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 and the years ended December 31, 2019 and December 31, 2018 (each 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 31, 2020 (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 and Swerve, is a global CPG business focused on building a branded portfolio oriented toward serving customers seeking zero-calorie, low-calorie, natural, no-sugar-added and plant-based products. Our Branded CPG business operates leading brands in the low- and zero-calorie sweetener market, such as Whole Earth®, Swerve®, Equal®, Canderel® and Pure Via®, and existing branded adjacencies.
•Flavors & Ingredients, comprised of our Mafco Worldwide division of operating companies, is our global, business-to-business focused operations 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 Flavors & Ingredients segment operates 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 sugar, keto-friendly, and plant-based sweeteners and 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, 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 is 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.
Covid-19 Impact
COVID-19 surfaced in Wuhan, China in late 2019, and has since spread throughout the rest of the world. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government. The pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and resulted in significant travel restrictions, including mandated facility closures and shelter-in-place orders.
We have taken measures to protect the health and safety of our employees and implemented work from home arrangements, where possible, social distancing where working from home is not feasible including in our manufacturing facilities, deep cleaning protocols at all of our facilities and travel restrictions, among other measures. We have also taken appropriate measures to work with our customers to minimize potential disruption and to support the communities that we serve to address the challenges posed by the pandemic.
While we have experienced a net increase in the overall demand for our products and have no supply disruptions, we are unable to fully determine the future impact of COVID-19 on demand for our products or our ability to supply our products. The full extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related containment and mitigation actions taken by national, state and local government officials across the world to prevent disease spread. The extent of the pandemic’s impact on us will also 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.
Recent Developments
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) the Company (acting through its direct wholly-owned subsidiary, Project Taste Intermediate LLC, as its designee) 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, is subject to Wholesome achieving certain EBITDA thresholds at or above approximately $30 million during the period beginning August 29, 2020, and ending December 31, 2021. A portion of the Earn-Out Amount (up to $27.5 million) may be paid, at the Company’s election, in freely tradeable, registered shares of Company common stock. Calculation of the achievement of the Earn-Out Amount is subject to certain adjustments more thoroughly described in the Wholesome Purchase Agreement. While the Earn-Out Amount, if any, is currently expected to be payable in the first quarter of 2022, the payment could accelerate upon the breach by the Company of certain covenants more thoroughly described in the Wholesome Purchase Agreement.
In connection with the closing of the Wholesome Transaction, on February 5, 2021, the Company and certain of its subsidiaries entered into an amendment and restatement agreement (the “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 “Liquidity and Capital Resources” below for a further description of the Amended and Restated Credit Agreement.
Stock Repurchase Plan
On September 8, 2020, we announced that the Company’s board of directors had authorized a stock repurchase plan of up to $20 million of shares of our common stock. The shares may be repurchased from time to time over a 12-month period expiring on September 15, 2021 (or upon the earlier completion of all purchases contemplated by the repurchase plan or the earlier termination of the repurchase plan), in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with U.S. federal securities laws.
The timing and actual number of shares of common stock repurchased under the stock repurchase plan will depend on a number of factors, including the market price of our common stock, general market and economic conditions, applicable legal requirements, compliance with the terms of our outstanding indebtedness, alternate uses for capital and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase plan may be extended, suspended or discontinued at any time without prior notice at our discretion.
During the year ended December 31, 2020, there were no repurchases of our common stock under the stock repurchase plan.
Results of Operations
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
(In thousands)
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended
December 31, 2018
|
Product revenues, net
|
$
|
147,168
|
|
|
|
$
|
128,328
|
|
|
$
|
272,123
|
|
|
$
|
290,965
|
|
Cost of goods sold
|
101,585
|
|
|
|
77,627
|
|
|
163,634
|
|
|
167,874
|
|
Gross profit
|
45,583
|
|
|
|
50,701
|
|
|
108,489
|
|
|
123,091
|
|
Selling, general and administrative expenses
|
44,616
|
|
|
|
43,355
|
|
|
65,896
|
|
|
74,767
|
|
Amortization of intangible assets
|
6,021
|
|
|
|
4,927
|
|
|
10,724
|
|
|
11,111
|
|
Asset impairment charges
|
—
|
|
|
|
40,600
|
|
|
—
|
|
|
—
|
|
Restructuring and other expenses
|
1,052
|
|
|
|
—
|
|
|
2,193
|
|
|
9,461
|
|
Operating (loss) income
|
(6,106)
|
|
|
|
(38,181)
|
|
|
29,676
|
|
|
27,752
|
|
Interest (expense) income, net
|
(4,371)
|
|
|
|
(238)
|
|
|
(500)
|
|
|
49
|
|
Other (expense) income, net
|
(578)
|
|
|
|
801
|
|
|
(830)
|
|
|
(1,648)
|
|
(Loss) income before income taxes
|
(11,055)
|
|
|
|
(37,618)
|
|
|
28,346
|
|
|
26,153
|
|
(Benefit) provision for income taxes
|
(2,618)
|
|
|
|
(3,482)
|
|
|
(2,466)
|
|
|
5,312
|
|
Net (loss) income
|
$
|
(8,437)
|
|
|
|
$
|
(34,136)
|
|
|
$
|
30,812
|
|
|
$
|
20,841
|
|
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Product revenues, net. Product revenues, net were $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 for the combined year ended December 31, 2020 were $275.5 million, an increase of $3.4 million, or 1.2%, from $272.1 million for the year ended December 31, 2019 due to an $11.7 million increase in product revenues at Branded CPG driven by strong growth in retail and e-commerce channels, $4.3 million of revenue from the acquisition of Swerve, partially offset by declines in the foodservice channel at Branded CPG and a decline in product revenues of $8.4 million at Flavors & Ingredients, as further discussed below.
Cost of goods sold. Cost of goods sold was $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 for the combined year ended December 31, 2020 was $179.2 million, an increase of $15.6 million, or 9.5%, from $163.6 million for the year ended December 31, 2019. This increase was driven by $12.1 million of purchase accounting adjustments related to inventory, $3.3 million from the acquisition of Swerve (which includes $0.5 million of purchase accounting adjustments related to inventory) and higher volumes in the Branded CPG segment, partially offset by lower volumes in the Flavors & Ingredients segment.
Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) were $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. Selling, general and administrative expenses for the combined year ended December 31, 2020 were $88.0 million, an increase of $22.1 million, or 33.5%, from $65.9 million for the year ended December 31, 2019. The increase was primarily due to Predecessor contracted transaction bonuses and related payroll taxes of $11.2 million in 2020, $5.1 million of acquisition related transaction expenses, $9.1 million for public company costs including both one-time costs as well as ongoing costs to operate as a public company, $1.0 million for stock-based compensation expense and $1.3 million from the acquisition of Swerve, partially offset by lower bonus expense of $2.0 million primarily due to certain employees receiving a one-time grant of restricted stock units on September 30, 2020 in lieu of an annual cash bonus for 2020, productivity initiatives and lower expenses such as travel and entertainment due to COVID-19.
Amortization of intangible assets. Amortization of intangible assets was $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 for the combined year ended December 31, 2020 was $10.9 million, an increase of $0.2 million, or 2.1%, from $10.7 million for the year ended December 31, 2019.
Asset impairment charges. 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 $1.1 million for the combined year ended December 31, 2020 and $2.2 million for the year ended December 31, 2019. The decrease is due to lower facility closure costs.
Interest expense, net. Interest expense, net was $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 for the combined year ended December 31, 2020 was $4.6 million, an increase of $4.1 million from $0.5 million for the year ended December 31, 2019. The increase was due to interest expense under our new credit facilities and the amortization of debt issuance costs.
Other (expense) income, net. Other (expense) income, net was 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 (expense) income, net for the combined year ended December 31, 2020 was income of $0.2 million, a change of $1.1 million from expense of $0.8 million for the year ended December 31, 2019. The increase was the result of lower foreign exchange losses.
Benefit for income taxes. The income tax benefit was $2.6 million, $3.5 million and $2.5 million for the periods from June 26, 2020 through December 31, 2020, January 1, 2020 through June 25, 2020, and for the year ended December 31, 2019, respectively.
The effective tax rate for the Successor period from June 26, 2020 through December 31, 2020 is 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. The effective tax rate for the year ended December 31, 2019 was an income tax benefit of 8.7% which differs from the statutory federal rate of 21% primarily due to the U.S. tax effect of international operations and state and local taxes.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Product revenues, net. Product revenues, net was $272.1 million for the year ended December 31, 2019, a decrease of $18.8 million, or 6.5%, compared to $291.0 million for the year ended December 31, 2018 due to decreases in product revenues at both Branded CPG and Flavors & Ingredients of $7.9 million and $10.9 million, respectively, as further described below.
Cost of goods sold. Cost of goods sold was $163.6 million for the year ended December 31, 2019, a decrease of $4.2 million, or 2.5%, compared to $167.9 million for the year ended December 31, 2018 primarily due to a $3.6 million favorable impact of foreign currency fluctuations. Cost of goods sold as a percentage of products revenue, net increased to 60.1% in 2019, from 57.7% in 2018. Excluding the favorable impact of foreign currency fluctuations, the increase in cost of goods sold as a percentage of product revenue was driven by Branded CPG North America.
Selling, general and administrative expenses. SG&A was $65.9 million for the year ended December 31, 2019, a decline of $8.9 million, or 11.9%, from $74.8 million for the year ended December 31, 2018. The decrease in SG&A was primarily due to lower brand marketing as the Company elected to increase trade marketing and incentives in 2019, which are recorded net of sales, and lower compensation expense. The decrease was partially offset by a favorable $3.2 million impact of foreign currency fluctuations.
Amortization of intangible assets. Amortization of intangible assets remained relatively flat, $10.7 million in 2019 compared to $11.1 million in 2018.
Restructuring and other expenses. Restructuring and other expenses decreased $7.3 million to $2.2 million for the year ended December 31, 2019, from $9.5 million for the year ended December 31, 2018. The decrease is primarily related to lower employee termination costs and a decrease in facility closure costs.
Interest (expense) income, net. Interest expense, net was $0.5 million for the year ended December 31, 2019 compared to interest income of $0.05 million for the year ended December 31, 2018.
Other expense, net. Other expense, net was $0.8 million for the year ended December 31, 2019 compared to $1.6 million for the year ended December 31, 2018 primarily due to lower foreign exchange losses in 2019.
(Benefit)/provision for income taxes. (Benefit)/provision for income taxes decreased $7.8 million to a benefit of $2.5 million for the year ended December 31, 2019, compared to a provision of $5.3 million for the year ended December 31, 2018. The effective tax rate for 2019 was an income tax benefit of 8.7% compared to an effective tax rate for 2018 of 20.3%. The decrease in 2019 was predominantly due to the tax benefit related to the impact of foreign restructuring and the change in tax rates enacted during the year.
Results of Operations by Segment
Branded CPG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
(In thousands)
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended
December 31, 2018
|
Product revenues, net
|
$
|
96,857
|
|
|
|
$
|
80,749
|
|
|
$
|
165,863
|
|
|
$
|
173,759
|
|
Operating (loss) income
|
$
|
(3,461)
|
|
|
|
$
|
(14,463)
|
|
|
$
|
10,280
|
|
|
$
|
8,283
|
|
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Segment Product Revenues, net. Product revenues, net for Branded CPG were $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 for the combined year ended December 31, 2020 were $177.6 million, an increase of $11.7 million, or 7.1%, from $165.9 million for the year ended December 31, 2019 primarily due to strong growth in retail and e-commerce channels globally and $4.3 million of revenue as a result of the acquisition of Swerve, partially offset by declines in the foodservice channel as a result of COVID-19.
Segment Operating (Loss) Income. Operating loss for Branded CPG was $3.5 million for the period from June 26, 2020 through December 31, 2020 and an operating loss of $14.5 million from January 1, 2020 through June 25, 2020. Operating loss for Branded CPG for the combined year ended December 31, 2020 was $17.9 million, a change of $28.2 million as compared to operating income of $10.3 million for the year ended December 31, 2019. The decline was primarily due to a goodwill impairment charge of $11.1 million recorded during the Predecessor Period in the first quarter of 2020, Predecessor contracted transaction bonuses and related payroll taxes of $7.5 million, $5.1 million of acquisition related transaction expenses, $9.1 million for public company costs including one-time public company readiness costs and $4.0 million of purchase accounting adjustments related to inventory (which includes $0.5 million related to the acquisition of Swerve), partially offset by increased sales, SG&A productivity initiatives and a decline in amortization expense of $2.5 million primarily due to the valuation of intangible assets from the Business Combination.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Segment Product Revenues, net. Product revenues, net for Branded CPG decreased approximately 4.5%, or $7.9 million, to $165.9 million for the year ended December 31, 2019, from $173.8 million for the year ended December 31, 2018. Excluding the $9.0 million unfavorable impact of foreign currency fluctuations, product revenues increased by 0.6% or $1.1 million. The increase in net revenue was driven by strong growth from Whole Earth in North America, growth in Asia Pacific and Latin America partially offset by higher trade marketing investments in North America and by the discontinuing of sales in the Middle East and Germany.
Segment Operating (Loss) Income. Operating income for Branded CPG was $10.3 million for the year ended December 31, 2019, an increase of $2.0 million, or 24.1%, as compared to operating income of $8.3 million for the year ended December 31, 2018. The increase was primarily due to higher sales and lower SG&A.
Flavors & Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
(In thousands)
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended
December 31, 2018
|
Product revenues, net
|
$
|
50,311
|
|
|
|
$
|
47,579
|
|
|
$
|
106,260
|
|
|
$
|
117,206
|
|
Operating (loss) income
|
$
|
(2,645)
|
|
|
|
$
|
(23,718)
|
|
|
$
|
19,396
|
|
|
$
|
19,469
|
|
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Segment Product Revenues, net. Product revenues, net for Flavors & Ingredients was were $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 for the combined twelve months ended December 31, 2020 were $97.9 million, a decrease of $8.4 million, or 7.9%, from $106.3 million for the year ended December 31, 2019, primarily driven by a $9.6 million decline in international tobacco revenues as well as some revenue decline due to the effects of COVID-19, partially offset by growth in the remainder of the licorice derivatives business.
Segment Operating (Loss) Income. Operating loss for Flavors & Ingredients was $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 loss for Flavors & Ingredients for the combined year ended December 31, 2020 was $26.4 million, a decrease of $45.8 million as compared to operating income of $19.4 million for the year ended December 31, 2019. The decline was primarily due to asset impairment charges totaling $29.5 million recorded during the Predecessor Period in the first quarter of 2020, $8.6 million of purchase accounting adjustments related to inventory, $2.7 million of higher amortization expense due to purchase accounting valuations, Predecessor contracted transaction bonuses and related payroll taxes of $4.2 million in 2020, and lower revenues, partially offset by a $1.3 million decline in bonus expense.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Segment Product Revenues, net. Product revenues, net for Flavors & Ingredients decreased approximately 9.3%, or $10.9 million, to $106.3 million for the year ended December 31, 2019, from $117.2 million for the year ended December 31, 2018. The decrease was primarily driven by the decline in international tobacco revenues.
Segment Operating (Loss) Income. Operating income for Flavors & Ingredients was $19.4 million for the year ended December 31, 2019, a decrease of $0.1 million as compared to operating income of $19.5 million for the year ended December 31, 2018. The decline was primarily due lower revenues largely offset by productivity gains.
Liquidity and Capital Resources
The Predecessor has historically funded operations with cash flow from operations and, when needed, with borrowings, which are described below.
We believe our cash flow from operations and other sources of liquidity and capital, including our new Loan Agreement, will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months.
The following table shows summary cash flow information for the periods from June 26, 2020 through December 31, 2020, January 1, 2020 through June 25, 2020 and the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended
December 31, 2018
|
Net cash (used in) provided by operating activities
|
$
|
(9,445)
|
|
|
|
$
|
19,908
|
|
|
$
|
31,665
|
|
|
$
|
33,804
|
|
Net cash used in investing activities
|
(282,122)
|
|
|
|
(3,532)
|
|
|
(4,037)
|
|
|
(2,181)
|
|
Net cash provided by (used in) financing activities
|
252,216
|
|
|
|
(16,924)
|
|
|
(23,942)
|
|
|
(28,532)
|
|
Effect of exchange rates on cash and cash equivalents
|
714
|
|
|
|
215
|
|
|
(496)
|
|
|
(24)
|
|
Net change in cash and cash equivalents
|
$
|
(38,637)
|
|
|
|
$
|
(333)
|
|
|
$
|
3,190
|
|
|
$
|
3,067
|
|
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Operating activities. Net cash used in operating activities was $9.4 million in the period from June 26, 2020 through December 31, 2020. Net cash provided by operating activities was $19.9 million from January 1, 2020 through June 25, 2020. Net cash provided by operating activities for the combined year ended December 31, 2020 was $10.5 million compared to $31.7 million for the year ended December 31, 2019. The decrease was primarily attributable to lower cash flow from operating results, unfavorable working capital changes and higher interest payments.
Investing activities. 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. Net cash used in investing activities was $4.0 million in the year ended December 31, 2019 and was entirely related to capital expenditures.
Financing activities. 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. Net cash used by financing activities was $23.9 million in the year ended December 31, 2019 due to funding to the parent of $25.4 million, partially offset by $1.5 million of proceeds from a revolving credit facility.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Operating activities. Net cash provided by operating activities decreased $2.1 million to $31.7 million for the year ended December 31, 2019, from $33.8 million for the year ended December 31, 2018. This decrease was due primarily to a decrease in deferred income taxes, offset by an increase in net income.
Investing activities. Net cash used in investing activities increased $1.9 million to $4.0 million for the year ended December 31, 2019, from $2.2 million for the year ended December 31, 2018. This increase was largely driven by proceeds from the sale of certain fixed assets in 2018.
Financing activities. Net cash used in financing activities decreased $4.6 million to $23.9 million for the year ended December 31, 2019, from $28.5 million for the year ended December 31, 2018. The decrease is due to reduced funding to parent offset by a decrease in net borrowing.
Indebtedness
Loan Agreement
In connection with the Business Combination, on June 25, 2020, we entered into a senior secured loan agreement (the “Loan Agreement”) which contained a Revolving Credit Facility and a Term Loan Facility with Toronto Dominion (Texas) LLC, as administrative agent, BofA Securities Inc., as Syndication Agent, BMO Capital Markets Corp. and Truist Bank, as documentation agents, and the other lenders party thereto.
The Loan Agreement provides for a term loan facility of $140 million and a revolving credit facility of up to $50 million. As of December 31, 2020, there were $2.1 million outstanding letters of credit that reduced our availability under the revolving credit facility.
As of December 31, 2020, we had term loan borrowings of $131.8 million, net of debt issuance costs of $4.7 million under the Loan Agreement and were in compliance with the related financial covenants. Additionally, there were $47.9 million in borrowings under the revolving credit facility as of December 30, 2020.
The Loan Agreement requires us 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 $5,000,000 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 Loan Agreement) and (iii) 50% of “Excess Cash Flow,” as defined in the Loan Agreement with a reduction to 25% if the total net leverage ratio for the fiscal year is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, and a reduction to 0% if the total net leverage ratio for the fiscal year is less than or equal to 2.00 to 1.00. We are also required to make quarterly amortization payments equal to (i) 1.25% per annum of the original principal amount of the Term Loan Facility during the first, second and third years after the closing date of the Credit Facilities, commencing after the first full fiscal quarter after the closing date of the Loan Agreement, and (ii) 2.50% per annum of the original principal amount of the term loan facility during the fourth and fifth years after the closing date of the Loan Agreement (subject to reductions by optional and mandatory prepayments of the loans). We may prepay the term loan facility at any time without premium or penalty, subject to payment of customary breakage costs.
The Loan Agreement contains financial covenants and a number of traditional negative covenants including negative covenants related to the following subjects: consolidations, mergers, and sales of assets; limitations on the incurrence of certain liens; limitations on certain indebtedness; limitations on the ability to pay dividends; and certain affiliate transactions.
The Loan Agreement also contains certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lenders under the Loan Agreement are entitled to take various actions, including the acceleration of amounts due under the loan and all actions permitted to be taken by a secured creditor. The Company was in compliance with its covenants under the Loan Agreement on December 31, 2020.
In connection with the Wholesome Transaction, on February 5, 2021, we entered into the Amended and Restated Credit Agreement, which provides for senior secured financing consisting of the following credit facilities: (a) a senior secured term loan facility in the aggregate principal amount of $375 million (the “Term Loan Facility”); and (b) a revolving credit facility in an aggregate principal amount of up to $75 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”). The Revolving Facility has a $15 million subfacility for the issuance of letters of credit and a $15 million sublimit for swing line loans. The Company used the proceeds under the Term Loan Facility to (i) repay and refinance existing indebtedness of Wholesome; (ii) pay the cash consideration for the Wholesome Transaction; (iii) repay and refinance outstanding borrowings under the Existing Credit Agreement; and (iv) pay fees and expenses incurred in connection with the foregoing. The proceeds of the Revolving Facility can be used to finance working capital needs, for general corporate purposes, and for working capital adjustments payable under the Wholesome Purchase Agreement.
Loans outstanding under the Credit Facilities will accrue interest at a rate per annum equal to (i) with respect to the Revolving Facility and letters of credit, (A) 2.75%, in the case of base rate advances, and (B) 3.75% in the case of LIBOR 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 LIBOR advances, with a LIBOR floor of 1.00% with respect to the Term Loan Facility, and 0.00% with respect to Revolving Facility and letters of credit, and base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, LIBOR for a one-month interest period plus 1.00%, and with respect to the Revolving Facility and letters of credit, 0.00%, or with respect to the Term Loan Facility, 2.0%, and undrawn amounts under the Revolving Facility will accrue a commitment fee at a rate per annum equal to 0.50% on the average daily undrawn portion of the commitments thereunder.
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 us 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 to1.00, 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. We are also 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).
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
The following table summarizes certain of our obligations as of December 31, 2020 and the estimated timing and effect that such obligations are expected to have on liquidity and cash flows in future periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
Debt
|
$
|
184,355
|
|
|
$
|
7,000
|
|
|
$
|
7,000
|
|
|
$
|
10,500
|
|
|
$
|
14,000
|
|
|
$
|
145,855
|
|
|
$
|
—
|
|
Interest on debt (1)
|
33,830
|
|
|
8,169
|
|
|
7,873
|
|
|
7,510
|
|
|
6,962
|
|
|
3,316
|
|
|
—
|
|
Minimum lease obligations (2)
|
16,124
|
|
|
4,119
|
|
|
3,611
|
|
|
3,512
|
|
|
1,919
|
|
|
1,417
|
|
|
1,546
|
|
Other purchase obligations
|
1,931
|
|
|
1,407
|
|
|
524
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
236,240
|
|
|
$
|
20,695
|
|
|
$
|
19,008
|
|
|
$
|
21,522
|
|
|
$
|
22,881
|
|
|
$
|
150,588
|
|
|
$
|
1,546
|
|
(1) Calculated based on debt outstanding as of December 31, 2020 and the interest rates as of that date.
(2) Minimum lease obligations have not been reduced by sublease rental income.
In addition, as of December 31, 2020, Mafco Worldwide had obligations to purchase $29.6 million of raw materials; however, we are unable to make reasonably reliable estimates of the timing of such payments and, therefore, the related commitments have been excluded from the table above.
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—Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, and all related amendments, which provides updated accounting guidance on recognizing revenue. This updated accounting guidance outlines a single comprehensive model for entities to utilize to recognize revenue when they transfer goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods or services.
The Company adopted this new accounting guidance using the modified retrospective method. There was no impact to the combined balance sheets or the combined statements of operations and comprehensive income as of January 1, 2018 for the adoption of the standards update.
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. 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.
The terms and conditions of sale under the supply agreements and/or purchase orders for Merisant call for FOB Destination and FOB Origin shipping terms with its customers. The customer payment terms are usually 40 days from invoice date. The terms and conditions of sale under the supply agreements and/or purchase orders for Mafco Worldwide have various shipping terms with its customers depending upon the customer requests. The customer payment terms range from 30 – 120 days from invoice date based upon geographic location of the customer.
Merisant usually offers promotional activities (e.g. coupons, trade discounts and other promotional activities) to the customers. These variable consideration amounts are estimated for each customer based on specific arrangement/agreement, 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 date of the Business Combination.
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. 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 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.
We typically evaluate impairment of indefinite-lived intangible assets, including 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 that 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,” 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. It is 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 11 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 and combined balance sheets and recognize changes in that funded status in the year in which changes occur through comprehensive income (loss).
We utilize 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, 2020, a 0.5% decrease in our discount rate assumptions of 2.85% for our qualified pension plan and 2.64% for our non-qualified pension plans would result in a $0.05 million increase in our pension income for the qualified pension plan and a nominal decrease in our pension expense for our non-qualified pension plans for the period of June 26, 2020 to December 31, 2020.
We used a multi-pronged approach to determine our 5.25% 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, 2020, a 0.5% decrease in our long-term rate of return assumption would result in a less than $0.1 million decrease in the pension income of our qualified pension plan for the period of June 26, 2020 to December 31, 2020. Our pension plan assets earned a return of 13.9% in 2020 and 21.5% in 2019. 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.
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Whole Earth Brands, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Whole Earth Brands, Inc. and subsidiaries (the Company) as of December 31, 2020 (Successor) and 2019 (Predecessor), the related consolidated and combined statements of operations, comprehensive income (loss), equity and cash flows for the period from June 26, 2020 through December 31, 2020 (Successor) and the period from January 1, 2020 through June 25, 2020 (Predecessor), and for each of the two years in the period ended December 31, 2019 (Predecessor), and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 (Successor) and 2019 (Predecessor), and the results of its operations and its cash flows for the period from June 26, 2020 through December 31, 2020 (Successor) and the period from January 1, 2020 to June 25, 2020 (Predecessor), and for each of the two years in the period ended December 31, 2019 (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 16, 2021
Whole Earth Brands, Inc.
Consolidated and Combined Balance Sheets
(In thousands of dollars, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
16,898
|
|
|
|
$
|
10,395
|
|
Accounts receivable (net of allowances of $955 and $2,832, respectively)
|
56,423
|
|
|
|
55,031
|
|
Inventories
|
111,699
|
|
|
|
121,129
|
|
Prepaid expenses and other current assets
|
5,045
|
|
|
|
7,283
|
|
Total current assets
|
190,065
|
|
|
|
193,838
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
47,285
|
|
|
|
20,340
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
Operating lease right-of-use assets
|
12,193
|
|
|
|
—
|
|
Goodwill
|
153,537
|
|
|
|
130,870
|
|
Other intangible assets, net
|
184,527
|
|
|
|
251,243
|
|
Deferred tax assets, net
|
2,671
|
|
|
|
1,368
|
|
Other assets
|
6,260
|
|
|
|
2,192
|
|
Total Assets
|
$
|
596,538
|
|
|
|
$
|
599,851
|
|
39
See Notes to Consolidated and Combined Financial Statements
Whole Earth Brands, Inc.
Consolidated and Combined Balance Sheets
(In thousands of dollars, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
$
|
25,200
|
|
|
|
$
|
26,240
|
|
Accrued expenses and other current liabilities
|
29,029
|
|
|
|
28,040
|
|
Current portion of operating lease liabilities
|
3,623
|
|
|
|
—
|
|
Current portion of long-term debt
|
7,000
|
|
|
|
—
|
|
Total current liabilities
|
64,852
|
|
|
|
54,280
|
|
Non-Current Liabilities
|
|
|
|
|
Long-term debt
|
172,662
|
|
|
|
—
|
|
Due to related party
|
—
|
|
|
|
8,400
|
|
Deferred tax liabilities, net
|
23,297
|
|
|
|
31,538
|
|
Operating lease liabilities, less current portion
|
11,324
|
|
|
|
—
|
|
Other liabilities
|
15,557
|
|
|
|
17,883
|
|
Total Liabilities
|
287,692
|
|
|
|
112,101
|
|
Commitments and Contingencies (Note 9)
|
—
|
|
|
|
—
|
|
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; 38,426,669 shares issued and outstanding
|
4
|
|
|
|
—
|
|
Additional paid-in capital
|
325,679
|
|
|
|
—
|
|
Accumulated deficit
|
(25,442)
|
|
|
|
—
|
|
Accumulated other comprehensive income
|
8,605
|
|
|
|
—
|
|
Net parent investment
|
—
|
|
|
|
487,750
|
|
Total stockholders’ equity
|
308,846
|
|
|
|
487,750
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
596,538
|
|
|
|
$
|
599,851
|
|
40
See Notes to Consolidated and Combined Financial Statements
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Operations
(In thousands of dollars, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Product revenues, net
|
$
|
147,168
|
|
|
|
$
|
128,328
|
|
|
$
|
272,123
|
|
|
$
|
290,965
|
|
Cost of goods sold
|
101,585
|
|
|
|
77,627
|
|
|
163,634
|
|
|
167,874
|
|
Gross profit
|
45,583
|
|
|
|
50,701
|
|
|
108,489
|
|
|
123,091
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
44,616
|
|
|
|
43,355
|
|
|
65,896
|
|
|
74,767
|
|
Amortization of intangible assets
|
6,021
|
|
|
|
4,927
|
|
|
10,724
|
|
|
11,111
|
|
Asset impairment charges
|
—
|
|
|
|
40,600
|
|
|
—
|
|
|
—
|
|
Restructuring and other expenses
|
1,052
|
|
|
|
—
|
|
|
2,193
|
|
|
9,461
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
(6,106)
|
|
|
|
(38,181)
|
|
|
29,676
|
|
|
27,752
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
(4,371)
|
|
|
|
(238)
|
|
|
(500)
|
|
|
49
|
|
Other (expense) income, net
|
(578)
|
|
|
|
801
|
|
|
(830)
|
|
|
(1,648)
|
|
(Loss) income before income taxes
|
(11,055)
|
|
|
|
(37,618)
|
|
|
28,346
|
|
|
26,153
|
|
(Benefit) provision for income taxes
|
(2,618)
|
|
|
|
(3,482)
|
|
|
(2,466)
|
|
|
5,312
|
|
Net (loss) income
|
$
|
(8,437)
|
|
|
|
$
|
(34,136)
|
|
|
$
|
30,812
|
|
|
$
|
20,841
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
$
|
(0.22)
|
|
|
|
|
|
|
|
|
41
See Notes to Consolidated and Combined Financial Statements
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Comprehensive Income (Loss)
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Net (loss) income
|
$
|
(8,437)
|
|
|
|
$
|
(34,136)
|
|
|
$
|
30,812
|
|
|
$
|
20,841
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Net change in pension benefit obligations recognized, net of taxes of $242, $65, $(2,689) and $110, respectively.
|
831
|
|
|
|
318
|
|
|
(569)
|
|
|
729
|
|
Foreign currency translation adjustments
|
7,774
|
|
|
|
(2,286)
|
|
|
(1,543)
|
|
|
(782)
|
|
Total other comprehensive income (loss), net of tax
|
8,605
|
|
|
|
(1,968)
|
|
|
(2,112)
|
|
|
(53)
|
|
Comprehensive income (loss)
|
$
|
168
|
|
|
|
$
|
(36,104)
|
|
|
$
|
28,700
|
|
|
$
|
20,788
|
|
42
See Notes to Consolidated and Combined Financial Statements
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Equity
(In thousands of dollars)
|
|
|
|
|
|
|
(Predecessor)
|
|
Total Equity
|
Balance at January 1, 2018
|
$
|
499,136
|
|
Funding to Parent, net
|
(35,432)
|
|
Net income
|
20,841
|
|
Other comprehensive loss, net of tax
|
(53)
|
|
Balance at December 31, 2018
|
$
|
484,492
|
|
Funding to Parent, net
|
(25,442)
|
|
Net income
|
30,812
|
|
Other comprehensive loss, net of tax
|
(2,112)
|
|
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
|
|
Preferred Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Balance at June 26, 2020
|
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
|
|
43
See Notes to Consolidated and Combined Financial Statements
Whole Earth Brands, Inc.
Consolidated and Combined Statements of Cash Flows
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Operating activities
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(8,437)
|
|
|
|
$
|
(34,136)
|
|
|
$
|
30,812
|
|
|
$
|
20,841
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
1,262
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Depreciation
|
1,652
|
|
|
|
1,334
|
|
|
3,031
|
|
|
3,591
|
|
Amortization of intangible assets
|
6,021
|
|
|
|
4,927
|
|
|
10,724
|
|
|
11,111
|
|
Deferred income taxes
|
(2,842)
|
|
|
|
(5,578)
|
|
|
(10,500)
|
|
|
(6,060)
|
|
Asset impairment charges
|
—
|
|
|
|
40,600
|
|
|
—
|
|
|
—
|
|
Pension
|
(169)
|
|
|
|
126
|
|
|
(1,648)
|
|
|
1,658
|
|
Amortization of inventory fair value adjustments
|
12,613
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(4,554)
|
|
|
|
7,726
|
|
|
1,311
|
|
|
2,488
|
|
Inventories
|
(5,305)
|
|
|
|
3,576
|
|
|
2,004
|
|
|
(692)
|
|
Prepaid expenses and other current assets
|
(2,066)
|
|
|
|
3,330
|
|
|
(3,097)
|
|
|
236
|
|
Accounts payable, accrued liabilities and income taxes
|
(7,939)
|
|
|
|
507
|
|
|
(3,057)
|
|
|
269
|
|
Other, net
|
319
|
|
|
|
(2,504)
|
|
|
2,085
|
|
|
362
|
|
Net cash (used in) provided by operating activities
|
(9,445)
|
|
|
|
19,908
|
|
|
31,665
|
|
|
33,804
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(4,489)
|
|
|
|
(3,532)
|
|
|
(4,037)
|
|
|
(4,039)
|
|
Acquisitions, net of cash acquired
|
(456,508)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Proceeds from sale of fixed assets
|
—
|
|
|
|
—
|
|
|
—
|
|
|
1,858
|
|
Transfer from trust account
|
178,875
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(282,122)
|
|
|
|
(3,532)
|
|
|
(4,037)
|
|
|
(2,181)
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
47,855
|
|
|
|
3,500
|
|
|
1,500
|
|
|
7,500
|
|
Repayments of revolving credit facility
|
—
|
|
|
|
(8,500)
|
|
|
—
|
|
|
(600)
|
|
Long-term borrowings
|
140,000
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repayments of long-term borrowings
|
(3,500)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Debt issuance costs
|
(7,139)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Proceeds from sale of common stock and warrants
|
75,000
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Funding to Parent, net
|
—
|
|
|
|
(11,924)
|
|
|
(25,442)
|
|
|
(35,432)
|
|
Net cash provided by (used in) financing activities
|
252,216
|
|
|
|
(16,924)
|
|
|
(23,942)
|
|
|
(28,532)
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
714
|
|
|
|
215
|
|
|
(496)
|
|
|
(24)
|
|
Net change in cash and cash equivalents
|
(38,637)
|
|
|
|
(333)
|
|
|
3,190
|
|
|
3,067
|
|
Cash and cash equivalents, beginning of period
|
55,535
|
|
|
|
10,395
|
|
|
7,205
|
|
|
4,138
|
|
Cash and cash equivalents, end of period
|
$
|
16,898
|
|
|
|
$
|
10,062
|
|
|
$
|
10,395
|
|
|
$
|
7,205
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
3,328
|
|
|
|
$
|
798
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Taxes paid, net of refunds
|
$
|
3,091
|
|
|
|
$
|
2,244
|
|
|
$
|
4,571
|
|
|
$
|
5,175
|
|
44
See Notes to Consolidated and Combined Financial Statements
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.
Change in Accounting Principle—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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-2, “Leases (Topic 842)”, and issued subsequent amendments to the initial guidance. The new guidance requires lessees to recognize assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. The lessee needs to recognize on its balance sheet a right-of-use asset and a lease liability for the majority of its leases (other than leases with a term of less than 12 months). The lease liabilities should be equal to the present value of lease payments not yet paid. The right-of-use asset is measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial indirect costs. For public entities, the updated standard is effective for fiscal years beginning after December 15, 2018. This standard is effective for the Company as an EGC for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted. Act II adopted the standard as of January 1, 2020. The Company recognized the leases acquired as part of the Business Combination on June 25, 2020, which were recorded pursuant to the aforementioned ASU. Refer to Note 3 for additional details.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
In March 2017, the FASB issued ASU 2017-7, “Compensation - Retirement Benefits (Topic 715).” Under the new guidance, employers are required to present the service cost component of net periodic benefit cost in the same statement of operations caption as other employee compensation costs arising from services rendered during the period. Employers are required to present the other components of the net periodic benefit cost separately from the caption that includes the service costs and outside of any subtotal of operating profit and are required to disclose the caption used to present the other components of net periodic benefit cost, if not presented separately on the statement of operations. The Company adopted ASU 2017-7 effective in the second quarter of 2020. The adoption of this standard did not have an effect on the Company’s historically reported net income (loss) but resulted in a presentation reclassification which increased the Company’s historically reported operating profit by $0.1 million for the period from January 1, 2020 to June 25, 2020.
In February 2018, the FASB issued ASU 2018-2, “Income Statement-Reporting Comprehensive Income (Topic 220),” which amends existing standards for income statement-reporting comprehensive income to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act and improve the usefulness of information reported to financial statements users. ASU 2018-2 was effective for years beginning after December 15, 2018, and early adoption was permitted. On January 1, 2019, the Predecessor elected to adopt this standard on a full retrospective approach and reclassified $2.1 million from accumulated other comprehensive income within net parent investment.
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.
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.
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 principally by the first in, first out method.
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 14 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.
Leases—As of the date of the Business Combination, the Company accounts for leases pursuant to ASU No. 2016-02, Leases (Topic 842). Under the new standard, 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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 Accounting Standards Codification “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.
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 date of the Business Combination.
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. 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 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, including 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 that 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 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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.
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 a defined contribution 401(k) plan, 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 pension plan for all participants on December 31, 2019. 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 net parent investment to the extent such changes are not recognized in earnings as components of periodic net benefit cost (see Note 11).
Self-Insurance—The Company is self-insured for certain workers’ compensation. Provisions for losses expected under the program are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred. As of December 31, 2020 and 2019, the liabilities for self-insured workers compensation were $0.5 million and $0.7 million, respectively.
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 12.
Revenue Recognition—Effective January 1, 2018, the Company adopted ASC Topic 606, and all related amendments, which provides updated accounting guidance on recognizing revenue. This updated accounting guidance outlines a single comprehensive model for entities to utilize to recognize revenue when they transfer goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods or services.
The Company adopted this new accounting guidance using the modified retrospective method. There was no impact to the combined balance sheets or the combined statements of operations and comprehensive income as of January 1, 2018 for the adoption of the standards update.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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. 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.
The terms and conditions of sale under the supply agreements and/or purchase orders for Merisant call for FOB Destination and FOB Origin shipping terms with its customers. The customer payment terms are usually 40 days from invoice date. The terms and conditions of sale under the supply agreements and/or purchase orders for Mafco Worldwide have various shipping terms with its customers depending upon the customer requests. The customer payment terms range from 30 – 120 days from invoice date based upon geographic location of the customer.
Merisant usually offers promotional activities (e.g. coupons, trade discounts and other promotional activities) to the customers. These variable consideration amounts are estimated for each customer based on specific arrangement/agreement, 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.
The following table presents the Company’s revenues disaggregated by product categories (in thousands):
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(Successor)
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(Predecessor)
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From June 26, 2020 to December 31, 2020
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From January 1, 2020 to
June 25, 2020
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Year Ended December 31, 2019
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Year Ended December 31, 2018
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Sweeteners and adjacencies
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$
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96,857
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$
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80,749
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$
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165,863
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$
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173,759
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Licorice products
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50,311
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47,579
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106,260
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117,206
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Total product revenues, net
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$
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147,168
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$
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128,328
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$
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272,123
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$
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290,965
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The following table presents revenues disaggregated by business and geographic region (in thousands):
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(Successor)
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(Predecessor)
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From June 26, 2020 to December 31, 2020
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From January 1, 2020 to
June 25, 2020
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Year Ended December 31, 2019
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Year Ended December 31, 2018
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Branded CPG:
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North America
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$
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40,273
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$
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29,926
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$
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59,945
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$
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59,007
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Europe, Middle East and Africa
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41,855
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35,360
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75,974
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81,978
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Asia-Pacific
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8,428
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9,584
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17,772
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17,035
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Latin America
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6,301
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5,879
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12,172
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15,739
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Flavors & Ingredients
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50,311
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47,579
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106,260
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117,206
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Total product revenues, net
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$
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147,168
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|
|
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$
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128,328
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|
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$
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272,123
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|
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$
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290,965
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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 Costs—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. Advertising expense was $6.2 million for the period from June 26, 2020 through December 31, 2020, $4.8 million from January 1, 2020 through June 25, 2020, $11.9 million in 2019 and $16.1 million in 2018.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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 of Financial Instruments—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 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.
The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term maturity.
The Company measures its term loan and revolving facilities at original carrying value including accrued interest, net of unamortized deferred financing costs and fees. The fair value of the credit facilities approximates carrying value, as they consist of variable rate loans.
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 losses, net of $0.9 million for the period from June 26, 2020 through December 31, 2020, foreign exchange gains, net of $0.5 million from January 1, 2020 through June 25, 2020, and foreign exchange losses, net of $2.0 million in 2019 and $1.9 million in 2018.
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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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. The Company recorded $0.3 million of expense related to remeasurement adjustments in the consolidated statements of operations for 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 and for the year ended December 31, 2019.
Derivative Financial Instruments—The Company periodically uses foreign currency forward exchange contracts to reduce the exposure of effects on net cash flows due to fluctuations in foreign currency exchange rates. The Company recognizes these derivative instruments on the balance sheet as either assets or liabilities measured at fair value, with changes in fair value recognized immediately in earnings. The foreign currency forward exchange contracts have maturities of less than one year. The Company did not enter into any forward exchange contracts in 2020 and the effect of forward exchange contracts were not material in 2019 and 2018.
Restructuring and Employee Termination Benefits—During 2020, 2019 and 2018, 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 employee termination benefits of $1.1 million for the period from June 26, 2020 to December 31, 2020 and $0.6 million and $3.1 million during the years ended December 31, 2019 and 2018, respectively. Employee termination benefits related to the restructuring plans are recorded in restructuring and other expenses in the accompanying consolidated and combined statements of operations. All of the charges related to the 2019 program were paid as of December 31, 2019. In addition, the Company recorded facility exit and other related costs of $0.8 million and $1.9 million during 2019 and 2018, respectively, related to Branded CPG, and $0.8 million and $4.5 million during 2019 and 2018, respectively, related to Flavors & Ingredients. The Company did not recognize any facility exit and other related costs during 2020. Facility exit and other related costs are recorded in restructuring and other expenses on the accompanying consolidated and combined statements of operations.
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.
New Accounting Standards—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 generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of adopting this standard but does not expect it to have a material impact on its consolidated financial statements.
In 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 is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20).” The standard modifies certain disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans by removing disclosures that are no longer considered cost beneficial, clarifying specific requirements of disclosures, and adding disclosure requirements identified as relevant. This standard is effective for the Company as an EGC for the fiscal years beginning after December 15, 2021. Early adoption is permitted.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The amendments in ASU 2018-14 should be applied retrospectively to each period presented. The Company is currently evaluating the impact of adopting ASU 2018-14 on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The standard requires entities to estimate losses on financial assets measured at amortized cost, including trade receivables, debt securities and loans, using an expected credit loss model. The expected credit loss differs from the previous incurred losses model primarily in that the loss recognition threshold of “probable” has been eliminated and that expected loss should consider reasonable and supportable forecasts in addition to the previously considered past events and current conditions. Additionally, the guidance requires additional disclosures related to the further disaggregation of information related to the credit quality of financial assets by year of the asset’s origination for as many as five years. Entities must apply the standard provision as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This standard is effective for the Company as an EGC for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
NOTE 2: BUSINESS COMBINATIONS
On June 25, 2020, pursuant to the Business Combination, the Company indirectly acquired Merisant and Mafco Worldwide in a transaction accounted for as a business combination under ASC Topic 805, “Business Combinations,” and was accounted for using the acquisition method. Under the acquisition method, the acquisition date fair value of the consideration paid by the Company was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.
The following summarizes the preliminary purchase consideration (in thousands):
|
|
|
|
|
|
Base cash consideration
|
$
|
387,500
|
|
Closing adjustment
|
(764)
|
|
Total Purchase Price
|
$
|
386,736
|
|
The Company preliminarily 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
|
$
|
10,062
|
|
Accounts receivable
|
45,769
|
|
Inventories
|
106,436
|
|
Prepaid expenses and other current assets
|
2,461
|
|
Property, plant and equipment, net
|
43,554
|
|
Operating lease right-of-use assets
|
12,541
|
|
Intangible assets
|
148,750
|
|
Deferred tax assets, net
|
1,065
|
|
Other assets
|
1,398
|
|
Total assets acquired
|
372,036
|
|
Accounts payable
|
18,590
|
|
Accrued expenses and other current liabilities
|
35,063
|
|
Current portion of operating lease liabilities
|
3,007
|
|
Operating lease liabilities, less current portion
|
12,208
|
|
Deferred tax liabilities, net
|
23,167
|
|
Other liabilities
|
15,467
|
|
Total liabilities assumed
|
107,502
|
|
Net assets acquired
|
264,534
|
|
Goodwill
|
122,202
|
|
Total Purchase Price
|
$
|
386,736
|
|
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The preliminary 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
|
$
|
47,359
|
|
|
0.5 to 10
|
Tradenames
|
90,691
|
|
|
25
|
Product formulations
|
10,700
|
|
|
Indefinite
|
|
$
|
148,750
|
|
|
|
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, $2.5 million will be deductible for income tax purposes pursuant to Internal Revenue Code (“IRC”) Section 197 over a 15 year period.
The Company’s preliminary allocation of purchase price was based upon preliminary 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 accounting for the Business Combination is not complete as the valuation for certain acquired assets and liabilities have not been finalized. These final valuations of the assets and liabilities could have a material impact on the preliminary purchase price allocation disclosed above.
In the third quarter and fourth quarter of 2020, the Company recorded measurement period adjustments to its initial allocation of purchase price as a result of ongoing valuation procedures on assets acquired and liabilities assumed, including (i) a decrease in accounts receivable of $1.5 million; (ii) a decrease in inventory of $2.7 million; (iii) a decrease in prepaid expenses and other current assets of $10.4 million (see discussion below); (iv) an increase in property, plant and equipment of $21.6 million, of which $19.1 million is due to the valuation of certain real estate; (v) a decrease in operating lease right-of-use assets of $2.7 million to adjust the value of the Company’s leases to market value; (vi) a decrease in intangible assets of $8.7 million; (vii) an increase in other assets of $0.4 million; (viii) a decrease in accounts payable of $0.4 million; (ix) a decrease in accrued expenses and other current liabilities of $0.7 million; (x) a decrease in deferred tax liabilities, net of $0.8 million; (xi) a decrease in other liabilities of $1.0 million; and (xii) a decrease to goodwill of $8.9 million due to the incremental measurement period adjustments discussed in items (i) through (xi).
The initial allocation of purchase price reflects a $10.1 million adjustment to prepaid expenses and other current assets as a result of a change to the consideration transferred relative to the initial purchase price allocation. This adjustment was also reflected as a reduction to the estimated closing adjustments, and therefore, the total purchase price.
Direct transaction-related costs consist of costs incurred in connection with the Business Combination. Act II incurred transaction costs of $17.0 million prior to the Business Combination which are reflected within the accumulated deficit within the consolidated statement of Equity. During the three months ended September 30, 2020, the Company identified $1.2 million of additional Act II transaction costs that had been incurred in connection with the Business Combination. The effect of correcting for these costs decreased additional paid-in capital by $0.9 million and accumulated deficit by $0.3 million.
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 sugar, keto-friendly, and plant-based sweeteners and 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 $3.2 million for the year ended December 31, 2020. Swerve is included within the Company’s Branded CPG reportable segment.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The following summarizes the preliminary purchase consideration (in thousands):
|
|
|
|
|
|
Base cash consideration
|
$
|
80,000
|
|
Closing adjustment estimate
|
(1,046)
|
|
Total Purchase Price
|
$
|
78,954
|
|
The Company preliminarily 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
|
36,003
|
|
Total Purchase Price
|
$
|
78,954
|
|
The preliminary 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.
The Company’s preliminary allocation of purchase price was based upon preliminary 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 accounting for the Swerve acquisition is not complete as the valuation for certain acquired assets and liabilities have not been finalized.These final valuations of the assets and liabilities could have a material impact on the preliminary purchase price allocation disclosed above.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
Statements of Operations
|
|
Year Ended
|
|
December 31, 2020
|
|
December 31, 2019
|
Revenue
|
$
|
305,544
|
|
|
$
|
302,991
|
|
Net loss (1)
|
$
|
(18,729)
|
|
|
$
|
(5,705)
|
|
(1) 2019 includes transaction bonuses and related payroll taxes of $11.9 million for the Predecessor and $21.1 million for Swerve employees.
The unaudited pro forma financial information does not include any costs related to the Business Combination and Swerve acquisition. In addition, 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 acquisitions been consummated on January 1, 2019.
The Successor and Predecessor periods have been combined in the pro forma for the years ended December 31, 2020 and 2019 and include 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 property, plant and equipment that has 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.
NOTE 3: LEASES
The Company measured Merisant and Mafco’s legacy lease agreements as if the leases were new at the date of the Business Combination and applied the provisions of ASC Topic 842. This resulted in the recognition of right-of-use assets and operating lease liabilities of $15.2 million as of June 26, 2020. The right-of-use assets and operating lease liabilities at June 26, 2020 also included approximately $0.3 million related to one lease that Act II had applied the provisions of ASC Topic 842 to effective January 1, 2020. In the third quarter of 2020, the Company recorded a measurement period adjustment that reduced the right-of-use assets by $2.7 million to adjust the value of the leases to market value. In the fourth quarter of 2020, the Company also applied the provisions of Topic 842 to one lease acquired in the Swerve acquisition. All leases are classified as operating leases.
The Company’s lease portfolio includes a factory building, office space, warehouses, material handling equipment, vehicles and office equipment.
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. Lease expense for the period from June 26, 2020 through December 31, 2020 was $2.3 million. Lease expense under prior lease accounting rules for the period of January 1, 2020 to June 25, 2020 and the years ended December 31, 2019 and 2018 was $2.2 million, $5.2 million and $3.7 million, respectively. The Company subleases some of its unused office space to third parties. These subleases generated sublease income of $0.3 million for the period from June 26, 2020 through December 31, 2020, $0.3 million from January 1, 2020 through June 25, 2020 and $0.5 million and $0.4 million for the years-ended December 31, 2019 and 2018, respectively.
The following table presents the future maturities of the Company’s lease obligations as of December 31, 2020 (in thousands):
|
|
|
|
|
|
2021
|
$
|
4,119
|
|
2022
|
3,611
|
|
2023
|
3,512
|
|
2024
|
1,919
|
|
2025
|
1,417
|
|
Thereafter
|
1,546
|
|
Total lease payments
|
16,124
|
|
Less: imputed interest
|
(1,177)
|
|
Total operating lease liabilities
|
$
|
14,947
|
|
The weighted-average remaining lease term is 4.6 years and the weighted-average discount rate is 3.42%.
Cash paid for amounts included in the measurement of the lease liability and for supplemental non-cash information for the period from June 26, 2020 through December 31, 2020 was $1.7 million.
The following table presents the Company’s future minimum lease payments under ASC Topic 840 as of December 31, 2019 (in thousands):
|
|
|
|
|
|
2020
|
$
|
3,224
|
|
2021
|
2,845
|
|
2022
|
2,608
|
|
2023
|
2,354
|
|
2024
|
968
|
|
Thereafter
|
2,195
|
|
Less: sublease rental income
|
(3,683)
|
|
Total
|
$
|
10,511
|
|
NOTE 4: INVENTORIES
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
Raw materials and supplies
|
$
|
66,487
|
|
|
|
$
|
89,611
|
|
Work in process
|
562
|
|
|
|
387
|
|
Finished goods
|
44,650
|
|
|
|
31,131
|
|
Total inventories
|
$
|
111,699
|
|
|
|
$
|
121,129
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
Machinery, equipment and other
|
$
|
14,108
|
|
|
|
$
|
49,901
|
|
Buildings and building improvements
|
20,247
|
|
|
|
23,207
|
|
|
34,355
|
|
|
|
73,108
|
|
Accumulated depreciation
|
(1,833)
|
|
|
|
(55,538)
|
|
|
32,522
|
|
|
|
17,570
|
|
Land
|
9,670
|
|
|
|
1,908
|
|
Construction in progress
|
5,093
|
|
|
|
862
|
|
Property, plant and equipment, net
|
$
|
47,285
|
|
|
|
$
|
20,340
|
|
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Other intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (useful life of 5 to 10 years)
|
$
|
50,877
|
|
|
$
|
(3,020)
|
|
|
$
|
47,857
|
|
|
|
$
|
105,000
|
|
|
$
|
(38,731)
|
|
|
$
|
66,269
|
|
Tradenames (useful life of 25 years)
|
128,155
|
|
|
(2,185)
|
|
|
125,970
|
|
|
|
95,055
|
|
|
(19,939)
|
|
|
75,116
|
|
Total
|
$
|
179,032
|
|
|
$
|
(5,205)
|
|
|
$
|
173,827
|
|
|
|
$
|
200,055
|
|
|
$
|
(58,670)
|
|
|
$
|
141,385
|
|
Other intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Product formulations
|
|
|
|
|
10,700
|
|
|
|
|
|
|
|
109,858
|
|
Total other intangible assets, net
|
|
|
|
|
184,527
|
|
|
|
|
|
|
|
251,243
|
|
Goodwill
|
|
|
|
|
153,537
|
|
|
|
|
|
|
|
130,870
|
|
Total goodwill and other intangible assets
|
|
|
|
|
$
|
338,064
|
|
|
|
|
|
|
|
$
|
382,113
|
|
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, 2020, have a weighted-average remaining useful life of approximately 20 years. The Successor’s amortization expense for intangible assets was $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, $10.7 million and $11.1 million for the periods from January 1, 2020 to June 25, 2020 and for the years ended December 31, 2019 and 2018, respectively.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Amortization expense relating to amortizable intangible assets as of December 31, 2020 for the next five years is expected to be as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
11,195
|
|
2022
|
11,195
|
|
2023
|
11,195
|
|
2024
|
11,195
|
|
2025
|
10,961
|
|
The changes in the carrying amounts of goodwill during the years ended December 31, 2020 and December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded CPG
|
|
Flavors & Ingredients
|
|
Total
|
Balance as of December 31, 2019 and 2018 (Predecessor)
|
$
|
88,849
|
|
|
$
|
42,021
|
|
|
$
|
130,870
|
|
Impairment
|
(11,100)
|
|
|
(6,600)
|
|
|
(17,700)
|
|
Balance at June 25, 2020 (Predecessor)
|
$
|
77,749
|
|
|
$
|
35,421
|
|
|
$
|
113,170
|
|
Purchase accounting adjustments
|
40,779
|
|
|
(31,747)
|
|
|
9,032
|
|
Balance at June 26, 2020 (Successor)
|
$
|
118,528
|
|
|
$
|
3,674
|
|
|
$
|
122,202
|
|
Acquisition of Swerve
|
36,003
|
|
|
—
|
|
|
36,003
|
|
Currency translation adjustment
|
(4,208)
|
|
|
(460)
|
|
|
(4,668)
|
|
Balance at December 31, 2020 (Successor)
|
$
|
150,323
|
|
|
$
|
3,214
|
|
|
$
|
153,537
|
|
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.
During the first quarter of 2020, the on-going macroeconomic disruption and uncertainty caused by the COVID-19 pandemic, including the impact on enterprise valuations across sectors, represented events which could indicate that the carrying value of goodwill and indefinite-lived intangible assets of the Predecessor may not be recoverable. As a result, the Predecessor performed an interim impairment assessment at March 31, 2020. In performing the quantitative assessment of indefinite-lived intangible assets, the estimated fair value was determined under an income approach using 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 main assumptions supporting the cash flow projections included revenue growth, EBIT margins and discount rate. The financial projections reflected management’s best estimate of economic and market conditions over the projected period including forecasted revenue growth, EBIT margins, tax rate, capital expenditures, depreciation and amortization, changes in working capital requirements and the terminal growth rate. It was determined that the carrying value of the indefinite-lived intangible assets at Flavors & Ingredients exceeded their fair value and an 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 goodwill impairment charge of $17.7 million was recorded in the first quarter of 2020.
In both the fourth quarters of 2020 and 2019, the Company performed its annual impairment tests on goodwill and product formulations using a qualitative assessment 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 7: DEBT
Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
Term loan
|
$
|
136,500
|
|
|
|
$
|
—
|
|
Revolving credit facility
|
47,855
|
|
|
|
—
|
|
Less: current portion
|
(7,000)
|
|
|
|
—
|
|
Less: unamortized debt issuance costs
|
(4,693)
|
|
|
|
—
|
|
Total long-term debt
|
$
|
172,662
|
|
|
|
$
|
—
|
|
Maturities—The Company’s debt and other obligations outstanding as of December 31, 2020 mature as shown below (in thousands):
|
|
|
|
|
|
2021
|
$
|
7,000
|
|
2022
|
7,000
|
|
2023
|
10,500
|
|
2024
|
14,000
|
|
2025
|
145,855
|
|
Total debt
|
184,355
|
|
Unamortized discounts
|
(4,693)
|
|
Total debt, net of unamortized discounts
|
$
|
179,662
|
|
Loan Agreement—The Company entered into a Loan Agreement (the “Loan Agreement”) on June 25, 2020, with Toronto Dominion (Texas) LLC, as administrative agent, BofA Securities Inc., as Syndication Agent, BMO Capital Markets Corp. and Truist Bank, as documentation agents, and the other lenders party thereto, which provided (x) a senior secured first lien term loan facility of $140 million that matures in five years on June 25, 2025 and (y) a first lien revolving credit facility of up to $50 million that also matures in five years. Loans outstanding under the first lien term loan facility and the first lien revolving credit facility accrue interest at a rate per annum equal to LIBOR subject to a floor of 1% plus a margin ranging from 3.00% to 3.75% or, at Company’s option, a base rate subject to a floor of 2% plus a margin ranging from 2.00% to 2.75%, depending on the achievement of certain leverage ratios. Undrawn amounts under the first lien revolving credit facility are expected to accrue a commitment fee at a rate per annum of 0.40% on the average daily undrawn portion of the commitments thereunder, with step downs to 0.30% upon achievement of certain leverage ratios. As of December 31, 2020, there were $2.1 million of outstanding letters of credit that reduced the Company’s availability under the revolving credit facility. Additionally, approximately $1.9 million of issuance costs allocated to the revolving credit facility were capitalized as an asset as of June 30, 2020 and are being amortized ratably over the commitment period of five years. There were $47.9 million in borrowings under the revolving credit facility as of December 31, 2020.
The Company converted the base rate term loan to a LIBOR loan on July 1, 2020 at an interest rate of 4.50%. Borrowings under the Loan Agreement are collateralized by substantially all of the Company’s assets, and the Loan Agreement includes restrictive qualitative and quantitative covenants. The Company was in compliance with its covenants under the Loan Agreement on December 31, 2020. The unpaid principal amount of the term loan is payable in quarterly installments on the last day of each fiscal quarter commencing on September 30, 2020. The payment for each of the first 12 fiscal quarters is equal to 1.25% of the beginning principal amount, or $1.75 million, and for the following seven fiscal quarters thereafter is 2.50%, or $3.5 million. The remaining principal payment on the term loan is due upon maturity.
On February 5, 2021, the Company amended and restated the Loan Agreement (see Note 18).
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
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.
Debt—The Company measures its first lien term loan and revolving facilities at original carrying value including accrued interest, net of unamortized deferred financing costs and fees. The fair value of the credit facilities approximates carrying value, as they consist of variable rate loans.
NOTE 9: 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.
As of December 31, 2020, the Company had obligations to purchase $29.6 million of raw materials through 2025; however, it is unable to make reasonably reliable estimates of the timing of such payments. In addition, the Company has commitments under purchase obligations related to market data research, technology services and capital projects totaling $1.9 million.
NOTE 10: 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.
Whole Earth Brands, Inc.
Notes to 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 income tax (benefit) provision were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(969)
|
|
|
|
$
|
51
|
|
|
$
|
1,972
|
|
|
$
|
4,789
|
|
State and local
|
54
|
|
|
|
16
|
|
|
197
|
|
|
134
|
|
Foreign
|
1,139
|
|
|
|
2,029
|
|
|
5,865
|
|
|
6,449
|
|
|
224
|
|
|
|
2,096
|
|
|
8,034
|
|
|
11,372
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
(2,192)
|
|
|
|
(4,262)
|
|
|
(1,802)
|
|
|
(5,148)
|
|
State and local
|
138
|
|
|
|
(259)
|
|
|
336
|
|
|
(1,006)
|
|
Foreign
|
(788)
|
|
|
|
(1,057)
|
|
|
(9,034)
|
|
|
94
|
|
|
(2,842)
|
|
|
|
(5,578)
|
|
|
(10,500)
|
|
|
(6,060)
|
|
Total (benefit) provision for income taxes
|
$
|
(2,618)
|
|
|
|
$
|
(3,482)
|
|
|
$
|
(2,466)
|
|
|
$
|
5,312
|
|
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The following is a reconciliation of income tax (benefit) provision computed at the U.S. federal statutory rate to income tax (benefit) provision in the consolidated and combined statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
(18,981)
|
|
|
|
$
|
(49,477)
|
|
|
$
|
10,859
|
|
|
$
|
(6,021)
|
|
Foreign
|
7,926
|
|
|
|
11,859
|
|
|
17,487
|
|
|
32,174
|
|
Total (loss) income before income taxes
|
$
|
(11,055)
|
|
|
|
$
|
(37,618)
|
|
|
$
|
28,346
|
|
|
$
|
26,153
|
|
|
|
|
|
|
|
|
|
|
Federal income tax rate
|
21.0%
|
|
|
21.0%
|
|
21.0%
|
|
21.0%
|
Tax provision at federal statutory rate
|
$
|
(2,322)
|
|
|
|
$
|
(7,900)
|
|
|
$
|
5,953
|
|
|
$
|
5,492
|
|
State and local taxes
|
1,812
|
|
|
|
(278)
|
|
|
426
|
|
|
(879)
|
|
Foreign rate differential
|
(70)
|
|
|
|
(125)
|
|
|
789
|
|
|
1,533
|
|
Change in tax rates
|
735
|
|
|
|
—
|
|
|
(2,209)
|
|
|
(53)
|
|
Changes in uncertain tax positions
|
40
|
|
|
|
(651)
|
|
|
64
|
|
|
(100)
|
|
Change in valuation allowance
|
(1,474)
|
|
|
|
883
|
|
|
588
|
|
|
(1,957)
|
|
Goodwill impairment
|
—
|
|
|
|
3,717
|
|
|
—
|
|
|
—
|
|
Impact of Luxembourg restructuring
|
—
|
|
|
|
—
|
|
|
(6,438)
|
|
|
—
|
|
U.S. effects of international operations
|
320
|
|
|
|
2,084
|
|
|
3,079
|
|
|
6,136
|
|
Tax credits
|
(2,161)
|
|
|
|
(1,201)
|
|
|
(5,233)
|
|
|
(5,498)
|
|
Other
|
502
|
|
|
|
(11)
|
|
|
515
|
|
|
638
|
|
Total (benefit) provision for income taxes
|
$
|
(2,618)
|
|
|
|
$
|
(3,482)
|
|
|
$
|
(2,466)
|
|
|
$
|
5,312
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
23.7%
|
|
|
9.3%
|
|
(8.7)%
|
|
20.3%
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
Deferred tax assets:
|
|
|
|
|
Accounts receivable
|
$
|
473
|
|
|
|
$
|
695
|
|
Accrued expenses
|
3,838
|
|
|
|
2,065
|
|
Inventory
|
5,231
|
|
|
|
4,102
|
|
Other assets
|
160
|
|
|
|
1,008
|
|
Deferred rent
|
—
|
|
|
|
427
|
|
Pension asset
|
348
|
|
|
|
1,783
|
|
Property, plant and equipment
|
—
|
|
|
|
864
|
|
Lease accounting
|
3,360
|
|
|
|
—
|
|
U.S. and foreign net operating losses
|
13,998
|
|
|
|
15,014
|
|
Tax credits
|
254
|
|
|
|
2,345
|
|
Total deferred tax assets
|
27,662
|
|
|
|
28,303
|
|
Less valuation allowance
|
(9,879)
|
|
|
|
(12,409)
|
|
Net deferred tax assets
|
$
|
17,783
|
|
|
|
$
|
15,894
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
(4,678)
|
|
|
|
—
|
|
Operating lease right-of-use asset
|
(2,747)
|
|
|
|
—
|
|
Intangible assets
|
(24,266)
|
|
|
|
(38,451)
|
|
Deferred rent
|
(78)
|
|
|
|
—
|
|
Unremitted earnings
|
(719)
|
|
|
|
(1,207)
|
|
Other liabilities
|
(5,921)
|
|
|
|
(6,406)
|
|
Total deferred tax liabilities
|
(38,409)
|
|
|
|
(46,064)
|
|
Net deferred tax liability
|
$
|
(20,626)
|
|
|
|
$
|
(30,170)
|
|
As of December 31, 2020 the Company recorded a reduction to deferred tax liabilities of approximately $2.9 million in connection with the business combination accounting with an offset to goodwill.
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 taxable temporary differences into future taxable income, the Company has determined that as of December 31, 2020 its deferred tax assets are realizable on a more-likely-than not basis with the exception of foreign tax credits of $0.2 million, certain state net operating loss carry forwards of $7.1 million predominately related to Illinois, and $2.5 million of net operating loss carry forwards in India, Luxembourg, Mexico and China.
As of December 31, 2020, the Company has net operating loss carry forwards and tax credits which will expire if not utilized, including: $98.1 million in Illinois state net operating losses expiring between 2021 and 2033, $0.3 million of U.S. federal foreign tax credits expiring in 2030, $2.9 million of net operating losses in Mexico substantially expiring in 2025 and through 2030, $4.8 million of net operating losses in Luxembourg substantially expiring in 2035 and through 2037, $2.8 million of net operating losses in India expiring between 2022 and 2028, and $0.8 million of net operating losses in China expiring in 2022 through 2026.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
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, 2020, and 2019, the Company has accrued future income taxes and withholding taxes for future remittances to its Switzerland and Hong Kong affiliates of $1.7 million and $1.4 million, respectively.
The following summarizes the changes in the Company’s liability for unrecognized tax positions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
Beginning of period
|
$
|
539
|
|
|
|
$
|
895
|
|
|
$
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
—
|
|
|
|
(291)
|
|
|
(92)
|
|
Currency differences
|
70
|
|
|
|
(65)
|
|
|
1
|
|
End of period
|
$
|
609
|
|
|
|
$
|
539
|
|
|
$
|
895
|
|
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 $0.6 million, $0.4 million and $0.9 million as of December 31, 2020, June 25, 2020 and December 31, 2019, respectively. Of the amounts reflected in the table above as of December 31, 2020, the entire amount if recognized, would reduce the Company’s effective tax rate. The Company expects that approximately $0.4 million of its unrecognized tax benefits will be recognized 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 2016 through 2020. The Company’s French, Argentina, Luxembourg and Swiss tax years 2015 through 2020 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 11: 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 pension plan on December 31, 2019. In addition, the Company has unfunded non-qualified plans covering certain salaried employees with additional retirement benefits in excess of qualified plan limits imposed by federal tax law. The Company uses December 31 as a measurement date for the plans.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The following table reconciles the funded status of the Company’s defined benefit pension plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
Accumulated benefit obligations
|
$
|
41,112
|
|
|
|
$
|
39,792
|
|
|
$
|
37,847
|
|
Changes in projected benefit obligations:
|
|
|
|
|
|
|
Projected benefit obligations at beginning of year
|
$
|
39,879
|
|
|
|
$
|
37,854
|
|
|
$
|
34,000
|
|
Service cost
|
94
|
|
|
|
41
|
|
|
692
|
|
Interest cost
|
545
|
|
|
|
593
|
|
|
1,410
|
|
Actuarial loss
|
1,568
|
|
|
|
1,826
|
|
|
5,236
|
|
Benefits paid
|
(974)
|
|
|
|
(435)
|
|
|
(1,019)
|
|
Liability gain due to curtailment
|
—
|
|
|
|
—
|
|
|
(2,465)
|
|
Projected benefit obligations at end of year
|
41,112
|
|
|
|
39,879
|
|
|
37,854
|
|
Change in plans’ assets:
|
|
|
|
|
|
|
Fair value of plans’ assets at beginning of year
|
30,674
|
|
|
|
30,213
|
|
|
25,800
|
|
Actual returns on plans’ assets
|
3,195
|
|
|
|
732
|
|
|
5,112
|
|
Employee contributions
|
163
|
|
|
|
163
|
|
|
320
|
|
Benefits paid
|
(974)
|
|
|
|
(434)
|
|
|
(1,019)
|
|
Fair value of plans’ assets at end of year
|
33,058
|
|
|
|
30,674
|
|
|
30,213
|
|
Net pension liability
|
$
|
(8,054)
|
|
|
|
$
|
(9,205)
|
|
|
$
|
(7,641)
|
|
The projected benefit obligation at December 31, 2020, June 25, 2020 and December 31, 2019 included $10.3 million, $9.7 million and $9.0 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Other assets
|
$
|
2,238
|
|
|
|
$
|
512
|
|
|
$
|
1,375
|
|
|
Accrued expenses and other current liabilities
|
(374)
|
|
|
|
(373)
|
|
|
(370)
|
|
|
Other liabilities
|
(9,918)
|
|
|
|
(9,344)
|
|
|
(8,646)
|
|
|
Net amount recognized
|
$
|
(8,054)
|
|
|
|
$
|
(9,205)
|
|
|
$
|
(7,641)
|
|
|
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 funded defined benefit pension plans, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
Prior service cost
|
$
|
—
|
|
|
|
$
|
169
|
|
|
$
|
201
|
|
Net actuarial (gain) loss
|
(620)
|
|
|
|
13,997
|
|
|
12,362
|
|
|
$
|
(620)
|
|
|
|
$
|
14,166
|
|
|
$
|
12,563
|
|
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)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
|
Net actuarial (gain) loss
|
$
|
—
|
|
|
|
$
|
1,912
|
|
|
$
|
(879)
|
|
|
|
Prior service credit
|
—
|
|
|
|
—
|
|
|
(316)
|
|
|
|
Amortization of prior service costs
|
—
|
|
|
|
(33)
|
|
|
(149)
|
|
|
|
Amortization of actuarial loss
|
—
|
|
|
|
(276)
|
|
|
(1,332)
|
|
|
|
Total (gain) loss recognized in other comprehensive income
|
$
|
—
|
|
|
|
$
|
1,603
|
|
|
$
|
(2,676)
|
|
|
|
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)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Service cost
|
$
|
94
|
|
|
|
$
|
41
|
|
|
$
|
692
|
|
|
$
|
864
|
|
Interest cost
|
545
|
|
|
|
593
|
|
|
1,410
|
|
|
1,320
|
|
Expected return on plan assets
|
(783)
|
|
|
|
(817)
|
|
|
(1,462)
|
|
|
(1,507)
|
|
Amortization of prior service cost
|
—
|
|
|
|
33
|
|
|
149
|
|
|
149
|
|
Amortization of net actuarial loss
|
—
|
|
|
|
276
|
|
|
1,332
|
|
|
1,344
|
|
Settlement/curtailment expense
|
(25)
|
|
|
|
—
|
|
|
317
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(169)
|
|
|
|
$
|
126
|
|
|
$
|
2,438
|
|
|
$
|
2,170
|
|
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)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Cost of Goods Sold
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
614
|
|
|
$
|
500
|
|
Selling, general and administrative expense
|
69
|
|
|
|
41
|
|
|
1,824
|
|
|
1,670
|
|
Other (expense) income, net
|
(238)
|
|
|
|
85
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(169)
|
|
|
|
$
|
126
|
|
|
$
|
2,438
|
|
|
$
|
2,170
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
Weighted-average assumptions used to determine benefit obligation at year end:
|
|
|
|
|
|
|
Discount rate
|
2.61
|
%
|
|
|
2.85
|
%
|
|
3.25
|
%
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
Discount rate
|
2.85
|
%
|
|
|
3.25
|
%
|
|
4.25
|
%
|
Expected long-term rate of return on plan assets
|
5.25
|
%
|
|
|
5.50
|
%
|
|
5.75
|
%
|
Rate of compensation increase
|
—
|
%
|
|
|
—
|
%
|
|
3.50
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
Weighted-average assumptions used to determine benefit obligation at year end:
|
|
|
|
|
|
|
Discount rate
|
2.42
|
%
|
|
|
2.64
|
%
|
|
3.25
|
%
|
Rate of compensation increase
|
3.50
|
%
|
|
|
3.50
|
%
|
|
3.50
|
%
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
Discount rate
|
2.64
|
%
|
|
|
3.25
|
%
|
|
4.25
|
%
|
Rate of compensation increase
|
3.50
|
%
|
|
|
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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The Company considers 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.
Plan Assets—The investment committee for the Company’s plan has adopted (and revises from time to time) 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 investment committee retains a professional investment consultant as an advisor. Based upon the investment consultant’s advice, in 2020 and 2019 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.
The plan currently has the following target ranges for these asset classes as shown below. The ranges are intended to allow flexibility for allocating assets and rebalancing as needed depending on changes in market values and the investment environment. The strategy utilized is regularly reviewed by the plan’s investment committee, which may decide to make adjustments to the allocations when allocations fall outside the asset class range.
|
|
|
|
|
|
|
Target Ranges
|
Asset classes:
|
|
Cash equivalents and other
|
0% - 17%
|
Fixed income securities
|
45% - 100%
|
Equity securities
|
0% - 28%
|
The following tables set forth, by category, the Company’s pension plan assets as of December 31, 2020 and December 31, 2019, using the fair value hierarchy established under ASC Topic 820 and as described in Note 8. The fair value hierarchy in the tables excludes certain investments which are valued using Net Asset Value (“NAV”) as a practical expedient (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan Assets as of December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Pension plan assets measured at fair value:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
419
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
419
|
|
Mutual funds
|
5,374
|
|
|
442
|
|
|
—
|
|
|
5,816
|
|
U.S. Government securities
|
—
|
|
|
3,087
|
|
|
—
|
|
|
3,087
|
|
Municipal/provincial bonds
|
—
|
|
|
296
|
|
|
—
|
|
|
296
|
|
Corporate bonds
|
—
|
|
|
13,408
|
|
|
—
|
|
|
13,408
|
|
Total pension plan assets measured at fair value
|
$
|
5,793
|
|
|
$
|
17,233
|
|
|
$
|
—
|
|
|
$
|
23,026
|
|
|
|
|
|
|
|
|
|
Pension plan assets measured at NAV as a practical expedient (1)
|
|
|
|
|
|
|
10,032
|
|
Total pension plan assets
|
|
|
|
|
|
|
$
|
33,058
|
|
(1) Certain common/collective trusts, investments in private equity funds and 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.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan Assets as of December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Pension plan assets measured at fair value:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
398
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
398
|
|
Mutual funds
|
4,996
|
|
|
457
|
|
|
—
|
|
|
5,453
|
|
U.S. Government securities
|
—
|
|
|
2,697
|
|
|
—
|
|
|
2,697
|
|
Municipal/provincial bonds
|
—
|
|
|
322
|
|
|
—
|
|
|
322
|
|
Corporate bonds
|
—
|
|
|
12,578
|
|
|
—
|
|
|
12,578
|
|
Total pension plan assets measured at fair value
|
$
|
5,394
|
|
|
$
|
16,054
|
|
|
$
|
—
|
|
|
21,448
|
|
|
|
|
|
|
|
|
|
Pension plan assets measured at NAV as a practical expedient (1)
|
|
|
|
|
|
|
8,765
|
|
Total pension plan assets
|
|
|
|
|
|
|
$
|
30,213
|
|
(1) Certain common/collective trusts, investments in private equity funds and 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. Mutual funds are valued at their net asset value quoted in active markets. Common and collective funds, as well as investments in private equity funds, are valued at net asset value as reported by the fund administrator. Within mutual funds and common and collective funds, the assets are invested in a broad range of publicly traded equity securities and publicly traded debt securities ranging from domestic and international treasury issues, corporate debt securities, government agencies debt securities and mortgage-backed and asset-backed issues, in accordance with the plan’s investment policies. 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. Exchange traded funds, which are investment portfolios that hold a collection of marketable securities designed to track the performance of a specific index (like the S&P 500), are valued at the market price quoted on the particular stock exchange where they are traded. There were no transfers between levels within the three-tier fair value hierarchy in 2020 and 2019.
Contributions—The Company currently does not expect to make contributions to its funded defined benefit pension plan in 2020 due to the funded status and the December 31, 2019 plan freeze.
Expected Future Benefit Payments—The projected benefit payments for the funded qualified and unfunded non-qualified defined benefit pension plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension Plan
|
|
Non-qualified Pension Plans
|
2021
|
$
|
968
|
|
|
$
|
374
|
|
2022
|
1,090
|
|
|
387
|
|
2023
|
1,235
|
|
|
502
|
|
2024
|
1,495
|
|
|
511
|
|
2025
|
1,233
|
|
|
517
|
|
2026-2030
|
7,233
|
|
|
2,920
|
|
The Company also participates in certain state-sponsored defined benefit plans covering certain non-U.S. employees with total net liabilities of $3.3 million and $2.8 million as of December 31, 2020 and 2019, respectively. The primary state-sponsored plan relates to Merisant employees in Switzerland and France, which had a pension benefit obligation of $6.3 million and plan assets $3.0 million as of December 31, 2020 and a pension benefit obligation of $5.6 million and plan assets $2.8 million as of December 31, 2019. Net periodic pension cost for the period June 26, 2020 through December 31, 2020, January 1, 2020 through June 25, 2020, 2019 and 2018 was $0.2 million, $0.3 million, $0.3 million and $0.5 million, respectively.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
Defined Contribution Pension Plans—The Company has two 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 $0.2 million for the period of June 26, 2020 to December 31, 2020, $0.3 million for each of the periods of January 1, 2020 to June 25 2020, 2019 and 2018, respectively.
NOTE 12: 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, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to officers, employees and non-employee directors of, and certain other service providers to, the Company and its subsidiaries. Under the terms of the Plan an aggregate of 9,300,000 shares of common stock are authorized for issuance under the Plan.
On September 30, 2020, 710,045 restricted stock units (“RSUs”) and 68,946 restricted stock awards (“RSAs”) were granted. 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. The RSUs granted to employees on September 30, 2020 cliff vest over the employee service period of approximately 14 months. The RSAs granted to non-employee board members on September 30, 2020 cliff vest over a service period of approximately 19 months. The Company accounts for forfeitures in the period incurred. Stock-based compensation expense for the year ended December 31, 2020 totaled $1.3 million.
A summary of activity and weighted average fair values related to the RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Fair Value
|
|
Weighted Avg.
Remaining
Contractual Term
(in years)
|
Outstanding at June 26, 2020
|
—
|
|
|
$
|
—
|
|
|
—
|
Granted
|
710,045
|
|
|
8.34
|
|
|
|
Forfeited
|
(76,988)
|
|
|
8.34
|
|
|
|
Outstanding and nonvested at December 31, 2020
|
633,057
|
|
|
$
|
8.34
|
|
|
0.88
|
A summary of activity and weighted average fair values related to the RSAs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Fair Value
|
|
Weighted Avg.
Remaining
Contractual Term
(in years)
|
Outstanding at June 26, 2020
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Granted
|
68,946
|
|
|
8.34
|
|
|
|
Outstanding and nonvested at December 31, 2020
|
68,946
|
|
|
$
|
8.34
|
|
|
1.33
|
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
As of December 31, 2020, 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
|
$
|
4,593
|
|
|
0.93
|
NOTE 13: 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 may be repurchased from time to time over a 12-month period expiring on September 15, 2021 (or upon the earlier completion of all purchases contemplated by the repurchase plan or the earlier termination of the repurchase plan), in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with U.S. federal securities laws. During the year ended December 31, 2020, there were no repurchases of the Company’s common stock under the stock repurchase plan.
Warrants—As of December 31, 2020, 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 Act II's initial public offering, and (ii) 5,263,500 private placement warrants that were sold by Act II to the PIPE Investors. Each warrant is exercisable for one-half of one share of our common stock at a price of $11.50 per share, subject to adjustment, at any time commencing 30 days after the completion of the Business Combination. The exercise price and number of common shares issuable upon exercise of the private warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization, reorganization, merger or consolidation. However, the private warrants will not be adjusted for issuance of common stock at a price below its exercise price. There were no warrants exercised as of December 31, 2020.
NOTE 14: EARNINGS PER SHARE
Basic loss per common share is calculated by dividing net 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.
Diluted loss per share is calculated by dividing net 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 the period from June 26, 2020 to December 31, 2020, 20,263,500 warrants were excluded from the calculation as these warrants were anti-dilutive.
For the period from June 26, 2020 to December 31, 2020, 633,057 RSUs and 68,946 RSAs, each weighted for the portion of the period for which they were outstanding, were excluded from the computation of diluted earnings per share as the effect was determined to be anti-dilutive.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The computation of basic and diluted loss per common share for the period from June 26, 2020 to December 31, 2020 is shown below (in thousands, except for share and per share data).
|
|
|
|
|
|
|
Successor
|
|
From June 26, 2020 to December 31, 2020
|
EPS numerator:
|
|
Net loss attributable to common shareholders
|
$
|
(8,437)
|
|
|
|
EPS denominator:
|
|
Weighted average shares outstanding - basic
|
38,426,669
|
|
Effect of dilutive securities
|
—
|
|
Weighted average shares outstanding - diluted
|
38,426,669
|
|
|
|
Net loss per share:
|
|
Basic
|
$
|
(0.22)
|
|
Diluted
|
$
|
(0.22)
|
|
NOTE 15: 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, 2018 (Predecessor)
|
$
|
4,428
|
|
|
$
|
(10,375)
|
|
|
$
|
(5,947)
|
|
Other comprehensive loss before reclassifications
|
(1,543)
|
|
|
1,568
|
|
|
25
|
|
Adoption of ASU 2018-02
|
—
|
|
|
(2,137)
|
|
|
(2,137)
|
|
Balance at December 31, 2019 (Predecessor)
|
2,885
|
|
|
(10,944)
|
|
|
(8,059)
|
|
Other comprehensive loss before reclassifications
|
(2,286)
|
|
|
—
|
|
|
(2,286)
|
|
Amounts reclassified from AOCI
|
—
|
|
|
318
|
|
|
318
|
|
Balance at June 25, 2020 (Predecessor)
|
599
|
|
|
(10,626)
|
|
|
(10,027)
|
|
Purchase accounting adjustments to eliminate Predecessor’s accumulated other comprehensive (loss) income
|
(599)
|
|
|
10,626
|
|
|
10,027
|
|
Balance at June 26, 2020 (Successor)
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income before reclassifications
|
7,774
|
|
|
856
|
|
|
8,630
|
|
Amounts reclassified from AOCI
|
—
|
|
|
(25)
|
|
|
(25)
|
|
Balance December 31, 2020 (Successor)
|
$
|
7,774
|
|
|
$
|
831
|
|
|
$
|
8,605
|
|
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
NOTE 16: 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 and the year ended December 31, 2019, 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. Outstanding borrowings at December 31, 2019 were $8.4 million and the interest rate at December 31, 2019 was 5.95%. The interest expense for the period from January 1, 2020 to June 25, 2020 was approximately $0.2 million. The interest expense for the year ended December 31, 2019 and 2018 was approximately $0.5 million and $0.3 million, respectively.
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 $0.4 million was expensed during the period from June 26, 2020 to December 31, 2020. Additionally, under the terms of the agreement, the Company incurred additional expense of $0.8 million related to services provided by Watermill in connection with the acquisition of Swerve. A former director of Act II is a registered representative of Watermill and is providing services directly to the Company under the agreement.
NOTE 17: BUSINESS SEGMENTS
The Company has two reportable segments: Branded CPG and Flavors & Ingredients. The Company does not present assets by reportable segments as they are not reviewed by the Chief Operating Decision Maker for purposes of assessing segment performance and allocating resources.
The following table presents selected financial information relating to the Company’s business segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Product revenues, net
|
|
|
|
|
|
|
|
|
Branded CPG
|
$
|
96,857
|
|
|
|
$
|
80,749
|
|
|
$
|
165,863
|
|
|
$
|
173,759
|
|
Flavors & Ingredients
|
50,311
|
|
|
|
47,579
|
|
|
106,260
|
|
|
117,206
|
|
Total product revenues, net
|
$
|
147,168
|
|
|
|
$
|
128,328
|
|
|
$
|
272,123
|
|
|
$
|
290,965
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Branded CPG
|
$
|
(3,461)
|
|
|
|
$
|
(14,463)
|
|
|
$
|
10,280
|
|
|
$
|
8,283
|
|
Flavors & Ingredients
|
(2,645)
|
|
|
|
(23,718)
|
|
|
19,396
|
|
|
19,469
|
|
Total operating (loss) income
|
$
|
(6,106)
|
|
|
|
$
|
(38,181)
|
|
|
$
|
29,676
|
|
|
$
|
27,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
The following table presents geographic information based upon revenues of the Company’s major geographic markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
From June 26, 2020 to December 31, 2020
|
|
|
From January 1, 2020 to
June 25, 2020
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
North America
|
$
|
63,386
|
|
|
|
$
|
54,253
|
|
|
$
|
104,788
|
|
|
$
|
103,803
|
|
Europe, Middle East and Africa
|
52,348
|
|
|
|
46,479
|
|
|
105,546
|
|
|
119,456
|
|
Asia-Pacific
|
24,606
|
|
|
|
21,090
|
|
|
47,695
|
|
|
48,889
|
|
Latin America
|
6,828
|
|
|
|
6,506
|
|
|
14,094
|
|
|
18,817
|
|
Total product revenues, net
|
$
|
147,168
|
|
|
|
$
|
128,328
|
|
|
$
|
272,123
|
|
|
$
|
290,965
|
|
The Company has a large and diverse customer base, which includes numerous customers located in foreign countries. No single unaffiliated customer accounted for more than 10% of total sales in any year during the past two years. With the exception of the United States and France, 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 Uzbekistan. For the year ended December 31, 2020, the Company’s purchases from this supplier totaled approximately $11.5 million, representing 31% of the Company’s licorice raw materials purchases for the year.
Long-lived assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
Long-Lived Assets*
|
|
|
|
|
|
United States
|
$
|
14,798
|
|
|
|
$
|
7,787
|
|
|
China
|
14,207
|
|
|
|
5,296
|
|
|
Czech Republic
|
6,070
|
|
|
|
3,278
|
|
|
France
|
11,076
|
|
|
|
3,144
|
|
|
Other Foreign Countries
|
1,134
|
|
|
|
835
|
|
|
Total
|
$
|
47,285
|
|
|
|
$
|
20,340
|
|
|
*Long-lived assets consist of property, plant and equipment, net.
NOTE 18: SUBSEQUENT EVENTS
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.
On February 5, 2021, pursuant to the terms of the Wholesome Purchase Agreement, (i) the Company (acting through its direct wholly-owned subsidiary, Project Taste Intermediate LLC, as its designee) 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, is subject to Wholesome achieving certain EBITDA thresholds at or above approximately $30 million during the period beginning August 29, 2020, and ending December 31, 2021. A portion of the Earn-Out Amount (up to $27.5 million) may be paid, at the Company’s election, in freely tradeable, registered shares of Company common stock.
Whole Earth Brands, Inc.
Notes to Consolidated and Combined Financial Statements
In connection with the closing of the Wholesome Transaction, on February 5, 2021, the Company and certain of its subsidiaries entered into an amendment and restatement agreement (the “Amendment Agreement”) with Toronto Dominion (Texas) LLC, which amended and restated its existing senior secured loan agreement dated as of June 25, 2020.
The Amended and Restated Credit Agreement provides for senior secured financing consisting of the following credit facilities: (a) a senior secured term loan facility in the aggregate principal amount of $375 million (the “Term Loan Facility”); and (b) a revolving credit facility in an aggregate principal amount of up to $75 million (the “Revolving Facility,” and together with the Term Loan Facility, the “Credit Facilities”). The Revolving Facility has a $15 million sub-facility for the issuance of letters of credit and a $15 million sublimit for swing line loans. The Company used the proceeds under the Term Loan Facility to (i) repay and refinance existing indebtedness of WSO Investments; (ii) pay the cash consideration for the Wholesome Transaction; (iii) repay and refinance outstanding borrowings under the Existing Credit Agreement; and (iv) pay fees and expenses incurred in connection with the foregoing. The proceeds of the Revolving Facility can be used to finance working capital needs, for general corporate purposes, and for working capital adjustments payable under the Wholesome Purchase Agreement.
Loans outstanding under the Credit Facilities will accrue interest at a rate per annum equal to (i) with respect to the Revolving Facility and letters of credit, (A) 2.75%, in the case of base rate advances, and (B) 3.75% in the case of LIBOR 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 LIBOR advances, with a LIBOR floor of 1.00% with respect to the Term Loan Facility, and 0.00% with respect to Revolving Facility and letters of credit, and base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, LIBOR for a one-month interest period plus 1.00%, and with respect to the Revolving Facility and letters of credit, 0.00%, or with respect to the Term Loan Facility, 2.0%, and undrawn amounts under the Revolving Facility will accrue a commitment fee at a rate per annum equal to 0.50% on the average daily undrawn portion of the commitments thereunder.
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).