THE SIMPLY GOOD FOODS COMPANY The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8 of this Report. In addition to historical information, the following discussion contains forward-looking statements, including, but not limited to, statements regarding the Company's expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from the Company's expectations. The Company's actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in "Cautionary Note Regarding Forward-Looking Statements," and in Item 1A "Risk Factors" of this Report. The Company assumes no obligation to update any of these forward-looking statements. Our fiscal year ends the last Saturday in August. Our fiscal years 2022, 2021, and 2020 endedAugust 27, 2022 ,August 28, 2021 , andAugust 29, 2020 , respectively, and were each fifty-two week periods. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three week fiscal periods for the which the fourth quarter is comprised of fourteen weeks, and end on the thirteenth Saturday of each quarter (fourteenth Saturday of the fourth quarter, when applicable). Our fiscal quarters for fiscal 2022 ended onNovember 27, 2021 ,February 26, 2022 ,May 28, 2022 andAugust 27, 2022 .
Unless the context requires otherwise in this Report, the terms "we," "us,"
"our," the "Company" and "
Overview
The Simply Good Foods Company is a consumer packaged food and beverage company that aims to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great-tasting, better-for-you snacks and meal replacements, and other product offerings. The product portfolio we develop, market and sell consists primarily of protein bars, ready-to-drink ("RTD") shakes, sweet and salty snacks and confectionery products marketed under the Atkins®, Atkins Endulge®, Quest® and Quest HeroTM brand names. We believeSimply Good Foods is poised to expand its wellness platform through innovation and organic growth along with acquisition opportunities in the nutritional snacking space. Our nutritious snacking platform consists of brands that specialize in providing products for consumers that follow certain nutritional philosophies and health-and-wellness trends: Atkins® for those following a low-carb lifestyle and Quest® for consumers seeking a variety of protein-rich foods and beverages that also limit sugars and simple carbs. We distribute our products in major retail channels, primarily inNorth America , including grocery, club, and mass merchandise, as well as through e-commerce, convenience, specialty, and other channels. Our portfolio of nutritious snacking brands gives us a strong platform with which to introduce new products, expand distribution, and attract new consumers to our products.
Business Trends
Our consolidated results of operations for the fiscal year endedAugust 27, 2022 improved from the end of fiscal year 2021, driven in part by the increasing normalization of consumer mobility and shopper traffic patterns in brick-and-mortar retailers versus prior periods that were more severely pressured by COVID-19 mitigation strategies, including movement restrictions and closures of or reduced access to customer establishments. We expect our business performance during fiscal year 2023 will continue to be affected by the dynamic macroeconomic inflationary environment inthe United States and elsewhere, elevated levels of supply chain cost inflation, and the level of consumer mobility, which includes the rate at which consumers return to working outside the home. Overall consumer spending, particularly inthe United States , continued to recover from the effects of the COVID-19 pandemic, which resulted in well documented industry-wide supply chain disruptions acrossthe United States and globally during fiscal year 2022. As a result, during the fifty-two weeks endedAugust 27, 2022 , we experienced corresponding unfavorable effects of higher raw material costs, higher freight and logistics costs, and supply chain challenges, including supply chain disruptions resulting from labor shortages and disruptions in ingredients. We expect these cost pressures and supply chain challenges to continue into fiscal year 2023. We have also continued to see contract manufacturer and logistics challenges, largely related to availability of labor, which we believe along with the ingredient shortages discussed above have contributed to lower retail and e-commerce sales of our products due to periodic out-of-stock situations, delayed recognition of sales and higher than historical inventory levels at times. We could experience additional lost sale opportunities at our retail and e-commerce customers if our products are not available for purchase because of continued or expanded disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our contract manufacturers, or if our customers experience delays in stocking our products. 38 -------------------------------------------------------------------------------- We have actively engaged with our retail customers, contract manufacturers, and logistics and transportation providers, to meet demand for our products and to remain informed of any challenges within our business operations. We have also instituted price increases effective in the first and fourth quarters of fiscal year 2022. Management believes these price increases and additional cost savings initiatives will enable us to continue to invest in projects that drive growth. The improvement in consumer mobility and shopper traffic patterns experienced during fiscal year 2022 has been variable, and there continues to be uncertainty related to the sustainability and longevity of these trends. The ultimate effect COVID-19, supply chain challenges, cost pressures discussed above, and the overall effects of the current high inflation environment on consumer purchasing patterns could have on our business continues to be not fully known. Additionally, management is continuing to monitor the conflict inUkraine , especially regarding the availability and cost of raw materials that are produced in this region andEurope in general. Management is also monitoring for signs of any expansion of economic or supply chain disruptions or broader supply chain inflationary costs resulting either directly or indirectly from the crisis inEastern Europe . Factors contributing to the uncertainty described above, among other things, include (i) continued supply chain disruptions, including disruptions resulting from labor shortages and other cost pressures, (ii) changes to customer operations, (iii) a reversal in improving consumer purchasing and consumption behavior, and (iv) unforeseen business disruptions or other effects due to current global geopolitical tensions, including relating directly or indirectly to theUkraine crisis. Based on information available to us as of the date of this Report, we believe we will be able to deliver products at acceptable levels to fulfill customer orders on a timely basis; therefore, we expect our products will continue to be available for purchase to meet consumer meal replacement and snacking needs for the foreseeable future. We continue to monitor customer and consumer demand along with our supply chain and logistics capabilities and intend to adapt our plans as needed to continue to drive our business and meet our obligations
Please also see the information under Item 1A. "Risk Factors" for additional information regarding the risks of pandemics, such as COVID-19, higher raw material, freight, and logistics costs, and supply chain challenges.
