Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, financial condition, and changes in financial condition for the three and six months ended June 30, 2022. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements, and the notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q and our December 31, 2021 Audited Consolidated Financial Statements and notes thereto included in our Registration Statement on Form S-4 (File No. 333-264464) , filed with the U.S. Securities and Exchange Commission (“SEC”) on April 25, 2022, as amended by Amendments No. 1, 2, 3 and 4 thereto filed with SEC on June 10, 2022, July 15, 2022, August 1, 2022 and August 3, 2022, respectively (the “Registration Statement”).
Overview
Westrock Coffee Company (f/k/a Westrock Coffee Holdings, LLC) (the “Company,” “Westrock,” “we,” “us,” or “our”) is a leading integrated coffee, tea, flavors, extracts, and ingredients solutions provider in the United States, providing coffee sourcing, supply chain management, product development, roasting, packaging, and distribution to the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG, and hospitality industries around the world. We supply the world’s most iconic brands with the world’s most innovative coffee, tea, flavors, extracts, and ingredients products.
In connection with the closing of our previously announced de-SPAC merger transaction (the “Transaction”) with Riverview Acquisition Corp. (“Riverview”), the Company converted from a Delaware limited liability company to a Delaware corporation and changed its name from “Westrock Coffee Holdings, LLC” to “Westrock Coffee Company.”
Our platform is built upon four fundamental pillars that enable us to positively impact the coffee, tea, flavors, extracts, and ingredients ecosystems from crop to cup: (i) we operate a fully transparent supply chain, (ii) we develop innovative beverage solutions tailored to our customers’ specific needs, (iii) we deliver a high quality and comprehensive set of products to our customers, and (iv) we leverage our scaled international presence to serve our blue-chip customer base. These four tenets comprise the backbone of our platform and position us as a leading provider of value-added beverage solutions. By partnering with Westrock, our customers also benefit from the benchmark-setting responsible sourcing policies and strong Environmental, Social, and Governance (“ESG”) focus surrounding our products, top tier consumer insights, and a differentiated product ideation process. Leading brands choose us because we are singularly positioned to meet their needs, while simultaneously driving a new standard for sustainably and responsibly sourced products.
We operate our business in two segments: Beverage Solutions and Sustainable Sourcing & Traceability (“SS&T”).
Beverage Solutions : Through this segment, we combine our product innovation and customer insights to provide value-added beverage solutions, including coffee, tea, juices, flavors, extracts, and ingredients. We provide products in a variety of packaging, including branded and private label coffee in bags, fractional packs, and single serve cups, as well as extract solutions to be used in products such as cold brew and ready-to-drink offerings. Currently, we serve customers in the United States, Europe, and Asia through the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG and hospitality industries.
Sustainable Sourcing & Traceability : Through this segment, we utilize our proprietary technology and digitally traceable supply chain to directly impact and improve the lives of our farming partners, tangible economic empowerment and an emphasis on environmental accountability and farmer literacy. Revenues primarily relate to the physical delivery and settlement of forward sales contracts for green coffee.
Key Business Metrics
We use Adjusted EBITDA to evaluate our performance, identify trends, formulate financial projections, and to make strategic decisions.
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Adjusted EBITDA
We refer to EBITDA and Adjusted EBITDA in our analysis of our results of operations, which are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). While we believe that net (loss) income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA and Adjusted EBITDA are important non-GAAP supplemental measures of operating performance as they contribute to a meaningful evaluation of the Company’s future operating performance and comparisons to the Company’s past operating performance. Additionally, we use these non-GAAP financial measures in evaluating the performance of our segments, to make operational and financial decisions and in our budgeting and planning process. The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance.
We define “EBITDA” as net (loss) income, as defined by GAAP, before interest expense, provision for income taxes and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA before equity-based compensation expense and the impact, which may be recurring in nature, of acquisition, restructuring and integration related costs, including management services and consulting agreements entered into in connection with the acquisition of S&D, impairment charges, non-cash mark-to-market adjustments, certain costs specifically excluded from the calculation of EBITDA under our material debt agreements, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, gains or losses on dispositions, and other similar or infrequent items (although we may not have had such charges in the periods presented). We believe EBITDA and Adjusted EBITDA are important supplemental measures to net (loss) income because they provide additional information to evaluate our operating performance on an unleveraged basis. In addition, Adjusted EBITDA is calculated similar to defined terms in our material debt agreements used to determine compliance with specific financial covenants.
Since EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, they should be viewed in addition to, and not be considered as alternatives for, net (loss) income determined in accordance with GAAP. Further, our computations of EBITDA and Adjusted EBITDA may not be comparable to that reported by other companies that define EBITDA and Adjusted EBITDA differently than we do.
The reconciliation of our net loss to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 is as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(Thousands)
2022
2021
2022
2021
Net loss
$
(5,819)
$
(6,068)
$
(10,524)
$
(12,192)
Interest expense
8,813
8,261
16,861
15,669
Income tax benefit
(1,499)
(502)
(3,083)
(1,443)
Depreciation and amortization
5,952
6,071
11,966
12,314
EBITDA
7,447
7,762
15,220
14,348
Acquisition, restructuring and integration expense
2,304
926
4,787
1,943
Management and consulting fees
866
1,595
2,201
3,200
Equity-based compensation
308
306
479
612
(Gain) Loss on disposal of property, plant and equipment
184
(25)
289
243
Mark-to-market adjustments
1,395
(2)
250
(1,975)
Other, net
789
621
1,461
1,121
Adjusted EBITDA
$
13,293
$
11,183
$
24,687
$
19,492
Beverage Solutions
12,471
10,330
22,891
18,462
Sustainable Sourcing & Traceability
822
853
1,796
1,030
Subtotal of Reportable Segments
$
13,293
$
11,183
$
24,687
$
19,492
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Significant Developments
Merger with Riverview Acquisition Corp.
On August 26, 2022, the Company completed the Transaction with Riverview. The Company issued 6,618,151 million shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”), to shareholders of Riverview, receiving $66.3 million of the cash held in the trust account of Riverview. The 6,618,151 million shares include 1,910,000 shares issued to PIPE investors who elected to satisfy their PIPE commitments through the purchase of Riverview Class A Shares on the public market, as permitted under the terms of their subscription agreements. As a part of the Transaction, Westrock converted from a Delaware limited liability company to a Delaware corporation and the Company changed its corporate name from “Westrock Coffee Holdings, LLC” to “Westrock Coffee Company.” Substantially concurrently with the closing of the Transaction, the Company has received $230.9 million in gross proceeds (which amount includes the contribution to the Company of certain notes) from Common Stock PIPE investments (the “PIPE Financing”) at $10.00 per share and has entered into a credit agreement among the Company, WBS, as the borrower, Wells Fargo Bank, N.A. as administrative agent, as collateral agent, and as swingline leader, Wells Fargo Securities, LLC, as sustainability structuring agent, and each issuing bank and lender party thereto for (a) a senior secured first lien revolving credit facility in an initial aggregate principal amount of $175.0 million (the “Revolving Credit Facility”), under which there were no outstanding borrowings as of August 29, 2022, and (b) a senior secured first lien term loan facility in an initial aggregate principal amount of $175.0 million (the “Term Loan Facility”). The Revolving Credit Facility and the Term Loan Facility will mature on August 29, 2027. Proceeds from the Transaction and the Term Loan Facility were used, in part, to retire borrowings under the Company’s existing term loan agreement and asset-based lending facility. In addition, $25.0 million of the Company’s outstanding related party subordinated debt (including $13.3 million outstanding at June 30, 2022) was converted to equity in satisfaction of such related parties’ obligations under its subscription agreements, as described below in “PIPE Pre-Funding” and “Liquidity and Capital Resources—Subordinated Related Party Debt.”
PIPE Pre-Funding
In connection with the Transaction, the Company and Riverview had entered into subscription agreements (the “Subscription Agreement”) with certain institutional and accredited investors (the “PIPE Investors”). Pursuant to the terms of its Subscription Agreement, on July 14, 2022, Wooster pre-funded $11.7 million of its committed PIPE Financing (the “Wooster Pre-fund”) and in exchange was issued a subordinated convertible note by Westrock (the “Convertible Note”). The Convertible Note had a principal amount of $11.7 million, a maturity of one year (July 13, 2023) and an interest rate of 8% per annum, which was payable quarterly on the last business day of each quarter. Upon closing of the Transaction, the Convertible Note was converted into 1,170,000 shares of Common Stock, which is equal to the quotient of the principal amount of the Convertible Note, then outstanding, divided by $10.00.
Sixth Amendment to the Prior Term Loan Agreement
On July 13, 2022, the Company entered into Amendment No. 6 to the Prior Term Loan Agreement (the “Sixth Term Loan Amendment”) in order to permit the Wooster Pre-fund. The Sixth Term Loan Amendment included the following modifications: (i) permitting the incurrence of subordinated debt from Wooster in the form of the Convertible Note; (ii) extending the PIK interest period to December 31, 2022; (iii) amending the definitions of EBITDA, Fixed Charge Coverage Ratio and Total Debt (which excludes the Convertible Note); and (iv) amending the level of the Minimum Liquidity covenant that the Company is required to comply with. The definition of EBITDA was modified to increase the cap on add-backs for the quarter ended June 30, 2022 and the quarter ended September 30, 2022 from 15% of EBITDA to 20% of EBITDA. The Wooster Pre-fund, together with the Sixth Term Loan Amendment, allowed the Company to meet increased capital expenditure and working capital needs of the business and to remain in compliance with its financial covenants as of June 30, 2022.
In connection with the closing of the Transaction, all loans outstanding under the Prior Term Loan Facility were repaid, and the associated Prior Term Loan Agreement was terminated.
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Fourth Amendment to the Prior ABL Credit Agreement
On July 13, 2022, the Company entered into Amendment No. 4 to the Prior ABL Credit Agreement, which included the following modifications: (i) permitting the incurrence of subordinated debt from Wooster in the form of the Convertible Note and (ii) amending the definitions of EBITDA, Fixed Charge Coverage Ratio and Total Debt (which excludes the Convertible Note). The definition of EBITDA was modified to increase the cap on add-backs for the quarter ended June 30, 2022 and the quarter ended September 30, 2022 from 15% of EBITDA to 20% of EBITDA.
