twnk-20210630

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
			June 30, 2021
			OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 001-37540

HOSTESS BRANDS, INC.

(Exact name of registrant as specified in its charter)


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

(816) 701-4600

Registrant’s telephone number, including area code

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


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

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

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

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

Large accelerated filer

☒

Accelerated
filer

☐

Non‑accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Shares of Class A common stock outstanding - 130,093,017 shares at August 3, 2021

HOSTESS BRANDS, INC.

FORM 10-Q

For the Three Months Ended June 30, 2021

INDEX


		Page
PART I - Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Operations (Unaudited)	5
	Consolidated Statements of Comprehensive Incom e (Loss) (Unaudited)	6
	Consolidated Statements of Stockholders’ Equity (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21
PART II - Other Information
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Default Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	23

Cautionary Note Regarding Forward Looking Statements

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

HOSTESS BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

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


	June 30,		December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	218,807	$	173,034
Accounts receivable, net	148,726		125,550
Inventories	52,164		49,348

Prepaids and other current assets	13,150		21,614
Total current assets	432,847		369,546
Property and equipment, net	311,535		303,959
Intangible assets, net	1,956,147		1,967,903
Goodwill	706,615		706,615
Other assets, net	17,976		17,446
Total assets	$	3,425,120	$	3,365,469

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Long-term debt and lease obligations payable within one year	$	14,103	$	13,811
Tax receivable agreement payments payable within one year	10,000		11,800
Accounts payable	67,751		61,428
Customer trade allowances	47,620		46,779
Warrant liabilities	1,316		861
Accrued expenses and other current liabilities	44,514		55,715

Total current liabilities	185,304		190,394
Long-term debt and lease obligations	1,107,021		1,113,037
Tax receivable agreement obligations	137,274		144,744
Deferred tax liability	310,992		295,009
Other long-term liabilities	1,585		1,560
Total liabilities	1,742,176		1,744,744

Commitments and Contingencies (Note 10)

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 130,459,939 and 130,347,464 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively	13		13

Additional paid in capital	1,297,670		1,281,018
Accumulated other comprehensive loss	(4,728)		(10,407)
Retained earnings	412,680		356,101
Treasury stock	(22,691)		(6,000)
Stockholders’ equity	1,682,944		1,620,725

Total liabilities and stockholders’ equity	$	3,425,120	$	3,365,469

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020

Net revenue	$	291,485	$	256,226	$	556,906	$	499,711
Cost of goods sold	186,379		166,852		356,281		331,000
Gross profit	105,106		89,374		200,625		168,711
Operating costs and expenses:
Advertising and marketing	13,144		11,158		24,925		21,221
Selling expense	9,454		12,378		18,084		30,498
General and administrative	23,504		24,153		45,689		49,348
Amortization of customer relationships	5,878		7,110		11,756		13,594
Business combination transaction costs	—		—		—		4,282
Other operating expense	—		—		—		27
Total operating costs and expenses	51,980		54,799		100,454		118,970
Operating income	53,126		34,575		100,171		49,741
Other expense (income):
Interest expense, net	9,954		10,580		19,971		22,305


Change in fair value of warrant liabilities	531		16,382		455		(62,718)
Other expense	1,067		1,132		1,430		1,685
Total other expense (income)	11,552		28,094		21,856		(38,728)
Income before income taxes	41,574		6,481		78,315		88,469
Income tax expense	11,727		5,493		21,736		5,741
Net income	29,847		988		56,579		82,728
Less: Net income attributable to the non-controlling interest	—		1,200		—		1,492
Net income (loss) attributable to Class A stockholders	$	29,847	$	(212)	$	56,579	$	81,236

Earnings per Class A share:
Basic	$	0.23	$	—	$	0.43	$	0.66
Diluted	$	0.21	$	—	$	0.41	$	0.15
Weighted-average shares outstanding:
Basic	131,354,059		123,638,723		131,096,686		123,381,190
Diluted	138,925,489		123,818,404		138,026,854		125,312,658

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, amounts in thousands)


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020

Net income	$	29,847	$	988	$	56,579	$	82,728
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap designated as a cash flow hedge	(1,810)		(3,006)		5,251		(15,795)
Reclassification into net income	1,152		1,097		2,479		1,178
Income tax benefit (expense)	175		481		(2,051)		3,650
Comprehensive income (loss)	29,364		(440)		62,258		71,761
Less: Comprehensive loss attributed to non-controlling interest	—		1,096		—		659
Comprehensive income (loss) attributed to Class A stockholders	$	29,364	$	(1,536)	$	62,258	$	71,102

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in thousands)


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


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


Balance–March 31, 2021	131,185	$	13		$	1,290,882	$	(4,245)	$	382,833	444	$	(6,000)	$	1,663,483
Comprehensive income (loss)	—	—			—		(483)		29,847		—	—		29,364
Share-based compensation	22	—			1,640		—		—		—	—		1,640


Exercise of employee stock options	220	—			3,135		—		—		—	—		3,135
Exercise of public warrants	209	—			2,405		—		—		—	—		2,405
Payment of taxes for employee stock awards	—	—			(392)		—		—		—	—		(392)
Repurchase of common stock	(1,176)	—			—		—		—		1,176	(16,691)		(16,691)

Balance–June 30, 2021	130,460	$	13		$	1,297,670	$	(4,728)	$	412,680	1,620	$	(22,691)	$	1,682,944


	Class A Voting Common Stock			Class B Voting Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Stockholders’ Equity		Non-controlling Interest
	Shares	Amount		Shares	Amount
Balance–December 31, 2019	122,107	$	12	8,411	$	1	$	1,123,805	$	(756)	$	251,425	$	1,374,487	$	94,432
Comprehensive income (loss)	—	—		—	—		—		(8,810)		81,448		72,638		(437)
Share-based compensation, net of income taxes of $103	106	—		—	—		2,180		—		—		2,180		—
Exchanges	969	—		(969)	—		11,819		(17)		—		11,802		(11,802)
Distributions	—	—		—	—		—		—		—		—		(1,613)
Exercise of employee stock options	2	—		—	—		153		—		—		153		—
Payment of taxes for employee stock awards	—	—		—	—		(1,004)		—		—		(1,004)		—
Exercise of public warrants	1	—		—	—		2		—		—		2		—
Tax receivable agreement arising from exchanges, net of income taxes of $1,341	—	—		—	—		(1,942)		—		—		(1,942)		—
Balance–March 31, 2020	123,185	$	12	7,442	$	1	$	1,135,013	$	(9,583)	$	332,873	$	1,458,316	$	80,580
Comprehensive income (loss)	—	—		—	—		—		(1,324)		(212)		(1,536)		1,096
Share-based compensation, net of income taxes of $496	46	—		—	—		1,929		—		—		1,929		—
Exchanges	1,140	—		(1,140)	—		13,803		(127)		—		13,676		(13,676)
Distributions	—	—		—	—		—		—		—		—		(365)
Exercise of employee stock options and warrants	37	—		—	—		408		—		—		408		—
Payment of taxes for employee stock awards	—	—		—	—		(32)		—		—		(32)		—
Tax receivable agreement arising from exchanges, net of income taxes of $952	—	—		—	—		(2,556)		—		—		(2,556)		—
Balance–June 30, 2020	124,408	$	12	6,302	$	1	$	1,148,565	$	(11,034)	$	332,661	$	1,470,205	$	67,635

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)



			Six Months Ended
			June 30, 2021		June 30, 2020

Operating activities
	Net income		$	56,579	$	82,728
	Depreciation and amortization		25,223		26,477

	Debt discount amortization		621		664
	Change in fair value of warrant liabilities		455		(62,718)


	Unrealized foreign exchange losses		73		996
	Non-cash lease expense		659		641
	Share-based compensation		4,363		4,503

	Deferred taxes		13,932		3,973
	Loss on sale of assets		—		128
	Change in operating assets and liabilities, net of acquisitions and dispositions:
		Accounts receivable	(23,194)		(11,320)
		Inventories	(2,816)		4,135
		Prepaids and other current assets	8,844		(1,091)

		Accounts payable and accrued expenses	1,735		3,323
		Customer trade allowances	827		8,242

	Net cash provided by operating activities		87,301		60,681

Investing activities
	Purchases of property and equipment		(20,051)		(23,376)
	Acquisition of business, net of cash acquired		—		(318,427)

	Acquisition and development of software assets		(2,129)		(3,402)
	Net cash used in investing activities		(22,180)		(345,205)

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


	Proceeds from long-term debt origination, net of fees paid		—		136,888
	Distributions to non-controlling interest		—		(1,977)
	Repurchase of common stock		(16,691)		—
	Tax payments related to issuance of shares to employees		(1,235)		(1,036)
	Cash received from exercise of options and warrants		13,524		563
	Payments on tax receivable agreement		(9,270)		(1,279)

	Net cash provided by (used in) financing activities		(19,256)		127,575
	Effect of exchange rate changes on cash and cash equivalents		(92)		(359)
Net increase (decrease) in cash and cash equivalents			45,773		(157,308)
Cash and cash equivalents at beginning of period			173,034		285,087
Cash and cash equivalents at end of period			$	218,807	$	127,779








































Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
	Interest	$	19,451	$	21,885
	Net taxes refunded	$	(1,506)	$	(577)
Supplemental disclosure of non-cash investing:
	Accrued capital expenditures	$	5,046	$	1,542

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

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

Basis of Presentation

The Company’s operations are conducted through wholly-owned operating subsidiaries . 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”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned or controlled subsidiaries, collectively referred to as the Company. For the periods presented, the Company has one reportable segment.

Adoption of New Accounting Standards

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

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022. Once elected, this ASU must be applied prospectively for all eligible contract modifications. The Company will adopt Topic 848 when its relevant contracts are modified upon transition to alternative reference rates. The Company does not expect the adoption of Topic 848 to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740)”. This ASU simplifies the accounting for certain income tax related items, including intraperiod tax allocations, deferred taxes related to foreign subsidiaries and step-up in tax basis of goodwill. The ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company adopted the standard effective January 1, 2021. Adoption of Topic 740 did not have a material impact on the Company’s consolidated financial statements.

Principles of Consolidation

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

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

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

Accounts Receivable

Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of June 30, 2021 and December 31, 2020, the Company’s accounts receivable were $148.7 million and $125.6 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $3.5 million at both June 30, 2021 and December 31, 2020.

Inventories

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

The components of inventories are as follows:


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

Ingredients and packaging	$	24,345	$	22,965
Finished goods	24,012		23,583
Inventory in transit to customers	3,807		2,800
	$	52,164	$	49,348

Software Costs

Capitalized software is included in “other assets, net” in the consolidated balance sheets in the amount of $15.0 million and $14.7 million at June 30, 2021 and December 31, 2020, respectively. Capitalized software costs are amortized over their estimated useful life of five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative operating expense was $1.0 million and $1.9 million for the three and six months ended June 30, 2021, compared to $1.3 million and $2.6 million for the three and six months ended June 30, 2020, respectively.

Disaggregation of Revenue

Net revenue consists of sales of packaged food products in the United States, primarily within the Sweet Baked Goods category. The Company also sells products in the United States and Canada within the Cookies category.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following tables disaggregate revenue by geographical market and category.


	Three Months Ended June 30, 2021
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	262,491	$	24,407	$	286,898
Canada	—		4,587		4,587
	$	262,491	$	28,994	$	291,485


	Three Months Ended June 30, 2020
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	232,620	$	20,459	$	253,079
Canada	—		3,147		3,147
	$	232,620	$	23,606	$	256,226


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


	Six Months Ended June 30, 2020
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	458,982	$	33,766	$	492,748
Canada	—		6,963		6,963
	$	458,982	$	40,729	$	499,711

Concentrations

For the three months ended June 30, 2021 and 2020, the Company has one customer (together with its affiliates) that accounted for 18.1% and 22.3% of total net revenue, and for the six months ended June 30, 2021 and 2020, 19.3% and 21.7% of total net revenue, respectively.

Foreign Currency Remeasurement

Certain Voortman Cookies Limited (“Voortman”) sales and costs are denominated in the Canadian dollar (“CAD”). CAD transactions have been remeasured into US dollars (“USD”) on the 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 six months ended June 30, 2021, the Company recognized a gain and loss, respectively, on remeasurement of less than $0.1 million, which is reported within other expense on the consolidated statement of operations. During both the three and six months ended June 30, 2020, the Company recognized a loss on remeasurement of $0.7 million which is reported within other expense on the consolidated statement of operations.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. Property and Equipment

Property and equipment consists of the following:


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

Land and buildings	$	62,737	$	59,774
Right of use assets, operating	32,192		31,354
Machinery and equipment	271,196		255,821
Construction in progress	23,906		25,041
	390,031		371,990
Less accumulated depreciation and amortization	(78,496)		(68,031)
	$	311,535	$	303,959

Depreciation expense was $5.7 million and $11.5 million for the three and six months ended June 30, 2021, compared to $5.2 million and $10.2 million for the three and six months ended June 30, 2020, respectively.

3. Accrued Expenses and Other Current Liabilities

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


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

Payroll, vacation and other compensation	$	11,659	$	9,886
Interest rate swap contract	6,253		13,694
Incentive compensation	9,860		16,199
Accrued interest	4,707		4,815
Other	12,035		11,121





	$	44,514	$	55,715

4. Debt and Lease Obligations

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


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

Term Loan (3.0% as of June 30, 2021)
Principal	$	1,097,180	$	1,102,763
Unamortized debt premium and issuance costs	(4,296)		(4,917)
	1,092,884		1,097,846
Lease obligations	28,240		29,002
Total debt and lease obligations	1,121,124		1,126,848
Less: Current portion of long term debt and lease obligations	(14,103)		(13,811)
Long-term portion	$	1,107,021	$	1,113,037

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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


(In thousands)
2021	$	5,584
2022	11,167
2023	11,167
2024	11,167
2025	1,058,095

Leases

The Company has entered into operating leases for certain properties which expire at various times through 2026. The Company determines if an arrangement is a lease at inception.

At June 30, 2021 and 2020, right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheet (see Note 2. Property and Equipment). As of June 30, 2021 and 2020, the Company has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease obligations on the consolidated balance sheet.

The table below shows the composition of lease expense:


	Three Months Ended				Six Months Ended
(In thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020


Operating lease expense	$	1,771	$	1,269	$	3,424	$	3,064
Short-term lease expense	379		544		582		1,558
Variable lease expense	385		467		742		1,021
	$	2,535	$	2,280	$	4,748	$	5,643

5. Derivative Instruments

Warrants

As of June 30, 2021 and December 31, 2020, there were 52,176,000 and 53,936,776 public warrants outstanding, respectively, and 541,658 private placement warrants outstanding. Each warrant entitles its holder to purchase one-half of one share of Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of Class A common stock. The warrants expire on November 4, 2021, or earlier upon redemption or liquidation. The Company may call the outstanding public warrants for redemption at a price of $0.01 per warrant, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by Gores Sponsor, LLC or its permitted transferees. The potential resale of the private placement warrants, which would result in a conversion to public warrants, has been registered with the SEC. When sold to the public, the private placement warrants will become public warrants.

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

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Swap and Foreign Currency Contracts

The Company entered into interest rate swap contracts with counter parties to make a series of payments based on fixed rates ranging from 1.11% to 1.78% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based on the June 30, 2021 notional amount of $600 million reducing by $100 million each year, until $500 million remains outstanding through August 2025. The Company entered into these transactions to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges. At June 30, 2021, the effective fixed interest rate on the long-term debt hedged by these contracts ranged from 3.36% to 4.03%.

To reduce the effect of fluctuations in CAD denominated expenses relative to their U.S. dollar equivalents originating from its Canadian operations, the Company entered into CAD purchase contracts. The contracts provide for the Company to sell a total of $11.1 million USD for $13.9 million CAD at varying defined settlement dates through June 2022. The Company has designated these contracts as cash flow hedges.

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

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


(In thousands)		June 30, 2021		December 31, 2020
Asset derivatives	Location
Foreign currency contracts (2)	Other current assets	$	288	$	—

Liability derivatives	Location
Interest rate swap contracts (1)	Accrued expenses	$	6,253	$	13,688
Foreign currency contracts (2)	Accrued expenses	—		6
		$	6,253	$	13,694

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

(2) The fair values of foreign currency contracts are measured on a recurring basis by comparison to available market information on similar contracts (Level 2).

A summary of the gains and losses related to interest rate and foreign currency instruments in the consolidated statement of operations is as follows:


		Three Months Ended				Six Months Ended
(In thousands)		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Gain on derivative contracts designated as cash flow hedges	Location
Interest rate swap contracts	Interest expense, net	$	1,152	$	1,097	$	2,479	$	1,178

Loss on other derivative contracts	Location

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

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Earnings per Share

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

Below are basic and diluted net income per share:


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Numerator:
Net income (loss) attributable to Class A stockholders (in thousands) - basic	$	29,847	$	(212)	$	56,579	$	81,236
Less: Change in fair value of warrant liabilities	—		—		—		(62,718)
Numerator - diluted	29,847		(212)		56,579		18,518
Denominator:
Weighted-average Class A shares outstanding - basic	131,354,059		123,638,723		131,096,686		123,381,190
Dilutive effect of warrants	6,867,024		—		6,319,296		1,744,314
Dilutive effect of RSUs	555,050		179,681		486,250		187,154
Dilutive effect of stock options	149,356		—		124,622		—
Weighted-average shares outstanding - diluted	138,925,489		123,818,404		138,026,854		125,312,658

Net income per Class A share - basic	$	0.23	$	—	$	0.43	$	0.66

Net income per Class A share - diluted	$	0.21	$	—	$	0.41	$	0.15

For warrants that are liability-classified, during periods when the impact would be dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method. During the three and six months ended June 30, 2021, the diluted weighted-average shares outstanding includes the dilutive impact of equity-classified warrants.

Stock options that were excluded from the computation of diluted weighted average shares, because their effect was anti-dilutive, for the three and six months ended June 30, 2021, were 31,051 and 71,240 compared to 711,870 and 600,919 for the three and six months ended June 30, 2020, respectively.

7. Income Taxes

The Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on its controlled foreign subsidiary. The income tax provision is determined based on the estimated full year effective tax rate, adjusted for infrequent or unusual items, which are recognized on a discrete basis in the period they occur. The Company’s estimated annual effective tax rate is 27.5% prior to taking into account any discrete items.

The effective tax rate was 28.2% and 84.8% for the three months ended June 30, 2021 and 2020, respectively. The effective tax rates for the respective periods were impacted by non-taxable losses from the change in fair value of warrant liabilities of $0.5 million and $16.4 million, respectively. The effective rate for the period ended June 30, 2021 was also impacted by the removal of the non-controlling interest. The effective tax rate was 27.8% and 6.5% for the six months ended June 30, 2021 and 2020, respectively. The effective tax rate for the respective periods were impacted by non-taxable losses of $0.5 million and non-taxable gains of $62.7 million from the change in fair value

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

of warrant liabilities. As of June 30, 2021, and December 31, 2020, income taxes receivable were $3.5 million and 12.3 million, respectively.

8. Tax Receivable Agreement Obligations

The following table summarizes activity related to the Tax Receivable Agreement for the six months ended June 30, 2021: