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/A 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 ("WHO") declared it a Public Health Emergency of International Concern. OnFebruary 28, 2020 , theWHO 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 , theWHO 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 24 -------------------------------------------------------------------------------- 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. 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. Our consolidated results of operations for the thirteen and thirty-nine weeks endedMay 29, 2021 continued to be affected by changes in consumer shopping and consumption behavior due to COVID-19. However, for the thirteen and thirty-nine weeks endedMay 29, 2021 , our business improved, driven by increasing consumer mobility and improving shopper traffic in brick and mortar retailers versus the prior year period that was pressured by COVID-19 movement restrictions. We believe there is a high correlation of consumer mobility to the consumption of our products. As shopper traffic within brick and mortar retailers improves, particularly in the mass and convenience store channels, our business, particularly bars, performs well. There is still uncertainty related to the duration of reduced consumer mobility and when shopping trips will fully return to pre-pandemic levels. While our Quest brand has outperformed its portion of the nutritious snacking segment, the performance of our Atkins brand, which is part of the weight management portion of the market, has improved at a slower rate. However, the Atkin's performance for the thirteen weeks endedMay 29, 2021 has improved sequentially, primarily due to increasing consumer mobility and improving shopper traffic in brick and mortar retailers. We remain uncertain of the ultimate effect COVID-19 could have on our business notwithstanding the distribution of severalU.S. government approved vaccines and the easing of movement restrictions. This uncertainty stems from the potential for, among other things, (i) the possibility 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) reversal in recently improving consumer purchasing and consumption behavior, 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 thirty-nine weeks endedMay 29, 2021 , we incurred a total of$0.2 million and$4.0 million in restructuring and restructuring-related costs, respectively, which have been included within General and administrative on the Condensed Consolidated Statements of Operations and Comprehensive Income. As ofMay 29, 2021 , we have incurred aggregate restructuring and restructuring-related costs of$9.5 million sinceMay 2020 . Overall, we expect to incur a total of approximately$9.9 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 teamwho 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.
Supply Chain Costs
As we expect higher raw material and freight costs starting in the fiscal fourth quarter of 2021 and in fiscal year 2022, inJune 2021 management notified our customers of our plans to institute a price increase effective inSeptember 2021 , the first month of our fiscal year 2022. Management believes the price increase will enable us to continue to invest in initiatives that drive growth. 25 --------------------------------------------------------------------------------
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 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 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 comprise 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
Sales and earnings growth improved during the third quarter, driven by
increasing consumer mobility compared to the prior year which experienced
COVID-19 movement restrictions. As consumer foot traffic within brick and mortar
retailers improved, particularly in the mass and convenience store channels, our
business, particularly bars, did well. Strong sales growth, cost controls around
general and administrative costs, and Acquisition of Quest synergies more than
offset higher marketing and employee-related costs.
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, the presentation of 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 net
income to EBITDA and Adjusted EBITDA for each applicable period.
26
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Table of Contents
Comparison of Unaudited Results for the Thirteen Weeks Ended May 29, 2021 and
the Thirteen Weeks Ended May 30, 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) May 29, 2021 % of Sales May 30, 2020 % of Sales
Net sales $ 284,001 100.0 % $ 215,101 100.0 %
Cost of goods sold 162,998 57.4 % 126,475 58.8 %
Gross profit 121,003 42.6 % 88,626 41.2 %
Operating expenses:
Selling and marketing 30,826 10.9 % 24,510 11.4 %
General and administrative 25,668 9.0 % 28,713 13.3 %
Depreciation and amortization 4,187 1.5 % 4,248 2.0 %
Business transaction costs - - % 47 - %
Total operating expenses 60,681 21.4 % 57,518 26.7 %
Income from operations 60,322 21.2 % 31,108 14.5 %
Other income (expense):
Interest income 1 - % 29 - %
Interest expense (7,985) (2.8) % (8,324) (3.9) %
(Loss) gain in fair value
change of warrant liability (35,833) (12.6) % 31,703 14.7 %
Gain on legal settlement 5,000 1.8 % - - %
Loss on foreign currency
transactions (272) (0.1) % (418) (0.2) %
Other income 70 - % 59 - %
Total other (expense) income (39,019) (13.7) % 23,049 10.7 %
Income before income taxes 21,303 7.5 % 54,157 25.2 %
Income tax expense 15,408 5.4 % 6,045 2.8 %
Net income $ 5,895 2.1 % $ 48,112 22.4 %
Other financial data:
Adjusted EBITDA (1) $ 67,459 23.8 % $ 43,363 20.2 %
(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$284.0 million represented an increase of$68.9 million , or 32.0%, for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 . The increase 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 0.9% 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 endedMay 29, 2021 were negatively affected by higher trade promotions.
