Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 001-41485
WESTROCK COFFEE COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware
80-0977200
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
4009 N. Rodney Parham Road, 4th Floor
Little Rock, Arkansas
72212
(Address of Principal Executive Offices)
(Zip Code)
(501) 918-9358
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Shares of common stock, par value $0.01 per share
WEST
The Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of common stock, par value $0.01 per share
WESTW
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
◻
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
As of August 2, 2024, the Registrant had 88,365,760 shares of common stock, par value $0.01 per share, outstanding.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as defined under U.S. federal securities laws. Forward-looking statements include all statements that are not historical statements of fact and statements including, but not limited to, the following statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future, our expectations regarding the build-out of the Conway, Arkansas facility and our ability to sell or commit capacity; our expectations regarding capital expenditures; our future liquidity needs and access to capital; and our expectations regarding remediation of the material weaknesses in our internal control over financial reporting. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “would,” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to significant risks and uncertainties. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements, and we assume no obligation and do not intend to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, risks related to the following:
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in the Annual Report or in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Many of the important factors that will determine these results are beyond our ability to control or predict. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and, except as otherwise required by law, we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Westrock Coffee Company
June 30, 2024
Part I.
Financial Information
5
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
6
Condensed Consolidated Statements of Comprehensive Income (Loss)
7
Condensed Consolidated Statements of Shareholders’ Equity
8
Condensed Consolidated Statements of Cash Flows
10
Notes to Condensed Consolidated Financial Statements
11
1. Organization and Description of Business
2. Basis of Presentation and Consolidation
3. Summary of Significant Accounting Policies
12
4. Revenue
16
5. Acquisitions
18
6. Inventories
19
7. Property, Plant and Equipment, Net
8. Goodwill
20
9. Intangible Assets, Net
10. Leases
11. Debt
22
12. Series A Preferred Shares
25
13. Common Stock Warrants
26
14. Derivatives
27
15. Fair Value Measurements
28
16. Accumulated Other Comprehensive Income (Loss)
31
17. Equity-Based Compensation
18. Earnings per Share
32
19. Segment Information
33
20. Commitments and Contingencies
36
21. Related Party Transactions
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
Overview
Key Business Metrics
Significant Developments
40
Results of Operations
Critical Accounting Estimates
46
Liquidity and Capital Resources
Recent Accounting Pronouncements
52
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
55
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
56
Signatures
57
Part I. Financial Information
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands, except par value)
December 31, 2023
ASSETS
Cash and cash equivalents
$
24,316
37,196
Restricted cash
1,711
644
Accounts receivable, net of allowance for credit losses of $3,941 and $2,915, respectively
102,071
99,158
Inventories
163,703
149,921
Derivative assets
17,751
13,658
Prepaid expenses and other current assets
22,973
12,473
Total current assets
332,525
313,050
Property, plant and equipment, net
418,247
344,038
Goodwill
116,111
Intangible assets, net
118,953
122,945
Operating lease right-of-use assets
62,643
67,601
Other long-term assets
7,894
7,769
Total Assets
1,056,373
971,514
LIABILITIES, CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt
12,137
9,811
Short-term debt
54,552
43,694
Accounts payable
43,091
69,106
Supply chain finance program
76,336
78,076
Derivative liabilities
5,044
3,731
Accrued expenses and other current liabilities
62,707
35,217
Total current liabilities
253,867
239,635
Long-term debt, net
280,255
223,092
Convertible notes payable - related party, net
49,671
—
Deferred income taxes
13,288
10,847
Operating lease liabilities
59,287
63,554
Warrant liabilities
43,148
44,801
Other long-term liabilities
1,287
1,629
Total liabilities
700,803
583,558
Commitments and contingencies (Note 20)
Series A Convertible Preferred Shares, $0.01 par value, 24,000 shares authorized, 23,512 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively, $11.50 liquidation value
274,042
274,216
Shareholders' Equity
Preferred stock, $0.01 par value, 26,000 shares authorized, no shares issued and outstanding
Common stock, $0.01 par value, 300,000 shares authorized, 88,366 shares and 88,051 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively
884
880
Additional paid-in-capital
476,795
471,666
Accumulated deficit
(404,056)
(362,624)
Accumulated other comprehensive income
7,905
3,818
Total shareholders' equity
81,528
113,740
Total Liabilities, Convertible Preferred Shares and Shareholders' Equity
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
Six Months Ended June 30,
(Thousands, except per share data)
2024
2023
Net sales
208,389
224,694
400,889
430,136
Costs of sales
166,986
189,018
322,212
360,162
Gross profit
41,403
35,676
78,677
69,974
Selling, general and administrative expense
51,610
34,170
96,050
68,292
Transaction, restructuring and integration expense
4,399
2,901
7,363
9,545
Impairment charges
831
Loss on disposal of property, plant and equipment
971
973
896
Total operating expenses
57,811
37,071
105,217
78,733
Loss from operations
(16,408)
(1,395)
(26,540)
(8,759)
Other (income) expense
Interest expense
7,453
7,385
15,032
13,414
Change in fair value of warrant liabilities
(1,612)
11,800
(1,653)
6,272
Other, net
98
(9)
233
811
Loss before income taxes and equity in earnings from unconsolidated entities
(22,347)
(20,571)
(40,152)
(29,256)
Income tax expense (benefit)
(4,645)
6,240
1,170
1,881
Equity in (earnings) loss from unconsolidated entities
110
Net loss
(17,759)
(26,811)
(41,432)
(31,137)
Net income (loss) attributable to non-controlling interest
15
Net loss attributable to shareholders
(31,152)
Accretion of Series A Convertible Preferred Shares
87
174
(341)
Net loss attributable to common shareholders
(17,672)
(26,724)
(41,258)
(31,493)
Loss per common share:
Basic
(0.20)
(0.35)
(0.47)
(0.42)
Diluted
Weighted-average number of shares outstanding:
88,323
75,726
88,209
75,543
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivative instruments
3,820
(717)
4,006
1,523
Foreign currency translation adjustment
51
59
81
41
Total other comprehensive income (loss)
3,871
(658)
4,087
1,564
Comprehensive loss
(13,888)
(27,469)
(37,345)
(29,573)
Comprehensive income (loss) attributable to non-controlling interests
Comprehensive loss attributable to shareholders
(29,588)
Comprehensive loss attributable to common shareholders
(13,801)
(27,382)
(37,171)
(29,929)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
Accumulated
Other
Common Stock
Additional
Comprehensive
Non-Controlling
Total
Shares
Amount
Paid-in Capital
Deficit
Income (Loss)
Interest
Equity (Deficit)
Balance at March 31, 2023
75,628
759
345,840
(332,383)
(3,881)
2,475
12,810
Net income (loss)
Issuance of common shares related to purchase of non-controlling interest
100
1
474
(2,475)
(2,000)
Other comprehensive income (loss)
Equity-based compensation
2,310
Balance at June 30, 2023
75,728
760
348,711
(359,194)
(4,539)
(14,262)
Balance at March 31, 2024
88,282
883
473,064
(386,297)
4,034
91,684
Issuance of common shares related to "at-the-market" offering program, net of issuance costs
60
624
625
Issuance of common shares related to stock options exercised
23
3,025
Net share settlement of equity awards
(17)
Balance at June 30, 2024
88,366
(Unaudited) (continued)
Balance at December 31, 2022
75,020
750
342,664
(328,042)
(6,103)
2,460
11,729
Issuance of common shares related to acquisitions
2
444
446
Issuance of common shares related to Public Warrant exercise
229
3,142
3,144
62
63
Issuance of common shares related to conversion of Series A Convertible Preferred Shares
253
254
311
3
3,854
3,857
(1,841)
Balance at December 31, 2023
88,051
5,478
5,481
(1,159)
9
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
15,516
12,055
Provision for credit losses
1,026
653
Amortization of deferred financing fees included in interest expense
1,715
988
Mark-to-market adjustments
(3,162)
(2,205)
Foreign currency transactions
53
907
Deferred income tax expense (benefit)
490
992
Change in operating assets and liabilities:
Accounts receivable
(3,954)
649
(12,912)
(6,874)
Derivative assets and liabilities
4,709
693
Prepaid expense and other assets
733
(8,529)
(20,211)
(24,080)
Accrued liabilities and other
34,936
7,314
Net cash used in operating activities
(15,691)
(35,668)
Cash flows from investing activities:
Additions to property, plant and equipment
(105,105)
(55,745)
Additions to intangible assets
(104)
(95)
Acquisition of business, net of cash acquired
(2,392)
Proceeds from sale of property, plant and equipment
449
Net cash used in investing activities
(104,760)
(58,175)
Cash flows from financing activities:
Payments on debt
(134,634)
(79,795)
Proceeds from debt
184,124
156,118
Payments on supply chain financing program
(49,612)
Proceeds from supply chain financing program
47,872
29,026
Proceeds from convertible notes payable
22,000
Proceeds from convertible notes payable - related party
50,000
Payment of debt issuance costs
(2,965)
(2,582)
Payment of convertible notes payable issuance costs
(511)
Net proceeds from (repayments of) repurchase agreements
(7,343)
(5,236)
Proceeds from exercise of stock options
Proceeds from exercise of Public Warrants
2,632
Proceeds from issuance of common stock
635
Payment of equity issuance costs
(10)
Payment for purchase of non-controlling interest
Payment for taxes for net share settlement of equity awards
Net cash provided by financing activities
108,409
96,385
Effect of exchange rate changes on cash
(165)
Net (decrease) increase in cash and cash equivalents and restricted cash
(11,813)
2,377
Cash and cash equivalents and restricted cash at beginning of period
37,840
26,405
Cash and cash equivalents and restricted cash at end of period
26,027
28,782
Supplemental non-cash investing and financing activities:
Property, plant and equipment acquired but not yet paid
16,191
17,958
The total cash and cash equivalents and restricted cash at June 30, 2024 and 2023 is as follows:
June 30, 2023
25,245
3,537
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Description of Business
Westrock Coffee Company, a Delaware corporation (the “Company,” “Westrock,” “we,” “us,” or “our”), is a leading integrated coffee, tea, flavors, extracts, and ingredients solutions provider in the United States, providing coffee sourcing, supply chain management, product development, roasting, packaging, and distribution services to the retail, food service and restaurant, convenience store and travel center, non-commercial account, consumer packaged goods (“CPG”), and hospitality industries around the world. We manage our business in two operating segments.