Restructuring and Related Charges
InMay 2020 , we announced certain restructuring activities in conjunction with the implementation of our future-state organization design, which created a fully integrated organization with our completed Quest Acquisition. The new organization design became effective onAugust 31, 2020 . These restructuring plans primarily included workforce reductions, changes in management structure, and the relocation of business activities from one location to another. We substantially completed our restructuring activities during fiscal year 2022. Since the announcement of the restructuring activities inMay 2020 , we incurred aggregate restructuring and restructuring-related costs of$9.9 million . As ofAugust 27, 2022 , there was no outstanding restructuring liability. For the fifty-two weeks endedAugust 27, 2022 ,August 28, 2021 , andAugust 29, 2020 , we incurred a total of$0.1 million ,$4.3 million , and$5.5 million in restructuring and restructuring-related costs, respectively, which have been included within General and administrative on the Consolidated Statements of Income and Comprehensive Income. Refer to Note 16, Restructuring and Related Charges, of our Consolidated Financial Statements included in this Report for additional information regarding restructuring activities.
SimplyProtein Sale
EffectiveSeptember 24, 2020 , we sold the assets exclusively related to our SimplyProtein® brand of products for approximately$8.8 million of consideration, including cash of$5.8 million and a note receivable for$3.0 million , to a newly formed entity led by the Company's former Canadian-based management team who had been responsible for this brand prior to the sale transaction (the "SimplyProtein Sale"). In addition to purchasing these assets, the buyer assumed certain liabilities related to the SimplyProtein® brand's business. There was no gain or loss recognized as a result of the SimplyProtein Sale. The transaction has enabled our management to focus its full time and resources on our core Atkins® and Quest® branded businesses and other strategic initiatives. Quest Acquisition InNovember 2019 , we completed the acquisition of Quest, a healthy lifestyle food company, for a cash purchase price of approximately$1.0 billion (subject to customary adjustments). For more information, please see "Liquidity and Capital Resources-Quest Acquisition." 39 --------------------------------------------------------------------------------
Our Reportable Segment
During the fifty-two weeks endedAugust 27, 2022 , we substantially completed our efforts to fully integrate our operations and organization structure after the Quest Acquisition. We aligned the nature of our production processes and the methods used to distribute products to customers for the Atkins® and Quest® brands. We also designed our organizational structure to support entity-wide business functions across brands, products, customers, and geographic regions. Additionally, our chief operating decision maker reviews operating results and forecasts at the consolidated level. As a result, we determined our operations are organized into one, consolidated operating segment and reportable segment. Previously, during the fifty-two weeks endedAugust 28, 2021 andAugust 29, 2020 , we had two operating segments, Atkins and Quest, which were aggregated into one reporting segment due to similar financial, economic and operating characteristics.
Key Financial Definitions
Net sales. Net sales consist primarily of product sales less the cost of promotional activities, slotting fees and other sales credits and adjustments, including product returns.
Cost of goods sold. Cost of goods sold consists primarily of the costs we pay to our contract manufacturing partners to produce the products sold. These costs include the purchase of raw ingredients, packaging, shipping and handling, warehousing, depreciation of warehouse equipment, and a tolling charge for the contract manufacturer. Cost of goods sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.
Operating expenses. Operating expenses consist primarily of selling and marketing, general and administrative, and depreciation and amortization. The following is a brief description of the components of operating expenses:
•Selling and marketing. Selling and marketing expenses comprise broker commissions, customer marketing, media and other marketing costs.
•General and administrative. General and administrative expenses comprise expenses associated with corporate and administrative functions that support our business, including employee compensation, stock-based compensation, professional services, integration costs, restructuring costs, insurance and other general corporate expenses. •Depreciation and amortization. Depreciation and amortization costs consist of costs associated with the depreciation of fixed assets and capitalized leasehold improvements and amortization of intangible assets.
