the outcome of these proceedings 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 claims that could materially impact our results.

The information required to be furnished by us under this Part I, Item 3 (Legal Proceedings) is incorporated by reference to the information contained in Note 12--Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 on this Annual Report on Form 10-K.

Item 4. Mine Safety Disclosures.
Not applicable.


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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A common stock and warrants are currently quoted on NASDAQ under the symbols “TWNK” and “TWNKW,” respectively. Through November 4, 2016, our common stock, warrants, and units were quoted under the symbols “GRSH,” “GRSHW,” and “GRSHU,” respectively. Upon consummation of the Business Combination, we separated our units, which were sold in our IPO, into their component securities of one share of Class A common stock and one warrant, and the units ceased public trading.
The following table sets forth the high and low sales prices for shares of our Class A common stock and warrants for the quarterly periods indicated, as reported on NASDAQ:
 
Class A Common Stock
 
Warrants
Fiscal 2016:
High
 
Low
 
High
 
Low
First Quarter
$
10.00

 
$
9.50

 
$
0.40

 
$
0.21

Second Quarter
$
9.80

 
$
9.50

 
$
0.36

 
$
0.16

Third Quarter
$
11.16

 
$
9.72

 
$
1.38

 
$
0.25

Fourth Quarter
$
13.50

 
$
10.67

 
$
1.98

 
$
1.13


 
Class A Common Stock(1)
 
Warrants(2)
Fiscal 2015:
High
 
Low
 
High
 
Low
Not applicable
$

 
$

 
$

 
$

Not applicable
$

 
$

 
$

 
$

Not applicable
$

 
$

 
$

 
$

Fourth Quarter
$
10.00

 
$
9.60

 
$
0.40

 
$
0.28


(1) Our common stock began separate trading on NASDAQ on November 30, 2015. As a result, the figures for the fourth quarter of 2015 are for the period from November 30, 2015 through December 31, 2015.

(2) Our warrants began separate trading on NASDAQ on November 25, 2015. As a result, the figures for the fourth quarter of 2015 are for the period from November 25, 2015 through December 31, 2015.






31


Holders of Common Stock
As of March 8, 2017, there were approximately 51 stockholders of record of our Class A common stock and one stockholder of record of our Class B common stock.
Dividend Policy
We currently do not pay dividends and have not paid any cash dividends on our common stock to date.
Securities Authorized for Issuance Under Equity Compensation Plans
On January 9, 2017, we filed a registration statement on Form S-8, registering 7,150,000 shares of Class A common stock, relating to awards to be undertaken in the future, with such vesting conditions, as applicable, to be determined in accordance with the Hostess Brands, Inc. Equity Incentive Plan ("the Plan"). The following types of awards can be issued under the Plan: stock options, stock appreciation rights, restricted stock awards, restricted stock units, cash performance awards and other stock-based awards.
For additional information, refer to Item 12 of Part III of this Annual Report on Form 10-K.     
Unregistered Sales of Equity Securities and Use of Proceeds
Information about unregistered sales of our equity securities is set forth in in Part II, Item 2 of our Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016, under Item 3.02 of our Current Report on Form 8-K filed with the SEC on July 5, 2016, in Part II, Item 2 of our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2016 and in Items 2.01 and 3.02 of our Current Report on Form 8-K filed with the SEC on November 9, 2016.

Issuer Purchase of Equity Securities
The Company did not have any repurchases of common stock for the twelve months ended December 31, 2016.
Earn-out Obligation
In connection with the Business Combination, we agreed to grant additional shares to certain of the Legacy Hostess Equityholders contingent on the Company attaining certain EBITDA targets for the years ended December 31, 2016 and December 31, 2017. We did not meet the EBITDA target for the year ended December 31, 2016.  At December 31, 2016, the remaining potential future grants were between zero and 5.5 million shares.  No amounts were accrued at December 31, 2016, as management determined it was not probable these thresholds would be met.
                In addition, we agreed to grant additional shares to Mr. Metropoulos as part of the Executive Chairman Agreement if certain EBITDA targets are met for the year ending December 31, 2018.  The potential grants range from zero to 2.7 million shares. No amounts were accrued for this earn-out as of December 31, 2016, as management determined that it was not probable these thresholds would be met.
Warrants
As of December 31, 2016, there were 37,500,000 public warrants and 19,000,000 private placement warrants outstanding. Each warrant entitles its holder to purchase one half of one share of our 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 our Class A common stock. The warrants became exercisable 30 days after the completion of the Business Combination on November 4, 2016 and expire five years after that date earlier upon redemption or liquidation. Once the warrants become exercisable, the Company may redeem the outstanding warrants 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 our Sponsor or its permitted transferees.

32


Performance Graph
The following stock price performance graph should not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10‑K into any filing under the Exchange Act or the Securities Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.
The following stock performance graph compares, for the period November 30, 2015 (the first day our common stock was traded following our initial public offering) through December 30, 2016 (the last trading day of our fiscal year), the cumulative total stockholder return for (1) Company’s common stock, (2) the Standard & Poor’s 500 and (3) the Standard & Poor’s 500 Packaged Foods and Meats Index. The graph assumes the value of the investment in our common stock and each index was $100.00 on November 30, 2015 and assumes reinvestment of any dividends.
The stock price performance below is not necessarily indicative of future stock price performance.

draft1hostess_chart-00691.jpg

33


Item 6. Selected Financial Data.
The following table sets forth our net revenues, operating costs and expenses attributable to our operations.
As a result of the Business Combination, we are the acquirer for accounting purposes and Hostess Holdings is the acquiree and accounting predecessor. Our financial statement presentation includes the financial statements of Hostess Holdings as “Predecessor” for periods prior to the Closing Date and of us for periods after the Closing Date, including the consolidation of Hostess Holdings. Also see “-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Supplemental Unaudited Pro Forma Combined Financial Information” for supplemental pro forma combined information for 2016 that gives effect to the Business Combination as if such transaction had been consummated on January 1, 2016.

Consolidated Statement of Operations Data
 
2016
 
2015

2014
(In thousands except for per share data)
From November 4, 2016
through
December 31, 2016
 
From January 1, 2016
through November 3, 2016
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
Year Ended
December 31, 2014

(Successor)

(Predecessor)

Pro forma combined
 
(Predecessor)

(Predecessor)
Net revenue
$
111,998


$
615,588


$
727,586

 
$
620,815


$
554,695

Gross profit
38,714


266,529


315,979

 
262,203


233,932

Operating income (loss)
(9,607
)

122,872


168,360

 
155,908


119,467

Income (loss) before income taxes
(16,247
)

60,864


115,304

 
88,760


81,464

Net income (loss)
$
(8,485
)

$
60,425


$
82,442

 
$
88,760


$
81,464

Less: Net income (loss) attributable to the non-controlling interest
(4,081
)

3,214


28,698

 
4,507


4,267

Net income (loss) attributable to Class A shareholders
$
(4,404
)

$
57,211


$
53,744

 
$
84,253


$
77,197

Earnings (loss) per Class A share:






 
 





Basic
$
(0.05
)




$
0.55

 





Diluted
$
(0.05
)




$
0.54

 





Weighted-average shares outstanding:






 
 





Basic
97,792





97,612

 





Diluted
97,792





100,185

 






34




Consolidated Statement of Cash Flows Data

The following table sets forth selected elements of our Consolidated Statement of Cash Flows:


2016

2015

2014


 Successor


 Predecessor
(In thousands)

 From November 4, 2016 through December 31, 2016


 From January 1, 2016 through November 3, 2016

 Year Ended December 31, 2015

 Year Ended December 31, 2014










Net cash provided by operating activities

$
13,611



$
102,221


$
132,972


$
108,329

Net cash provided by (used in) investing activities

$
(428,196
)