Beverage Solutions: Through this segment, we combine our product innovation and customer insights to provide value-added beverage solutions, including coffee, tea, flavors, extracts and ingredients. We provide products in a variety of packaging, including branded and private label coffee in bags, fractional packs, and single serve cups, as well as extract solutions to be used in products such as cold brew and ready-to-drink offerings. Currently, we serve customers in the United States, Europe and Asia, through the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG, and hospitality industries.
Sustainable Sourcing & Traceability: Through this segment, we utilize our proprietary technology and digitally traceable supply chain to directly impact and improve the lives of our farming partners, tangible economic empowerment and an emphasis on environmental accountability and farmer literacy. Revenues primarily relate to the physical delivery and settlement of forward sales contracts for green coffee.
Note 2. Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) using the U.S. dollar as the reporting currency. They do not include all the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated Financial Statements include the activities of the Company and its wholly owned and/or controlled subsidiaries. All intercompany balances and transactions have been eliminated. The Condensed Consolidated Balance Sheet as of December 31, 2023 was derived from the audited financial statements, but does not include all disclosures required by GAAP.
On April 3, 2023, the Company purchased the remaining 15% of the equity interests of Falcon Coffees Limited (“Falcon”) that it did not previously own, resulting in Falcon becoming a wholly owned subsidiary of the Company. Aggregate consideration paid for the interest totaled $3.2 million and included $2.0 million in cash and 100,000 shares of common stock, par value $0.01 per share, of the Company (“Common Shares”). Due to the Company’s controlling financial interest in Falcon prior to the purchase, the transaction was accounted for as an equity transaction. For periods prior to April 3, 2023, equity interests not owned by us are reflected as non-controlling interests. In the Condensed Consolidated Statements of Operations, we allocate net income (loss) attributable to non-controlling interest to arrive at net income (loss) attributable to common shareholders based on their proportionate share. Falcon operates our trading business and is reported within our Sustainable Sourcing & Traceability segment.
The interim financial information is unaudited but, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair statement of results for the interim periods have been included. Operating results from any interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited December 31, 2023 consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 15, 2024. Accordingly, certain significant accounting policies and other disclosures normally provided have been omitted from the accompanying Condensed Consolidated Financial Statements and related notes since such items are disclosed in our audited financial statements.
Note 3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses, useful lives of property, plant and equipment, incremental borrowing rates for lease liability measurement, fair values of forward purchase and sales contracts, green coffee associated with forward contracts, warrant liabilities, share-based compensation, contingencies, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from the estimates and assumptions used in preparing the accompanying condensed consolidated financial statements.
Going Concern
In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its obligations as they become due within one year after the date that the financial statements are available to be issued. The Company is dependent on borrowings under its Credit Agreement and cash generated from operations to finance its operations, service its debt requirements, maintain compliance with its covenants, and to fund capital requirements. The Company believes that projected cash flow from operations, including current projections of the timing and amount of cash flows to be generated from our Conway, Arkansas extract and ready-to-drink manufacturing facility (the “Conway Facility”), and available borrowings under its Credit Agreement, as amended, will be sufficient to fund operations for at least the next twelve months. However, during the six months ended June 30, 2024, the Company incurred net losses of $41.4 million and net cash outflows from operating activities of $15.7 million. If we are unable to achieve our profitability growth projections and maintain our minimum liquidity requirements, as a result of, for example, experiencing any adverse impact of changes or delays in the estimated timing and volume of products to be commercialized in our Conway Facility over the next twelve months, and generate sufficient cash flows from operations, it may restrict our liquidity and capital resources and our ability to maintain compliance with our financial covenants.
As management’s ability to amend its financial covenants cannot be assured, if necessary, management has committed to delay growth capital expenditures and/or reduce operating expenses, including headcount, salary and/or bonus reductions, all of which are in the Company’s control, as necessary, in order to have adequate liquidity and to remain in compliance with its debt covenants. As further discussed in Restructuring Activities below, the Company has recently committed to a plan to consolidate its manufacturing operations and a targeted reduction in excess workforce capacity, which are designed to improve operational efficiency. If required, the Company will further reduce operating costs to ensure compliance with its financial covenants. The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable consist principally of amounts billed and currently due from customers and are generally unsecured and due within 30 to 60 days. A portion of our accounts receivable is not expected to be collected due to non-payment, bankruptcies and deductions. Our accounting policy for the allowance for credit losses requires us to reserve an amount based on the evaluation of the aging of accounts receivable, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers. This evaluation considers the customer demographic, such as large commercial customers as compared to small businesses or individual customers. We consider our accounts receivable delinquent or past due based on payment terms established with each customer. Accounts receivable are written off when the account is determined to be uncollectible.
Activity in the allowance for credit losses for the periods indicated was as follows:
Balance at beginning of period
3,356
2,516
2,915
3,023
Charged to selling, general and administrative expense
585
156
Write-offs
(1,004)
3,941
2,672
Within our Sustainable Sourcing & Traceability segment, green coffee associated with our forward contracts is recorded at net realizable value, which approximates market price, consistent with our forward purchase contracts recorded at fair value in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). Green coffee is a commodity with quoted market prices in active markets, may be sold without significant further processing, has predictable and insignificant disposal costs and is available for immediate delivery. We estimate the fair value of green coffee based on the quoted market price at the end of each reporting period, with changes in fair value being reported as a component of costs of sales in our Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2024, we recognized $1.7 million and $1.0 million of net unrealized gains, respectively, on green coffee inventory associated with our forward sales and purchase contracts. For the three and six months ended June 30, 2023, we recognized $1.1 million of net unrealized losses and $1.1 million of net unrealized gains, respectively, on green coffee inventory associated with our forward sales and purchase contracts.
Capitalized Interest
We capitalize a portion of interest costs incurred related to assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based on eligible expenditures incurred during the period involved in bringing the assets to their intended use and the Company’s weighted-average interest rate during the period. For the three and six months ended June 30, 2024, we capitalized $4.3 million and $7.2 million of interest costs, respectively. No such interest was capitalized during the three or six months ended June 30, 2023.
Supply Chain Finance Program
The Company is party to a supply chain finance program (the “Program”) with a third-party financing provider to provide better working capital usage by deferring payments for certain raw materials. Under the Program, the financing provider remits payment to the Company’s suppliers for approved invoices, and the Company repays the financing provider the amount of the approved invoices, plus a financing charge, on 180-day terms. The Program is uncommitted and the financing provider may, at its sole discretion, cancel the Program at any time. 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 Condensed Consolidated Balance Sheets. Amounts paid by the financing provider to suppliers are reported as cash inflows from financing activities and a corresponding cash outflow from operating activities in our Condensed Consolidated Statements of Cash Flows. Amounts paid to the financing provider are reflected as cash outflows from financing activities in our Condensed Consolidated Statements of Cash Flows. At June 30, 2024 and December 31, 2023, there were $76.3 million and $78.1 million of obligations outstanding under the Program, respectively.
Accrued Expenses and Other Current Liabilities
At June 30, 2024 and December 31, 2023, there was $25.0 million and $2.1 million, respectively, of received not billed liabilities within accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
13
Restructuring Activities
The Company accounts for exit or disposal activities in accordance with ASC 420, Exit or Disposal Cost Obligations (“ASC 420”). Restructuring charges may include one-time termination benefits related to employee separations, contract termination costs, long-lived asset impairments, and other related costs with exit or disposal activities.
The recognition of restructuring charges requires the Company to make certain judgements and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. To the extent the Company’s actual results differ from its estimates and assumptions, the Company may be required to revise the estimates of future liabilities, require the recognition of additional restructuring charges or the reduction of liabilities already recognized. Such changes to previously estimated amounts may be material to the Condensed Consolidated Financial Statements. Restructuring charges are not included in the Company’s measurement of segment profitability as discussed in Note 19.
During the second quarter of 2024, the Company committed to a plan to consolidate its manufacturing operations in its Beverage Solutions segment, 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 our Richmond, CA facility is expected to cease during the third quarter of 2024.
The Company currently estimates total charges related to the plant consolidations to be in the range of $5.0 million to $10.0 million, of which no amounts have been incurred during the three months ended June 30, 2024. These charges primarily relate to costs to remove and re-install production equipment into other manufacturing facilities. At June 30, 2024, the Company classified approximately $9.1 million of land and buildings as held-for-sale, which are reported within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. During the three and six months ended June 30, 2024, the Company incurred impairment charges of approximately $0.8 million on equipment associated with the plant consolidations, which is reported within impairment charges on the Condensed Consolidated Statements of Operations. The Company is continuing to evaluate which plant assets will be moved to other manufacturing facilities and which plant assets will be disposed of; therefore, there may be additional impairment charges in the future related to the consolidation of our manufacturing facilities.
In addition, during the second quarter of 2024, the Company committed to targeted restructuring activities to improve operational efficiency by reducing excess workforce capacity. As a result of this reduction, and the impacts of the consolidation of manufacturing facilities noted above, the Company recognized approximately $4.1 million of one-time employee severance costs during the three months ended June 30, 2024, which are recorded in transaction, restructuring and integration expense in the Condensed Consolidated Statements of Operations, of which $0.5 million was paid during the three months ended June 30, 2024. At June 30, 2024, approximately $3.6 million of such termination benefits were accrued for within accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
On February 12, 2024, following the completion of its 530,000 square foot distribution center in Conway, AR, the Company entered into a lease termination agreement for its distribution center located in North Little Rock, AR (the “Gregory Distribution Center”). The Gregory Distribution Center lease terminated, by mutual agreement, on June 30, 2024. No costs were incurred as a result of the lease termination. During the first quarter of 2024, the Company remeasured the Gregory Distribution Center lease liability, and related right-of-use asset, in accordance with ASC 842, Leases, resulting in a reduction of the lease liability and right-of-use asset of approximately $3.0 million. At June 30, 2024, there was no remaining lease liability or right-of-use assets related to the Gregory Distribution Center recorded in the Condensed Consolidated Balance Sheets.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases, using enacted income tax rates expected to apply when the deferred tax assets and liabilities are expected to be realized or
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settled. The Company’s foreign subsidiaries file income tax returns and are subject to tax provisions in their respective foreign tax jurisdictions.
A valuation allowance is established to reduce deferred income tax assets if, on the basis of available evidence, it is more likely than not that all or a portion of any deferred tax assets will not be realized. The consideration of available evidence requires significant management judgment including an assessment of the future periods in which the deferred tax assets and liabilities are expected to be realized and projections of future taxable income. Specifically, in assessing the need for a valuation allowance, we consider the reversal of taxable temporary differences, future taxable income, the ability to carryback certain attributes and tax-planning strategies. The ultimate realization of the deferred tax assets, including net operating losses, is dependent upon the generation of future taxable income during the periods prior to their expiration. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax assets may not be recoverable, which may result in an increase to our valuation allowance that will impact current earnings. We re-evaluate our need for a valuation allowance on a quarterly basis.
The effective income tax rates for the six months ended June 30, 2024 and 2023 were (2.9%) and (6.4%), respectively. The Company’s 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. The effective tax rate for the six months ended June 30, 2024 differs from the effective tax rate for the same period in 2023 primarily due to the Company’s full year forecasted ordinary income (loss) in the periods and the permanent difference for changes in the fair value of warrants.
On December 20, 2021, the Organization for Economic Co-operation and Development ("OECD") released Pillar Two Model Rules, which provide for a global minimum tax of 15% on multinational entities. Although the United States has not yet adopted the Pillar Two Model Rules, several foreign countries enacted Pillar Two legislation in 2023 with an initial effective date of January 1, 2024. The impact of Pillar Two legislation on the Company's 2024 effective tax rate is expected to be minimal. Management will continue to monitor future Pillar Two legislation in relevant jurisdictions for any impacts to the Company's effective tax rate.
Recently adopted accounting pronouncements
ASU 2022-04 - Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations
In September 2022, the FASB issued ASU 2022-04 “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”, which requires that a company that uses a supplier finance program in connection with the purchase of goods or services disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted the amendments within ASU 2022-04 on a retrospective basis effective January 1, 2023. The amendments to ASU 2022-04 do not affect the recognition, measurement or financial statement presentation of obligations covered by supplier finance programs.
Recently issued accounting pronouncements
ASU 2023-07 – Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments in the update are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. ASU 2023-07 requires disclosure to include significant segment expenses that are regularly provided to the chief operating decision maker and a description of other segment items by reportable segment. ASU 2023-07 also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The amendments in the update are effective for fiscal years beginning after December 31, 2023, and interim periods within fiscal years beginning after December 31, 2024, with early adoption
permitted. The amendments in the update require retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the impact that ASU 2023-07 will have on our consolidated financial statements.
ASU 2023-09 – Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The amendments in the update relate to the rate reconciliation and income taxes paid disclosure and are intended to improve transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the tax reconciliation and (2) income taxes paid disaggregated by jurisdiction. The other amendments in the update are intended to improve comparability of disclosures by (1) adding disclosures of pretax income (or loss) and income tax expense (or benefit) and (2) removing disclosures that no longer are considered cost beneficial or relevant. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in the update should be applied on a prospective basis, with retrospective application permitted. The Company is currently evaluating the impact that ASU 2023-09 will have on our consolidated financial statements.
ASU 2023-05 – Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement
In August 2023, the FASB issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement”. The amendments in this update require that a joint venture recognize and initially measure assets contributed and liabilities assumed at fair value upon its formation in the joint venture’s separate financial statements. The amendments in this update are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025, with early adoption permitted. The Company will apply the provisions of ASU 2023-05 to new joint ventures, as applicable, but does not believe the adoption of ASU 2023-05 will have a material impact on our consolidated financial statements.
The Enhancement and Standardization of Climate-Related Disclosure for Investors
In March 2024, the SEC adopted final rules requiring registrants to provide certain climate-related disclosures, including Scope 1 and Scope 2 greenhouse gas emissions to the extent they are material. These rules require certain disclosures related to severe weather events and other natural conditions in the notes to audited financial statements. These disclosures are required to phase-in over multiple years beginning with fiscal 2025 for large accelerated filers and fiscal 2026 for accelerated filers. On April 4, 2024, the SEC determined to voluntarily stay the final rules pending certain legal challenges. The Company is currently evaluating the impact of the new rules.
Note 4. Revenue
Revenue from Contracts with Customers (ASC 606)
We measure revenue based on the consideration specified in the client arrangement, and revenue is recognized when the performance obligations in the client arrangement are satisfied. Our principal source of revenue is from the procurement, trade, manufacture, and distribution of coffee, tea and extracts to customers in the United States, Europe, and Asia.
The transaction price of a contract, net of discounts and expected returns, is allocated to each distinct performance obligation based on the relative standalone selling price of the obligation and is recognized as revenue when the performance obligation is satisfied. The standalone selling price is the estimated price we would charge for the good or service in a separate transaction with similar customers in similar circumstances. Identifying distinct performance obligations and determining the standalone selling price for each performance obligation within a contract requires management judgment.
Substantially all our client contracts require that we be compensated for services performed to date. This is upon shipment of goods or upon delivery to the customer, depending on contractual terms. Shipping and handling costs paid
by the customer to us are included in revenue and costs incurred by us for shipping and handling activities that are performed after a customer obtains control of the product are accounted for as fulfillment costs. In addition, we exclude from net revenue and cost of sales taxes assessed by governmental authorities on revenue-producing transactions. Although we occasionally accept returns of products from our customers, historically returns have not been material.
At times, the Company may enter into agreements in which its Sustainable Sourcing & Traceability segment will sell inventory to a third party, from whom the Company’s Beverage Solutions segment has an obligation to repurchase. Such transactions are accounted for as financing transactions in accordance with ASC 606. At June 30, 2024 and December 31, 2023, the Company has $1.0 million and $8.3 million, respectively, of such repurchase agreement obligations, collateralized by the corresponding inventory, that are recorded within accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. Net cash flows associated with these repurchase agreements are reported as financing activities in the Condensed Consolidated Statements of Cash Flows.
Revenue from Forward Contracts (ASC 815)
A portion of the Company’s revenues consist of sales from commodity contracts that are accounted for under ASC 815. Sales from commodity contracts primarily relate to forward sales of green coffee which are accounted for as derivatives at fair value under ASC 815. These forward sales meet the definition of a derivative under ASC 815 as they have an underlying, notional amount, no initial net investment and can be net settled since the commodity is readily converted to cash. The Company does not apply the normal purchase and normal sale exception under ASC 815 to these contracts.
Revenues from commodity contracts are recognized in revenues for the contractually stated amount when the contracts are settled. Settlement generally occurs upon shipment or delivery of the product when title and risks and rewards of ownership transfers to the customer. Prior to settlement, these forward sales contracts are recognized at fair value with the unrealized gains or losses recorded within costs of sales in our Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2024, we recorded $0.1 million of net unrealized losses and $2.2 million of net unrealized gains, respectively, within costs of sales. For the three and six months ended June 30, 2023, we recorded $2.1 million and $1.1 million of net unrealized gains, respectively, within costs of sales.
For the three and six months ended June 30, 2024, the Company recognized $44.1 million and $79.1 million in revenues under ASC 815, respectively, and for the three and six months ended June 30, 2023, the Company recognized $34.7 million and $59.1 million in revenues under ASC 815, respectively, which are reported within the Company’s Sustainable Sourcing & Traceability segment.
Contract Estimates
The nature of the Company’s contracts gives rise to variable consideration including cash discounts, volume-based rebates, point of sale promotions, and other promotional discounts to certain customers. For all promotional programs and discounts, the Company estimates the rebate or discount that will be granted to the customer and records an accrual upon invoicing. These estimated rebates or discounts are included in the transaction price of the Company’s contracts with customers as a reduction to net revenues and are included as accrued sales incentives in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. Accrued sales incentives were $1.9 million and $1.5 million at June 30, 2024 and December 31, 2023, respectively. Other accrued deductions were $2.7 million and $2.7 million at June 30, 2024 and December 31, 2023, respectively, and are included as a reduction to accounts receivable, net in the Condensed Consolidated Balance Sheets.
We do not disclose the value of unsatisfied performance obligations for contracts (i) with an original expected length of one year or less or (ii) for which the Company recognizes revenue at the amount in which it has the right to invoice as the product is delivered.
Contract Balances
Contract balances relate primarily to advances received from the Company’s customers before revenue is recognized. The Company does not have any material contract liabilities as of June 30, 2024 or December 31, 2023. Receivables
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from contracts with customers are included in accounts receivable, net on the Company’s Condensed Consolidated Balance Sheets. At June 30, 2024 and December 31, 2023, accounts receivable, net included $107.4 million and $104.8 million in receivables from contracts with customers, respectively.
