Westrock fee pany(WEST) - 2024 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section warns against undue reliance on forward-looking statements, which are subject to significant risks and uncertainties Nature of Forward-Looking Statements Defines forward-looking statements as non-historical facts, including future operations and financial expectations, with no obligation to update - Forward-looking statements are predictions about future events based on current expectations and assumptions, subject to significant risks and uncertainties[3] - Key areas for forward-looking statements include expectations regarding the Conway, Arkansas facility, capital expenditures, the joint venture with Select Milk, future liquidity, and remediation of material weaknesses in internal control over financial reporting[3] Important Factors and Risks Identifies numerous factors that could cause actual results to differ materially from forward-looking statements, including financial, operational, and external risks - Risks include potential future net losses, volatility in raw material costs (green coffee, tea, packaging), and inability to pass these costs to customers[4] - Operational risks encompass supply chain disruptions, inability to secure raw materials, and disruptions at production/distribution facilities[4] - Financial and strategic risks include inability to secure additional capital, failure to remediate material weaknesses in internal control over financial reporting, and risks associated with future acquisitions[4] - External factors like deteriorating macroeconomic conditions, climate change, global conflicts, inflation, and interest rate environment could significantly impact results[8] Part I. Financial Information Presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Provides unaudited condensed consolidated financial statements and detailed notes for Westrock Coffee Company Condensed Consolidated Balance Sheets Details the company's financial position, showing a slight increase in total assets and liabilities, and a decrease in equity | (Thousands) | March 31, 2024 | December 31, 2023 | Change | | :--------------------------------------- | :------------- | :---------------- | :----- | | ASSETS | | | | | Cash and cash equivalents | $12,571 | $37,196 | $(24,625) | | Total current assets | $273,225 | $313,050 | $(39,825) | | Property, plant and equipment, net | $400,839 | $344,038 | $56,801 | | Total Assets | $983,256 | $971,514 | $11,742 | | LIABILITIES, CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY | | | | | Total current liabilities | $220,288 | $239,635 | $(19,347) | | Long-term debt, net | $224,090 | $223,092 | $998 | | Convertible notes payable - related party, net | $49,654 | $— | $49,654 | | Total liabilities | $617,443 | $583,558 | $33,885 | | Series A Convertible Preferred Shares | $274,129 | $274,216 | $(87) | | Total shareholders' equity | $91,684 | $113,740 | $(22,056) | | Total Liabilities, Convertible Preferred Shares and Shareholders' Equity | $983,256 | $971,514 | $11,742 | Condensed Consolidated Statements of Operations Reports a significant increase in net loss for Q1 2024 due to lower sales, higher expenses, and increased interest | (Thousands, except per share data) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net sales | $192,500 | $205,442 | $(12,942) | | Costs of sales | $155,226 | $171,144 | $(15,918) | | Gross profit | $37,274 | $34,298 | $2,976 | | Selling, general and administrative expense | $44,440 | $34,122 | $10,318 | | Loss from operations | $(10,132) | $(7,364) | $(2,768) | | Interest expense | $7,579 | $6,029 | $1,550 | | Net loss | $(23,673) | $(4,326) | $(19,347) | | Net loss attributable to common shareholders | $(23,586) | $(4,770) | $(18,816) | | Basic Loss per common share | $(0.27) | $(0.06) | $(0.21) | | Diluted Loss per common share | $(0.27) | $(0.13) | $(0.14) | Condensed Consolidated Statements of Comprehensive Income (Loss) Shows a substantial increase in comprehensive loss for Q1 2024, driven by the higher net loss | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net loss | $(23,673) | $(4,326) | $(19,347) | | Unrealized gain (loss) on derivative instruments | $186 | $2,240 | $(2,054) | | Foreign currency translation adjustment | $30 | $(18) | $48 | | Total other comprehensive income (loss) | $216 | $2,222 | $(2,006) | | Comprehensive loss | $(23,457) | $(2,104) | $(21,353) | | Comprehensive loss attributable to common shareholders | $(23,370) | $(2,548) | $(20,822) | Condensed Consolidated Statements of Shareholders' Equity Reflects a decrease in total shareholders' equity primarily due to the net loss incurred during the period | (Thousands) | Balance at December 31, 2023 | Net income (loss) | Accretion of Series A Convertible Preferred Shares | Other comprehensive income (loss) | Equity-based compensation | Net share settlement of