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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 140 added, 115 removed, 218 unchanged (54% of the section changed)

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, 2023.

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, 2022 Audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K filed with the U.S.

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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 “EBITDA” as net (loss) income, as defined by GAAP, before interest expense, net, 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 Coffee, Inc., impairment charges, changes in the fair value of warrant liabilities, non-cash mark-to-market adjustments, certain costs specifically excluded from the calculation of EBITDA under our material debt agreements, such as facility start-up costs, 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).

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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, 2023 and 2022 is as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Interest expense

The reconciliation of our net loss to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022 is as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Interest expense, net

Income tax expense (benefit)

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Significant Developments

Credit Agreement Amendment

On June 30, 2023, we entered into Amendment No.

2 (the “Second Amendment”) to the Credit Agreement.

The Second Amendment established a covenant relief period (the “Covenant Relief Period”) commencing on June 30, 2023, and ending on the earlier to occur of (i) April 1, 2025 and (ii) the date following December 31, 2023, on which the Borrower delivers to the Administrative Agent a certificate of a responsible officer (a) electing to terminate the Covenant Relief Period, (b) demonstrating a total net leverage ratio less than 3.75x and (c) attaching projections demonstrating compliance with the total net leverage ratio financial covenant (as in effect prior to giving effect to the Covenant Relief Period) until the then-existing latest maturity date.

During the Covenant Relief Period, (i) the total net leverage ratio financial covenant will be (a) 5.00x for the test period ending June 30, 2023, (b) 5.25x for the test period ending September 30, 2023, (c) 5.50x for the test periods ending on or after December 31, 2023 to and including September 30, 2024, (d) 5.00x for the test period ending December 31, 2024 and (e) 4.50x for the test period ending March 31, 2025 and (ii) the applicable margin for any term SOFR rate loan will range from 2.50% to 3.75% and for any ABR loan will range from 1.50% to 2.75%, in each case depending on the total net leverage ratio.

After the Covenant Relief Period, the total net leverage ratio financial covenant and the applicable margin for term SOFR rate loans and ABR loans will revert to the pre-amendment terms of the Credit Agreement.

During and after the Covenant Relief Period, the minimum interest coverage ratio financial covenant will be 2.00x.

As of the date of this Quarterly Report on Form 10-Q, the Company was in compliance with its financial covenants.

PIPE Investment & Amended and Restated Investor Rights Agreement

On June 29, 2023, the Company entered into a subscription agreement (the “Subscription Agreement”) with HF Direct Investments Pool, LLC (the “HF Investor”), an affiliate of HF Capital, LLC, pursuant to which the Company agreed to sell and issue to the HF Investor and the HF Investor agreed to purchase from the Company 5,000,000 shares (the “HF Subscription Amount”) of common stock, par value $0.01 per share (the “Common Shares”), of the Company at a purchase price per share of $10.00 for aggregate gross proceeds to the Company of $50.0 million (such transaction, the “HF Investment”).

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Results of Operations

Comparison of the Three Months Ended June 30, 2023 and 2022

Comparison of the Three Months Ended September 30, 2023 and 2022

The following table sets forth our results of operations expressed as dollars and as a percentage of total revenues for the periods indicated:

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

Costs of sales

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Total operating expenses

(Loss) income from operations

Income (loss) from operations

Other (income) expense

Interest expense

Interest expense, net

Change in fair value of warrant liabilities

Loss before income taxes

Income (loss) before income taxes and equity in earnings from unconsolidated entities

Income tax expense (benefit)

Net (loss) income attributable to non-controlling interest

Net loss attributable to shareholders

Equity in (earnings) loss from unconsolidated entities

Net income (loss)

Net income (loss) attributable to non-controlling interest

Net income (loss) attributable to shareholders

Participating securities' share in earnings

Accretion of Series A Convertible Preferred Shares

Loss on extinguishment of Redeemable Common Equivalent Preferred Units, net

Common equivalent preferred dividends

Accumulating preferred dividends

Net loss attributable to common shareholders

The following table sets forth selected financial information of our reportable segments for the three months ended June 30, 2023 and 2022:

Net income (loss) attributable to common shareholders

The following table sets forth selected financial information of our reportable segments for the three months ended September 30, 2023 and 2022:

Segment Revenues:

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Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions segment.