Contract acquisition costs for obtaining contracts that are deemed recoverable are capitalized as contract costs. Such costs result from the payment of sales incentives and are amortized over the contract life. As of June 30, 2024 and December 31, 2023, no costs were capitalized as all arrangements were less than a year.
Disaggregated Revenue
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment’s results of operations.
Further disaggregation of revenues from sales to external customers by type and geographic area, based on customer location, for the periods indicated is as follows:
Coffee & tea
115,077
144,604
233,845
291,753
Flavors, extracts & ingredients
47,366
44,396
85,782
77,682
810
719
1,685
1,493
Green coffee
45,136
34,975
79,577
59,208
United States
166,936
193,106
327,070
378,667
All other countries
41,453
31,588
73,819
51,469
Note 5. Acquisitions
Bixby Roasting Co.
On February 28, 2023, the Company completed the acquisition of substantially all of the assets of Bixby Roasting Co. (“Bixby”), a specialty-grade roaster that is a leader in the emerging influencer-led brand space. The transaction is accounted for as a business combination in accordance with ASC 805, Business Combinations. Aggregate consideration paid for Bixby included 39,778 Common Shares and approximately $2.2 million in cash, for total consideration of $2.6 million, subject to customary adjustments. Net assets acquired totaled approximately $0.7 million. The acquisition allows the Company to continue to expand its product marketing and development resources as it capitalizes on shifting consumer consumption trends. The acquisition includes Bixby’s roasting facility in Los Angeles, California. The acquisition was recorded by allocating the costs of the assets acquired and liabilities assumed, which consisted of accounts receivable, inventory, property, plant and equipment, and accounts payable, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company finalized its purchase price allocation during the second quarter of 2023, recognizing approximately $2.0 million of goodwill, which is deductible for tax purposes, within our Beverage Solutions segment. The financial results of Bixby are included in the Beverage Solutions segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.
Note 6. Inventories
The following table summarizes inventories as of June 30, 2024 and December 31, 2023:
Raw materials
86,350
78,882
Finished goods
33,410
26,857
43,943
44,182
Total inventories
Green coffee inventories represent green coffee held for resale. At June 30, 2024 and December 31, 2023, all green coffee held for resale was included within our Sustainable Sourcing & Traceability segment.
Note 7. Property, Plant and Equipment, Net
The following table summarizes property, plant and equipment, net as of June 30, 2024 and December 31, 2023:
(Dollars in Thousands)
Depreciable Lives
Land
6,630
8,778
Buildings
10-40 years
38,164
35,911
Leasehold improvements(1)
12,764
9,800
Plant equipment
3-15 years
145,307
128,639
Vehicles and transportation equipment
3-5 years
637
648
IT systems
3-7 years
12,853
8,909
Furniture and fixtures
3-10 years
7,002
3,294
Customer beverage equipment(2)
23,089
22,931
Lease right-of-use assets(3)
Construction in progress and equipment deposits
265,161
208,308
511,688
427,299
Less: accumulated depreciation
(93,441)
(83,261)
1 - Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life.
2 - Customer beverage equipment consists of brewers held on site at customer locations.
3 - Lease right-of-use assets are amortized over the shorter of the useful life of the asset or the lease term.
Depreciation expense for the three and six months ended June 30, 2024 was $5.8 million and $11.3 million, respectively, and depreciation expense for the three and six months ended June 30, 2023 was $4.1 million and $8.0 million, respectively. Assets classified as construction in progress and equipment deposits are not depreciated, as they are not ready for production use. All assets classified as construction in progress and equipment deposits at June 30, 2024 are expected to be in production use.
Note 8. Goodwill
The following table reflects the carrying amount of goodwill as of June 30, 2024 and December 31, 2023:
Beverage
Solutions
192,994
Accumulated impairment loss
(76,883)
Note 9. Intangible Assets, Net
The following table summarizes intangible assets, net as of June 30, 2024 and December 31, 2023:
Cost
Amortization
Net
Customer relationships
148,648
(30,342)
118,306
Favorable lease asset
790
(548)
242
Software
1,179
(774)
405
150,617
(31,664)
(26,487)
122,161
(413)
377
1,079
(672)
407
150,517
(27,572)
Amortization expense of intangible assets was $2.1 million and $4.1 million for the three and six months ended June 30, 2024, respectively, and amortization expense of intangible assets was $2.0 million and $4.0 million for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, the weighted average useful life for definite-lived intangibles is approximately 20 years.
Note 10. Leases
We have operating leases for manufacturing, production, administrative, distribution and warehousing facilities, vehicles and machinery and equipment. Some of our lease agreements have renewal options, tenant improvement allowances, rent holidays and rent escalation clauses. The remaining terms on our leases range from 1 year to 15 years, some of which may include options to extend the leases and some of which may include options to terminate the leases within 1 year.
The following table summarizes the amount of right-of-use lease assets and lease liabilities included in each respective line item on the Company’s Condensed Consolidated Balance Sheets:
Balance Sheet Location
Right-of-use operating lease assets
Operating lease liabilities - current
4,531
4,809
Operating lease liabilities - noncurrent
During the six months ended June 30, 2024 and 2023, the Company obtained approximately $1.0 million and $6.0 million of right-of-use operating lease assets in exchange for lease obligations.
On February 12, 2024, following the completion of its 530,000 square foot distribution center in Conway, Arkansas, the Company entered into a lease termination agreement for the Gregory Distribution Center lease. The Gregory Distribution Center lease terminated, by mutual agreement, on June 30, 2024. No costs were incurred as a result of the lease termination. This lease termination event does not significantly alter the Company’s operational capabilities or its financial position.
Depending on the nature of the lease, lease costs are classified within costs of sales or selling, general and administrative expense on the Company’s Condensed Consolidated Statements of Operations. The components of lease costs for the three and six months ended June 30, 2024 and 2023, respectively, are as follows:
Operating lease cost
2,772
1,209
5,564
2,430
Short-term lease cost
228
239
461
479
3,000
1,448
6,025
2,909
The following table presents information about the Company’s weighted average discount rate and remaining lease term as of June 30, 2024 and December 31, 2023:
Weighted-average discount rate
7.7%
7.8%
Weighted-average remaining lease term
12.8 years
12.9 years
Supplemental cash flow information about the Company’s leases as of June 30, 2024 and 2023, respectively, is as follows:
Cash paid related to operating lease liabilities
4,981
2,141
Finance lease assets are recorded in property, plant and equipment, net with the corresponding lease liabilities included in accrued expenses and other current liabilities and long-term debt, net on the Condensed Consolidated Balance Sheets. There were no material finance leases as of June 30, 2024.
21
Future minimum lease payments under non-cancellable operating leases as of June 30, 2024 are as follows:
Remainder of 2024
4,528
2025
8,207
2026
7,672
2027
7,714
2028
7,173
Thereafter
68,641
Total future minimum lease payments
103,935
Less: imputed interest
(40,117)
Present value of minimum lease payments
63,818
Note 11. Debt
Our long-term debt at June 30, 2024 and December 31, 2023 is as follows:
Term loan facility
159,688
164,063
Delayed draw term loan facility
49,375
Revolving credit facility
59,000
65,000
Convertible notes payable
72,000
International trade finance lines
International notes payable
5,801
6,179
Other loans
39
Total debt
400,444
278,975
Unamortized debt costs
(3,829)
(2,378)
(12,137)
(9,811)
(49,671)
(54,552)
(43,694)
Credit Agreement
The Company is party to 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. 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”), (b) a senior secured first lien term loan facility in an initial aggregate principal amount of $175.0 million (the “Term Loan Facility”), and (c) 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. The Revolving Credit Facility, the Term Loan Facility and the Delayed Draw Term Loan Facility will mature on August 29, 2027. All obligations under the Credit Agreement are guaranteed by the Company and each of the Borrower’s domestic subsidiaries, which comprise our Beverage Solutions segment, and are secured by substantially all of the Company’s assets.
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%.
On February 15, 2024, the Borrower entered into Amendment No. 3 (the “Third Amendment”) to the Credit Agreement. The Third Amendment modified the existing covenant relief period (the “Covenant Relief Period”), which commenced on June 30, 2023 and will end on the earlier to occur of (i) April 1, 2026 and (ii) any date following June 30, 2024, on which the Borrower elects to terminate the Covenant Relief Period subject to satisfaction of certain conditions. During the Covenant Relief Period, the Company’s ability to incur additional indebtedness and make investments, restricted payments and junior debt restricted payments will be more limited. The Third Amendment permits the Company to issue convertible notes, including the Convertible Notes (as defined below).
During the Covenant Relief Period, the applicable margin for any term SOFR rate loan will range from 3.00% to 4.00% and for any ABR loan will range from 2.00% to 3.00%, in each case depending on the secured net leverage ratio. After the Covenant Relief Period, the applicable margin for any term SOFR rate loan will range from 2.00% to 3.00% and for any ABR loan will range from 1.00% to 2.00%, in each case depending on the secured net leverage ratio.
The Credit Agreement, as amended, requires the Borrower to maintain compliance with (i) a secured net leverage ratio at levels ranging from 4.50:1.00 to 6.25:1.00 and stepping down to 4.50:1.00 by April 2026 and (ii) an interest coverage ratio of at least 1.50:1.00 on and prior to September 30, 2025 and at least 2.00:1.00 on December 31, 2025 and thereafter. The Credit Agreement, as amended, also includes (i) a minimum liquidity covenant requiring the Borrower not to permit its liquidity, measured as of the last business day of each calendar month commencing March 29, 2024, to be less than $15 million and (ii) an anti-cash hoarding covenant, which shall be effective only during the Covenant Relief Period, requiring the Borrower to have no more than $20 million of unrestricted cash on the last day of each calendar month when revolving loans or letters of credit are outstanding or on the date of borrowing of a revolving loan. 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). 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.
