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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 153 added, 141 removed, 224 unchanged (57% 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, 2024.

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, 2023 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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Key Business Metrics

We use Adjusted EBITDA to evaluate our performance, identify trends, formulate financial projections, and to make strategic decisions.

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 use Consolidated Adjusted EBITDA to evaluate our performance, identify trends, formulate financial projections, and to make strategic decisions.

Consolidated Adjusted EBITDA

We refer to EBITDA and Consolidated 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 Consolidated 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.

The Company believes that providing these non-GAAP

financial measures 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 transaction, 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).

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, 2024 and 2023 is as follows:

Three Months Ended June 30,

Six Months Ended June 30,

We define “Consolidated Adjusted EBITDA” as EBITDA before equity-based compensation expense and the impact, which may be recurring in nature, of transaction, 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 non-capitalizable costs necessary to place the Conway extract and ready-to-drink facility into commercial production, 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 Consolidated Adjusted EBITDA are important supplemental measures to net (loss) income because they provide additional information to evaluate our operating performance on an unleveraged basis.

Since EBITDA and Consolidated 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 Consolidated Adjusted EBITDA may not be comparable to that reported by other companies that define EBITDA and Consolidated Adjusted EBITDA differently than we do.

The reconciliation of our net (loss) income to EBITDA and Consolidated Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023 is as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Net (loss) income

Interest expense

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Impairment charges

Conway extract and ready-to-drink facility start-up costs

Conway extract and ready-to-drink facility pre-production costs

Mark-to-market adjustments

Loss on disposal of property, plant and equipment

Adjusted EBITDA

Beverage Solutions

Sustainable Sourcing & Traceability

Total of Reportable Segments

Consolidated Adjusted EBITDA

The Company presents Consolidated Adjusted EBITDA as excluding certain Conway extract and ready-to-drink facility start-up costs (“Conway Start-up Costs”).

Prior to the third quarter of 2024, Conway Start-up Costs included two categories:

(i) non-capitalizable costs necessary to place production and packaging capabilities into commercial production (“pre-production costs”), and (ii) recurring operating costs incurred once a capability is placed into commercial production but before completion of the production scale up (“scale up operating costs”).

Beginning in the third quarter of 2024, the Company no longer excludes scale up operating costs in the determination of Consolidated Adjusted EBITDA.

Consolidated Adjusted EBITDA for the three and six months ended June 30, 2024 has been revised to exclude the impact of scale up operating costs, as follows:

Three Months Ended

Six Months Ended

June 30, 2024

Consolidated Adjusted EBITDA, as presented

Conway extract and ready-to-drink facility scale-up costs

Consolidated Adjusted EBITDA, as revised

Significant Developments

Restructuring Activities

During the second quarter of 2024, the Company committed to a plan to consolidate its manufacturing operations, which will result in the closure and sale of its West Winds manufacturing facility in Concord, NC, and the closure of its manufacturing facility in Richmond, CA.

All production from the impacted facilities will be consolidated into other facilities operated by the Company in Concord, NC and Conway, AR.

The closure of the West Winds facility was completed as of June 30, 2024, and the sale of the land and buildings is expected to be completed within the next 12 months.

Production in the Richmond, CA facility is expected to cease during the third quarter of 2024.

In addition, during the second quarter of 2024, the Company committed to targeted restructuring activities to improve operational efficiency by reducing excess workforce capacity in our selling, general and administrative functions.

We estimate annualized savings from these initiatives to be approximately $10.0 million, and we expect to begin fully realizing these savings, on a run-rate basis, in the first quarter of 2025.

Warrant Exchange

On August 28, 2024, the Company announced that it had commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”) relating to its outstanding (i) public warrants to purchase shares of common stock of the Company, par value $0.01 per share (the “Common Shares”), which warrants trade on The Nasdaq Global Market (the “Nasdaq”) under the symbol “WESTW” (the “Westrock Public Warrants”), and (ii) private placement warrants to purchase common shares (the “Westrock Private Warrants” and, together with the Westrock Public Warrants, the “Westrock Warrants”).

The Company offered to all holders of the Westrock Warrants the opportunity to receive 0.290 common shares in exchange for each of the Westrock Warrants tendered pursuant to the Offer.