In connection with the closing of the Transaction, all loans outstanding under the Prior ABL Facility were repaid, and the associated Prior ABL Credit Agreement was terminated.
Results of Operations
Comparison of the Three Months Ended June 30, 2022 and 2021
The following table sets forth our results of operations expressed as dollars and as a percentage of total revenues for the periods indicated:
Three Months
Three Months
Ended
% of
Ended
% of
(Thousands, except per share data)
June 30, 2022
Revenues
June 30, 2021
Revenues
Net sales
$
223,413
100.0
%
$
171,144
100.0
%
Costs of sales
184,515
82.6
%
136,791
79.9
%
Gross profit
38,898
17.4
%
34,353
20.1
%
Selling, general and administrative expense
35,048
15.7
%
31,819
18.6
%
Acquisition, restructuring and integration expense
2,304
1.0
%
926
0.5
%
Loss (gain) on disposal of property, plant and equipment
184
0.1
%
(25)
(0.0)
%
Total operating expenses
37,536
16.8
%
32,720
19.1
%
Income from operations
1,362
0.6
%
1,633
1.0
%
Other (income) expense, net
(133)
(0.1)
%
(58)
(0.0)
%
Interest expense, net
8,813
3.9
%
8,261
4.8
%
Loss before income taxes
(7,318)
(3.3)
%
(6,570)
(3.8)
%
Income tax expense (benefit)
(1,499)
(0.7)
%
(502)
(0.3)
%
Net loss
$
(5,819)
(2.6)
%
$
(6,068)
(3.5)
%
Net income attributable to noncontrolling interest
(106)
(0.0)
%
26
0.0
%
Net loss attributable to unitholders
(5,713)
(2.6)
%
(6,094)
(3.6)
%
Accumulating preferred dividends
(7,145)
(3.2)
%
(6,109)
(3.6)
%
Net loss attributable to common unitholders
$
(12,858)
(5.8)
%
$
(12,203)
(7.1)
%
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The following table sets forth selected financial information of our reportable segments for the three months ended June 30, 2022 and 2021:
Sustainable
Total of
Beverage
Sourcing &
Intersegment
Reportable
(Thousands)
Solutions
Traceability
Revenues (1)
Segments
Segment Revenues:
2022
$
170,865
$
58,459
$
(5,911)
$
223,413
2021
134,405
41,322
(4,583)
171,144
Segment Costs of Sales:
2022
133,685
50,830
n/a
184,515
2021
102,899
33,892
n/a
136,791
Segment Gross Profit:
2022
37,180
1,718
n/a
38,898
2021
31,506
2,847
n/a
34,353
Segment Adjusted EBITDA:
2022
12,471
822
n/a
13,293
2021
10,330
853
n/a
11,183
Segment Adjusted EBITDA Margin:
2022
7.3
%
1.6
%
n/a
5.9
%
2021
7.7
%
2.3
%
n/a
6.5
%
(1)
Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions Segment.
Net Sales
Net Sales from our Beverage Solutions segment were $170.9 million for the three months ended June 30, 2022, compared to $134.4 million for the three months ended June 30, 2021, an increase of approximately 27.1%. The increase was driven by a 57% increase in single serve cup volumes, and a 20% increase in flavors, extracts and ingredients volumes, compared to the three months ended June 30, 2021.
Net Sales from our SS&T segment totaled $52.5 million, net of intersegment revenues, during the three months ended June 30, 2022, increasing 43.0% compared to $36.7 million during the three months ended June 30, 2021. The increase is driven by an increase in the average sales price per pound, which increased 44% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase in the average sales price per pound is directly correlated to the global commodities price, which increased approximately 53% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. SS&T sales volume remained flat, with a change of less than 1%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.
Costs of Sales
In our Beverage Solutions segment, costs of sales increased to $133.7 million for the three months ended June 30, 2022, from $102.9 million for the three months ended June 30, 2021; however, costs of sales as a percentage of segment revenues remained approximately flat at 78% and 77%, for the three months ended June 30, 2022 and 2021, respectively. The increase in costs of sales was driven by an increase in green coffee, tea and liquid extract costs of approximately $30.7 million, due to increased production volumes and underlying commodities pricing.
In our SS&T segment, costs of sales increased $16.9 million to $50.8 million for the three months ended June 30, 2022. This increase is primarily due to an increase in green coffee cost driven by an increase in underlying commodities pricings, as volume of green coffee sold was essentially flat year-over-year. Costs of sales for the three months ended June 30, 2022 included $1.4 million of net unrealized losses on forward sales and purchase contracts and mark-to-market adjustment on green coffee inventory compared to no such costs for the three months ended June 30, 2021.
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Table of Contents
Selling, General and Administrative Expense
Three Months Ended June 30,
2022
2021
% of Segment
% of Segment
(Thousands)
Amount
Revenues
Amount
Revenues
Beverage Solutions
$
32,673
19.1
%
$
29,702
22.1
%
Sustainable Sourcing & Traceability
2,375
4.5
%
2,117
5.8
%
Total selling, general and administrative expense
$
35,048
15.7
%
$
31,819
18.6
%
Total selling, general and administrative expenses in our Beverage Solutions segment increased $3.0 million to $32.7 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The increase is primarily due to an approximately $1.2 million increase in advertising costs, $1.1 million increase in legal and professional fees, and a $0.8 million increase in software maintenance costs for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. In our SS&T segment, selling, general and administrative costs increased $0.3 million due to increased personnel costs.
Acquisition, Restructuring and Integration Expense
Acquisition, restructuring and integration expenses for the three months ended June 30, 2022 were $2.3 million, $0.9 million of which related to public-company preparedness costs, and $0.8 million related to the integration of our new enterprise resource planning system. During the three months ended June 30, 2021, we incurred $1.0 million of acquisition, restructuring and integration expenses, approximately $0.8 million of which were integration costs related to the acquired S&D business.
Interest Expense
Three Months Ended June 30,
(Thousands)
2022
2021
Interest expense, net
Cash:
Term Loan
$
5,775
$
5,953
ABL facility
877
426
Short-term related party debt
—
287
Subordinated related party debt
202
295
International trade finance lines
990
150
International notes payable
125
131
Other
175
113
Total cash interest
8,144
7,355
Non-cash:
Amortization of deferred financing costs
523
458
Payments-in-kind interest
146
448
Total non-cash interest
669
906
Total interest expense, net
$
8,813
$
8,261
Interest expense for the three months ended June 30, 2022 was $8.8 million compared to $8.3 million for the three months ended June 30, 2021. The increase is primarily driven by an increase in the utilization of Falcon’s working capital trade finance facility, and an increase in average Prior ABL Facility borrowings during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This increase was partially offset by a decrease in the payment-in-kind interest rate applicable to our Prior Term Loan Facility.
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Income Tax Benefit
Income tax benefit for the three months ended June 30, 2022 was $1.5 million, resulting in an effective tax rate of 20.5%, compared to an income tax benefit for the three months ended June 30, 2021 of $0.5 million, resulting in an effective tax rate of 7.6%. The effective tax rates differ primarily due to the impact of state income taxes and permanent differences, namely the global intangible low-taxed income (“GILTI”) inclusion, in relation to forecasted earnings before income taxes.
Comparison of the Six Months Ended June 30, 2022 and 2021
The following table sets forth our results of operations expressed as dollars and as a percentage of total revenues for the periods indicated:
Six Months Ended
% of
Six Months Ended
% of
(Thousands, except per share data)
June 30, 2022
Revenues
June 30, 2021
Revenues
Net Sales
$
409,841
100.0
%
$
326,475
100.0
%
Costs of sales
332,512
81.1
%
258,987
79.3
%
Gross profit
77,329
18.9
%
67,488
20.7
%
Selling, general and administrative expense
70,109
17.1
%
63,506
19.5
%
Acquisition, restructuring and integration expense
4,787
1.2
%
1,943
0.6
%
Loss on disposal of property, plant and equipment
289
0.1
%
243
0.1
%
Total operating expenses
75,185
18.3
%
65,692
20.1
%
Income from operations
2,144
0.5
%
1,796
0.6
%
Other (income) expense, net
(1,110)
(0.3)
%
(238)
(0.1)
%
Interest expense, net
16,861
4.1
%
15,669
4.8
%
Loss before income taxes
(13,607)
(3.3)
%
(13,635)
(4.2)
%
Income tax expense (benefit)
(3,083)
(0.8)
%
(1,443)
(0.4)
%
Net loss
$
(10,524)
(2.6)
%
$
(12,192)
(3.7)
%
Net income attributable to noncontrolling interest
65
0.0
%
336
0.1
%
Net loss attributable to unitholders
(10,589)
(2.6)
%
(12,528)
(3.8)
%
Accumulating preferred dividends
(13,882)
(3.4)
%
(11,848)
(3.6)
%
Net loss attributable to common unitholders
$
(24,471)
(6.0)
%
$
(24,376)
(7.5)
%
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The following table sets forth selected financial information of our reportable segments for the six months ended June 30, 2022 and 2021.
Sustainable
Total of
Beverage
Sourcing &
Intersegment
Reportable
(Thousands)
Solutions
Traceability
Revenues (1)
Segments
Segment Revenues:
2022
$
319,226
$
106,232
$
(15,617)
$
409,841
2021
261,668
74,021
(9,214)
326,475
Segment Costs of Sales:
2022
248,131
84,381
n/a
332,512
2021
201,143
57,844
n/a
258,987
Segment Gross Profit:
2022
71,095
6,234
n/a
77,329
2021
60,525
6,963
n/a
67,488
Segment Adjusted EBITDA:
2022
22,891
1,796
n/a
24,687
2021
18,462
1,030
n/a
19,492
Segment Adjusted EBITDA Margin:
2022
7.2
%
2.0
%
n/a
6.0
%
2021
7.1
%
1.6
%
n/a
6.0
%
(1)
Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions segment.
Net Sales
Net sales from our Beverage Solutions segment for the six months ended June 30, 2022 were $319.2 million, compared to $261.7 million for the six months ended June 30, 2021, an increase of approximately 22%. The increase was driven by a 42% increase in single serve cup volumes, and a 15% increase in flavors, extracts and ingredients volumes, compared to the six months ended June 30, 2021.