Results of Operations
During the fifty-two weeks endedAugust 27, 2022 , our net sales increased$163.1 million , or 16.2%, and our gross profit increased$35.8 million , or 8.7%, compared to the fifty-two weeks endedAugust 28, 2021 . Net sales for the fifty-two weeks endedAugust 27, 2022 were positively affected by the price increases effective in the first and fourth quarters of fiscal year 2022, and both the Atkins® and Quest® brands experienced sales and earnings growth driven by increased retail and e-commerce sales volume. However, unfavorable effects of higher raw material costs, freight, and logistics costs and supply chain challenges in the fifty-two weeks endedAugust 27, 2022 resulted in decreased gross profit margin as compared to the fifty-two weeks endedAugust 28, 2021 . As previously discussed above in "Business Trends," we expect these cost pressures and supply chain challenges to continue into fiscal year 2023. In assessing the performance of our business, we consider a number of key performance indicators used by management and typically used by our competitors, including the non-GAAP measures EBITDA and Adjusted EBITDA. Because not all companies use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. See "Reconciliation of EBITDA and Adjusted EBITDA" below for a reconciliation of EBITDA and Adjusted EBITDA to net income for each applicable period. A discussion regarding our financial condition and results of operations for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 is presented below. A discussion regarding our financial condition and results of operations for the fifty-two weeks endedAugust 28, 2021 compared to the fifty-two weeks endedAugust 29, 2020 can be found under Item 7 of our Annual Report on Form 10-K for the fiscal year endedAugust 28, 2021 , filed with theSEC onOctober 26, 2021 . 40 --------------------------------------------------------------------------------
Comparison of Results for the Fifty-Two Weeks Ended
The following table presents, for the periods indicated, selected information
from our consolidated financial results, including information presented as a
percentage of net sales:
52-Weeks Ended % of Net 52-Weeks Ended % of Net
(In thousands) August 27, 2022 Sales August 28, 2021 Sales
Net sales $ 1,168,678 100.0 % $ 1,005,613 100.0 %
Cost of goods sold 723,117 61.9 % 595,847 59.3 %
Gross profit 445,561 38.1 % 409,766 40.7 %
Operating expenses:
Selling and marketing 121,685 10.4 % 112,928 11.2 %
General and administrative 103,832 8.9 % 106,181 10.6 %
Depreciation and amortization 17,285 1.5 % 16,982 1.7 %
Total operating expenses 242,802 20.8 % 236,091 23.5 %
Income from operations 202,759 17.3 % 173,675 17.3 %
Other income (expense):
Interest income 15 - % 84 - %
Interest expense (21,881) (1.9) % (31,557) (3.1) %
Loss in fair value change of
warrant liability (30,062) (2.6) % (66,197) (6.6) %
Gain on legal settlement - - % 5,000 0.5 %
Gain (loss) on foreign
currency transactions 191 - % (5) - %
Other expense (453) - % (140) - %
Total other expense (52,190) (4.5) % (92,815) (9.2) %
Income before income taxes 150,569 12.9 % 80,860 8.0 %
Income tax expense 41,995 3.6 % 39,980 4.0 %
Net income $ 108,574 9.3 % $ 40,880 4.1 %
Other financial data:
Adjusted EBITDA (1) $ 234,043 20.0 % $ 207,273 20.6 %
(1) Adjusted EBITDA is a non-GAAP financial metric. See "Reconciliation of EBITDA and Adjusted EBITDA" below for a reconciliation of net income to EBITDA and Adjusted EBITDA for each applicable period.
Net sales. Net sales of$1,168.7 million represented an increase of$163.1 million , or 16.2%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . The increase was primarily attributable to retail and e-commerce sales volume growth for both the Atkins® and Quest® brands, which increased ourNorth America net sales by 18.1% in the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . Additionally, we instituted price increases effective in the first and fourth quarters of fiscal year 2022. The increase in net sales was partially offset by a 23.8% decline in our international business due to the decision to wind down our European business. The European exit represented a 1.2% headwind to total net sales growth. Cost of goods sold. Cost of goods sold increased$127.3 million , or 21.4%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . The cost of goods sold increase was driven by sales volume growth for both the Atkins® and Quest® brands, as discussed above. Additionally, our cost of goods sold for the fifty-two weeks endedAugust 27, 2022 was unfavorably affected by higher raw material, freight, and logistics costs and supply chain challenges. As previously discussed above in "Business Trends," we expect these cost pressures and supply chain challenges to continue into fiscal year 2023. Gross profit. Gross profit increased$35.8 million , or 8.7%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 , which was primarily driven by the sales volume growth for both the Quest® and Atkins® brands as discussed above. Gross profit of$445.6 million , or 38.1% of net sales, for the fifty-two weeks endedAugust 27, 2022 decreased 260 basis points from 40.7% of net sales for the fifty-two weeks endedAugust 28, 2021 . The decrease in gross profit margin was primarily the result 41 -------------------------------------------------------------------------------- of the unfavorable effects of higher raw material, freight, and logistics costs and supply chain challenges in the fifty-two weeks endedAugust 27, 2022 as previously discussed. The decrease in gross profit margin was partially offset by the favorable effects of the price increases which became effective in the first and fourth quarters of fiscal year 2022. Operating expenses. Operating expenses increased$6.7 million , or 2.8%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 due to the following: •Selling and marketing. Selling and marketing expenses increased$8.8 million , or 7.8%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 , primarily related to additional brand building initiatives for both Atkins® and Quest®. •General and administrative. General and administrative expenses decreased$2.3 million , or 2.2%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . The decrease was primarily attributable to reductions in costs related to business integration activities of$2.5 million , restructuring charges of$4.2 million , and incentive compensation in the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . These decreases were partially offset by an increase in stock-based compensation of$3.4 million and increased corporate expenses in the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . •Depreciation and amortization. Depreciation and amortization expenses increased$0.3 million , or 1.8%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 , primarily due to increased depreciation expense related to the$5.2 million of purchases of property and equipment during the fifty-two weeks endedAugust 27, 2022 . Interest income. Interest income was immaterial for the fifty-two weeks endedAugust 27, 2022 compared to interest income of$0.1 million for the fifty-two weeks endedAugust 28, 2021 . Interest expense. Interest expense decreased$9.7 million for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to$406.5 million as ofAugust 27, 2022 from$456.5 million as ofAugust 28, 2021 . Additionally, interest expense related to the amortization of deferred financing costs and debt discount decreased$2.1 million for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . Loss in fair value change of warrant liability. During the fifty-two weeks endedAugust 27, 2022 andAugust 28, 2021 , we recorded a non-cash loss of$30.1 million and$66.2 million , respectively, related to changes in valuation of our liability-classified warrants issued through a private placement ("Private Warrants"), which was primarily driven by movements in our stock price. OnJanuary 7, 2022 , the Private Warrants were fully exercised on a cashless basis, resulting in a net issuance of 4,830,761 shares of our common stock. As a result, there were no outstanding liability-classified Private Warrants as ofAugust 27, 2022 .