Cost of goods sold. Cost of goods sold increased
Gross profit. Gross profit increased$32.4 million , or 36.5%, for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 . Gross profit of$121.0 million , or 42.6% of net sales, for the thirteen weeks endedMay 29, 2021 increased 140 basis points from 41.2% of net sales for the thirteen weeks endedMay 30, 2020 . The increase in gross profit margin was primarily the result of favorable product form and retail channel mix given higher shopper traffic in brick and mortar channels. 27
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Table of Contents
Operating expenses. Operating expenses increased
•Selling and marketing. Selling and marketing expenses increased$6.3 million , or 25.8%, for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 . The increase was primarily related to higher marketing spend that was reinstated following a decline in the prior year period due to the impact of COVID 19. •General and administrative. General and administrative expenses decreased$3.0 million , or 10.6%, for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 . The decrease was primarily attributable to a$3.9 million reduction in costs related to the integration of Quest and a decrease in restructuring charges of$1.2 million in the thirteen weeks endedMay 29, 2021 . These decreases were partially offset by an increase in incentive compensation in the thirteen weeks endedMay 29, 2021 . •Depreciation and amortization. Depreciation and amortization expenses remained approximately flat at$4.2 million for the thirteen weeks endedMay 29, 2021 andMay 30, 2020 .
•Business transaction costs. Business transaction costs were nominal for the
thirteen weeks ended
Interest income. Interest income was nominal for each of the thirteen weeks
ended
Interest expense. Interest expense decreased$0.3 million for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 , primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to$506.5 million as ofMay 29, 2021 from$635.5 million as ofMay 30, 2020 , offset by accelerated deferred financing fee amortization. (Loss) gain in fair value change of warrant liability. A non-cash loss of$35.8 million in fair value change of warrant liability was recorded for the thirteen weeks endedMay 29, 2021 compared to a non-cash gain of$31.7 million for the thirteen weeks endedMay 30, 2020 . The increase in loss relates to changes in the valuation of warrant liabilities primarily driven by changes in stock price and volatility.
Gain on legal settlement. The Company recorded a
Loss on foreign currency transactions. A loss of$0.3 million in foreign currency transactions was recorded for the thirteen weeks endedMay 29, 2021 compared to a foreign currency loss of$0.4 million for the thirteen weeks endedMay 30, 2020 . The change relates to changes in foreign currency rates related to international operations. Income tax expense. Income tax expense increased$9.4 million for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 . The increase in our income tax expense is primarily driven by higher income from operations, partially offset by permanent differences. Net income. Net income was$5.9 million for the thirteen weeks endedMay 29, 2021 , a decrease of$42.2 million compared to net income of$48.1 million for the thirteen weeks endedMay 30, 2020 . The decrease was primarily related to an increase in loss in fair value change of the warrant liability. Adjusted EBITDA. Adjusted EBITDA increased$24.1 million , or 55.6% for the thirteen weeks endedMay 29, 2021 compared to the thirteen weeks endedMay 30, 2020 . For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see "Reconciliation of EBITDA and Adjusted EBITDA" below. 28 --------------------------------------------------------------------------------
Comparison of Unaudited Results for the Thirty-Nine 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:
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
(In thousands) May 29, 2021 % of Sales May 30, 2020 % of Sales
Net sales $ 745,760 100.0 % $ 594,355 100.0 %
Cost of goods sold 440,451 59.1 % 358,129 60.3 %
Gross profit 305,309 40.9 % 236,226 39.7 %
Operating expenses:
Selling and marketing 82,171 11.0 % 69,985 11.8 %
General and administrative 77,645 10.4 % 74,961 12.6 %
Depreciation and
amortization 12,643 1.7 % 10,988 1.8 %
Business transaction costs - - % 26,900 4.5 %
Total operating expenses 172,459 23.1 % 182,834 30.8 %
Income from operations 132,850 17.8 % 53,392 9.0 %
Other income (expense):
Interest income 4 - % 1,493 0.3 %
Interest expense (24,352) (3.3) % (23,882) (4.0) %
(Loss) gain in fair value
change of warrant liability (60,714) (8.1) % 82,655 13.9 %
Gain on legal settlement 5,000 0.7 % - - %
Gain (loss) on foreign
currency transactions 712 0.1 % (596) (0.1) %
Other income 229 - % 104 - %
Total other (expense)
income (79,121) (10.6) % 59,774 10.1 %