Net Sales from our Beverage Solutions segment were $189.7 million for the three months ended June 30, 2023, compared to $170.9 million for the three months ended June 30, 2022, an increase of approximately 11.0%.

The increase was primarily due to a $15.0 million increase in the sale of flavors, extracts and ingredients products, which was primarily driven by an increase in sales related to the Kohana extract business and the pass through of higher underlying green coffee costs, compared to the three months ended June 30, 2022.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $35.0 million for the three months ended June 30, 2023, decreasing 33.4% compared to $52.5 million for the three months ended June 30, 2022.

The decrease is driven by a decrease in sales volume, as a result of a decrease in customer demand, which decreased 31% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Net Sales from our Beverage Solutions segment were $176.8 million for the three months ended September 30, 2023, compared to $173.5 million for the three months ended September 30, 2022, an increase of approximately 1.9%.

The increase was primarily due to an $18.2 million increase in the sale of flavors, extracts and ingredients products, which was primarily driven by the acquisition of Kohana Coffee, LLC (“Kohana”) and a 43.6% increase in non-Kohana manufactured extracts volumes, partially offset by a $14.9 million decrease in the sale of coffee and tea products, which was driven by a 10.8% decrease in roast and ground coffee volumes and a 12.9% decrease in single serve cup volumes compared to the three months ended September 30, 2022.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $42.8 million for the three months ended September 30, 2023, decreasing 24.7% compared to $56.8 million for the three months ended September 30, 2022.

The decrease is driven by a decrease in sales volume, as a result of a decrease in customer demand, which decreased 19.0% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Costs of Sales

In our Beverage Solutions segment, costs of sales increased to $157.2 million for the three months ended June 30, 2023, from $133.7 million for the three months ended June 30, 2022.

The increase in costs of sales was primarily driven by inflationary increases in materials and production costs, an increase in flavors, extracts and ingredients volume, and an increase in green coffee costs driven by an increase in underlying commodities pricings for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

In our SS&T segment, costs of sales decreased $19.1 million to $31.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

In our Beverage Solutions segment, costs of sales increased to $144.9 million for the three months ended September 30, 2023, from $136.4 million for the three months ended September 30, 2022.

The increase in costs of sales was primarily driven by an increase in costs related to the acquisition of Kohana for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

In our SS&T segment, costs of sales decreased $13.2 million to $39.6 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This decrease is primarily due to a decrease in green coffee sales volume.

Costs of sales in our SS&T segment for the three months ended June 30, 2023 included $1.0 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $1.4 million of net unrealized losses for the three months ended June 30, 2022.

Costs of sales in our SS&T segment for the three months ended September 30, 2023 included $1.2 million of net unrealized losses on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $0.5 million of net unrealized losses for the three months ended September 30, 2022.

Selling, General and Administrative Expense

Three Months Ended June 30,

Three Months Ended September 30,

Beverage Solutions

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Total selling, general and administrative expense

Total selling, general and administrative expenses in our Beverage Solutions segment decreased $1.2 million to $31.5 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The decrease is primarily due to a $0.7 million decrease in freight costs.

In our SS&T segment, selling, general and administrative costs increased $0.3 million, primarily due to a $0.2 million increase in bad debt expense compared to the three months ended June 30, 2022.

Total selling, general and administrative expenses in our Beverage Solutions segment increased $5.8 million to $34.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

The increase is primarily due to a $3.0 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas compared to no such expenses during the three months ended September 30, 2022.

Additionally, during the three months ended September 30, 2023, the Company incurred approximately $2.4 million in expenses related to equity-based compensation compared to $0.7 million of such expenses during the three months ended September 30, 2022.

In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the three months ended September 30, 2022.

Acquisition, Restructuring and Integration Expense

Acquisition, restructuring and integration expenses for the three months ended June 30, 2023 were $2.9 million, approximately $2.2 million of which related to the costs associated with the integration of our new enterprise resource planning system, including internal and external costs related to post go-live system support and duplicative systems costs.

During the three months ended June 30, 2022, we incurred $2.3 million of acquisition, restructuring and integration expenses, of which approximately $0.9 million related to public-company preparedness costs and $0.8 million related to the integration of our new enterprise resource planning system.