Gain on legal settlement. We recorded a
Gain (loss) on foreign currency transactions. Foreign currency transactions resulted in a$0.2 million gain and an immaterial loss for the fifty-two weeks endedAugust 27, 2022 andAugust 28, 2021 , respectively. During the fifty-two weeks endedAugust 27, 2022 , we recognized a foreign currency translation gain of$1.1 million related to the liquidation of a foreign subsidiary. The remaining variance is attributable to changes in foreign currency rates related to our international operations.
Income tax expense. Income tax expense increased
Net income. Net income was$108.6 million for the fifty-two weeks endedAugust 27, 2022 , an increase of$67.7 million , compared to net income of$40.9 million for the fifty-two weeks endedAugust 28, 2021 . The increase in net income was primarily related to the$29.1 million increase in income from operations driven by the Atkins® and Quest® brand sales volume growth as discussed above, the$36.1 million decrease in the non-cash loss in fair value change of our Private Warrant liability, and the$9.7 million decrease in interest expense in the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 . These increases were partially offset by the$2.0 million increase in income tax expense in the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 as well as the non-recurring$5.0 million gain on a legal settlement in the fifty-two weeks endedAugust 28, 2021 . Adjusted EBITDA. Adjusted EBITDA increased$26.8 million , or 12.9%, for the fifty-two weeks endedAugust 27, 2022 compared to the fifty-two weeks endedAugust 28, 2021 , driven primarily by sales volume growth for the Atkins® and Quest® brands, which was partially offset by the unfavorable effects of higher raw material, freight, and logistics costs and supply chain challenges in the fifty-two weeks endedAugust 27, 2022 as discussed above. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see "Reconciliation of EBITDA and Adjusted EBITDA" below. 42 --------------------------------------------------------------------------------
Reconciliation of EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-GAAP financial measures commonly used in our industry and should not be construed as alternatives to net income as an indicator of operating performance or as alternatives to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP).Simply Good Foods defines EBITDA as net income or loss before interest income, interest expense, income tax expense, depreciation and amortization, and Adjusted EBITDA as further adjusted to exclude the following items: stock-based compensation expense, integration costs, restructuring costs, gain or loss in fair value change of warrant liability, gain or loss due to legal settlements, and other non-core expenses. The Company believes that EBITDA and Adjusted EBITDA, when used in conjunction with net income, are useful to provide additional information to investors. Management of the Company uses EBITDA and Adjusted EBITDA to supplement net income because these measures reflect operating results of the on-going operations, eliminate items that are not directly attributable to the Company's underlying operating performance, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics the Company's management uses in its financial and operational decision making. The Company also believes that EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in the non-GAAP calculation. The following unaudited table provides a reconciliation of EBITDA and Adjusted EBITDA to its most directly comparable GAAP measure, which is net income, for the fifty-two weeks endedAugust 27, 2022 andAugust 28, 2021 : 52-Weeks Ended 52-Weeks Ended (In thousands) August 27, 2022 August 28, 2021 Net income$ 108,574 $ 40,880 Interest income (15) (84) Interest expense 21,881 31,557 Income tax expense 41,995 39,980 Depreciation and amortization 19,299 18,174 EBITDA 191,734 130,507 Stock-based compensation expense 11,697 8,265 Integration of Quest 468 2,928 Restructuring 98 4,324 Loss in fair value change of warrant liability 30,062 66,197 Gain on legal settlement - (5,000) Other (1) (16) 52 Adjusted EBITDA$ 234,043 $ 207,273 (1) Other items consist principally of exchange impact of foreign currency transactions and other expenses.
Liquidity and Capital Resources
Overview
We have historically funded our operations with cash flow from operations and, when needed, with borrowings under our Credit Agreement (as defined below). Our principal uses of cash have been working capital, debt service, repurchases of our common stock, and acquisition opportunities. We had$67.5 million in cash as ofAugust 27, 2022 . We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. As circumstances warrant, we may issue debt and/or equity securities from time to time on an opportunistic basis, dependent upon market conditions and available pricing. We make no assurance that we can issue and sell such securities on acceptable terms or at all. Our material future cash requirements from contractual and other obligations relate primarily to our principal and interest payments for our Term Facility, as defined and discussed below, and our operating and finance leases. Refer to Note 7, Long-Term Debt and Line of Credit, and Note 10, Leases, of the Consolidated Financial Statements included in Item 8 of this Report for additional information related to the expected timing and amount of payments related to our contractual and other obligations. 43 --------------------------------------------------------------------------------
Debt and Credit Facilities
OnJuly 7, 2017 , we entered into a credit agreement with Barclays Bank PLC and other parties (as amended to date, the "Credit Agreement"). The Credit Agreement at that time provided for (i) a term facility of$200.0 million ("Term Facility") with a seven-year maturity and (ii) a revolving credit facility of up to$75.0 million (the "Revolving Credit Facility") with a five-year maturity. Substantially concurrent with the consummation of the business combination betweenConyers Park Acquisition Corp. andNCP-ATK Holdings, Inc. onJuly 7, 2017 , the full$200.0 million of the Term Facility (the "Term Loan") was drawn. OnNovember 7, 2019 , we entered into a second amendment (the "Incremental Facility Amendment") to the Credit Agreement to increase the principal borrowed on the Term Facility by$460.0 million . The Term Facility together with the incremental borrowing make up the Initial Term Loans (as defined in the Incremental Facility Amendment). The Incremental Facility Amendment was executed to partially finance the acquisition ofQuest Nutrition, LLC onNovember 7, 2019 . No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment. Effective as ofDecember 16, 2021 , we entered into a third amendment (the "Extension Amendment") to the Credit Agreement. The Extension Amendment provided for an extension of the stated maturity date of the Revolving Commitments and Revolving Loans (each as defined in the Credit Agreement) fromJuly 7, 2022 to the earlier of (i) 91 days prior to the maturity date of the Initial Term Loans onJuly 7, 2024 and (ii)December 16, 2026 . OnJanuary 21, 2022 , we entered into a repricing amendment (the "2022 Repricing Amendment") to the Credit Agreement. The 2022 Repricing Amendment, among other things, (i) reduced the interest rate per annum applicable to the Initial Term Loans outstanding under the Credit Agreement immediately prior to the effective date of the 2022 Repricing Amendment, (ii) reset the prepayment premium for the existing Initial Term Loans to apply to Repricing Transactions (as defined in the Credit Agreement) that occur within six months after the effective date of the 2022 Repricing Amendment, and (iii) implemented the Secured Overnight Financing Rate ("SOFR") and related replacement provisions for the London Interbank Offered Rate ("LIBOR").
Effective as of the 2022 Repricing Amendment dated
i.A base rate equaling the higher of (a) the "prime rate," (b) the federal funds effective rate plus 0.50%, or (c) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) applicable for an interest period of one month plus 1.00% plus (x) 2.25% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility; or ii.SOFR plus a credit spread adjustment equal to 0.10% for one-month SOFR, 0.15% for up to three-month SOFR and 0.25% for up to six-month SOFR, subject to a floor of 0.50%, plus (x) 3.25% margin for the Term Loan or (y) 3.00% margin for the Revolving Credit Facility.The Simply Good Foods Company is not a borrower under the Credit Agreement and has not provided a guarantee of the Credit Agreement.Simply Good Foods USA, Inc. , is the administrative borrower and certain other subsidiary holding companies are co-borrowers under the Credit Agreement. Each of our domestic subsidiaries that is not a named borrower under the Credit Agreement has provided a guarantee on a secured basis. As security for the payment or performance of the debt under the Credit Agreement, the borrowers and the guarantors have pledged certain equity interests in their respective subsidiaries and granted the lenders a security interest in substantially all of their domestic assets. All guarantors other thanQuest Nutrition, LLC are holding companies with no assets other than their investments in their respective subsidiaries. The Credit Agreement contains certain financial and other covenants that limit our ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders, and prepayments of material subordinated debt, in each case, subject to customary exceptions materially consistent with credit facilities of such type and size. The Revolving Credit Facility has a maximum total net leverage ratio equal to or less than 6.00:1.00 contingent on credit extensions in excess of 30% of the total amount of commitments available under the Revolving Credit Facility. Any failure to comply with the restrictions of the credit facilities may result in an event of default. We were in compliance with all financial covenants as ofAugust 27, 2022 andAugust 28, 2021 , respectively. As ofAugust 27, 2022 , the outstanding balance of the Term Facility was$406.5 million . We are not required to make principal payments on the Term Facility over the twelve months following the period endedAugust 27, 2022 . The outstanding balance of the Term Facility is due upon its maturity inJuly 2024 . As ofAugust 27, 2022 , there were no amounts drawn against the Revolving Credit Facility. 44 --------------------------------------------------------------------------------
Stock Repurchase Program
OnApril 13, 2022 , we announced that our Board of Directors had approved the addition of$50.0 million to our stock repurchase program, resulting in authorized stock repurchases of up to an aggregate of$100.0 million . During the fifty-two weeks endedAugust 27, 2022 , we repurchased 1,720,520 shares of common stock for$59.9 million , averaging a purchase price per share of$34.79 . We did not repurchase any shares of common stock during the fifty-two weeks endedAugust 28, 2021 andAugust 29, 2020 . As ofAugust 27, 2022 , approximately$38.0 million remained available for repurchases under our$100.0 million stock repurchase program. Refer to Note 12, Stockholders' Equity of the Consolidated Financial Statements included in Item 8 of this Report for additional information related to our stock repurchase program.