Concurrently with the Offer, the Company also solicited consents from the holders of each of the Westrock Public Warrants and the Westrock Private Warrants to amend that certain Warrant Agreement, dated as of August 25, 2022, by and between the Company and Computershare Inc., a Delaware corporation, and its affiliate, Computershare Trust Company, N.A., a federally chartered trust company, as warrant agent (the “Warrant Agent”), which governs all of the Warrants (the “Warrant Agreement”), to permit the Company to require that (x) each Westrock Public Warrant that is outstanding upon the closing of the Offer be exchanged for 0.261 common shares, which is a ratio 10% less than the exchange ratio applicable to the Offer and (y) each Westrock Private Warrant that is outstanding upon the closing of the Offer be exchanged for 0.261 common shares, which is a ratio 10% less than the exchange ratio applicable to the Offer (such amendment, the “Warrant Amendment”).

The Offer and Consent Solicitation expired on September 26, 2024 (the “Expiration Date”).

As of the Expiration Date, (x) 16,676,541 outstanding Westrock Public Warrants were validly tendered and not validly withdrawn in the Offer and Consent Solicitation, representing approximately 97.42% of the Westrock Public Warrants and (y) 2,026,046 outstanding Westrock Private Warrants were validly tendered and not validly withdrawn in the Offer and Consent Solicitation, representing 100% of the Westrock Private Warrants.

On September 30, 2024, the Company issued 5,423,681 Common Shares in exchange for the tendered Westrock Warrants.

In addition, pursuant to the Consent Solicitation, the Company received the approval of holders of approximately 97.42% of the outstanding Westrock Public Warrants and 100% of the outstanding Westrock Private Warrants to adopt the Warrant Amendment, which exceeded (x) the 50% threshold of the outstanding Westrock Public Warrants required to amend the Warrant Agreement with respect to the Westrock Public Warrants and (y) the 50% threshold of the outstanding Westrock Private Warrants required to amend the Warrant Agreement with respect to the Westrock Private Warrants.

Accordingly, the Company and the Warrant Agent entered into the Warrant Amendment, dated September 30, 2024.

On September 30, 2024, the Company announced that it would exercise its right, in accordance with the terms of the Warrant Amendment, to exchange each Westrock Public Warrant that is outstanding following the closing of the Offer for 0.261 common shares per warrant (the “Post-Offer Exchange”).

In lieu of issuing fractional shares, any holder of warrants who would otherwise have been entitled to receive fractional shares, after aggregating all such fractional shares of such holder, was paid in cash (without interest) in an amount equal to such fractional part of a share multiplied

The Company fixed the date for the Post-Offer Exchange as October 15, 2024.

On October 16, 2024, the Company issued 115,220 Common Shares for the untendered Westrock Public Warrants.

Following the completion of the Offer and Post-Offer Exchange, no Westrock Warrants remain outstanding.

Accordingly, the Westrock Public Warrants were suspended from trading on the Nasdaq as of the close of business on October 15, 2024, and were delisted.

Falcon Credit Agreement Amendment

On August 21, 2024, Falcon Coffees Limited, a wholly owned subsidiary of the Company, amended its working capital trade finance facility.

The amendment increased the facility size from $55.0 million to $75.0 million.

The interest rates and maturity date were unchanged as a result of the amendment.

See Note 11 to our Condensed Consolidated Financial Statements for additional discussion related to the working capital trade finance facility.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023

Comparison of the Three Months Ended September 30, 2024 and 2023

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

(Dollars in Thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Costs of sales

8 unchanged sentences

Change in fair value of warrant liabilities

Loss before income taxes and equity in earnings from unconsolidated entities

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

Income tax expense (benefit)

Equity in (earnings) loss from unconsolidated entities

Net loss attributable to shareholders

Net (loss) income

Net (loss) income attributable to shareholders

Participating securities' share in earnings

Accretion of Series A Convertible Preferred Shares

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, 2024 and 2023:

(Dollars in Thousands)

Segment Revenues:

Segment Costs of Sales:

Segment Gross Profit:

Segment Adjusted EBITDA:

Segment Adjusted EBITDA Margin:

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 $163.3 million for the three months ended June 30, 2024, compared to $189.7 million for the three months ended June 30, 2023, a decrease of approximately 14.0%.

The decrease was primarily due to a $29.5 million decrease in the sale of coffee and tea products, driven by a 22.1% decrease in roast and ground coffee volumes and a 14.8% decrease in single serve cup volumes, partially offset by a $3.0 million increase in the sale of flavors, extracts and ingredients products, driven by a 31.2% increase in flavors, extracts and ingredients volumes.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $45.1 million for the three months ended June 30, 2024, increasing 29.1% compared to $35.0 million for the three months ended June 30, 2023.