Interest Expense

Three Months Ended June 30,

Interest expense

Acquisition, restructuring and integration expenses for the three months ended September 30, 2023 were $3.1 million, approximately $1.2 million of which related to the costs associated with the integration of our new enterprise resource planning system, including internal and external costs related to post go-live system support and duplicative systems costs and $1.0 million of which primarily related to non-capitalizable costs associated with registration statements.

During the three months ended September 30, 2022, we incurred $4.0 million of acquisition, restructuring and integration expenses, of which approximately $1.3 million related to the integration of our new enterprise resource planning system, $1.2 million related to public-company preparedness costs and $0.9 million related to startup costs for our Conway, Arkansas manufacturing facility.

Interest Expense, net

Three Months Ended September 30,

Interest expense, net

Term loan facility

Prior term loan facility

Prior term loan facility early termination fee

Revolving credit facility

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Amortization of deferred financing costs

Write-off of deferred financing costs

Payments-in-kind interest

Capitalized interest

Total non-cash interest

Total interest expense

Interest expense for the three months ended June 30, 2023 was $7.4 million compared to $8.8 million for the three months ended June 30, 2022.

The decrease is primarily due to a decrease in the amount of outstanding term loans under the Term Loan Facility (as defined below) compared to the prior term loan facility that was in place during the prior year.

Additionally, the interest rate applicable to our Term Loan Facility was 7.4% at June 30, 2023 compared to an interest rate of 9.75% on the prior term loan facility that was in place at June 30, 2022.

Total interest expense, net

Interest expense, net for the three months ended September 30, 2023 was $7.8 million compared to $13.4 million for the three months ended September 30, 2022.

The decrease is primarily due to the $4.3 million of unamortized deferred financing fees associated with the termination of our prior term loan facility and our prior ABL facility, and $1.6 million of early termination payments associated with the prior term loan facility that were incurred during the three months ended September 30, 2022.

No such costs were incurred in the three months ended September 30, 2023.

These decreases were partially offset by interest on the outstanding revolving credit facility and supply chain finance program borrowings.

Furthermore, during the three months ended September 30, 2023, the Company capitalized approximately $1.0 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, while no such interest was capitalized during the three months ended September 30, 2022.

Change in Fair Value of Warrant Liabilities

Warrant liabilities are adjusted to fair value at each reporting period, with any change in fair value recognized in the Condensed Consolidated Statement of Operations.

The change in fair value of warrant liabilities for the three months ended September 30, 2023 resulted in recognition of $25.1 million of gains compared to recognition of $5.2 million of losses during the three months ended September 30, 2022.

Income Tax Expense (Benefit)

Income tax expense for the three months ended June 30, 2023 was $6.2 million, resulting in an effective tax rate of (30.3%).

The effective tax rate for the current period differs from the federal statutory rate primarily due to an increase in the valuation allowance against domestic deferred tax assets and permanent differences, including nondeductible expenses related to a change in the fair value of warrants.

Income tax benefit for the three months ended June 30, 2022 was $1.5 million, resulting in an effective tax rate of 20.5%.

Comparison of the Six Months Ended June 30, 2023 and 2022

Income tax benefit for the three months ended September 30, 2023 was $5.2 million, resulting in an effective tax rate of (45.7%).

The effective tax rate for the current period differs from the federal statutory rate primarily due to an increase in the valuation allowance against domestic deferred tax assets and permanent differences, including nontaxable income related to a change in the fair value of warrants.

Income tax benefit for the three months ended September 30, 2022 was $0.4 million, resulting in an effective tax rate of 3.2%.