We incurred a total of $2.4 million in financing fees in connection with the Third Amendment. Approximately $1.3 million of the fees were allocated to the Term Loan Facility and are being amortized over the remaining term of the Term Loan Facility utilizing the frozen effective yield method based on the interest rate in place at the issuance of the Term Loan Facility. Approximately $1.0 million of the fees were allocated to the Revolving Credit Facility, are reported within other long-term assets on the Condensed Consolidated Balance Sheets and are being amortized ratably over the remaining term of the Revolving Credit Facility.
Convertible Notes
On February 15, 2024, the Company sold and issued in a private placement $72.0 million in aggregate principal amount of 5.00% convertible senior notes due 2029 (the “Convertible Notes”), of which $50.0 million was from related parties (See Note 21). The Convertible Notes are unsecured, senior obligations of the Company and accrue interest at a rate of 5.00% per annum.
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. 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.
Pursuant to the terms of the Convertible Notes, noteholders may convert their Convertible Notes at their option only in the following circumstances: (i) during the period commencing on August 15, 2024, and prior to the close of business on the trading day immediately preceding August 15, 2028, if the closing price for at least 20 trading days (whether or not consecutive) during the period of any 30 consecutive trading days in the immediately preceding calendar quarter is equal to or greater than 130% of the conversion price; (ii) during the period commencing on August 15, 2028, and prior to the close of business on the second scheduled trading day immediately preceding February 15, 2029, at any time; and (iii) during the 35 trading days following the effective date of certain fundamental change transactions that occur prior to the close of business on the trading day immediately preceding August 15, 2028.
The Company will settle conversions by paying or delivering, as applicable, at the Company’s election, cash, Common Shares, or a combination of cash and Common Shares. The Company may not issue more than 19.99% of the issued and outstanding Common Shares immediately prior to the issuance of the Convertible Notes in respect of the conversion of the Convertible Notes. The initial conversion price of the Convertible Notes is $12.84, which corresponds to an initial conversion rate of approximately 77.88 Common Shares per $1,000 principal amount of Convertible Notes. The conversion price and conversion rate are subject to customary adjustments.
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. The facility is uncommitted and repayable on demand, with certain of Falcon’s assets pledged as collateral against the facility. The facility was set to mature one year from inception. Borrowings under the facility bore interest at the borrower’s option at a rate equal to (a) Term SOFR, as defined in the facility, 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%).
On March 8, 2024, Falcon renewed its working capital trade finance facility with multiple institutions. The facility size was reduced from $70.0 million to $55.0 million and remains 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, 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. 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.
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, as defined in the facility, before the Quotation Day, as defined in the facility; 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. 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.
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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.
Note 12. Series A Preferred Shares
The Company has 23,511,922 Westrock Series A Preferred Shares outstanding, which rank senior to the Common Shares with respect to dividend rights and/or distribution rights upon the liquidation, winding up or dissolution, as applicable, of Westrock. Each holder of Westrock Series A Preferred Shares is entitled to vote, on an as-converted basis, as a single class with the holders of Common Shares and the holders of any other class or series of capital stock of Westrock then entitled to vote with the Common Shares on all matters submitted to a vote of the holders of Common Shares.
The initial liquidation preference of Westrock Series A Preferred Shares is $11.50 per share, plus any declared but unpaid dividends and subject to accretion under certain circumstances. In the event of our liquidation, dissolution or winding up, holders of Westrock Series A Preferred Shares are entitled to receive, per Westrock Series A Preferred Share, the greater of (a) the liquidation preference and (b) the amount such holder would have received had they converted their Westrock Series A Preferred Shares into Common Shares immediately prior to such liquidation event.
Holders of Westrock Series A Preferred Shares may voluntarily convert their Westrock Series A Preferred Shares into a whole number of Common Shares at any time at a rate equal to the quotient of (a) the liquidation preference as of the applicable conversion date, divided by (b) the conversion price as of the applicable conversion date, which is currently $11.50 per Westrock Series A Preferred Share, plus cash in lieu of fractional shares. The initial conversion price of $11.50 per Westrock Series A Preferred Share is subject to customary adjustments for the issuance of Common Shares as a dividend or distribution to the holders of Common Shares, a subdivision or combination of the Common Shares, reclassification of the Common Shares into a greater or lesser number of Common Shares, certain tender or exchange offers for the Common Shares, and issuances of Common Shares below a specified price.
After February 26, 2028, any holder of Westrock Series A Preferred Shares may require Westrock to redeem all or any whole number of such holder’s Westrock 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 Westrock 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 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 outstanding at June 30, 2024 remain outstanding after February 26, 2028, we estimate an aggregate redemption payment of at least approximately $270.4 million.
At any time after February 26, 2028, Westrock may redeem, ratably, in whole or, from time to time in part, the Westrock Series A Preferred Shares of any holder then outstanding at the redemption price in cash, equal to the greater of (i) the liquidation preference and (ii) the product of (x) the number of Common Shares that would have been obtained from converting one Westrock Series A Preferred Share on the date of the exercise of such call is notified by Westrock (including fractional shares for this purpose) and (y) the simple average of the daily volume weighted average price per Common Share for the ten trading days ending on and including the trading day immediately preceding the date of the exercise of such call by Westrock. The redemption price for the Westrock Series A Preferred Shares held by controlled affiliates of Brown Brothers Harriman & Co. (“BBH Investors”) may not be less than the $18.50 per Westrock Series A Preferred Share (subject to adjustments); provided that, Westrock may redeem such shares in such a case if it pays an incremental price per share on the redemption date to the BBH Investors equal to the difference between $18.50 (subject to adjustments) and the redemption price otherwise.
Upon issuance, the Westrock Series A Preferred Shares were recorded on our Condensed Consolidated Balance Sheets at fair value. Subsequently, the Company will accrete changes in the redemption value from the date of issuance to the earliest redemption date using the effective interest rate method. The accretion will be recorded as a deemed dividend, which adjusts retained earnings (or in the absence of retained earnings, additional paid-in capital) and earnings attributable to common shareholders in computing basic and diluted earnings per share. However, at no time will the Westrock Series A Preferred Shares be reported at a value less than its initial carrying value. For the three and six months ended June 30, 2024, the Company recorded $0.1 million and $0.2 million of amortization, respectively, with respect to the Westrock Series A Preferred Shares. For the three and six months ended June 30, 2023, the Company recorded $0.1 million of amortization and $0.3 million of accretion, respectively, with respect to the Westrock Series A Preferred Shares.
Note 13. Common Stock Warrants
The Company has 19,144,120 common stock warrants outstanding at June 30, 2024. 17,118,074 of the warrants are publicly-traded (the “Westrock Public Warrants”) and 2,026,046 of the warrants are private placements warrants (the “Westrock Private Warrants” and together with the Westrock Public Warrants, the “Westrock Warrants”). The Westrock Warrants are included in warrant liabilities on the Company’s Condensed Consolidated Balance Sheet. The Westrock Warrants entitle the holder to purchase one share of Common Share at an exercise price of $11.50 per share.
The Westrock Warrants may only be exercised for a whole number of shares, and will expire on August 26, 2027, or earlier upon redemption or liquidation. Westrock may redeem the outstanding Westrock Public Warrants (i) in whole and not in part; (ii) at a price of $0.01 per warrant; (iii) upon not less than 30 days’ prior written notice of redemption to each warrant holder; and (iv) if, and only if, the reported last sale price of the Common Shares for any 20 trading days within a 30-trading day period ending three business days before Westrock sends the notice of redemption to the warrant holders equals or exceeds $18.00 per share. During any period when Westrock fails to maintain an effective registration statement registering the Common Shares issuable upon the exercise of the Westrock Warrants, Westrock is required to permit holders of Westrock Warrants to exercise their Westrock Warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act of 1933, as amended, or another exemption.
If and when the Westrock Public Warrants become redeemable by Westrock, Westrock may exercise its redemption right even if Westrock is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
The Westrock Private Warrants are generally identical to the Westrock Public Warrants, except they cannot be redeemable by Westrock so long as they are held by the existing holders or its permitted transferees. Furthermore, the existing holders, or their permitted transferees, have the option to exercise the Westrock Private Warrants on a cashless basis.
We account for the Westrock Warrants in accordance with the guidance contained in ASC 815, under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classify the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period. The liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Condensed Consolidated Statements of Operations.
The Company re-measures the fair value of the Westrock Public Warrants based on the quoted market price of the Westrock Public Warrants. The Westrock Private Warrants are valued using a binomial lattice valuation model. For the three and six months ended June 30, 2024, the Company recognized $1.6 million and $1.7 million of gains, respectively, related to the change in fair value of warrant liabilities, which is recognized in other (income) expense in the Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2023, the Company recognized $11.8 million and $6.3 million of losses, respectively, related to the change in fair value of warrant liabilities.
Note 14. Derivatives
We record all derivatives, whether designated in a hedging relationship or not, at fair value on the Condensed Consolidated Balance Sheets. We use various types of derivative instruments including, but not limited to, forward contracts, futures contracts, and options contracts for certain commodities. Forward and futures contracts are agreements to buy or sell a quantity of a commodity at a predetermined future date, and at a predetermined rate or price. Forward contracts are traded over the counter whereas future contracts are traded on an exchange. Option contracts are agreements to facilitate a potential transaction involving the commodity at a preset price and date.
The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the types of hedging relationships. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The changes in the fair values of derivatives that have not been designated and for which hedge accounting is not applied, are recorded in the same line item in our Condensed Consolidated Statements of Operations as the changes in the fair value of the hedged items attributable to the risk being hedged. The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into the line item in the Condensed Consolidated Statements of Operations in which the hedged items are recorded in the same period the hedged items affect earnings.
For derivatives that will be accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at the inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are highly effective at offsetting changes in either the fair values or cash flows of the related underlying exposures.