The increase is driven by an increase in sales volume, which increased 39.9%, partially offset by an 8.2% decrease in average sales price per pound for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The decrease in the average sales price per pound is directly correlated to the global commodities price.

Net (loss) income attributable to common shareholders

Three Months Ended September 30,

Beverage Solutions

Sustainable Sourcing & Traceability 1

Total net sales

(1) Net of intersegment revenues.

Net Sales from our Beverage Solutions segment were $164.0 million for the three months ended September 30, 2024, compared to $176.8 million for the three months ended September 30, 2023, a decrease of approximately 7.2%.

The decrease was primarily due to a $16.4 million decrease in the sale of coffee and tea products, driven by a 6.4% decrease in roast and ground coffee volumes and a 24.4% decrease in single serve cup volumes, partially offset by a $3.1 million increase in the sale of flavors, extracts and ingredients products, driven by an 18.5% increase in flavors, extracts and ingredients volumes.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $56.9 million for the three months ended September 30, 2024, increasing 32.8% compared to $42.8 million for the three months ended September 30, 2023.

The increase is driven by an increase in sales volume, which increased 35.9% compared to the three months ended September 30, 2023.

Costs of Sales

In our Beverage Solutions segment, costs of sales decreased to $126.6 million for the three months ended June 30, 2024, from $157.2 million for the three months ended June 30, 2023.

The decrease in costs of sales was primarily driven by a decrease in the sale of coffee and tea products for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

In our SS&T segment, costs of sales increased $8.6 million to $40.3 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Three Months Ended September 30,

Beverage Solutions

Sustainable Sourcing & Traceability

Total costs of sales

In our Beverage Solutions segment, costs of sales decreased to $131.8 million for the three months ended September 30, 2024, from $144.9 million for the three months ended September 30, 2023.

The decrease in costs of sales was primarily driven by a decrease in the sale of coffee and tea products and single serve cup volumes for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

In our SS&T segment, costs of sales increased $12.4 million to $52.0 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

This increase is primarily due to an increase in green coffee sales volume.

Costs of sales in our SS&T segment for the three months ended June 30, 2024 included $1.5 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $1.0 million of net unrealized gains for the three months ended June 30, 2023.

Costs of sales in our SS&T segment for the three months ended September 30, 2024 included $0.5 million of net unrealized losses on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $1.2 million of net unrealized losses for the three months ended September 30, 2023.

Selling, General and Administrative Expense

Three Months Ended June 30,

Three Months Ended September 30,

(Dollars in Thousands)

2 unchanged sentences

Total selling, general and administrative expense

Total selling, general and administrative expenses in our Beverage Solutions segment increased $17.3 million to $48.8 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily due to a $11.9 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas.

In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the three months ended June 30, 2023.

Total selling, general and administrative expenses in our Beverage Solutions segment increased $8.5 million to $43.1 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023.

increase is primarily due to an $8.9 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas.

In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the three months ended September 30, 2023.

Transaction, Restructuring and Integration Expense

Transaction, restructuring and integration expenses for the three months ended June 30, 2024 were $4.4 million, approximately $4.1 million of which related to severance and other employee termination and benefit costs associated with the elimination of various positions as part of cost reduction objectives.

During the three months ended June 30, 2023, we incurred $2.9 million of transaction, restructuring and integration expenses, 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 system costs.

Transaction, restructuring and integration expenses for the three months ended September 30, 2024 were $2.5 million, approximately $1.4 million of which related to professional and legal costs associated with the Westrock Warrant exchange and $1.0 million of which related to plant closure costs.

During the three months ended September 30, 2023, we incurred $3.1 million of transaction, restructuring and integration expenses, 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 system costs and $1.0 million of which primarily related to non-capitalizable costs associated with registration statements.

Interest Expense

Three Months Ended June 30,

Three Months Ended September 30,

Interest expense

11 unchanged sentences

Total interest expense

Interest expense for the three months ended June 30, 2024 was $7.5 million compared to $7.4 million for the three months ended June 30, 2023.

$1.7 million of the increase is attributable to interest expense associated with our term loan and delayed draw term loan facilities, primarily due to an increase in interest rates and higher outstanding borrowings.