Income before income taxes 53,729 7.2 % 113,166 19.0 %
Income tax expense 31,095 4.2 % 8,238 1.4 %
Net income $ 22,634 3.0 % $ 104,928 17.7 %
Other financial data:
Adjusted EBITDA (1) $ 158,800 21.3 % $ 116,889 19.7 %
(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$745.8 million represented an increase of$151.4 million , or 25.5%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 2020 . The increase was primarily attributable to the Quest brand, which increased net sales by 22.8%, 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 1.2% related to the SimplyProtein Sale and the restructuring-related business activities inEurope in fiscal year 2021. Cost of goods sold. Cost of goods sold increased$82.3 million , or 23.0%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 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 recorded in fiscal year 2020. 29 -------------------------------------------------------------------------------- Gross profit. Gross profit increased$69.1 million , or 29.2%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 2020 . Gross profit of$305.3 million , or 40.9% of net sales, for the thirty-nine weeks endedMay 29, 2021 increased 120 basis points from 39.7% of net sales for the thirty-nine weeks endedMay 30, 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. Operating expenses. Operating expenses decreased$10.4 million , or 5.7%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 2020 due to the following: •Selling and marketing. Selling and marketing expenses increased$12.2 million , or 17.4%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 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$2.7 million , or 3.6%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 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$4.0 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 15.1%, for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 2020 . The increase was primarily due to the partial inclusion of amortization expense related to intangible assets recognized as part of the Acquisition of Quest in fiscal year 2020 as compared to fiscal year 2021. •Business transaction costs. Business transaction costs were$26.9 million for the thirty-nine weeks endedMay 30, 2020 and comprised expenses related to the Acquisition of Quest. Interest income. Interest income decreased$1.5 million for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 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$0.5 million for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 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. (Loss) gain in fair value change of warrant liability. A non-cash loss of$60.7 million in fair value change of warrant liability was recorded for the thirty-nine weeks endedMay 29, 2021 compared to a non-cash gain of$82.7 million for the thirty-nine weeks endedMay 30, 2020 . The loss relates to changes in the valuation of warrant liabilities, primarily driven by changes in stock price and volatility.
Gain on legal settlement. The Company recorded a
Gain (loss) on foreign currency transactions. A gain of
Income tax expense. Income tax expense increased
Net income. Net income was
Adjusted EBITDA. Adjusted EBITDA increased$41.9 million , or 35.9% for the thirty-nine weeks endedMay 29, 2021 compared to the thirty-nine weeks endedMay 30, 2020 , driven primarily by the Acquisition of Quest. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see "Reconciliation of EBITDA and Adjusted EBITDA" below. 30 --------------------------------------------------------------------------------
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: business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal 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 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 EBITDA and Adjusted EBITDA to their most directly comparable GAAP measure, which is net income, for the thirteen and thirty-nine weeks endedMay 29, 2021 andMay 30, 2020 : Thirteen Weeks Ended Thirty-Nine Weeks Ended (In thousands) May 29, 2021 May 30, 2020 May
29, 2021
Net income$ 5,895 $ 48,112 $ 22,634 $ 104,928 Interest income (1) (29) (4) (1,493) Interest expense 7,985 8,324 24,352 23,882 Income tax expense 15,408 6,045 31,095 8,238 Depreciation and amortization 4,487 4,488 13,508 11,607 EBITDA 33,774 66,940 91,585 147,162 Business transaction costs - 47 - 26,900 Stock-based compensation expense 2,172 2,150 5,766 5,945 Inventory step-up - - - 7,522 Integration of Quest 244 4,094 2,458 9,435 Restructuring 206 1,386 3,992 1,386 Non-core legal costs - 48 - 603 Loss (gain) in fair value change of warrant liability 35,833 (31,703)
60,714 (82,655) Gain on legal settlement (5,000) - (5,000) - Other (1) 230 401 (715) 591
Adjusted EBITDA
$ 116,889
(1) Other items consist principally of exchange impact of foreign currency transactions and other expenses.