Warrants to Purchase Common Stock
As ofAugust 28, 2021 , we had outstanding liability-classified Private Warrants that allowed holders to purchase 6,700,000 shares of our common stock. Such Private Warrants were held byConyers Park Sponsor, LLC ("Conyers Park"), a related party. Each whole warrant entitled the holder to purchase one share of our common stock at a price of$11.50 per share. OnJanuary 7, 2022 , Conyers Park elected to exercise the Private Warrants in full on a cashless basis, resulting in a net issuance of 4,830,761 shares of the Company's common stock. As a result, there were no outstanding liability-classified Private Warrants as ofAugust 27, 2022 . Refer to Note 12, Stockholders' Equity of the Consolidated Financial Statements included in Item 8 of this Report for additional details regarding the Private Warrants.
Public Equity Offering
OnOctober 9, 2019 , we completed an underwritten public offering of 13,379,205 shares of our common stock at a price to the public of$26.35 per share. We paid underwriting discounts and commissions of$0.19 per share resulting in net proceeds to us of$26.16 per share, or approximately$350.0 million (the "Offering"). We paid$0.8 million for legal, accounting and registrations fees related to the Offering. The net proceeds were used to pay a portion of the purchase price and related fees and expenses for the Quest Acquisition.
Quest Acquisition
OnAugust 21, 2019 , our wholly-owned subsidiarySimply Good Foods USA, Inc. , formerly known asAtkins Nutritionals, Inc. ("Simply Good USA ") entered into a Stock and Unit Purchase Agreement (the "Purchase Agreement") withVMG Voyage Holdings, LLC ,VMG Tax-Exempt II, L.P. ,Voyage Employee Holdings, LLC , and other sellers, as defined in the Purchase Agreement, to Quest, a healthy lifestyle food company. OnNovember 7, 2019 , pursuant to the Purchase Agreement,Simply Good USA completed the Quest Acquisition, for a cash purchase price of approximately$1.0 billion , subject to customary post-closing adjustments. The Quest Acquisition was funded through a combination of cash, equity and debt financing. Total consideration paid on the closing date was$988.9 million . Cash sources of funding included$195.3 million of cash on hand, net proceeds of approximately$350.0 million from an underwritten public offering of common stock, and$443.6 million in new term loan debt. In the third fiscal quarter of 2020, we received a post-closing release from escrow of approximately$2.1 million related to net working capital adjustments, resulting in a total net consideration paid of$986.8 million . Business transaction costs within the Consolidated Statements of Income and Comprehensive Income for the fifty-two weeks endedAugust 29, 2020 was$27.1 million , which included$14.5 million of transaction advisory fees related to the Quest Acquisition,$3.2 million of banker commitment fees,$6.1 million of non-deferrable debt issuance costs related to the incremental term loan, and$3.3 million of other costs, including legal, due diligence, and accounting fees.
Cash Flows
The following table sets forth the major sources and uses of cash for the
fifty-two weeks ended
52-Weeks Ended 52-Weeks Ended
(In thousands) August 27, 2022
Net cash provided by operating activities $ 110,639 $ 132,089
Net cash used in investing activities $ (8,156) $ (2,506)
Net cash used in financing activities $ (110,032) $ (150,049)
45-------------------------------------------------------------------------------- Operating activities. Our net cash provided by operating activities decreased$21.5 million to$110.6 million for the fifty-two weeks endedAugust 27, 2022 compared to$132.1 million for the fifty-two weeks endedAugust 28, 2021 . The decrease in cash provided by operating activities was primarily attributable to changes in working capital, comprised of changes in accounts receivable, net, inventories, prepaid expenses, accounts payable, and accrued expenses and other current liabilities, which are driven by the timing of payments and receipts and seasonal building of inventory. Changes in working capital consumed cash of$63.8 million in the fifty-two weeks endedAugust 27, 2022 compared to$21.5 million of cash consumed in the fifty-two weeks endedAugust 28, 2021 . Additionally, cash paid for taxes increased$17.0 million to$49.2 million for the fifty-two weeks endedAugust 27, 2022 as compared to$32.2 million for the fifty-two weeks endedAugust 28, 2021 . These decreases in cash provided by operating activities were partially offset by the$29.1 million increase in income from operations to$202.8 million for the fifty-two weeks endedAugust 27, 2022 as compared to$173.7 million for the fifty-two weeks endedAugust 28, 2021 , primarily attributable to retail and e-commerce sales volume growth for both the Atkins® and Quest® brands as discussed in "Results of Operations" above. Additionally, cash paid for interest was$19.2 million in the fifty-two weeks endedAugust 27, 2022 , which was a decrease of$8.6 million as compared to the$27.8 million paid for interest in the fifty-two weeks endedAugust 28, 2021 . Investing activities. Our net cash used in investing activities was$8.2 million for the fifty-two weeks endedAugust 27, 2022 compared to$2.5 million for the fifty-two weeks endedAugust 28, 2021 . Our net cash used in investing activities for the fifty-two weeks endedAugust 27, 2022 primarily comprised$5.2 million of purchases of property and equipment and the issuance of a$2.4 million note receivable. The$2.5 million of net cash used in investing activities for the fifty-two weeks endedAugust 28, 2021 primarily comprised the$5.9 million purchases of property and equipment and the issuance of a$1.6 million note receivable, partially offset by the$5.8 million of cash proceeds received from the SimplyProtein Sale. Financing activities. Our net cash used in financing activities was$110.0 million for the fifty-two weeks endedAugust 27, 2022 compared to$150.0 million for the fifty-two weeks endedAugust 28, 2021 . Net cash used in financing activities for the fifty-two weeks endedAugust 27, 2022 primarily consisted of$50.0 million in principal payments on the Term Facility and$59.9 million in repurchases in common stock. Net cash used in financing activities for the fifty-two weeks endedAugust 28, 2021 primarily consisted of$150.0 million in principal payments on the Term Facility.
Critical Accounting Policies, Judgments and Estimates
General
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in theU.S. While the majority of our revenue, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions. Management regularly reviews the estimates and assumptions used in the preparation of the financial statements for reasonableness and adequacy. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of our Consolidated Financial Statements in this filing; however, the following discussion pertains to accounting policies we believe are most critical to the portrayal of its financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our financial condition, results of operations and cash flows to those of other companies.
Revenue Recognition
We recognize revenue when performance obligations under the terms of a
contract with its customer are satisfied. We have determined that fulfilling and
delivering products is a single performance obligation. Revenue is recognized at
the point in time when we have satisfied our performance obligation and the
customer has obtained control of the products. This generally occurs when the
product is delivered to or picked up by our customer based on applicable
shipping terms, which is typically within 30 days.
Revenue is measured as the amount of consideration expected to be received in
exchange for fulfilled product orders, including estimates of variable
consideration. The most common forms of variable consideration include trade
promotions, such as consumer incentives, coupon redemptions and other marketing
activities, allowances for unsaleable product, and any additional amounts where
a distinct good or service cannot be identified or the value cannot be
reasonably estimated. Estimates of variable consideration are made using various
information including historical data on performance of similar trade
promotional activities, market data from IRI, and our best estimate of current
activity. Revisions can include changes for consideration paid to customers that
lack sufficient evidence to support a distinct good or service assertion, or for
which a reasonably estimable fair value cannot be determined, primarily related
to our assessments of cooperative advertising programs. We review these
estimates regularly and makes revisions as necessary. Uncertainties
46
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related to the estimate of variable consideration are resolved in a short time
frame and do not require any additional constraint on variable consideration.
Adjustments to variable consideration have historically been insignificant.
Although some payment terms may be longer, the majority of our payment terms are less than 60 days. As a result, we do not have any material significant payments terms as payment is received shortly after the time of sale.
While our revenue recognition does not involve significant judgment, it represents a key accounting policy.
Trade Promotions
We offer trade promotions through various programs to customers and consumers. Trade promotions include discounts, rebates, slotting and other marketing activities. Trade promotions are recorded as a reduction to net sales with a corresponding reduction to accounts receivable at the time of revenue recognition for the underlying sale. The recognition of trade promotions requires management to make estimates regarding the volume of incentive that will be redeemed and their total cost. These estimates are made using various information including historical data on performance of similar trade promotional activities, market data from IRI, and the Company's best estimates of current activity. Our consolidated financial statements could be materially affected if the actual promotion rates are different from the estimated rates. As ofAugust 27, 2022 andAugust 28, 2021 , the allowance for trade promotions was$23.9 million and$22.3 million , respectively. Differences between estimated expense and actual redemptions are recognized as a change in management estimate in a subsequent period. These differences have historically been insignificant.
Goodwill and indefinite-lived intangible assets, comprising our brands and trademarks, are not amortized, but instead are tested for impairment at least annually, or more frequently if indicators of impairment exist. We conduct our annual impairment tests at the beginning of the fourth fiscal quarter. We perform our goodwill impairment assessment for each reporting unit that has goodwill. The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires significant judgment at many points during the analysis. During the fifty-two weeks endedAugust 27, 2022 , we substantially completed our efforts to fully integrate our operations and organization structure after the Quest Acquisition. We aligned the nature of our production processes and the methods used to distribute products to customers for the Atkins® and Quest® brands. We also designed our organizational structure to support entity-wide business functions across brands, products, customers, and geographic regions. Additionally, our chief operating decision maker reviews operating results and forecasts at the consolidated level. As a result, we determined our operations are organized into one, consolidated operating segment and reporting unit. Previously, during the fifty-two weeks endedAugust 28, 2021 andAugust 29, 2020 , we had two reporting units which were our operating segments, Atkins and Quest. We assess goodwill and indefinite-lived intangible assets using either a qualitative or quantitative approach to determine whether it is more likely than not that the fair values of the reporting units or indefinite-lived intangible assets are less than their carrying amounts. The qualitative assessment evaluates factors including macro-economic conditions, industry-specific and company-specific considerations, legal and regulatory environments, and historical performance. If we determine that it is more likely than not that the fair value of a reporting unit or an indefinite-lived intangible asset is less than its carrying value, a quantitative assessment is performed. Otherwise, no further assessment is required. The quantitative approach compares the estimated fair value of the reporting unit, including goodwill, or the indefinite-lived intangible asset to its carrying amount. The material inputs and assumptions underlying the quantitative assessments of goodwill and intangible impairment are based on operational forecasts derived from expectations of future operating performance, which require considerable management judgment regarding matters that are uncertain and susceptible to change. Impairment is indicated if the estimated fair value of the reporting unit or indefinite-lived intangible asset is less than the carrying amount, and an impairment charge is recognized for the differential. For fiscal year 2022 and 2021, we performed qualitative assessments of goodwill and indefinite-lived intangible assets. The qualitative assessments did not identify indicators of impairment, and it was determined that it was more likely than not each reporting unit and indefinite-lived intangible had fair values in excess of their carrying values. Accordingly, no further impairment assessment was necessary, and no impairment charges related to goodwill or indefinite-lived intangibles were recognized in the fifty-two weeks endedAugust 27, 2022 orAugust 28, 2021 . Additionally, we determined there was not a material risk for future possible impairments as of the date of the most recent assessment. 47 -------------------------------------------------------------------------------- For fiscal year 2020, we elected to bypass the qualitative assessment and proceed directly to performing the first step of the quantitative goodwill impairment assessment for each reporting unit. We performed the first step of the quantitative goodwill impairment assessment by comparing the fair value of each of our reporting units, Atkins and Quest, to its carrying amount, including goodwill. The estimated fair values of the Atkins and Quest reporting units substantially exceeded their carrying values. We determined neither reporting unit was impaired, therefore, no impairment charges related to goodwill were recorded in the fifty-two weeks endedAugust 29, 2020 . Additionally, for fiscal year 2020, we elected to qualitatively assess for impairment the indefinite-lived intangible related to our Quest brand and trademark. The qualitative assessment indicated that it was more likely than not that the Quest brand and trademark indefinite-lived intangible's fair value exceeded its carrying amount, and as a result we did not perform a quantitative assessment. For our indefinite-lived brand and trademark intangible related to our Atkins brand, we elected to bypass the qualitative assessment and proceed directly to performing the quantitative impairment assessment. The estimated fair value of the Atkins brand and trademark indefinite-lived intangible substantially exceeded its carrying value. During the fourth quarter of fiscal 2020, we determined there were indicators of impairment related to the SimplyProtein brand intangible asset, including but not limited to an offer to sell the SimplyProtein brand. Therefore, we performed a quantitative assessment of our brand intangible asset, which indicated the fair value did not exceed the carrying value, resulting in a loss on impairment of$3.0 million in the fifty-two weeks endedAugust 29, 2020 . We also have intangible assets that have determinable useful lives, consisting primarily of customer relationships, proprietary recipes and formulas, licensing agreements, and software and website development costs. Costs of these finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Finite-lived intangible assets are tested for impairment when events or circumstances indicated that the carrying amount may not be recoverable. For the fifty-two weeks endedAugust 27, 2022 ,August 28, 2021 andAugust 29, 2020 , we did not identify indicators of impairment related to our finite-lived intangible assets, and as such there were no impairments recorded related to finite-lived intangible assets. We also determined that there was no material risk for future possible intangible impairments related to our finite-lived intangible assets as of the date of the most recent assessments.
Income Taxes
We are subject to income taxes inthe United States and numerous other jurisdictions. Significant judgment is required in determining our provision for income tax, including evaluating uncertainties in the application of accounting principles and complex tax laws. Income taxes include federal, state and foreign taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the differences between the financial statement balances and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Significant management judgment is required in determining the effective tax rate, evaluating tax positions and determining the net realizable value of deferred tax assets.
Warrant Liability
As ofAugust 28, 2021 , we had outstanding Private Warrants that allowed holders to purchase 6,700,000 shares of our common stock. Such Private Warrants were held by Conyers Park, a related party. Each whole warrant entitled the holder to purchase one share of our common stock at a price of$11.50 per share. OnJanuary 7, 2022 , Conyers Park elected to exercise the Private Warrants in full on a cashless basis, resulting in a net issuance of 4,830,761 shares of the Company's common stock. As a result of the cashless exercise onJanuary 7, 2022 , there were no outstanding Private Warrants as ofAugust 27, 2022 . During the reporting periods the Private Warrants were outstanding, we accounted for our Private Warrants as a derivative warrant liability in accordance with ASC Topic 815-40, Derivatives and Hedging: Contracts in Entity's Own Equity. Accordingly, we recognized the Private Warrants as a liability at fair value and adjusted the Private Warrants to fair value at each reporting period through other income. We utilized the Black-Scholes option-pricing valuation model ("Black-Scholes model") to estimate the fair value of the Private Warrants at each reporting date. The application of the Black-Scholes model utilizes significant assumptions, including expected volatility, the determination of which requires significant judgment. In order to determine the most accurate measure of this volatility, we measured expected volatility based on several inputs, including considering a peer group of publicly traded companies,Simply Good Foods' implied volatility based on traded options, the implied volatility of comparable warrants, and the implied volatility of any outstanding public warrants during the periods they were outstanding. As a result of the unobservable inputs that were used to determine the expected volatility of the Private Warrants, the fair value measurement of these warrants reflected a Level 3 measurement within the fair value measurement hierarchy. The expected volatility was historically a key assumption or input to the valuation of the Private Warrants, however changes in the expected volatility assumption had less of an effect on the Black-Scholes model valuation as the Private Warrants approached their expiration. 48 --------------------------------------------------------------------------------
New Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, of the Consolidated Financial Statements included in Item 8 of this Report for information regarding recently issued accounting standards.
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