In addition, we incurred $2.5 million in interest on our supply chain finance program borrowings for the three months ended June 30, 2024 compared to $0.2 million of such interest for the three months ended June 30, 2023.

Furthermore, during the three months ended June 30, 2024, the Company capitalized approximately $4.3 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 June 30, 2023.

Interest expense for the three months ended September 30, 2024 was $6.9 million compared to $7.8 million for the three months ended September 30, 2023.

Interest expense associated with our revolving credit facility increased $1.4 million, primarily due to higher outstanding borrowings, and interest on our Convertible Notes increased $0.9 million.

During the three months ended September 30, 2024, the Company capitalized approximately $4.0 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, compared to $1.0 million of such interest for the three months ended September 30, 2023.

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 June 30, 2024 resulted in recognition of $1.6 million of gains compared to recognition of $11.8 million of losses during the three months ended June 30, 2023.

The change in fair value of warrant liabilities for the three months ended September 30, 2024 resulted in recognition of $5.5 million of gains compared to recognition of $25.1 million of gains during the three months ended September 30, 2023.

Income Tax Expense (Benefit)

Income tax benefit for the three months ended June 30, 2024 was $4.6 million, resulting in an effective tax rate of 20.8%.

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 certain permanent differences, including nondeductible expenses related to executive compensation.

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

Comparison of the Six Months Ended June 30, 2024 and 2023

Income tax expense for the three months ended September 30, 2024 was $0.1 million, resulting in an effective tax rate of (0.6%).

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.

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

Comparison of the Nine Months Ended September 30, 2024 and 2023

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

Nine Months Ended

(Dollars in Thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Costs of sales

15 unchanged sentences

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, 2024 and 2023:

(Dollars in Thousands)

Segment Revenues:

Segment Costs of Sales:

Segment Gross Profit:

Segment Adjusted EBITDA:

Segment Adjusted EBITDA Margin:

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 $321.3 million for the six months ended June 30, 2024, compared to $370.9 million for the six months ended June 30, 2023, a decrease of approximately 13.4%.

The decrease was primarily due to a $57.9 million decrease in the sale of coffee and tea products, driven by a 23.0% decrease in roast and ground coffee volumes and a 10.9% decrease in single serve cup volumes, partially offset by a $8.1 million increase in the sale of flavors, extracts and ingredients products, driven by a 35.6% increase in flavors, extracts and ingredients volumes.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $79.6 million for the six months ended June 30, 2024, increasing 34.4% compared to $59.2 million for the six months ended June 30, 2023.

The increase is driven by an increase in sales volume, which increased 63.3%, partially offset by an 18.5% decrease in average sales price per pound for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Nine Months Ended September 30,

Beverage Solutions

Sustainable Sourcing & Traceability 1

Total net sales

(1) Net of intersegment revenues.

Net Sales from our Beverage Solutions segment were $485.3 million for the nine months ended September 30, 2024, compared to $547.7 million for the nine months ended September 30, 2023, a decrease of approximately 11.4%.

The decrease was primarily due to a $75.9 million decrease in the sale of coffee and tea products, driven by a 17.8% decrease in roast and ground coffee volumes and a 15.0% decrease in single serve cup volumes, partially offset by an $11.2

million increase in the sale of flavors, extracts and ingredients products, driven by a 28.9% increase in flavors, extracts and ingredients volumes.

Net Sales from our SS&T segment, net of intersegment revenues, totaled $136.4 million for the nine months ended September 30, 2024, increasing 33.7% compared to $102.0 million for the nine months ended September 30, 2023.

The increase is driven by an increase in sales volume, which increased 43.9%, partially offset by a 7.7% decrease in average sales price per pound for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

The decrease in the average sales price per pound is directly correlated to the global commodities price.

Costs of Sales

In our Beverage Solutions segment, costs of sales decreased to $251.7 million for the six months ended June 30, 2024, from $308.0 million for the six months ended June 30, 2023.

The decrease in costs of sales was primarily driven by a decrease in the sale of coffee and tea products for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

In our SS&T segment, costs of sales increased $18.3 million to $70.5 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Nine Months Ended September 30,

Beverage Solutions

Sustainable Sourcing & Traceability

Total costs of sales

In our Beverage Solutions segment, costs of sales decreased to $383.5 million for the nine months ended September 30, 2024, from $452.9 million for the nine months ended September 30, 2023.