Net sales from our SS&T segment totaled $90.6 million, net of intersegment revenues, for the six months ended June 30, 2022 compared to $64.8 million for the six months ended June 30, 2021, primarily due to increases in underlying commodities pricing, as the volume of green coffee sold was essentially flat year-over-year.
Costs of Sales
In our Beverage Solutions segment, costs of sales increased to $248.1 million for the six months ended June 30, 2022, compared to $201.1 million for the six months ended June 30, 2021; however, costs of sales as a percentage of segment revenues remained approximately flat at 78% and 77% for the six months ended June 30, 2022 and 2021, respectively. The increase in costs of sales is primarily due to a $46.9 million increase in green coffee, tea and liquid extracts costs, driven by higher volumes and commodity price increases, specifically related to green coffee.
In our SS&T segment, costs of sales were $84.4 million for the six months ended June 30, 2022, an increase of $26.5 million compared to the six months ended June 30, 2021. This increase is primarily due to an increase in green coffee cost driven by an increase in underlying commodities pricings, as volume of green coffee sold was essentially flat year-over-year. Costs of sales for the six months ended June 30, 2022 included $0.3 million of net unrealized losses on forward sales and purchase contracts and mark-to-market adjustment on green coffee inventory compared to $2.0 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustment on green coffee inventory for the six months ended June 30, 2021.
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Selling, General and Administrative Expense
Six Months Ended June 30,
2022
2021
% of Segment
% of Segment
(Thousands)
Amount
Revenues
Amount
Revenues
Beverage Solutions
$
64,931
20.3
%
$
59,369
22.7
%
Sustainable Sourcing & Traceability
5,178
5.7
%
4,137
6.4
%
Total selling, general and administrative expense
$
70,109
17.1
%
$
63,506
19.5
%
Total selling, general and administrative expenses in our Beverage Solutions segment increased $5.6 million to $64.9 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase is primarily due to an approximately $1.5 million increase in advertising costs, $1.2 million increase in contract services, $1.1 million increase in freight costs resulting from increased freight rates and $1.1 million increase in bad debt expenses, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. In our SS&T segment, selling, general and administrative costs increased $1.0 million due to increased personnel costs.
Acquisition, Restructuring and Integration Expense
Acquisition, restructuring and integration expense increased $2.8 million to $4.8 million for the six months ended June 30, 2022, approximately $2.5 million of which related to public-company preparedness costs and $1.4 million of which related to the integration of our new enterprise resource planning system. During the six months ended June 30, 2021, we incurred $2.0 million of acquisition, restructuring and integration expenses, approximately $1.2 million of which were integration costs related to the acquired S&D business.
Interest Expense
Six Months Ended June 30,
(Thousands)
2022
2021
Interest expense, net
Cash:
Term Loan
$
11,519
$
11,000
ABL facility
1,448
897
Short-term related party debt
428
578
Subordinated related party debt
401
596
International trade finance lines
1,188
251
International notes payable
208
250
Other
329
203
Total cash interest
15,521
13,775
Non-cash:
Amortization of deferred financing costs
1,046
903
Payments-in-kind interest
294
991
Total non-cash interest
1,340
1,894
Total interest expense, net
$
16,861
$
15,669
Interest expense for the six months ended June 30, 2022 increased by $1.2 million to $16.9 million. The increase is primarily driven by an increase in the utilization of Falcon’s working capital trade finance facility, and an increase in average Prior ABL Facility borrowings during the six months ended June 30, 2022, compared to the six months ended June 30, 2021. This increase was partially offset by a decrease in the payment-in-kind interest rate applicable to our Prior Term Loan Facility.
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Income Tax Benefit
Income tax benefit for the six months ended June 30, 2022 was $3.1 million, resulting in an effective tax rate of 22.7%, compared to an income tax benefit for the six months ended June 30, 2021 of $1.4 million, resulting in an effective tax rate of 10.6%. The effective tax rates differ primarily due to the impact of state income taxes and permanent differences, namely the global intangible low-taxed income (“GILTI”) inclusion, in relation to forecasted earnings before income taxes.
Critical Accounting Policies and Estimates
We make certain judgements and use certain estimates and assumptions when applying accounting principles in the preparation of our financial statements. The nature of those estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse effect on our results of operations and, in certain situations, could have a material adverse effect on our financial condition.
For further information on our critical accounting policies and estimates, see “Management Discussion and Analysis of Financial Condition and Results of Operations” and notes to our audited financial statements included in the Registration Statement. As of June 30, 2022, there have been no material changes to these estimates.
Liquidity and Capital Resources
Our principal liquidity needs are to fund operating expenses, meet debt service obligations, and fund investment activities, which include capital expenditures. Our primary sources of liquidity and capital resources are cash on hand, cash provided by operating activities, and available borrowings under our Revolving Credit Facility
Six Months Ended June 30,
(Thousands)
2022
2021
Net cash used in operating activities
$
(46,974)
$
(782)
Net cash used in investing activities
(12,963)
(7,455)
Net cash provided by financing activities
55,281
7,676
As of June 30, 2022, we had unrestricted cash and cash equivalents of $14.3 million and $14.5 million of borrowing availability under our Prior ABL Facility, which was based on our borrowing base (accounts receivables and inventory as of May 31, 2022). Subsequent to June 30, 2022, other than payments made in connection with the Transaction, there have been no material outlays of funds outside of our budgeted capital expenditures. On August 29, 2022, we used proceeds from the Transaction and Term Loan Facility of $175.0 million to pay off and terminate our existing Prior Term Loan Facility and Prior ABL Facility and have $175.0 million of available borrowing capacity under our new Revolving Credit Facility. We believe we have sufficient liquidity to fund our operations for the foreseeable future, meet our debt obligations, and to comply with our new debt covenants, however; if there was a sudden or prolonged negative change in our expectations regarding our liquidity, we may be forced to cease investments in our growth.
For the six months ended June 30, 2022, net cash used in operating activities was $47.0 million compared to $0.8 million for the six months ended June 30, 2021. The change is primarily attributable to increased working capital needs, primarily related to a $46.1 million increase in inventory levels to meet anticipated customer demand.
Net cash used in investing activities was $13.0 million for the six months ended June 30, 2022, compared to $7.5 million for the six months ended June 30, 2021. The increase was primarily driven by an increase of $6.6 million in growth capital expenditures for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
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For the six months ended June 30, 2022, net cash provided by financing activities was $55.3 million, compared to $7.7 million for the six months ended June 30, 2021. The increase is primarily related to an increase in net proceeds from debt of approximately $47.3 million, which were primarily used to fund inventory purchases.
Prior Term Loan Facility
On February 28, 2020, Westrock Beverage Solutions, LLC (f/k/a Westrock Coffee Company, LLC), a Delaware limited liability company and wholly owned subsidiary of the Company (“WBS”), as borrower, borrowed $240.0 million of term loans from various financial institutions pursuant to a loan and security agreement (the “Prior Term Loan Agreement”) (such term loans, the “Prior Term Loan Facility”). The Prior Term Loan Facility accrued interest quarterly, at the borrower’s option, at the LIBOR or Prime Rate plus an Applicable Margin, as such terms were defined in the Prior Term Loan Agreement, that corresponded to our total leverage ratio at the end of each quarter. All outstanding loans accrued interest in the second quarter of 2022 at the LIBOR Rate, and the interest rate on the Prior Term Loan Facility was 9.75% on June 30, 2022.
On July 13, 2022, the Company entered into Amendment No. 6 to the Prior Term Loan Agreement (the “Sixth Term Loan Amendment”) in order to permit the Wooster Pre-fund. The Sixth Term Loan Amendment included the following modifications: (i) permitting the incurrence of subordinated debt from Wooster in the form of the Convertible Note; (ii) extending the PIK interest period to December 31, 2022; (iii) amending the definitions of EBITDA, Fixed Charge Coverage Ratio and Total Debt (which excludes the Convertible Note); and (iv) amending the level of the Minimum Liquidity covenant that the Company is required to comply with. The definition of EBITDA was modified to increase the cap on add-backs for the quarter ended June 30, 2022 and the quarter ended September 30, 2022 from 15% of EBITDA to 20% of EBITDA. The Wooster Pre-fund, together with the Sixth Term Loan Amendment, allowed the Company to meet increased capital expenditure and working capital needs of the business and to remain in compliance with its financial covenants as of June 30, 2022.
The Prior Term Loan Facility was repaid with proceeds from the Transaction, and the Prior Term Loan Agreement was terminated and replaced by the Credit Agreement described below under the heading “New Credit Agreement”.
Prior ABL Facility
On February 28, 2020, WBS, as borrower, entered into a credit agreement with Bank of America as administrative agent (the “Prior ABL Credit Agreement”) that created an asset-based loan of $90.0 million (the “Prior ABL Facility”). Proceeds from the Prior ABL Facility could be used for any lawful corporate purposes, including working capital. Depending on the loan type, interest accrued, at the borrower’s option, at the LIBOR or Base Rate plus an Applicable Margin, as such terms were defined in the Prior ABL Credit Agreement. The Applicable Margin ranged from 1.50% to 3.00% for LIBOR Rate loans and 0.50% to 2.00% for Base Rate loans.
As of June 30, 2022, our total availability under the Prior ABL Facility was $14.5 million, which was based on our borrowing base (accounts receivables and inventory as of May 31, 2022). As of June 30, 2022, we had $72.8 million of outstanding borrowings under the Prior ABL Facility and $2.7 million of letters of credit. The Prior ABL Facility carried a commitment fee on any of the unused commitment of 0.375% per annum. The weighted average effective interest rate on our outstanding borrowings was 5.8% on June 30, 2022.
On July 13, 2022, the Company entered into Amendment No. 4 to the Prior ABL Credit Agreement, which included the following modifications: (i) permitting the incurrence of subordinated debt from Wooster in the form of the Convertible Note and (ii) amending the definitions of EBITDA, Fixed Charge Coverage Ratio and Total Debt (which excludes the Convertible Note). The definition of EBITDA was modified to increase the cap on add-backs for the quarter ended June 30, 2022 and the quarter ended September 30, 2022 from 15% of EBITDA to 20% of EBITDA.