31
--------------------------------------------------------------------------------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$90.2 million in cash and cash equivalents as ofMay 29, 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% or (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 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 ofMay 29, 2021 andAugust 29, 2020 , respectively. AtMay 29, 2021 , the outstanding balance of the Term Facility was$506.5 million . We are not required to make principal payments on the Term Facility over the twelve months following the period endedMay 29, 2021 . The outstanding balance of the Term Facility is due upon its maturity inJuly 2024 . As ofMay 29, 2021 , there were no amounts drawn against the Revolving Credit Facility. 32 --------------------------------------------------------------------------------
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 Foods USA, Inc. , formerly known asAtkins Nutritionals, Inc. ("Simply Good USA ") entered into a Stock and Unit 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 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 . For the thirteen and thirty-nine weeks endedMay 30, 2020 , we incurred no business transaction costs and$26.9 million of business transaction costs, respectively.
Private Warrants to Purchase Common Stock
The Company's private placement warrants to purchase 6,700,000 shares of the common stock remain outstanding, are held byConyers Park Sponsor, LLC , a related party, and remain liability-classified. If all Private Warrants are exercised at the$11.50 exercise price per warrant, our cash would increase by$77.1 million . Cash Flows
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
Thirty-Nine Weeks Ended
May 29, 2021 May 30, 2020
Net cash provided by operating activities $ 91,488 $ 24,100
Net cash provided by (used in) investing activities $ 2,454 $ (984,306)
Net cash (used in) provided by financing activities $ (99,889) $ 805,586
Operating activities. Our net cash provided by operating activities increased
$67.4 million to $91.5 million for the thirty-nine weeks ended May 29, 2021
compared to cash provided by operating activities of $24.1 million for the
thirty-nine weeks ended May 30, 2020 . The increase in cash provided by operating
activities was primarily attributable to higher operating income driven by (i)
the Quest® brand sales volume growth, which increased net sales by 22.8% 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 $7.0 million . These increases were partially offset by $6.9
million of cash payments made for restructuring-related costs, predominately
composed of termination benefits and severance payments, during the thirty-nine
weeks ended May 29, 2021 . Additionally, cash paid for taxes increased $10.6
million for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine
weeks ended May 30, 2020 .
Investing activities. Our net cash provided by investing activities was $2.5
million for the thirty-nine weeks ended May 29, 2021 , which was primarily
related to the $5.8 million of cash proceeds received from the SimplyProtein
Sale, partially offset by purchases of property and equipment of $3.2 million .
The net cash used in investing activities of $984.3 million for the thirty-nine
weeks ended May 30, 2020 was primarily related to the cash paid for the
Acquisition of Quest, net of cash acquired, of $982.1 million .
Financing activities. Our net cash used in financing activities was $99.9
million for the thirty-nine weeks ended May 29, 2021 compared to net cash
provided by financing activities of $805.6 million for the thirty-nine weeks
ended May 30, 2020 . Net cash used in financing activities for the thirty-nine
weeks ended May 29, 2021 primarily consisted of $100.0 million in principal
payments on the Term Facility. For the thirty-nine weeks ended May 30, 2020 , net
cash provided by financing activities included gross proceeds of $352.5 million
from the Offering partially offset by issuance costs of $3.3 million , proceeds
of $460.0 million from the Term Facility
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borrowing related to the Incremental Facility Amendment partially offset by
issuance costs of $8.2 million , and a $21.0 million principal payment on the
Term Facility.
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 ofMay 29, 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 on Form 10-K/A. 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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