Comparison of the Nine Months Ended September 30, 2023 and 2022

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

June 30, 2023

June 30, 2022

Nine Months Ended

September 30, 2023

September 30, 2022

Costs of sales

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Total operating expenses

(Loss) income from operations

Income (loss) from operations

Other (income) expense

Interest expense

Interest expense, net

Change in fair value of warrant liabilities

Loss before income taxes

Income (loss) before income taxes and equity in earnings from unconsolidated entities

Income tax expense (benefit)

Net (loss) income attributable to non-controlling interest

Net loss attributable to shareholders

Equity in (earnings) loss from unconsolidated entities

Net income (loss)

Net income (loss) attributable to non-controlling interest

Net income (loss) attributable to shareholders

Accretion of Series A Convertible Preferred Shares

Loss on extinguishment of Redeemable Common Equivalent Preferred Units, net

Common equivalent preferred dividends

Accumulating preferred dividends

Net loss attributable to common shareholders

The following table sets forth selected financial information of our reportable segments for the six months ended June 30, 2023 and 2022:

Net income (loss) attributable to common shareholders

The following table sets forth selected financial information of our reportable segments for the nine months ended September 30, 2023 and 2022:

Segment Revenues:

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Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions segment.

Net Sales from our Beverage Solutions segment were $370.9 million for the six months ended June 30, 2023, compared to $319.2 million for the six months ended June 30, 2022, an increase of approximately 16.2%.

The increase was primarily due to a $29.5 million increase in the sale of coffee and tea products, driven by a 21% increase in single serve cup volumes, a $22.6 million increase in the sale of flavors, extracts and ingredients products, which was primarily driven by an increase in sales related to the Kohana extract business, and increased pricing from the pass through of higher underlying green coffee prices during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $59.2 million during the six months ended June 30, 2023, decreasing 34.7% compared to $90.6 million during the six months ended June 30, 2022.

The decrease is driven by a 38% decrease in sales volume, as a result of a decrease in customer demand, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Net Sales from our Beverage Solutions segment were $547.7 million for the nine months ended September 30, 2023, compared to $492.7 million for the nine months ended September 30, 2022, an increase of approximately 11.2%.

The increase was primarily due to a $40.6 million increase in the sale of flavors, extracts and ingredients products, which was primarily driven by the acquisition of Kohana and a 16.6% increase in non-Kohana manufactured extracts volumes, a $16.3 million increase in the sale of coffee and tea products, driven by an 8.3% increase in single serve cup volumes, and increased pricing from the pass through of higher underlying green coffee prices during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $102.0 million during the nine months ended September 30, 2023, decreasing 30.8% compared to $147.4 million during the nine months ended September 30, 2022.

The decrease is driven by a 32% decrease in sales volume, as a result of a decrease in customer demand, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Costs of Sales

In our Beverage Solutions segment, costs of sales increased to $308.0 million for the six months ended June 30, 2023, compared to $248.1 million for the six months ended June 30, 2022.

The increase in costs of sales was primarily driven by inflationary increases in materials and production costs in our roast and ground coffee products, an increase in flavors, extracts and ingredients volume, and an increase in green coffee costs driven by an increase in underlying commodities pricings for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

In our SS&T segment, costs of sales decreased $32.2 million to $52.2 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

In our Beverage Solutions segment, costs of sales increased $68.6 million to $452.9 million for the nine months ended September 30, 2023, compared to $384.3 million for the nine months ended September 30, 2022.

The increase in costs of sales was primarily driven by an increase in costs related to the acquisition of Kohana, increases in materials costs, and an increase in flavors, extracts and ingredients volume for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

In our SS&T segment, costs of sales decreased $45.5 million to $91.8 million for the nine months ended September 30, 2023 compared to $137.4 million for the nine months ended September 30, 2022.

This decrease is primarily due to a decrease in green coffee sales volume.

Costs of sales in our SS&T segment for the six months ended June 30, 2023 included $2.2 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $0.3 million of net unrealized losses for the six months ended June 30, 2022.

Costs of sales in our SS&T segment for the nine months ended September 30, 2023 included $1.0 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $0.8 million of net unrealized losses for the nine months ended September 30, 2022.

Selling, General and Administrative Expense

Six Months Ended June 30,

Nine Months Ended September 30,

Beverage Solutions

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Total selling, general and administrative expense

Total selling, general and administrative expenses in our Beverage Solutions segment decreased $1.6 million to $63.3 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The decrease is primarily due to a $2.0 million decrease in freight costs.

In our SS&T segment, selling, general and administrative costs decreased $0.2 million, primarily due to a $0.3 million decrease in professional fees compared to the six months ended June 30, 2022.

