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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended
September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37540
twnk-20200930_g1.jpg
HOSTESS BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
47-4168492
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)
7905 Quivira Road
66215
Lenexa,
KS
(Zip Code)
(Address of principal executive offices)
(816701-4600
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTicker Symbol Name of each exchange on which registered
Class A Common Stock, Par Value of $0.0001 per shareTWNKThe Nasdaq Stock Market LLC
Warrants, each exercisable for a half share of Class A Common StockTWNKWThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.:
Large accelerated filer
Accelerated
filer 
Non‑accelerated  filer Smaller reporting company Emerging growth company 
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes  No 
Shares of Class A common stock outstanding - 126,211,761 shares at November 5, 2020
Shares of Class B common stock outstanding - 4,568,497 shares at November 5, 2020



HOSTESS BRANDS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2020

INDEX
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.










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






3



HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data)

September 30,December 31,
20202019
ASSETS
Current assets:
Cash and cash equivalents$152,297 $285,087 
Accounts receivable, net136,930 104,892 
Inventories47,710 47,608 
Prepaids and other current assets20,116 15,569 
Total current assets357,053 453,156 
Property and equipment, net284,118 242,384 
Intangible assets, net1,974,081 1,853,315 
Goodwill707,132 535,853 
Other assets, net17,459 12,993 
Total assets$3,339,843 $3,097,701 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and lease obligations payable within one year$13,097 $11,883 
Tax receivable agreement payments payable within one year9,100 12,100 
Accounts payable 60,096 68,566 
Customer trade allowances57,059 45,715 
Accrued expenses and other current liabilities57,020 21,661 
Total current liabilities196,372 159,925 
Long-term debt and lease obligations1,106,374 975,405 
Tax receivable agreement obligations128,355 126,096 
Deferred tax liability298,387 256,051 
Other long-term liabilities1,340  
Total liabilities1,730,828 1,517,477 
Commitments and Contingencies (Note 13)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 125,149,257 and 122,108,086 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
12 12 
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 5,622,149 and 8,409,834 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
1 1 
Additional paid in capital1,185,003 1,152,055 
Accumulated other comprehensive loss(11,004)(756)
Retained earnings375,603 334,480 
Stockholders’ equity1,549,615 1,485,792 
Non-controlling interest59,400 94,432 
Total liabilities and stockholders’ equity$3,339,843 $3,097,701 
See accompanying notes to the unaudited consolidated financial statements.
4


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net revenue$260,855 $227,211 $760,566 $691,009 
Cost of goods sold169,700 156,791 500,700 461,951 
Gross profit91,155 70,420 259,866 229,058 
Operating costs and expenses:
Advertising and marketing
11,762 10,627 32,983 30,186 
Selling expense
8,675 6,992 39,173 23,822 
General and administrative
21,913 17,736 71,261 54,483 
Amortization of customer relationships
6,739 5,755 20,333 17,749 
Business combination transaction costs  4,282  
Other operating expense729 5,739 756 6,256 
Total operating costs and expenses49,818 46,849 168,788 132,496 
Operating income 41,337 23,571 91,078 96,562 
Other expense:
Interest expense, net10,265 9,813 32,570 30,351 
Other expense818  2,503 1,286 
Total other expense11,083 9,813 35,073 31,637 
Income before income taxes30,254 13,758 56,005 64,925 
Income tax expense6,281 3,029 12,022 10,915 
Net income 23,973 10,729 43,983 54,010 
Less: Net income attributable to the non-controlling interest1,368 1,944 2,860 12,615 
Net income attributable to Class A stockholders$22,605 $8,785 $41,123 $41,395 
Earnings per Class A share:
Basic$0.18 $0.08 $0.33 $0.39 
Diluted$0.18 $0.07 $0.33 $0.37 
Weighted-average shares outstanding:
Basic124,905,538 115,196,195 123,901,333 106,904,733 
Diluted127,586,881 121,122,895 126,090,645 110,804,367 


See accompanying notes to the unaudited consolidated financial statements.
5


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)

Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net income$23,973 $10,729 $43,983 $54,010 
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap contracts designated as cash flow hedges155 (741)(14,462)(5,912)
Tax benefit (expense)(39)172 3,611 1,255 
Comprehensive income24,089 10,160 33,132 49,353 
Less: Comprehensive income attributed to non-controlling interest1,375 1,858 2,034 11,447 
Comprehensive income attributed to Class A stockholders$22,714 $8,302 $31,098 $37,906 


See accompanying notes to the unaudited consolidated financial statements.