$
(76,579
)

$
17,880


$
(91,393
)
Net cash used in financing activities

$
(232,345
)


$
(31,596
)

$
(296,002
)

$
(9,769
)

Consolidated Balance Sheet Data

The following table sets forth selected elements of our Consolidated Balance Sheets:







Successor

Predecessor
 
(In thousands)
December 31, 2016

December 31, 2015






Cash and cash equivalents
$
26,855


$
64,473


Property and equipment, net
153,224


128,078


Total assets
2,847,892


643,529


Long-term debt and capital lease obligation
993,374


1,193,667


Non-controlling interest
334,192


(37,991
)


Other Financial data

The following table sets forth Adjusted EBITDA:



2016

2015

2014


 Successor


 Predecessor

Pro Forma Combined




(In thousands)

 From
November 4, 2016 through
December 31, 2016


 From
January 1, 2016 through
November 3, 2016

Year ended
December 31, 2016

 Year Ended
December 31, 2015

 Year Ended
December 31, 2014
Adjusted EBITDA

$
31,894



$
183,409


$
215,303


$
177,930


$
145,343


On a pro forma combined basis for 2016, net income was $82.4 million and Adjusted EBITDA was $215.3 million. See “Item 7. Management and Discussion and Analysis of Financial Condition and Results of Operations-Supplemental Unaudited Pro Forma Combined Financial Information.”

35


The following table sets forth Adjusted Gross Profit and Adjusted Gross Margin:
(in thousands)
From
November 4, 2016
through
December 31, 2016
 
 
From
January 1, 2016
through
November 3, 2016
 
(unaudited)
Pro forma combined Year Ended
December 31, 2016
 
Year Ended
December 31, 2015
 
Year Ended
December 31, 2014
 
(Successor)

 
(Predecessor)

 

(Predecessor)

(Predecessor)
Net revenue
$
111,998


 
$
615,588


$
727,586


$
620,815


$
554,695

Cost of goods sold
73,284


 
346,864


411,607


355,963


320,763

Special employee incentive compensation


 
2,195

 


2,649



Gross Profit - US GAAP
$
38,714


 
$
266,529


$
315,979


$
262,203


$
233,932





 











Add back:



 











Special employee incentive compensation (i)


 
2,195




2,649



Inventory fair value adjustment (ii)
8,914


 







Adjusted Gross Profit
$
47,628


 
$
268,724


$
315,979


$
264,852


$
233,932




 







Gross Margin - GAAP
34.6
%

 
43.3
%

43.4
%

42.2
%

42.2
%




 











Adjusted Gross Margin
42.5
%

 
43.7
%

43.4
%

42.7
%

42.2
%

(i) For the Predecessor period January 1, 2016 through November 3, 2016, a special bonus payment of $2.2 million was paid to employees at the bakery facilities as compensation for their efforts in the Business Combination. For the year ended December 31, 2015, a special bonus payment of $2.6 million was paid to employees at the bakery facilities as compensation for their efforts in the recapitalization of Hostess.
(ii) For the Successor period November 4, 2016 through December 31, 2016, the Company re-measured inventory at fair value at the Business Combination date, resulting in additional non-cash cost of goods sold of $8.9 million.

36


Reconciliation of Adjusted EBITDA, Adjusted Gross Profit and Adjusted Gross Margin
Adjusted EBITDA and pro forma combined Adjusted EBITDA are defined and explained in more detail in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which contains a reconciliation to the most comparable GAAP measures. We believe Adjusted EBITDA and pro forma combined Adjusted EBITDA are non-GAAP financial measures commonly used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. However, Adjusted EBITDA should not be construed as alternatives to net income as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). Adjusted EBITDA and pro forma combined Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We have included Adjusted EBITDA and pro forma combined Adjusted EBITDA because we believe they provide management and investors with additional information to measure our performance.

Adjusted Gross Profit and Adjusted Gross Margin are non-GAAP financial measures commonly used in our industry, however they should not be construed as an alternative to gross profit and gross margin as an indicator of operating performance. Adjusted Gross Profit and Adjusted Gross Margin may not be comparable to similarly titled measures reported by other companies. We have included Adjusted Gross Profit and Adjusted Gross Margin because we believe they provide management and investors with additional information to measure our performance. We believe the presentation of Adjusted Gross Profit and Adjusted Gross Margin is useful to investors because it is consistent with our definition of Adjusted EBITDA.

37


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A “Risk Factors” of this Annual Report on Form 10-K.

Overview

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

We operate five bakeries and three centralized distribution centers. Our DTW product distribution system allows us to deliver to our customers’ warehouses. Our customers in turn distribute to their retail stores and/or distributors.

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

Principal Components of Operating Results
Net Revenue

We generate revenue primarily through selling sweet baked goods and other products under the Hostess® group of brands, which includes iconic products such as Twinkies®, Cup Cakes, Ding Dongs®, Zingers®, HoHo’s® and Donettes® and the Dolly Madison® brand and the Superior on Main® group of products (e.g., eclairs, madeleines, brownies and iced cookies). Our product assortment, which includes snack cakes, muffins, donuts and pies, is sold to customers’ warehouses and distribution centers by the case or in display ready corrugate units. Our retail customers then display and sell our products to the end consumer in single-serve, multi-pack or club-pack formats. We sell our products primarily to supermarket chains, national mass merchandisers and convenience stores, along with a smaller portion of our product sales going to dollar stores, vending and club locations.

Our revenues are driven by average net price and total volume of products sold. Factors that impact unit pricing and sales volume include product mix, the cost of ingredients, the promotional activities implemented by our Company and our competitors, industry capacity, product innovation and quality and consumer preferences. We do not keep a significant backlog of finished goods inventory, as our fresh baked products are promptly shipped to our distribution centers after being produced and then distributed to customers.
Cost of Goods Sold

Cost of goods sold consists of ingredients, packaging, labor, energy, other production costs and warehousing and transportation costs for the distribution of our products to our customers. The cost of ingredients and packaging represent the majority of our total costs of goods sold. All costs that are incurred at the bakeries are included in cost of goods sold. We do not allocate any corporate functions into cost of goods sold.


38


Our cost of ingredients consists principally of flour, sweeteners, edible oils and cocoa, which are subject to substantial price fluctuations, as is the cost of paper, corrugate, films and plastics used to package our products. The prices for raw materials are influenced by a number of factors, including the weather, crop production, transportation and processing costs, government regulation and policies and worldwide market supply and demand. We also rely on fuel products, such as natural gas, diesel, propane and electricity, to operate our bakeries and produce our products. Fluctuations in the prices of the raw materials or fuel products used in the production, packaging or transportation of our products affect the cost of products sold and our product pricing strategy. We utilize forward buying strategies through short-term and long-term advance purchase contracts to lock in prices for certain high-volume raw materials, packaged components and fuel inputs. Through these initiatives, we believe we are able to obtain competitive pricing.

Advertising and Marketing

Our advertising and marketing expenses primarily relate to our advertising campaigns, which include social media, radio, billboard, print, online advertising, local promotional events and monthly agency fees. We also invest in wire and corrugate displays delivered to customers to display our products off shelf, field marketing and merchandising to reset and check the store inventory on a regular basis and marketing employment costs.

Selling Expense

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

General and Administrative

General and administrative expenses primarily include employee and related expenses for the accounting, planning, customer service, legal, human resources, corporate operations, research and development, purchasing, logistics and executive functions. Also included are professional services relating to our corporate audit and tax fees, legal fees, outsourced fees relating to information technology, transportation planning, and corporate site and insurance costs.