Total selling, general and administrative expenses in our Beverage Solutions segment increased $4.0 million to $97.8 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

The increase is primarily due to a $6.6 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas and a $5.1 million increase in equity-based compensation costs, partially offset by a $3.1 million decrease in freight costs, a $2.5 million decrease in management and consulting fees associated with the S&D Coffee, Inc.

acquisition and a $1.5 million decrease in personnel-related expenses.

In our SS&T segment, selling, general and administrative costs decreased $0.1 million, primarily due to a $0.2 million decrease in professional fees.

Acquisition, Restructuring and Integration Expense

Acquisition, restructuring and integration expenses for the six months ended June 30, 2023 were $9.5 million, approximately $8.3 million of which related to the costs associated with the integration of our new enterprise resource planning system, including internal and external costs related to post go-live system support and duplicative systems costs and $0.5 million of which related to the acquisition of Bixby Roasting Co.

During the six months ended June 30, 2022, we incurred $4.8 million of acquisition, restructuring and integration expenses, of which approximately $2.5 million related to public-company preparedness costs and $1.4 million related to the integration of our new enterprise resource planning system.

Interest Expense

Six Months Ended June 30,

Interest expense

Acquisition, restructuring and integration expenses for the nine months ended September 30, 2023 were $12.7 million, approximately $9.7 million of which related to the costs associated with the integration of our new enterprise resource planning system, including internal and external costs related to post go-live system support and duplicative systems costs and $2.0 million of non-capitalizable costs associated with acquisitions and registration statements.

During the nine months ended September 30, 2022, we incurred $8.7 million of acquisition, restructuring and integration expenses, of which approximately $3.7 million related to public-company preparedness costs, $2.9 million related to the integration of our new enterprise resource planning system and $1.6 million related to equity-funded startup costs.

Interest Expense, net

Nine Months Ended September 30,

Interest expense, net

Term loan facility

Prior term loan facility

Prior term loan facility early termination fee

Revolving credit facility

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Amortization of deferred financing costs

Write-off of deferred financing costs

Payments-in-kind interest

Capitalized interest

Total non-cash interest

Total interest expense

Interest expense for the six months ended June 30, 2023 was $13.4 million compared to $16.9 million for the six months ended June 30, 2022.

Total interest expense, net

Interest expense, net for the nine months ended September 30, 2023 was $21.2 million compared to $30.3 million for the nine months ended September 30, 2022.

The decrease is primarily due to lower cash interest of $3.6 million on our outstanding borrowings, as well as the $4.3 million of unamortized deferred financing fees associated with the termination of the prior term loan facility and prior ABL facility, and $1.6 million of early termination payments associated with the prior term loan facility that were incurred during the three months ended September 30, 2022.

No such costs were incurred in the three months ended September 30, 2023.

The decrease in cash interest is due to a decrease in the amount of outstanding term loans under the Term Loan Facility (as defined below) compared to the prior term loan facility that was in place during the prior year.

This decrease was partially offset by interest on the outstanding revolving credit facility and supply chain finance program borrowings for the nine months ended September 30, 2023 compared to no such interest during the nine months ended September 30, 2022.

Furthermore, during the nine months ended September 30, 2023, the Company capitalized approximately $1.0 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, while no such interest was capitalized during the nine months ended September 30, 2022.

Change in Fair Value of Warrant Liabilities

The change in fair value of warrant liabilities for the nine months ended September 30, 2023 resulted in recognition of $18.8 million of gains compared to recognition of $5.2 million of losses during the nine months ended September 30, 2022.

Income Tax Expense (Benefit)

Income tax expense for the six months ended June 30, 2023 was $1.9 million, resulting in an effective tax rate of (6.4%).

Income tax benefit for the six months ended June 30, 2022 was $3.1 million, resulting in an effective tax rate of 22.7%.

Income tax benefit for the nine months ended September 30, 2023 was $3.3 million, resulting in an effective tax rate of (18.7%).

The effective tax rate for the current period differs from the federal statutory rate primarily due to an increase in the valuation allowance against domestic deferred tax assets and permanent differences, including nontaxable income related to a change in the fair value of warrants.

Income tax benefit for the nine months ended September 30, 2022 was $3.5 million, resulting in an effective tax rate of 13.0%.

Critical Accounting Estimates

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For further information on our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 21, 2023.

