Whole Earth Brands, Inc. - Quarter Report: 2022 March (Form 10-Q)
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 quarterly period ended March 31, 2022
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File No. 001-38880
Whole Earth Brands, Inc. | ||||||||
| (Exact name of registrant as specified in its charter) | ||||||||
Delaware (State or other jurisdiction of incorporation or organization) | 38-4101973 (I.R.S. Employer Identification No.) | |||||||
125 S. Wacker Drive, Suite 3150 Chicago, Illinois | 60606 | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
(312) 840-6000 | |||||
| (Registrant’s telephone number, including area code) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.0001 per share | FREE | The NASDAQ Stock Market LLC | ||||||||||||
| Warrants to purchase one-half of one share of common stock | FREEW | 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 (§ 232.405 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 the 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 Exchange Act): Yes ☐ No ☒
As of May 6, 2022, there were 41,912,356 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.
WHOLE EARTH BRANDS, INC.
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
| Page | ||||||||
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
3
Whole Earth Brands, Inc.
Condensed Consolidated Financial Statements (Unaudited)
For the Quarter Ended March 31, 2022
| Condensed Consolidated Financial Statements | |||||
4
| Whole Earth Brands, Inc. | |||||||||||
| Condensed Consolidated Balance Sheets | |||||||||||
| (In thousands of dollars, except for share and per share data) | |||||||||||
| (Unaudited) | |||||||||||
March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 29,365 | $ | 28,296 | |||||||
Accounts receivable (net of allowances of $1,340 and $1,285, respectively) | 73,089 | 69,590 | |||||||||
| Inventories | 215,058 | 212,930 | |||||||||
| Prepaid expenses and other current assets | 8,289 | 7,585 | |||||||||
| Total current assets | 325,801 | 318,401 | |||||||||
| Property, Plant and Equipment, net | 59,330 | 58,503 | |||||||||
| Other Assets | |||||||||||
| Operating lease right-of-use assets | 24,678 | 26,444 | |||||||||
| Goodwill | 241,535 | 242,661 | |||||||||
| Other intangible assets, net | 261,592 | 266,939 | |||||||||
| Deferred tax assets, net | 1,876 | 1,993 | |||||||||
| Other assets | 8,747 | 7,638 | |||||||||
| Total Assets | $ | 923,559 | $ | 922,579 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 55,426 | $ | 55,182 | |||||||
| Accrued expenses and other current liabilities | 34,503 | 30,733 | |||||||||
| Contingent consideration payable | — | 54,113 | |||||||||
| Current portion of operating lease liabilities | 8,101 | 7,950 | |||||||||
| Current portion of long-term debt | 3,750 | 3,750 | |||||||||
| Total current liabilities | 101,780 | 151,728 | |||||||||
| Non-Current Liabilities | |||||||||||
| Long-term debt | 412,895 | 383,484 | |||||||||
| Warrant liabilities | 587 | 2,053 | |||||||||
| Deferred tax liabilities, net | 33,883 | 35,090 | |||||||||
| Operating lease liabilities, less current portion | 20,437 | 22,575 | |||||||||
| Other liabilities | 14,003 | 13,778 | |||||||||
| Total Liabilities | 583,585 | 608,708 | |||||||||
Commitments and Contingencies (Note 8) | — | — | |||||||||
| Stockholders’ Equity | |||||||||||
Preferred shares, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021 | — | — | |||||||||
Common stock, $0.0001 par value; 220,000,000 shares authorized; 41,677,664 and 38,871,646 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 4 | 4 | |||||||||
| Additional paid-in capital | 356,220 | 330,616 | |||||||||
| Accumulated deficit | (23,710) | (26,436) | |||||||||
| Accumulated other comprehensive income | 7,460 | 9,687 | |||||||||
| Total stockholders’ equity | 339,974 | 313,871 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 923,559 | $ | 922,579 | |||||||
See Notes to Unaudited Consolidated Financial Statements
5
| Whole Earth Brands, Inc. | |||||||||||
| Condensed Consolidated Statements of Operations | |||||||||||
| (In thousands of dollars, except for share and per share data) | |||||||||||
| (Unaudited) | |||||||||||
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| $ | 130,592 | $ | 105,825 | ||||||||
| Cost of goods sold | 91,034 | 70,174 | |||||||||
| Gross profit | 39,558 | 35,651 | |||||||||
| Selling, general and administrative expenses | 27,788 | 32,907 | |||||||||
| Amortization of intangible assets | 4,705 | 4,151 | |||||||||
| Restructuring and other expenses | — | 1,657 | |||||||||
| Operating income (loss) | 7,065 | (3,064) | |||||||||
| Change in fair value of warrant liabilities | 861 | (2,362) | |||||||||
| Interest expense, net | (6,032) | (5,078) | |||||||||
| Loss on extinguishment and debt transaction costs | — | (5,513) | |||||||||
| Other income, net | 1,956 | 310 | |||||||||
| Income (loss) before income taxes | 3,850 | (15,707) | |||||||||
| Provision (benefit) for income taxes | 1,124 | (3,682) | |||||||||
| Net income (loss) | $ | 2,726 | $ | (12,025) | |||||||
| Net earnings (loss) per share: | |||||||||||
| Basic | $ | 0.07 | $ | (0.31) | |||||||
| Diluted | $ | 0.07 | $ | (0.31) | |||||||
See Notes to Unaudited Consolidated Financial Statements
6
| Whole Earth Brands, Inc. | |||||||||||
| Condensed Consolidated Statements of Comprehensive Income (Loss) | |||||||||||
| (In thousands of dollars) | |||||||||||
| (Unaudited) | |||||||||||
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Net income (loss) | $ | 2,726 | $ | (12,025) | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
Net change in pension benefit obligations recognized, net of taxes of $(71) and $0, respectively | (224) | 9 | |||||||||
| Foreign currency translation adjustments | (2,003) | (2,047) | |||||||||
| Total other comprehensive income (loss), net of tax | (2,227) | (2,038) | |||||||||
| Comprehensive income (loss) | $ | 499 | $ | (14,063) | |||||||
See Notes to Unaudited Consolidated Financial Statements
7
| Whole Earth Brands, Inc. | |||||||||||||||||||||||||||||||||||
| Condensed Consolidated Statements of Equity | |||||||||||||||||||||||||||||||||||
| (In thousands of dollars) | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 38,426,669 | $ | 4 | $ | 325,679 | $ | (25,442) | $ | 8,605 | $ | 308,846 | ||||||||||||||||||||||||
| Reclassification of Private Warrants (Note 1) | — | — | (7,062) | (1,077) | — | (8,139) | |||||||||||||||||||||||||||||
| Transfer of Private Warrants to Public Warrants | — | — | 2,502 | — | — | 2,502 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (12,025) | — | (12,025) | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (2,038) | (2,038) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,639 | — | — | 1,639 | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 38,426,669 | $ | 4 | $ | 322,758 | $ | (38,544) | $ | 6,567 | $ | 290,785 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 38,871,646 | $ | 4 | $ | 330,616 | $ | (26,436) | $ | 9,687 | $ | 313,871 | ||||||||||||||||||||||||
| Transfer of Private Warrants to Public Warrants | — | — | 605 | — | — | 605 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 2,726 | — | 2,726 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (2,227) | (2,227) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,354 | — | — | 1,354 | |||||||||||||||||||||||||||||
| Net share settlements of stock-based awards | 146,444 | — | (291) | — | — | (291) | |||||||||||||||||||||||||||||
| Shares issued for payment of contingent consideration | 2,659,574 | — | 23,936 | — | — | 23,936 | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 41,677,664 | $ | 4 | $ | 356,220 | $ | (23,710) | $ | 7,460 | $ | 339,974 | ||||||||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements
8
| Whole Earth Brands, Inc. | |||||||||||
| Condensed Consolidated Statements of Cash Flows | |||||||||||
| (In thousands of dollars) | |||||||||||
| (Unaudited) | |||||||||||
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | 2,726 | $ | (12,025) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Stock-based compensation | 1,650 | 1,639 | |||||||||
| Depreciation | 1,460 | 969 | |||||||||
| Amortization of intangible assets | 4,705 | 4,151 | |||||||||
| Deferred income taxes | (905) | 3,402 | |||||||||
| Amortization of inventory fair value adjustments | (1,599) | 1,619 | |||||||||
| Non-cash loss on extinguishment of debt | — | 4,435 | |||||||||
| Change in fair value of warrant liabilities | (861) | 2,362 | |||||||||
| Changes in current assets and liabilities: | |||||||||||
| Accounts receivable | (3,821) | (1,341) | |||||||||
| Inventories | (878) | (4,903) | |||||||||
| Prepaid expenses and other current assets | (842) | 665 | |||||||||
| Accounts payable, accrued liabilities and income taxes | 4,833 | (7,052) | |||||||||
| Other, net | (2,022) | 482 | |||||||||
| Net cash provided by (used in) operating activities | 4,446 | (5,597) | |||||||||
| Investing activities | |||||||||||
| Capital expenditures | (3,276) | (1,544) | |||||||||
| Acquisitions, net of cash acquired | — | (186,601) | |||||||||
| Proceeds from the sale of fixed assets | 50 | — | |||||||||
| Net cash used in investing activities | (3,226) | (188,145) | |||||||||
| Financing activities | |||||||||||
| Proceeds from revolving credit facility | 30,000 | 25,000 | |||||||||
| Repayments of revolving credit facility | — | (47,855) | |||||||||
| Long-term borrowings | — | 375,000 | |||||||||
| Repayments of long-term borrowings | (938) | (136,500) | |||||||||
| Debt issuance costs | — | (11,589) | |||||||||
| Payment of contingent consideration | (29,108) | — | |||||||||
| Tax withholdings related to net share settlements of stock-based awards | (291) | — | |||||||||
| Net cash (used in) provided by financing activities | (337) | 204,056 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 186 | 594 | |||||||||
| Net change in cash and cash equivalents | 1,069 | 10,908 | |||||||||
| Cash and cash equivalents, beginning of period | 28,296 | 16,898 | |||||||||
| Cash and cash equivalents, end of period | $ | 29,365 | $ | 27,806 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Interest paid | $ | 5,567 | $ | 4,491 | |||||||
| Taxes paid, net of refunds | $ | 993 | $ | 3,535 | |||||||
See Notes to Unaudited Consolidated Financial Statements
9
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Whole Earth Brands, Inc. and its consolidated subsidiaries (“Whole Earth Brands” or the “Company”) is a global industry-leading platform, focused on the “better for you” consumer packaged goods (“CPG”) and ingredients space. The Company has a global platform of branded products and ingredients, focused on the consumer transition towards natural alternatives and clean label products.