The decrease in costs of sales was primarily driven by a decrease in the sale of coffee and tea products and single serve cup volumes for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

In our SS&T segment, costs of sales increased $30.7 million to $122.5 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

This increase is primarily due to an increase in green coffee sales volume.

Costs of sales in our SS&T segment for the six months ended June 30, 2024 included $3.2 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $2.2 million of net unrealized gains for the six months ended June 30, 2023.

Costs of sales in our SS&T segment for the nine months ended September 30, 2024 included $2.7 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $1.0 million of net unrealized gains for the nine months ended September 30, 2023.

Selling, General and Administrative Expense

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in Thousands)

2 unchanged sentences

Total selling, general and administrative expense

Total selling, general and administrative expenses in our Beverage Solutions segment increased $27.5 million to $90.8 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Total selling, general and administrative expenses in our Beverage Solutions segment increased $36.1 million to $133.9 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

The increase is primarily due to a $28.7 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas.

In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the six months ended June 30, 2023.

In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the nine months ended September 30, 2023.

Transaction, Restructuring and Integration Expense

Transaction, restructuring and integration expenses for the six months ended June 30, 2024 were $7.4 million, approximately $4.1 million of which related to severance and other employee termination and benefit costs associated with the elimination of various positions as part of cost reduction objectives and $2.2 million of which related to the establishment of our at-the-market common stock offering program.

During the six months ended June 30, 2023, we incurred $9.5 million of transaction, restructuring and integration expenses, 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 system costs and $0.5 million of which related to the acquisition of Bixby Roasting Co.

Transaction, restructuring and integration expenses for the nine months ended September 30, 2024 were $9.9 million, approximately $3.5 million of which related to severance and other employee termination and benefit costs associated with the elimination of various positions as part of cost reduction objectives, $2.4 million of which related to the establishment of our at-the-market common stock offering program and $1.4 million of which related to professional and legal costs associated with the Westrock Warrant exchange.

During the nine months ended September 30, 2023, we incurred $12.7 million of transaction, restructuring and integration expenses, 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 system costs and $2.0 million of non-capitalizable costs associated with acquisitions and registration statements.

Interest Expense

Six Months Ended June 30,

Nine Months Ended September 30,

Interest expense

11 unchanged sentences

Total interest expense

Interest expense for the six months ended June 30, 2024 was $15.0 million compared to $13.4 million for the six months ended June 30, 2023.

$3.6 million of the increase is attributable to interest expense associated with our term loan and delayed draw term loan facilities, primarily due to an increase in interest rates and higher outstanding borrowings.

In addition, we incurred $4.5 million in interest on our supply chain finance program borrowings for the six months ended June 30, 2024 compared to $0.2 million of such interest for the six months ended June 30, 2023.

Furthermore, during the six months ended June 30, 2024, the Company capitalized approximately $7.2 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 six months ended June 30, 2023.

Interest expense for the nine months ended September 30, 2024 was $21.9 million compared to $21.2 million for the nine months ended September 30, 2023.

$4.1 million of the increase is attributable to interest expense associated with our term loan and delayed draw term loan facilities, primarily due to higher outstanding borrowings, and $2.3 million of the increase is due to interest on our Convertible Notes.

In addition, we incurred $4.9 million in interest on our supply chain finance program borrowings for the nine months ended September 30, 2024, compared to $1.2 million of such

interest for the nine months ended September 30, 2023.

Furthermore, during the nine months ended September 30, 2024, the Company capitalized approximately $11.1 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, compared to $1.0 million of such interest for the nine months ended September 30, 2023.

Change in Fair Value of Warrant Liabilities

The change in fair value of warrant liabilities for the six months ended June 30, 2024 resulted in recognition of $1.7 million of gains compared to recognition of $6.3 million of losses during the six months ended June 30, 2023.

The change in fair value of warrant liabilities for the nine months ended September 30, 2024 resulted in recognition of $7.1 million of gains compared to recognition of $18.8 million of gains during the nine months ended September 30, 2023.

Income Tax Expense (Benefit)

Income tax expense for the six months ended June 30, 2024 was $1.2 million, resulting in an effective tax rate of (2.9%).

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 expense for the nine months ended September 30, 2024 was $1.3 million, resulting in an effective tax rate of (2.3%).

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.

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

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 15, 2024.

As of June 30, 2024, there have been no material changes to these estimates.