We use cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in commodity prices. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. We did not discontinue any cash flow hedging relationships during the six months ended June 30, 2024 or 2023.
Within our Beverage Solutions segment, we have entered into coffee futures contracts to hedge our exposure to price fluctuations on green coffee associated with certain price-to-be-fixed purchase contracts, which generally range from three to twelve months in length. These derivative instruments have been designated as cash flow hedges. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of green coffee.
The notional amount for the coffee futures contracts that were designated and qualified for our commodity cash flow hedging program was 15.5 million pounds and 11.5 million pounds as of June 30, 2024 and December 31, 2023, respectively. During the three and six months ended June 30, 2024, the Company purchased coffee futures contracts and coffee options contracts under our cash flow hedging program with aggregate notional amounts of 20.1 million pounds and 30.0 million pounds, respectively. During the three and six months ended June 30, 2023, the Company purchased coffee futures contracts and coffee options contracts under our cash flow hedging program with aggregate notional amounts of 15.2 million pounds and 23.6 million pounds, respectively.
Approximately $3.5 million and $3.6 million of net realized gains, representing the effective portion of the cash flow hedge, were subsequently reclassified from AOCI to earnings and recognized in costs of sales in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024, respectively. Approximately $1.4 million and $2.1 million of net realized losses, representing the effective portion of the cash flow hedge, were subsequently reclassified from AOCI to earnings and recognized in costs of sales in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, the estimated amount of net gains reported in AOCI that is expected to be reclassified to the Condensed Consolidated Statements of Operations within the next twelve months is $8.7 million.
Within our Sustainable Sourcing & Traceability segment, the Company’s forward sales and forward purchase contracts are for physical delivery of green coffee in a future period. While the Company considers these contracts to be effective
economic hedges, the Company does not designate or account for forward sales or forward purchase contracts as hedges as defined under current accounting standards. See Note 4 for a description of the treatment of realized and unrealized gains and losses on forward sales and forward purchase contracts.
The fair value of our derivative assets and liabilities included in the Condensed Consolidated Balance Sheets are set forth below:
Derivative assets designated as cash flow hedging instruments:
Coffee futures contracts(1)
3,924
3,355
Options contracts
712
4,636
Derivative assets not designated as cash flow hedging instruments:
Forward purchase and sales contracts
13,115
10,303
Total derivative assets
Derivative liabilities not designated as cash flow hedging instruments:
Total derivative liabilities
1 - The fair value of coffee futures excludes amounts related to margin accounts.
The following table presents the pre-tax net gains and losses for our derivative instruments for the three and six months ended June 30, 2024 and 2023, respectively:
Statement of Operations Location
Net realized gains (losses) on coffee derivatives
3,480
(1,366)
3,572
(2,087)
Derivative assets and liabilities not designated as cash flow hedging instruments:
Net unrealized gains (losses) on forward sales and purchase contracts
(141)
2,098
2,200
1,070
Note 15. Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value at the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value. These levels are:
The following table summarizes the fair value of financial instruments at June 30, 2024:
Level 1
Level 2
Level 3
Assets:
Green coffee associated with forward contracts
34,818
Coffee futures contracts
47,933
52,569
Liabilities:
Westrock Public Warrants
38,002
Westrock Private Warrants
5,146
48,192
The following table presents the change in fair value of Level 3 Westrock Private Warrant liabilities:
Westrock
Private Warrants
Fair value as of December 31, 2023
5,430
Change in fair value
(284)
Fair value as of June 30, 2024
29
The following table summarizes the fair value of financial instruments at December 31, 2023:
33,447
43,750
47,105
39,371
48,532
Coffee futures contracts and coffee options are valued based on quoted market prices. The estimated fair value for green coffee inventories associated with forward contracts and forward sales and purchase contracts are based on exchange-quoted prices, adjusted for differences in origin, quantity, quality, and future delivery period, as the exchange quoted prices represent standardized terms for the commodity. These adjustments are generally determined using broker or dealer quotes or based upon observable market transactions. As a result, green coffee associated with forward contracts and forward sales and purchase contracts are classified within Level 2 of the fair value hierarchy.
Westrock Public Warrants are valued based on their quoted market price of $2.22 and $2.30 per warrant as of June 30, 2024 and December 31, 2023, respectively. Westrock Private Warrants price of $2.54 and $2.68 per warrant as of June 30, 2024 and December 31, 2023, respectively, are valued using a binomial lattice valuation model, which is considered to be a Level 3 fair value measurement. The primary unobservable inputs were as follows:
Stock price
10.23
10.21
Exercise price
11.50
Expected term (years)
5.00
Expected volatility
34.20%
33.80%
Risk-free rate of return
4.45%
3.91%
Dividend yield
0.00%
The most significant of these primary unobservable inputs utilized in determining the fair value of the Westrock Private Warrants is the expected volatility of the stock price, which is determined by use of an option pricing model.
Financial instruments consist primarily of cash, accounts receivable, accounts payable, a supply chain finance program, convertible notes payable, short-term debt and long-term debt. The carrying amount of cash, accounts receivable, accounts payable, short-term debt and the supply chain finance program was estimated by management to approximate fair value due to the relatively short period of time to maturity for those instruments. The Term Loan Facility, Revolving Credit Facility and Delayed Draw Term Loan Facility are carried on the Condensed Consolidated Balance Sheets at amortized cost and are estimated by management to approximate fair value as of June 30, 2024 as the interest rate on these facilities is adjusted for changes in the market rates. The Convertible Notes are carried on the Condensed Consolidated Balance Sheets at amortized cost and are estimated by management to approximate fair value as of June 30, 2024. The fair value of the Term Loan Facility, Revolving Credit Facility, Delayed Draw Term Loan Facility and Convertible Notes was determined based on Level 2 inputs under the fair value hierarchy.
Non-financial assets and liabilities, including property, plant and equipment, goodwill and intangible assets are measured at fair value on a non-recurring basis. No events occurred during the three and six months ended June 30, 2024 or 2023, requiring these non-financial assets and liabilities to be subsequently recognized at fair value, with the exception of the
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$0.8 million impairment charge on equipment related to the restructuring activities disclosed in Note 3. The equipment is no longer in use and was determined to have no salvage value.
At June 30, 2024, the Company had an equity investment with a carrying value of approximately $1.0 million, for which there is no readily determinable fair value. This investment is recorded at cost within other long-term assets on the Condensed Consolidated Balance Sheets. As of June 30, 2024, there have been no adjustments, upward or downward, to the carrying value.
Note 16. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss), net of tax by component for the three and six months ended June 30, 2024 and 2023 is as follows:
Unrealized gain (loss) on derivative instruments:
3,548
(4,115)
3,362
(6,355)
Other comprehensive income (loss) before reclassifications
8,541
(1,208)
8,878
1,146
Amounts reclassified from accumulated comprehensive income
(3,480)
1,366
(3,572)
2,087
Tax effect
(1,241)
(875)
(1,300)
(1,710)
Net accumulated other comprehensive income
7,368
(4,832)
Less: Other comprehensive income attributable to non-controlling interests
Balance at end of period
486
234
456
252
537
293
Accumulated other comprehensive income (loss) at end of period
Note 17. Equity-Based Compensation
During the three and six months ended June 30, 2024, the Company granted 0.1 million and 1.4 million restricted stock units (“RSUs”), respectively, under the Westrock Coffee Company 2022 Equity Incentive Plan (the “2022 Equity Plan”). The RSUs had a grant date fair value of $1.0 million and $13.2 million, respectively, which was calculated using the closing price of the Common Shares on the applicable date of grant. The RSUs are amortized on a straight-line basis to expense over the vesting period. For RSUs issued during 2024, the vesting period is four years, and for RSUs issued prior to 2024, the vesting period is three years. As of June 30, 2024, there were 2.7 million shares available for future issuance under the 2022 Equity Plan.
The following table sets forth the RSU activity under the 2022 Equity Plan for the six months ended June 30, 2024.
Weighted-Average
Fair Value at
Units
Grant Date
Outstanding at December 31, 2023
1,989,782
11.51
Granted
1,367,139
9.66
Forfeited
(128,150)
10.58
Vested
(373,293)
11.93
Outstanding at June 30, 2024
2,855,478
10.61
Note 18. Earnings per Share
Westrock Series A Preferred Shares and our RSUs issued under our 2022 Equity Plan are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as Common Shares. As participating securities, we include these instruments in the computation of earnings per share under the two-class method described in ASC 260 Earnings per Share (“ASC 260”).
The dilutive effect of Westrock Series A Preferred Shares and the Convertible Notes is calculated using the if-converted method, which assumes an add-back of any accretion on preferred shares and interest expense associated with the Convertible Notes to net income attributable to shareholders as if the securities were converted to common shares at the beginning of the reporting period (or at the time of issuance, if later), and the resulting common shares being included in the number of weighted-average units outstanding.
The dilutive effect of time-based option awards and RSUs is calculated using the treasury stock method, while performance-based awards are treated as contingently issuable.
The following potentially dilutive securities were excluded from the computation of diluted shares for the periods indicated because their inclusion would have an anti-dilutive effect on dilutive earnings (loss) per common share.
Warrants
19,144
19,155
Restricted stock
2,860
2,242
2,504
1,788
Options
1,316
1,476
1,322
1,505
If-converted securities
30,517
23,566
25,278
23,575
The following table sets forth the computation of basic and diluted earnings per share under the two-class method for the periods indicated.