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

Related Party Expenses

For periods prior to the Business Combination, related party expenses consisted of the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman. For the Successor Period November 4, 2016 through December 31, 2016, related party expenses consisted of a grant of stock awarded to Mr. Metropoulos under his new employment arrangements. Following the consummation of the Business Combination, the cash expenses associated with Mr. Metropoulos’s employment arrangements are estimated to be approximately $0.3 million annually.

Non-Controlling Interest

For the Successor period from November 4, 2016 through December 31, 2016, Hostess Brands, Inc. consolidated the financial position and results of operations of Hostess Holdings. Mr. Metropoulos and the Metropoulos Entities hold their equity investment in us primarily through Class B limited partnership units in the Company’s subsidiary, Hostess Holdings (“Class B Units”) and an equal number of shares of the Company’s Class B common stock (“Class B Stock”). Our Class B Stock has voting, but no economic rights, while Hostess Holdings’ Class B Units have economic, but no voting rights. Each Class B Unit, together with a share of Class B Stock held by the Metropoulos Entities, is exchangeable for a share of the Company’s Class A common stock (or at the option of the Company, the cash equivalent thereof). The Company holds 100% of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests, and consolidates Hostess Holdings in the Company’s Consolidated Financial Statements. The interest of the Metropoulos Entities in Hostess Holdings’ Class B Units is reflected in our Consolidated Financial Statements as a noncontrolling interest.


39


For the Predecessor periods, Hostess Holdings consolidated the financial position and results of operations of New Hostess Holdco LLC. The portion of New Hostess Holdco, LLC not owned by Hostess Holdings was recognized as a noncontrolling interest in the Consolidated Financial Statements. The non-controlling interest presented in the accompanying consolidated balance sheet represents the amount of cash that would be payable to the non-controlling interest holders if the Company were liquidated at book value as of the balance sheet date. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, is the share of the earnings or losses allocated to non-controlling interest for the period.


Factors Impacting Recent Results

Long-term Debt Refinancing

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

Recall Costs Related to Flour

On June 3, 2016, we voluntarily recalled approximately 710,000 cases of snack cakes and donuts as a direct result of the recall by our supplier, Grain Craft, of certain lots of its flour for undeclared peanut residue. We also destroyed approximately 200,000 cases of product within our possession that were produced using Grain Craft flour. The matter was resolved by mutual agreement of the parties and we recorded a gain of $0.8 million. As a result, for the periods reported, this recall did not result in any expense for recall costs (not including lost sales during this period of time).

Acquisition of Superior

On May 10, 2016, we acquired the stock of Superior for $51.0 million. The purchase price was subject to working capital and other purchase price adjustments of $0.1 million during the third quarter of 2016, based on the final closing date working capital amounts. We have included this amount as part of the total purchase price. Superior is located in Southbridge, Massachusetts and manufactures eclairs, madeleines, brownies, and iced cookies. We acquired Superior to expand our market and product offerings in the ISB section of grocery and club retailers. We expect to realize synergies and cost savings related to this acquisition as a result of purchasing and procurement economies of scale and general and administrative expense savings, particularly with respect to the consolidation of corporate related functions and elimination of redundancies.

Note on Financial Presentation

As a result of the completion of the Business Combination on November 4, 2016, our Consolidated Financial Statements included elsewhere in the Annual Report are presented: (i) as of December 31, 2016 and for the period November 4, 2016 to December 31, 2016 (Successor); (ii) for the period January 1, 2016 to November 3, 2016 (Predecessor); and (iii) as of December 31, 2015 and for the years ended December 31, 2015 and December 31, 2014 (Predecessor).  For comparative purposes, we also present supplemental unaudited pro forma combined Statements of Operations for the year ended December 31, 2016. See “-Supplemental Unaudited Pro Forma Combined Financial Information.” In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss the Predecessor and Successor periods of 2016 on a standalone basis, as comparisons to the Predecessor’s full year 2015 results would not be meaningful. We supplement this with a discussion of pro forma combined 2016 results compared to the Predecessor’s 2015 results. We believe this discussion provides helpful information with respect to the performance of our business during those respective periods. In addition we discuss the Predecessor’s 2015 results compared to the Predecessor’s 2014 results.


40


Results of Operations—For the periods November 4, 2016 through December 31, 2016 (Successor) and January 1, 2016 through November 3, 2016 (Predecessor)

2016
(In thousands)
From
November 4, 2016
through
December 31, 2016

% of Net Revenues

 
From
January 1, 2016
through
November 3, 2016
 
% of Net Revenues

(Successor)



 
(Predecessor)
 

Net revenue
$
111,998


100.0
 %

 
$
615,588

 
100.0
%
Cost of goods sold
73,284


65.4


 
346,864

 
56.3

Special employee incentive compensation




 
2,195

 
0.4

Gross profit
38,714


34.6
 %

 
266,529

 
43.3
%







 


 


Operating costs and expenses:






 


 


Advertising and marketing
5,245


4.7


 
30,626

 
5.0

Selling expense
5,033


4.5


 
25,730

 
4.2

General and administrative
7,322


6.5


 
38,391

 
6.2

Special employee incentive compensation




 
2,503

 
0.4

Amortization of customer relationships
3,922


3.5


 
1,185

 
0.2

Impairment of property and equipment




 
7,300

 
1.2

Loss on sale/abandonment of property and equipment and bakery shutdown costs




 
2,551

 
0.4

Business combination transaction costs




 
31,832


5.2

Related party expenses
26,799


23.9


 
3,539

 
0.6

Total operating costs and expenses
48,321


43.1


 
143,657

 
23.3

Operating income (loss)
(9,607
)

(8.6
)%

 
122,872

 
20.0
%







 


 


Interest expense, net
6,649


5.9


 
60,384

 
9.8

Gain on debt extinguishment
(763
)

(0.7
)

 

 

Other expense (income)
754


0.7


 
1,624

 
0.3

Total other expense
6,640


5.9


 
62,008

 
10.1

Income (loss) before income taxes
(16,247
)

(14.5
)%

 
60,864

 
9.9
%
Income tax expense (benefit)
(7,762
)

(6.9
)

 
439

 
0.1

Net income (loss)
$
(8,485
)

(7.6
)%

 
$
60,425

 
9.8
%
Net Revenue
Net revenues in the Successor period from November 4, 2016 through December 31, 2016 were $112.0 million, compared to $615.6 million for the Predecessor period from January 1, 2016 through November 3, 2016. During the Predecessor period, the Company acquired Superior on May 10, 2016 and reported net revenues of $19.9 million from Superior from the date of acquisition through November 3, 2016. During the Successor period, the net revenues for Superior were $6.8 million.
Cost of Goods Sold
In the Successor period, as a result of the Business Combination, we recorded a one-time inventory fair value step-up of $8.9 million that was charged to cost of goods sold. Excluding the impact of the inventory fair value step-up, cost of goods sold in the Successor period would have been 57.5% of net revenues, slightly higher than in the Predecessor period.
    

41


Gross margin for the Successor period November 4, 2016 through December 31, 2106 was 34.6% of net revenues compared to the Predecessor period from January 1, 2016 through November 3, 2106 of 43.3% of net revenues. Excluding the impact of the inventory fair value step up discussed above, adjusted gross margin for the Successor period was 42.5% of net revenue. Adjusted gross margin for the Successor period compared to the gross margin for the Predecessor period declined slightly due to overall changes in mix of products sold.
Special Employee Incentive Compensation
For the Predecessor period January 1, 2016 through November 3, 2016, we made a special bonus payment to certain employees at our bakery facilities as compensation for their efforts in connection with the Business Combination. Payment of $2.2 million of this special bonus was recorded as a separate line item reducing gross profit.
Gross Profit
For the Predecessor period January 1, 2016 through November 3, 2016, gross profit, including the effect of the special employee incentive compensation discussed above, was $266.5 million, or 43.3% of net revenue. Excluding this item, gross profit would have been $268.7 million, or 43.7% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, gross profit was $38.7 million, or 34.6% of net revenue.
Operating Costs and Expenses
Advertising and Marketing
For the Predecessor period January 1, 2016 through November 4, 2016, advertising and marketing expenses were $30.6 million, or 5.0% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, advertising and marketing expenses were $5.2 million, or 4.7% in net revenue.
Advertising and marketing expenses as a percentage of net revenue were lower in the Successor period primarily due to higher field marketing costs in the Predecessor Period.
Selling Expense
For the Predecessor period January 1, 2016 through November 4, 2016, selling expenses were $25.7 million, or 4.2% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, selling expenses were $5.0 million, or 4.5% in net revenue.
General and Administrative
For the Predecessor period January 1, 2016 through November 4, 2016, general and administrative expenses were $38.4 million, or 6.2%, of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, general and administrative expenses were $7.3 million, or 6.5% of net revenue.
Special Employee Incentive Compensation
For the Predecessor period January 1, 2016 through November 3, 2016, we paid a special bonus payment of $2.5 million to certain corporate employees as compensation for their efforts in connection with the Business Combination. This payment to corporate employees was recorded under operating costs and expenses.
Amortization of Customer Relationships
For the Predecessor period January 1, 2016 through November 3, 2016, amortization of customer relationships was $1.2 million, or 0.2% of net revenue.

For the Successor period November 4, 2016 through December 31, 2016, amortization of customer relationships was $3.9 million, or 3.5% of net revenue.

42



Amortization of customer relationships in the Successor period was significantly higher than in the Predecessor period primarily due to the higher fair value measurement at November 4, 2016 as a result of the Business Combination compared to the overall fair value of the customer relationships in the Predecessor period. There were no significant changes in the nature of the customer relationships, including overall useful lives in the comparative periods.
Impairment of Property and Equipment
For the Predecessor period January 1, 2016 through November 3, 2016, impairment of property and equipment was $7.3 million, or 1.2% of net revenue. During the Predecessor period, we closed multiple production lines at our Indianapolis, Indiana bakery, and transitioned production to other facilities.
There were no such impairments in the Successor period November 4, 2016 through December 31, 2016.
Loss on Sale/Abandonment of Property and Equipment and Bakery Shutdown Costs
For the Predecessor period January 1, 2016 through November 3, 2016, we recorded a charge for loss on sale/abandonment of property and bakery shutdown costs of $2.6 million, or 0.4% of net revenue, primarily due to utilities, insurance, taxes and maintenance expenses related to the Schiller Park, Illinois bakery.

For the Successor period November 4, 2016 through December 31, 2016, there were no such charges.
Business Combination Transaction Costs
For the Predecessor period January 1, 2016 through November 3, 2016, business combination transaction costs were $31.8 million, or 5.2% of net revenue. This consisted of professional and legal costs associated with the Business Combination, and transactional costs attributable to the acquisition of Superior in May 2016.
For the Successor period November 4, 2016 through December 31, 2016, there were no such charges.
Related Party Expenses
For the Predecessor period January 1, 2016 through November 3, 2016, related party expenses were $3.5 million, or 0.6% of net revenue. These amounts represent the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman.
For the Successor period November 4, 2016 through December 31, 2016, the Company expensed $26.8 million, or 23.9% of net revenue, as a result of a grant of stock awarded to Mr. Metropoulos as required under his new employment arrangements.
Following the consummation of the Business Combination, the cash expenses associated with Mr. Metropoulos’s employment arrangements are estimated to be approximately $0.3 million annually.

Operating Income (Loss)
For the Predecessor period January 1, 2016 through November 3, 2016, total operating costs and expenses were $143.7 million, or 23.3% of net revenue, and operating income was $122.9 million, or 20.0% of net revenue,
For the Successor period November 4, 2016 through December 31, 2016, total operating costs and expenses were $48.3 million, or 43.1% of net revenue, and operating (loss) was $(9.6) million or (8.6)% of net revenue.
Operating (loss) for the Successor period was significantly impacted by the related party expense discussed above.






43


Interest Expense, net
For the Predecessor period January 1, 2016 through November 3, 2016, interest expense, net was $60.4 million, or 9.8% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, interest expense, net was $6.6 million, or 5.9% of net revenue.
The lower interest expense in the Successor period is a result of the reduced applicable interest rates following the debt refinancing discussed below.
Gain on Debt Extinguishment
For the Successor period November 4, 2016 through December 31, 2016, in connection with the refinancing of existing debt with the New First Lien Term Loan we recorded a net gain on a partial extinguishment of debt in the amount of $0.8 million. The gain consisted of the write-off of approximately $4.0 million of debt premium and deferred financing costs, partially offset by prepayment penalties of $3.0 million and the write-off of deferred financing costs of $0.2 million.
Other Expense
For the Predecessor period January 1, 2016 through November 3, 2016, other expense was $1.6 million, or 0.3% of net revenue. This consisted of professional and transactional costs for acquisition activity which has since been abandoned, partially offset by a gain from the settlement in connection with the Grain Craft product recall matter discussed above of approximately $0.8 million.
For the Successor period November 4, 2016 through December 31, 2016, other expense was $0.8 million, or 0.7% of net revenue.
Income (Loss) Before Income Taxes
For the Predecessor period January 1, 2016 through November 3, 2016, as a result of the foregoing, income before income taxes was $60.9 million, or 9.9% of net revenue.
For the Successor period November 4, 2016 through December 31, 2016, as a result of the foregoing, (loss) before income taxes was $(16.2) million or (14.5)% of net revenue.
Income Tax Expense
For the Predecessor period January 1, 2016 through November 3, 2016, the Company was a series of limited liability companies and, therefore, had no tax expense or benefit, except insignificant amounts for Superior, a C corporation.
For the Successor period November 4, 2016 through December 31, 2016, income tax (benefit) was $(7.8) million or (6.9)% of net revenue. This represented an effective tax rate of 47.8% which exceeds the statutory rates primarily due to the reversal of a previously recorded valuation allowance.











44






Supplemental Unaudited Pro Forma Combined Financial Information
For comparative purposes, we are presenting a supplemental unaudited pro forma combined statement of operations for the year ended December 31, 2016, and we discuss such pro forma combined results compared to the Predecessor’s full year 2015 results below.
The unaudited pro forma combined statements of operations for the year ended December 31, 2016 presents our consolidated results of operations giving pro forma effect to the Business Combination as if it had occurred as of January 1, 2016. The pro forma combined adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma combined basis, the impact of these transactions on the historical financial information of our Predecessor and Successor entities, as applicable.
The Business Combination was accounted for using the acquisition method of accounting. The initial estimated fair values of the acquired assets and assumed liabilities as of the Closing Date, which are based on the consideration paid and our estimates and assumptions, are reflected herein. As explained in more detail in Note 2 in the accompanying Notes to the Consolidated Financial Statements, the total purchase price to acquire Hostess Holdings has been allocated to the assets acquired and assumed liabilities of Hostess Holdings, based upon preliminary estimated fair values at the Closing Date. We utilized third-party valuation specialists to assist our management in determining the fair values of the acquired assets and liabilities assumed. As of December 31, 2016, we have not completed our review of the purchase consideration and estimated fair value of assets acquired and liabilities assumed at the Closing Date.
The unaudited pro forma combined financial information contains a variety of adjustments, assumptions and estimates, is subject to numerous other uncertainties and the assumptions and adjustments as described in the accompanying notes hereto and should not be relied upon as being indicative of our results of operations had the Business Combination occurred on January 1, 2016. The unaudited pro forma combined financial information also does not project our results of operations for any future period or date. The unaudited pro forma combined financial information for the year ended December 31, 2016 includes results of the Superior acquisition and its related operations from May 10, 2016, the date of acquisition, through December 31, 2016. We evaluated the impact of the Superior acquisition on the Company’s financial statements and concluded that the impact was not significant and did not require nor separately warrant the inclusion of pro forma combined financial results assuming the acquisition of Superior at January 1, 2016 under applicable SEC rules and regulations or under GAAP. In addition, we evaluated the impact of the refinancing of existing debt pursuant to the New First Lien Term Loan, completed on November 18, 2016, and concluded that the impact was not significant and did not require nor separately warrant the inclusion of pro forma combined financial results assuming the completion of the refinancing on January 1, 2016. The pro forma combined adjustments give effect to the items identified in the pro forma combined table below in connection with the Business Combination.

45


Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2016

Historical (i)





(Successor)


(Predecessor)



Pro Forma
Combined
(Unaudited)
(In thousands except per share data)
From
November 4, 2016 to
December 31, 2016


From
January 1, 2016 to
November 3, 2016

Pro Forma Adjustments

Year Ended
December 31, 2016
Net revenue
$
111,998



$
615,588


$


$
727,586

Cost of goods sold
73,284



346,864


(8,541
)
ii
411,607

Special employee incentive compensation



2,195


(2,195
)
iii

Gross profit
38,714



266,529


10,736


315,979

Operating costs and expenses:
 
 
 
 
 
 

 
Advertising and marketing
5,245



30,626




35,871

Selling expenses
5,033



25,730




30,763

General and administrative
7,322



38,391


(3,902
)
iv
41,811

Special employee incentive compensation



2,503


(2,503
)
iii

Amortization of customer relationships
3,922



1,185


20,050

v
25,157

Impairment of property and equipment



7,300




7,300

Loss on sale/abandonment of property and equipment and bakery shutdown costs



2,551




2,551

Business combination transaction costs

 
 
31,832


(31,257
)
vi
575

Related party expenses
26,799



3,539


(26,747
)
vii
3,591

Total operating costs and expenses
48,321

 
 
143,657

 
44,359

 
147,619

Operating income (loss)
(9,607
)
 
 
122,872

 
55,095

 
168,360

Other (income) expense:












     Interest expense, net
6,649



60,384


(15,592
)
viii
51,441

     Gain on debt extinguishment
(763
)






(763
)
     Other (income) expense
754



1,624




2,378

Total other (income) expense
6,640



62,008


(15,592
)

53,056

Pretax net income (loss)
(16,247
)


60,864


70,687


115,304

Income tax expense
(7,762
)


439


40,185

ix
32,862

Net income (loss)
$
(8,485
)


$
60,425


$
30,502


$
82,442

Less: Net income (loss) attributable to the non-controlling interest
(4,081
)


3,214


29,565

x
28,698

Net income (loss) attributable to Class A shareholders
(4,404
)


57,211


937


53,744

Earnings (loss) per Class A share:












Basic
$
(0.05
)








$
0.55

Diluted
$
(0.05
)








$
0.54

Weighted-average shares outstanding:












Basic
97,792






(180
)
xi
97,612

Diluted
97,792






2,393

xii
100,185


46




i.
The amounts in these columns represent the Successor’s and Predecessor’s historical results of operations for the periods reflected.
ii.
The adjustment reflects the incremental depreciation expense associated with the allocation of purchase price to property and equipment and is recorded in cost of goods sold. In addition, for cost of goods sold, approximately $8.9 million reflects the non-cash impact of the re-measurement of inventory at fair value as a result of the Business Combination.
iii.
For cost of goods sold, this adjustment represents special payments we made to certain employees at our bakery facilities of $2.2 million and for operating costs this adjustment represents special payments to corporate employees of $2.5 million as compensation for their efforts in connection with the Business Combination
iv.
Represents compensation for management profits interest plan of approximately $3.9 million that was recognized as part of the Business Combination. See Note 1 to the Consolidated Financial Statements for additional information.
v.
Represents additional amortization expense associated with the fair value recognized for customer relationship in connection with the Business Combination.
vi.
This adjustment consists primarily of legal and professional fees, and other costs associated with the Business Combination.
vii.
Represents non-cash expenses incurred by Successor for stock awarded to Mr. Metropoulos as required under his new employment arrangements.
viii.
Represents the reduction in interest expense due to the repayment of a portion of Hostess Holdings debt as part of the Business Combination.
ix.
Represents the effective income tax rate of 28.5% for the Successor, giving effect to the noncontrolling interest, and not giving effect to the adjustment made to the valuation allowance on the Company’s historical deferred tax assets.
x.
Represents the elimination of historical income attributable to the noncontrolling interest and attributes a portion of the pro forma income to the noncontrolling interest created in the Business Combination. Income is allocated to the noncontrolling interest based on its pro rata share of the total equity of Hostess Holdings.
xi.
This adjustment annualized the basic weighted average number of Class A shares outstanding.
xii.
This adjustment includes the dilutive impact of the outstanding warrants that are considered anti-dilutive on a historical basis.



47


Results of Operations—For the Unaudited Pro Forma combined Year Ended December 31, 2016 compared to the Year Ended December 31, 2015

Pro Forma
Combined
(Unaudited)

Predecessor
(In thousands)
Year Ended
December 31, 2016

% of
Net Revenue

Year Ended December 31, 2015

% of
Net Revenue
Net revenue
$
727,586


100.0
 %

$
620,815


100.0
 %
Cost of goods sold
411,607


56.6


355,963


57.3

Special employee incentive compensation




2,649


0.4

Gross profit
315,979


43.4


262,203


42.2

Operating costs and expenses:
 
 
 
 
 
 
 
Advertising and marketing
35,871


4.9


31,967


5.1

Selling expenses
30,763


4.2


29,484


4.7

General and administrative
41,811


5.7


31,531


5.1

Special employee incentive compensation




1,274


0.2

Amortization of customer relationships
25,157


3.5


851


0.1

Impairment of property and equipment
7,300


1.0


2,700


0.4

Loss on sale/abandonment of property and equipment and bakery shutdown costs
2,551


0.4


4,182


0.7

Business combination transaction costs
575


0.1

 



Related party expenses
3,591


0.5


4,306


0.7

Total Operating costs and expenses
147,619

 
20.3

 
106,295

 
17.1

Operating income
168,360

 
23.1

 
155,908

 
25.1

Other (income) expense:
 
 
 
 
 
 
 
     Interest expense, net
51,441


7.1


50,011


8.1

     (Gain) loss on debt extinguishment
(763
)

(0.1
)

25,880


4.2

     Other (income) expense
2,378


0.3


(8,743
)

(1.4
)
Total other expense
53,056


7.3


67,148


10.8

Pretax net income
115,304


15.8


88,760


14.3

Income tax expense
32,862


4.5





Net income
$
82,442


11.3
 %

$
88,760


14.3
 %

Net Revenue
Pro forma combined net revenue was $727.6 million for 2016, an increase of $106.8 million, or 17.2%, compared to net revenue of $620.8 million for 2015, primarily due to new product launches in 2016 of $44.0 million and contribution of Superior net revenue of $26.7 million from the date of its acquisition. New products in 2016 included Deep Fried Twinkies®, Hostess Sweet Shop brownies, plus the relaunch of Suzy Qs® snack cakes.    








48


Cost of Goods Sold
Cost of goods sold increased 15.6%, or $55.6 million, to $411.6 million for the pro forma combined year ended December 31, 2016, compared to $356.0 million for the year ended December 31, 2015, primarily due to the increase in volume.
As a percentage of net revenue, pro forma combined cost of goods sold was 56.6% for the year ended December 31, 2016 and cost of goods sold was 57.3% for the year ended December 31, 2015. This decrease is due primarily to higher ingredient costs for the year ended December 31, 2015. An outbreak of avian influenza in 2015 led to reduced availability of eggs, which increased egg ingredient prices to record high levels. Pro forma combined gross profit was $316.0 million for the year ended December 31, 2016, compared to $264.9 million for the year ended December 31, 2015, excluding the impact of a $2.6 million special employee incentive compensation payment for the year ended December 31, 2015, as described below.
Special Employee Incentive Compensation
For the year ended December 31, 2015, a special bonus payment was paid to employees at our bakery facilities as compensation for their efforts in the recapitalization of our Company of which $2.6 million was recorded on a separate line in our Consolidated Statements of Operations as a deduction from gross profit.
Gross Profit
Pro forma combined gross profit was $316.0 million for the year ended December 31, 2016, compared to $264.9 million for the year ended December 31, 2015, excluding the impact of the $2.6 million special employee incentive compensation payment for the year ended December 31, 2015.
Pro forma combined gross margin was 43.4% for 2016, compared to 42.7% for 2015, excluding the impact of a $2.6 million special employee incentive compensation payment for the year ended December 31, 2015. The improved gross margin was driven primarily by commodity cost decreases and improved bakery costs.
Operating Costs and Expenses
Advertising and Marketing
Advertising and marketing expenses increased 12.2%, or $3.9 million, to $35.9 million for the pro forma combined year ended December 31, 2016, compared to $32.0 million for the year ended December 31, 2015. This increase was primarily attributable to planned expansion of field marketing activities.
Selling Expense
Selling expenses increased 4.3%, or $1.3 million, to $30.8 million for the pro forma combined year ended December 31, 2016, compared to $29.5 million for the year ended December 31, 2015, primarily due to increases in sales management expense and broker fees.
General and Administrative
General and administrative expenses increased 32.6%, or $10.3 million, to $41.8 million for the pro forma combined year ended December 31, 2016, compared to $31.5 million for the year ended December 31, 2015, primarily due to increased incentive compensation related to improved operating performance and the addition of Superior’s operations.
Special Employee Incentive Compensation
For the year ended December 31, 2015, a special bonus payment of $1.3 million was paid to corporate employees as compensation for their efforts in the recapitalization of the Company.
Amortization of Customer Relationships
Amortization of customer relationships increased $24.3 million to $25.2 million for the pro forma year ended December 31, 2016, compared to $0.9 million for the year ended December 31, 2015, primarily due to an increase in intangible assets with definite lives as a result of the Business Combination.


49


Impairment of Property and Equipment
For the pro forma combined year ended December 31, 2016, we recorded an impairment of $7.3 million. We closed multiple production lines at the Indianapolis, Indiana bakery and transitioned production to other facilities resulting in a loss of $7.3 million.
Loss on Sale/Abandonment of Property and Equipment and Bakery Shutdown Costs
For the pro forma combined year ended December 31, 2016 and for the year ended December 31, 2015, we incurred a loss on sale/abandonment of property and equipment and bakery shutdown costs of $2.6 million and $4.2 million, respectively.
Related Party Expenses
Related party expenses were $3.6 million and $4.3 million, for the pro forma combined year ended December 31, 2016 and the year ended December 31, 2015, respectively. Mr. Metropoulos serves as our Executive Chairman and expenses associated with his employment agreements are recorded in related party expenses. Following the consummation of the Business Combination, the cash expenses associated with the employment arrangements with Mr. Metropoulos are estimated to be approximately $0.3 million annually.
Operating Income (Loss)
For the pro forma combined year ended December 31, 2016, total operating costs and expenses were $147.6 million, compared to $106.3 million for the year ended December 31, 2015. Operating income increased 8.0%, or $12.5 million, to $168.4 million for the pro forma combined year ended December 31, 2016, compared to $155.9 million for the year ended December 31, 2015.
Interest Expense, net
Interest expense, net, for the pro forma combined year ended December 31, 2016 increased 2.9%, or $1.4 million, compared to the year ended December 31, 2015 from $50.0 million to $51.4 million. On November 18, 2016, we completed the refinancing of existing debt with the New First Lien Term Loan.
(Gain) Loss on Debt Extinguishment
For the pro forma combined year ended December 31, 2016, in connection with the New First Lien Term Loan, we recorded a net gain on a partial extinguishment of debt in the amount of $0.8 million. The gain consisted of the write-off of approximately $4.0 million of debt premium and deferred financing costs, partially offset by prepayment penalties of $3.0 million and the write-off of deferred financing costs of $0.2 million.

We extinguished the Term Loan dated April 9, 2013 (the “2013 Term Loan”) through early principal payments of $343.8 million and $150.0 million on August 3, 2015 and June 4, 2015, respectively. As part of this debt extinguishment and in accordance with its contractual terms, we expensed 2% prepayment penalties of $9.9 million, as well as $16.0 million of amortization to write-off the remaining deferred financing costs. For the year ended December 31, 2015, the total loss on debt extinguishment was $25.9 million.
Other (Income) Expense
For the pro forma combined year ended December 31, 2016, the Company recorded expenses of $2.4 million which primarily consisted of legal and professional fees related to post-Business Combination activities. For the year ended December 31, 2015, other income consisted of $12.0 million of proceeds from the sale of foreign trademark rights and certain “know how” in certain countries in the Middle East, partially offset by $3.3 million for professional service fees related to the pursuit of potential sale transactions.
Income Taxes
The income tax expense of $32.9 million represents the effective rate of 28.5% for the pro forma combined year ended December 31, 2016, giving effect to the noncontrolling interest, a partnership for income tax purposes. For the year ended December 31, 2015, the Company was a series of limited partnerships and, therefore, had no income tax expense or benefit.

50


Results of Operations—For the Year Ended December 31, 2015 compared to the Year Ended December 31, 2014
(In thousands)
Year Ended December 31, 2015

% of
Net Revenue

Year Ended December 31, 2014

% of
Net Revenue
Net revenue
$
620,815


100.0
 %

$
554,695


100.0
%
Cost of goods sold
355,963


57.3


320,763


57.8

Special employee incentive compensation
2,649


0.4





Gross profit
262,203


42.2


233,932


42.2

Operating costs and expenses
 
 
 
 
 
 
 
Advertising and marketing
31,967


5.1


32,197


5.8

Selling expenses
29,484


4.7


25,664


4.6

General and administrative
31,531


5.1


33,122


6.0

Special employee incentive compensation
1,274


0.2





Amortization of customer relationships
851


0.1


623


0.1

Impairment of property and equipment
2,700


0.4


13,241


2.4

Loss on sale/abandonment of property and equipment and bakery shutdown costs
4,182


0.7


5,150


0.9

Business combination transaction costs



 



Related party expenses
4,306


0.7


4,468


0.8

Total operating costs and expenses
106,295

 
17.1

 
114,465

 
20.6

Operating income
155,908

 
25.1

 
119,467

 
21.5

Other (income) expense:











Interest expense, net
50,011


8.1


37,447


6.8

Loss on debt extinguishment
25,880


4.2





Other (income) expense
(8,743
)

(1.4
)