equity awards | Balance at March 31, 2024 | | :-------------------------------- | :--------------------------- | :------------------ | :----------------------------------------- | :-------------------------------- | :------------------------ | :---------------------------------- | :-------------------------- | | Common Stock (Amount) | $880 | — | — | — | $3 | — | $883 | | Additional Paid-in Capital | $471,666 | — | $87 | — | $2,452 | $(1,141) | $473,064 | | Accumulated Deficit | $(362,624) | $(23,673) | — | — | — | — | $(386,297) | | Accumulated Other Comprehensive Income | $3,818 | — | — | $216 | — | — | $4,034 | | Total Shareholders' Equity | $113,740 | $(23,673) | $87 | $216 | $2,455 | $(1,141) | $91,684 | Condensed Consolidated Statements of Cash Flows Details cash flow changes, including a shift to positive operating cash flow but a net decrease in cash due to investing activities | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net cash provided by (used in) operating activities | $7,979 | $(25,131) | $33,110 | | Net cash used in investing activities | $(68,936) | $(22,028) | $(46,908) | | Net cash provided by financing activities | $36,973 | $46,379 | $(9,406) | | Net decrease in cash and cash equivalents and restricted cash | $(24,064) | $(835) | $(23,229) | | Cash and cash equivalents and restricted cash at end of period | $13,776 | $25,570 | $(11,794) | Notes to Condensed Consolidated Financial Statements Provides essential explanations and context for the financial statements, covering policies, revenue, acquisitions, and specific accounts 1. Organization and Description of Business Describes Westrock Coffee as an integrated coffee, tea, and ingredients provider operating in two segments - Westrock Coffee Company is an integrated solutions provider for coffee, tea, flavors, extracts, and ingredients, serving retail, food service, convenience, CPG, and hospitality industries globally[16] - The company operates in two segments: Beverage Solutions (product innovation, value-added solutions) and Sustainable Sourcing & Traceability (proprietary technology, traceable supply chain, green coffee commodity sales)[17][18] 2. Basis of Presentation and Consolidation Explains the financial statements' preparation under U.S. GAAP and the consolidation of subsidiaries, including a recent acquisition - Financial statements are prepared under U.S. GAAP and consolidate wholly-owned/controlled subsidiaries[19] - On April 3, 2023, Westrock acquired the remaining 15% of Falcon Coffees Limited for $3.2 million (cash and common stock), making it a wholly-owned subsidiary, accounted for as an equity transaction[20] 3. Summary of Significant Accounting Policies Outlines key accounting policies, estimates, going concern evaluation, and recently adopted or issued accounting pronouncements - The company relies on estimates for various financial statement items, including credit losses, useful lives of assets, fair values of contracts, warrant liabilities, equity-based compensation, and income taxes, with actual results potentially differing[23] - Management believes current cash flow from operations and available borrowings will be sufficient for the next 12 months, but acknowledges net losses and potential liquidity restrictions if profitability targets or Conway Facility projections are not met; remediation plans include raising capital, delaying capital expenditures, or reducing operating expenses[24] - The company adopted ASU 2022-04 (Supplier Finance Programs) retrospectively effective January 1, 2023, requiring enhanced disclosures without affecting recognition or measurement[34] - New ASUs 2023-07 (Segment Reporting) and 2023-09 (Income Tax Disclosures) are being evaluated for their impact on consolidated financial statements, with effective dates in fiscal years beginning after December 2023 and 2024, respectively[35][37] - Obligations under the supply chain finance program totaled $78.7 million at March 31, 2024, and $78.1 million at December 31, 2023, recorded outside of accounts payable due to extended payment terms[28] 4. Revenue Details revenue recognition policies and disaggregates net sales by product type and geographic area, showing overall decline - Revenue is recognized upon shipment or delivery, with variable consideration (discounts, rebates) reducing net revenues[39][41][47] - Sales from commodity contracts (forward sales of green coffee) are accounted for as derivatives at fair value under ASC 815, with unrealized gains/losses recorded in costs of sales[44][45] Revenue by Type and Geographic Area | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Revenue by Type | | | | | Coffee & tea | $118,768 | $146,349 | $(27,581) | | Flavors, extracts & ingredients | $38,416 | $33,862 | $4,554 | | Green coffee | $34,441 | $24,233 | $10,208 | | Net sales | $192,500 | $205,442 | $(12,942) | | Revenue by Geographic