Whole Earth Brands, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

BUSINESS COMBINATION

BUSINESS COMBINATION

9 Months Ended

Sep. 30, 2020

NOTE 2: BUSINESS COMBINATION

On June 25, 2020, pursuant to the Acquisition, the Company indirectly acquired Merisant and Mafco Worldwide in a transaction accounted for as a business combination under ASC Topic 805, “Business Combinations,” and was accounted for using the acquisition method. Under the acquisition method, the acquisition date fair value of the consideration paid by the Company was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.

The following summarizes the preliminary purchase consideration (in thousands):


Base cash consideration	$	387,500
Closing adjustment estimate	(764)
Total Purchase Price	$	386,736

The Company preliminarily recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):


Cash and cash equivalents	$	10,062
Accounts receivable	46,959
Inventories	106,436
Prepaid expenses and other current assets	2,461
Property, plant and equipment, net	39,814
Operating lease right-of-use assets	12,541
Intangible assets	147,650
Deferred tax assets, net	1,202
Other assets	1,585
Total assets acquired	368,710
Accounts payable	19,356
Accrued expenses and other current liabilities	35,728
Current portion of operating lease liabilities	3,007
Operating lease liabilities, less current portion	12,208
Deferred tax liabilities, net	21,082
Other liabilities	15,467
Total liabilities assumed	106,848
Net assets acquired	261,862
Goodwill	124,874
Total Purchase Price	$	386,736

The preliminary values allocated to identifiable intangible assets and their estimated useful lives are as follows:


Identifiable intangible assets	Fair Value (in thousands)		Useful life (in Years)
Customer relationships	$	44,640	0.5 to 10
Tradenames	92,310		25
Product formulations	10,700		Indefinite
	$	147,650

Goodwill represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities.

The Company’s preliminary allocation of purchase price was based upon preliminary valuations performed to determine the fair value of the net assets as of the acquisition date and is subject to adjustments for up to one year after the closing date of the acquisition to reflect final valuations. These final valuations of the assets and liabilities could have a material impact on the preliminary purchase price allocation disclosed above.

In the third quarter of 2020, the Company recorded measurement period adjustments to its initial allocation of purchase price as a result of ongoing valuation procedures on assets acquired and liabilities assumed, including (i) a decrease in accounts receivable of $0.3 million; (ii) a decrease in inventory of $2.7 million; (iii) a decrease in prepaid expenses and other current assets of $10.4 million (see discussion below); (iv) an increase in property, plant and equipment of $17.9 million due to the valuation of certain real estate; (v) a decrease in operating lease right-of-use assets of $2.7 million to adjust the value of the Company’s leases to market value; (vi) a decrease in intangible assets of $9.8 million; (vii) an increase in other assets of $0.6 million; (viii) an increase in accounts payable of $0.4 million; (ix) a decrease in deferred tax liabilities, net of $2.9 million; (x) a decrease in other liabilities of $1.0 million; and (xi) a decrease to goodwill of $6.2 million due to the incremental period adjustments discussed in items (i) through (x). The impact of measurement period adjustments to the results of operations resulted in an increase in cost of goods sold related to the fair value step-up in inventory acquired that was subsequently sold of $0.8 million for the period of June 26, 2020 to June 30, 2020.

The initial allocation of purchase price reflects a $10.1 million adjustment to prepaid expenses and other current assets as a result of a change to the consideration transferred relative to the initial purchase price allocation. This adjustment was also reflected as a reduction to the estimated closing adjustments, and therefore, the total purchase price.

Direct transaction-related costs consist of costs incurred in connection with the Acquisition. Act II incurred transaction costs of $17.0 million prior to the Acquisition which are reflected within the accumulated deficit within the Condensed Consolidated Statement of Changes in Equity. During the three months ended September 30, 2020, the Company identified $1.2 million of additional Act II transaction costs that had been incurred in connection with the Acquisition. The effect of correcting for these costs decreased additional paid-in capital by $0.9 million and accumulated deficit by $0.3 million.

Pro Forma Financial Information—The following unaudited pro forma financial information summarizes the results of operations for the Company as though the Acquisition had occurred on January 1, 2019 (in thousands):


	Pro Forma Statements of Operations
	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Revenue	$	67,002	$	64,060	$	199,808	$	203,354
Net income (loss)	$	4,971	$	5,037	$	(20,350)	$	4,317

The unaudited pro forma financial information does not include any costs related to the Acquisition. In addition, the unaudited pro forma financial information does not assume any impacts from revenue, cost or other operating synergies that could be generated as a result of the acquisition. The unaudited pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition been consummated on January 1, 2019.

The Successor and Predecessor periods have been combined in the pro forma for the three and nine months ended September 30, 2020 and 2019 and include adjustments to reflect intangible asset amortization based on the economic values derived from definite-lived intangible assets, interest expense on the new debt financing, depreciation expense for certain real estate that has been adjusted to fair value, the release of the inventory fair value step-down into cost of goods sold and the elimination of non-recurring expense related to Predecessor transaction bonuses. These adjustments are net of taxes.