As of June 30, 2023, there have been no material changes to these estimates.

As of September 30, 2023, there have been no material changes to these estimates.

Liquidity and Capital Resources

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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.

On June 30, 2023, we amended the Credit Agreement to provide greater access to available borrowings and covenant relief, and in August 2023, the Company sold and issued approximately 11.9 million Common Shares pursuant to the terms of the HF Investment, PIPE Investments and BBH Preemptive Rights, receiving aggregate gross proceeds of approximately $118.8 million.

The proceeds from this equity issuance will be used for capital expenditures related to our extract and ready-to-drink facility in Conway, Arkansas.

Our ability to generate cash provided by operating activities is dependent on several factors, including our ability to generate net sales and manage costs in-line with our expectations.

Failure to meet our financial targets may restrict our liquidity and capital resources and our ability to maintain compliance with our financial covenants and may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions, which could have a material adverse effect on our business, operating results, financial condition, covenant compliance and ability to achieve our intended business objectives.

Failure to meet our financial targets may restrict our liquidity and capital resources and our ability to maintain compliance with our financial covenants and may require us to

modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions, which could have a material adverse effect on our business, operating results, financial condition, covenant compliance and ability to achieve our intended business objectives.

Where possible, we seek to recover inflation-impacted costs by passing these costs onto our customers through periodic pricing increases.

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On August 29, 2022, we entered into a credit agreement (the “Credit Agreement”) among the Company, Westrock Beverage Solutions, LLC, as the borrower (the “Borrower”), Wells Fargo Bank, N.A., as administrative agent, collateral agent, and swingline lender, Wells Fargo Securities, LLC, as sustainability structuring agent, and each issuing bank and lender party thereto.

loan facility in an initial aggregate principal amount of $175.0 million (the “Term Loan Facility”).

The Credit Agreement includes (a) a senior secured first lien revolving credit facility in an initial aggregate principal amount of $175.0 million (the “Revolving Credit Facility”) and (b) a senior secured first lien term loan facility in an initial aggregate principal amount of $175.0 million (the “Term Loan Facility”).

Proceeds from the Term Loan Facility were used for paying off existing indebtedness.

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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.

At June 30, 2023, we had $80.0 million of outstanding borrowings under the Revolving Credit Facility, with a weighted average interest rate of 7.3%, and the interest rate applicable to our Term Loan Facility was 7.4%, and we had $2.6 million of standby letters of credit outstanding.

At September 30, 2023, we had $45.0 million of outstanding borrowings under the Revolving Credit Facility, with a weighted average interest rate of 9.0%, and the interest rate applicable to our Term Loan Facility was 9.2%, and we had $2.6 million of standby letters of credit outstanding.

On February 14, 2023, we entered into an Incremental Assumption Agreement and Amendment No.

1 (the “Amendment”) to the Credit Agreement, which established a new class of incremental term loan commitments in the form of a senior secured delayed draw term loan credit facility (the “Delayed Draw Term Loan Facility”) in the aggregate principal amount of $50.0 million, proceeds of which may be used to fund capital expenditures related to our extract and ready-to-drink facility in Conway, Arkansas, or for general corporate purposes.

1 to the Credit Agreement, which established a new class of incremental term loan commitments in the form of a senior secured delayed draw term loan credit facility (the “Delayed Draw Term Loan Facility”) in the aggregate principal amount of $50.0 million, proceeds of which may be used to fund capital expenditures related to our extract and ready-to-drink facility in Conway, Arkansas, or for general corporate purposes.

The interest rates under the Delayed Draw Term Loan Facility are the same as the interest rates with respect to the initial term loans under the existing Term Loan Facility, and the commitment fees applying to the unused portion of the Delayed Draw Term Loan Facility are the same as the commitment fees with respect to the Revolving Credit Facility.

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During and after the Covenant Relief Period, the minimum interest coverage ratio financial covenant will be 2.00x.

As of June 30, 2023, we were in compliance with the Financial Covenants.

As of September 30, 2023, we were in compliance with the Financial Covenants.

The Term Loan Facility requires quarterly principal payments during the first three years of approximately $2.2 million (1.25% of the original principal balance).