556


0.1

Total other expense
67,148


10.8


38,003


6.9

Pretax net income (loss)
88,760


14.3


81,464


14.7

Income tax provision







Net income
$
88,760


14.3
 %

$
81,464


14.7
%
Net Revenue
Net revenue increased 11.9%, or $66.1 million, to $620.8 million for the year ended December 31, 2015, compared to $554.7 million for the year ended December 31, 2014, primarily due to adopting additional trade programs and promotional events to increase volumes. These incentives, along with our 2015 innovations and distribution gains, increased net revenue for the year.
Cost of Goods Sold
Cost of goods sold increased 11.0%, or $35.2 million, to $356.0 million for the year ended December 31, 2015, compared to $320.8 million for the year ended December 31, 2014. As a percentage of net revenue, cost of goods sold was 57.3% for the year ended December 31, 2015 and 57.8% for the year ended December 31, 2014. This increase is due primarily to higher ingredient costs for the year ended December 31, 2015. An outbreak of avian influenza in 2015 led to reduced availability of eggs, which increased the egg ingredient prices to record-high levels.
Our investments in state-of-the-art baking technologies enabled us to increase production volume and improve operational efficiencies. These investments and improvements allowed us to close our Schiller Park, Illinois bakery, while continuing to meet customer demands.
Special Employee Incentive Compensation
For the year ended December 31, 2015, we paid a special bonus totaling $3.9 million to our employees as compensation for their efforts in connection with the recapitalization of the Company. The payment of $2.6 million to employees at our bakery facilities was recorded on a separate line item reducing gross profit. The payment of $1.3 million to corporate employees was recorded under operating costs and expenses as discussed below.

51


Gross Profit
Gross profit for the year ended December 31, 2015 was $262.2 million, compared to $233.9 million for the year ended December 31, 2014. Excluding the impact of the $2.6 million special employee incentive compensation discussed above, gross profit for the year ended December 31, 2015 would have been $264.8 million. As a percentage of net revenue, gross profit was 42.2% in each of the years ended December 31, 2015 and 2014. Excluding the effect of the $2.6 million compensation payment discussed above, gross profit was 42.7% of net revenue for the year ended December 31, 2015.
Operating Costs and Expenses
Advertising and Marketing
Advertising and marketing expenses decreased $0.2 million to $32.0 million for the year ended December 31, 2015, compared to 32.2 million for the year ended December 31, 2014, primarily due to higher field marketing and merchandising costs to reset and check the store inventory on a regular basis, displays, and marketing expenses in 2014, partially offset by the increase in expense for advertising.
Selling Expense
Selling expenses increased 14.9%, or $3.8 million, to $29.5 million for the year ended December 31, 2015, compared to $25.7 million for the year ended December 31, 2015. This increase was primarily due to higher brokerage fee expenses.
General and Administrative
General and administrative expenses decreased 4.8%, or $1.6 million, to $31.5 million for the year ended December 31, 2015, compared to $33.1 million for the year ended December 31, 2014, primarily due to lower overall employment costs in the year ended December 31, 2015.
Special Employee Incentive Compensation
For the year ended December 31, 2015, a special bonus payment totaling $3.9 million was paid to employees as compensation for their efforts in the recapitalization of the Company. The payment of $1.3 million to corporate employees was recorded under operating costs and expenses.
Amortization of Customer Relationships
Amortization of customer relationships increased 36.6%, or $0.2 million, to $0.9 million for the year ended December 31, 2015, compared to $0.6 million for the year ended December 31, 2014.
Impairment of Property and Equipment
At December 31, 2015, we had assets held for sale with a carrying value of $4.0 million. These are recorded in Other Assets, net on the Consolidated Balance Sheet. We recorded impairment expense of $2.7 million, for the year ended December 31, 2015, to write-down the carrying value as determined using the fair value agreed upon in a purchase agreement with a third-party, dated December 21, 2015, less estimated closing costs and transaction commissions. This property consisted of the buildings that formerly operated as our Schiller Park, Illinois bakery.
Loss on Sale/Abandonment of Property and Equipment and Bakery Shutdown Costs
On October 17, 2014, we closed our Schiller Park, Illinois bakery. During the years ended December 31, 2015 and December 31, 2014, we incurred expenses associated with the closure and relocation of assets of $1.2 million and $1.4 million, respectively. Also, during the year ended December 31, 2014, we incurred expenses associated with employee severance and Worker Adjustment and Retraining Notification (WARN) ACT payments of $2.9 million. The carrying value of the Schiller Park bakery asset was impaired $2.7 million during the year ended December 31, 2015. Comparatively, assets at this location were impaired $12.0 million during the year ended December 31, 2014.
Related Party Expenses
Related party expenses were $4.3 million and $4.5 million for the years ended December 31, 2015 and December 31, 2014, respectively. Mr. Metropoulos serves as our Executive Chairman and expenses associated with his employment arrangements are recorded to related party expenses. Following the consummation of the Business Combination, the cash expenses associated with the employment arrangements with Mr. Metropoulos are estimated to be approximately $0.3 million annually.

52


Operating Income
For the year ended December 31, 2015, total operating costs and expenses were $106.3 million, compared to $114.5 million for the year ended December 31, 2014. Operating income was $155.9 million for the year ended December 31, 2015, compared to $119.5 million for the year ended December 31, 2014.
Interest Expense, net
For the year ended December 31, 2015, we incurred debt fees of $14.7 million in connection with the Former First Lien Term Loan, funded with the gross proceeds of the loan. These fees were capitalized and recorded as deferred finance charges on the consolidated balance sheet. These debt fees are amortized and recognized as interest expense utilizing the effective interest method over the life of the loan. Interest expense from the Former First Lien Term Loan debt fee amortization was $0.9 million for the year ended December 31, 2015. We also recorded a contractual interest obligation of $17.5 million for the year ended December 31, 2015.
For the year ended December 31, 2015, we incurred debt fees of $6.3 million in connection with the Former Second Lien Term Loan, funded with gross proceeds of the loan. These fees were capitalized and recorded as deferred finance charges on the consolidated balance sheet. These debt fees are amortized and recognized as interest expense utilizing the effective interest method over the life of the loan. Interest expense from the Former Second Lien Term Loan debt fee amortization was $0.3 million for the year ended December 31, 2015. We also recorded a contractual interest obligation of $10.7 million for the year ended December 31, 2015.
Interest on the 2013 Term Loan was paid quarterly at a rate of the greater of the applicable LIBOR or 1.25% per annum (LIBOR FLOOR) plus an applicable margin of 5.50% per annum or the base rate plus an applicable margin of 4.5% per annum. The total weighted average interest rate charged on the Term Loan during the year ended December 31, 2015 and for the year ending December 31, 2014, was 6.75% per annum. The final interest payment was made on August 3, 2015, when the 2013 Term Loan was paid off in full. We incurred debt fees of $22.7 million in connection with the 2013 Term Loan, funded with gross proceeds. These fees were capitalized and recorded as deferred finance charges on the consolidated balance sheet. These debt fees were amortized and recognized as interest expense utilizing the effective interest method over the life of the loan. Interest expense from the 2013 Term Loan debt fee amortization was $1.9 million for year ended December 31, 2015 and $3.3 million for the year ended December 31, 2014. We also recorded and paid a contractual interest obligation of $18.2 million for the year ended December 31, 2015. The contractual interest obligation paid for the year ended December 31, 2014, was $34.2 million.
We also expensed 2% prepayment penalties of $6.9 million and $3.0 million as part of the 2013 Term Loan’s early extinguishment in August 2015 and June 2015, respectively, in accordance with its contractual terms. In addition, $15.2 million of amortization was expensed for the year ended December 31, 2015, to write-off the deferred financing costs in connection with the extinguishment of the debt.
Loss on Debt Extinguishment
We extinguished the 2013 Term Loan through early principal payments of $343.8 million and $150.0 million on August 3, 2015 and June 4, 2015, respectively. As part of this debt extinguishment and in accordance with its contractual terms, we expensed 2% prepayment penalties of $9.9 million, as well as $16.0 million of amortization to write-off the remaining deferred financing costs. For the year ended December 31, 2015, the total loss on debt extinguishment was $25.9 million.
Other (Income) Expense
For the year ended December 31, 2015, other (income) expense consists primarily of proceeds of $12.0 million from an April 16, 2015 sale of foreign trademark rights and perpetual irrevocable licenses to certain “know how” in certain countries in the Middle East, partially offset by $3.3 million for professional service fees related to our pursuit of a potential sale of the Company.
Income Taxes
For the Predecessor periods we were a series of limited liability companies and, therefore, had no tax liability for federal income taxes in the Predecessor years ended December 31, 2015 and December 31, 2014. Income was taxed to the ultimate owners based on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for income taxes was made in the respective financial statement periods at the federal level. We also do not believe we were subject to significant state income taxes. Therefore, we did not recognize any state income taxes in the respective Predecessor financial statement periods.

53


Reconciliation of Adjusted EBITDA presented in MD&A
Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net income as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We have included Adjusted EBITDA because we believe it provides management and investors with additional information to measure our performance and liquidity, estimate our value and evaluate our ability to service debt.
We define Adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization and (iii) as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments set forth below. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:
does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;
does not reflect changes in, or cash requirements for, our working capital needs;
does not reflect the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; and
does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future.
Our presentation of Adjusted EBITDA does not exclude the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as the Chief Executive Officer and/or Executive Chairman. These amounts were $0.1 million for the Successor period November 4, 2016 to December 31, 2016, $4.2 million for the Predecessor period January 1, 2016 to November 3, 2016; $3.6 million for the pro forma combined year ended December 31, 2016; $4.3 million for the year ended December 31, 2015 (Predecessor); and $4.5 million for the year ended December 31, 2014 (Predecessor). Following completion of the Business Combination, these cash expenses will be approximately $0.3 million annually.
The Company’s Proxy Statement dated October 21, 2016 respecting its November 3, 2016 special meeting at which stockholders approved various items related to the acquisition of Hostess contained certain projections for 2016 provided by Hostess Holdings, L.P. to the Company in connection with the Company’s consideration of the acquisition. These projections presented Adjusted EBITDA, consistent with the transaction agreement, excluding related party expenses associated with the employment arrangements with C. Dean Metropoulos. The Company’s presentation of Adjusted EBITDA did not exclude such related party expenses, which were $3.6 million for the year ending December 31, 2016. In addition, the projected Adjusted EBITDA included $2.0 million estimated pro forma adjusted EBITDA from Superior’s results prior to its acquisition in May 2016, which are not included in Adjusted EBITDA as presented by the Company. The projected Adjusted EBITDA for 2016 included in the proxy statement of $220.4 million, adjusted for these two items, would have been $214.8 million, compared to the Company’s reported 2016 pro forma combined Adjusted EBITDA of $215.3 million.




54




 2016

2016

2015

2014


 Successor


 Predecessor

Pro Forma Combined




(In thousands)

 From
November 4, 2016 through
December 31, 2016


 From
January 1, 2016 through
November 3, 2016

Year ended
December 31, 2016

 Year Ended
December 31, 2015

 Year Ended
December 31, 2014












Net income (loss)

$
(8,485
)


$
60,425


$
82,442


$
88,760


$
81,464













Plus non-GAAP adjustments:











Income tax provision

(7,762
)


439


32,862





Interest expense, net

6,649



60,384


51,441


50,011


37,447

(Gain) loss on debt extinguishment
i
(763
)




(763
)

25,880



Depreciation and amortization

5,843



10,265


36,520


9,836


7,113

Executive chairman agreement termination and execution
ii
26,747










Unit-based compensation




3,891




1,381


372

Other expense (income)
iii
751



1,624


2,375


(8,743
)

556

Business Combination Transaction Costs
iv



31,832


575





Impairment of property and equipment
v



7,300


7,300


2,700


13,241

Loss on sale/abandonment of property and equipment and bakery shutdown costs
vi



2,551


2,551


4,182


5,150

Inventory fair value adjustment
vii
8,914










Special employee incentive compensation
viii



4,698




3,923



Adjusted EBITDA

$
31,894



$
183,409


$
215,303


$
177,930


$
145,343


55



i.
For the Successor period November 4, 2016 through December 31, 2016 and pro forma combined year ended December 31, 2016, we recorded a gain on extinguishment of Former First Lien of $0.8 million, which consisted of penalties of $3.0 million, the write-off of deferred financing costs of $0.2 million net of debt premium write-offs of approximately $4.0 million. For the year ended December 31, 2015 (Predecessor), we recorded a loss on extinguishment related to our 2013 Term Loan of $25.9 million, which consisted of prepayment penalties of $9.9 million and write-off of deferred financing costs of $16.0 million.
ii.
For the Successor period November 4, 2016 through December 31, 2016, we expensed $26.7 million related to stock awarded to Mr. Metropoulos as required under his new employment arrangements.
iii.
For the Successor period November 4, 2016 through December 31, 2016, we recorded expenses of $0.8 million which primarily consisted of legal and professional fees and other post-Business Combination costs such as fees related to securities filings. For the Predecessor period from January 1, 2016 through November 3, 2016, other expense consisted of transaction costs attributable the pursuit of a potential acquisition that has since been abandoned, offset partially by a gain from the settlement of the Grain Craft peanut recall matter of approximately $0.8 million. For the year ended December 31, 2015, other income consisted of $12.0 million of proceeds from the sale of foreign trademark rights and certain “know how” in certain countries in the Middle East, partially offset by $3.3 million for professional service fees related to the pursuit of a potential sale transactions. For the year ended, December 31, 2014, other expense was $0.6 million.
iv.
For the Predecessor period from January 1, 2016 through November 3, 2016, business combination transaction costs consisted primarily of professional and legal costs.
v.
For the period January 1, 2016 through November 3, 2016, and for the pro forma combined year ended December 31, 2016, we closed multiple production lines at the Indianapolis, Indiana bakery and transitioned production to other facilities resulting in a loss of $7.3 million.
vi.
For the period January 1, 2016 through November 3, 2016, and for the pro forma combined year ended December 31, 2016, we incurred a loss on a sale/abandonment of property and bakery shutdown costs of $0.3 million, primarily due to utilities, insurance, taxes and maintenance expenses related to the Schiller Park, Illinois bakery. In addition, we incurred losses of approximately $2.6 million related to equipment that we no longer intended to use or had idled.
vii.
For the Successor period November 4, 2016 through December 31, 2016, we re-measured inventory at fair value at the Closing Date, resulting in additional non-cash cost of goods sold of $8.9 million.
viii.
For the Predecessor period January 1, 2016 through November 3, 2016, a special bonus payment of $2.5 million and $2.2 million was paid to employees at the bakery facilities and corporate employees, respectively, as compensation for their efforts in the Business Combination. For the year ended December 31, 2015, a special bonus payment of $2.6 million and $1.3 million was paid to employees at the bakery facilities and corporate employees, respectively, as compensation for their efforts in the recapitalization of the Company.


56


Segments

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

2016

2015

2014
(In thousands)
From
November 4, 2016
through December 31, 2016


From
January 1, 2016
through November 3, 2016

Year Ended December 31, 2015

Year Ended December 31, 2014

(Successor)


(Predecessor)

(Predecessor)

(Predecessor)
  Net revenue:












Sweet Baked Goods