On June 24, 2020, Act II Global Acquisition Corp., a Cayman Islands exempted company (“Act II”), domesticated into a Delaware corporation (the “Domestication”), and on June 25, 2020 (the “Closing”), consummated the indirect acquisition (the “Business Combination”) of (i) all of the issued and outstanding equity interests of Merisant Company (“Merisant”), Merisant Luxembourg Sarl (“Merisant Luxembourg”), Mafco Worldwide LLC (“Mafco Worldwide”), Mafco Shanghai LLC (“Mafco Shanghai”), EVD Holdings LLC (“EVD Holdings”), and Mafco Deutschland GmbH (together with Merisant, Merisant Luxembourg, Mafco Worldwide, Mafco Shanghai, and EVD Holdings, and their respective direct and indirect subsidiaries, “Merisant and Mafco Worldwide”), and (ii) certain assets and liabilities of Merisant and Mafco Worldwide included in the Transferred Assets and Liabilities (as defined in the Purchase Agreement (as hereafter defined)), from Flavors Holdings Inc. (“Flavors Holdings”), MW Holdings I LLC (“MW Holdings I”), MW Holdings III LLC (“MW Holdings III”), and Mafco Foreign Holdings, Inc. (“Mafco Foreign Holdings,” and together with Flavors Holdings, MW Holdings I, and MW Holdings III, the “Sellers”), pursuant to that certain Purchase Agreement (the “Purchase Agreement”) entered into by and among Act II and the Sellers dated as of December 19, 2019, as amended. In connection with the Domestication, Act II changed its name to “Whole Earth Brands, Inc.”
Upon the completion of the Domestication, each of Act II’s then-issued and outstanding ordinary shares converted, on a one-for-one basis, into shares of common stock of Whole Earth Brands. In conjunction with the Business Combination, the Company issued an aggregate of 7,500,000 shares of Whole Earth Brands common stock and 5,263,500 private placement warrants (the “Private Warrants”) exercisable for 2,631,750 shares of Whole Earth Brands common stock to certain investors. On the date of Closing, the Company’s common stock and warrants began trading on The Nasdaq Stock Market under the symbols “FREE” and “FREEW,” respectively.
As a result of the Business Combination, for accounting purposes, Act II was deemed to be the acquirer and Mafco Worldwide and Merisant Company were deemed to be the acquired parties.
Basis of Presentation—The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. The balance sheet data as of December 31, 2021 was derived from the audited consolidated financial statements. These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated and combined financial statements for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K.
In the opinion of management, the financial statements contain all adjustments necessary to state fairly the financial position of the Company as of March 31, 2022 and the results of operations and cash flows for all periods presented. All adjustments in the accompanying unaudited condensed consolidated financial statements, which management believes are necessary to state fairly the financial position, results of operations and cash flows, have been reflected and are of a normal recurring nature. Results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.
Principles of Consolidation—The condensed consolidated financial statements include the accounts of Whole Earth Brands, Inc., and its indirect and wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
10
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently Adopted Accounting Pronouncements—The Company qualifies as an emerging growth company (an “EGC”) and as such, has elected the extended transition period for complying with certain new or revised accounting pronouncements. During the extended transition period, the Company is not subject to certain new or revised accounting standards applicable to public companies. The accounting pronouncements pending adoption below reflect effective dates for the Company as an EGC with the extended transition period.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Accounting Standards Codification “ASC” 740) - Simplifying the Accounting for Income Taxes.” The standard enhances and simplifies various aspects of the income tax accounting guidance. For public entities, the standard is effective for annual periods and interim periods beginning after December 15, 2020. This standard is effective for the Company as an EGC for the fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company adopted this standard on January 1, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted—In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. The amendments in ASU 2020-4 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The new standard was effective upon issuance and upon adoption can be applied prospectively to applicable contract modifications made on or before December 31, 2022. The Company is currently evaluating the impact of adopting this standard but does not expect it to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The standard requires entities to estimate losses on financial assets measured at amortized cost, including trade receivables, debt securities and loans, using an expected credit loss model. The expected credit loss differs from the previous incurred losses model primarily in that the loss recognition threshold of “probable” has been eliminated and that expected loss should consider reasonable and supportable forecasts in addition to the previously considered past events and current conditions. Additionally, the guidance requires additional disclosures related to the further disaggregation of information related to the credit quality of financial assets by year of the asset’s origination for as many as five years. Entities must apply the standard provision as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This standard is effective for the Company as an EGC for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
Restructuring and Employee Termination Benefits—During 2020, the Company adopted restructuring plans to streamline processes and realize cost savings by consolidating facilities and eliminating various positions in operations and general and administrative areas.
In connection with the restructuring plans, the Company recognized restructuring and other expenses of $1.7 million for the three months ended March 31, 2021, primarily consisting of facility exit and other related costs. During the three months ended March 31, 2022, the Company paid employee termination benefits of $0.1 million. The Company had accrued severance expense related to the restructuring plans of $0.7 million and $0.8 million at March 31, 2022 and December 31, 2021, respectively, which is recorded in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets.
Warrant Liabilities—The Company accounts for the Private Warrants in accordance with ASC Topic 815, “Derivatives and Hedging.” Under the guidance contained in ASC Topic 815-40, the Private Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the Private Warrants as liabilities at their fair value and adjusts the warrants to fair value at each reporting period. The liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s statement of operations. The Private Warrants are valued using a Black-Scholes option pricing model.