As of September 30, 2024, there have been no material changes to these estimates.

Liquidity and Capital Resources

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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, including any adverse impact from changes or delays in the estimated timing and volume of products to be commercialized in our extract and ready-to-drink manufacturing facility in Conway, Arkansas, 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, including any adverse impact from changes or further delays in the estimated timing and volume of products to be commercialized in our extract and ready-to-drink manufacturing facility in Conway, Arkansas, 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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Borrowings under the Revolving Credit Facility, the Term Loan Facility and the Delayed Draw Term Loan Facility will bear interest, at the Borrower’s option, initially at an annual rate equal to (a) term SOFR 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”) 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 United States as the prime rate in effect, (ii) the NYFRB Rate from time to time plus 0.50% and (iii) the Adjusted Term SOFR for a one month interest period plus 1.00%, (the “Base Rate”)), in each case plus an applicable margin.

At June 30, 2024, we had $59.0 million of outstanding borrowings under the Revolving Credit Facility, with a weighted average interest rate of 9.1% and we had $2.6 million of standby letters of credit outstanding.

At June 30, 2024 the interest rate applicable to our Term Loan Facility was 9.2% and the interest rate applicable to our Delayed Draw Term Loan Facility was 8.7%.

At September 30, 2024, we had $107.5 million of outstanding borrowings under the Revolving Credit Facility, with a weighted average interest rate of 8.8% and we had $2.6 million of standby letters of credit outstanding.

At September 30, 2024 the interest rate applicable to our Term Loan Facility was 8.0% and the interest rate applicable to our Delayed Draw Term Loan Facility was 8.9%.

On February 15, 2024, the Borrower entered into Amendment No.

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

The Term Loan Facility and Delayed Draw Term Loan Facility requires quarterly principal payments totaling approximately $2.8 million (1.25% of the original principal balance).

The Term Loan Facility and Delayed Draw Term Loan Facility require quarterly principal payments totaling approximately $2.8 million (1.25% of the original principal balance).

Quarterly payments increase to approximately $4.2 million and $5.6 million (1.875% and 2.5% of the original principal balance) during the final two years of the agreements, respectively.

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The Convertible Notes are carried at amortized cost and are recorded in long-term debt, net and convertible notes payable – related party, net on the Condensed Consolidated Balance Sheets.

At June 30, 2024, the carrying value of the Convertible Notes was $71.5 million, of which $49.7 million was from related parties.

At September 30, 2024, the carrying value of the Convertible Notes was $71.6 million, of which $49.7 million was from related parties.

We incurred a total of $0.5 million of financing fees in connection with the Convertible Notes, which were ratably allocated to the convertible notes payable and the convertible notes payable – related party, respectively, and are being amortized into interest expense over the remaining term of the Convertible Notes utilizing the effective interest rate method.

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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, as defined in the facility, at such time, (ii) one-half of 1.00% in excess of the Federal Funds Effective Rate, as defined in the facility, at such time, and (iii) Term SOFR for a one-month tenor in effect at such time plus 1.00%).

At June 30, 2024, there was $41.7 million of outstanding borrowings under the facility, which is recorded in short-term debt in the Condensed Consolidated Balance Sheets.

On August 21, 2024, Falcon amended its working capital trade finance facility.

The amendment increased the facility size from $55.0 million to $75.0 million.

The interest rates and maturity date were unchanged as a result of the amendment.

At September 30, 2024, there was $48.5 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, 2024.

Falcon was in compliance with these financial covenants as of September 30, 2024.

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.

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or (b) the most recent applicable Term SOFR (as of the 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 June 30, 2024, there was $5.0 million of outstanding borrowings under the facility, of which $4.5 million and $0.5 million, is recorded in long-term debt, net and current maturities of long-term debt, respectively, on the Condensed Consolidated Balance Sheets.

At September 30, 2024, there was $5.0 million of outstanding borrowings under the facility, of which $4.5 million and $0.5 million, is recorded in long-term debt, net and current maturities of long-term debt, respectively, 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 June 30, 2024.

Falcon was in compliance with these financial covenants as of September 30, 2024.

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 $8.4 million at June 30, 2024 and (b) a long-term note payable with a balance of $0.8 million at June 30, 2024.

Additionally, Rwanda Trading Company maintains two short-term futures contract-based lending facilities from international institutions with outstanding balances of $2.5 million and $2.0 million at June 30, 2024.

(a) a short-term trade finance facility with a balance of $6.6 million at September 30, 2024 and (b) a long-term note payable with a balance of $0.8 million at September 30, 2024.

Additionally, Rwanda Trading Company maintains two short-term futures contract-based lending facilities from international institutions with outstanding balances of $0.6 million and $2.4 million at September 30, 2024.

Supply Chain Finance Program

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The Company may request cancellation of the Program in whole or in respect of one or more approved suppliers.

Due to the extension of payment terms beyond the original due date of approved invoices, obligations under the Program are recorded outside of accounts payable, within our supply chain finance program, on our Consolidated Balance Sheets.

As of June 30, 2024, there were $76.3 million obligations outstanding under the Program.

As of September 30, 2024, there were $70.9 million obligations outstanding under the Program.

At-the-Market Common Stock Offering Program

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Under the Registration Statement, we have established an at-the-market common stock offering program (the “ATM Program”) to sell shares of common stock not to exceed 5,000,000 Common Shares in the aggregate.

During the six months ended June 30, 2024, the Company sold 60,000 Common Shares under the ATM Program, resulting in net proceeds of $0.6 million.

This program is intended to provide additional financial flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need financing, including for acquisitions.

During the nine months ended September 30, 2024, the Company sold 60,000 Common Shares under the ATM Program, resulting in net proceeds of $0.6 million.

This program is intended to provide additional financial

flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need financing, including for acquisitions.

Current and Long-Term Liquidity

A key component of our long-term growth strategy is 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.

A key component of our long-term growth strategy is to complete the build-out of our extract and ready-to-drink manufacturing facility in Conway, Arkansas, which utilizes 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.

During the second quarter of 2024, we commenced commercial production in a portion of the facility.

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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, 2024, 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, redemption or liquidation.

The exercise of warrants, and any proceeds we may receive from their exercise, are highly dependent on the price of our Common Shares and the spread between the exercise price of the warrant and the price of our Common Shares at the time of exercise.

For example, to the extent that the price of our Common Shares exceeds $11.50 per share, it is more likely that holders of our warrants will exercise their warrants.

If the price of our Common Shares is less than $11.50 per share, it is unlikely that such holders will exercise their warrants.

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 Westrock Public Warrants (as defined in Note 13 to our Condensed Consolidated Financial Statements) 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 Warrants (as defined in Note 13 to our Condensed Consolidated Financial Statements), of which there were 2,026,046 outstanding at June 30, 2024, are not redeemable so long as they are held by the existing holders or their 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.

As of the date of this Quarterly Report on Form 10-Q, we have neither included nor intend to include any potential cash proceeds from the exercise of our warrants in our short-term or long-term liquidity sources or capital resource planning.

We do not expect to rely on the cash exercise of warrants to fund our operations.

Instead, we intend to rely on our primary sources of cash discussed above to continue to support our operations.

Therefore, the availability or unavailability of any proceeds from the exercise of our warrants is not expected to affect our ability to fund our operations.

We will continue to evaluate the probability of warrant exercise over the life of our warrants and the merit of including potential cash proceeds from the exercise thereof in our liquidity sources and capital resources planning.

To the extent such warrants are exercised, additional Common Shares will be issued, which will result in dilution to the holders of our Common Shares and increase the number of Common Shares eligible for resale in the public market.

Sales of substantial numbers of such shares in the public market could adversely affect the market price of our Common Shares, which increases the likelihood of periods when our warrants will not be in the money prior to their expiration.

Redemptions of Series A Preferred Shares

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.

After February 26, 2028, 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.

Assuming that the liquidation preference of the Series A Preferred Shares remains $11.50 per share and all 23,510,527 Series A Preferred Shares remain outstanding after February 26, 2028, we estimate an aggregate redemption payment of at least approximately $270.4 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 $180.3 million as of June 30, 2024 consist of commitments for the purchase of inventory over the next 12 months.

Future purchase obligations of $266.8 million as of September 30, 2024 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, 2024 and 2023 were as follows:

Six months ended June 30, 2024

Six months ended June 30, 2023

Capital expenditures for the nine months ended September 30, 2024 and 2023 were as follows:

Nine months ended September 30, 2024

Nine months ended September 30, 2023

During the remainder of 2024, we expect to invest approximately $30.0 million to continue the build out of our extract and ready-to-drink product manufacturing facility in Conway, Arkansas.

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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