Basic Earnings per Common Share
Numerator:
Net income (loss) attributable to common shareholders
Denominator:
Weighted-average common shares outstanding - basic
Basic earnings (loss) per common share
Diluted Earnings per Common Share
Net income (loss) attributable to common shareholders - basic
Effect of participating securities
Effect of non-participating securities
Net income (loss) attributable to common shareholders - diluted
Effect of dilutive participating securities
Effect of dilutive non-participating securities
Weighted-average common shares outstanding - diluted
Dilutive loss per common share
Note 19. Segment Information
Our two operating segments, Beverage Solutions and Sustainable Sourcing & Traceability, are evaluated using Adjusted EBITDA, which is a segment performance measure we define as net (loss) income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, equity-based compensation expense and the impact, which may be recurring in nature, transaction, restructuring and integrations 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).
Selected financial data related to our segments is presented below for the periods indicated:
Three Months Ended June 30, 2024
Sustainable
Total of
Sourcing &
Intersegment
Reportable
Traceability
Revenues
Segments
163,253
46,740
(1,604)
Adjusted EBITDA
13,245
419
n/a
13,664
Less:
7,968
Conway extract and ready-to-drink facility start-up costs
13,612
(1,522)
Loss (gain) on disposal of property, plant and equipment
943
Total assets
965,250
91,123
Three Months Ended June 30, 2023
189,719
36,048
(1,073)
11,660
(350)
11,310
6,181
(969)
562
727,471
94,837
822,308
34
Six Months Ended June 30, 2024
321,312
83,060
(3,483)
24,045
761
24,806
Change in fair value of warrants
23,408
1,279
Six Months Ended June 30, 2023
370,928
61,439
(2,231)
20,081
(318)
19,763
Management and consulting fees (S&D acquisition)
556
3,580
1,049
35
Note 20. Commitments and Contingencies
We are subject to various claims and legal proceedings with respect to matters such as governmental regulations, and other actions arising out of the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position, results of operations, or cash flow.
We have future purchase obligations of $180.3 million as of June 30, 2024 that 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.
In addition, at June 30, 2024, we had an obligation to repurchase $1.0 million of inventory associated with repurchase agreements in which the Company’s Sustainable Sourcing & Traceability segment has sold inventory to a third party and from whom the Company’s Beverage Solutions segment has an obligation to repurchase. The liability for these obligations is recorded within accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheet.
Note 21. Related Party Transactions
In February 2024, the Company sold and issued Convertible Notes to Westrock Group, LLC (an affiliate of Scott Ford, the Company’s Chief Executive Officer and a member of the board of directors of the Company, “Westrock Group”), Wooster Capital, LLC (an affiliate of Joe Ford, chairman of the board of directors) and HF Direct Investments Pool, LLC (a holder of more than 10% of the outstanding Common Shares), each a related party.
The Condensed Consolidated Financial Statements reflect the following transactions with related parties:
Westrock Group
378
Wooster Capital
94
HF Direct Investment Pool, LLC
472
944
Convertible notes payable - related party, net:
20,000
5,000
25,000
(329)
Interest expense:
In connection with the acquisition of S&D Coffee, Inc. in February 2020, the Company entered into a Management Services Agreement with Westrock Group, whose controlling manager and controlling member, Greenbrier Holdings, LLC, is owned and controlled by our co-founder and Chief Executive Officer Scott Ford. Under the terms of the
agreement, which expired in February 2023, Westrock Group was paid $10.0 million in return for financial, managerial, operational, and strategic services. The associated expense is recorded within selling, general and administrative expense in our Condensed Consolidated Statements of Operations. The Company recognized no such expenses during the three or six months ended June 30, 2024. The Company recognized no expenses and $0.6 million of such expenses during the three and six months ended June 30, 2023. In addition, the Company reimburses Westrock Group for the usage of a corporate aircraft, and its portion of shared administrative expenses. For the three and six months ended June 30, 2024, the Company recognized expenses of $0.3 million and $0.6 million, respectively, for such items, which are recorded in selling, general and administrative expenses in our Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2023, the Company recognized expenses of $0.5 million and $0.8 million, respectively, for such items. At June 30, 2024 and December 31, 2023, we had no amounts payable and $0.2 million payable to Westrock Group, respectively, related to such items.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, financial condition, and changes in financial condition for the three and six months ended June 30, 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. Securities and Exchange Commission (“SEC”) on March 15, 2024.
Westrock Coffee Company, a Delaware corporation (the “Company,” “Westrock,” “we,” “us,” or “our”), is a leading integrated coffee, tea, flavors, extracts, and ingredients solutions provider in the United States, providing coffee sourcing, supply chain management, product development, roasting, packaging, and distribution services to the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG, and hospitality industries around the world.
Our platform is built upon four fundamental pillars that enable us to positively impact the coffee, tea, flavors, extracts, and ingredients ecosystems from crop to cup: (i) we operate a fully transparent supply chain, (ii) we develop innovative beverage solutions tailored to our customers’ specific needs, (iii) we deliver a high quality and comprehensive set of products to our customers, and (iv) we leverage our scaled international presence to serve our blue-chip customer base. These four tenets comprise the backbone of our platform and position us as a leading provider of value-added beverage solutions. By partnering with Westrock, our customers also benefit from the benchmark-setting responsible sourcing policies and strong Environmental, Social, and Governance focus surrounding our products, top tier consumer insights, and a differentiated product ideation process. Leading brands choose us because we are singularly positioned to meet their needs, while simultaneously driving a new standard for sustainably and responsibly sourced products.
We operate our business in two segments: Beverage Solutions and Sustainable Sourcing & Traceability (“SS&T”).
Beverage Solutions: Through this segment, we combine our product innovation and customer insights to provide value-added beverage solutions, including coffee, tea, flavors, extracts, and ingredients. We provide products in a variety of packaging, including branded and private label coffee in bags, fractional packs, and single serve cups, as well as extract solutions to be used in products such as cold brew and ready-to-drink offerings. Currently, we serve customers in the United States, Europe, and Asia through the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG and hospitality industries.
We use Adjusted EBITDA to evaluate our performance, identify trends, formulate financial projections, and to make strategic decisions.
We refer to EBITDA and Adjusted EBITDA in our analysis of our results of operations, which are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). While we believe that net (loss) income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA and Adjusted EBITDA are important non-GAAP supplemental measures of operating performance as they contribute to a meaningful evaluation of the Company’s future operating performance and comparisons to the Company’s past operating performance. Additionally, we use these non-GAAP financial measures in evaluating the
performance of our segments, to make operational and financial decisions and in our budgeting and planning process. The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance.
We define “EBITDA” as net (loss) income, as defined by GAAP, before interest expense, provision for income taxes and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA before equity-based compensation expense and the impact, which may be recurring in nature, of 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:
EBITDA
(6,983)
(7,005)
(9,714)
(3,787)
Management and consulting fees (S&D Coffee, Inc. acquisition)
Beverage Solutions
Sustainable Sourcing & Traceability
Total of Reportable Segments
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.
Comparison of the Three Months Ended June 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:
Three Months
Ended
% of
100.0
%
80.1
84.1
19.9
15.9
24.8
15.2
2.1
1.3
0.4
0.0
0.5
27.7
16.5
(7.9)
(0.6)
3.6
3.3
(0.8)
5.3
(0.0)
(10.7)
(9.2)
(2.2)
2.8
(8.5)
(11.9)
The following table sets forth selected financial information of our reportable segments for the three months ended June 30, 2024 and 2023:
Revenues(1)
Segment Revenues:
Segment Costs of Sales:
126,638
40,348
157,244
31,774
Segment Gross Profit:
36,615
4,788
32,475
3,201
Segment Adjusted EBITDA:
Segment Adjusted EBITDA Margin:
8.1
0.9
6.6
6.1
(1.0)
5.0
(1)
Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions segment.
Net Sales
Net Sales from our Beverage Solutions segment 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.
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. 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.
Selling, General and Administrative Expense
% of Segment
48,765
29.9
31,485
16.6
2,845
6.3
2,685
7.7
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.
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.
Interest Expense
Cash:
Term loan and delayed draw term loan facilities
4,876
3,153
1,075
1,440
278
Convertible notes payable - related party
632
2,536
220
1,144
984
212
370
1,030
Total cash interest
11,123
6,850
Non-cash:
Amortization of deferred financing costs
665
535
Capitalized interest
(4,335)
Total non-cash interest
(3,670)
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.
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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.
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
Six Months Ended
80.4
83.7
19.6
16.3
24.0
1.8
2.2
0.2
26.2
18.3
(6.6)
(2.0)
3.7
3.1
(0.4)
1.5
0.1
(10.0)
(6.8)
0.3
(10.3)
(7.2)
(0.1)
(7.3)
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The following table sets forth selected financial information of our reportable segments for the six months ended June 30, 2024 and 2023:
251,698
70,514
307,958
52,204
69,614
9,063
62,970
7,004
7.5
1.0
6.2
5.4
(0.5)
4.6
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. The decrease in the average sales price per pound is directly correlated to the global commodities price.
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. 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.
44
90,794
28.3
63,287
17.1
5,256
5,005
8.5
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. The increase is primarily due to a $19.8 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.
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.
9,530
5,904
1,827
2,157
416
4,544
2,008
2,197
398
54
813
1,894
20,480
12,426
(7,163)
(5,448)
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
45
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.
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.
Income tax expense for the six months ended June 30, 2024 was $1.2 million, resulting in an effective tax rate of (2.9%). 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 six months ended June 30, 2023 was $1.9 million, resulting in an effective tax rate of (6.4%).
We make certain judgements and use certain estimates and assumptions when applying accounting principles in the preparation of our financial statements. The nature of those estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse effect on our results of operations and, in certain situations, could have a material adverse effect on our financial condition.
For further information on our critical accounting 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.
Our principal liquidity needs are to fund operating expenses, meet debt service obligations, and fund investment activities, which include capital expenditures. Our primary sources of liquidity and capital resources are cash on hand, cash provided by operating activities, and available borrowings under our Credit Agreement (as defined herein).
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. Where possible, we seek to recover inflation-impacted costs by passing these costs onto our customers through periodic pricing increases. However, our pricing increases often lag our cost increases, including increases in commodity costs. The persistence of these negative effects on our business could adversely impact our ability to reach our revenue and other financial targets.
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%.
On February 15, 2024, the Borrower entered into Amendment No. 3 (the “Third Amendment”) to the Credit Agreement. The Third Amendment modified the existing covenant relief period (the “Covenant Relief Period”), which commenced on June 30, 2023 and will end on the earlier to occur of (i) April 1, 2026 and (ii) any date following June 30, 2024, on which the Borrower elects to terminate the Covenant Relief Period subject to satisfaction of certain conditions. During the Covenant Relief Period, the Company’s ability to incur additional indebtedness and make investments, restricted payments and junior debt restricted payments will be more limited. The Third Amendment permits the Company to issue convertible notes, including the Convertible Notes (as defined herein).
The Credit Agreement, as amended, requires the Borrower to maintain compliance with (i) a secured net leverage ratio at levels ranging from 4.50:1.00 to 6.25:1.00 and stepping down to 4.50:1.00 by April 2026 and (ii) an interest coverage ratio of at least 1.50:1.00 on and prior to September 30, 2025 and at least 2.00:1.00 on December 31, 2025 and thereafter. The Credit Agreement, as amended, also includes (i) a minimum liquidity covenant requiring the Borrower not to permit its liquidity, measured as of the last business day of each calendar month commencing March 29, 2024, to be less than $15 million and (ii) an anti-cash hoarding covenant, which shall be effective only during the Covenant Relief Period, requiring the Borrower to have no more than $20 million of unrestricted cash on the last day of each calendar month when revolving loans or letters of credit are outstanding or on the date of borrowing of a revolving loan. Failure to comply with these covenants or make payments when due could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations under the Credit Agreement and could result in a default and acceleration under other agreements containing cross-default provisions. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. As of the date of this Quarterly Report on Form 10-Q, the Company was in compliance with its financial covenants.
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On February 15, 2024, the Company sold and issued in a private placement $72.0 million in aggregate principal amount of 5.00% convertible senior notes due 2029 (the “Convertible Notes”), of which $50.0 million was from related parties. The Convertible Notes are unsecured, senior obligations of the Company and accrue interest at a rate of 5.00% per annum.
The Company will settle conversions by paying or delivering, as applicable, at the Company’s election, cash, common stock, par value $0.01 per share (“Common Shares”), or a combination of cash and Common Shares. The Company may not issue more than 19.99% of the issued and outstanding Common Shares immediately prior to the issuance of the Convertible Notes in respect of the conversion of the Convertible Notes. The initial conversion price of the Convertible Notes is $12.84, which corresponds to an initial conversion rate of approximately 77.88 Common Shares per $1,000 principal amount of Convertible Notes. The conversion price and conversion rate are subject to customary adjustments.
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 was set to mature one year from inception. Borrowings under the facility bore interest at the borrower’s option at a rate equal to (a) term SOFR, as defined in the facility, 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%).
On March 8, 2024, Falcon renewed its working capital trade finance facility with multiple institutions. The facility size was reduced from $70.0 million to $55.0 million and remains uncommitted and repayable on demand, with certain of
48
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, 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. 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.
The Company is party to a supply chain finance program (the “Program”) with a third-party financing provider to provide better working capital usage by deferring payments for certain raw materials. Under the Program, the financing provider remits payment to the Company’s suppliers for approved invoices, and the Company repays the financing provider the amount of the approved invoices, plus a financing charge, on 180-day terms. The Program is uncommitted and the financing provider may, at its sole discretion, cancel the Program at any time. 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.
At-the-Market Common Stock Offering Program
We have an effective shelf registration statement on file with the SEC (the “Registration Statement”) to offer and sell various securities from time to time. 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.
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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. During the second quarter of 2024, we commenced commercial production in a portion of the facility. We are continuing to build out the remaining portions of the facility, and expect that the material capital expenditures related to the facility will be completed by the first quarter of 2025.
We believe proceeds from the Delayed Draw Term Loan Facility, Convertible Notes, cash from operations and borrowings available under the Revolving Credit Facility will provide sufficient cash on-hand 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, (v) continuing to drive margin expansion and (vi) completing the build-out of our extract and ready-to-drink manufacturing facility in Conway, Arkansas. 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 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
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
50
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 23,511,922 Series A Preferred Shares remain outstanding after February 26, 2028, we estimate an aggregate redemption payment of at least approximately $270.4 million. If Westrock was required by the holders to redeem a significant number of Series A Preferred Shares, Westrock may not have enough cash available (including through draws on its credit facility) for other purposes such as paying dividends on the Common Shares, repurchases of Common Shares, financing acquisitions or other expansions, paying employee incentives and executing its business strategy. An outflow of a significant amount of cash from Westrock as a result of redemptions of the Series A Preferred Shares may cause a deterioration in the financial condition of Westrock and our ability to pay our other obligations and/or execute our business strategy. The impact of such redemptions on Westrock will depend, among other things, on the financial condition of Westrock at the time of such redemptions, including the amount of available cash on hand and ability to draw on Westrock’s credit facilities or obtain other sources of financing, the business strategies and objectives of Westrock at that time and the magnitude of such redemptions. Additionally, we may reserve cash, refrain from pursuing other business objectives and/or direct cash away from other business objectives to ensure that we have sufficient available cash to satisfy holder redemptions and this may adversely affect our business and financial condition and ability to execute on our business strategy.
Contractual and Other Obligations
Our material contractual and other obligations include the payment of principal and interest under our debt obligations and future purchase of inventory obligations. Our Term Loan Facility and Delayed Draw Term Loan Facility require quarterly principal payments of 1.25% of the original principal. Quarterly payments increase 1.875% and 2.5% of the original principal balance during the fourth and fifth years of the Credit Agreement, respectively. 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. These obligations represent the minimum contractual obligations expected under the normal course of business. There are no material purchase obligations beyond 12 months.
We have future obligations to repurchase $1.0 million of inventory associated with repurchase agreements in which the Company’s SS&T segment has sold inventory to a third party and from whom the Company’s Beverage Solution segment has an obligation to repurchase.
Capital Expenditures
We categorize our capital expenditures as (i) growth, (ii) maintenance, (iii) customer beverage equipment or (iv) other.
We define growth capital expenditures as investments in our manufacturing facilities that will contribute to revenue growth by increasing production capacity, improving production efficiencies, or related to production of new products. Maintenance capital expenditures are those necessary to keep our existing manufacturing equipment fully operational. Customer beverage equipment represents Company-owned equipment that is deployed in our customers’ locations.
Capital expenditures for the six months ended June 30, 2024 and 2023 were as follows:
Customer
Growth
Maintenance
Equipment
Six months ended June 30, 2024
102,742
1,043
538
782
105,105
Six months ended June 30, 2023
50,512
1,757
1,151
2,325
55,745
During the remainder of 2024, we expect to invest approximately $55.0 million to continue the build out of our extract and ready-to-drink product manufacturing facility in Conway, Arkansas.
If circumstances warrant, we may need to take measures to conserve cash, which may include a suspension, delay, or reduction in growth and/or maintenance capital expenditures. We continually assess our capital expenditure plans in light of developments impacting our business, including the needs of our customers.
Off-Balance Sheet Arrangements
As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements.
See Note 3, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Item I of Part 1 of this Quarterly Report on Form 10-Q for a detailed discussion of recent accounting pronouncements.
Item 3. 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 About Market Risk” in our Annual Report on Form 10-K filed with the SEC on March 15, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024, due to the material weaknesses in our internal control over financial reporting, described below.
However, after giving full consideration to the material weaknesses, management believes that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with U.S. GAAP. Our Principal Executive Officer and Principal Financial Officer have certified that, based on such officer’s knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses in our internal control over financial reporting, which remain outstanding as of June 30, 2024.
Westrock did not design and maintain effective controls in response to the risks of material misstatement as changes to existing controls or the implementation of new controls were not sufficient to respond to changes to the risks of material misstatement to financial reporting. This material weakness in risk assessment contributed to the following material weaknesses:
Additionally, the material weaknesses could result in a misstatement of substantially all of Westrock’s accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Activities
Westrock has taken and is taking certain measures to remediate the material weaknesses described above, including the following:
The enhancements are expected to remediate the material weaknesses when they have operated effectively for a sufficient period of time.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, that occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
We are subject to various claims and legal proceedings with respect to matters such as governmental regulations, and other actions arising out of the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to the risk factors affecting our business that were described under Item 1A “Risk Factors” discussed in our Annual Report on Form 10-K filed with the SEC on March 15, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a) None.
(b) None.
(c)
During the three months ended June 30, 2024, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
Item 6. Exhibits
Exhibit
Index
Incorporated by Reference
ExhibitNumber
Exhibit Description
Form
File No.
FilingDate
FiledHerewith
Certificate of Incorporation of Westrock Coffee Company
10-Q
001-41485
August 29, 2022
3.2
Bylaws of Westrock Coffee Company
31.1
Chief Executive Officer—Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*
31.2
Chief Financial Officer—Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Chief Executive Officer—Certification pursuant to Rule13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2
Chief Financial Officer—Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Calculation Linkbase Document.
101.DEF
XBRL Definition Linkbase Document.
101.LAB
XBRL Taxonomy Label Linkbase Document.
101.PRE
XBRL Taxonomy Presentation Linkbase Document.
104
Cover Page Interactive Data File – The Cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 8, 2024
By:
/s/ T. Christopher Pledger
Name:
T. Christopher Pledger
Title:
Chief Financial Officer
(Principal Financial Officer)
/s/ Blake Schuhmacher
Blake Schuhmacher
Senior Vice President – Chief Accounting Officer
(Principal Accounting Officer)