11
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Based on the views expressed in the SEC’s Staff Statement of April 12, 2021 in which the SEC staff clarified its interpretations of certain generally accepted accounting principles related to certain terms common in warrants issued by Special Purpose Acquisition Companies (“SPACs”), the Company determined that the Private Warrants should be treated as derivative liabilities rather than as components of equity, as previously presented as of December 31, 2020. Accordingly, the Company recorded out of period adjustments to the unaudited Condensed Consolidated Balance Sheet at January 1, 2021 to reclassify warrant liabilities of $8.1 million and transaction costs incurred by Act II of $1.1 million related to the issuance of the Private Warrants. Additionally, during the first quarter of 2021, the Company recognized the cumulative effect of the error on prior periods by recording a $1.2 million gain in the Statement of Operations to reflect the cumulative decrease in the fair value of the Private Warrants from the date of issuance through December 31, 2020. The Company concluded that this misstatement was not material to the current period or the previously filed financial statements.
NOTE 2: BUSINESS COMBINATIONS
Wholesome Acquisition—On December 17, 2020, the Company entered into a stock purchase agreement (the “Wholesome Purchase Agreement”) with WSO Investments, Inc. (“WSO Investments” and together with its subsidiaries, “Wholesome” and affiliates). WSO Investments is the direct parent of its wholly-owned subsidiary Wholesome Sweeteners, Incorporated, which was formed to import, market, distribute, and sell organic sugars, unrefined specialty sugars, and related products. Wholesome is included within the Company’s Branded CPG reportable segment. Wholesome’s results are included in the Company’s consolidated statement of operations from the date of acquisition.
On February 5, 2021, pursuant to the terms of the Wholesome Purchase Agreement, the Company purchased and acquired all of the issued and outstanding shares of capital stock for an initial cash purchase price of $180 million plus up to an additional $55 million (the “Earn-Out Amount”) upon the satisfaction of certain post-closing financial metrics. Subject to the terms and conditions of the Wholesome Purchase Agreement payment of the Earn-Out Amount, in whole or in part, was subject to Wholesome achieving certain EBITDA thresholds at or above approximately $30 million during the period beginning August 29, 2020, and ending December 31, 2021 (the “Earn-Out Period”). A portion of the Earn-Out Amount (up to $27.5 million) could be paid, at the Company’s election, in freely tradeable, registered shares of Company common stock calculated using the 20-day volume weighted average trading price per share as of the date of determination. Calculation of the achievement of the Earn-Out Amount was subject to certain adjustments more thoroughly described in the Wholesome Purchase Agreement. In connection with the acquisition of Wholesome, the Company incurred transaction-related costs of $0.2 million and $4.4 million in the three months ended March 31, 2022 and 2021, respectively.
Following the completion of the Earn-Out Period, the Company determined, in accordance with the terms of the Purchase Agreement, that the sellers were entitled to receive the Earn-Out Amount in full. The Company elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under the Company’s revolving credit facility. The settlement of the earn-out resulted in a non-cash gain of $1.1 million that was recorded in the first quarter of 2022 which represents the difference in the value of the common stock issued using the 20-day volume weighted average trading price per share as compared to the trading price on the date of issuance.
The following summarizes the purchase consideration (in thousands):
| Base cash consideration | $ | 180,000 | |||
| Closing adjustment | 13,863 | ||||
| Fair value of Earn-Out Amount | 52,395 | ||||
| Total Purchase Price | $ | 246,258 | |||
12
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):
| Cash and cash equivalents | $ | 2,664 | |||
| Accounts receivable | 15,868 | ||||
| Inventories | 76,879 | ||||
| Prepaid expenses and other current assets | 1,322 | ||||
| Property, plant and equipment, net | 3,134 | ||||
| Operating lease right-of-use assets | 7,585 | ||||
| Intangible assets | 104,500 | ||||
| Other assets | 1,189 | ||||
| Total assets acquired | 213,141 | ||||
| Accounts payable | 5,251 | ||||
| Accrued expenses and other current liabilities | 10,576 | ||||
| Current portion of operating lease liabilities | 1,435 | ||||
| Operating lease liabilities, less current portion | 6,150 | ||||
| Deferred tax liabilities, net | 24,234 | ||||
| Total liabilities assumed | 47,646 | ||||
| Net assets acquired | 165,495 | ||||
| Goodwill | 80,763 | ||||
| Total Purchase Price | $ | 246,258 | |||
The values allocated to identifiable intangible assets and their estimated useful lives are as follows:
| Identifiable intangible assets | Fair Value (in thousands) | Useful Life (in years) | |||||||||
| Customer relationships | $ | 55,700 | 10 | ||||||||
| Tradenames | 48,800 | 25 | |||||||||
| $ | 104,500 | ||||||||||
Goodwill represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities. Of the purchase price allocated to goodwill, a total of $4.7 million will be deductible for income tax purposes pursuant to IRC Section 197 over a 9-year period.
The Company’s allocation of purchase price was based upon valuations performed to determine the fair value of the net assets as of the acquisition date and was subject to adjustments for up to one year after the closing date of the acquisition to reflect final valuations. The allocation of purchase price was finalized in the first quarter of 2022.
In 2021, the Company recorded measurement period adjustments to its initial allocation of purchase price as a result of ongoing valuation procedures on assets and liabilities assumed, including (i) an increase in purchase price of $3.6 million due to the finalization of the closing adjustment; (ii) a decrease to inventory of $1.8 million; (iii) an increase in prepaid expenses and other current assets of $0.5 million; (iv) an increase in property, plant and equipment of $0.4 million; (v) a decrease to intangible assets of $1.9 million; (vi) a decrease to other assets of $0.1 million; (vii) a decrease to accrued expenses and other current liabilities of $2.7 million; (viii) a decrease to deferred tax liabilities, net of $2.8 million; and (ix) an increase to goodwill of $1.0 million due to the incremental measurement period adjustments discussed in items (i) through (viii). The impact of measurement period adjustments to the results of operations was immaterial.
13
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The results of the Company’s operations for the three months ended March 31, 2021 includes the results of Wholesome since February 5, 2021. Product revenues, net and operating income of Wholesome included in the Company’s condensed consolidated statement of operations for the three months ended March 31, 2021 was $27.7 million and $1.7 million, respectively.
Pro Forma Financial Information—The following unaudited pro forma financial information summarizes the results of operations of the Company for the three months ended March 31, 2021 as though the Wholesome acquisition had occurred on January 1, 2020 (in thousands):
| Pro Forma Statement of Operations | |||||
| Three Months Ended March 31, 2021 | |||||
| Revenue | $ | 126,205 | |||
| Net loss | $ | (3,862) | |||
The unaudited pro forma financial information does not assume any impacts from revenue, cost or other operating synergies that could be generated as a result of the acquisition. The unaudited pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved had the Wholesome acquisition been consummated on January 1, 2020.
The pro forma financial information for the three months ended March 31, 2021 includes adjustments to reflect intangible asset amortization based on the economic values derived from definite-lived intangible assets, interest expense on the new debt financing, and the release of the inventory fair value adjustments into cost of goods sold. These adjustments are net of taxes. The results of the Company’s operations for the three months ended March 31, 2022 includes Wholesome for the entire period and therefore pro forma financial information is not required.
NOTE 3: INVENTORIES
Inventories consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Raw materials and supplies | $ | 134,961 | $ | 129,712 | |||||||
| Work in process | 2,145 | 1,480 | |||||||||
| Finished goods | 77,952 | 81,738 | |||||||||
| Total inventories | $ | 215,058 | $ | 212,930 | |||||||
14
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||||||||||||||||
| Other intangible assets subject to amortization | ||||||||||||||||||||||||||||||||||||||
Customer relationships (useful life of 5 to 10 years) | $ | 105,930 | $ | (17,435) | $ | 88,495 | $ | 106,013 | $ | (14,478) | $ | 91,535 | ||||||||||||||||||||||||||
Tradenames (useful life of 25 years) | 172,900 | (10,503) | 162,397 | 173,522 | (8,818) | 164,704 | ||||||||||||||||||||||||||||||||
| Total | $ | 278,830 | $ | (27,938) | 250,892 | $ | 279,535 | $ | (23,296) | 256,239 | ||||||||||||||||||||||||||||
| Other intangible assets not subject to amortization | ||||||||||||||||||||||||||||||||||||||
| Product formulations | 10,700 | 10,700 | ||||||||||||||||||||||||||||||||||||
| Total other intangible assets, net | 261,592 | 266,939 | ||||||||||||||||||||||||||||||||||||
| Goodwill | 241,535 | 242,661 | ||||||||||||||||||||||||||||||||||||
| Total goodwill and other intangible assets | $ | 503,127 | $ | 509,600 | ||||||||||||||||||||||||||||||||||
At March 31, 2022 and December 31, 2021, goodwill at Branded CPG was $237.7 million and $238.9 million, respectively. Goodwill at Flavors & Ingredients was $3.8 million at both March 31, 2022 and December 31, 2021.
The amortization expense for intangible assets was $4.7 million and $4.2 million for the three months ended March 31, 2022 and 2021, respectively.
Amortization expense relating to amortizable intangible assets as of March 31, 2022 for the next five years is expected to be as follows (in thousands):
| Remainder of 2022 | $ | 14,041 | |||
| 2023 | 18,721 | ||||
| 2024 | 18,721 | ||||
| 2025 | 18,488 | ||||
| 2026 | 18,267 | ||||
| 2027 | 17,040 | ||||
NOTE 5: DEBT
Debt consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Term loan, due 2028 | $ | 371,250 | $ | 372,187 | |||||||
| Revolving credit facility, due 2026 | 55,000 | 25,000 | |||||||||
| Less: current portion | (3,750) | (3,750) | |||||||||
| Less: unamortized discount and debt issuance costs | (9,605) | (9,953) | |||||||||
| Total long-term debt | $ | 412,895 | $ | 383,484 | |||||||
15
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
At both March 31, 2022 and December 31, 2021, the Company’s senior secured loan agreement consisted of a senior secured term loan facility (the “Term Loan Facility”) of $375 million and a revolving credit facility of up to $75 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”). At both March 31, 2022 and December 31, 2021, there were $2.1 million of outstanding letters of credit that reduced the Company’s availability under the revolving credit facility. The Company’s unamortized discounts and debt issuance costs related to the Term Loan Facility were $9.6 million and $10.0 million at March 31, 2022 and December 31, 2021, respectively. The unamortized debt issuance costs related to the Revolving Facility were $1.7 million and $1.8 million at March 31, 2022 and December 31, 2021, respectively, and are included in other assets in the condensed consolidated balance sheet. See Note 7 to the Company’s consolidated and combined financial statements in its Annual Report on Form 10-K for the year ended December 31, 2021 for further information and significant terms and conditions associated with the Term Loan Facility and Revolving Facility.
In connection with the closing of the Wholesome Transaction, on February 5, 2021, the Company and certain of its subsidiaries entered into an amendment and restatement agreement (the “Amended and Restated Agreement”) which amended and restated its then existing senior secured loan agreement dated as of June 25, 2020. As of the date of the amendment of the credit facilities, the aggregate unamortized debt issuance costs totaled $6.2 million, of which $4.4 million was expensed as a loss on extinguishment of debt in the first quarter of 2021. Additionally, in connection with the Amended and Restated Credit Agreement, the Company paid fees to certain lenders of $3.8 million, which was considered a debt discount, all of which was deferred, and incurred transaction costs of $8.9 million, of which $7.8 million was deferred and $1.1 million was expensed as part of loss on extinguishment and debt transaction costs in the first quarter of 2021.
As further described in Note 2, following the completion of the Wholesome Earn-Out Period, the Company determined, in accordance with the terms of the Purchase Agreement, that the sellers were entitled to receive the Earn-Out Amount in full. The Company elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under the Company’s revolving credit facility.
NOTE 6: WARRANTS
As of the date of the Business Combination, the Company had approximately 20,263,500 warrants outstanding, consisting of (i) 15,000,000 public warrants originally sold as part of the units issued in Act II’s initial public offering (the “Public Warrants”) and (ii) 5,263,500 Private Warrants that were sold by Act II to the PIPE Investors in conjunction with the Business Combination (collectively with the Public Warrants, the “Warrants”). Each warrant is exercisable for one-half of one share of the Company’s common stock at a price of $11.50 per whole share, subject to adjustment. Warrants may only be exercised for a whole number of shares as no fractional shares will be issued. As of March 31, 2022 and December 31, 2021, the Company had 19,491,320 and 18,929,880 Public Warrants outstanding, respectively, and 771,980 and 1,333,420 Private Warrants outstanding, respectively.
There were no Warrants exercised for shares of the Company’s common stock in the three months ended March 31, 2022 and 2021.
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and records in its consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820 “Fair Value Measurement and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:
•Level 1 – Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market.
•Level 2 – Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data.
•Level 3 – Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement.
16
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Current Assets and Other Financial Assets and Liabilities—Cash and cash equivalents, trade accounts receivable and trade accounts payable are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.
Contingent Consideration Payable—The Company measured the contingent consideration payable at fair value. The fair value of the contingent consideration utilized Level 3 inputs as it is based on significant inputs not observable in the market as of December 31, 2021, such as projected financial information and discount rate.
Debt—The Company measures its term loan and revolving facilities at original carrying value including accrued interest, net of unamortized deferred financing costs and fees. The fair value of the credit facilities approximates carrying value, as they consist of variable rate loans.
Warrant Liabilities—The Company classifies its Private Warrants as liabilities in accordance with ASC Topic 815. The Company estimates the fair value of the Private Warrants using a Black-Scholes options pricing model. The fair value of the Private Warrants utilized Level 3 inputs as it is based on significant inputs not observable in the market as of March 31, 2022 and December 31, 2021.
The fair value of the Private Warrants was estimated at March 31, 2022 and December 31, 2021 using a Black-Scholes options pricing model and the following assumptions:
| Input | March 31, 2022 | December 31, 2021 | ||||||||||||
| Asset price | $ | 7.16 | $ | 10.74 | ||||||||||
| Exercise price | $ | 11.50 | $ | 11.50 | ||||||||||
| Risk-free interest rate | 2.45% | 1.04% | ||||||||||||
| Expected volatility | 48.0% | 41.0% | ||||||||||||
| Expected term (years) | 3.24 | 3.49 | ||||||||||||
| Dividend yield | 0.0% | 0.0% | ||||||||||||
The fair value of warrant liabilities as of March 31, 2022 was $0.6 million. The changes in the warrant liabilities during the three months ended March 31, 2022 were as follows (in thousands):
| Fair value of warrant liabilities as of December 31, 2021 | $ | 2,053 | ||||||
| Transfer of Private Warrants to Public Warrants | (605) | |||||||
| Change in fair value of warrant liabilities in Q1 2022 | (861) | |||||||
| Fair value of warrant liabilities as of March 31, 2022 | $ | 587 | ||||||
NOTE 8: COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims, pending and possible legal actions for product liability and other damages, and other matters arising out of the conduct of the business. The Company believes, based on current knowledge and consultation with counsel, that the outcome of such claims and actions will not have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.
NOTE 9: INCOME TAXES
The Company’s provision for income taxes consists of U.S., state and local, and foreign taxes. The Company has significant operations in various locations outside the U.S. The annual effective tax rate is a composite rate reflecting the earnings in the various locations at their applicable statutory tax rates.
17
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s income tax provision was $1.1 million for the three months ended March 31, 2022. The effective tax rate for the three months ended March 31, 2022 was an income tax provision of 29.2% on pre-tax income of $3.9 million which differs from the statutory federal rate of 21% primarily due to state and local taxes, non-deductible permanent differences, limited benefit on current year interest deductions and losses in certain jurisdictions, the change in the fair value of warrant liabilities, foreign income at different rates and the U.S. tax effect of international operations including Global Intangible Low-Taxed Income (“GILTI”) recorded during the period.
The Company’s income tax benefit was $3.7 million for the three months ended March 31, 2021. The effective tax rate for the three months ended March 31, 2021 was an income tax benefit of 23.4% on a pre-tax loss of $15.7 million. The effective tax rate differs from the statutory federal rate of 21% primarily due to certain non-deductible expenses including transaction costs, the change in the fair value of warrant liabilities, stock-based compensation expense and the U.S. tax effect of international operations including GILTI recorded during the period.
At both March 31, 2022 and December 31, 2021, the Company had an uncertain tax position liability of $0.2 million, including interest and penalties. The unrecognized tax benefits include amounts related primarily to various state and foreign tax issues.
