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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
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
twnk-20210630_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 - 130,093,017 shares at August 3, 2021




HOSTESS BRANDS, INC.
FORM 10-Q
For the Three Months Ended June 30, 2021

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 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.






3



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

June 30,December 31,
20212020
ASSETS
Current assets:
Cash and cash equivalents$218,807 $173,034 
Accounts receivable, net148,726 125,550 
Inventories52,164 49,348 
Prepaids and other current assets13,150 21,614 
Total current assets432,847 369,546 
Property and equipment, net311,535 303,959 
Intangible assets, net1,956,147 1,967,903 
Goodwill706,615 706,615 
Other assets, net17,976 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 year10,000 11,800 
Accounts payable 67,751 61,428 
Customer trade allowances47,620 46,779 
Warrant liabilities1,316 861 
Accrued expenses and other current liabilities44,514 55,715 
Total current liabilities185,304 190,394 
Long-term debt and lease obligations1,107,021 1,113,037 
Tax receivable agreement obligations137,274 144,744 
Deferred tax liability310,992 295,009 
Other long-term liabilities1,585 1,560 
Total liabilities1,742,176 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 capital1,297,670 1,281,018 
Accumulated other comprehensive loss(4,728)(10,407)
Retained earnings412,680 356,101 
Treasury stock(22,691)(6,000)
Stockholders’ equity1,682,944 1,620,725 
Total liabilities and stockholders’ equity$3,425,120 $3,365,469 
See accompanying notes to the unaudited consolidated financial statements.
4


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Net revenue$291,485 $256,226 $556,906 $499,711 
Cost of goods sold186,379 166,852 356,281 331,000 
Gross profit105,106 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 expenses51,980 54,799 100,454 118,970 
Operating income 53,126 34,575 100,171 49,741 
Other expense (income):
Interest expense, net9,954 10,580 19,971 22,305 
Change in fair value of warrant liabilities531 16,382 455 (62,718)
Other expense1,067 1,132 1,430 1,685 
Total other expense (income)11,552 28,094 21,856 (38,728)
Income before income taxes41,574 6,481 78,315 88,469 
Income tax expense11,727 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:
Basic131,354,059 123,638,723 131,096,686 123,381,190 
Diluted138,925,489 123,818,404 138,026,854 125,312,658 


See accompanying notes to the unaudited consolidated financial statements.
5


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands)
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 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 income1,152 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.


6


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 StockTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance–December 31, 2020130,347 $13 $1,281,018 $(10,407)$356,101 444 $(6,000)$1,620,725 
Comprehensive income— — — 6,162 26,732 — — 32,894 
Share-based compensation146 — 2,723 — — — — 2,723 
Exercise of employee stock options20 — 262 — — — — 262 
Exercise of public warrants672 — 7,722 — — — — 7,722 
Payment of taxes for employee stock awards— — (843)— — — — (843)
Balance–March 31, 2021131,185 $13 $1,290,882 $(4,245)$382,833 444 $(6,000)$1,663,483 
Comprehensive income (loss)— — — (483)29,847 — — 29,364 
Share-based compensation22 — 1,640 — — — — 1,640 
Exercise of employee stock options220 — 3,135 — — — — 3,135 
Exercise of public warrants209 — 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, 2021130,460 $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
SharesAmountSharesAmount
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 — 
Exchanges969 — (969)— 11,819 (17)— 11,802 (11,802)
Distributions— — — — — — — — (1,613)
Exercise of employee stock options2 — — — 153 — — 153 — 
Payment of taxes for employee stock awards— — — — (1,004)— — (1,004)— 
Exercise of public warrants1 — — — 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 — 
Exchanges1,140 — (1,140)— 13,803 (127)— 13,676 (13,676)
Distributions— — — — — — — — (365)
Exercise of employee stock options and warrants37 — — — 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 $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.
7


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Six Months Ended
June 30, 2021June 30, 2020
Operating activities
Net income$56,579 $82,728 
Depreciation and amortization25,223 26,477 
Debt discount amortization621 664 
Change in fair value of warrant liabilities455 (62,718)
Unrealized foreign exchange losses73 996 
Non-cash lease expense659 641 
Share-based compensation4,363 4,503 
Deferred taxes13,932 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 expenses1,735 3,323 
Customer trade allowances827 8,242 
Net cash provided by operating activities87,301 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 warrants13,524 563 
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 equivalents45,773 (157,308)
Cash and cash equivalents at beginning of period173,034 285,087 
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.
8


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.    
9


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 goods24,012 23,583 
Inventory in transit to customers3,807 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.
10


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 GoodsCookiesTotal
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 GoodsCookiesTotal
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 GoodsCookiesTotal
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 GoodsCookiesTotal
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.

11


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, operating32,192 31,354 
Machinery and equipment271,196 255,821 
Construction in progress23,906 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 contract6,253 13,694 
Incentive compensation9,860 16,199 
Accrued interest4,707 4,815 
Other12,035 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 obligations28,240 29,002 
Total debt and lease obligations1,121,124 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 

12


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 
202211,167 
202311,167 
202411,167 
20251,058,095 

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 EndedSix Months Ended
(In thousands)June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Operating lease expense$1,771 $1,269 $3,424 $3,064 
Short-term lease expense379 544 582 1,558 
Variable lease expense385 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.

13


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 derivativesLocation
Foreign currency contracts (2)Other current assets$288 $ 
Liability derivativesLocation
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 EndedSix Months Ended
(In thousands)June 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Gain on derivative contracts designated as cash flow hedgesLocation
Interest rate swap contractsInterest expense, net$1,152 $1,097 $2,479 $1,178 
Loss on other derivative contractsLocation
Foreign currency contractsOther expense$ $ $ $(255)
14


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 EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 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 - diluted29,847 (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 warrants6,867,024  6,319,296 1,744,314 
Dilutive effect of RSUs555,050 179,681 486,250 187,154 
Dilutive effect of stock options149,356  124,622  
Weighted-average shares outstanding - diluted138,925,489 123,818,404 138,026,854 125,312,658 
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
15


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: