THE SIMPLY GOOD FOODS COMPANY This Quarterly Report on Form 10-Q (this "Report") contains forward-looking statements. When used anywhere in this Report, the words "expect," "believe," "anticipate," "estimate," "intend," "plan" and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These statements include, but are not limited to, the effect of the COVID-19 pandemic on our business, financial condition and results of operations. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. These statements reflect our current views with respect to future events and are based on assumptions subject to risks and uncertainties. Such risks and uncertainties include those related to our ability to sell our products. 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 our Annual Report on Form 10-K for the fiscal year endedAugust 29, 2020 ("Annual Report") and our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in 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 in Item 1A. "Risk Factors" of our Annual Report. The Company assumes no obligation to update any of these forward-looking statements.
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. Our nutritious snacking platform consists of the following core brands that specialize in providing products for consumers that follow certain nutritional philosophies, dietary approaches and/or health-and-wellness trends: Atkins® for those following a low-carb lifestyle; and Quest® for consumers seeking to partner with a brand that makes the foods they crave work for them, not against them, through 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. Our platform also positions us to continue to selectively pursue acquisition opportunities of brands in the nutritious snacking category. To that end, inNovember 2019 , we completed the acquisition ofQuest Nutrition, LLC ("Quest"), a healthy lifestyle food company, for a cash purchase price of approximately$1.0 billion (subject to customary adjustments) (the "Acquisition of Quest"). For more information, please see "Liquidity and Capital Resources - Acquisition of Quest."
Effects of COVID-19
InDecember 2019 , a novel coronavirus disease, or COVID-19, was reported and inJanuary 2020 , theWorld Health Organization , or WHO, declared it a Public Health Emergency of International Concern. OnFebruary 28, 2020 , the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and onMarch 11, 2020 , the WHO characterized COVID-19 as a pandemic. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. The CARES Act provided a substantial stimulus and assistance package intended to address the effect of the COVID-19 pandemic, including tax relief and government loans, grants and investments. Additionally, various federal, state and local government-imposed movement restrictions and initiatives have been implemented to reduce the global transmission of COVID-19, including reduced or eliminated food services, the closure of retailing establishments, the promotion of social distancing and the adoption of remote working policies. Beginning in the third quarter of 2020, we actively engaged with the various elements of our value chain, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for our products and to remain informed of any challenges within our value chain. Given the unpredictable nature of the COVID-19 pandemic and the initial surge in consumption, we increased finished goods inventory of some of our key products. In the fourth quarter of 2020 and continuing into the second quarter of 2021, consumer consumption habits became more steady and inventory levels normalized. Based on information available to us as of the date of this Report, we believe we will be able to deliver our products to meet customer orders on a timely basis, and therefore, we expect our products will continue to be available for purchase to meet consumer meal replacement and snacking needs for the foreseeable future. 21 --------------------------------------------------------------------------------
We continue to monitor customer and consumer demand, and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 situation.
We implemented remote work arrangements and restricted business travel inMarch 2020 , and to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. We believe our lean infrastructure, which allows for significant flexibility, speed-to-market and minimal capital investment, has enabled us to adjust our expenditures to maintain cash flow until the more fulsome reopening of theU.S. economy and the associated return of shopping behavior to more normal patterns occurs. We also believe the return of these shopping patterns along with our brand benefits of active nutrition and weight management will drive more better-for-you snacking and meal replacement usage occasions. During the fiscal second quarter of 2021, several vaccines were first authorized for use against COVID-19 inthe United States and internationally. As a result of distribution of the vaccines, various federal, state and local government have begun to ease the movement restrictions and initiatives while continuing to adhere to enhanced safety measures, such as physical distancing and face mask protocols. However, the uncertainty continues to exist regarding the severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and deployment, potential mutations of COVID-19, and the effect of actions taken and that will be taken to contain COVID-19 or treat its effect, among others. Our consolidated results of operations for the thirteen and twenty-six weeks endedFebruary 27, 2021 continued to be affected by changes in consumer shopping and consumption behavior due to COVID-19. The nutritional snacking category has experienced a marked decrease in shopping trips (particularly in the mass channel) and fewer usage occasions. There is still uncertainty related to the duration of reduced consumer mobility and when shopping trips will return to pre-pandemic levels, particularly in the mass market retail channel. This has affected our portable and convenient on-the-go products, especially the nutrition and protein bar portion of our business for both our Atkins and Quest brands. While our Quest brand has outperformed its portion of the nutritious snaking segment, the performance of our Atkins brand, which is part of the weight management portion of the market, has remained slower due to what we believe is the temporary softer interest in weight management for consumers, fewer on-the-go usage occasions and weakness in the mass channel that has experienced reduced shopper traffic during the pandemic. We remain uncertain of the ultimate effect COVID-19 could have on our business notwithstanding the distribution of severalU.S. government approved vaccines and various federal, state and local governments having begun to ease the movement restrictions and public health initiatives while continuing to adhere to enhanced safety measures, such as physical distancing and face mask protocols. This uncertainty as to the duration and severity of economic effects from severity of economic effects from the COVID-19 pandemic stems from the potential for, among other things, (i) continued rates of reported cases of COVID-19 and the potential for mutations of COVID-19 to result in increased rates of reported cases for which currently approved vaccines are not effective, (ii) unexpected supply chain disruptions, (iii) changes to customer operations, (iv) continued or additional changes in consumer purchasing and consumption behavior beyond those evidenced to date, and (v) the closure of customer establishments.
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 Acquisition of Quest. The new organization design became effective onAugust 31, 2020 . These restructuring plans primarily include workforce reductions, changes in management structure, and the relocation of business activities from one location to another. For the thirteen and twenty-six weeks endedFebruary 27, 2021 , we incurred a total of$1.3 million and$3.8 million in restructuring and restructuring related costs, respectively, which have been included within General and administrative on the Consolidated Statements of Operations and Comprehensive Income. As ofFebruary 27, 2021 , we have incurred aggregate restructuring and restructuring related costs of$9.3 million sinceMay 2020 . Overall, we expect to incur a total of approximately$10.0 million in restructuring and restructuring-related costs, which are to be paid throughout fiscal 2021 and the first quarter of fiscal 2022. Refer to Note 14, Restructuring and Related Charges, of our Notes to Unaudited Condensed Consolidated Financial Statements 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 enables our management to focus its full time and our resources on our core Atkins® and Quest® branded businesses and other strategic initiatives. 22 --------------------------------------------------------------------------------
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, depreciation and amortization, and business transaction costs. The following is a brief description of the components of operating expenses:
•Selling and marketing. Selling and marketing expenses are comprised of broker commissions, customer marketing, media and other marketing costs.
•General and administrative. General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support our business, including employee salaries, 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.
•Business transaction costs. Business transaction costs are comprised of legal, due diligence, consulting and accounting firm expenses associated with the process of actively pursuing potential and completed business combinations, including the Acquisition of Quest.
Results of Operations
In the second quarter of fiscal 2021, we were able to continue to drive net sales and earnings growth in a challenging operating environment. The strong performance of the Quest brand drove the increases in net sales and net income for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 . We are encouraged by our business's performance in the first half of fiscal year 2021, including the momentum of the Quest brand and the progress made against our strategic initiatives, however there is still uncertainty related to when customer mobility, consumption behavior and shopping trips will return to pre-COVID-19 levels. However, we anticipate there will be overall marketplace trend improvements in the second half of fiscal 2021 as consumer mobility and on-the-go consumption increases. 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 measure Adjusted EBITDA. Because not all companies use identical calculations, this presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. See "Reconciliation of Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income for each applicable period. 23 -------------------------------------------------------------------------------- Table of Contents Comparison of Unaudited Results for the Thirteen Weeks EndedFebruary 27, 2021 and the Thirteen Weeks EndedFebruary 29, 2020 The following unaudited table presents, for the periods indicated, selected information from our Condensed Consolidated Statements of Operations and Comprehensive Income, including information presented as a percentage of net sales: Thirteen Weeks Thirteen Weeks Ended Ended (In thousands) February 27, 2021 % of Sales February 29, 2020 % of Sales Net sales$ 230,607 100.0 %$ 227,101 100.0 % Cost of goods sold 140,342 60.9 % 141,707 62.4 % Gross profit 90,265 39.1 % 85,394 37.6 % Operating expenses: Selling and marketing 26,150 11.3 % 27,041 11.9 % General and administrative 26,562 11.5 % 28,103 12.4 % Depreciation and amortization 4,212 1.8 % 4,287 1.9 % Business transaction costs - - % 694 0.3 % Total operating expenses 56,924 24.7 % 60,125 26.5 % Income from operations 33,341 14.5 % 25,269 11.1 % Other income (expense): Interest income - - % 85 - % Interest expense (7,995) (3.5) % (10,589) (4.7) % Gain (loss) on foreign 0.4 % (0.1) % currency transactions 975 (194) Other income 112 - % 8 - % Total other expense (6,908) (3.0) % (10,690) (4.7) % Income before income taxes 26,433 11.5 % 14,579 6.4 % Income tax expense 7,313 3.2 % 3,922 1.7 % Net income $ 19,120 8.3 % $ 10,657 4.7 % Other financial data: Adjusted EBITDA(1) $ 42,644 18.5 % $ 41,731 18.4 %
(1) Adjusted EBITDA is a non-GAAP financial metric. See "Reconciliation of Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income for each applicable period.
Net sales. Net sales of$230.6 million represented an increase of$3.5 million , or 1.5%, for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 . The net sales increase of 1.5% was primarily driven by Quest brand net sales growth and solid e-commerce growth across both the Atkins brand and Quest brand. The increase was partially offset by a 1.2% decrease in net sales due to the SimplyProtein Sale and the restructuring related business activities inEurope in fiscal year 2021. Additionally, net sales in the thirteen weeks endedFebruary 27, 2021 were negatively affected by the timing of seasonal inventory shipments as well as higher trade promotions. Cost of goods sold. Cost of goods sold decreased$1.4 million , or 1.0%, for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 . The cost of goods sold decrease was driven by the effect of the$5.1 million non-cash inventory step-up related to the Acquisition of Quest in fiscal year 2020, partially offset by sales volume growth primarily attributable to the Quest brand as discussed above. Gross profit. Gross profit increased$4.9 million , or 5.7%, for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 . Gross profit of$90.3 million , or 39.1% of net sales, for the thirteen weeks endedFebruary 27, 2021 increased 150 basis points from 37.6% of net sales for the thirteen weeks endedFebruary 29, 2020 . The increase in gross profit margin was primarily the result of a$5.1 million non-cash inventory purchase accounting step-up adjustment which resulted in a 220 basis point headwind in fiscal year 2020. This increase was partially offset by higher trade promotions in fiscal year 2021. 24
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Table of Contents
Operating expenses. Operating expenses decreased$3.2 million , or 5.3%, for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 due to the following: •Selling and marketing. Selling and marketing expenses decreased$0.9 million , or 3.3%, for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 . The decrease was primarily related to the SimplyProtein Sale and the restructuring related business activities inEurope in fiscal year 2021. •General and administrative. General and administrative expenses decreased$1.5 million , or 5.5%, for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 . The decrease was primarily attributable to a$2.9 million reduction in costs related to the integration of Quest, partially offset by an increase in restructuring charges of$1.3 million in the thirteen weeks endedFebruary 27, 2021 . •Depreciation and amortization. Depreciation and amortization expenses decreased slightly to$4.2 million for the thirteen weeks endedFebruary 27, 2021 compared to$4.3 million for the thirteen weeks endedFebruary 29, 2020 . •Business transaction costs. Business transaction costs were$0.7 million for the thirteen weeks endedFebruary 29, 2020 and was comprised of expenses related to the Acquisition of Quest.
Interest income. Interest income was nominal for each of the thirteen weeks
ended
Interest expense. Interest expense decreased$2.6 million for the thirteen weeks endedFebruary 27, 2021 compared to the thirteen weeks endedFebruary 29, 2020 primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to$556.5 million as ofFebruary 27, 2021 from$635.5 million as ofFebruary 29, 2020 . Gain (loss) on foreign currency transactions. A gain of$1.0 million in foreign currency transactions was recorded for the thirteen weeks endedFebruary 27, 2021 compared to a foreign currency loss of$0.2 million for the thirteen weeks endedFebruary 29, 2020 . The change relates to changes in foreign currency rates related to international operations.
Income tax expense. Income tax expense increased
Net income. Net income was$19.1 million for the thirteen weeks endedFebruary 27, 2021 , an increase of$8.5 million compared to net income of$10.7 million for the thirteen weeks endedFebruary 29, 2020 . The increase was primarily related to increased gross profit as well as reductions to operating expenses and interest expense as discussed above.
Adjusted EBITDA. Adjusted EBITDA increased
25
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Comparison of Unaudited Results for the Twenty-Six Weeks Ended
The following unaudited table presents, for the periods indicated, selected
information from our Condensed Consolidated Statements of Operations and
Comprehensive Income, including information presented as a percentage of net
sales:
Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
(In thousands) February 27, 2021 % of Sales February 29, 2020 % of Sales
Net sales $ 461,759 100.0 % $ 379,254 100.0 %
Cost of goods sold 277,453 60.1 % 231,654 61.1 %
Gross profit 184,306 39.9 % 147,600 38.9 %
Operating expenses:
Selling and marketing 51,345 11.1 % 45,475 12.0 %
General and administrative 51,977 11.3 % 46,248 12.2 %
Depreciation and amortization 8,456 1.8 % 6,740 1.8 %
Business transaction costs - - % 26,853 7.1 %
Total operating expenses 111,778 24.2 % 125,316 33.0 %
Income from operations 72,528 15.7 % 22,284 5.9 %
Other income (expense):
Interest income 3 - % 1,464 0.4 %
Interest expense (16,367) (3.5) % (15,558) (4.1) %
Gain (loss) on foreign 0.2 % - %
currency transactions 984 (178)
Other income 159 - % 45 - %
Total other expense (15,221) (3.3) % (14,227) (3.8) %
Income before income taxes 57,307 12.4 % 8,057 2.1 %
Income tax expense 15,687 3.4 % 2,193 0.6 %
Net income $ 41,620 9.0 % $ 5,864 1.5 %
Other financial data:
Adjusted EBITDA(1) $ 91,341 19.8 % $ 73,526 19.4 %
(1) Adjusted EBITDA is a non-GAAP financial metric. See "Reconciliation of Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income for each applicable period.
Net sales. Net sales of$461.8 million represented an increase of$82.5 million , or 21.8%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . The net sales increase of 21.8% was primarily attributable to the Quest brand, which increased net sales by 25.2%, due to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021 as well as post-acquisition Quest brand sales volume growth. These increases in net sales were partially offset by decreased sales volume of approximately 1.4% related to the SimplyProtein Sale and the restructuring related business activities inEurope in fiscal year 2021. Additionally, the continued effects of COVID-19 related movement restrictions as well as higher trade promotions partially offset the overall increase in net sales. Cost of goods sold. Cost of goods sold increased$45.8 million , or 19.8%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . The cost of goods sold increase was driven by sales volume growth primarily attributable to the Quest brand as discussed above, which was partially offset by the effect of the$7.5 million non-cash inventory step-up related to the Acquisition of Quest. Gross profit. Gross profit increased$36.7 million , or 24.9%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . Gross profit of$184.3 million , or 39.9% of net sales, for the twenty-six weeks endedFebruary 27, 2021 increased 100 basis points from 38.9% of net sales for the twenty-six weeks endedFebruary 29, 2020 . The increase in gross margin was primarily the result of the$7.5 million non-cash inventory step-up related to the Acquisition of Quest in fiscal year 2020 offset by higher trade promotions in fiscal year 2021. 26 -------------------------------------------------------------------------------- Operating expenses. Operating expenses decreased$13.5 million , or 10.8%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 due to the following: •Selling and marketing. Selling and marketing expenses increased$5.9 million , or 12.9%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . The increase was primarily related to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021, which was partially offset by decreased selling and marketing expenses related to the SimplyProtein Sale and the restructuring related business activities inEurope . •General and administrative. General and administrative expenses increased$5.7 million , or 12.4%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . The increase was primarily attributable to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021 as well as restructuring charges of$3.8 million in fiscal year 2021. These increases were partially offset by the reductions in costs related to the integration of Quest and stock-based compensation. •Depreciation and amortization. Depreciation and amortization expenses increased$1.7 million , or 25.5%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . The increase was primarily due to the partial inclusion amortization expense related to intangible assets recognized in the Acquisition of Quest in fiscal year 2020 as compared to fiscal year 2021.
•Business transaction costs. Business transaction costs were
Interest income. Interest income decreased$1.5 million for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 , primarily due to$195.3 million of cash on hand being utilized for the Acquisition of Quest in the first quarter of fiscal year 2020 and lower market rates. Interest expense. Interest expense increased$0.8 million for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 , primarily due to the funding of the Term Facility in the amount of$460.0 million to partially finance the Acquisition of Quest in the first quarter of fiscal 2020.
Gain (loss) on foreign currency transactions. A gain of
Income tax expense. Income tax expense increased$13.5 million , for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . The increase in our income tax expense was primarily driven by higher pre-tax book income offset by permanent difference. Net income. Net income was$41.6 million for the twenty-six weeks endedFebruary 27, 2021 an increase of$35.8 million compared to net income of$5.9 million for the twenty-six weeks endedFebruary 29, 2020 . The increase was primarily related to increased gross profit as discussed above and decreased transaction costs related to the Acquisition of Quest in fiscal year 2020. Adjusted EBITDA. Adjusted EBITDA increased$17.8 million , or 24.2%, for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 , driven primarily by the Acquisition of Quest. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see "Reconciliation of Adjusted EBITDA" below. 27 --------------------------------------------------------------------------------
Reconciliation of Adjusted EBITDA
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net income as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP).Simply Good Foods defines Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) as net income before interest income, interest expense, income tax expense, depreciation and amortization with further adjustments to exclude the following items: business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, and other non-core expenses. The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted EBITDA, when used in conjunction with net income, are useful to provide additional information to investors, and management of the Company uses Adjusted EBITDA to supplement net income because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making. The Company also believes that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. 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 tables below provide a reconciliation of Adjusted
EBITDA to its most directly comparable GAAP measure, which is net income, for
the thirteen and twenty-six weeks ended
Thirteen Weeks Ended Twenty-Six Weeks Ended
February 27, 2021 February 29, February 27, February 29,
(In thousands) 2020 2021 2020
Net income $ 19,120 $ 10,657 $ 41,620 $ 5,864
Interest income - (85) (3) (1,464)
Interest expense 7,995 10,589 16,367 15,558
Income tax expense 7,313 3,922 15,687 2,193
Depreciation and
amortization 4,508 4,594 9,021 7,119
EBITDA 38,936 29,677 82,692 29,270
Business transaction
costs - 694 - 26,853
Stock-based
compensation expense 2,484 2,122 3,594 3,795
Inventory step-up - 5,085 - 7,522
Integration of Quest 968 3,903 2,214 5,341
Restructuring 1,267 - 3,786 -
Non-core legal costs - 76 - 555
Other (1) (1,011) 174 (945) 190
Adjusted EBITDA $ 42,644 $ 41,731 $ 91,341 $ 73,526 (1) Other items consist principally of exchange impact of foreign currency transactions and other expenses.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
We have historically funded our operations with cash flow from operations and, when needed, with borrowings under our credit facilities. Our principal uses of cash have been debt service, working capital and the Acquisition of Quest. We had$91.3 million in cash and cash equivalents as ofFebruary 27, 2021 . 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.
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 provides 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 Acquisition of Atkins, the full$200.0 million of the Term Facility (the "Term Loan") was drawn. The interest rate per annum is based on either (i) a base rate equaling the higher of (a) the "prime rate", (b) the federal funds effective rate plus 0.50% and (c) the Euro-currency rate applicable for an interest period of one month plus 1.00% plus (x) 3.00% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility, or (ii) London Interbank Offered Rate ("LIBOR") adjusted for statutory reserve requirements, plus (x) 4.00% margin for the Term Loan subject to a floor of 1.00% or (y) 3.00% margin for the Revolving Credit Facility. As security for the payment or performance of its debt, we have pledged certain equity interests in its subsidiaries. OnMarch 16, 2018 (the "Amendment Date"), we entered into an amendment (the "Repricing Amendment") to the Credit Agreement. As a result of the Repricing Amendment, the interest rate on the Term Loan was reduced and, as of the Amendment Date, such loans had an interest rate equal to, at our option, either LIBOR plus an applicable margin of 3.50% or a base rate plus an applicable margin of 2.50%. The Repricing Amendment did not change the interest rate on the Revolving Credit Facility. The Revolving Credit Facility continued to bear interest based upon our consolidated net leverage ratio as of the last financial statements delivered to the administrative agent. No additional debt was incurred, or any proceeds received, by us in connection with the Repricing Amendment. The incremental fees paid to the administrative agent are reflected as additional debt discount and are amortized over the terms of the long-term financing agreements using the effective-interest method. OnNovember 7, 2019 , we entered into an 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) and as of the Amendment No. 2 Effective Date (as defined in the Incremental Facility Amendment), the Initial Term Loans bear interest at a rate equal to, at our option, either LIBOR plus an applicable margin of 3.75% or a base rate plus an applicable margin of 2.75%. The Incremental Facility Amendment was executed to partially finance the Acquisition of Quest. No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment. The Applicable Rate per annum applicable to the loans under the Credit Agreement Amendment is, with respect to any Initial Term Loan that is an ABR Loan (as defined in the Credit Agreement), 2.75% per annum, and with respect to any Initial Term Loan that is a Eurodollar Loan, 3.75% per annum. The incremental term loans will mature on the maturity date applicable to the Initial Term Loans, which date isJuly 7, 2024 . 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 6.25:1.00 (with a reduction to 6.00:1.00 on and after the third anniversary of the closing date of the Credit Agreement) 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 ofFebruary 27, 2021 andAugust 29, 2020 , respectively. AtFebruary 27, 2021 , the outstanding balance of the Term Facility was$556.5 million . We are not required to make principal payments on the Term Facility over the twelve months following the period endedFebruary 27, 2021 . The outstanding balance of the Term Facility is due upon its maturity inJuly 2024 . As ofFebruary 27, 2021 , there were no amounts drawn against the Revolving Credit Facility. 29 --------------------------------------------------------------------------------
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 Acquisition of Quest.
Acquisition of Quest
OnAugust 21, 2019 , our wholly-owned subsidiarySimply Good USA entered into 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 acquire Quest, a healthy lifestyle food company. OnNovember 7, 2019 , pursuant to the Purchase Agreement,Simply Good USA completed the Acquisition of Quest, for a cash purchase price of approximately$1.0 billion , subject to customary post-closing adjustments. The Acquisition of Quest 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 of 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 as ofFebruary 27, 2021 . For the thirteen and twenty-six weeks endedFebruary 29, 2020 , we incurred business transaction costs$0.7 million and$26.9 million , respectively.
Equity Warrants
The Company's private placement warrants to purchase 6,700,000 shares of common stock remain outstanding.
Cash Flows
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
Twenty-Six Weeks Ended
February 27, 2021
Net cash provided by (used in) operating
activities $ 39,764 $
(14,886)
Net cash provided by (used in) investing
activities $ 5,237 $
(985,932)
Net cash (used in) provided by financing
activities $ (49,893) $ 780,705 Operating activities. Our net cash provided by operating activities increased$54.7 million to$39.8 million for the twenty-six weeks endedFebruary 27, 2021 compared to cash used in operating activities of$14.9 million for the twenty-six weeks endedFebruary 29, 2020 . The increase in cash provided by operating activities was primarily caused by higher income before taxes, which was driven by (i) the Quest brand sales volume growth, which increased net sales by 25.2%, due to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021 as well as post-acquisition Quest brand sales volume growth and (ii) significant reductions in cash outlays and changes in working capital related to the first quarter 2020 Acquisition of Quest, including decreases in business transaction costs of$26.9 million and integration costs of$3.1 million . These increases in cash provided by operations were partially offset by$6.3 million of cash payments made for restructuring related costs, predominately composed of termination benefits and severance payments, during the twenty-six weeks endedFebruary 27, 2021 . Additionally, cash paid for taxes increased$5.7 million for the twenty-six weeks endedFebruary 27, 2021 compared to the twenty-six weeks endedFebruary 29, 2020 . Investing activities. Our net cash provided by investing activities was$5.2 million for the twenty-six weeks endedFebruary 27, 2021 , which was primarily related to the$5.8 million of cash proceeds received from the SimplyProtein Sale. The net cash used in investing activities of$985.9 million for the twenty-six weeks endedFebruary 29, 2020 was primarily related to the cash paid for the Acquisition of Quest, net of cash acquired, of$984.2 million . Financing activities. Our net cash used in financing activities was$49.9 million for the twenty-six weeks endedFebruary 27, 2021 compared to net cash provided by financing activities of$780.7 million for the twenty-six weeks endedFebruary 29, 2020 . Net cash used in financing activities for the twenty-six weeks endedFebruary 27, 2021 primarily consisted of a$50.0 million principal payment on the Term Facility. For the twenty-six weeks endedFebruary 29, 2020 , net cash provided by financing activities included gross proceeds of$352.5 million from the Offering offset by issuance costs of$3.3 million , proceeds of$460.0 million from the Term Facility borrowing related to the Incremental Facility Amendment offset by issuance costs of$8.2 million , and a$21.0 million principal payment on the Term Facility. 30 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations
Our contractual obligations are related to our Credit Agreement and our finance and operating leases. There have been no material changes to our contractual obligations from our Annual Report.
Off-Balance Sheet Arrangements
As ofFebruary 27, 2021 , we had no material off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.
New Accounting Pronouncements
For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report. There have been no significant changes to our critical accounting policies sinceAugust 29, 2020 . Refer to Note 2 of our unaudited interim consolidated financial statements in this Report for further information regarding recently issued accounting standards.
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