NOTE 10: PENSION BENEFITS
Certain current and former employees of the Company are covered under a funded qualified defined benefit retirement plan. Plan provisions covering certain of the Company’s salaried employees generally provide pension benefits based on years of service and compensation. Plan provisions covering certain of the Company’s union members generally provide stated benefits for each year of credited service. The Company’s funding policy is to contribute annually the statutory required amount as actuarially determined. The Company froze the pension plan on December 31, 2019. In addition, the Company has unfunded non-qualified plans covering certain salaried employees with additional retirement benefits in excess of qualified plan limits imposed by federal tax law. The Company uses December 31 as a measurement date for the plans.
In February 2021, the Compensation Committee approved the termination of the Company’s qualified defined benefit retirement plan at Flavors & Ingredients. During the fourth quarter of 2021, the Company offered the option of receiving a lump sum payment to certain participants with vested benefits in lieu of receiving monthly annuity payments. Approximately 125 participants elected to receive the settlement, and lump sum payments of approximately $16.8 million were paid from plan assets to these participants in December 2021. The benefit obligation settled approximated payments to plan participants and a pre-tax settlement gain of $0.5 million was recorded in the fourth quarter of 2021. On February 11, 2022, the Company purchased non-participating annuity contracts to settle the remaining liabilities of the plan for approximately $9.5 million which was fully funded by plan assets. The annuity contracts purchased resulted in a settlement gain of approximately $1.0 million that was recorded in the first quarter of 2022. The remaining surplus of the plan will be used, as prescribed in the applicable regulations, to fund future contributions to the defined contribution plan at Flavors & Ingredients.
The components of net periodic benefit (credit) cost for the Company’s defined benefit pension plans was as follows (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Service cost | $ | 10 | $ | 16 | |||||||
| Interest cost | 127 | 259 | |||||||||
| Expected return on plan assets | (53) | (399) | |||||||||
| Recognized actuarial loss | — | 9 | |||||||||
| Settlement gain | (1,017) | — | |||||||||
| Net periodic benefit credit | $ | (933) | $ | (115) | |||||||
18
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net periodic benefit (credit) cost is reflected in the Company’s condensed consolidated financial statements as follows (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Selling, general and administrative expense | $ | 10 | $ | 16 | |||||||
| Other income, net | (943) | (131) | |||||||||
| Net periodic benefit credit | $ | (933) | $ | (115) | |||||||
The Company currently does not expect to make contributions to its funded defined benefit pension plan in 2022 due to the funded status.
NOTE 11: STOCK-BASED COMPENSATION
On June 24, 2020, the Whole Earth Brands, Inc. 2020 Long-Term Incentive Plan (the “Plan”) was approved for the purpose of promoting the long-term financial interests and growth of the Company and its subsidiaries by attracting and retaining management and other personnel and key service providers. The Plan provides for the granting of stock options (“SOs”), stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares, performance share units (“PSUs”) and other stock-based awards to officers, employees and non-employee directors of, and certain other service providers to, the Company and its subsidiaries. These awards are settled in shares of the Company’s stock and therefore classified as equity awards. Under the terms of the Plan an aggregate of 9,300,000 shares of common stock are authorized for issuance under the Plan.
RSUs generally vest ratably on the anniversary of the grant date over a period of to three years, depending on the specific terms of each RSU agreement.
PSU awards generally cliff vest subsequent to the completion of a cumulative three-year performance period, depending on the period specified in each respective PSU agreement. The number of PSUs that ultimately vest depends on the Company’s performance relative to specified three-year cumulative financial targets established for each grant and are expected to be settled in stock.
Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was $1.7 million and $1.6 million, respectively. Stock-based compensation expense for the three months ended March 31, 2022 includes $0.3 million of expense related to management bonuses expected to be settled in stock and accounted for as a liability.
A summary of activity and weighted average fair values related to the RSUs is as follows:
| Three Months Ended March 31, 2022 | |||||||||||
| Shares | Weighted Average Grant Date Fair Value (per share) | ||||||||||
Outstanding at December 31, 2021 | 484,744 | $ | 13.46 | ||||||||
| Granted | 564,485 | 7.42 | |||||||||
| Vested | (206,368) | 13.14 | |||||||||
| Forfeited | (4,075) | 13.58 | |||||||||
Outstanding and nonvested at March 31, 2022 | 838,786 | $ | 9.45 | ||||||||
19
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of activity and weighted average fair values related to the RSAs is as follows:
| Three Months Ended March 31, 2022 | |||||||||||
| Shares | Weighted Average Grant Date Fair Value (per share) | ||||||||||
Outstanding at December 31, 2021 | 117,801 | $ | 9.76 | ||||||||
| Granted | — | — | |||||||||
Outstanding and nonvested at March 31, 2022 | 117,801 | $ | 9.76 | ||||||||
A summary of activity and weighted average fair values related to the PSUs is as follows:
| Three Months Ended March 31, 2022 | |||||||||||
| Shares | Weighted Average Grant Date Fair Value (per share) | ||||||||||
Outstanding at December 31, 2021 | 282,141 | $ | 13.65 | ||||||||
| Granted | 527,871 | 7.24 | |||||||||
| Forfeited | (1,818) | 13.65 | |||||||||
Outstanding and nonvested at March 31, 2022 | 808,194 | $ | 9.46 | ||||||||
As of March 31, 2022, the Company had not yet recognized compensation costs on nonvested awards as follows (in thousands):
| Unrecognized Compensation Cost | Weighted Avg. Remaining Recognition Period (in years) | ||||||||||
| Nonvested awards | $ | 15,331 | 2.07 | ||||||||
NOTE 12: EARNINGS PER SHARE
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Warrants issued are not considered outstanding at the date of issuance. RSUs and RSAs also are not considered outstanding until they have vested. Contingently issuable shares associated with outstanding PSUs that have cliff vesting based on achievement of a performance condition were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average shares outstanding assuming dilution. Dilutive common shares outstanding is computed using the treasury stock method and reflects the additional shares that would be outstanding if dilutive warrants were exercised and restricted stock units and restricted stock awards were settled for common shares during the period.
For warrants that are liability-classified, during the 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 the fair value of warrant liability and adjusts the denominator to include the dilutive shares using the treasury stock method.
20
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The computation of basic and diluted earnings (loss) per common share is shown below (in thousands, except for share and per share data):
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| EPS numerator: | |||||||||||
| Net income (loss) attributable to common shareholders | $ | 2,726 | $ | (12,025) | |||||||
| EPS denominator: | |||||||||||
| Weighted average shares outstanding - basic | 40,017,296 | 38,430,742 | |||||||||
| Effect of dilutive securities | 53,157 | — | |||||||||
| Weighted average shares outstanding - diluted | 40,070,453 | 38,430,742 | |||||||||
| Net earnings (loss) per share: | |||||||||||
| Basic | $ | 0.07 | $ | (0.31) | |||||||
| Diluted | $ | 0.07 | $ | (0.31) | |||||||
For the three months ended March 31, 2022, 20,263,300 warrants and 839,126 RSUs were excluded from the diluted EPS calculation because they were determined to be anti-dilutive. For the three months ended March 31, 2021, 20,263,500 warrants, 1,152,443 RSUs and 68,946 RSAs were excluded from the diluted EPS calculation because they were determined to be anti-dilutive.
NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes accumulated other comprehensive income (loss) (“AOCI”), net of taxes, by component (in thousands):
| Net Currency Translation Gains (Losses) | Funded Status of Benefit Plans | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
Balance at December 31, 2020 | $ | 7,774 | $ | 831 | $ | 8,605 | |||||||||||
| Other comprehensive loss before reclassifications | (2,047) | — | (2,047) | ||||||||||||||
| Amounts reclassified from AOCI | — | 9 | 9 | ||||||||||||||
Balance at March 31, 2021 | $ | 5,727 | $ | 840 | $ | 6,567 | |||||||||||
Balance at December 31, 2021 | $ | 8,758 | $ | 929 | $ | 9,687 | |||||||||||
| Other comprehensive loss before reclassifications | (2,003) | — | (2,003) | ||||||||||||||
| Amounts reclassified from AOCI | — | (224) | (224) | ||||||||||||||
Balance at March 31, 2022 | $ | 6,755 | $ | 705 | $ | 7,460 | |||||||||||
NOTE 14: RELATED PARTY TRANSACTIONS
In July 2020, the Company entered into an agreement with Watermill Institutional Trading LLC, a registered broker-dealer (“Watermill”), to act as one of the Company’s financial advisors for a 12-month period commencing July 22, 2020 for total consideration of $0.9 million, of which $0.2 million was expensed during the three months ended March 31, 2021. Additionally, the Company incurred expense of $2.0 million during the three months ended March 31, 2021 related to services provided by Watermill in connection with the acquisition of Wholesome. A former director of Act II is a registered representative of Watermill and provided services directly to the Company under the agreement.