Area | | | | | United States | $160,134 | $185,561 | $(25,427) | | All other countries | $32,366 | $19,881 | $12,485 | | Net sales | $192,500 | $205,442 | $(12,942) | 5. Acquisitions Reports the acquisition of Bixby Roasting Co. for $2.6 million, resulting in $2.0 million in goodwill for Beverage Solutions - On February 28, 2023, Westrock acquired Bixby Roasting Co. for $2.6 million, including cash and common shares[54] - The acquisition resulted in approximately $2.0 million of goodwill, deductible for tax purposes, within the Beverage Solutions segment, aimed at expanding product marketing and development[54] 6. Inventories Shows a decrease in total inventories, primarily green coffee, with all green coffee for resale in the SS&T segment Inventories Breakdown | (Thousands) | March 31, 2024 | December 31, 2023 | Change | | :---------------- | :------------- | :---------------- | :----- | | Raw materials | $78,720 | $78,882 | $(162) | | Finished goods | $30,074 | $26,857 | $3,217 | | Green coffee | $31,560 | $44,182 | $(12,622) | | Total inventories | $140,354 | $149,921 | $(9,567) | - All green coffee held for resale is included within the Sustainable Sourcing & Traceability segment[55] 7. Property, Plant and Equipment, Net Indicates a significant increase in net property, plant, and equipment, driven by construction in progress and equipment deposits Property, Plant and Equipment, Net | (Thousands) | March 31, 2024 | December 31, 2023 | Change | | :-------------------------------------- | :------------- | :---------------- | :----- | | Land | $8,756 | $8,778 | $(22) | | Buildings | $45,975 | $35,911 | $10,064 | | Construction in progress and equipment deposits | $251,852 | $208,308 | $43,544 | | Property, plant and equipment, net | $400,839 | $344,038 | $56,801 | - Depreciation expense for the three months ended March 31, 2024, was $5.5 million, up from $3.9 million in the prior year period[58] 8. Goodwill Reports stable goodwill at $116.1 million, with all attributed to the Beverage Solutions segment Goodwill Carrying Amount | (Thousands) | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Goodwill | $192,994 | $192,994 | | Accumulated impairment loss | $(76,883) | $(76,883) | | Net Goodwill | $116,111 | $116,111 | - All goodwill is within the Beverage Solutions segment[59] 9. Intangible Assets, Net Shows a slight decrease in net intangible assets due to amortization, with a weighted average useful life of 20 years Intangible Assets, Net | (Thousands) | March 31, 2024 (Net) | December 31, 2023 (Net) | Change | | :---------------------- | :------------------- | :---------------------- | :----- | | Customer relationships | $120,233 | $122,161 | $(1,928) | | Favorable lease asset | $309 | $377 | $(68) | | Software | $408 | $407 | $1 | | Intangible assets, net | $120,950 | $122,945 | $(1,995) | - Amortization expense for intangible assets was $2.0 million for both Q1 2024 and Q1 2023[60] 10. Leases Details operating lease assets and liabilities, increased lease costs, and a lease termination related to the Conway facility Operating Lease Assets and Liabilities | (Thousands) | March 31, 2024 | December 31, 2023 | Change | | :-------------------------------- | :------------- | :---------------- | :----- | | Operating lease right-of-use assets | $64,000 | $67,601 | $(3,601) | | Operating lease liabilities - current | $4,650 | $4,809 | $(159) | | Operating lease liabilities - noncurrent | $60,400 | $63,554 | $(3,154) | - Total lease costs (operating and short-term) increased from $1.455 million in Q1 2023 to $3.024 million in Q1 2024[65] - The company terminated a lease for a North Little Rock distribution center, effective June 30, 2024, after completing its Conway, Arkansas distribution center[63][64] 11. Debt Reports an increase in total debt due to new convertible notes and term loan draws, alongside amended credit agreement covenants Debt Breakdown | (Thousands) | March 31, 2024 | December 31, 2023 | Change | | :-------------------------------------- | :------------- | :---------------- | :----- | | Term loan facility | $161,875 | $164,063 | $(2,188) | | Delayed draw term loan facility | $50,000 | $— | $50,000 | | Revolving credit facility | $— | $65,000 | $(65,000) | | Convertible notes payable | $72,000 | $— | $72,000 | | Total debt | $324,326 | $278,975 | $45,351 | | Long-term debt, net | $224,090 | $223,092 | $998 | - The Credit Agreement was amended in February 2024, modifying the covenant relief period (ending April 1, 2026, or earlier) and introducing new financial covenants including secured net leverage ratio (4.50:1.00 to 6.25:1.00), interest coverage ratio (at least 1.50:1.00), minimum liquidity ($15 million), and an anti-cash hoarding covenant ($20 million unrestricted cash limit)[71][74] - The company issued $72.0 million in 5.00% convertible senior notes due 2029 in February 2024, with $50.0 million from related parties[77] - Falcon's working capital trade finance facility was renewed and reduced from $70.0 million to $55.0 million, with $27.8 million outstanding at March 31, 2024[84] 12. Series A Preferred Shares Describes outstanding Series A Preferred Shares, their conversion and redemption features, and estimated redemption value - There are 23,511,922 Series A Preferred Shares outstanding with an initial liquidation preference of $11.50 per share[87][89] - Holders can convert to common shares at a rate based on liquidation preference divided by conversion price ($11.50 per share)[90] - After February 26, 2028, holders can require redemption, or the company can redeem, at a price based on liquidation preference or common share value, with an estimated aggregate redemption payment of at least $270.4 million[91][92] 13. Common Stock Warrants Details outstanding common stock warrants, their liability classification, fair value re-measurement, and recognized gains - As of March 31, 2024, there are 19,144,120 common stock warrants outstanding (17.1 million public, 2.0 million private), exercisable at $11.50 per share and expiring August 26, 2027[94][95] - Warrants are classified as liabilities and re-measured at fair value each reporting period, with changes recognized in the Condensed Consolidated Statements of Operations[99] - The company recognized less than $0.1 million in gains from the change in fair value of warrant liabilities for Q1 2024, compared to $5.5 million in gains for Q1 2023[100] 14. Derivatives Explains the company's use of commodity derivatives for hedging and fair value accounting, reporting realized and unrealized gains - The company uses forward, futures, and options contracts for commodities, recorded at fair value[101] - Coffee futures contracts are designated as cash flow hedges in the Beverage Solutions segment to manage green coffee price exposure[107] - Forward sales and purchase contracts in the Sustainable Sourcing & Traceability segment are not designated as hedges but are accounted for at fair value[110] Net Realized and Unrealized Gains (Losses) on Derivatives | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net realized gains (losses) on coffee derivatives (cash flow hedges) | $92 | $(721) | $813 | | Net unrealized gains (losses) on forward sales and purchase contracts | $2,340 | $(1,028) | $3,368 | 15. Fair Value Measurements Categorizes financial instruments by fair value hierarchy, detailing Level 1, 2, and 3 assets and liabilities, including private warrants - Financial instruments are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[115][117] Fair Value Measurements by Level | (Thousands) | Level 1 (March 31, 2024) | Level 2 (March 31, 2024) | Level 3 (March 31, 2024) | Total (March 31, 2024) | | :-------------------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Assets: | | | | | | Green coffee associated with forward contracts | $— | $27,017 | $— | $27,017 | | Coffee futures contracts | $2,772 | $— | $— | $2,772 | | Forward purchase and sales contracts | $— | $12,652 | $— | $12,652 | | Liabilities: | | | | | | Forward purchase and sales contracts | $— | $4,229 | $— | $4,229 | | Westrock Public Warrants | $39,372 | $— | $— | $39,372 | | Westrock Private Warrants | $— | $— | $5,389 | $5,389 | - Westrock Private Warrants are Level 3 fair value measurements, valued using a binomial lattice model, with expected volatility (33.40% at March 31, 2024) being the most significant unobservable input[118] 16. Accumulated Other Comprehensive Income (Loss) Shows an increase in accumulated other comprehensive income, driven by unrealized derivative gains and foreign currency adjustments Accumulated Other Comprehensive Income (Loss) | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Unrealized gain (loss) on derivative instruments (before reclassifications) | $337 | $2,354 | $(2,017) | | Amounts reclassified from accumulated comprehensive income (derivative instruments) | $(92) | $721 | $(813) | | Foreign currency translation adjustment (before reclassifications) | $30 | $(18) | $48 | | Accumulated other comprehensive income (loss) at end of period | $4,034 | $(3,881) | $7,915 | 17. Equity-Based Compensation Reports RSU grants, their fair value, vesting periods, and remaining shares available under the 2022 Equity Plan - 1.3 million RSUs were granted in Q1 2024 (fair value $12.3 million), compared to 1.1 million RSUs in Q1 2023 (fair value $13.0 million)[123] - Vesting period for 2024 RSUs is four years; for prior RSUs, it was three years[123] - As of March 31, 2024, 2.7 million shares are available for future issuance under the 2022 Equity Plan[123] 18. Earnings per Share Details EPS computation using the two-class method, showing a significant increase in basic and diluted loss per share - EPS is computed using the two-class method, treating Series A Preferred Shares and RSUs as participating securities[126] Earnings per Share Data | (Thousands, except per share data) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net loss attributable to common shareholders | $(23,586) | $(4,770) | $(18,816) | | Basic earnings (loss) per common share | $(0.27) | $(0.06) | $(0.21) | | Diluted loss per common share | $(0.27) | $(0.13) | $(0.14) | - Potentially dilutive securities (warrants, restricted stock, options, if-converted securities) were excluded from diluted EPS calculation for both periods due to their anti-dilutive effect[128][129] 19. Segment Information Presents segment performance by Adjusted EBITDA and net sales, showing overall EBITDA growth despite sales decline - The company's two operating segments are Beverage Solutions and Sustainable Sourcing & Traceability, with performance evaluated using Adjusted EBITDA[131] Segment Net Sales and Adjusted EBITDA | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net Sales | | | | | Beverage Solutions | $158,059 | $181,209 | $(23,150) | | Sustainable Sourcing & Traceability | $36,320 | $25,391 | $10,929 | | Total Net Sales | $192,500 | $205,442 | $(12,942) | | Adjusted EBITDA | | | | | Beverage Solutions | $10,800 | $8,421 | $2,379 | | Sustainable Sourcing & Traceability | $342 | $32 | $310 | | Total Adjusted EBITDA | $11,142 | $8,453 | $2,689 | | Adjusted EBITDA Margin | | | | | Beverage Solutions | 6.8% | 4.6% | 2.2% | | Sustainable Sourcing & Traceability | 1.0% | 0.1% | 0.9% | | Total Adjusted EBITDA Margin | 5.8% | 4.1% | 1.7% | - Beverage Solutions net sales decreased by 12.8% due to a 23.8% decrease in roast and ground coffee volumes, partially offset by a 41.5% increase in flavors, extracts, and ingredients volumes[170] - Sustainable Sourcing & Traceability net sales increased by 42.1% due to a 100.9% increase in sales volume, partially offset by a 27.9% decrease in average sales price per pound[171] 20. Commitments and Contingencies Addresses legal claims and future purchase obligations, with management expecting no material adverse effect from litigation - Management believes current legal proceedings will not materially affect financial position, results, or cash flow[134] - Future purchase obligations for inventory over the next 12 months totaled $160.1 million as of March 31, 2024[135] - The company had a $3.4 million obligation to repurchase inventory associated with repurchase agreements as of March 31, 2024[136] 21. Related Party Transactions Details related party transactions, including convertible notes issuance and shared administrative expenses - In February 2024, the company sold $50.0 million in Convertible Notes to related parties, including Westrock Group, Wooster Capital, and HF Direct Investments Pool[137][138] - Interest expense from related party Convertible Notes was $312 thousand for Q1 2024[138] - Expenses for corporate aircraft usage and shared administrative expenses with Westrock Group were $0.3 million for Q1 2024 and Q1 2023; Management services agreement expenses with Westrock Group ceased in Q1 2024 (vs. $0.6 million in Q1 2023)[139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and changes for the three months ended March 31, 2024 Overview Describes Westrock Coffee as a global integrated solutions provider, emphasizing its transparent supply chain and ESG focus - Westrock Coffee Company is an integrated solutions provider for coffee, tea, flavors, extracts, and ingredients, serving various industries globally[141] - The company's platform is built on four pillars: transparent supply chain, innovative beverage solutions, high-quality products, and scaled international presence, with a strong focus on responsible sourcing and ESG[142] - Business segments are Beverage Solutions (value-added products) and Sustainable Sourcing & Traceability (digitally traceable supply chain, green coffee sales)[143][144][145] Key Business Metrics Explains the use of Adjusted EBITDA as a key non-GAAP metric for performance evaluation and strategic decision-making - Adjusted EBITDA is a key non-GAAP metric used to evaluate performance, identify trends, and make operational/financial decisions[146][147][149] - Adjusted EBITDA is defined as net loss before interest, taxes, depreciation, amortization, equity-based compensation, transaction/restructuring costs, warrant fair value changes, mark-to-market adjustments, facility start-up costs, and other infrequent items[150] Adjusted EBITDA Reconciliation | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net loss | $(23,673) | $(4,326) | $(19,347) | | EBITDA | $(2,731) | $3,218 | $(5,949) | | Adjusted EBITDA | $11,142 | $8,453 | $2,689 | | Beverage Solutions Adjusted EBITDA | $10,800 | $8,421 | $2,379 | | Sustainable Sourcing & Traceability Adjusted EBITDA | $342 | $32 | $310 | Significant Developments Highlights a joint venture LOI, convertible notes private placement, credit agreement amendment, and an ATM common stock offering program - The company entered a non-binding LOI with Select Milk Producers for a joint venture to build an extended shelf life/aseptic bottle line facility in Texas, with first product shipments expected in Q1 2026[153] - A $72.0 million private placement of 5.00% convertible senior notes due 2029 was completed, with $50.0 million from related parties[154][155] - The Credit Agreement was amended (Third Amendment) to modify the covenant relief period (ending April 1, 2026, or earlier) and adjust financial covenants, including secured net leverage, interest coverage, minimum liquidity, and an anti-cash hoarding covenant[157][158] - An "at the market" common stock offering program was established to sell up to 5,000,000 common shares, providing additional financial flexibility; no sales were made under this program in Q1 2024[161][208] Results of Operations Analyzes Q1 2024 financial results, noting decreased net sales, increased gross profit, and a substantial rise in net loss Condensed Consolidated Statements of Operations | (Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net sales | $192,500 | $205,442 | $(12,942) | | Costs of sales | $155,226 | $171,144 | $(15,918) | | Gross profit | $37,274 | $34,298 | $2,976 | | Selling, general and administrative expense | $44,440 | $34,122 | $10,318 | | Transaction, restructuring and integration expense | $2,964 | $6,644 | $(3,680) | | Loss from operations | $(10,132) | $(7,364) | $(2,768) | | Interest expense | $7,579 | $6,029 | $1,550 | | Net loss | $(23,673) | $(4,326) | $(19,347) | - Beverage Solutions net sales decreased by 12.8% due to lower coffee and tea volumes, while SS&T net sales increased by 42.1% due to higher green coffee sales volume[170][171] - Selling, general and administrative expenses increased by $10.2 million in Beverage Solutions, primarily due to a $7.9 million increase in Conway facility start-up costs[175] - Interest expense increased by $1.55 million, driven by higher interest rates on term loans and $2.0 million in interest on the supply chain finance program, partially offset by $2.8 million in capitalized interest for the Conway facility[177] Critical Accounting Estimates The company's financial statements involve significant judgments, estimates, and assumptions, particularly concerning credit losses, asset useful lives, fair values of contracts, warrant liabilities, equity-based compensation, contingencies, and income taxes - Significant judgments and estimates are made for items like allowance for credit losses, useful lives of property, plant and equipment, fair values of forward contracts, warrant liabilities, equity-based compensation, and income taxes[181] - Actual results may differ from estimates, potentially having a material adverse effect on results of operations and financial condition[182] - No material changes to critical accounting estimates occurred as of March 31, 2024[183] Liquidity and Capital Resources Outlines liquidity sources, capital needs, recent financing activities, and potential impacts of preferred share redemptions - Principal liquidity sources are cash on hand, operating cash flow, and Credit Agreement borrowings; needs include operating expenses, debt service, and capital expenditures[184] - The company's ability to generate operating cash flow depends on sales generation and cost management, with potential risks from failing to meet financial targets or delays in the Conway Facility[185] - In Q1 2024, the company borrowed $50.0 million from the Delayed Draw Term Loan Facility and issued $72.0 million in Convertible Notes to fund growth strategies[156][197] - The company has an "at the market" common stock offering program for up to 5,000,000 shares for financial flexibility but did not make sales in Q1 2024[208] - The company does not include potential cash proceeds from warrant exercises in its liquidity planning due to uncertainty[214] - Redemptions of Series A Preferred Shares after February 26, 2028, could require an aggregate payment of at least $270.4 million, potentially impacting the company's financial condition and ability to execute its business strategy[216][217] Capital Expenditures | (Thousands) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Capital Expenditures | | | | | Growth | $67,344 | $17,766 | $49,578 | | Maintenance | $622 | $311 | $311 | | Customer Beverage Equipment | $288 | $566 | $(278) | | Other | $660 | $982 | $(322) | | Total Capital Expenditures | $68,914 | $19,625 | $49,289 | Recent Accounting Pronouncements This section refers to Note 3, "Summary of Significant Accounting Policies," for a detailed discussion of recently adopted and issued accounting pronouncements - Refer to Note 3 for details on recent accounting pronouncements[228] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the market risks previously discussed in the company's Annual Report on Form 10-K filed on March 15, 2024 - No material changes to market risks were reported compared to the Annual Report on Form 10-K[229] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of March 31, 2024, due to identified material weaknesses in internal control over financial reporting, specifically related to risk assessment, period-end financial reporting, and segregation of duties Evaluation of Disclosure Controls and Procedures Disclosure controls were ineffective due to material weaknesses, yet financial statements are believed to be fairly presented - Disclosure controls and procedures were deemed not effective as of March 31, 2024, due to material weaknesses in internal control over financial reporting[231] - Despite the material weaknesses, management believes the condensed consolidated financial statements fairly present the company's financial condition, results of operations, and cash flows in accordance with U.S. GAAP[232] Material Weaknesses in Internal Control Over Financial Reporting Identifies material weaknesses in risk assessment, period-end financial reporting, and segregation of duties - Material weaknesses exist due to ineffective design and maintenance of controls in response to risks of material misstatement[234] - Specific weaknesses include ineffective controls over the period-end financial reporting process (leading to immaterial adjustments and material adjustments to cash flow presentation and operating lease assets/liabilities) and inadequate segregation of duties for journal entries and account reconciliations[234][236] Remediation Activities Details ongoing remediation efforts, including personnel hires, process formalization, and successful IT control remediation - Remediation efforts include hiring key personnel (Chief Accounting Officer, IT compliance, internal controls, Chief Information Officer) with relevant expertise[239][244] - The company formalized its risk assessment process and engaged a third party to assist in designing and implementing controls for period-end financial reporting and segregation of duties[239] - The material weakness related to IT general computer controls was remediated by March 31, 2024, through enhanced policies, procedures, and training for IT change management, user access, computer operations, and program development[242][244] Changes in Internal Control Over Financial Reporting Reports no material changes in internal control over financial reporting during the quarter ended March 31, 2024 - No material changes in internal control over financial reporting occurred during Q1 2024[243] Part II. Other Information Provides additional information not covered in Part I, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings Discusses ongoing legal claims, with management expecting no material adverse effect on the company's financials - The company is subject to various legal claims and proceedings in the normal course of business[246] - Management believes the resolution of these matters will not materially adversely affect the company's financial position, results of operations, or liquidity[246] Item 1A. Risk Factors States no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - No material changes to risk factors were reported compared to the Annual Report on Form 10-K[247] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities or use of proceeds occurred[248] Item 3. Defaults Upon Senior Securities States no defaults upon senior securities occurred during the reporting period - No defaults upon senior securities occurred[249] Item 4. Mine Safety Disclosures Confirms that Mine Safety Disclosures are not applicable to the company's operations - Mine Safety Disclosures are not applicable[250] Item 5. Other Information Discloses the CFO's Rule 10b5-1 trading arrangement for common stock sales - CFO T. Christopher Pledger entered a Rule 10b5-1 trading arrangement on March 18, 2024, to sell up to 30,000 shares of common stock[252] - The trading period for the CFO's plan is from 90 days after the plan date until March 31, 2025[252] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including organizational documents, debt agreements, equity award agreements, certifications, and XBRL interactive data files - The exhibits include the Certificate of Incorporation, Bylaws, Form of Convertible Note, Amendment No. 3 to the Credit Agreement, Deferred Compensation Plan, Form of Restricted Stock Unit Award Agreement, CEO/CFO Certifications (302 and 906), and XBRL Instance Document and Taxonomy files[255][258] Signatures Confirms the report's official signing by the Chief Financial Officer and Chief Accounting Officer - The report is signed by T. Christopher Pledger, Chief Financial Officer, and Blake Schuhmacher, Senior Vice President – Chief Accounting Officer, on May 9, 2024[261]