The Prior ABL Facility was repaid with the proceeds from the Transaction, and the Prior ABL Facility was terminated and replaced by the Credit Agreement described below under the heading “New Credit Agreement”.
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Convertible Note
In connection with the Transaction, on July 14, 2022, pursuant to the terms of the subscription agreement entered into between the Company and Wooster, in which Wooster agreed to subscribe for and purchase, and the Company agreed to issue and sell to Wooster, prior to and substantially concurrently with the closing of the Transaction, an aggregate of 2,150,000 shares of Common Stock at a purchase price of $10.00 per share, for aggregate gross proceeds of $21,500,000 to the Company, Wooster pre-funded $11.7 million of its commitment (the “Wooster Pre-fund”) and in exchange thereof was issued the Convertible Note. The Convertible Note had a principal amount of $11.7 million, a one-year maturity, and an interest rate of 8% per annum, which was payable quarterly on the last business day of each quarter. On August 26, 2022, in connection with the closing of the Transaction, the Convertible Note was automatically converted into 1.17 million shares of Common Stock.
New Credit Agreement
On August 29, 2022, in connection with the Transaction, the Company entered into a credit agreement (the “Credit Agreement”) among the Company, WBS, as the borrower (the “Borrower”), Wells Fargo Bank, N.A., as administrative agent, as collateral agent, and as swingline lender, Wells Fargo Securities, LLC, as sustainability structuring agent, and each issuing bank and lender party thereto. The Credit Agreement includes (a) the Revolving Credit Facility in an initial aggregate principal amount of $175.0 million and (b) the Term Loan Facility in an initial aggregate principal amount of $175.0 million. The proceeds from the Revolving Credit Facility and the Term Loan Facility will be used for paying off existing indebtedness, working capital and other general corporate purposes. The Revolving Credit Facility and the Term Loan Facility will mature on August 29, 2027. As of August 29, 2022, there are no borrowings outstanding under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility or the Term Loan Facility will bear interest, at the borrower’s option, initially at an annual rate equal to (a) Term SOFR (as defined in the Credit Agreement) plus a credit spread adjustment of 0.10% for loans with an interest period of one month, 0.15% for loans with an interest period of three months and 0.25% for loans with an interest period of six months, as applicable, (the “Adjusted Term SOFR Rate”) plus the applicable margin or (b) the base rate (determined by reference to the greatest of (i) the rate of interest last quoted by The Wall Street Journal in the U.S. as the prime rate in effect, (ii) the NYFRB Rate (as defined in the Credit Agreement) from time to time plus 0.50% and (iii) the Adjusted Term SOFR Rate for a one month interest period plus 1.00%, (the “Base Rate”)) plus the applicable margin. The applicable margin for the Revolving Credit Facility and the Term Loan Facility ranges from 1.50% to 2.50% for Adjusted Term SOFR Rate loans and from 0.50% to 1.50% for Base Rate loans, in each case depending on the total net leverage ratio. As of August 29, 2022, all borrowings under the Term Loan Facility will bear interest at the applicable Adjusted Term SOFR Rate plus the applicable margin.
Commitment fees on the daily unused amount of commitments under the Revolving Credit Facility range from 0.20% to 0.35% depending on the total net leverage ratio.
The Credit Agreement contains two financial covenants requiring maintenance of a total net leverage ratio not to exceed 4.50 to 1.00, with a stepdown to 4.00 to 1.00 on the 18-month anniversary of the closing date of the Transaction and an interest coverage ratio of at least 1.50 to 1.00, which will be tested with the fiscal quarter ending September 30, 2022.
International Debt and Lending Facilities
At June 30, 2022, Westrock Coffee International, LLC (“Westrock International”), through its subsidiary Falcon Coffees Limited (“Falcon”) had a $1.6 million promissory note payable with responsAbility SICAV (Lux), split into two tranches. Proceeds from the note are restricted for the sole purpose of financing Falcon’s trading activities. The note was amended in January 2022 to adjust the maturity of certain tranches, and to re-set interest rates. Borrowings on the note bear interest at a fixed rate of 9.5% for both the $0.9 million tranche and the $0.7 million tranche maturing on September 30, 2022 and December 31, 2022, respectively. Westrock Coffee International, LLC, through its subsidiary Rwanda Trading Company, maintains two mortgage-backed lending facilities with a local bank in Rwanda: a short-term trade finance facility with a balance of $8.9 million at June 30, 2022 and a long-term note payable with a balance of $1.9 million at June 30, 2022.
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Falcon maintains a working capital trade finance facility with multiple financial institutions, which prior to March 16, 2022, was agented by BBH, a related party of the Company through its equity interests in the Company, and was reported as short-term related party debt on the Condensed Consolidated Balance Sheets. On March 16, 2022, Falcon refinanced its working capital trade finance facility, and the facility was transferred to different lenders with the same terms as the previous facility. The new facility is uncommitted, repayable on demand and secured by Falcon’s assets. The facility is renewable on an annual basis beginning in March 2023. On April 29, 2022, the facility size increased from $50 million to $55 million and subsequently, on June 16, 2022, the facility size increased to $62.5 million. At June 30, 2022, there was $52.0 million outstanding under the facility, which is recorded in short-term debt in the Condensed Consolidated Balance Sheets. Interest is payable monthly at the U.S. Prime Rate plus 1.50%, subject to a minimum rate of 5.00%. The facility carries an agent fee of 0.25% of total available capital. Availability under the facility is subject to a borrowing base calculation. The credit facility is secured by substantially all liquid assets of Falcon. Falcon’s facility contains certain restrictive financial covenants which require Falcon to maintain certain levels of working capital, debt, and net worth. Falcon was in compliance with these financial covenants as of June 30, 2022.