21
Whole Earth Brands, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In December 2019, Wholesome entered into a partnership agreement to form WS Services, LLC (“WS Services”). As of March 31, 2022, Wholesome had a 50% interest in the partnership and accounts for the partnership as an equity method investment. Wholesome’s investment in the partnership, which is classified as other assets in the condensed consolidated balance sheets, was $0.7 million as of both March 31, 2022 and December 31, 2021. Wholesome utilizes a warehouse leased by WS Services for storage of raw materials. During the three months ended March 31, 2022 and the period from February 5, 2021 through March 31, 2021, Wholesome expensed $0.3 million and $0.1 million, respectively, related to the use of the warehouse space. Wholesome recorded a payable to WS Services for $0.2 million and $0.3 million as of March 31, 2022 and December 31, 2021, respectively.
NOTE 15: BUSINESS SEGMENTS
The Company has two reportable segments: Branded CPG and Flavors & Ingredients. In addition, the Company’s corporate office functions are reported and included under Corporate. Corporate is not a reportable or operating segment but is included for reconciliation purposes and includes the costs for the corporate office administrative activities as well as transaction-related and other costs. The Company does not present assets by reportable segments as they are not reviewed by the Chief Operating Decision Maker for purposes of assessing segment performance and allocating resources.
The following table presents selected financial information relating to the Company’s business segments (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Product revenues, net | |||||||||||
| Branded CPG | $ | 103,761 | $ | 81,797 | |||||||
| Flavors & Ingredients | 26,831 | 24,028 | |||||||||
| Total product revenues, net | $ | 130,592 | $ | 105,825 | |||||||
| Operating income (loss) | |||||||||||
| Branded CPG | $ | 6,460 | $ | 10,159 | |||||||
| Flavors & Ingredients | 7,827 | 972 | |||||||||
| 14,287 | 11,131 | ||||||||||
| Corporate | (7,222) | (14,195) | |||||||||
| Total operating income (loss) | $ | 7,065 | $ | (3,064) | |||||||
The following table presents geographic information based upon revenues of the Company’s major geographic markets (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Branded CPG: | |||||||||||
| North America | $ | 73,080 | $ | 51,970 | |||||||
| Europe | 18,008 | 19,414 | |||||||||
| India, Middle East and Africa | 3,579 | 2,643 | |||||||||
| Asia-Pacific | 6,062 | 5,226 | |||||||||
| Latin America | 3,032 | 2,544 | |||||||||
| Flavors & Ingredients | 26,831 | 24,028 | |||||||||
| Total product revenues, net | $ | 130,592 | $ | 105,825 | |||||||
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report”) and our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act (the “Exchange Act”) concerning us and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of management, as well as assumptions made by, and information currently available to, management.
Forward-looking statements may be accompanied by words such as “achieve,” “aim,” “anticipate,” “believe,” “can,” “continue,” “could,” “drive,” “estimate,” “expect,” “forecast,” “future,” “grow,” “improve,” “increase,” “intend,” “may,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or similar words, phrases or expressions. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, which could cause actual results to differ materially from the results contemplated by the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to achieve or maintain profitability; the extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on overall demand for our products; local, regional, national, and international economic conditions that have deteriorated as a result of the COVID-19 pandemic including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and management’s assessment of that impact; the projected financial information, anticipated growth rate, and market opportunity of our Branded CPG and Flavors & Ingredients business segments; the ability to maintain the listing of our securities on Nasdaq; the potential liquidity and trading of our public securities; our expected capital requirements and the availability of additional financing; our ability to attract or retain highly qualified personnel, including in accounting and finance roles; extensive and evolving government regulations that impact the way we operate; the effect of the reclassification and treatment of warrants pursuant to ASC Topic 815-40; the impact of the COVID-19 pandemic on our suppliers, including disruptions and inefficiencies in the supply chain; factors relating to the business, operations and financial performance of our Branded CPG and Flavors & Ingredients segments; our success in integrating the various operating companies constituting Merisant and MAFCO; our ability to integrate our acquisitions and achieve the anticipated benefits of the transactions in a timely manner or at all; the ongoing conflict in Ukraine and related economic disruptions and new governmental regulations on our business, including but not limited to the potential impact on our sales, operations and supply chain; adverse changes in the global or regional general business, political and economic conditions, including the impact of continuing uncertainty and instability in certain countries, that could materially affect our global markets and the potential adverse economic impact and related uncertainty caused by these items; our ability to continue to use, maintain, enforce, protect and defend owned and licensed intellectual property, including the Whole Earth® brand; and such other factors as discussed throughout, including in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited, and we cannot guarantee future results. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
Overview
We are a global food company enabling healthier lifestyles and providing access to high-quality, plant-based sweeteners, flavor enhancers and other foods through our diverse portfolio of trusted brands and delicious products. We operate a proven platform organized into two reportable segments.
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•Branded CPG, comprised of our Merisant division of operating companies, Wholesome and Swerve, is a global CPG business focused on building a branded portfolio oriented toward serving customers seeking better-for-you sweeteners across the zero calorie, plant-based, organic, non GMO, and Fair Trade spaces in zero/low calorie sweeteners, honey, agave and baking mix segments. Our Branded CPG products are sold under both our flagship brands, as well as local and private label brands. Our global flagship brands include Whole Earth®, Pure Via®, Wholesome®, Swerve®, Canderel®, Equal® and existing branded adjacencies.
•Flavors & Ingredients, comprised of our Mafco Worldwide division of operating companies, is a global, business-to-business focused operation with a long history as a trusted supplier of essential, functional ingredients to some of the CPG industry’s largest and most demanding customers. Our products provide a variety of solutions for our customers including flavor enhancement, flavor / aftertaste masking, moisturizing, product mouthfeel modification and skin soothing characteristics. Our Flavors & Ingredients segment operates our licorice-derived products business.
Acquisition
On December 17, 2020, we entered into a stock purchase agreement (the “Wholesome Purchase Agreement”) with WSO Investments, Inc. (“WSO Investments” and together with its subsidiaries “Wholesome”), WSO Holdings, LP (“WSO Partnership”), Edwards Billington and Son, Limited (“EBS”), WSO Holdings, LLC (“WSO LLC,” and together with WSO Partnership and EBS, the “WSO Sellers”), and WSO Partnership, in its capacity as representative for the WSO Sellers. WSO Investments is the direct parent of its wholly-owned subsidiary Wholesome Sweeteners, Incorporated, which was formed to import, market, distribute, and sell organic sugars, unrefined specialty sugars, and related products.
On February 5, 2021, pursuant to the terms of the Wholesome Purchase Agreement, (i) we purchased and acquired all of the issued and outstanding shares of capital stock of WSO Investments from the WSO Sellers, for (x) an initial cash purchase price of $180 million (subject to customary post-closing adjustments), plus (y) as more thoroughly described below, up to an additional $55 million (the “Earn-Out Amount”) upon the satisfaction of certain post-closing financial metrics by Wholesome; and (ii) WSO Investments became an indirect wholly-owned subsidiary of the Company (collectively, the “Wholesome Transaction”). Subject to the terms and conditions of the Wholesome Purchase Agreement, and as more thoroughly described therein, payment of the Earn-Out Amount, in whole or in part, was subject to Wholesome achieving certain EBITDA thresholds at or above approximately $30 million during the period beginning August 29, 2020, and ending December 31, 2021. A portion of the Earn-Out Amount (up to $27.5 million) could be paid, at our election, in freely tradeable, registered shares of Company common stock calculated using the 20-day volume weighted average trading price per share as of the date of determination. Calculation of the achievement of the Earn-Out Amount was subject to certain adjustments more thoroughly described in the Wholesome Purchase Agreement.
Following the completion of the Earn-Out Period, we determined, in accordance with the terms of the Purchase Agreement, that the sellers were entitled to receive the Earn-Out Amount in full. We elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under our revolving credit facility. The settlement of the earn-out resulted in a non-cash gain of $1.1 million that was recorded in the first quarter of 2022 which represents the difference in the value of the common stock issued using the 20-day volume weighted average trading price per share as compared to the trading price on the date of issuance.