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International Debt and Lending Facilities

On March 21, 2023, we entered into a $70 million working capital trade finance facility with multiple financial institutions through our subsidiary, Falcon.

On March 21, 2023, we entered into a $70 million working capital trade finance facility with multiple financial institutions through our subsidiary, Falcon Coffees Limited (“Falcon”).

The facility replaced Falcon’s then existing working capital trade finance facility.

The new facility is uncommitted and repayable on demand, with certain of Falcon’s assets pledged as collateral against the facility.

The new facility will mature one year from inception.

Borrowings under the new facility will bear interest at the borrower’s option at a rate equal to (a) Term SOFR plus a margin of 4.00% plus a liquidity premium set by the lender at the time of borrowing or (b) the Base Rate (determined by reference to the greatest of (i) the Prime Rate at such time, (ii) one-half of 1.00% in excess of the Federal Funds Effective Rate at such time, and (iii) Term SOFR for a one-month tenor in effect at such time plus 1.00%).

At June 30, 2023, there was $32.8 million of outstanding borrowings under the facility, which is recorded in short-term debt in the Condensed Consolidated Balance Sheets.

The facility is uncommitted and repayable on demand, with certain of Falcon’s assets pledged as collateral against the facility.

The facility will mature one year from inception.

Borrowings under the facility will bear interest at the borrower’s option at a rate equal to (a) Term SOFR plus a margin of 4.00% plus a liquidity premium set by the lender at the time of borrowing or (b) the Base Rate (determined by reference to the greatest of (i) the Prime Rate at such time, (ii) one-half of 1.00% in excess of the Federal Funds Effective Rate at such time, and (iii) Term SOFR for a one-month tenor in effect at such time plus 1.00%).

At September 30, 2023, there was $42.5 million of outstanding borrowings under the facility, which is recorded in short-term debt in the Condensed Consolidated Balance Sheets.

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, 2023.

Falcon was in compliance with these financial covenants as of September 30, 2023.

On September 28, 2023, we entered into a $5.0 million unsecured working capital trade finance facility with responsAbility Climate Smart Agriculture & Food Systems Fund through our subsidiary, Falcon.

The facility will mature on December 31, 2026, and requires stepped repayments of $0.5 million on December 31, 2024, $1.0 million on December 31, 2025 and $3.5 million on December 31, 2026.

Borrowings under the facility will bear interest at the borrower’s option at a rate equal to (a) (i) the most recent applicable Term SOFR for the longest period (for which Term SOFR is available) which is less than the applicable interest period of the loan or (ii) If no such Term SOFR is available for a period which is less than the applicable interest period, SOFR for the day which is two U.S.

Government Securities Business Days before the Quotation day;

or (b) the most recent applicable Term SOFR (as of Quotation Day) for the shortest period (for which Term SOFR is available) which exceeds the applicable interest period of that loan, in each case plus the applicable margin.

At September 30, 2023, there was $5.0 million of outstanding borrowings under the facility, which is recorded in long-term debt, net on the Condensed Consolidated Balance Sheets.

Falcon’s facility contains certain restrictive financial covenants which require Falcon to maintain certain levels of working capital, debt, and tangible net worth.

Falcon was in compliance with these financial covenants as of September 30, 2023.

Westrock Coffee International, LLC, through its subsidiary Rwanda Trading Company, maintains two mortgage and inventory-backed lending facilities with a local bank in Rwanda:

(a) a short-term trade finance facility with a balance of $8.8 million at June 30, 2023 and (b) a long-term note payable with a balance of $1.4 million at June 30, 2023.

Additionally, Rwanda Trading Company maintains three short-term futures contract-backed lending facilities from international institutions with outstanding balances of $2.5 million, $1.2 million and $0.9 million at June 30, 2023.

(a) a short-term trade finance facility with a balance of $8.5 million at September 30, 2023 and (b) a long-term note payable with a balance of $1.4 million at September 30, 2023.

Additionally, Rwanda Trading Company maintains three short-term futures contract-backed lending facilities from international institutions with outstanding balances of $0.8 million, $0.7 million and $0.6 million at September 30, 2023.

Current and Long-Term Liquidity

Our liquidity needs are to fund operating expenses, meet debt service obligations, and fund both current and long-term investment activities, which include capital expenditures.

We expect to use cash from operations and borrowings available under the Credit Agreement, as amended, 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.

We expect to use proceeds from the equity issuance in August

2023, cash from operations and borrowings available under the Credit Agreement, as amended, 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.

A key component of our long-term growth strategy will be to complete the build-out of our extract and ready-to-drink manufacturing facility in Conway, Arkansas, which will utilize state-of-the-art equipment 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.

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However, the Company will continuously evaluate its liquidity needs, and may seek to opportunistically access additional liquidity, including through either the debt or equity capital markets.

If it is determined that we have insufficient liquidity to fund the Conway build-out or fund our acquisition strategy, we may delay the 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.

If it is determined that we have insufficient liquidity to fund the Conway facility build-out or fund our acquisition strategy, we may delay the 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.

Warrant Proceeds

As of June 30, 2023, we had 19,144,120 outstanding Warrants to purchase 19,144,120 Common Shares, exercisable at an exercise price of $11.50 per share, which expire on the earliest to occur of August 26, 2027 (i.e.

As of September 30, 2023, we had 19,144,120 outstanding warrants to purchase 19,144,120 Common Shares, exercisable at an exercise price of $11.50 per share, which expire on the earliest to occur of August 26, 2027 (i.e.

the five year anniversary of the Closing), redemption or liquidation.

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Even if our warrants are in the money, there can be no assurance that warrant holders will exercise their warrants prior to their expiration.

Our Public Warrants under certain conditions, as described in their warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis.

Our Private Placement Warrants

are not redeemable so long as they are held by the Riverview Sponsor or its permitted transferees (except as otherwise set forth herein).

Our Westrock Public Warrants under certain conditions, as described in their warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis.

Our Westrock Private Placement Warrants are not redeemable so long as they are held by the Riverview Sponsor or its permitted transferees.

As such, it is possible that we may never generate any or only very limited cash proceeds from the exercise of our warrants.

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After February 26, 2028 (i.e.

the five-and-half year anniversary of the Closing), any holder of Series A Preferred Shares may require Westrock to redeem all or any whole number of such holder’s Series A Preferred Shares in cash, subject to applicable law and the terms of any credit agreement or similar arrangement pursuant to which a third-party lender provides debt financing to Westrock or its subsidiaries, at a redemption price per share equal to the greater of (a) the liquidation preference and (b) the product of (i) the number of Common Shares that would have been obtained from converting one Series A Preferred Share on the redemption notice date and (ii) the simple average of the daily volume-weighted average price per Common Share for the ten (10) trading days ending on and including the trading day immediately preceding the redemption notice date.

liquidation preference and (b) the product of (i) the number of Common Shares that would have been obtained from converting one Series A Preferred Share on the redemption notice date and (ii) the simple average of the daily volume-weighted average price per Common Share for the ten (10) trading days ending on and including the trading day immediately preceding the redemption notice date.

Assuming that the liquidation preference of the Series A Preferred Shares remains $11.50 per share and all 23,511,922 Series A Preferred Shares remain outstanding after February 26, 2028, we estimate an aggregate redemption payment of at least approximately $270.0 million.

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We have no other material obligations to pay principal amounts of our long-term debt obligations prior to their maturity.

Future purchase obligations of $193.3 million as of June 30, 2023 consist of commitments for the purchase of inventory over the next 12 months.

Future purchase obligations of $234.0 million as of September 30, 2023 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.

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Customer beverage equipment represents Company-owned equipment that is deployed in our customers’ locations.

Capital expenditures for the six months ended June 30, 2023 and 2022 were as follows:

Six months ended June 30, 2023

Six months ended June 30, 2022

Capital expenditures for the nine months ended September 30, 2023 and 2022 were as follows:

Nine months ended September 30, 2023

Nine months ended September 30, 2022

We expect to continue to invest to expand our extract and ready-to-drink product manufacturing capacity in Conway, Arkansas.

As of June 30, 2023, approximately $78.0 million has been spent towards the facility.

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.

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Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risks discussed in Item 7A “Quantitative and Qualitative Disclosures Regarding Market Risk” in our Annual Report on Form 10-K filed with the SEC on March 21, 2023.

There have been no material changes in the market risks discussed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K filed with the SEC on March 21, 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis