Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1. Business,” and our audited consolidated and combined financial statements and notes thereto. For purposes of this section, “Whole Earth Brands,” the “Company,” “we,” or “our” refer to (i) Mafco Worldwide & Merisant and their subsidiaries (“Predecessor”) for the period from January 1, 2020 through June 25, 2020 (referred to herein as a “Predecessor Period”) prior to the consummation of the Business Combination and (ii) Whole Earth Brands, Inc. and its subsidiaries (the “Successor”) for the period from June 26, 2020 through December 30, 2020 and the years ended December 31, 2021 and 2022 (the “Successor Period”) after the consummation of the Business Combination, unless the context otherwise requires.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this Annual Report on Form 10-K and particularly in “Item 1A. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
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.
•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 consumers 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 baking mix, and baking chocolate segments. Our Branded CPG products are sold under both our flagship brands, as well as local and private label brands. Our 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 flavoring enhancement, flavor / aftertaste masking, moisturizing, product mouthfeel modification and skin soothing characteristics. Our Flavors & Ingredients segment operates as our licorice-derived products business.
Significant Acquisitions
On June 24, 2020, we domesticated into a Delaware corporation and changed our name from “Act II Global Acquisition Corp.” to “Whole Earth Brands, Inc.” On June 25, 2020, we consummated the Business Combination of (i) all of the issued and outstanding equity interests of Merisant Company, Merisant Luxembourg Sarl (“Merisant Luxembourg”), Mafco Worldwide LLC, Mafco Shanghai LLC (“Mafco Shanghai”), EVD Holdings LLC (“EVD Holdings”), and Mafco Deutschland GmbH (together with Merisant Company, Merisant Luxembourg, Mafco Worldwide LLC, 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 with the Sellers dated as of December 19, 2019, as amended.
As a result of the Business Combination, Act II was deemed to be the acquirer for accounting purposes, and Merisant and MAFCO, which is the business conducted prior to the closing of the Business Combination, was deemed to be the acquiree and accounting Predecessor. The Business Combination was accounted for as a business combination using the acquisition method of accounting, and the Successor’s financial statements reflect a new basis of accounting that is based on the fair value of net assets acquired. As a result of the application of the acquisition method of accounting as of the effective time of the Business Combination, the financial statements for the Predecessor Period and for the Successor Period are presented on different bases. The historical financial information of Act II prior to the Business Combination has not been reflected in the Predecessor Period financial statements.
On November 10, 2020, we executed and closed the Swerve Purchase Agreement. Swerve is a manufacturer and marketer of a portfolio of zero and reduced sugar, keto-friendly, and plant-based sweeteners and grain free, gluten free, and low/no sugar baking mixes. Upon the terms and subject to the conditions set forth in the Swerve Purchase Agreement, at the closing we purchased all of the issued and outstanding equity interests of both Swerve LLC and Swerve IP from RF Development, and both Swerve LLC and Swerve IP became wholly-owned subsidiaries of Whole Earth Brands. The transaction was structured to simultaneously sign and close and was not subject to any closing conditions.
Pursuant to the terms of the Swerve Purchase Agreement, we paid RF Development $80 million in cash for all of the issued and outstanding membership interests of both Swerve LLC and Swerve IP, which was subject to customary post-closing adjustments.
To finance a portion of the Swerve transaction, we utilized approximately $47.9 million under our $50 million revolving loan facility with Toronto Dominion (Texas) LLC.
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 (the “Earn-Out Period”). 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 is 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 its 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 audited consolidated and combined financial statements for further description of the Amended and Restated Credit Agreement.
Covid-19 Impact
The COVID-19 pandemic has caused and continues to cause economic disruption and uncertainty in the U.S. and globally including as infection rates and new variants continue to evolve. 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. 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 2022, we have continued to experience inflationary cost increases in raw materials and transportation costs, as well as supply chain challenges. We expect these cost pressures and supply chain challenges to continue in 2023. 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.
There continues to be an increasingly competitive labor market at certain of our manufacturing facilities that has led too an increase in employee turnover and changes in the availability of our workers due to, among other things COVID-19 related absences. Labor shortages and increased turnover rates have 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
(In thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to June 25, 2020 | | | | |
| Product revenues, net | $ | 538,272 | | | $ | 493,973 | | | $ | 147,168 | | | | $ | 128,328 | | | | | |
| Cost of goods sold | 398,060 | | | 335,218 | | | 101,585 | | | | 77,627 | | | | | |
| Gross profit | 140,212 | | | 158,755 | | | 45,583 | | | | 50,701 | | | | | |
| | | | | | | | | | | | |
| Selling, general and administrative expenses | 99,735 | | | 113,141 | | | 44,616 | | | | 43,355 | | | | | |
| Amortization of intangible assets | 18,623 | | | 18,295 | | | 6,021 | | | | 4,927 | | | | | |
| Asset impairment charges | 46,500 | | | — | | | — | | | | 40,600 | | | | | |
| Restructuring and other expenses | — | | | 4,503 | | | 1,052 | | | | — | | | | | |
| | | | | | | | | | | | |
| Operating (loss) income | (24,646) | | | 22,816 | | | (6,106) | | | | (38,181) | | | | | |
| | | | | | | | | | | | |
| Change in fair value of warrant liabilities | 1,232 | | | 29 | | | — | | | | — | | | | | |
| Interest expense, net | (30,600) | | | (24,589) | | | (4,371) | | | | (238) | | | | | |
| Loss on extinguishment and debt transaction costs | — | | | (5,513) | | | — | | | | — | | | | | |
| Other income (expense), net | 1,051 | | | 196 | | | (578) | | | | 801 | | | | | |
| Loss before income taxes | (52,963) | | | (7,061) | | | (11,055) | | | | (37,618) | | | | | |
| Provision (benefit) for income taxes | 5,789 | | | (7,144) | | | (2,618) | | | | (3,482) | | | | | |
| Net (loss) income | $ | (58,752) | | | $ | 83 | | | $ | (8,437) | | | | $ | (34,136) | | | | | |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Product revenues, net. Product revenues, net for the year ended December 31, 2022 were $538.3 million, an increase of $44.3 million, or 9.0%, from $494.0 million for the year ended December 31, 2021 due to a $33.5 million increase in product revenues at Branded CPG and a $10.8 million increase in product revenues at Flavors & Ingredients. The increase in Branded CPG revenues was primarily a result of a full year of Wholesome (acquired February 5, 2021), as well as price increases, partially offset by declines in volume and unfavorable impacts from foreign exchange, as further discussed below. The increase in Flavors & Ingredients revenues was primarily driven by volume growth and price increases, partially offset by unfavorable impacts from foreign exchange, as further discussed below.
Cost of goods sold. Cost of goods sold for the year ended December 31, 2022 was $398.1 million, an increase of $62.8 million, or 18.7%, from $335.2 million for the year ended December 31, 2021. The increase was primarily due to a $36.3 million increase in costs as a result of a full year of Wholesome (acquired February 5, 2021), as well as costs associated with the new production operations at Branded CPG and increased logistics, energy and raw materials costs due to inflationary pressures, partially offset by a $1.0 million decline in stock-based compensation expense.
Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2022 were $99.7 million, a decrease of $13.4 million, or 11.8%, from $113.1 million for the year ended December 31, 2021. The decrease was primarily due to a $13.5 million decline in public company readiness and acquisition related transaction expenses, a $5.3 million decrease in marketing costs, and a $2.2 million decrease in stock-based compensation expense, partially offset by $1.4 million of severance and related expenses, a $2.1 million increase in bonus expense, higher salaries from increased headcount in the second half of 2021 and increases in other corporate expenses including higher professional fees and insurance expense.
Amortization of intangible assets. Amortization of intangible assets for the year ended December 31, 2022 was $18.6 million, an increase of $0.3 million, or 1.8%, from $18.3 million for the year ended December 31, 2021 primarily due to amortization expense related to the intangible assets acquired as part of the Wholesome acquisition on February 5, 2021.
Asset impairment charges. Asset impairment charges were $46.5 million for the year ended December 31, 2022. The Company determined that the carrying values of the North America and LATAM reporting units within Branded CPG exceeded their respective fair values and as a result, the Company recognized non-cash goodwill impairment charges of $42.5 million related to the North America reporting unit and $4.0 million related to the LATAM reporting unit.
Restructuring and other expenses. Restructuring and other expenses were $4.5 million for the year ended December 31, 2021 and related primarily to certain disposal costs at our Camden, New Jersey facility, which was sold in the second quarter of 2021.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities for the year ended December 31, 2022 was a non-operating gain of $1.2 million, compared to a non-operating gain of $0.03 million for the year ended December 31, 2021, which is net of a $1.2 million non-operating gain that relates to the fiscal year ended December 31, 2020. See Notes 1, 8 and 9 to our audited consolidated and combined financial statements for further discussion.
Interest expense, net. Interest expense, net for the year ended December 31, 2022 was $30.6 million, an increase of $6.0 million, or 24.4%, from $24.6 million for the year ended December 31, 2021. The increase was primarily due to higher debt levels under our revolving credit facility and rising interest rates during the year ended December 31, 2022 compared to the year ended December 31, 2021.
Other income (expense), net. Other income (expense), net for the year ended December 31, 2022 was income of $1.1 million, an increase of $0.9 million from income of $0.2 million for the year ended December 31, 2021. The increase was primarily due to 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 year ended December 31, 2022 was $5.8 million which relates primarily to current and deferred foreign taxes in connection with our operations in China, France and Switzerland partially offset by a deferred tax benefit in the U.S. The tax benefit on our U.S. operating loss was limited as it included an impairment of non-deductible goodwill and interest deductions within the U.S for which no tax benefit was provided. The benefit for income taxes for the year ended December 31, 2021 was $7.1 million.
The effective tax rate for the year ended December 31, 2022 was (10.9)%. The effective tax rate differs from the statutory federal rate of 21% primarily due to the impairment of non-deductible goodwill for which no tax benefit was provided, the U.S. tax effect of international operations including Global Intangible Low-Taxed Income (“GILTI”) and a limited benefit on current year interest deductions within the U.S.
The effective tax rate for the year ended December 31, 2021 was 101.2%. The effective tax rate differs from the statutory federal rate of 21% primarily due to state and local taxes, non-deductible expenses including executive compensation, stock-based compensation and transaction related costs coupled with the finalization of the Switzerland tax ruling, changes in U.K. tax laws and the reversal of uncertain tax liabilities as a result of the lapse of applicable statute of limitations.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Product revenues, net. Product revenues, net were $494.0 million for the year ended December 31, 2021. Product revenues, net for the combined year ended December 31, 2020 were $275.5 million, including $147.2 million for the period from June 26, 2020 through December 31, 2020 and $128.3 million from January 1, 2020 through June 25, 2020. Product revenues, net increased $218.5 million, or 79.3%, due to a $211.6 million increase in product revenues at Branded CPG and a $6.9 million increase in product revenues at Flavors & Ingredients. The increase in Branded CPG revenues was driven by $203.6 million of revenues from the acquisitions of Wholesome and Swerve, $2.8 million of organic Branded CPG growth and a $5.2 million favorable impact from foreign exchange.
Cost of goods sold. Cost of goods sold was $335.2 million for the year ended December 31, 2021. Cost of goods sold for the combined year ended December 31, 2020 was $179.2 million, including $101.6 million for the period from June 26, 2020 through December 31, 2020 and $77.6 million from January 1, 2020 through June 25, 2020. Cost of goods sold increased $156.0 million, or 87.1%, primarily driven by $154.2 million from the acquisitions of Wholesome and Swerve (which includes $1.6 million of purchase accounting adjustments related to inventory), additional costs associated with new production operations of $7.9 million, increased sales volume and mix and a $1.0 million increase in stock-based compensation expense, partially offset by a $17.6 million favorable change in purchase accounting adjustments related to inventory revaluation adjustments from the Business Combination (benefit of $5.5 million for the year ended December 31, 2021 compared to expense of $12.1 million for the year ended December 31, 2020).
Selling, general and administrative expenses. SG&A expenses were $113.1 million for the year ended December 31, 2021. SG&A expenses for the combined year ended December 31, 2020 were $88.0 million, including $44.6 million for the period from June 26, 2020 through December 31, 2020 and $43.4 million from January 1, 2020 through June 25, 2020. SG&A expenses increased $25.2 million, or 28.6%, primarily due to a $3.3 million increase in acquisition related transaction expenses, $17.0 million of SG&A expenses from the acquisitions of Wholesome and Swerve, a $3.2 million increase in bonus expense (the prior year included a reversal of $2.3 million of bonus expense in the third quarter of 2020 for certain employees who received a one-time grant of restricted stock units in lieu of an annual cash bonus for 2020), a $5.6 million increase in stock-based compensation expense, a $2.6 million increase in insurance expense, and a $2.4 million increase in marketing costs, partially offset by transaction bonuses of $11.2 million recorded in 2020.
Amortization of intangible assets. Amortization of intangible assets was $18.3 million for the year ended December 31, 2021. Amortization of intangible assets for the combined year ended December 31, 2020 was $10.9 million, including $6.0 million for the period from June 26, 2020 through December 31, 2020 and $4.9 million from January 1, 2020 through June 25, 2020. Amortization of intangible assets increased $7.3 million, or 67.1%, primarily due to the amortization expense related to the intangible assets acquired as part of the Wholesome and Swerve acquisitions.
Asset impairment charges. There were no asset impairment charges for the year ended December 31, 2021. Asset impairment charges were $40.6 million in the Predecessor period and for the combined year ended December 31, 2020 and included an impairment charge of $22.9 million related to indefinite-lived intangible assets and a goodwill impairment charge of $17.7 million. The goodwill impairment charge of $17.7 million was the result of the Flavors & Ingredients and Branded CPG reporting units carrying value exceeding their fair value by $6.6 million and $11.1 million, respectively. The asset impairment charges were recorded in the first quarter of 2020.
Restructuring and other expenses. Restructuring and other expenses were $4.5 million for the year ended December 31, 2021 and related primarily to certain disposal costs at our Camden, New Jersey facility, which was sold in the second quarter of 2021. Restructuring and other expenses for the combined year ended December 31, 2020 were $1.1 million and related to employee termination benefits associated with restructuring plans to streamline processes, consolidate facilities and eliminate various positions in operations and general and administrative areas.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities for the year ended December 31, 2021 was a non-operating gain of $0.03 million, which is net of a $1.2 million non-operating gain that relates to the fiscal year ended December 31, 2020. See Notes 1, 8 and 9 to our audited consolidated and combined financial statements for further discussion.
Interest expense, net. Interest expense, net was $24.6 million for the year ended December 31, 2021. Interest expense, net for the combined year ended December 31, 2020 was $4.6 million, including $4.4 million for the period from June 26, 2020 through December 31, 2020 and $0.2 million from January 1, 2020 through June 25, 2020. Interest expense, net increased $20.0 million due to higher debt levels under our new credit facilities and the amortization of debt issuance costs.
Other income (expense), net. Other income (expense), net was income of $0.2 million for the year ended December 31, 2021. Other income (expense), net for the combined year ended December 31, 2020 was income of $0.2 million, including expense of $0.6 million for the period from June 26, 2020 through December 31, 2020 and income of $0.8 million from January 1, 2020 through June 25, 2020. Other income (expense), net was flat year over year.
Provision (benefit) for income taxes. The income tax benefit was $7.1 million for the year ended December 31, 2021. The income tax benefit for the combined year ended December 31, 2020 was $6.1 million, including $2.6 million for the period from June 26, 2020 through December 31, 2020 and $3.5 million for the period from January 1, 2020 through June 25, 2020.
The effective tax rate for the year ended December 31, 2021 was 101.2%. The effective tax rate differs from the statutory federal rate of 21% primarily due to state and local taxes, non-deductible expenses including executive compensation, stock-based compensation and transaction related costs coupled with the finalization of the Switzerland tax ruling, changes in U.K. tax laws and the reversal of uncertain tax liabilities as a result of the lapse of applicable statute of limitations.
The effective tax rate for the Successor period from June 26, 2020 through December 31, 2020 was 23.7%. The effective tax rate differs from the statutory federal rate of 21% primarily due to the U.S. tax effect of international operations, state and local taxes and tax rate differences related to our foreign operations. The effective rate for the Predecessor period from January 1, 2020 to June 25, 2020 was 9.3% and differs from the federal statutory rate of 21% primarily due to the impairment of non-deductible goodwill, the U.S. effect of foreign operations and a decrease in our uncertain tax position liability.