6


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands except share data)

Class A Voting
Common Stock
Class B Voting
Common Stock
Additional
Paid-in Capital
Accumulated
Other Comprehensive Income (Loss)
Retained
Earnings
Total
Stockholders’
Equity
Non-controlling
Interest
SharesAmountSharesAmount
Balance–December 31, 2019122,108,086 $12 8,409,834 $1 $1,152,055 $(756)$334,480 $1,485,792 $94,432 
Comprehensive income (loss)— — — — — (8,810)2,348 (6,462)(437)
Share-based compensation, including income taxes of $103
106,770 — — — 2,180 — — 2,180 — 
Exchanges969,247 — (969.247)— 11,819 (17)— 11,802 (11,802)
Distributions— — — — — — — — (1,613)
Exercise of employee stock options and warrants2,205 — — — 155 — — 155 — 
Payment of taxes for employee stock awards— — — — (1,004)— — (1,004)— 
Tax receivable agreement arising from exchanges, net of income taxes of $1,341
— — — — (1,942)— — (1,942)— 
Balance–March 31, 2020123,186,308 12 7,440,587 1 1,163,263 (9,583)336,828 1,490,521 80,580 
Comprehensive income (loss)— — — — — (1,324)16,170 14,846 1,096 
Share-based compensation, net of income taxes of $496
46,304 — — — 1,929 — — 1,929 — 
Exchanges1,139,302 — (1,139,302)— 13,803 (127)— 13,676 (13,676)
Distributions— — — — — — — — (365)
Exercise of employee stock options and warrants36,700 — — — 408 — — 408 — 
Payment of taxes for employee stock awards— — — — (32)— — (32)— 
Tax receivable agreement arising from exchanges, net of income taxes of $952
— — — (2,556)— — (2,556)— 
Balance–June 30, 2020124,408,614 12 6,301,285 1 1,176,815 (11,034)352,998 1,518,792 67,635 
Comprehensive income (loss)— — — — — 109 22,605 22,714 1,375 
Share-based compensation, net of income taxes of $361
60,781 — — — 1,720 — — 1,720 — 
Exchanges679,136 — (679,136)— 8,244 (79)— 8,165 (8,165)
Distributions— — — — — — — — (1,445)
Exercise of employee stock options and warrants726 — — — 2 — — 2 — 
Payment of taxes for employee stock awards— — — — (347)— — (347)— 
Tax receivable agreement arising from exchanges, net of income taxes of $754
— — — — (1,431)— — (1,431)— 
Balance–September 30, 2020125,149,257 $12 5,622,149 $1 $1,185,003 $(11,004)$375,603 $1,549,615 $59,400 














7




HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands except share data)
Class A Voting
Common Stock
Class B Voting
Common Stock
Additional
Paid-in Capital
Accumulated
Other Comprehensive Income (Loss)
Retained
Earnings
Total
Stockholders’
Equity
Non-controlling
Interest
SharesAmountSharesAmount
Balance–December 31, 2018100,046,392 $10 30,255,184 $3 $925,902 $2,523 $271,365 $1,199,803 $350,454 
Comprehensive income (loss)— — — — — (1,216)21,126 19,910 4,984 
Share-based compensation, net of income taxes of $613
— — — — 1,668 — — 1,668 — 
Distributions— — — — — — — — (457)
Exercise of public warrants50 — — — — — — — — 
Balance–March 31, 2019100,046,442 10 30,255,184 3 927,570 1,307 292,491 1,221,381 354,981 
Comprehensive income (loss)— — — — — (1,789)11,483 9,694 4,605 
Share-based compensation, net of income taxes of $563
20,241 — — — 1,936 — — 1,936 — 
Distributions— — — — — — — — (4,459)
Exercise of employee stock options1,788 — — — 23 — — 23 — 
Payment of taxes for employee stock awards— — — — (124)— — (124)— 
Exchanges9,255,400 1 (9,255,400)(1)110,734 292 — 111,026 (111,026)
Tax receivable agreement arising from exchanges, net of income taxes of $10,109
— — — — (17,610)— — (17,610)— 
Balance-June 30, 2019109,323,871 11 20,999,784 2 1,022,529 (190)303,974 1,326,326 244,101 
Comprehensive income (loss)— — — — — (483)8,785 8,302 1,858 
Share-based compensation, net of income taxes of $228
78,610 — — — 2,149 — — 2,149 — 
Distributions— — — — — — — — (1,743)
Payment of taxes for employee stock awards— — — — (483)— — (483)— 
Exchanges11,544,600 1 (11,544,600)(1)139,169 (14)— 139,155 (139,155)
Tax receivable agreement arising from exchanges, net of income taxes of $17,185
— — — — (23,238)— — (23,238)— 
Balance–September 30, 2019120,947,081 $12 9,455,184 $1 $1,140,126 $(687)$312,759 $1,452,211 $105,061 
See accompanying notes to the unaudited consolidated financial statements.
8


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Nine Months Ended
Operating activitiesSeptember 30, 2020September 30, 2019
Net income43,983 $54,010 
Depreciation and amortization40,999 32,678 
Impairment of property, goodwill and intangibles 1,005 
Debt discount (premium) amortization977 (803)
Tax receivable agreement remeasurement610 1,296 
Non-cash fees on disposal of assets 1,414 
Unrealized foreign exchange losses1,392  
Non-cash lease expense358  
Share-based compensation6,583 7,157 
Deferred taxes8,575 9,519 
Loss on sale of assets317 471 
Change in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable(7,106)(13,536)
Inventories7,462 (3,451)
Prepaids and other current assets (4,334)(3,793)
Accounts payable and accrued expenses2,186 18,305 
Customer trade allowances5,989 3,080 
Net cash provided by operating activities107,991 107,352 
Investing activities
Purchases of property and equipment(33,382)(28,421)
Acquisition of business, net of cash acquired(316,013) 
Proceeds from sale of business, net of cash 63,353 
Acquisition and development of software assets(4,994)(4,298)
Net cash provided by (used in) investing activities(354,389)30,634 
Financing activities
Repayments of long-term debt and lease obligations(8,375)(7,470)
Proceeds from long-term debt origination, net of fees paid136,888  
Distributions to non-controlling interest(3,423)(6,659)
Tax payments related to issuance of shares to employees(1,383)(607)
Cash received from exercise of options and warrants565 23 
Payments on tax receivable agreement(10,327)(2,779)
Net cash provided by (used in) financing activities113,945 (17,492)
Effect of exchange rate changes on cash and cash equivalents(337) 
Net increase (decrease) in cash and cash equivalents(132,790)120,494 
Cash and cash equivalents at beginning of period285,087 146,377 
Cash and cash equivalents at end of period$152,297 $266,871 

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest$31,883 $33,602 
Net taxes paid$5,403 $2,416 
Supplemental disclosure of non-cash investing:
Accrued capital expenditures$3,124 $1,468 
See accompanying notes to the unaudited consolidated financial statements.
9


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business
Hostess Brands, Inc. is a Delaware corporation headquartered in Lenexa, Kansas. The consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing snack products, including sweet baked goods, cookies and wafers in North America.
The Company’s operations are conducted through indirect operating subsidiaries that are wholly-owned by Hostess Holdings, L.P. (“Hostess Holdings”), a direct subsidiary of Hostess Brands, Inc. Hostess Brands, Inc. holds 100% of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidates Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings are held by the holders of the outstanding shares of Class B common stock of Hostess Brands, Inc. These limited partnership interests in Hostess Holdings are reflected in the consolidated financial statements as a non-controlling interest. In January 2020, the Company acquired Voortman Cookies Limited (“Voortman”), a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies.

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

For the periods presented, the Company had two reportable segments: Snacking and In-Store Bakery. The Company sold its In-Store Bakery operations on August 30, 2019. Subsequent to the sale, Snacking remains as the Company’s single reportable segment.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“Topic 326”). This ASU requires entities to measure the impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. Adoption of Topic 326 did not have a material impact on the Company’s consolidated financial statements.

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity). All intercompany balances and transactions have been eliminated in consolidation.    
10


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and for the reported amounts of revenues and expenses during the reporting period. Management utilizes estimates, including, but not limited to, valuation and useful lives of tangible and intangible assets, valuation of expected future payments under the tax receivable agreement, and reserves for trade and promotional allowances. Actual results could differ from these estimates.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of September 30, 2020 and December 31, 2019, the Company’s accounts receivable were $136.9 million and $104.9 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $5.1 million and $2.7 million, respectively.
Inventories
Inventories are stated at the lower of cost or net-realizable value on a first-in first-out basis. Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.
The components of inventories are as follows:
(In thousands)
September 30,
2020
December 31,
2019
Ingredients and packaging$23,937 $21,439 
Finished goods21,043 22,513 
Inventory in transit to customers2,730 3,656 
$47,710 $47,608 
Software Costs

Capitalized software is included in “Other assets, net” in the consolidated balance sheets in the amount of $14.7 million and $10.9 million at September 30, 2020 and December 31, 2019, respectively. Capitalized software costs are amortized over their estimated useful life of five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative operating expense was $1.4 million and $4.0 million for the three and nine months ended September 30, 2020, respectively, compared to $0.7 million and $2.1 million for the three and nine months ended September 30, 2019, respectively.
Disaggregation of Revenue
Net revenue consists of sales of packaged food products in the United States primarily within the Sweet Baked Goods category. Beginning with the acquisition of Voortman on January 3, 2020 (see Note 2. Business Combinations), the Company also sells products in the United States and Canada within the Cookies category.
The following tables disaggregate revenue by geographical market and category.
Three Months Ended September 30, 2020
(In thousands)
Sweet Baked GoodsIn-Store BakeryCookiesTotal
United States$234,103 $ $22,328 $256,431 
Canada  4,424 4,424 
$234,103 $ $26,752 $260,855 
11


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2019
(In thousands)
Sweet Baked GoodsIn-Store BakeryCookiesTotal
United States$220,156 $7,055 $ $227,211 
Canada    
$220,156 $7,055 $ $227,211 

Nine Months Ended September 30, 2020
(In thousands)
Sweet Baked GoodsIn-Store BakeryCookiesTotal
United States$693,085 $ $56,094 $749,179 
Canada  11,387 11,387 
$693,085 $ $67,481 $760,566 
    
Nine Months Ended September 30, 2019
(In thousands)
Sweet Baked GoodsIn-Store BakeryCookiesTotal
United States$662,307 $28,702 $ $691,009 
Canada    
$662,307 $28,702 $ $691,009 

Concentrations
The Company has one customer (together with its affiliates) that accounted for 10% or more of the Company’s total net revenue. The percentage of total net revenues for this customer is presented below by segment:
Three Months EndedNine Months Ended
(% of Consolidated Net Revenues)
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Snacking
19.7 %22.3 %21.0 %23.0 %
In-Store Bakery0.0 %0.3 %0.0 %0.5 %
Total19.7 %22.6 %21.0 %23.5 %

Foreign Currency Remeasurement

Certain Voortman sales and costs are denominated in the Canadian dollar (“CAD”). CAD transactions have been remeasured into U.S. dollars (“USD”) on the consolidated statement of operations using the average exchange rate for the reporting period. Balances expected to be settled in CAD have been remeasured into USD on the consolidated balance sheet using the exchange rate at the end of the period. During the three and nine months ended September 30, 2020, the Company recognized losses on remeasurement of $0.4 million and $1.1 million, respectively, reported within other expense on the consolidated statement of operations.