Subordinated Related Party Debt
On February 28, 2020, we issued $13.3 million of subordinated debt (the “Subordinated Notes”) to Wooster and Jo Ellen Ford. The Subordinated Notes provided for maturity on the earlier of (i) six months after the Prior Term Loan Facility is paid in full or (ii) 10 years from the date of issuance (February 2030). Interest was payable quarterly at the end of each calendar quarter at a rate of 6% per annum. Substantially concurrently with the closing of the Transaction and pursuant to the terms of their respective subscription agreements with the Company, Wooster and Jo Ellen Ford contributed their respective Subordinated Notes to the Company and in exchange for such contribution, the Company issued shares of Common Stock to Wooster and Jo Ellen Ford. The Company issued a total of 1,330,000 shares of Common Stock in exchange for the contribution of the Subordinated Notes, which were subsequently extinguished.
Current and Long-Term Liquidity
Our current liquidity needs are to fund operating expenses, meet debt service obligations, and fund both current and long-term investment activities, which include capital expenditures. Proceeds from the Transaction were used to repay all existing term loan and asset-based lending facilities. In addition, we expect to use proceeds to fund our near-term growth strategies, which include, (i) extending and enhancing product offerings through innovation, (ii) expanding our customer base, (iii) expanding geographically, (iv) funding accretive acquisitions, and (v) continuing to drive margin expansion. As of August 29, 2022, we had no borrowings outstanding under our Revolving Credit Facility.
A key component of our long-term growth strategy will be to complete the phased build-out of our FE&I manufacturing facility in Conway, Arkansas, which will utilize state-of-the-art equipment, including advanced robotics specifically designed to efficiently manufacture and package a wide range of beverages, such as canned or bottled cold brew coffees, lattes, assorted teas, and juice-based products, as well as single serve coffee capsules. This facility will also incorporate a premiere product development laboratory, enabling us to test and produce new beverage solutions. We believe proceeds from the Transaction and available borrowings under our Revolving Credit Facility will provide sufficient cash on-hand to complete the initial build-out of this facility, which is currently expected to be approximately $190 million over the next three years. However, the Company will continuously evaluate its liquidity needs, and if it is determined that we have insufficient liquidity to fund the Conway build-out or fund our acquisition strategy, we may delay the initial build-out of the Conway facility and/or modify the scope of the build-out and we may reprioritize our strategy to focus on organic growth opportunities, which may have an adverse impact on our ability to achieve our growth objectives.
Contractual Obligations
Our material contractual obligations include the payment of principal and interest under our debt obligations. Our Term Loan Facility requires quarterly principal payments during the first three years of approximately $2.2 million (1.25% of the original principal balance beginning December 31, 2022. Quarterly payments increase to approximately $3.3 million and $4.4 million (1.875% and 2.5% of the original principal balance) during the fourth and fifth years, respectively. We have no other material obligations to pay principal amounts of our long-term debt obligations prior to their maturity.
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Future purchase obligations of $371.7 million as of June 30, 2022 consist of commitments for the purchase of inventory over the next 12 months. These obligations represent the minimum contractual obligations expected under the normal course of business. There are no material purchase obligations beyond 12 months.
Capital Expenditures
We categorize our capital expenditures as (i) growth, (ii) maintenance, (iii) customer beverage equipment or (iv) other.
We define growth capital expenditures as investments in our manufacturing facilities that will contribute to revenue growth by increasing production capacity, improving production efficiencies, or related to production of new products. Maintenance capital expenditures are those necessary to keep our existing manufacturing equipment fully operational. Customer beverage equipment represents Company-owned equipment that is deployed in our customers’ locations.
Capital expenditures for the six months ended June 30, 2022 and 2021 were as follows:
Customer
Beverage
(Thousands)
Growth
Maintenance
Equipment
Other
Total
Six months ended June 30, 2022
$
10,393
$
1,151
$
2,589
$
1,030
$
15,163
Six months ended June 30, 2021
$
5,424
$
366
$
2,071
$
695
$
8,556
We expect to invest to expand our FE&I product manufacturing capacity in Conway, Arkansas, for which we currently expect to spend approximately $190 million over the next 3 years to complete the initial build-out.
If circumstances warrant, we may need to take measures to conserve cash, which may include a suspension, delay, or reduction in growth and/or maintenance capital expenditures. We continually assess our capital expenditure plans in light of developments impacting our business, including the needs of our customers.
Off-Balance Sheet Arrangements
As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 3, Summary of Significant Accounting Policies, to the condensed consolidated financial statements included in Item I of Part 1 of this Quarterly Report on Form 10-Q for a detailed discussion of recent accounting pronouncements.
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