In connection with the closing of the Wholesome Transaction, on February 5, 2021, we and certain of our subsidiaries entered into an amendment and restatement agreement (the “Amendment Agreement”) with Toronto Dominion (Texas) LLC, as administrative agent, and certain lenders signatory thereto, which amended and restated our existing senior secured loan agreement dated as of June 25, 2020 (as amended on September 4, 2020, the “Existing Credit Agreement,” and as further amended by the Amendment Agreement, the “Amended and Restated Credit Agreement”), by and among Toronto Dominion (Texas) LLC, as administrative agent, certain lenders signatory thereto and certain other parties. See Note 7 to our consolidated and combined financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for a further description of the Amended and Restated Credit Agreement.
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COVID-19 Impact
The COVID-19 pandemic has caused and continues to cause economic disruption and uncertainty in the U.S. and globally, including in our business. We continue to closely monitor the impacts of the COVID-19 pandemic and remain focused on protecting the health and safety of our employees and maintaining our supply chain and inventory levels to meet customer demand. COVID-19 and its impacts are unprecedented and continue to evolve. The extent of the pandemic’s impact on us will continue to depend upon our employees’ ability to work safely in our facilities, our customers’ ability to continue to operate or receive our products, the ability of our suppliers to continue to operate, and the level of activity and demand for the ultimate product and services of our customers or their customers.
Inflation and Supply Chain Impact
During the three months ended March 31, 2022, we have continued to experience inflationary cost increases in raw materials and transportation costs, as well as supply chain challenges. We expect to continue to see these cost pressures and supply chain challenges through the remainder of 2022. These cost increases have resulted in and could continue to result in negative impacts to our results of operations. However, we have taken measures to mitigate the impact of these inflationary pressures by implementing pricing actions during the first quarter of 2022.
There continues to be an increasingly competitive labor market at certain of our manufacturing facilities. This has resulted in increased employee turnover and changes in the availability of our workers, including as a result of COVID-19 related absences, which has resulted in and could continue to result in increased costs and could negatively impact our ability to meet customer demand. However, we expect we will be able to deliver products to fulfill customer orders on a timely basis and we intend to continue to monitor customer demand along with our supply chain and logistics capabilities to drive our business and meet our obligations.
Results of Operations
Consolidated
| Three Months Ended | |||||||||||||||||
| (In thousands) | March 31, 2022 | March 31, 2021 | Change | ||||||||||||||
| Product revenues, net | $ | 130,592 | $ | 105,825 | +23.4 | % | |||||||||||
| Cost of goods sold | 91,034 | 70,174 | +29.7 | % | |||||||||||||
| Gross profit | 39,558 | 35,651 | +11.0 | % | |||||||||||||
| Selling, general and administrative expenses | 27,788 | 32,907 | -15.6 | % | |||||||||||||
| Amortization of intangible assets | 4,705 | 4,151 | +13.3 | % | |||||||||||||
| Restructuring and other expenses | — | 1,657 | * | ||||||||||||||
| Operating income (loss) | 7,065 | (3,064) | * | ||||||||||||||
| Change in fair value of warrant liabilities | 861 | (2,362) | * | ||||||||||||||
| Interest expense, net | (6,032) | (5,078) | +18.8 | % | |||||||||||||
| Loss on extinguishment and debt transaction costs | — | (5,513) | * | ||||||||||||||
| Other income, net | 1,956 | 310 | * | ||||||||||||||
| Income (loss) before income taxes | 3,850 | (15,707) | * | ||||||||||||||
| Provision (benefit) for income taxes | 1,124 | (3,682) | * | ||||||||||||||
| Net income (loss) | $ | 2,726 | $ | (12,025) | * | ||||||||||||
* Represents positive or negative change equal to, or in excess of 100%
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Product revenues, net. Product revenues, net for the three months ended March 31, 2022 were $130.6 million, an increase of $24.8 million, or 23.4%, from $105.8 million for the three months ended March 31, 2021 due to a $22.0 million
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increase in product revenues in the Branded CPG segment and a $2.8 million increase in product revenues at Flavors & Ingredients. The increase in Branded CPG revenues was driven by a full quarter of Wholesome, which was acquired on February 5, 2021, partially offset by organic Branded CPG declines and unfavorable impacts from foreign exchange.
Cost of goods sold. Cost of goods sold for the three months ended March 31, 2022 was $91.0 million, an increase of $20.9 million, or 29.7%, from $70.2 million for the three months ended March 31, 2021. The increase was primarily due to a $19.8 million increase as a result of a full quarter of Wholesome (acquired on February 5, 2021), as well as costs associated with new production operations and higher volumes at Flavors & Ingredients, partially offset by a $3.2 million favorable change in the amortization of purchase accounting adjustments related to inventory revaluations (benefit of $1.6 million in the first quarter of 2022 compared to expense of $1.6 million in the first quarter of 2021).
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended March 31, 2022 were $27.8 million, a decrease of $5.1 million, or 15.6%, from $32.9 million for the three months ended March 31, 2021 primarily due to a $7.4 million decline in acquisition related transaction expenses, partially offset by a $1.3 million increase in costs driven by a full quarter of Wholesome, and higher bonus expense.
Amortization of intangible assets. Amortization of intangible assets for the three months ended March 31, 2022 was $4.7 million, an increase of $0.6 million, or 13.3%, from $4.2 million for the three months ended March 31, 2021 primarily due to higher amortization expense related to the intangible assets acquired as part of the Wholesome acquisition on February 5, 2021.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities for the three months ended March 31, 2022 was a non-operating gain of $0.9 million, an increase of $3.2 million, from a non-operating loss of $2.4 million for the three months ended March 31, 2021.
Interest expense, net. Interest expense, net for the three months ended March 31, 2022 was $6.0 million, an increase of $1.0 million, or 18.8%, from $5.1 million for the three months ended March 31, 2021. The increase was primarily due to higher debt levels under our credit facilities beginning February 5, 2021 and the amortization of debt issuance costs.
Other income, net. Other income, net for the three months ended March 31, 2022 was $2.0 million compared to $0.3 million for the three months ended March 31, 2021. The increase was primarily due to a $1.0 million non-cash settlement gain related to the termination of our qualified defined benefit pension plan at Flavors & Ingredients and a $1.1 million non-cash gain related to the settlement of the Wholesome acquisition earn-out as further described above.
Provision (benefit) for income taxes. The provision for income taxes for the three months ended March 31, 2022 was $1.1 million. The benefit for income taxes for the three months ended March 31, 2021 was $3.7 million. The effective tax rate for the three months ended March 31, 2022 was an income tax provision of 29.2%, compared to an income tax benefit of 23.4% for the three months ended March 31, 2021. The effective tax rate for the three months ended March 31, 2022 differs from the statutory federal rate of 21% primarily due to state and local taxes, non-deductible permanent differences, limited benefit on current year interest deductions and losses in certain jurisdictions, the change in the fair value of warrant liabilities, foreign income at different rates and the U.S. tax effect of international operations including Global Intangible Low-Taxed Income (“GILTI”) recorded during the period. The effective tax rate for the three months ended March 31, 2021 differs from the statutory federal rate of 21% primarily due to certain non-deductible expenses including transaction costs, the change in the fair value of warrant liabilities, stock-based compensation expense and the U.S. tax effect of international operations including GILTI recorded during the period.
Branded CPG
| Three Months Ended | |||||||||||||||||
| (In thousands) | March 31, 2022 | March 31, 2021 | Change | ||||||||||||||
| Product revenues, net | $ | 103,761 | $ | 81,797 | +26.9 | % | |||||||||||
| Operating income | $ | 6,460 | $ | 10,159 | -36.4 | % | |||||||||||
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Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Segment product revenues, net. Product revenues, net for Branded CPG for the three months ended March 31, 2022 were $103.8 million, an increase of $22.0 million, or 26.9%, from $81.8 million for the three months ended March 31, 2021, primarily driven by a $26.0 million increase in revenues as a result of a full quarter of Wholesome which was acquired on February 5, 2021, partially offset by a $2.2 million decline in organic sales due to the planned discontinuance of certain private label contracts and a $1.8 million unfavorable impact of foreign exchange.
Segment operating income. Operating income for Branded CPG for the three months ended March 31, 2022 was $6.5 million, a decrease of $3.7 million, or 36.4%, from $10.2 million for the three months ended March 31, 2021, primarily due to declines in natural products sales, costs associated with new production operations of $3.4 million, increased logistics and materials costs due to inflationary pressures, and higher bonus expense, partially offset by a $4.8 million increase in operating income at Wholesome as a result of a full quarter of results (acquired on February 5, 2021) and growth in the business.
Flavors & Ingredients
| Three Months Ended | |||||||||||||||||
| (In thousands) | March 31, 2022 | March 31, 2021 | Change | ||||||||||||||
| Product revenues, net | $ | 26,831 | $ | 24,028 | +11.7 | % | |||||||||||
| Operating income | $ | 7,827 | $ | 972 | * | ||||||||||||
* Represents positive or negative change equal to, or in excess of 100%
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Segment product revenues, net. Product revenues, net for Flavors & Ingredients for the three months ended March 31, 2022 were $26.8 million, an increase of $2.8 million, or 11.7%, from $24.0 million for the three months ended March 31, 2021, primarily driven by increases in licorice extracts and pure derivatives primarily due to volume growth.
Segment operating income. Operating income for Flavors & Ingredients for the three months ended March 31, 2022 was $7.8 million, an increase of $6.9 million, from $1.0 million for the three months ended March 31, 2021, primarily driven by increased revenue of $2.8 million, a $2.0 million decrease in cost of goods sold and a $1.7 million decrease in restructuring and other expenses included in the prior year results that did not re-occur in 2022. The decrease in cost of goods sold was largely due to a $2.3 million favorable change in amortization of purchase accounting adjustments related to inventory revaluations in the first quarter of 2022 (benefit of $1.6 million in the first quarter of 2022 compared to expense of $0.7 million in the first quarter of 2021).
Corporate
| Three Months Ended | |||||||||||||||||
| (In thousands) | March 31, 2022 | March 31, 2021 | Change | ||||||||||||||
| Operating loss | $ | (7,222) | $ | (14,195) | -49.1 | % | |||||||||||
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Operating loss. Operating loss for Corporate for the three months ended March 31, 2022 was $7.2 million, a decrease of $7.0 million from $14.2 million for the three months ended March 31, 2021, primarily driven by a $7.4 million decrease in acquisition related transaction expenses, partially offset by higher salaries from increased headcount in the second half of 2021.
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Liquidity and Capital Resources
We have historically funded operations with cash flow from operations and, when needed, with borrowings, which are described below.
We believe our sources of liquidity and capital, and our Credit Facilities will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months.
The following table shows summary cash flow information for the three months ended March 31, 2022 and March 31, 2021 (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Net cash provided by (used in) operating activities | $ | 4,446 | $ | (5,597) | |||||||
| Net cash used in investing activities | (3,226) | (188,145) | |||||||||
| Net cash (used in) provided by financing activities | (337) | 204,056 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 186 | 594 | |||||||||
| Net change in cash and cash equivalents | $ | 1,069 | $ | 10,908 | |||||||
Operating activities. Net cash provided by operating activities was $4.4 million for the three months ended March 31, 2022 compared to cash used in operating activities of $5.6 million for the three months ended March 31, 2021. The increase was primarily attributable to higher cash flows from operating results driven by lower transaction-related expenses, favorable working capital changes, and lower income tax payments, partially offset by higher interest payments during the three months ended March 31, 2022. Cash paid for income taxes, net of income tax refunds was $1.0 million for the three months ended March 31, 2022 compared to $3.5 million for the three months ended March 31, 2021. Cash paid for interest for the three months ended March 31, 2022 was $5.6 million compared to $4.5 million for the three months ended March 31, 2021.
Investing activities. Net cash used in investing activities was $3.2 million for the three months ended March 31, 2022 and primarily related to capital expenditures. Net cash used in investing activities was $188.1 million for the three months ended March 31, 2021 which included cash paid of $187.6 million, net of cash acquired, related to the acquisition of Wholesome, $1 million of cash received for the final working capital settlement related to the acquisition of Swerve and capital expenditures of $1.5 million.
Financing activities. Net cash used in financing activities was $0.3 million for the three months ended March 31, 2022 and reflects $30.0 million of proceeds from the revolving credit facility, repayments of long-term debt of $0.9 million, cash payment for the Wholesome acquisition earn-out of $29.1 million (amount is net of $0.9 million related to transaction bonuses paid in connection with the earn-out and reflected in operating activities) and payments of $0.3 million for employee tax withholdings related to net share settlements of share-based awards. Net cash provided by financing activities was $204.1 million for the three months ended March 31, 2021 and reflects $400 million of proceeds from the Credit Facilities, repayment of the revolving credit facility of $47.9 million, repayments of long-term debt of $136.5 million and payments of debt issuance costs of $11.6 million.
Debt
As of March 31, 2022, term loan borrowings were $361.6 million, net of debt issuance costs of $9.6 million. As of December 31, 2021, term loan borrowings were $362.2 million, net of debt issuance costs of $10.0 million. There were borrowings under the Revolving Facility of $55.0 million and $25.0 million as of March 31, 2022 and December 31, 2021, respectively. The unamortized debt issuance costs related to the Revolving Facility were $1.7 million and $1.8 million at March 31, 2022 and December 31, 2021, respectively, and are included in other assets in the condensed consolidated balance sheet. At both March 31, 2022 and December 31, 2021, there were $2.1 million of outstanding letters of credit that reduced our availability under the revolving credit facility. See Note 7 to our consolidated and combined financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for further information and significant terms and conditions associated with the Term Loan Facility and Revolving Facility.
As further described in the Acquisition section above, following the completion of the Wholesome Earn-Out Period, we determined, in accordance with the terms of the Purchase Agreement, that the sellers were entitled to receive the Earn-Out
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Amount in full. We elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under our revolving credit facility.
Critical Accounting Policies and Recently Issued Accounting Pronouncements
There have been no changes to critical accounting policies and estimates from those disclosed in our audited consolidated and combined financial statements for the year ended December 31, 2021. For information regarding our critical accounting policies and accounting pronouncements, see our unaudited condensed consolidated financial statements and the related notes to those statements included under Item 1. hereof and our 2021 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk from those addressed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 during the three months ended March 31, 2022. See the information set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). The Company’s management and the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments in our legal proceedings since we filed our Annual Report on Form 10-K for the year ended December 31, 2021. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding legal proceedings.
Item 1A. Risk Factors.
We discuss in our filings with the SEC various risks that may materially affect our business. The materialization of any risks and uncertainties identified in forward-looking statements contained in this report together with those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 and our other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking Statements.” There have been no material changes in the risk factors previously disclosed in the section entitled “Item 1A-Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2021, including the risk factors incorporated by reference therein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Following the completion of the Earn-Out Period, we determined, in accordance with the terms of the Wholesome Purchase Agreement, that the WSO Sellers were entitled to receive the Earn-Out Amount in full. We elected to satisfy part of the Earn-Out Amount in common stock and on February 23, 2022, issued 2,659,574 shares of the Company’s common stock. The remaining $30 million portion of the $55 million Earn-Out Amount was paid in cash which was funded from available capacity under our revolving credit facility. The earn-out shares were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering. No underwriter participated in the offer and sale of the earn-out shares, and no commission or other remuneration was paid or given directly or indirectly in connection therewith. We did not receive any proceeds in connection with the issuance of the earn-out shares.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| No. | Description of Exhibit | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 10.1* | ||||||||
| 10.2* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Taxonomy Extension Labels Linkbase Document | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 | |||||||
| * | Filed herewith. | ||||
| ** | Furnished herewith. | ||||
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Whole Earth Brands, Inc. | ||||||||
| /s/ Albert Manzone | ||||||||
| Date: May 10, 2022 | Name: | Albert Manzone | ||||||
| Title: | Chief Executive Officer | |||||||
| (Principal Executive Officer) | ||||||||
| /s/ Duane Portwood | ||||||||
| Date: May 10, 2022 | Name: | Duane Portwood | ||||||
| Title: | Chief Financial Officer | |||||||
| (Principal Financial and Accounting Officer) | ||||||||
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