Results of Operations by Segment
Branded CPG
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) | | |
| (In thousands) | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to June 25, 2020 | | | | |
| Product revenues, net | $ | 422,638 | | | $ | 389,174 | | | $ | 96,857 | | | | $ | 80,749 | | | | | |
| Operating (loss) income | (30,182) | | | 34,918 | | | 13,463 | | | | (5,055) | | | | | |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Segment product revenues, net. Product revenues, net for Branded CPG for the year ended December 31, 2022 were $422.6 million, an increase of $33.5 million, or 8.6%, from $389.2 million for the year ended December 31, 2021, primarily driven by a $40.1 million increase in revenues at Wholesome due to a full year of results in 2022 (acquired February 5, 2021) as well as both higher pricing and volume. This increase was partially offset by a $6.6 million decline in revenues for all other Branded CPG business as a $10.1 million increase in sales largely due to higher pricing was more than offset by a $6.2 million decline in sales due to the discontinuance of certain private label contracts and a $10.5 million unfavorable impact of foreign exchange.
Segment operating (loss) income. Operating loss for Branded CPG for the year ended December 31, 2022 was $30.2 million, a decrease of $65.1 million from operating income of $34.9 million for the year ended December 31, 2021, primarily due to the $46.5 million non-cash goodwill impairment charge, an increase in costs associated with new production operations of $14.9 million, increased logistics, energy and raw materials costs due to inflationary pressures, partially offset by a $6.4 million increase in operating income at Wholesome driven by a full year of results (acquired February 5, 2021), a $5.3 million decrease in marketing costs, and a $1.2 million reduction in stock-based compensation expense in the segment.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Segment product revenues, net. Product revenues, net for Branded CPG for the year ended December 31, 2021 were $389.2 million. Product revenues, net for Branded CPG for the combined year ended December 31, 2020 were $177.6 million, including $96.9 million for the period from June 26, 2020 through December 31, 2020 and $80.7 million from January 1, 2020 through June 25, 2020. Product revenues, net for Branded CPG increased $211.6 million primarily due to $203.6 million of revenues as a result of the acquisitions of Wholesome and Swerve, $2.8 million of global organic Branded CPG growth and a $5.2 million favorable impact of foreign exchange.
Segment operating income (loss). Operating income for Branded CPG for the year ended December 31, 2021 was $34.9 million. Operating income for Branded CPG for the combined year ended December 31, 2020 was $8.4 million, including operating income of $13.5 million for the period from June 26, 2020 through December 31, 2020 and an operating loss of $5.1 million from January 1, 2020 through June 25, 2020. Operating income for Branded CPG increased $26.5 million, primarily due to a goodwill impairment charge of $11.1 million and transaction bonuses of $2.7 million reflected in the prior year results that did not reoccur in 2021, additional operating income of $24.2 million related to the acquisitions of Wholesome and Swerve (which includes $1.6 million of amortization of inventory fair value adjustments), a reduction of $3.5 million in purchase accounting adjustments related to inventory revaluations from the Business Combination, as well as organic revenue growth, partially offset by costs associated with new production operations of $7.9 million, a $2.4 million increase in marketing costs, a $1.9 million increase in bonus expense (the prior year included a reversal of $1.2 million of bonus expense as described above) and a $2.5 million increase in stock-based compensation expense in 2021.
Flavors & Ingredients
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) | | |
| (In thousands) | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to June 25, 2020 | | | | |
| Product revenues, net | $ | 115,634 | | | $ | 104,799 | | | $ | 50,311 | | | | $ | 47,579 | | | | | |
| Operating income (loss) | 32,505 | | | 21,860 | | | (2,645) | | | | (23,718) | | | | | |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Segment product revenues, net. Product revenues, net for Flavors & Ingredients for the year ended December 31, 2022 were $115.6 million, an increase of $10.8 million, or 10.3%, from $104.8 million for the year ended December 31, 2021, primarily driven by increases in licorice extracts and pure derivatives primarily due to volume and price growth, partially offset by a $2.2 million unfavorable impact of foreign exchange .
Segment operating income (loss). Operating income for Flavors & Ingredients for the year ended December 31, 2022 was $32.5 million, an increase of $10.6 million, or 48.7%, from $21.9 million for the year ended December 31, 2021, primarily driven by increased revenue of $10.8 million and a $4.5 million decrease in restructuring and other expenses included in the prior year results that did not re-occur in 2022, partially offset by a $4.6 million increase in cost of goods sold. The increase in cost of goods sold was largely due to the increase in revenue as well as a $2.9 million unfavorable change in amortization of purchase accounting adjustments related to inventory revaluations in the year ended December 31, 2022 (benefit of $2.5 million in the year ended December 31, 2022 compared to a benefit of $5.5 million in the year ended December 31, 2021).
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Segment product revenues, net. Product revenues, net for Flavors & Ingredients for the year ended December 31, 2021 were $104.8 million. Product revenues, net for Flavors & Ingredients for the combined year ended December 31, 2020 were $97.9 million, including $50.3 million for the period from June 26, 2020 through December 31, 2020 and $47.6 million from January 1, 2020 through June 25, 2020. Product revenues, net for Flavors & Ingredients increased $6.9 million, or 7.1%, primarily driven by increases in licorice extracts and our Magnasweet® product lines.
Segment operating income (loss). Operating income for Flavors & Ingredients for the year ended December 31, 2021 was $21.9 million. Operating loss for Flavors & Ingredients for the combined year ended December 31, 2020 was $26.4 million, including $2.6 million for the period from June 26, 2020 through December 31, 2020 and $23.7 million from January 1, 2020 through June 25, 2020. Operating income for Flavors & Ingredients increased $48.2 million, primarily due to higher revenues, asset impairment charges totaling $29.5 million and transaction bonuses of $4.2 million, both included in the prior year results that did not re-occur in 2021, a favorable change in purchase accounting adjustments related to inventory of $14.1 million (benefit of $5.5 million in 2021 compared to expense of $8.6 million in 2020), a $1.5 million reduction in salaries as a result of position eliminations in 2020 and 2021, and lower operating expenses related to the Camden facility that was sold in the second quarter of 2021, partially offset by a $3.5 million increase in facility closure and restructuring costs, a $0.9 million increase in stock-based compensation expense and a $1.0 million increase in amortization expense due to purchase accounting revaluations of intangible assets.
Corporate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) | | |
| (In thousands) | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to June 25, 2020 | | | | |
| Operating loss | $ | (26,969) | | | $ | (33,962) | | | $ | (16,924) | | | | $ | (9,408) | | | | | |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Operating loss. Operating loss for Corporate for the year ended December 31, 2022 was $27.0 million, a decrease of $7.0 million or 20.6% from $34.0 million for the year ended December 31, 2021, primarily driven by an $11.7 million decrease in acquisition related transaction expenses and public company readiness expenses, partially offset by a $2.0 million increase in compensation expense (primarily due to increased headcount in the second half of 2021) and increases in other corporate expenses including professional fees and insurance expense.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Operating loss. Operating loss for Corporate for the year ended December 31, 2021 was $34.0 million. Operating loss for the combined year ended December 31, 2020 was $26.3 million, including $16.9 million for the period from June 26, 2020 through December 31, 2020 and $9.4 million from January 1, 2020 through June 25, 2020. Operating loss rose $7.6 million, or 29.0%, primarily due to a $3.3 million increase in acquisition related transaction expenses, a $3.1 million increase in stock-based compensation expense, a $2.6 million increase in insurance expense and higher salaries due to new hires and the full year impact of 2020 hires to operate as a public company, partially offset by $2.6 million of lower bonus expense as 2020 included $4.8 million of transaction bonuses.
Liquidity and Capital Resources
We have historically funded operations with cash flow from operations and, when needed, with borrowings, which are described below.
As of December 31, 2022, we had cash and cash equivalents of $28.7 million. Our principal source of liquidity is our cash from operations. We also have access to credit markets, if needed, for liquidity or general corporate purposes, including our revolving credit facility. 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. Overall, we do not anticipate negative effects to our funding sources that would have a material effect on our liquidity. However, in connection with the COVID-19 pandemic and other recent global events, if a serious economic crisis ensues, it could have a material adverse effect on our liquidity, results of operations and financial condition.
The following table shows summary cash flow information for the years ended December 31, 2022 and December 31, 2021, and the periods from June 26, 2020 through December 31, 2020 and January 1, 2020 through June 25, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Net cash (used in) provided by operating activities | $ | (5,810) | | | $ | 9,482 | | | $ | (9,445) | | | | $ | 19,908 | |
| Net cash used in investing activities | (8,419) | | | (197,913) | | | (282,122) | | | | (3,532) | |
| Net cash provided by (used in) financing activities | 16,525 | | | 199,330 | | | 252,216 | | | | (16,924) | |
| Effect of exchange rates on cash and cash equivalents | (1,916) | | | 499 | | | 714 | | | | 215 | |
| Net change in cash and cash equivalents | $ | 380 | | | $ | 11,398 | | | $ | (38,637) | | | | $ | (333) | |
Operating activities. Net cash used in operating activities was $5.8 million for the year ended December 31, 2022 compared to cash provided by operating activities of $9.5 million for the year ended December 31, 2021. The decrease in cash was primarily attributable to unfavorable working capital changes, higher income tax and interest payments and lower cash flows from operating results during the year ended December 31, 2022. Cash paid for interest for the year ended December 31, 2022 was $28.4 million compared to $21.2 million for the year ended December 31, 2021. Cash paid for income taxes, net of income tax refunds, was $9.1 million for the year ended December 31, 2022 compared to $4.5 million for the year ended December 31, 2021.
Net cash provided by operating activities was $9.5 million for the year ended December 31, 2021, a decrease of $1.0 million compared to $10.5 million for the combined year ended December 31, 2020. The decrease was primarily attributable to higher cash paid for interest and unfavorable working capital changes, largely offset by higher cash generated from operations.
Investing activities. Net cash used in investing activities was $8.4 million for the year ended December 31, 2022 and included capital expenditures of $8.9 million and proceeds from the sale of fixed assets of $0.5 million.
Net cash used in investing activities was $197.9 million for the year ended December 31, 2021, which included cash paid of $191.2 million, net of cash acquired, related to the acquisition of Wholesome, $1.0 million of cash received for the final working capital settlement related to the acquisition of Swerve, capital expenditures of $12.2 million and proceeds from the sale of one of our facilities of $4.5 million.
Net cash used in investing activities was $282.1 million in the period from June 26, 2020 through December 31, 2020, which included cash paid of $376.7 million, net of cash acquired, related to the Business Combination, $178.9 million of cash transferred from the trust account, $79.8 million related to the Swerve acquisition and capital expenditures of $4.5 million. Net cash used in investing activities was $3.5 million from January 1, 2020 through June 25, 2020 and was entirely related to capital expenditures.
We expect 2023 capital expenditures to be approximately $9 million which includes manufacturing equipment at our production facilities and information technology expenditures.
Financing activities. Net cash provided by financing activities was $16.5 million for the year ended December 31, 2022 and reflects $54.0 million of proceeds from the revolving credit facility, repayments of the revolving credit facility of $3.0 million, repayments of long-term debt of $3.8 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), payments of $0.9 million for employee tax withholdings related to net share settlements of share awards and payments of debt issuance costs of $0.7 million.
Net cash provided by financing activities was $199.3 million for the year ended December 31, 2021 and reflects $400 million of proceeds from the Credit Facilities (as defined and described below), repayment of the revolving credit facility of $47.9 million, repayments of long-term debt of $139.3 million, payments of debt issuance costs of $11.6 million and payments of $1.9 million for tax withholdings related to net share settlements of share-based awards.
Net cash provided by financing activities was $252.2 million in the period from June 26, 2020 through December 31, 2020 and reflects $140.0 million of proceeds from the Loan Agreement (as defined and described below), net of debt issuance costs of $7.1 million, proceeds from the revolving credit facility of $47.9 million, proceeds from the sale of common stock and warrants of $75.0 million and repayments of long-term debt of $3.5 million. Net cash used in financing activities was $16.9 million from January 1, 2020 through June 25, 2020 due to $8.5 million of repayments, offset by $3.5 million of borrowings related to the prior revolving credit facility and $11.9 million due to funding to the parent.
Debt
At December 31, 2022, 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 $125 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”). See Note 7 to our audited consolidated and combined financial statements for additional information on our Credit Facilities.
As of December 31, 2022 and December 31, 2021, term loan borrowings were $359.9 million and $362.2 million, respectively, net of unamortized discount and debt issuance costs of $8.5 million and $10.0 million, respectively. There were $76.0 million and $25.0 million of borrowings under the revolving credit facility as of December 31, 2022 and December 31, 2021, respectively. As of December 31, 2022 and December 31, 2021, the Company’s unamortized debt issuance costs related to the revolving credit facility were $2.0 million and $1.8 million, respectively, which are included in other assets in the consolidated balance sheet. Additionally, as of both December 31, 2022 and 2021, there were $2.1 million of outstanding letters of credit that reduced our availability under the revolving credit 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 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.
On June 15, 2022, the Company and certain of its subsidiaries entered into a first amendment (the “Amendment”) to the Amended and Restated Agreement dated as of February 5, 2021. The Amendment increased the aggregate principal amount of the Revolving Credit Facility from $75 million to $125 million (the “Amended Revolving Credit Facility”) and transitioned from LIBOR to Secured Overnight Financing Rate (“SOFR”) as the benchmark for purposes of calculating interest for all loans outstanding under the Amended and Restated Credit Agreement. At the election of the Company, loans outstanding under the Amended and Restated Credit Agreement will accrue interest at a rate per annum equal to (i) term SOFR plus 0.10%, 0.15%, or 0.25% in case of, respectively, a one-month, three-month, or six-month interest period (“Adjusted Term SOFR”), or (ii) the greater of the prime rate, the federal funds effective rate plus 0.50%, and one-month Adjusted Term SOFR plus 1.00%, in each case plus the applicable margin which is equal to (i) with respect to the Amended Revolving Credit Facility and letters of credit, (A) 2.75%, in the case of base rate advances, and (B) 3.75% in the case of SOFR advances, and (ii) with respect to the Term Loan Facility, (A) 3.50%, in the case of base rate advances, and (B) 4.50% in the case of SOFR advances. In connection with the Amendment, the Company paid fees and incurred transactions costs of $0.7 million, all of which was deferred.
The transition to SOFR did not materially impact the interest rates applied to the Company’s borrowings. No other material changes were made to the terms of the Company’s Amended and Restated Agreement as a result of the Amendment.
Contractual Obligations
The following table summarizes certain of our obligations as of December 31, 2022 and the estimated timing and effect that such obligations are expected to have on liquidity and cash flows in future periods (in thousands):
| | | | | | | | | | | | | | | | | |
| | Total | | Current | | Long-Term |
| Debt | $ | 444,438 | | | $ | 3,750 | | | $ | 440,688 | |
| Interest on debt (1) | 191,532 | | | 40,801 | | | 150,731 | |
| Minimum lease obligations (2) | 22,797 | | | 9,458 | | | 13,339 | |
| Raw materials purchase obligations | 77,610 | | | 75,812 | | | 1,798 | |
| Other purchase obligations | 4,944 | | | 3,120 | | | 1,824 | |
| Total | $ | 741,321 | | | $ | 132,941 | | | $ | 608,380 | |
(1) Calculated based on debt outstanding as of December 31, 2022 and the interest rates as of that date.
(2) Minimum lease obligations have not been reduced by sublease rental income.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 to our audited consolidated and combined financial statements. These policies conform with U.S. Generally Accepted Accounting Principles (“GAAP”) and reflect practices appropriate to our businesses. The preparation of our consolidated and combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated and combined financial statements and accompanying notes thereto. Actual results could differ from these estimates. We evaluate our policies, estimates and assumptions on an ongoing basis.
Our critical accounting policies and estimates relate to revenue recognition, goodwill and other indefinite-lived intangible assets, impairment review of long-lived assets, income taxes and pension benefits. Management continually evaluates the development, selection and disclosure of our critical accounting policies and estimates and the application of these policies and estimates. In addition, there are other items within the consolidated and combined financial statements that require the application of accounting policies and estimation, but are not deemed to be critical accounting policies and estimates. Changes in the estimates used in these and other items could have a material impact on our consolidated and combined financial statements.
Revenue Recognition—In accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” the Company recognizes revenue when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenues are primarily derived from customer orders for the purchase of products and are generally recognized when the product is shipped or delivered depending on the arrangement with the customer. The Company made an accounting policy election to exclude from the measurement of the transaction price sales taxes and all other items of a similar nature, and also elected to account for shipping and handling activities as a fulfillment of the promise to transfer the goods. Accordingly, shipping and handling costs are included in cost of sales.
Branded CPG may offer promotional activities (e.g. coupons, trade discounts and other promotional activities) to its customers. These variable consideration amounts are estimated for each customer based on specific arrangements/agreements, an analysis of historical volume, and/or current activity with that customer. Reassessment of variable consideration estimates is done at each reporting date throughout the contract period until the uncertainty is resolved (e.g. promotional campaign is closed and settled with customer).
Historically, the Company has encountered limited instances whereby customers rejected products as a result of orders being materially inaccurate and/or products being defective. The Company tracks the reason codes for those customer returns. Based on that, the materiality of such returns is assessed. A return reserve is calculated (based on historical data as described above) every month to record an adjustment to net sales; these adjustments have not been significant.
Goodwill and Other Indefinite-Lived Intangible Assets—We review goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that an asset may be impaired, in accordance with ASC Topic 350, “Intangibles—Goodwill and Other.” Under ASC Topic 350, the impairment review of goodwill and other intangible assets not subject to amortization must be based on estimated fair values.
Our annual impairment review measurement date is in the fourth quarter of each year. In performing the annual assessment, we have the option of performing a qualitative assessment to determine if it is more likely than not that a reporting unit has been impaired. As part of the qualitative assessment for the reporting units, we evaluate the factors that are specific to the reporting units as well as industry and macroeconomic factors (including changes in interest and discount rates). The reporting unit specific factors may include cost factors, a comparison of current year results to prior year, current year budget and future projected financial performance. We also consider the change in the overall enterprise value of the Company compared to the prior year.
If we determine that it is more likely than not that a reporting unit is impaired or if we elect not to perform the optional qualitative assessment, a quantitative assessment is performed utilizing both the income and market approaches to estimate the fair value of its reporting units. The income approach involves discounting future estimated cash flows. The discount rate used is the value-weighted average of the reporting unit’s estimated cost of equity and debt (“cost of capital”) derived using both known and estimated customary market metrics adjusted for company specific risks. We perform sensitivity tests with respect to growth rates and discount rates used in the income approach. In applying the market approach, valuation multiples are derived from historical and projected operating data of selected guideline companies; evaluated and adjusted, if necessary, based on the strengths and weaknesses of the reporting unit relative to the selected guideline companies; and applied to the appropriate historical and/or projected operating data to arrive at an indication of fair value. We typically weight the results of the income and market approaches equally. If the reporting unit’s carrying value exceeds its estimated fair value, then an impairment is recorded for the difference, limited to the total amount of goodwill allocated to the reporting unit.
As disclosed in Note 6 to our audited consolidated and combined financial statements, as a result of our 2022 impairment test, the Company recorded non-cash goodwill impairment charges related to our North America and LATAM reporting units within the Branded CPG segment of $42.5 million and $4.0 million, respectively. The reporting units that were impaired were written down to their respective fair values resulting in zero excess fair value over carrying amounts as of the fourth quarter assessment date. Accordingly, our North America reporting unit has 10% or less excess fair value over carrying amount and a heightened risk of future impairments. The $4.0 million non-cash goodwill impairment charge related to our LATAM reporting unit was the full amount of goodwill associated with that reporting unit. The remaining reporting units have more than 10% excess fair value over carrying amounts as of the latest 2022 impairment test. The determination of estimated fair values requires significant judgments in estimating several factors, including, future cash flows, terminal growth rates, income tax considerations and discount rates. If current expectations of future cash flows are not met, if market factors outside of the Company’s control change, including those impacting discount rates, income tax rates and foreign currency exchange rates, or if management’s expectations or plans otherwise change, then one or more of our reporting units might become impaired in the future. After the impairments, the goodwill carrying amounts of the North America and LATAM reporting units was approximately $80.5 million and $0 million, respectively.
The discount rate and long-term growth rate used to estimate the fair value of the reporting unit with 10% or less excess fair value over carrying amount, as well as the goodwill carrying amount, as of the 2022 impairment test, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Reporting Unit | | Goodwill Carrying Amount
(in thousands) | | Discount Rate | | Long-Term Growth Rate |
| North America | | $ | 80,486 | | | 13.0% | | 2.5% |
| | | | | | |
Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in the discount rate and long-term growth rate on the fair values of our reporting unit with 10% or less excess fair value over carrying amount. These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline.
If we had changed the assumptions used to estimate the fair value of our reporting unit with 10% or less excess fair value over carrying amount, as of the 2022 impairment test, these isolated changes, which are reasonably possible to occur, would have led to the following increase/(decrease) in the aggregate fair value of the reporting unit (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discount Rate | | Long-Term Growth Rate |
| | 50-Basis-Point | | 25-Basis-Point |
| Reporting Unit | | Increase | | Decrease | | Increase | | Decrease |
| North America | | $ | (7,513) | | | $ | 8,268 | | | $ | 1,481 | | | $ | (1,413) | |
| | | | | | | | |
We typically evaluate impairment of indefinite-lived intangible assets, which relates to our product formulations, by first performing a qualitative assessment. If we elect to bypass the qualitative assessment or we determine that it is more likely than not that the fair value of the product formulations is less than its carrying value, a quantitative assessment is then performed using the relief from royalty method under the income approach to estimate the fair value. Some of the more significant assumptions inherent in estimating the fair value include the estimated future annual sales, royalty rates (as a percentage of sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations and a discount rate that reflects the level of risk.
See Note 6 to our audited consolidated and combined financial statements for additional information.
Impairment Review of Long-Lived Assets—In accordance with ASC Topic 360, “Property, Plant and Equipment,” we evaluate the carrying value of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset group may be impaired. When such events occur, we compare the sum of the future undiscounted cash flows expected to be generated from the asset or asset group over its remaining depreciable life to the carrying value. If this comparison indicates that there is an impairment, the carrying amount of the long-lived asset would then be reduced to the estimated fair value, which generally approximates discounted cash flows. We also evaluate the amortization periods of assets to determine whether events or circumstances warrant revised estimates of useful lives. Our applicable long-lived assets include property, plant and equipment and definite-lived intangible assets.
Income Taxes—The provision for income taxes is determined using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes.” The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
For the Predecessor period, income taxes as presented herein are attributable to current and deferred income taxes of the Company’s financial statements in a manner that is systematic, rational, and consistent with the asset and liability method described by ASC 740. Accordingly, the Company’s income tax provision during the predecessor period was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the combined group as if the group member were a separate taxpayer and a stand-alone enterprise. Use of the separate return method may result in differences when the sum of the amounts allocated to stand-alone tax provisions are compared with amounts presented in the combined financial statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein. The combined financial statements reflect the Company’s portion of income taxes payable as if the Company had been a separate taxpayer.
The Company made a policy election to treat the income tax due on U.S. inclusion of the global intangible low taxed income (“GILTI”) provisions as a period expense when incurred.
Uncertainty in Income Taxes—The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued under ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company provides loss contingencies for federal, state and international tax matters relating to potential tax examination issues, planning initiatives and compliance responsibilities. The development of these reserves requires judgements about tax issues, potential outcomes and timing, which if different, may materially impact the Company’s financial condition and results of operations. The Company classifies interest and penalties associated with income taxes as a component of the provision (benefit) for income taxes in the consolidated and combined statements of operations.
Pension Benefits—Retirement benefits are provided to certain current and former employees through qualified and non-qualified defined benefit pension plans sponsored by us. In 2022, the Company terminated its qualified defined benefit pension plan. The surplus assets of the terminated plan will be used, as prescribed in the applicable regulations, to fund future contributions to the defined contribution plan at Flavors and Ingredients. At December 31, 2022, the remaining surplus of the plan was approximately $2.5 million. Prior to the termination of the qualified defined benefit pension plan, it was our policy to fund the minimum for our company-sponsored pension plans as required by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The expected cost of providing the qualified pension plan benefits was accrued over the years that the employees render services, until the plan was frozen on December 31, 2019. The expected cost of providing the non-qualified pension plan benefits is accrued over the years that the employees rendered services. It is our policy to fund non-qualified pension benefits as payments are due. Accounting for pension benefits requires the use of several assumptions and estimates. Actual experience or changes to these assumptions and other estimates could have a significant impact on our consolidated and combined results of operations and financial position. See Note 12 to our audited consolidated and combined financial statements for a summary of all of the key assumptions related to pension benefits as well as a description of our defined benefit pension plans as well as additional disclosures.
We recognize the overfunded or underfunded status of our defined benefit pensions as an asset or liability in our consolidated balance sheets and recognize changes in that funded status in the year in which changes occur through comprehensive income (loss). Any changes in the funded status deferred into accumulated other comprehensive income (loss) are amortized within other income (expense) in future periods using the corridor approach, over an appropriate term. The corridor is 10% of the greater of the market-related value of the plan’s asset or projected benefit obligation.
For our qualified pension plan we utilized a blend of appropriate durations of annuity purchase contracts at December 31, 2021. For our non-qualified pension plans we utilized the Aon Hewitt AA-Only Bond Universe Yield Curve (the “Aon Hewitt Yield Curve”) for discounting future benefit obligations and calculating interest cost. The Aon Hewitt Yield Curve represents the yield on high quality (AA and above) corporate bonds that closely match the cash flows of the estimated payouts for our benefit obligations. As of December 31, 2022, a 0.5% decrease in our discount rate assumptions of 2.38% for our qualified pension plan and 2.78% for our non-qualified pension plans would result in a nominal decrease in our pension expense for both our qualified pension plan and our non-qualified pension plans for the year ended December 31, 2022.
Prior to terminating the qualified defined benefit pension plan in 2022, we used a multi-pronged approach to determine our 1.70% assumption for the long-term expected rate of return on pension plan assets. This approach included a review of actual historical returns achieved and anticipated long-term performance of each asset class. As of December 31, 2022, a 0.5% decrease in our long-term rate of return assumption would result in a $0.1 million increase in the pension expense of our qualified pension plan for the year ended December 31, 2022. Our pension plan assets earned a return of 0.7% in 2022 and 2.9% in 2021. The asset returns are net of administrative expenses.
Our pension actuarial valuation also incorporates other factors such as mortality rates. The actuarial assumptions used by us may differ materially from actual results due to, among other things, longer or shorter life spans of plan participants. Differences in these assumptions could significantly impact the actual amount of net periodic benefit cost and pension liability recorded by us.
Foreign Currency Translation—The Company has determined that the functional currency for each combined subsidiary is its local currency, except for certain entities whose functional currency is the U.S. dollar. Assets and liabilities of entities outside the U.S. are translated into U.S. dollars at the exchange rates in effect at the end of each period; income and expense items are translated at each period’s average exchange rate; and any resulting translation difference is reported and accumulated as a separate component of combined statements of net parent investment, except for any entities which may operate in highly inflationary economies. Gains and losses resulting from transactions in other than functional currencies are reflected in operating results, except for transactions of a long-term nature.
Remeasurements of European entities whose functional currency is the U.S. dollar as well as translation adjustments for entities operating in highly inflationary economies and impacts of foreign currency transactions are recognized currently in other expense (income), net.
Beginning January 1, 2019, the Company was required to apply highly-inflationary accounting to its Argentinian subsidiary. This accounting treatment requires a change in the subsidiary’s functional currency from the local currency (Argentinian Peso) to the parent’s reporting currency (USD). This highly-inflationary classification results from the fact that the cumulative inflation rate for the preceding 3 year period exceeded 100 percent as of June 30, 2018. When the Company changed the functional currency, it revalued the subsidiary’s financial statements as if the new functional currency (USD) were the reporting currency. Accordingly, effective January 1, 2019, all Argentinian Peso denominated monetary assets and liabilities are considered foreign currency denominated assets and liabilities and are revalued to USD (the functional currency) with remeasurement adjustments in the period recorded in the statement of operations. The USD will be the functional currency until the economic environment in Argentina ceases to be considered highly-inflationary.
As of the date of the Business Combination, the assets and liabilities of the Argentinian subsidiary were adjusted to fair value. Certain non-monetary assets and liabilities that were previously recorded at the applicable historical exchange rates are recorded in USD using the exchange rate as of June 25, 2020. Argentinian Peso denominated monetary assets and liabilities continue to be revalued to USD (the functional currency) with remeasurement period adjustments in the period recorded in the statement of operations.
New Accounting Standards
See Note 1 to our audited consolidated financial statements for the discussion of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The principal market risks affecting our business are exposures to interest rates on debt and foreign exchange rates.
Interest Rate Risk
We are exposed to market risk from changes in interest rates of our variable rate debt under our Loan Agreement, which consists of a Term Loan Facility and a Revolving Credit Facility. At December 31, 2022, we had $368 million and $76 million of aggregate principal amounts outstanding under our Term Loan Facility and Revolving Credit Facility, respectively.
Loans outstanding under the Term Loan Facility currently accrue interest at a rate per annum equal to 90-day SOFR subject to a floor of 1% plus a margin of 4.50% and the Revolving Credit Facility currently accrues interest at a rate per annum equal to 90-day SOFR plus a margin of 3.75%. Based on the amounts outstanding under the Term Loan Facility and Revolving Credit Facility at December 31, 2022, adding 1% to the applicable interest rate under the Term Loan Facility and Revolving Credit Facility would result in an increase of approximately $4.4 million in our annual interest expense. We currently do not use interest rate swaps to hedge the interest rate risk related to our outstanding variable rate debt.
Foreign Currency Risk
The revenues and expenses of our international operations generally are denominated in local currencies, which subject us to exchange rate fluctuations between such local currencies and the U.S. Dollar (“USD”). These exchange rate fluctuations subject us to currency translation risk with respect to the reported results of our international operations, as well as to other risks sometimes associated with international operations. In the future, we could experience fluctuations in financial results from our international operations, and there can be no assurance we will be able, contractually or otherwise, to reduce the currency risks associated with our international operations. Foreign currency risk is primarily related to operations in Europe and Asia. A 10% increase or decrease in the Swiss Franc, Euro, Chinese Yuan and British Pound Sterling against the USD would result in approximately a 4% change in our revenue for the year ended December 31, 2022. See Note 1 to our audited consolidated and combined financial statements for further information on our accounting policies for foreign currency translation.
Fluctuations in currency exchange rates may also impact our Stockholders’ Equity. Amounts invested in our foreign subsidiaries are translated into USD at the exchange rates as of the last day of each reporting period. Any resulting cumulative translation adjustments are recorded in Stockholders’ Equity as Accumulated Other Comprehensive Income (Loss). The cumulative translation adjustments component of Accumulated Other Comprehensive Income (Loss) decreased by $13.5 million for the period of December 31, 2022.
Changes in Fair Value Risk
We account for the Private Warrants in accordance with Accounting Standards Codification “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, we classify the Private Warrants as liabilities at their fair value and adjust 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 our statement of operations. Changes in the fair value of the Private Warrants each reporting period will be adjusted through earnings, subjecting us to non-cash volatility in our results of operations.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Whole Earth Brands, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Whole Earth Brands, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated and combined statements of operations, comprehensive income (loss), equity and cash flows for the year ended December 31, 2022 (Successor), December 31, 2021 (Successor), and for the periods from June 26, 2020 through December 31, 2020 (Successor) and January 1, 2020 through June 25, 2020 (Predecessor), and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the year ended December 31, 2022 (Successor), December 31, 2021 (Successor), and for the periods from June 26, 2020 through December 31, 2020 (Successor) and January 1, 2020 through June 25, 2020 (Predecessor), in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1987.
New York, NY
March 13, 2023
Whole Earth Brands, Inc.
Consolidated Balance Sheets
(In thousands of dollars, except for share and per share data)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Assets | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 28,676 | | | $ | 28,296 | |
Accounts receivable (net of allowances of $1,614 and $1,285, respectively) | 66,653 | | | 69,590 | |
| Inventories | 218,975 | | | 212,930 | |
| Prepaid expenses and other current assets | 10,530 | | | 7,585 | |
| Total current assets | 324,834 | | | 318,401 | |
| | | |
| Property, Plant and Equipment, net | 58,092 | | | 58,503 | |
| | | |
| Other Assets | | | |
| Operating lease right-of-use assets | 18,238 | | | 26,444 | |
| Goodwill | 193,139 | | | 242,661 | |
| Other intangible assets, net | 245,376 | | | 266,939 | |
| Deferred tax assets, net | 539 | | | 1,993 | |
| Other assets | 8,785 | | | 7,638 | |
| Total Assets | $ | 849,003 | | | $ | 922,579 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current Liabilities | | | |
| Accounts payable | $ | 47,002 | | | $ | 55,182 | |
| Accrued expenses and other current liabilities | 27,488 | | | 30,733 | |
| Contingent consideration payable | — | | | 54,113 | |
| Current portion of operating lease liabilities | 8,804 | | | 7,950 | |
| Current portion of long-term debt | 3,750 | | | 3,750 | |
| Total current liabilities | 87,044 | | | 151,728 | |
| Non-Current Liabilities | | | |
| Long-term debt | 432,172 | | | 383,484 | |
| Warrant liabilities | 216 | | | 2,053 | |
| Deferred tax liabilities, net | 32,585 | | | 35,090 | |
| Operating lease liabilities, less current portion | 12,664 | | | 22,575 | |
| Other liabilities | 9,771 | | | 13,778 | |
| Total Liabilities | 574,452 | | | 608,708 | |
Commitments and Contingencies (Note 10) | — | | | — | |
| Stockholders’ Equity | | | |
Preferred shares, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding | — | | | — | |
Common stock, $0.0001 par value; 220,000,000 shares authorized; 41,994,355 and 38,871,646 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | 4 | | | 4 | |
| Additional paid-in capital | 360,777 | | | 330,616 | |
| Accumulated deficit | (85,188) | | | (26,436) | |
| Accumulated other comprehensive (loss) income | (1,042) | | | 9,687 | |
| Total stockholders’ equity | 274,551 | | | 313,871 | |
| Total Liabilities and Stockholders’ Equity | $ | 849,003 | | | $ | 922,579 | |
See Notes to Consolidated and Combined Financial Statements
43
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Operations
(In thousands of dollars, except for per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to June 25, 2020 |
| Product revenues, net | $ | 538,272 | | | $ | 493,973 | | | $ | 147,168 | | | | $ | 128,328 | |
| Cost of goods sold | 398,060 | | | 335,218 | | | 101,585 | | | | 77,627 | |
| Gross profit | 140,212 | | | 158,755 | | | 45,583 | | | | 50,701 | |
| | | | | | | | |
| Selling, general and administrative expenses | 99,735 | | | 113,141 | | | 44,616 | | | | 43,355 | |
| Amortization of intangible assets | 18,623 | | | 18,295 | | | 6,021 | | | | 4,927 | |
| Asset impairment charges | 46,500 | | | — | | | — | | | | 40,600 | |
| Restructuring and other expenses | — | | | 4,503 | | | 1,052 | | | | — | |
| | | | | | | | |
| Operating (loss) income | (24,646) | | | 22,816 | | | (6,106) | | | | (38,181) | |
| | | | | | | | |
| Change in fair value of warrant liabilities | 1,232 | | | 29 | | | — | | | | — | |
| Interest expense, net | (30,600) | | | (24,589) | | | (4,371) | | | | (238) | |
| Loss on extinguishment and debt transaction costs | — | | | (5,513) | | | — | | | | — | |
| Other income (expense), net | 1,051 | | | 196 | | | (578) | | | | 801 | |
| Loss before income taxes | (52,963) | | | (7,061) | | | (11,055) | | | | (37,618) | |
| Provision (benefit) for income taxes | 5,789 | | | (7,144) | | | (2,618) | | | | (3,482) | |
| Net (loss) income | $ | (58,752) | | | $ | 83 | | | $ | (8,437) | | | | $ | (34,136) | |
| | | | | | | | |
| Net (loss) earnings per share: | | | | | | | | |
| Basic | $ | (1.42) | | | $ | 0.00 | | | $ | (0.22) | | | | |
| Diluted | $ | (1.42) | | | $ | 0.00 | | | $ | (0.22) | | | | |
See Notes to Consolidated and Combined Financial Statements
44
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Comprehensive Income (Loss)
(In thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Net (loss) income | $ | (58,752) | | | $ | 83 | | | $ | (8,437) | | | | $ | (34,136) | |
| Other comprehensive income (loss), net of tax: | | | | | | | | |
Net change in pension benefit obligations recognized, net of taxes of $640, $26, $242, and $65, respectively. | 2,740 | | | 98 | | | 831 | | | | 318 | |
| Foreign currency translation adjustments | (13,469) | | | 984 | | | 7,774 | | | | (2,286) | |
| Total other comprehensive (loss) income, net of tax | (10,729) | | | 1,082 | | | 8,605 | | | | (1,968) | |
| Comprehensive (loss) income | $ | (69,481) | | | $ | 1,165 | | | $ | 168 | | | | $ | (36,104) | |
See Notes to Consolidated and Combined Financial Statements
45
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Equity
(In thousands of dollars, except for share data)
| | | | | |
| (Predecessor) |
| Total Equity |
| |
| |
| |
| |
| Balance at December 31, 2019 | $ | 487,750 | |
| Funding to Parent, net | (11,924) | |
| Net loss | (34,136) | |
| Other comprehensive loss, net of tax | (1,968) | |
| Balance at June 25, 2020 | $ | 439,722 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
| Balance at June 26, 2020 (Successor) | 30,926,669 | | | $ | 3 | | | $ | 250,366 | | | $ | (16,703) | | | $ | — | | | $ | 233,666 | |
| Issuance of warrants | — | | | — | | | 7,895 | | | — | | | — | | | 7,895 | |
| Issuance of common stock | 7,500,000 | | | 1 | | | 67,104 | | | — | | | — | | | 67,105 | |
| Net loss | — | | | — | | | — | | | (8,437) | | | — | | | (8,437) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 8,605 | | | 8,605 | |
| Stock-based compensation | — | | | — | | | 1,262 | | | — | | | — | | | 1,262 | |
| Other | — | | | — | | | (948) | | | (302) | | | — | | | (1,250) | |
| Balance at December 31, 2020 (Successor) | 38,426,669 | | | 4 | | | 325,679 | | | (25,442) | | | 8,605 | | | 308,846 | |
| Reclassification of Private Warrants | — | | | — | | | (7,062) | | | (1,077) | | | — | | | (8,139) | |
| Transfer of Private Warrants to Public Warrants | — | | | — | | | 6,057 | | | — | | | — | | | 6,057 | |
| Net income | — | | | — | | | — | | | 83 | | | — | | | 83 | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 1,082 | | | 1,082 | |
| Warrant exercises | 100 | | | — | | | 1 | | | — | | | — | | | 1 | |
| Stock-based compensation | — | | | — | | | 7,854 | | | — | | | — | | | 7,854 | |
| Net share settlements of stock-based awards | 444,877 | | | — | | | (1,913) | | | — | | | — | | | (1,913) | |
| Balance at December 31, 2021 (Successor) | 38,871,646 | | | 4 | | | 330,616 | | | (26,436) | | | 9,687 | | | 313,871 | |
| Transfer of Private Warrants to Public Warrants | — | | | — | | | 605 | | | — | | | — | | | 605 | |
| Net loss | — | | | — | | | — | | | (58,752) | | | — | | | (58,752) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (10,729) | | | (10,729) | |
| | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 4,636 | | | — | | | — | | | 4,636 | |
| Net share settlements of stock-based awards | 259,372 | | | — | | | (418) | | | — | | | — | | | (418) | |
| Net share settlements under management bonus plan | 203,763 | | | — | | | 1,402 | | | — | | | — | | | 1,402 | |
| Shares issued for payment of contingent consideration | 2,659,574 | | | — | | | 23,936 | | | — | | | — | | | 23,936 | |
| Balance at December 31, 2022 (Successor) | 41,994,355 | | | $ | 4 | | | $ | 360,777 | | | $ | (85,188) | | | $ | (1,042) | | | $ | 274,551 | |
See Notes to Consolidated and Combined Financial Statements
46
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Cash Flows
(In thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Operating activities | | | | | | | | |
| Net (loss) income | $ | (58,752) | | | $ | 83 | | | $ | (8,437) | | | | $ | (34,136) | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
| Stock-based compensation | 4,933 | | | 8,715 | | | 1,262 | | | | — | |
| Depreciation | 6,001 | | | 4,727 | | | 1,652 | | | | 1,334 | |
| Amortization of intangible assets | 18,623 | | | 18,295 | | | 6,021 | | | | 4,927 | |
| Deferred income taxes | (456) | | | (12,300) | | | (2,842) | | | | (5,578) | |
| Asset impairment charges | 46,500 | | | — | | | — | | | | 40,600 | |
| Amortization of inventory fair value adjustments | (2,537) | | | (3,396) | | | 12,613 | | | | — | |
| Non-cash loss on extinguishment of debt | — | | | 4,435 | | | — | | | | — | |
| Amortization of debt issuance costs and original issue discount | 1,982 | | | 1,783 | | | 762 | | | | — | |
| Change in fair value of warrant liabilities | (1,232) | | | (29) | | | — | | | | — | |
| Changes in current assets and liabilities: | | | | | | | | |
| Accounts receivable | 1,222 | | | 964 | | | (4,554) | | | | 7,726 | |
| Inventories | (7,684) | | | (22,957) | | | (5,305) | | | | 3,576 | |
| Prepaid expenses and other current assets | 201 | | | (1,030) | | | (2,066) | | | | 3,330 | |
| Accounts payable, accrued liabilities and income taxes | (11,574) | | | 12,050 | | | (7,939) | | | | 507 | |
| Other, net | (3,037) | | | (1,858) | | | (612) | | | | (2,378) | |
| Net cash (used in) provided by operating activities | (5,810) | | | 9,482 | | | (9,445) | | | | 19,908 | |
| | | | | | | | |
| Investing activities | | | | | | | | |
| Capital expenditures | (8,887) | | | (12,198) | | | (4,489) | | | | (3,532) | |
| Acquisitions, net of cash acquired | — | | | (190,231) | | | (456,508) | | | | — | |
| Proceeds from sale of fixed assets | 468 | | | 4,516 | | | — | | | | — | |
| Transfer from trust account | — | | | — | | | 178,875 | | | | — | |
| Net cash used in investing activities | (8,419) | | | (197,913) | | | (282,122) | | | | (3,532) | |
| | | | | | | | |
| Financing activities | | | | | | | | |
| Proceeds from revolving credit facility | 54,000 | | | 25,000 | | | 47,855 | | | | 3,500 | |
| Repayments of revolving credit facility | (3,000) | | | (47,855) | | | — | | | | (8,500) | |
| Long-term borrowings | — | | | 375,000 | | | 140,000 | | | | — | |
| Repayments of long-term borrowings | (3,750) | | | (139,314) | | | (3,500) | | | | — | |
| Debt issuance costs | (719) | | | (11,589) | | | (7,139) | | | | — | |
| Payment of contingent consideration | (29,108) | | | — | | | — | | | | — | |
| Proceeds from sale of common stock and warrants | — | | | 1 | | | 75,000 | | | | — | |
| Tax withholdings related to net share settlements of stock-based awards | (898) | | | (1,913) | | | — | | | | — | |
| Funding to Parent, net | — | | | — | | | — | | | | (11,924) | |
| Net cash provided by (used in) financing activities | 16,525 | | | 199,330 | | | 252,216 | | | | (16,924) | |
See Notes to Consolidated and Combined Financial Statements
47
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Cash Flows (Continued)
(In thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (1,916) | | | 499 | | | 714 | | | | 215 | |
| Net change in cash and cash equivalents | 380 | | | 11,398 | | | (38,637) | | | | (333) | |
| Cash and cash equivalents, beginning of period | 28,296 | | | 16,898 | | | 55,535 | | | | 10,395 | |
| Cash and cash equivalents, end of period | $ | 28,676 | | | $ | 28,296 | | | $ | 16,898 | | | | $ | 10,062 | |
| | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | |
| Interest paid | $ | 28,386 | | | $ | 21,203 | | | $ | 3,328 | | | | $ | 798 | |
| Taxes paid, net of refunds | $ | 9,113 | | | $ | 4,523 | | | $ | 3,091 | | | | $ | 2,244 | |
| Supplemental disclosure of non-cash investing | | | | | | | | |
| Non-cash capital expenditures | $ | — | | | $ | 3,796 | | | $ | — | | | | $ | — | |
See Notes to Consolidated and Combined Financial Statements
48
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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. Additionally, immediately after 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 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 and, collectively, the accounting predecessor. The Company’s financial statement presentation includes the combined financial statements of Mafco Worldwide and Merisant Company as the “Predecessor” for periods prior to the completion of the Business Combination and includes the consolidation of Mafco Worldwide and Merisant Company, for periods after the Closing (referred to as the “Successor”). The combined financial statements for the “Predecessor” periods include the accounts of Mafco Worldwide and Merisant Company which were wholly owned subsidiaries of Flavors Holdings Inc. Flavors Holdings Inc. is an indirect, wholly owned subsidiary of MacAndrews & Forbes Incorporated, which was not acquired in the Business Combination.
Principles of Consolidation—The consolidated and combined 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 consolidated and combined financial statements and accompanying notes. Actual results could differ from these estimates.
Reclassifications—Certain previously reported amounts have been reclassified to conform to the current presentation.
Cash and Cash Equivalents—The Company considers all cash on hand, money market funds, and other highly liquid debt instruments with a maturity, when purchased, of three months or less to be cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses in its existing accounts receivable based on historical losses and current economic conditions. Account balances are charged against the allowance when the Company believes it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. Recoveries of accounts receivable previously offset against the allowance are recorded in the combined statements of operations when received.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
A summary of the activity with respect to the accounts receivable allowances is as follows (in thousands):
| | | | | |
| Accounts receivable allowance balance at December 31, 2019 (Predecessor) | $ | 2,833 | |
| January 1, 2020 to June 25, 2020 additions charged to revenues, costs and expenses | 759 | |
| January 1, 2020 to June 25, 2020 deductions and other | (2,148) | |
| Accounts receivable allowance balance at June 25, 2020 (Predecessor) | $ | 1,444 | |
| June 26, 2020 to December 31, 2020 additions charged to revenues, costs and expenses | 709 | |
| June 26, 2020 to December 31, 2020 deductions and other | (1,198) | |
| Accounts receivable allowance balance at December 31, 2020 (Successor) | $ | 955 | |
| 2021 additions charged to revenues, costs and expenses | 1,783 | |
| 2021 deductions and other | (1,453) | |
| Accounts receivable allowance balance at December 31, 2021 (Successor) | $ | 1,285 | |
| 2022 additions charged to revenues, costs and expenses | 2,711 | |
| 2022 deductions and other | (2,382) | |
| Accounts receivable allowance balance at December 31, 2022 (Successor) | $ | 1,614 | |
Inventories—Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predicable costs of completion, disposal, and transportation. The cost of inventory is determined by the first in, first out or average cost methods.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Additions, improvements, and replacements that extend asset life are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the Company’s property, plant and equipment in service currently ranges as follows: 3 to 40 years for buildings and 1 to 20 years for all other equipment.
When property and equipment are disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gains or losses are included in income from operations. Ordinary repairs and maintenance costs are charged to operating expense as incurred.
Deferred Software Costs—Deferred implementation costs for hosted cloud computing service arrangements are stated at historical cost and amortized on a straight-line basis over the term of the hosting arrangement that the implementation costs relate to. Deferred implementation costs are included in other assets and amortized to selling, general and administrative expenses (“SG&A”). The corresponding cash flows related to deferred software costs will be reported within operating activities consistent with the treatment for payments associated with the service component of the hosting arrangement. The Company reviews the deferred implementation costs for impairment when it believes the deferred costs may no longer be recoverable. As of December 31, 2022 and 2021, deferred software costs associated with cloud computing arrangements were $2.1 million and $1.0 million, respectively. No costs were amortized during 2022 or 2021.
Leases—As of the date of the Business Combination, the Company accounts for leases pursuant to Accounting Standards Codification (“ASC”) Topic 842, “Leases.” Under ASC Topic 842, a right-of-use asset and a lease liability is recorded for all leases with a term greater than 12 months. Lease right-of-use assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using our incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable.
The Company’s lease portfolio includes a factory building, office space, warehouses, material handling equipment, vehicles and office equipment. All of our leases are classified as operating leases.
Goodwill and Other Indefinite-Lived Intangible Assets—Goodwill and other indefinite-lived intangible assets are summarized in Note 6. The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that an asset may be impaired, in accordance with ASC Topic 350, “Intangibles—Goodwill and Other.” Under ASC Topic 350, the impairment review of goodwill and other intangible assets not subject to amortization must be based on estimated fair values.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The Company’s annual impairment review measurement date is in the fourth quarter of each year. In performing the annual assessment, the Company has the option of performing a qualitative assessment to determine if it is more likely than not that a reporting unit has been impaired. As part of the qualitative assessment for the reporting units, the Company evaluates the factors that are specific to the reporting units as well as industry and macroeconomic factors (including changes in interest and discount rates). The reporting unit specific factors may include cost factors, a comparison of current year results to prior year, current year budget and future projected financial performance. The Company also considers the change in the overall enterprise value of the Company compared to the prior year.
If the Company determines that it is more likely than not that a reporting unit is impaired or if the Company elects not to perform the optional qualitative assessment, a quantitative assessment is performed utilizing both the income and market approaches to estimate the fair value of its reporting units. The income approach involves discounting future estimated cash flows. The discount rate used is the value-weighted average of the reporting unit’s estimated cost of equity and debt (“cost of capital”) derived using both known and estimated customary market metrics adjusted for company specific risks. The Company performs sensitivity tests with respect to growth rates and discount rates used in the income approach. In applying the market approach, valuation multiples are derived from historical and projected operating data of selected guideline companies; evaluated and adjusted, if necessary, based on the strengths and weaknesses of the reporting unit relative to the selected guideline companies; and applied to the appropriate historical and/or projected operating data to arrive at an indication of fair value. The Company typically weights the results of the income and market approaches equally. If the reporting unit’s carrying value exceeds its estimated fair value, then an impairment is recorded for the difference, limited to the total amount of goodwill allocated to the reporting unit.
The Company typically evaluates impairment of indefinite-lived intangible assets, which relates to our product formulations, by first performing a qualitative assessment. If the Company elects to bypass the qualitative assessment or determines that it is more likely than not that the fair value of the product formulations is less than its carrying value, a quantitative assessment is then performed using the relief from royalty method under the income approach to estimate the fair value. Some of the more significant assumptions inherent in estimating the fair value include the estimated future annual sales, royalty rates (as a percentage of sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations and a discount rate that reflects the level of risk.
Impairment Review of Long-Lived Assets—In accordance with ASC Topic 360, “Property, Plant and Equipment,” the Company evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset group may be impaired. When such events occur, the Company compares the sum of the future undiscounted cash flows expected to be generated from the asset or asset group over its remaining depreciable life to the carrying value. If this comparison indicates that there is an impairment, the carrying amount of the long-lived asset would then be reduced to the estimated fair value, which generally approximates discounted cash flows. The Company also evaluates the amortization periods of assets to determine whether events or circumstances warrant revised estimates of useful lives. The Company’s applicable long-lived assets include its property, plant and equipment, operating lease right-of-use assets and definite-lived intangible assets.
Income Taxes—The provision for income taxes for the Successor period is determined using the asset and liability method in accordance with ASC Topic 740, “Accounting for Income Taxes.” The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
For the Predecessor period, income taxes as presented herein are attributable to current and deferred income taxes of the Company’s financial statements in a manner that is systematic, rational, and consistent with the asset and liability method described by ASC Topic 740. Accordingly, the Company’s income tax provision during the Predecessor period was prepared following the separate return method. The separate return method applies ASC Topic 740 to the stand-alone financial statements of each member of the combined group as if the group member were a separate taxpayer and a stand-alone enterprise. Use of the separate return method may result in differences when the sum of the amounts allocated to stand-alone tax provisions are compared with amounts presented in the combined financial statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein. The combined financial statements reflect the Company’s portion of income taxes payable as if the Company had been a separate taxpayer.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The Company made a policy election to treat the income tax due on United States (“U.S.”) inclusion of the global intangible low taxed income (“GILTI”) provisions as a period expense when incurred.
Uncertainty in Income Taxes—The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued under ASC Topic 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company provides loss contingencies for federal, state and international tax matters relating to potential tax examination issues, planning initiatives and compliance responsibilities. The development of these reserves requires judgements about tax issues, potential outcomes and timing, which if different, may materially impact the Company’s financial condition and results of operations. The Company classifies interest and penalties associated with income taxes as a component of provision (benefit) for income taxes in the consolidated and combined statements of operations.
Pension Plans—The Company has defined benefit pension plans and defined contribution 401(k) plans, which cover certain current and former employees of the Company who meet eligibility requirements. Benefits for the defined benefit pension plans are based on years of service and, in some cases, the employee’s compensation and participation was frozen to all employees hired on or after August 1, 2017. The Company’s policy is to contribute annually the amount required pursuant to the Employee Retirement Income Security Act. The Company froze the qualified pension plan for all participants on December 31, 2019 and froze the non-qualified pension plans on December 31, 2022. Certain subsidiaries of the Company outside the U.S. have retirement plans that provide certain payments upon retirement. The Company recognizes in its balance sheet the funded status of its defined benefit pension plans, measured as the difference between the fair value of the plan assets and the benefit obligation and recognizes changes in the funded status of the defined benefit pension plans as accumulated other comprehensive loss, net of tax, within accumulated other comprehensive income (loss) to the extent such changes are not recognized in earnings as components of periodic net benefit cost (see Note 12). These amounts are subsequently amortized within other income (expense) in future periods using the corridor approach. The corridor is 10% of the greater of the market-related value of the plan’s assets or projected benefit obligation. Any actuarial gains and losses in excess of the corridor are then amortized over an appropriate term.
Research and Development Costs—The Company expenses costs as incurred for product research and development within SG&A. Research and development expenses were approximately $3.9 million for 2022, $3.4 million for 2021, $1.6 million for the period from June 26, 2020 to December 31, 2020, and $1.7 million for the period from January 1, 2020 to June 25, 2020.
Stock-Based Compensation—In accordance with ASC Topic 718, “Compensation—Stock Compensation,” the Company recognizes stock-based compensation cost in its consolidated statements of operations. Stock-based compensation cost is measured at the grant date for equity-classified awards and at the end of each reporting period for liability-classified awards based on the estimated fair value of the awards. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. Additional information pertaining to the Company’s stock-based compensation is provided in Note 13.
Revenue Recognition—In accordance with ASC Topic 606, “Revenue from Contracts with Customers,” the Company recognizes revenue when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenues are primarily derived from customer orders for the purchase of products and are generally recognized when the product is shipped or delivered depending on the arrangement with the customer. The Company made an accounting policy election to exclude from the measurement of the transaction price sales taxes and all other items of a similar nature, and also elected to account for shipping and handling activities as a fulfillment of the promise to transfer the goods. Accordingly, shipping and handling costs are included in cost of sales.
Branded CPG may offer promotional activities (e.g. coupons, trade discounts and other promotional activities) to its customers. These variable consideration amounts are estimated for each customer based on specific arrangements/agreements, an analysis of historical volume, and/or current activity with that customer. Reassessment of variable
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
consideration estimates is done at each reporting date throughout the contract period until the uncertainty is resolved (e.g. promotional campaign is closed and settled with customer).
Historically, the Company has encountered limited instances whereby customers rejected products as a result of orders being materially inaccurate and/or products being defective. The Company tracks the reason codes for those customer returns. Based on that, the materiality of such returns is assessed. A return reserve is calculated (based on historical data as described above) every month to record an adjustment to net sales; these adjustments have not been significant.
The following table presents the Company’s revenues disaggregated by product categories (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Sweeteners and adjacencies | $ | 422,638 | | | $ | 389,174 | | | $ | 96,857 | | | | $ | 80,749 | |
| Licorice products | 115,634 | | | 104,799 | | | 50,311 | | | | 47,579 | |
| Total product revenues, net | $ | 538,272 | | | $ | 493,973 | | | $ | 147,168 | | | | $ | 128,328 | |
The following table presents revenues disaggregated by business and geographic region (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Branded CPG: | | | | | | | | |
| North America | $ | 299,871 | | | $ | 266,661 | | | $ | 40,273 | | | | $ | 29,926 | |
| Europe | 67,962 | | | 76,392 | | | 35,384 | | | | 31,838 | |
| India, Middle East and Africa | 17,828 | | | 13,363 | | | 6,727 | | | | 3,778 | |
| Asia-Pacific | 22,371 | | | 20,787 | | | 8,172 | | | | 9,328 | |
| Latin America | 14,606 | | | 11,971 | | | 6,301 | | | | 5,879 | |
| Flavors & Ingredients | 115,634 | | | 104,799 | | | 50,311 | | | | 47,579 | |
| Total product revenues, net | $ | 538,272 | | | $ | 493,973 | | | $ | 147,168 | | | | $ | 128,328 | |
The Company records an allowance for doubtful accounts as an estimate of the inability of its customers to make their required payments. The determination of the allowance requires the Company to make assumptions about the future ability to collect amounts owed from customers.
Marketing, Advertising, Consumer Incentives and Trade Promotions—The Company promotes its products with marketing activities, including advertising, consumer incentives and trade promotions. On an annual basis, advertising costs are expensed as incurred or in the year in which the related advertisement initially appears. Marketing and advertising expense was $11.8 million in 2022, $17.0 million in 2021, $6.2 million for the period from June 26, 2020 through December 31, 2020, and $4.8 million from January 1, 2020 through June 25, 2020.
Consumer incentive and trade promotion activities are deducted from revenue based on amounts estimated as being or becoming due to customers and consumers at the end of a period, based principally on the Company’s historical utilization and redemption rates. These deductions are estimated and recorded upon sale of product by the Company and revised as necessary at each period end.
Fair Value Measurements—The Company measures fair value using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Major Customers and Credit Concentration—The Company sells products to customers in the U.S. and internationally. The Company performs ongoing credit evaluations of customers, and generally does not require collateral on trade accounts receivable. Allowances are maintained for potential credit losses and such losses have been within management’s expectations.
Foreign Currency Translation—The Company has determined that the functional currency for each combined subsidiary is its local currency, except for certain entities whose functional currency is the U.S. dollar. Assets and liabilities of entities outside the U.S. are translated into U.S. dollars at the exchange rates in effect at the end of each period and income statement accounts are translated at each period’s average exchange rate. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of accumulated other comprehensive income (loss) on the balance sheet, except for any entities which may operate in highly inflationary economies. Gains and losses resulting from transactions in other than functional currencies are reflected in operating results, except for transactions of a long-term nature.
Remeasurements of European entities whose functional currency is the U.S. dollar as well as translation adjustments for entities operating in highly inflationary economies and impacts of foreign currency transactions are recognized currently in other income (expense), net in the accompanying consolidated and combined statements of operations. The Company had foreign exchange gains, net of $0.1 million in 2022, foreign exchange losses, net of $0.2 million in 2021, $0.9 million for the period from June 26, 2020 through December 31, 2020, and foreign exchange gains, net of $0.5 million from January 1, 2020 through June 25, 2020.
Beginning January 1, 2019, the Company was required to apply highly-inflationary accounting to its Argentinian subsidiary. This accounting treatment requires a change in the subsidiary’s functional currency from the local currency (Argentinian Peso) to the parent’s reporting currency (USD). This highly-inflationary classification results from the fact that the cumulative inflation rate for the preceding 3 year period exceeded 100 percent as of June 30, 2018. Accordingly, effective January 1, 2019, all Argentinian Peso denominated monetary assets and liabilities are considered foreign currency denominated assets and liabilities and are revalued to USD (the functional currency) with remeasurement adjustments in the period recorded in the statement of operations. The USD will be the functional currency until the economic environment in Argentina ceases to be considered highly-inflationary.
The Company recorded $1.2 million of expense related to remeasurement adjustments in the consolidated statements of operations for the year ended December 31, 2022 and $0.3 million of expense for both the year ended December 31, 2021 and the period of June 26, 2020 to December 31, 2020. The impact was not material for the period of January 1, 2020 to June 25, 2020.
Restructuring and Employee Termination Benefits—In previous years 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 $4.5 million and $1.1 million during the year ended December 31, 2021 and for the period from June 26, 2020 to December 31, 2020, respectively. This included facility exit and other related costs of $3.9 million in 2021, and employee termination benefits of $0.6 million in 2021 and $1.1 million for the period from June 26, 2020 to December 31, 2020. In 2022, the Company paid employee termination benefits of $0.8 million. The Company had no accrued severance expense related to the restructuring plans as of December 31, 2022 and $0.8 million at December 31, 2021.
Termination benefits are payable when an employee is involuntarily terminated, or whenever an employee accepts voluntary termination in exchange for termination benefits. One-time involuntary termination benefits are recognized as a liability when the termination plan meets certain criteria and has been communicated to employees. If employees are required to render future service in order to receive these one-time termination benefits, the liability is recognized ratably over the future service period.
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
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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.
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 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.
Accounting Standards Adopted in the Current Year—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 (ASC 740) - Simplifying the Accounting for Income Taxes.” The standard removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis difference. The standard also 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 audited consolidated and combined financial statements and related disclosures.
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 adopted this standard during the second quarter of 2022. The adoption of this standard did not have a material impact on the Company’s consolidated and combined financial statements and related disclosures.
Accounting Standards Not Yet Adopted—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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 2: BUSINESS COMBINATIONS
Swerve Acquisition—On November 10, 2020, the Company executed and closed a definitive Equity Purchase Agreement (the “Purchase Agreement”) with RF Development, LLC (“RF Development”), Swerve, L.L.C. (“Swerve LLC”) and Swerve IP, L.L.C. (“Swerve IP” and together with Swerve LLC, “Swerve”). Swerve is a manufacturer and marketer of a portfolio of zero and reduced sugar, keto-friendly, and plant-based sweeteners and grain free, gluten free and low/no sugar baking mixes. The Company purchased all of the issued and outstanding equity interests of both Swerve LLC and Swerve IP from RF Development for $80 million in cash, subject to customary post-closing adjustments. The transaction was funded through a combination of available cash on hand and approximately $47.9 million under the Company’s $50 million revolving loan facility. In connection with the acquisition of Swerve, the Company incurred transaction-related costs of $0.3 million and $3.2 million for the years ended December 31, 2021 and December 31, 2020, respectively. Swerve is included within the Company’s Branded CPG reportable segment. Swerve’s results are included in the Company’s consolidated statement of operations from the date of acquisition.
The following summarizes the purchase consideration (in thousands):
| | | | | |
| Base cash consideration | $ | 80,000 | |
| Closing adjustment | (968) | |
| Total Purchase Price | $ | 79,032 | |
The Company recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):
| | | | | |
| |
| Accounts receivable | $ | 3,223 | |
| Inventories | 6,824 | |
| Prepaid expenses and other current assets | 223 | |
| Property, plant and equipment, net | 143 | |
| Operating lease right-of-use assets | 76 | |
| Intangible assets | 36,300 | |
| |
| Other assets | 3 | |
| Total assets acquired | 46,792 | |
| Accounts payable | 3,477 | |
| Accrued expenses and other current liabilities | 288 | |
| Current portion of operating lease liabilities | 48 | |
| Operating lease liabilities, less current portion | 28 | |
| |
| |
| Total liabilities assumed | 3,841 | |
| Net assets acquired | 42,951 | |
| Goodwill | 36,081 | |
| Total Purchase Price | $ | 79,032 | |
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 | $ | 3,200 | | | 10 |
| Tradenames | 33,100 | | | 25 |
| $ | 36,300 | | | |
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. The entire amount of the purchase price allocated to goodwill will be deductible for income tax purposes pursuant to IRC Section 197 over a 15 year period.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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 fourth quarter of 2021.
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 is 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 $4.7 million in the years ended December 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 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 | |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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 is 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The results of the Company’s operations for the year ended December 31, 2021 includes the results of Wholesome since February 5, 2021. Product revenues, net and operating income of Wholesome included in the Company’s consolidated statement of operations for the year ended December 31, 2021 were $179.6 million and $20.6 million, respectively.
Pro Forma Financial Information—The following unaudited pro forma financial information summarizes the results of operations for the Company as though the Business Combination and Swerve acquisition had occurred on January 1, 2019 and the Wholesome acquisition had occurred on January 1, 2020 (in thousands):
| | | | | | | | | | | |
| Pro Forma Statements of Operations |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
| Revenue | $ | 514,353 | | | $ | 499,652 | |
| Net income (loss) | $ | 14,082 | | | $ | (38,266) | |
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 acquisitions. 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 Business Combination and Swerve acquisitions been consummated on January 1, 2019 and the Wholesome acquisition been consummated on January 1, 2020.
The Successor and Predecessor periods have been combined in the pro forma financial information for the year ended December 31, 2020. The pro forma financial information 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, depreciation expense for certain property, plant and equipment that have been adjusted to fair value, 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 year ended December 31, 2022 include Wholesome for the entire period and therefore pro forma financial information is not required.
NOTE 3: LEASES
The Company’s lease portfolio includes factory buildings, office space, warehouses, material handling equipment, vehicles and office equipment. The Company subleases some of its unused office space to third parties. Included in the Wholesome purchase price allocation are right-of-use assets and operating lease liabilities of $7.6 million related to two leases acquired. All leases are classified as operating leases.
Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of lease renewal options is at the Company’s sole discretion. For purposes of calculating operating lease liabilities, lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option.
Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment.
The Company’s lease agreements do not contain any residual value guarantees. Some leases include variable payments that are based on the usage and occupancy of the leased asset. The Company has elected not to record leases with an initial term of twelve months or less on the balance sheet.
For real estate and vehicle leases, the Company elected the practical expedient to not separate lease from non-lease components within the contract. Electing this practical expedient means the Company accounts for each lease component and the related non-lease component together as a single component. For equipment leases, the Company has not elected this practical expedient and separates the non-lease components from the lease component.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 |
| Operating lease expense | $ | 8,370 | | | $ | 5,658 | | | $ | 1,662 | |
| Variable lease expense | 1,634 | | | 1,022 | | | 616 | |
| Short-term lease expense | 711 | | | 988 | | | 47 | |
| Sublease income | (326) | | | (508) | | | (290) | |
| Total | $ | 10,389 | | | $ | 7,160 | | | $ | 2,035 | |
Lease expense under prior lease accounting rules for the period of January 1, 2020 to June 25, 2020 was $2.2 million. Sublease income was $0.3 million from January 1, 2020 through June 25, 2020.
The following table presents the future maturities of the Company’s lease obligations as of December 31, 2022 (in thousands):
| | | | | |
| 2023 | $ | 9,458 | |
| 2024 | 6,834 | |
| 2025 | 3,770 | |
| 2026 | 1,310 | |
| 2027 | 879 | |
| Thereafter | 546 | |
| Total lease payments | 22,797 | |
| Less: imputed interest | (1,329) | |
| Total operating lease liabilities | $ | 21,468 | |
The weighted-average remaining lease term was 3.0 years and the weighted-average discount rate was 4.19% as of December 31, 2022. The weighted-average remaining lease term was 4.0 years and the weighted-average discount rate was 3.99% as of December 31, 2021.
Cash paid for amounts included in the measurement of the lease liability was $8.9 million, $5.7 million and $1.7 million for the years ended December 31, 2022 and 2021 and for the period from June 26, 2020 to December 31, 2020, respectively. Right-of -use assets obtained in exchange for lease liabilities was $0.7 million, $12.9 million and $0.1 million for the years ended December 31, 2022 and 2021 and for the period from June 26, 2020 to December 31, 2020, respectively.
NOTE 4: INVENTORIES
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Raw materials and supplies | $ | 129,131 | | | $ | 129,712 | |
| Work in process | 1,835 | | | 1,480 | |
| Finished goods | 88,009 | | | 81,738 | |
| Total inventories | $ | 218,975 | | | $ | 212,930 | |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Machinery, equipment and other | $ | 39,695 | | | $ | 32,048 | |
| Buildings and improvements | 21,565 | | | 21,243 | |
| 61,260 | | | 53,291 | |
| Accumulated depreciation | (11,410) | | | (6,591) | |
| 49,850 | | | 46,700 | |
| Land | 5,951 | | | 6,891 | |
| Construction in progress | 2,291 | | | 4,912 | |
| Property, plant and equipment, net | $ | 58,092 | | | $ | 58,503 | |
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | December 31, 2021 |
| Gross | | Accumulated Amortization | | Net | | | Gross | | Accumulated Amortization | | Net |
| Other intangible assets subject to amortization | | | | | | | | | | | | |
Customer relationships (useful life of 5 to 10 years) | $ | 105,298 | | | $ | (26,137) | | | $ | 79,161 | | | | $ | 106,013 | | | $ | (14,478) | | | $ | 91,535 | |
Tradenames (useful life of 25 years) | 171,013 | | | (15,498) | | | 155,515 | | | | 173,522 | | | (8,818) | | | 164,704 | |
| Total | $ | 276,311 | | | $ | (41,635) | | | $ | 234,676 | | | | $ | 279,535 | | | $ | (23,296) | | | $ | 256,239 | |
| Other intangible assets not subject to amortization | | | | | | | | | | | | |
| Product formulations | | | | | 10,700 | | | | | | | | 10,700 | |
| Total other intangible assets, net | | | | | 245,376 | | | | | | | | 266,939 | |
| Goodwill | | | | | 193,139 | | | | | | | | 242,661 | |
| Total goodwill and other intangible assets | | | | | $ | 438,515 | | | | | | | | $ | 509,600 | |
The Company amortizes its intangible assets subject to amortization on a straight-line basis over their respective useful lives. The remaining intangible assets subject to amortization as of December 31, 2022 have a weighted-average remaining useful life of approximately 17.6 years, including weighted-average remaining useful lives of approximately 7.2 years for customer relationships and approximately 22.8 years for tradenames. The Successor’s amortization expense for intangible assets was $18.6 million and $18.3 million for the years ended December 31, 2022 and 2021, respectively, and $6.0 million for the period from June 26, 2020 through December 31, 2020. The Predecessor’s amortization expense for intangible assets was $4.9 million for the period from January 1, 2020 to June 25, 2020.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Amortization expense relating to amortizable intangible assets as of December 31, 2022 for the next five years is expected to be as follows (in thousands):
| | | | | |
| 2023 | $ | 18,612 | |
| 2024 | 18,612 | |
| 2025 | 18,373 | |
| 2026 | 18,147 | |
| 2027 | 16,924 | |
The changes in the carrying amounts of goodwill during the years ended December 31, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Branded CPG | | Flavors & Ingredients | | Total |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at December 31, 2020 | $ | 150,323 | | | $ | 3,214 | | | $ | 153,537 | |
| | | | | |
| Purchase accounting adjustments | 2,301 | | | — | | | 2,301 | |
| Acquisition of Wholesome | 80,763 | | | — | | | 80,763 | |
| Currency translation adjustment | 5,470 | | | 590 | | | 6,060 | |
| Balance at December 31, 2021 | $ | 238,857 | | | $ | 3,804 | | | $ | 242,661 | |
| Impairment | (46,500) | | | — | | | (46,500) | |
| Currency translation adjustment | (2,870) | | | (152) | | | (3,022) | |
| Balance at December 31, 2022 | $ | 189,487 | | | $ | 3,652 | | | $ | 193,139 | |
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets—As disclosed in Note 1, the Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that an asset may be impaired, in accordance with ASC Topic 350.
The Company performs its annual impairment procedures for all of its reporting units and indefinite-lived intangible assets during the fourth quarter of each year. In 2022, the Company performed a quantitative impairment test and estimated the fair values of the reporting units utilizing both the income and market approach to determine the fair values of the Company’s reporting units.
As a result of the 2022 impairment test, the Company determined that the carrying values of the North America and LATAM reporting units within the Branded CPG segment exceeded their respective fair values and as a result, the Company recognized a non-cash impairment charge of $46.5 million in the fourth quarter of 2022, which included $42.5 million related to the North America reporting unit and $4.0 million related to the LATAM reporting unit. The impairment was primarily due to current macroeconomic conditions, including rising interest rates and continued currency devaluation in LATAM, and higher supply chain costs and other inflationary pressures which contributed to lower earnings forecasts for our North America and LATAM reporting units. The income approach incorporated estimated future cash flows and a terminal value discounted to present value using an appropriate risk-adjusted discount rate. The estimated future cash flows reflected management’s best estimate of economic and market conditions over the projected period including forecasted revenue, gross margins, tax rates, capital expenditures, depreciation and amortization, changes in working capital requirements and terminal growth rates. The market approach estimated the fair value of the North America reporting unit using Company specific and guideline company valuation metrics and was equally weighted with the income approach to determine the fair value of the North America reporting unit. The Company used the income approach to determine the fair value of the LATAM reporting unit. After the impairments, the goodwill carrying amount of the North America and LATAM reporting units was approximately $80.5 million and $0 million, respectively.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
In the fourth quarter of 2021, the Company performed a quantitative impairment test and concluded that their fair values exceeded their respective carrying values and therefore, there was no impairment. In the fourth quarter of 2020, the Company used a qualitative assessment for its impairment tests and concluded that it was more likely than not that their fair values exceeded their respective carrying values and therefore, did not result in an impairment. In the first quarter of 2020, the Predecessor performed an interim impairment assessment at March 31, 2020 as the on-going macroeconomic disruption and uncertainty caused by the COVID-19 pandemic, including the impact on enterprise valuations across sectors, represented events that indicated the carrying value of goodwill and indefinite-lived intangible assets of the Predecessor may not be recoverable. For the interim impairment assessment of indefinite-lived intangible assets, the Predecessor used the income approach to determine fair values. The income approach used the discounted cash flow method which requires assumptions related to projected operating results and a discount rate using a market-based weighted-average cost of capital. The financial projections reflected management’s best estimate of economic and market conditions over the projected period including forecasted revenue growth, gross margins, tax rate, capital expenditures, depreciation and amortization, changes in working capital requirements and the terminal growth rates. It was determined that the carrying value of the indefinite-lived intangible assets at Flavors & Ingredients exceeded their fair value and a non-cash impairment charge of $22.9 million was recorded in the first quarter of 2020. For the interim impairment assessment of goodwill as of March 31, 2020, the Predecessor utilized a market approach to estimate fair value based upon the then proposed purchase price of the Business Combination from a willing buyer in an active open market transaction. As a result of the interim quantitative impairment assessment, the carrying value of the Mafco Worldwide and Merisant reporting units exceeded their fair value by $6.6 million and $11.1 million, respectively, and a non-cash goodwill impairment charge of $17.7 million was recorded in the first quarter of 2020.
NOTE 7: DEBT
Debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Term loan, due 2028 | $ | 368,438 | | | $ | 372,187 | |
| Revolving credit facility, due 2026 | 76,000 | | | 25,000 | |
| Less: current portion | (3,750) | | | (3,750) | |
| Less: unamortized discount and debt issuance costs | (8,516) | | | (9,953) | |
| Total long-term debt | $ | 432,172 | | | $ | 383,484 | |
Maturities—The Company’s debt and other obligations outstanding as of December 31, 2022 mature as shown below (in thousands):
| | | | | |
| 2023 | $ | 3,750 | |
| 2024 | 3,750 | |
| 2025 | 3,750 | |
| 2026 | 79,750 | |
| 2027 | 3,750 | |
| Thereafter | 349,688 | |
| Total debt | 444,438 | |
| Unamortized discounts | (8,516) | |
| Total debt, net of unamortized discounts | $ | 435,922 | |
Loan Agreement—At December 31, 2022, 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 $125 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”).
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
As of December 31, 2022 and December 31, 2021, term loan borrowings were $359.9 million and $362.2 million, respectively, net of unamortized discount and debt issuance costs of $8.5 million and $10.0 million, respectively. There were $76.0 million and $25.0 million of borrowings under the revolving credit facility as of December 31, 2022 and December 31, 2021, respectively. Additionally, as of December 31, 2022 and December 31, 2021, the Company’s unamortized debt issuance costs related to the revolving credit facility were $2.0 million and $1.8 million, respectively, which are included in other assets in the consolidated balance sheet. As of both December 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.
In connection with the closing of the Wholesome Transaction, on February 5, 2021, further discussed in Note 2, the Company and certain of its subsidiaries entered into an amendment and restatement agreement (the “Amended and Restated Agreement”) with Toronto Dominion (Texas) LLC, which amended and restated its 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. As of the date of the Amended and Restated Credit Agreement, 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.
On June 15, 2022, the Company and certain of its subsidiaries entered into a first amendment (the “Amendment”) to the Amended and Restated Agreement dated as of February 5, 2021. The Amendment increased the aggregate principal amount of the Revolving Credit Facility from $75 million to $125 million (the “Amended Revolving Credit Facility”) and transitioned from LIBOR to Secured Overnight Financing Rate (“SOFR”) as the benchmark for purposes of calculating interest for all loans outstanding under the Amended and Restated Credit Agreement. At the election of the Company, loans outstanding under the Amended and Restated Credit Agreement will accrue interest at a rate per annum equal to (i) term SOFR plus 0.10%, 0.15%, or 0.25% in case of, respectively, a one-month, three-month, or six-month interest period (“Adjusted Term SOFR”), or (ii) the greater of the prime rate, the federal funds effective rate plus 0.50%, and one-month Adjusted Term SOFR plus 1.00%, in each case plus the applicable margin which is equal to (i) with respect to the Amended Revolving Credit Facility and letters of credit, (A) 2.75%, in the case of base rate advances, and (B) 3.75% in the case of SOFR advances, and (ii) with respect to the Term Loan Facility, (A) 3.50%, in the case of base rate advances, and (B) 4.50% in the case of SOFR advances. In connection with the Amendment, the Company paid fees and incurred transactions costs of $0.7 million, all of which was deferred.
The transition to SOFR did not materially impact the interest rates applied to the Company’s borrowings. No other material changes were made to the terms of the Company’s Amended and Restated Agreement as a result of the Amendment.
The obligations under the Credit Facilities are guaranteed by certain direct or indirect wholly-owned domestic subsidiaries of the Company, other than certain excluded subsidiaries, including, but not limited to, immaterial subsidiaries and foreign subsidiaries. The Credit Facilities are secured by substantially all of the personal property of the Company and the guarantor subsidiaries (in each case, subject to certain exclusions and qualifications).
The Credit Facilities require the Company to make certain mandatory prepayments, with (i) 100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property in excess of $5 million in any fiscal year, subject to the ability to reinvest such proceeds and certain other exceptions, (ii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the definitive agreements (but excluding debt incurred to refinance the Credit Facilities) and (iii) 50% of “Excess Cash Flow,” as defined in the Amended and Restated Credit Agreement, with a reduction to 25% if the total net leverage ratio for the fiscal year is less than or equal to 3.50 to 1.00 but greater than 3.00 to 1.00, and a reduction to 0% if the total net leverage ratio for the fiscal year is less than or equal to 3.00 to 1.00. The Company also is required to make quarterly amortization payments equal to 0.25% per annum of the original principal amount of the Term Loan Facility (subject to reductions by optional and mandatory prepayments of the loans).
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 8: 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 December 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.
The exercise price and number of ordinary shares issuable upon exercise of the Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. If the number of shares of Common Stock purchasable upon the exercise of the Warrants is adjusted, the Warrant price shall be adjusted proportionally. In no event will the Company be required to net cash settle the Warrants. Additionally, the Warrants became exercisable as of July 27, 2020 and expire five years from the date of the Business Combination or earlier upon redemption or liquidation.
There were no Warrants exercised for shares of the Company’s common stock in the year ended December 31, 2022. There were 200 Warrants exercised for 100 shares of the Company’s common stock in the year ended December 31, 2021.
Public Warrants—The Public Warrants are subject to redemption by the Company:
•in whole and not in part;
•at a price of $0.01 per public warrant;
•upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
•if, and only if, the reported last sale price of the ordinary shares for any 20 trading days within a 30-day trading period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders equals or exceeds $18 per share (as adjusted).
The Company may not redeem the warrants as described above unless a registration statement under the Securities Act covering the issuance of the ordinary shares issuable upon exercise of the warrants is then effective and a current prospectus relating to those ordinary shares is available throughout the 30-day redemption period. If any such registration statement does not remain effective after closing of the Business Combination, the Company has the right to redeem the warrants on a “cashless” exercise basis. The public warrant holders only have the right to exercise their warrants pursuant to a “cashless” exercise if the Company does not maintain an effective registration statement.
Private Warrants—The Private Warrants are identical to the Public Warrants, except that so long as they are held by the PIPE Investors or any permitted transferees, as applicable, the Private Warrants: (i) may be exercised for cash or on a cashless basis, (ii) were not allowed to be transferred, assigned or sold until thirty (30) days after the closing of the Business Combination, and (iii) shall not be redeemable by the Company. Upon the transfer of a Private Warrant to a party other than a PIPE Investor or a permitted transferee, the Private Warrants become Public Warrants and the fair market value of the Private Warrants at the date of transfer is reclassified to equity. See Note 1 for additional discussion.
NOTE 9: FAIR VALUE MEASUREMENTS
The Company measures and records in its consolidated and combined 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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, net of unamortized deferred financing costs and fees. At December 31, 2022, the estimated fair value of the term loan was $338.0 million as compared to a carrying value of $359.9 million. At December 31, 2021, the estimated fair value of the term loan approximated the carrying value of $362.2 million. The estimated fair value of the outstanding principal balance of the term loan utilized Level 2 inputs as it is based on quoted market prices for identical or similar instruments. The fair value of the revolving facility at both December 31, 2022 and 2021 approximated carrying value.
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 December 31, 2022 and 2021.
The fair value of the Private Warrants was estimated at December 31, 2022 and 2021using a Black-Scholes options pricing model and the following assumptions:
| | | | | | | | | | | | | | |
| Input | | December 31, 2022 | | December 31, 2021 |
| Asset price | | $ | 4.07 | | $ | 10.74 |
| Exercise price | | $ | 11.50 | | $ | 11.50 |
| Risk-free interest rate | | 4.32 | % | | 1.04 | % |
| Expected volatility | | 63.0 | % | | 41.0 | % |
| Expected term (years) | | 2.49 | | 3.49 |
| Dividend yield | | 0.0 | % | | 0.0 | % |
The fair value of warrant liabilities as of December 31, 2022 was $0.2 million. The changes in the warrant liabilities during the years ended December 31, 2022 and 2021 were as follows (in thousands):
| | | | | | | | |
| Reclassification of fair value of Private Warrants to warrant liabilities as of January 1, 2021 | | $ | 8,139 | |
| Cumulative impact of change in fair value of Private Warrants in 2020 | | (1,161) | |
| Transfer of Private Warrants to Public Warrants | | (6,057) | |
| Change in fair value of warrant liabilities in 2021 | | 1,132 | |
| 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 2022 | | (1,232) | |
| Fair value of warrant liabilities as of December 31, 2022 | | $ | 216 | |
NOTE 10: 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 consolidated and combined financial position or results of operations.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
As of December 31, 2022, the Company had obligations to purchase approximately $75.8 million and $1.8 million of raw material during 2023 and 2024, respectively. In addition, the Company had commitments under purchase obligations related to market data research and technology services totaling approximately $4.9 million, of which $3.1 million was short-term and $1.8 million was long-term.
NOTE 11: INCOME TAXES
For the Successor period, 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.
For the Predecessor period, income taxes as presented herein attribute current and deferred income taxes of the Company’s financial statements in a manner that is systematic, rational, and consistent with the asset and liability method described by ASC 740, “Income Taxes.” Accordingly, the Company’s income tax provision during the predecessor period was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the combined group as if the group member were a separate taxpayer and a stand-alone enterprise. Use of the separate return method may result in differences when the sum of the amounts allocated to stand-alone tax provisions are compared with amounts presented in the combined financial statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein. The combined financial statements reflect the Company’s portion of income taxes payable as if the Company had been a separate taxpayer.
In August 2022, the Inflation Reduction Act (“IRA”) and CHIPS and Science Act (“CHIPS Act”) were both enacted. This new legislation includes the implementation of a new corporate alternative minimum tax, an excise tax on stock buybacks, and tax incentives for energy and climate initiatives, among other provisions. The income tax provisions of the IRA or the CHIPS Act had limited applicability to the Company and did not have a material impact on the Company’s consolidated and combined financial statements.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhanced recoverability of alternative minimum tax credit carryforwards. The income tax provisions of the CARES Act had limited applicability to the Company and did not have a material impact on the Company’s consolidated and combined financial statements.
Components of the income tax provision (benefit) were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Current: | | | | | | | | |
| Federal | $ | (364) | | | $ | 916 | | | $ | (969) | | | | $ | 51 | |
| State and local | 419 | | | 283 | | | 54 | | | | 16 | |
| Foreign | 6,190 | | | 3,957 | | | 1,139 | | | | 2,029 | |
| 6,245 | | | 5,156 | | | 224 | | | | 2,096 | |
| Deferred: | | | | | | | | |
| Federal | (2,944) | | | (6,498) | | | (2,192) | | | | (4,262) | |
| State and local | (581) | | | (2,801) | | | 138 | | | | (259) | |
| Foreign | 3,069 | | | (3,001) | | | (788) | | | | (1,057) | |
| (456) | | | (12,300) | | | (2,842) | | | | (5,578) | |
| Total provision (benefit) for income taxes | $ | 5,789 | | | $ | (7,144) | | | $ | (2,618) | | | | $ | (3,482) | |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The following is a reconciliation of income tax provision (benefit) computed at the U.S. federal statutory rate to income tax provision (benefit) in the consolidated and combined statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| (Loss) income before income taxes: | | | | | | | | |
| Domestic | $ | (86,952) | | | $ | (36,205) | | | $ | (18,981) | | | | $ | (49,477) | |
| Foreign | 33,989 | | | 29,144 | | | 7,926 | | | | 11,859 | |
| Total (loss) income before income taxes | $ | (52,963) | | | $ | (7,061) | | | $ | (11,055) | | | | $ | (37,618) | |
| | | | | | | | |
| Federal income tax rate | 21.0% | | 21.0% | | 21.0% | | | 21.0% |
| Federal income taxes | $ | (11,122) | | | $ | (1,483) | | | $ | (2,322) | | | | $ | (7,900) | |
| State and local taxes | (1,666) | | | (3,572) | | | 1,812 | | | | (278) | |
| Foreign rate differential | (545) | | | (1,431) | | | (70) | | | | (125) | |
| Change in tax rates | 295 | | | 225 | | | 735 | | | | — | |
| Change in uncertain tax positions | 6 | | | (1,005) | | | 40 | | | | (651) | |
| Change in valuation allowance | 4,588 | | | 2,657 | | | (1,474) | | | | 883 | |
| Goodwill impairment | 9,765 | | | — | | | — | | | | 3,717 | |
| U.S. effects of international operations | 5,603 | | | 3,041 | | | 320 | | | | 2,084 | |
| Tax credits | (3,250) | | | (2,763) | | | (2,161) | | | | (1,201) | |
| Section 162(m) limitation | 87 | | | 206 | | | — | | | | — | |
| Transaction costs | 31 | | | 385 | | | — | | | | — | |
| Stock-based compensation | 422 | | | 502 | | | — | | | | — | |
| Switzerland tax ruling | — | | | (4,057) | | | — | | | | — | |
| Foreign withholding taxes | 1,043 | | | 350 | | | — | | | | — | |
| Other | 532 | | | (199) | | | 502 | | | | (11) | |
| Total provision (benefit) for income taxes | $ | 5,789 | | | $ | (7,144) | | | $ | (2,618) | | | | $ | (3,482) | |
| | | | | | | | |
| Effective tax rate | (10.9)% | | 101.2% | | 23.7% | | | 9.3% |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Significant components of the Company’s net deferred tax assets and liabilities were as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Deferred tax assets: | | | |
| Accounts receivable | $ | 441 | | | $ | 381 | |
| Accrued expenses | 4,938 | | | 5,251 | |
| Inventory | 4,112 | | | 6,166 | |
| Other assets | 1,184 | | | 930 | |
| Pension asset | 2,320 | | | 365 | |
| Capitalized research and development expense | 445 | | | — | |
| Lease accounting | 5,458 | | | 7,558 | |
| U.S. and foreign net operating losses | 19,150 | | | 17,433 | |
| Deferred interest expense | 11,241 | | | 6,106 | |
| Tax credits | 887 | | | 511 | |
| Total deferred tax assets | 50,176 | | | 44,701 | |
| Less valuation allowance | (16,592) | | | (12,184) | |
| Net deferred tax assets | $ | 33,584 | | | $ | 32,517 | |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (6,270) | | | (5,271) | |
| Operating lease right-of-use asset | (4,621) | | | (6,553) | |
| Intangible assets | (45,964) | | | (46,511) | |
| Deferred rent | (63) | | | (59) | |
| Unremitted earnings | (2,295) | | | (965) | |
| Other liabilities | (6,417) | | | (6,255) | |
| Total deferred tax liabilities | (65,630) | | | (65,614) | |
| Net deferred tax liability | $ | (32,046) | | | $ | (33,097) | |
In assessing the recoverability of its deferred tax assets within the jurisdiction from which they arise, management considers whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of any net operating loss and tax credit carry forwards. The Company evaluates all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. Based on the weight of available evidence, including the scheduling of existing taxable temporary differences into future taxable income, the Company determined that as of December 31, 2022 its deferred tax assets were realizable on a more-likely-than not basis with the exception of certain interest deductions of $2.3 million, foreign tax credits of $0.8 million, certain state net operating loss carry forwards of $10.2 million predominately related to Illinois, and $3.3 million of net operating loss carry forwards in India, Luxembourg, Spain, Mexico, China and Argentina. The Company’s valuation allowance at December 31, 2022 increased by approximately $4.4 million, of which $4.6 million was charged to income tax expense in 2022 (as shown in the rate reconciliation table above), partially offset by foreign exchange translation adjustments. The Company’s valuation allowance at December 31, 2021 increased by approximately $2.3 million, of which $2.7 million was charged to income tax expense in 2021 (as shown in the rate reconciliation table above), partially offset by foreign exchange translation adjustments.
The Company received a beneficial Switzerland tax ruling in 2021 permitting a step up in the tax basis of intangible assets. The Company will be able to amortize the intangible assets over a 10-year period for Swiss tax purposes, resulting in future cash tax savings. The Company recognized a discrete tax benefit of $4.1 million in 2021 related to this change.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
As of December 31, 2022, the Company had net operating loss carry forwards and tax credits which will expire if not utilized, including: $123.4 million in Illinois state net operating losses expiring between 2029 and 2042, $0.9 million of U.S. federal foreign tax credits expiring in 2030 through 2032, $47.1 million of federal deferred interest carryforward under IRC Section 163(j) that can be carried forward indefinitely but is limited to 30% tax adjusted EBIT, $1.4 million of net operating losses in Mexico substantially expiring in 2023 and through 2032, $7.9 million of net operating losses in Luxembourg substantially expiring in 2035 and through 2039, $1.8 million of net operating losses in India expiring in 2023 through 2028, $0.6 million of net operating losses in China expiring in 2023 through 2026 and $0.9 million of net operating losses in Argentina expiring in 2026 through 2027.
Notwithstanding the current taxation of certain foreign subsidiaries under GILTI and one-time transition taxation enacted as part of the Tax Cut and Jobs Act, the Company intends to continue to invest these earnings indefinitely outside the U.S. If these future earnings are repatriated to the U.S., or if the Company determines that such earnings will be remitted in the foreseeable future, the Company may be required to accrue U.S. deferred taxes (if any) and applicable withholding taxes. It is not practicable to estimate the tax impact of the reversal of the outside basis difference, or the repatriation of cash due to the complexity of its hypothetical calculation. As of December 31, 2022 and 2021, the Company had accrued future income taxes and withholding taxes for future remittances to its Switzerland and Hong Kong affiliates of $2.3 million and $1.8 million, respectively.
The following summarizes the changes in the Company’s liability for unrecognized tax positions (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Beginning of period | $ | 94 | | | $ | 609 | |
| | | |
| | | |
| | | |
| | | |
| Lapse in statute of limitations | — | | | (507) | |
| Currency differences | — | | | (8) | |
| End of period | $ | 94 | | | $ | 94 | |
The unrecognized tax benefits in both the successor and predecessor periods include amounts related to various foreign tax issues. The Company records both accrued interest and penalties related to income tax matters in the provision for income taxes in the accompanying consolidated and combined statements of operations. The Company’s accrued interest and penalties related to uncertain tax positions totaled $0.1 million as of both December 31, 2022 and December 31, 2021. Of the amounts reflected in the table above as of December 31, 2022, the entire amount if recognized, would reduce the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s U.S. federal and state income tax periods are generally open to examination for the tax years 2018 through 2022. The Company’s French, Argentina, Luxembourg and Swiss tax years 2017 through 2022 also remain open for examination. In addition, open tax years related to the Company’s other foreign jurisdictions remain subject to examination but are not considered material.
NOTE 12: PENSION AND OTHER RETIREMENT 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 qualified 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, which were frozen by the Company on December 31, 2022. The Company uses December 31 as a measurement date for the plans.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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. During 2022, the Company purchased non-participating annuity contracts to settle the remaining liabilities of the plan for approximately $9.3 million which was fully funded by plan assets. The annuity contracts purchased along with the plan termination activities resulted in a settlement gain of $1.2 million for the year ended December 31, 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. At December 31, 2022, the remaining surplus of the plan was approximately $2.5 million.
The following table reconciles the funded status of the Company’s defined benefit pension plans (in thousands):
| | | | | | | | | | | |
| |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Accumulated benefit obligations | $ | 7,706 | | | $ | 20,314 | |
| Changes in projected benefit obligations: | | | |
| Projected benefit obligations at beginning of year | $ | 20,314 | | | $ | 41,112 | |
| Service cost | 41 | | | 63 | |
| Interest cost | 326 | | | 1,047 | |
| Actuarial gain | (3,084) | | | (1,054) | |
| Benefits paid | (9,891) | | | (20,854) | |
| | | |
| Projected benefit obligations at end of year | 7,706 | | | 20,314 | |
| Change in plans’ assets: | | | |
| Fair value of plans’ assets at beginning of year | 12,902 | | | 33,058 | |
| Actual returns on plans’ assets | (349) | | | 372 | |
| Employee contributions | 360 | | | 326 | |
| Benefits paid | (9,891) | | | (20,854) | |
| Transfers related to plan termination | (500) | | | — | |
| Fair value of plans’ assets at end of year | 2,522 | | | 12,902 | |
| Net pension liability | $ | (5,184) | | | $ | (7,412) | |
The projected benefit obligation at December 31, 2022 and December 31, 2021 included $7.7 million and $9.8 million, respectively, related to the Company’s unfunded non-qualified plans.
Amounts recognized in the Company’s consolidated and combined balance sheets consisted of (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Other assets | $ | 2,522 | | | $ | 2,367 | |
| Accrued expenses and other current liabilities | (355) | | | (488) | |
| Other liabilities | (7,351) | | | (9,291) | |
| Net amount recognized | $ | (5,184) | | | $ | (7,412) | |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Amounts recognized in accumulated other comprehensive income (loss), net of tax, which have not yet been recognized as a component of net periodic pension expense for the Company’s defined benefit pension plans, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Prior service cost | $ | — | | | $ | — | | | $ | — | | | | $ | 169 | |
| Net actuarial (gain) loss | (1,523) | | | (207) | | | (620) | | | | 13,997 | |
| $ | (1,523) | | | $ | (207) | | | $ | (620) | | | | $ | 14,166 | |
As a result of the Business Combination on June 25, 2020, unamortized amounts previously charged to accumulated other comprehensive income (loss) were eliminated.
The components of the changes in unrecognized amounts included in pension obligation, net in other comprehensive income (loss) for the Company’s defined benefit pension plans were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Net actuarial (gain) loss | $ | (1,316) | | | $ | 527 | | | $ | — | | | | $ | 1,912 | |
| Amortization of prior service costs | — | | | — | | | — | | | | (33) | |
| Amortization of actuarial loss | — | | | (36) | | | — | | | | (276) | |
| Total (gain) loss recognized in other comprehensive income (loss) | $ | (1,316) | | | $ | 491 | | | $ | — | | | | $ | 1,603 | |
The components of net periodic benefit (credit) cost for the Company’s defined benefit pension plans for the Successor and Predecessor were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Service cost | $ | 41 | | | $ | 63 | | | $ | 94 | | | | $ | 41 | |
| Interest cost | 326 | | | 1,047 | | | 545 | | | | 593 | |
| Expected return on plan assets | 144 | | | (1,310) | | | (783) | | | | (817) | |
| Amortization of prior service cost | — | | | — | | | — | | | | 33 | |
| Amortization of net actuarial loss | — | | | 36 | | | — | | | | 276 | |
| Settlement income | (1,178) | | | (644) | | | (25) | | | | — | |
| Net periodic benefit (credit) cost | $ | (667) | | | $ | (808) | | | $ | (169) | | | | $ | 126 | |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Net periodic benefit (credit) cost is reflected in the Company’s consolidated and combined financial statements as follows for the Successor and Predecessor periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Selling, general and administrative expense | $ | 41 | | | $ | 63 | | | $ | 69 | | | | $ | 41 | |
| Other (income) expense, net | (708) | | | (871) | | | (238) | | | | 85 | |
| Net periodic benefit (credit) cost | $ | (667) | | | $ | (808) | | | $ | (169) | | | | $ | 126 | |
Assumptions—The following assumptions were used to determine the benefit obligation at year end and net periodic benefit (credit) cost during the year for the Company’s funded defined benefit pension plan:
| | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Weighted-average assumptions used to determine benefit obligation at year end: | | | |
| Discount rate (1) | — | % | | 2.38 | % |
| Weighted-average assumptions used to determine net periodic benefit cost: | | | |
| Discount rate | 2.38 | % | | 2.61 | % |
| Expected long-term rate of return on plan assets | 1.70 | % | | 4.90 | % |
(1) The discount rate assumption used to determine the benefit obligation at December 31, 2021 was based on blended 7 year and 15 year duration annuity purchase contracts.
The following assumptions were used to determine the benefit obligation at year end and net periodic benefit (credit) cost during the year for the Company’s unfunded supplemental defined benefit pension plan:
| | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Weighted-average assumptions used to determine benefit obligation at year end: | | | |
| Discount rate | 5.01 | % | | 2.78 | % |
| Rate of compensation increase | — | % | | 3.50 | % |
| Weighted-average assumptions used to determine net periodic benefit cost: | | | |
| Discount rate | 2.78 | % | | 2.42 | % |
| Rate of compensation increase | 3.50 | % | | 3.50 | % |
The Company bases the discount rate assumption on current investment yields of high quality fixed income investments during the retirement benefits maturity period. The rate of increase in future compensation assumptions reflects the Company’s long-term actual experience and future and near-term outlook.
The Company considered a number of factors to determine its expected rates of return on the assets in its plan, including, without limitation, historical performance of the plan assets, investment style, asset allocations and other third-party studies and surveys. The Company considered the plan portfolio’s asset allocation over a variety of time periods and compared them with third-party studies and reviewed performance of the capital markets in recent years and other factors and advice from various third parties, such as the pension plan’s advisors, investment managers and actuaries. While the Company considered recent performance and the historical performance of its plan assets, the Company’s assumptions are based primarily on its estimates of long-term, prospective rates of return. Differences between actual and expected asset returns are recognized in the net periodic benefit cost over the remaining service period of the active participating employees.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Plan Assets—The investment committee for the Company’s plan adopted investment policies with the objective of meeting and exceeding over time, the expected long-term rate of return on plan assets assumptions, weighted against a reasonable risk level and considering the appropriate liquidity levels. In connection with this objective, the plan’s assets were mainly invested in mutual funds, common and collective funds, corporate bonds, government bonds, private equity funds, as well as a real estate fund, in order to achieve the Company’s goals to enhance the expected returns of its investments together with their liquidity and protect the plan’s funded status. As a result of the planned termination of the qualified pension plan, certain of the plan’s assets were liquidated during the fourth quarter of 2021 and used to satisfy lump sum benefit payments as further described above, and any remaining plan assets were liquidated during 2022. Therefore, at December 31, 2022 the plan’s assets were invested in cash and cash equivalents and at December 31, 2021, the plan’s assets were primarily invested in cash and fixed income securities.
The following tables set forth, by category, the Company’s pension plan assets as of December 31, 2022 and December 31, 2021, using the fair value hierarchy established under ASC Topic 820 and as described in Note 9. The fair value hierarchy in the table as of December 31, 2021 excludes certain investments which are valued using Net Asset Value (“NAV”) as a practical expedient (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan Assets as of December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Pension plan assets measured at fair value: | | | | | | | |
| Cash and cash equivalents | $ | 2,522 | | | $ | — | | | $ | — | | | $ | 2,522 | |
| Total pension plan assets measured at fair value | $ | 2,522 | | | $ | — | | | $ | — | | | $ | 2,522 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan Assets as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Pension plan assets measured at fair value: | | | | | | | |
| Cash and cash equivalents | $ | 325 | | | $ | — | | | $ | — | | | $ | 325 | |
| U.S. Government securities | — | | | 6,283 | | | — | | | 6,283 | |
| Corporate bonds | — | | | 6,283 | | | — | | | 6,283 | |
| Total pension plan assets measured at fair value | $ | 325 | | | $ | 12,566 | | | $ | — | | | $ | 12,891 | |
| | | | | | | |
| Pension plan assets measured at NAV as a practical expedient (1) | | | | | | | 11 | |
| Total pension plan assets | | | | | | | $ | 12,902 | |
(1) Certain investments in real estate funds that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
Cash and cash equivalents are stated at cost, which approximates fair market value. Corporate and government bonds are generally valued on the basis of evaluated bids furnished by a pricing service, which determines valuations for normal, institutional size-trading units of such securities using market information, transactions for comparable securities and various relationships between securities. There were no transfers between levels within the three-tier fair value hierarchy in 2022 and 2021.
Contributions—The Company does not expect to make further contributions to its funded defined benefit pension plan due to its termination.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Expected Future Benefit Payments—The projected benefit payments for the unfunded non-qualified defined benefit pension plans are as follows (in thousands):
| | | | | |
| |
| 2023 | $ | 355 | |
| 2024 | 357 | |
| 2025 | 426 | |
| 2026 | 587 | |
| 2027 | 584 | |
| 2028-2032 | 3,125 | |
The Company also participates in certain state-sponsored defined benefit plans covering certain non-U.S. employees with total net liabilities of $1.9 million and $3.6 million as of December 31, 2022 and December 31, 2021, respectively. The primary state-sponsored plan relates to Merisant employees in Switzerland and France, which had pension benefit obligations of $5.5 million and plan assets of $3.6 million as of December 31, 2022 and a pension benefit obligation of $6.9 million and plan assets of $3.4 million as of December 31, 2021. Net periodic pension cost for 2022, 2021, for the period June 26, 2020 through December 31, 2020, and January 1, 2020 through June 25, 2020 was $0.4 million, $0.4 million, $0.2 million, and $0.3 million, respectively.
Defined Contribution Pension Plans—The Company has defined contribution 401(k) plans covering certain eligible domestic employees, as defined by the plans. The plans provide for certain employer matching contributions. The Company recorded compensation expense related to its defined contribution plans of $1.2 million for 2022, $1.0 million for 2021, $0.2 million for the period from June 26, 2020 to December 31, 2020, and $0.3 million for the period from January 1, 2020 to June 25 2020.
NOTE 13: 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.
The RSUs and RSAs are accounted for as equity awards and have a grant-date fair value equal to the fair market value of the underlying stock on the grant date. RSUs granted generally vest ratably on the anniversary of the grant date over a period of one to three years, depending on the specific terms of each RSU agreement. The RSAs granted to non-employee board members cliff vest over a service period of approximately 24 months. The Company records compensation expense over the expected vesting period and recognizes forfeitures in the period incurred.
PSU awards generally cliff vest subsequent to the completion of the 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 a specified cumulative financial targets established for each grant and are expected to be settled in stock.
Stock-based compensation expense for the year ended December 31, 2022 and 2021, and for the period from June 26, 2020 to December 31, 2020 was $4.9 million, $8.7 million, and $1.3 million respectively. Stock-based compensation expense for the year ended December 31, 2021 included $0.9 million of expense related to 2021 management bonuses that were settled in stock during the second quarter of 2022. The tax benefit recognized related to stock-based compensation was $0.4 million and $0.5 million for the years ended December 31, 2022 and 2021. There was no tax benefit recognized related to stock-based compensation for the period from June 26, 2020 to December 31, 2020.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
A summary of activity and weighted average fair values related to the RSUs is as follows:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Grant Date
Fair Value (per share) | | Weighted Average
Remaining
Contractual Term
(in years) |
| Outstanding at December 31, 2021 | 484,744 | | | $ | 13.46 | | | 1.02 |
| Granted | 1,742,191 | | | 5.42 | | | |
| Vested | (217,734) | | | 12.96 | | | |
| Forfeited | (470,442) | | | 4.58 | | | |
| Outstanding and nonvested at December 31, 2022 | 1,538,759 | | | $ | 6.65 | | | 0.71 |
The weighted average grant date fair value per share of RSUs granted during the year was $5.42 in 2022, $13.48 in 2021, and $8.34 for the period from June 26, 2020 through December 31, 2020.
The aggregate fair value of RSUs upon vesting during the years ended December 31, 2022 and 2021 was $1.5 million and $7.2 million, respectively. No RSUs vested during the period from June 26, 2020 to December 31, 2020.
A summary of activity and weighted average fair values related to the RSAs is as follows:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Grant Date
Fair Value (per share) | | Weighted Average
Remaining
Contractual Term
(in years) |
| Outstanding at December 31, 2021 | 117,801 | | | $ | 9.76 | | | 0.98 |
| Granted | 82,615 | | | 6.96 | | | |
| Vested | (68,946) | | | 8.34 | | | |
| Outstanding and nonvested at December 31, 2022 | 131,470 | | | $ | 8.75 | | | 1.19 |
The weighted average grant date fair value per share of RSAs granted during the year was $6.96 in 2022, $11.77 in 2021, and $8.34 for the period from June 26, 2020 through December 31, 2020.
The aggregate fair value of RSAs upon vesting during the year ended December 31, 2022 was $0.5 million. No RSAs vested during the year ended 2021 or the period from June 26, 2020 to December 31, 2020.
A summary of activity and weighted average fair values related to the PSUs is as follows:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Grant Date
Fair Value (per share) | | Weighted Average
Remaining
Contractual Term
(in years) |
| Outstanding at December 31, 2021 | 282,141 | | | $ | 13.65 | | | 2.21 |
| Granted | 572,845 | | | 7.19 | | | |
| Forfeited | (223,609) | | | 6.04 | | | |
| Outstanding and nonvested at December 31, 2022 | 631,377 | | | $ | 8.49 | | | 1.88 |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The weighted average grant date fair value per share of PSUs granted during the year was $7.19 in 2022 and $13.65 in 2021.
As of December 31, 2022, the Company had not yet recognized compensation cost on nonvested awards as follows (in thousands):
| | | | | | | | | | | |
| Unrecognized
Compensation Cost | | Weighted Avg.
Remaining
Recognition Period
(in years) |
| Nonvested awards | $ | 6,507 | | | 1.06 years |
The nonvested awards excludes unvested PSUs that are deemed not probable of vesting constituting $5.4 million of unrecognized compensation expense at December 31, 2022.
NOTE 14: STOCKHOLDERS' EQUITY
Common Stock Repurchase Plan—On September 8, 2020, the Company announced that its board of directors had authorized a stock repurchase plan of up to $20 million of shares of the Company’s common stock. The shares were available for repurchase from time to time over a 12-month period which expired on September 15, 2021, in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with U.S. federal securities laws. There were no repurchases of the Company’s common stock under the stock repurchase plan.
NOTE 15: EARNINGS PER SHARE
Basic earnings (loss) per common share (“EPS”) 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 earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.
Diluted EPS 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The computation of basic and diluted EPS for the years ended December 31, 2022 and 2021 and the period from June 26, 2020 to December 31, 2020 is shown below (in thousands, except for share and per share data):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 |
| EPS numerator: | | | | | |
| Net (loss) income attributable to common shareholders | $ | (58,752) | | | $ | 83 | | | $ | (8,437) | |
| Less: Change in fair value of warrant liabilities | — | | | (29) | | | — | |
| Numerator - diluted | $ | (58,752) | | | $ | 54 | | | $ | (8,437) | |
| | | | | |
| EPS denominator: | | | | | |
| Weighted average shares outstanding - basic | 41,481,079 | | | 38,505,458 | | | 38,426,669 | |
| Effect of dilutive securities | — | | | 1,370,929 | | | — | |
| Weighted average shares outstanding - diluted | 41,481,079 | | | 39,876,387 | | | 38,426,669 | |
| | | | | |
| Net earnings (loss) per share: | | | | | |
| Basic | $ | (1.42) | | | $ | 0.00 | | | $ | (0.22) | |
| Diluted | $ | (1.42) | | | $ | 0.00 | | | $ | (0.22) | |
For the year ended December 31, 2022, 20,263,300 warrants, 1,538,759 RSUs, and 131,470 RSAs were excluded from the diluted EPS calculation because they were determined to be anti-dilutive. For the period from June 26, 2020 to December 31, 2020, 20,263,500 warrants, 633,057 RSUs, and 68,946 RSAs were excluded from the diluted EPS calculation because they were determined to be anti-dilutive. Additionally, at December 31, 2022 and 2021, 631,377 and 282,141 PSUs, respectively, were excluded from the diluted EPS calculation because they are subject to performance conditions that were not satisfied.
NOTE 16: 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 income before reclassifications | 984 | | | 701 | | | 1,685 | |
| Amounts reclassified from AOCI | — | | | (603) | | | (603) | |
| Balance at December 31, 2021 | $ | 8,758 | | | $ | 929 | | | $ | 9,687 | |
| Other comprehensive (loss) income, before reclassifications | (13,469) | | | 2,926 | | | (10,543) | |
| Amounts reclassified from AOCI | — | | | (186) | | | (186) | |
| Balance at December 31, 2022 | $ | (4,711) | | | $ | 3,669 | | | $ | (1,042) | |
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 17: RELATED PARTY TRANSACTIONS
The Predecessor participated in MacAndrews & Forbes’ (“MacAndrews”) directors and officer’s insurance program, which covered the Predecessor along with MacAndrews and its other affiliates. The limits of coverage were available on aggregate losses to any or all of the participating companies and their respective directors and officers. For the period of January 1, 2020 to June 25, 2020, the Predecessor reimbursed MacAndrews an immaterial amount for its allocable portion of the premiums for such coverage, which the Predecessor believed was more favorable than the premiums that it could have secured were it to secure its own coverage. The Predecessor also participated in certain other insurance programs with MacAndrews under which it paid premiums directly to the insurance broker.
In March 2018, the Predecessor entered into a revolving credit agreement with Wesco US LLC, an indirect and wholly-owned subsidiary of Merisant. This revolving credit facility, as amended, had a maturity date of January 3, 2022 and provided for maximum outstanding borrowings of up to $9.0 million. The revolving credit facility was unsecured and bore interest at 3-month LIBOR plus 4.0% and provided for periodic interest payments with all principal due upon maturity. MacAndrews had the right to accept or reject any borrowing request made by the Predecessor pursuant to the revolving credit agreement in its sole discretion. The outstanding balance on the revolving credit agreement at June 25, 2020 was $3.4 million and was forgiven by MacAndrews in connection with the Business Combination. Interest expense for the period from January 1, 2020 to June 25, 2020 was approximately $0.2 million.
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 $0.5 million and $0.4 million was expensed during the year ended December 31, 2021 and the period from June 26, 2020 to December 31, 2020, respectively. Additionally, under the terms of the agreement, the Company incurred additional expense of $2.0 million during the year ended December 31, 2021 related to services provided by Watermill in connection with the acquisition of Wholesome and $0.8 million during the period from June 26, 2020 to December 31, 2020 related to services provided in connection with the acquisition of Swerve. A former director of Act II is a registered representative of Watermill and provided services directly to the Company under the agreement.
In December 2019, Wholesome entered into a partnership agreement to form WS Services, LLC (“WS Services”). As of December 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 consolidated balance sheets, was $0.7 million as of both December 31, 2022 and 2021. Wholesome utilizes a warehouse leased by WS Services for storage of raw materials. During both the year ended December 31, 2022 and the period from February 5, 2021 through December 31, 2021, Wholesome expensed $0.9 million related to the use of the warehouse space. Wholesome recorded a payable to WS Services for $0.1 million and $0.3 million as of December 31, 2022 and 2021.
NOTE 18: 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. Certain prior year amounts have been reclassified to conform to the current presentation. 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The following table presents selected financial information relating to the Company’s business segments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| Product revenues, net | | | | | | | | |
| Branded CPG | $ | 422,638 | | | $ | 389,174 | | | $ | 96,857 | | | | $ | 80,749 | |
| Flavors & Ingredients | 115,634 | | | 104,799 | | | 50,311 | | | | 47,579 | |
| Total product revenues, net | $ | 538,272 | | | $ | 493,973 | | | $ | 147,168 | | | | $ | 128,328 | |
| | | | | | | | |
| Operating (loss) income | | | | | | | | |
| Branded CPG | $ | (30,182) | | | $ | 34,918 | | | $ | 13,463 | | | | $ | (5,055) | |
| Flavors & Ingredients | 32,505 | | | 21,860 | | | (2,645) | | | | (23,718) | |
| 2,323 | | | 56,778 | | | 10,818 | | | | (28,773) | |
| Corporate | (26,969) | | | (33,962) | | | (16,924) | | | | (9,408) | |
| Total operating (loss) income | $ | (24,646) | | | $ | 22,816 | | | $ | (6,106) | | | | $ | (38,181) | |
The following table presents geographic information based upon revenues of the Company’s major geographic markets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Successor) | | | (Predecessor) |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | From June 26, 2020 to December 31, 2020 | | | From January 1, 2020 to
June 25, 2020 |
| North America | $ | 357,175 | | | $ | 318,958 | | | $ | 63,386 | | | | $ | 54,253 | |
| Europe | 92,272 | | | 96,013 | | | 45,608 | | | | 42,776 | |
| India, Middle East and Africa | 19,940 | | | 14,801 | | | 6,996 | | | | 3,959 | |
| Asia-Pacific | 53,300 | | | 51,598 | | | 24,350 | | | | 20,834 | |
| Latin America | 15,585 | | | 12,603 | | | 6,828 | | | | 6,506 | |
| Total product revenues, net | $ | 538,272 | | | $ | 493,973 | | | $ | 147,168 | | | | $ | 128,328 | |
The Company has a large and diverse customer base, which includes numerous customers located in foreign countries. Branded CPG’s combined sales to a single customer accounted for 14.1% and 10.6% of total sales in 2022 and 2021, respectively. No single customer accounted for more than 10% of total sales in 2020. With the exception of the United States, no one country represented more than 10% of the Company’s net sales.
The Company has an exclusive supply contract to purchase the output of licorice extract and certain licorice derivatives from a manufacturer with facilities in Central Asia. For the year ended December 31, 2022, the Company’s purchases from this supplier totaled approximately $9.1 million, representing 23.4% of the Company’s licorice raw material purchases for the year.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Long-lived assets are as follows (in thousands): | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Long-Lived Assets* | | | |
| United States | $ | 24,516 | | | $ | 24,327 | |
| China | 14,805 | | | 15,620 | |
| Czech Republic | 6,451 | | | 6,074 | |
| France | 10,960 | | | 11,353 | |
| Other Foreign Countries | 1,360 | | | 1,129 | |
| Total | $ | 58,092 | | | $ | 58,503 | |
*Long-lived assets consist of property, plant and equipment, net.