12


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Business Combinations

On January 3, 2020, the Company completed the acquisition of all of the shares of the parent company of Voortman, a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies for approximately $328.7 million ($427.0 million CAD), reflecting final working capital and other closing statement adjustments finalized in the three months ended September 30, 2020. Net cash outflow related to the purchase price through September 30, 2020 was $316.0 million. This net cash outflow reflects a net gain on a related foreign currency contract of $6.9 million, cash acquired of $1.6 million and a liability outstanding as of September 30, 2020 for certain purchase price adjustments of $4.2 million.

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

An aggregate of $10.8 million CAD was deposited into an escrow account to satisfy amounts in respect of post-closing adjustments and to provide for payment to the Company of indemnity claims, if any. During the three months ended September 30, 2020, the post-closing working capital adjustment was finalized and in connection therewith, $3.1 million CAD was released from escrow. During the three and nine months ended September 30, 2020, working capital and other adjustments of $4.2 million and $5.2 million were made to goodwill, respectively. The Company continues to evaluate contractual rights it has under the transaction documents.

Included in other non-current liabilities in the table below is a $1.3 million liability for pre-acquisition uncertain tax positions. It is offset by a non-current receivable balance of $1.3 million representing expected recovery through seller or insurance policy indemnification.

The Company recorded a preliminary allocation of the purchase price to tangible and identified intangible assets acquired and liabilities assumed, based on their fair values as of the closing date. The final allocation of the purchase price is pending the final valuation of certain assets acquired and liabilities assumed. The Company expects to finalize the allocation of the purchase consideration as soon as practicable. The preliminary purchase price allocation is as follows:

(In thousands)
Cash$1,639 
Accounts receivable24,848 
Inventory7,564 
Income tax receivable7,522 
Other current assets420 
Property and equipment32,028 
Customer relationships11,100 
Trade names130,000 
Goodwill171,279 
Other non-current assets1,320 
Accounts payable and accrued expenses(6,173)
Customer trade allowances(5,428)
Lease liabilities(6,420)
Deferred taxes(39,665)
Other non-current liabilities(1,320)
Assets acquired and liabilities assumed$328,714 


13


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Goodwill is attributed to intangible assets which do not qualify for separate recognition.

During the nine months ended September 30, 2020, the Company incurred $4.3 million of expenses related to this acquisition. These expenses are classified as business combination transaction costs on the consolidated statement of operations.

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

Three Months EndedNine Months Ended
(In thousands)
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
(unaudited, pro forma)(unaudited, pro forma)
Net revenue$260,855 $259,040 $760,566 $771,182 
Net income$23,973 $12,476 $43,983 $54,535 

3. Exit Costs
Subsequent to the Company’s acquisition of Voortman, activities were initiated to transition Voortman’s distribution model to the Company’s direct-to-warehouse distribution model. The Company has incurred costs to exit Voortman’s direct-store-delivery model, including severance and contract termination costs related to third-party distributor and leasing relationships. Total costs are expected to be approximately $13.0 million through completion of the transition in 2020. During the nine months ended September 30, 2020, contract termination costs of $8.3 million were recognized in selling expense on the consolidated statement of operations. No contract termination costs were recognized during the three months ended September 30, 2020. During the three and nine months ended September 30, 2020, severance costs of $0.1 million and $4.3 million, respectively, were recognized within general and administrative expenses on the consolidated statement of operations.

Reserves for these activities are reported within accrued expenses on the consolidated balance sheet and had the following activity during the nine months ended September 30, 2020:
(In thousands)SeveranceContract TerminationTotal
Charges recorded$4,290 $8,278 $12,568 
Payments made(3,560)(7,617)(11,177)
Impact of change in exchange rates on CAD denominated liability(89)(365)(454)
Reserve balance as of September 30, 2020$641 $