Simply Good Foods Earnings 2020-02-29
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 29, 2020
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________ | |
Commission File Number: 001-38115
___________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices and zip code)
(303 ) 633-2840
(Registrant’s telephone number, including area code)
___________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of April 3, 2020, there were 95,378,514 shares of common stock, par value $0.01 per share, issued and outstanding.
THE SIMPLY GOOD FOODS COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2020
INDEX
Page | ||
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
The Simply Good Foods Company and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, dollars in thousands, except share data)
See accompanying notes to the unaudited condensed consolidated financial statements.
February 29, 2020 | August 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Inventories | ||||||||
Prepaid expenses | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Long-term assets: | ||||||||
Property and equipment, net | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Other long-term assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued interest | ||||||||
Accrued expenses and other current liabilities | ||||||||
Current maturities of long-term debt | ||||||||
Total current liabilities | ||||||||
Long-term liabilities: | ||||||||
Long-term debt, less current maturities | ||||||||
Deferred income taxes | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
See commitments and contingencies (Note 10) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued | ||||||||
Common stock, $0.01 par value, 600,000,000 shares authorized, 95,476,537 and 81,973,284 issued at February 29, 2020 and August 31, 2019, respectively | ||||||||
Treasury stock, 98,234 and 98,234 shares at cost at February 29, 2020 and August 31, 2019, respectively | ( | ) | ( | ) | ||||
Additional paid-in-capital | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | |||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
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The Simply Good Foods Company and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited, dollars in thousands, except share and per share data)
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
February 29, 2020 | February 23, 2019 | February 29, 2020 | February 23, 2019 | |||||||||||||
Net sales | $ | $ | $ | $ | ||||||||||||
Cost of goods sold | ||||||||||||||||
Gross profit | ||||||||||||||||
Operating expenses: | ||||||||||||||||
Selling and marketing | ||||||||||||||||
General and administrative | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Business transaction costs | ||||||||||||||||
Loss in fair value change of contingent consideration - TRA liability | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Income from operations | ||||||||||||||||
Other (expense) income: | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Gain on settlement of TRA liability | ||||||||||||||||
Gain (loss) on foreign currency transactions | ( | ) | ( | ) | ( | ) | ||||||||||
Other income | ||||||||||||||||
Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income before income taxes | ||||||||||||||||
Income tax expense | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Comprehensive income | $ | $ | $ | $ | ||||||||||||
Earnings per share from net income: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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The Simply Good Foods Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
Twenty-Six Weeks Ended | ||||||||
February 29, 2020 | February 23, 2019 | |||||||
Operating activities | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Amortization of deferred financing costs and debt discount | ||||||||
Stock compensation expense | ||||||||
Loss on fair value change of contingent consideration - TRA liability | ||||||||
Gain on settlement of TRA liability | ( | ) | ||||||
Unrealized (gain) loss on foreign currency transactions | ||||||||
Deferred income taxes | ||||||||
Loss on disposal of property and equipment | ||||||||
Amortization of operating lease right-of-use asset | ||||||||
Other | ||||||||
Changes in operating assets and liabilities, net of acquisition: | ||||||||
Accounts receivable, net | ( | ) | ( | ) | ||||
Inventories | ( | ) | ||||||
Prepaid expenses | ( | ) | ( | ) | ||||
Other current assets | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ||||||
Accrued interest | ||||||||
Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
Other assets and liabilities | ( | ) | ( | ) | ||||
Net cash (used in) provided by operating activities | ( | ) | ||||||
Investing activities | ||||||||
Purchases of property and equipment | ( | ) | ( | ) | ||||
Issuance of note receivable | ( | ) | ||||||
Acquisition of business, net of cash acquired | ( | ) | ||||||
Net cash (used in) investing activities | ( | ) | ( | ) | ||||
Financing activities | ||||||||
Proceeds from option exercises | ||||||||
Tax payments related to issuance of restricted stock units | ( | ) | ( | ) | ||||
Payments on finance lease obligations | ( | ) | ||||||
Cash received from warrant exercises | ||||||||
Repurchase of common stock | ( | ) | ||||||
Settlement of TRA liability | ( | ) | ||||||
Principal payments of long-term debt | ( | ) | ( | ) | ||||
Proceeds from issuance of common stock | ||||||||
Equity issuance costs | ( | ) | ||||||
Proceeds from issuance of long term debt | ||||||||
Deferred financing costs | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Cash and cash equivalents | ||||||||
Net (decrease) increase in cash | ( | ) | ||||||
Effect of exchange rate on cash | ( | ) | ( | ) | ||||
Cash at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
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Twenty-Six Weeks Ended | ||||||||
February 29, 2020 | February 23, 2019 | |||||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid for interest | $ | $ | ||||||
Cash paid for taxes | $ | $ | ||||||
Non-cash investing and financing transaction | ||||||||
Operating lease right-of-use assets recognized at ASU No 2016-02 transition | $ | $ | ||||||
Finance lease right-of-use assets recognized at ASU No 2016-02 transition | $ | $ | ||||||
Operating lease right-of-use assets recognized after ASU No 2016-02 transition | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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The Simply Good Foods Company and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited, dollars in thousands, except share data)
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance at August 31, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | ||||||||||||||||||||||||
Public equity offering | — | — | — | — | ||||||||||||||||||||||||||
Shares issued upon vesting of Restricted Stock Units | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Exercise of options to purchase common stock | — | — | — | — | ||||||||||||||||||||||||||
Balance at November 30, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Shares issued upon vesting of Restricted Stock Units | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Exercise of options to purchase common stock | — | — | — | — | ||||||||||||||||||||||||||
Balance at February 29, 2020 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance at August 25, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | ||||||||||||||||||||||||
Shares issued upon vesting of Restricted Stock Units | — | — | ( | ) | — | — | ||||||||||||||||||||||||
Exercise of options to purchase common stock | — | — | — | — | ||||||||||||||||||||||||||
Warrant Conversion | — | — | — | — | ||||||||||||||||||||||||||
Balance at November 24, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Repurchase of common stock | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Shares issued upon vesting of Restricted Stock Units | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||
Exercise of options to purchase common stock | — | — | — | — | — | |||||||||||||||||||||||||
Balance at February 23, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited, dollars in thousands, except for share and per share data)
1. Nature of Operations and Principles of Consolidation
The Simply Good Foods Company (“Simply Good Foods”) was formed by Conyers Park Acquisition Corp. (“Conyers Park”) on March 30, 2017. On April 10, 2017, Conyers Park and NCP-ATK Holdings, Inc., among others, entered into a definitive merger agreement (the “Merger Agreement”), pursuant to which on July 7, 2017, Conyers Park merged into Simply Good Foods and as a result acquired the companies which conducted the Atkins® brand business (the “Acquisition of Atkins”). The common stock of Simply Good Foods is listed on the Nasdaq Capital Market under the symbol “SMPL.”
On August 21, 2019, our wholly owned subsidiary Atkins Nutritionals, Inc. (“Atkins”) entered into a Stock and Unit Purchase Agreement (the "Purchase Agreement") to acquire Quest Nutrition, LLC ("Quest"), a healthy lifestyle food company (the "Acquisition of Quest"). On November 7, 2019, pursuant to the Purchase Agreement, Atkins completed the Acquisition of Quest, via Atkins’ direct or indirect acquisition of 100% of the equity interests of Voyage Holdings, LLC (“Voyage Holdings”), and VMG Quest Blocker, Inc. (“Voyage Blocker” and, together with Voyage Holdings, the “Target Companies”) for a cash purchase price of approximately $1.0 billion (subject to customary adjustments for the Target Companies’ levels of cash, indebtedness, net working capital and transaction expenses as of the closing date).
The unaudited condensed consolidated financial statements include the accounts of Simply Good Foods and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to Simply Good Foods and its subsidiaries.
The Company maintains its accounting records on a 52/53-week fiscal year, ending on the last Saturday in August of each year.
Description of Business
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. The Company’s nutritious snacking platform consists of 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; 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; and SimplyProtein® for consumers looking for protein-enhanced snacks made with fewer, simple ingredients. We distribute our products in major retail channels, primarily in North 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 and broader health-and-wellness food space.
Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform to the current year presentation including (i) Selling and Marketing expenses, which have been combined as Selling and marketing on the Consolidated Statements of Operations and Comprehensive Income and (ii) other operating expense, which has been combined with General and administrative expense on the Consolidated Statements of Operations and Comprehensive Income.
Unaudited Interim Condensed Consolidated Financial Statements
The interim condensed consolidated financial statements and related notes of the Company and its subsidiaries are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The unaudited interim condensed consolidated financial statements reflect all adjustments and disclosures which are, in our opinion, necessary for a fair presentation of the results of operations, financial position and cash flows for the indicated periods. All such adjustments were of a normal and recurring nature unless otherwise disclosed. The results reported in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be reported for the entire fiscal year and should be read in conjunction with our consolidated financial statements for the fiscal year ended August 31, 2019, included in our Annual Report on Form 10-K (“Annual Report”), filed with the SEC on October 30, 2019. The year-end balance sheet data was derived from the audited financial statements and, in accordance with the instructions to Form 10-Q, certain information and footnote disclosures required by GAAP have been condensed or omitted.
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2. Summary of Significant Accounting Policies
Refer to Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in our Annual Report for a description of significant accounting policies.
Change in Accounting Principle
During the fourth quarter ended August 31, 2019, the Company changed its accounting principle related to the presentation of third party delivery costs associated with shipping and handling activities previously included as operating expenses in Distribution in the Consolidated Statements of Operations and Comprehensive Income. The Company now presents these expenses within Cost of goods sold in the Consolidated Statements of Operations and Comprehensive Income. In connection with the change in accounting principle, the Company also changed its definition of shipping and handling costs to include costs paid to third-party warehouse operators associated with delivering product to a customer, previously included in General and administrative, and Depreciation and amortization of the assets at the third-party warehouse, previously included in Depreciation and amortization. Under the previous definition of shipping and handling costs, the Company only included delivery costs in Distribution. The effect of the adjustment is as follows:
Thirteen Weeks Ended February 23, 2019 | As Reported | Change in Accounting Principle and Presentation | Other Operating Expense | As Adjusted | ||||||||||
Cost of goods sold | $ | $ | ||||||||||||
Distribution | $ | ( | ) | $ | ||||||||||
General and administrative | $ | ( | ) | $ | ||||||||||
Depreciation and amortization | $ | ( | ) | $ | ||||||||||
Twenty-Six Weeks Ended February 23, 2019 | As Reported | Change in Accounting Principle and Presentation | Other Operating Expense | As Adjusted | ||||||||||
Cost of goods sold | $ | $ | ||||||||||||
Distribution | $ | ( | ) | $ | ||||||||||
General and administrative | $ | ( | ) | $ | ||||||||||
Depreciation and amortization | $ | ( | ) | $ | ||||||||||
Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, The Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which modifies disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The amendments of this ASU should be applied on a retrospective basis to all periods presented. The Company is currently evaluating the effects adoption of this guidance will have on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements on fair value measurements of Accounting Standards Codification (“ASC”) 820. This ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted including in any interim period for which financial statements have not yet been issued. Entities are permitted to early adopt the eliminated or modified disclosure requirements and delay the adoption new disclosure requirements until their effective date. The Company is currently evaluating the effects adoption of this guidance will have on the consolidated financial statements and does not anticipate adoption of this ASU will be material to its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments of this ASU should be applied on a prospective basis. The Company is currently evaluating the effects adoption of this guidance will have on the consolidated financial statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. In July 2018, the
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FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. The amendments provide the option for the ASU to be applied at the beginning of the period adopted using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.
On September 1, 2019, we adopted ASU No. 2016-02, Leases (“Topic 842”) using the alternative transition method under ASU No. 2018-11, which permits application of the new guidance at the beginning of the period of adoption, with comparative periods continuing to be reporting under Topic 840. Upon adoption of the new standard as of the first day of fiscal 2020, the Company recorded the following within the Condensed Consolidated Balance Sheet: operating lease right of use assets of $5.1 million included within Other long-term assets, current operating lease liabilities of $2.0 million included within Accrued expenses and other current liabilities, long-term operating lease liabilities of $3.8 million included within Other long-term liabilities, finance lease right of use assets of $1.2 million included within Property and equipment, net, current finance lease liabilities of $0.2 million included within Current maturities of long term debt, and long-term finance lease liabilities of $1.0 million included within Long-term debt less current maturities. Following the Acquisition of Quest, the Company recorded the following amounts in the Condensed Consolidated Balance Sheet as of the closing date: operating lease right of use assets of $21.1 million included within Other long-term assets, current operating lease liabilities of $2.0 million included within Accrued expenses and other current liabilities, and long-term operating lease liabilities of $18.9 million included within Other long-term liabilities. The adoption of these ASUs did not result in a cumulative-effect adjustment to the opening balance of retained earnings.
The guidance provides a number of optional practical expedients in adoption. We elected to adopt the package of practical expedients permitted under the transition guidance within the standard, which among other things, permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight practical expedient or the practical expedient pertaining to land easements, the latter not being applicable to us. In addition, we elected an accounting policy to include both lease and non-lease components as a single component for all asset classes where we are the lessee. For additional information on our leases, see Note 9.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The Company adopted this ASU as of the first day of fiscal 2020. The adoption of this ASU did not have a material effect on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted this ASU as of the first day of fiscal 2020. The adoption of this ASU did not have a material effect on the consolidated financial statements.
3. Business Combination
On August 21, 2019, Atkins entered into the Purchase Agreement with the Target Companies, VMG Voyage Holdings, LLC, VMG Tax-Exempt II, L.P., Voyage Employee Holdings, LLC, and other sellers defined in the Purchase Agreement. On November 7, 2019, pursuant to the Purchase Agreement, Atkins completed the Acquisition of Quest for a cash purchase price at closing of $988.9 million subject to customary post closing adjustments.
Atkins acquired Quest as a part of our vision 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. Quest is a healthy lifestyle food company offering a variety of bars, cookies, chips, ready-to-drink shakes and pizzas that compete in many of the attractive, fast growing sub-segments within the nutritional snacking category. Quest has a loyal following and strong appeal among consumers 18-44 years.
The Acquisition of Quest was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”), whereby the results of operations, including the revenues and earnings of Quest, are included in the financial statements from the date of acquisition. ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements, as of the closing date. ASC 805 establishes a measurement period to provide the Company with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date.
The Acquisition of Quest was funded by the Company 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. A total of $26.9 million is included within the Business transaction costs line item of the Consolidated Statements of Operations and Comprehensive Income for twenty-six weeks ended February 29, 2020 including $14.5 million of transaction advisory fees related to the Acquisition of Quest, $3.2 million of
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banker commitment fees, $6.1 million of non-deferrable debt issuance costs related to the incremental term loan, and $3.1 million of other costs including legal, due diligence, and accounting fees.
Included in the transaction advisory fees paid for the Acquisition of Quest is $12.0 million paid to Centerview Partners LLC, an investment banking firm that served as the lead financial advisor to the Company for this transaction. Three members of the Company’s Board of Directors, Messrs. Kilts, West, and Ratzan, have business relationships with certain partners of Centerview Partners LLC (including relating to Centerview Capital Consumer, a private equity firm and affiliate of Conyers Park Sponsor LLC), but they are not themselves partners, executives or employees of Centerview Partners LLC and Centerview Partners LLC is not a related party of the Company pursuant to applicable rules and policies. The advisory fee paid to Centerview Partners LLC represents approximately 1.2% of the total cash purchase price paid by the Company on the closing date of the Acquisition of Quest. All transaction advisory fees relating to the Acquisition of Quest were approved by the Company’s Audit Committee.
The following table sets forth the preliminary purchase price of the Acquisition of Quest to the estimated fair value of the net assets acquired at the date of acquisition, subject to finalization per the terms of the Purchase Agreement. The preliminary purchase price allocation may be adjusted as a result of the finalization of our purchase price allocation procedures related to the assets acquired and liabilities assumed. The preliminary November 7, 2019 fair value is as follows:
(In thousands) | ||||
Assets acquired: | ||||
Cash and cash equivalents | $ | |||
Accounts receivable, net | ||||
Inventories | ||||
Prepaid assets | ||||
Other current assets | ||||
Property and equipment, net(1) | ||||
Intangible assets, net(2) | ||||
Other long-term assets | ||||
Liabilities assumed: | ||||
Accounts payable | ||||
Other current liabilities | ||||
Deferred income taxes(3) | ||||
Other long-term liabilities | ||||
Total identifiable net assets | ||||
Goodwill(4) | ||||
Total assets acquired and liabilities assumed | $ | |||
(1) Property and equipment, net primarily consists of leasehold improvements for the Quest headquarters of $6.9 million, furniture and fixtures of $2.2 million, and equipment of $1.3 million. The Quest headquarters lease ends in April 2029. The useful lives of the leasehold improvements, furniture and fixtures, and equipment is consistent with the Company's accounting policies.
(2) Intangible assets were recorded at fair value consistent with ASC 820 as a result of the Acquisition of Quest. Intangible assets consist of $730.0 million of indefinite brands and trademarks, $115.0 million of amortizable customer relationships, and $3.4 million of internally developed software. The useful lives of the intangible assets are disclosed in Note 5 of the consolidated financial statements. The fair value measurement of the assets and liabilities was based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows and market comparable data and companies.
(3) As a result of the increase in the fair value of the identifiable intangible asset, the deferred income tax liability was increased by $14.2 million.
(4) Goodwill was recorded at fair value consistent with ASC 820 as a result of the Acquisition of Quest. Amounts recorded for goodwill created in an acquisition structured as a stock purchase for tax are generally not expected to be deductible for tax purposes. Amounts recorded for goodwill resulting in a tax basis step-up are generally expected to be deductible for tax purposes. Tax deductible Goodwill is estimated to be $79.7 million. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
The purchase price is pending finalization per the terms of the Purchase Agreement. The final determination of the fair value of the assets acquired and liabilities assumed is expected to be completed as soon as practicable after completion of the Acquisition of Quest, including a period of time to finalize working capital adjustments and tax attributes. During the thirteen weeks ended February 29, 2020, a fair value measurement period adjustment of $3.3 million was recorded primarily related to accounts receivable, net. The final fair value determination of the assets acquired and liabilities assumed will be completed prior to one year from the transaction completion, consistent with ASC 805.
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The results of Quest's operations have been included in the Simply Good Foods' Consolidated Financial Statements since November 7, 2019, the date of acquisition. The following table provides net sales from the acquired Quest business included in the Company's results:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||
February 29, 2020 | February 29, 2020 | |||||||
Net sales | $ | $ | ||||||
Unaudited Pro Forma Financial Information
Pro forma financial information is not intended to represent or be indicative of the actual results of operations of the combined business that would have been reported had the Acquisition of Quest been completed at the beginning of the fiscal year 2019, nor is it representative of future operating results of the Company.
This unaudited pro forma combined financial information is prepared based on Article 11 of Regulation S-X period end guidance. The Company and the legacy Quest entity have different fiscal year ends, with Simply Good Foods’ fiscal year being the last Saturday of August while the legacy Quest business fiscal year end was December 31. Because the year ends differ by more than 93 days, Quest's financial information is required to be adjusted to a period within 93 days of Simply Good Foods’ fiscal period end. For the purposes of preparing the unaudited pro forma combined financial information for the thirteen weeks ended February 23, 2019, Quest’s unaudited consolidated statement of operations for the three months ended December 31, 2018 was derived by deducting the historical unaudited consolidated statement of operations for the nine months ended September 30, 2018, from the unaudited consolidated statement of operations for the fiscal year ended December 31, 2018. For the purposes of preparing the unaudited pro forma combined financial information for the twenty-six weeks ended February 23, 2019, Quest’s unaudited consolidated statement of operations for the six months ended December 31, 2018 was derived by deducting the historical unaudited consolidated statement of operations for the six months ended June 30, 2018, from the unaudited consolidated statement of operations for the fiscal year ended December 31, 2018.
In addition to the above period end adjustments, the pro forma results include certain adjustments, as required under ASC 805, which are different than Article 11 pro forma requirements. ASC 805 requires pro forma adjustments to reflect the effects of fair value adjustments, transaction costs, capital structure changes, the tax effects of such adjustments, and also requires nonrecurring adjustments be prepared as though the Acquisition of Quest had occurred as of the beginning of the earliest period presented. The adjustments to the historical Quest financial results include the exclusion of legacy derivatives and interest expense that were settled in the execution of the Acquisition of Quest. Additional adjustments include non recurring transaction costs and the portion of the inventory fair value adjustment recorded by the Company during the thirteen weeks ended and twenty-six weeks ended February 29, 2020. Both periods were further adjusted to reflect a full period of (a) fair value adjustments related to inventory and incremental customer relationship amortization, (b) interest expense with the higher principal and interest rates associated with the Company's new term loan debt incurred to finance, in part, the Acquisition of Quest, and (c) the effects of the adjustments on income taxes and net income.
The following unaudited pro forma combined financial information presents combined results of the Company and Quest as if the Acquisition of Quest has occurred at the beginning of fiscal 2019:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
February 29, 2020 | February 23, 2019 | February 29, 2020 | February 23, 2019 | |||||||||||||
Revenue | $ | $ | $ | $ | ||||||||||||
Gross profit | $ | $ | $ | $ | ||||||||||||
Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
4. Revenue Recognition
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The singular performance obligation of our customer contracts is determined by each individual purchase order and the products ordered, with revenue being recognized at a point-in-time when the obligation under the terms of the agreement is satisfied and product control is transferred to the customer. Specifically, control transfers to our customers when the product is delivered to or picked up by our customers based on applicable shipping terms. The performance obligations of our customer contracts are generally satisfied within 30 days.
Revenue is measured as the amount of consideration we expect to receive in exchange for fulfilled product orders, including estimates of variable consideration. The most common forms of variable consideration include trade programs, consumer incentives, coupon redemptions, allowances for unsaleable products, 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
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similar trade promotional activities, as well as the Company’s best estimate of current activity. We review these estimates regularly and make revisions as necessary. 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. Uncertainties 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 are recognized in the period the adjustments are identified and have historically been insignificant. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.
We provide standard assurance type warranties that our products will comply with all agreed-upon specifications. No services beyond an assurance type warranty are provided to our customers. While customers generally have a right to return defective or non-conforming products, past experience has demonstrated that product returns have been immaterial. Customer remedies for defective or non-conforming products may include a refund or exchange. As a result, the right of return is estimated and recorded as a reduction in revenue, if necessary.
Our customer contracts identify product quantity, price and payment terms. Payment terms are granted consistent with industry standards. Although some payment terms may be more extended, the majority of our payment terms are less than 60 days. As a result, we do not adjust our revenues for the effects of a significant financing component. Amounts billed and due from our customers are classified as accounts receivable on the condensed consolidated balance sheets.
The Company utilizes third-party contract manufacturers for the manufacture of its products. The Company has evaluated whether the Company is the principal or agent in these relationships. The Company has determined that it is the principal in all cases, as it maintains the responsibility for fulfillment, risk of loss and establishes the price.
The Company has elected the following practical expedients in accordance with ASC Topic 606:
• | Shipping and handling costs—We have elected to account for shipping and handling costs incurred to deliver products to customers as fulfillment activities, rather than a promised service. As such, fulfillment costs are included in Cost of goods sold in our Condensed Consolidated Statements of Operations and Comprehensive Income. |
• | Costs of obtaining a contract—We have elected to expense costs of obtaining a contract because the amortization period would be less than one year. |
Revenues from transactions with external customers for each of Simply Good Foods’ products would be impracticable to disclose and management does not view its business by product line. The following table presents our revenue disaggregated by geographic area and brand.
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
(In thousands) | February 29, 2020 | February 23, 2019 | February 29, 2020 | February 23, 2019 | ||||||||||||
Net sales | ||||||||||||||||
North America | $ | $ | $ | $ | ||||||||||||
International | ||||||||||||||||
Total Atkins | ||||||||||||||||
Quest(1) | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
(1) Quest net sales are primarily in North America.
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5. Goodwill and Intangibles
Changes to goodwill during the twenty-six weeks ended February 29, 2020 were as follows:
Total | ||||
Balance as of August 31, 2019 | $ | |||
Acquisition of business | ||||
Balance as of February 29, 2020 | $ | |||
The change in the Company's Goodwill from August 31, 2019 to February 29, 2020 is the result of the acquisition method of accounting related to the Acquisition of Quest, as described in Note 3. There were no impairment charges related to goodwill during this period or since the inception of the Company.
Intangible assets, net in our Condensed Consolidated Balance Sheets consist of the following:
February 29, 2020 | ||||||||||||||||
(In thousands) | Useful life | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||
Intangible assets with indefinite life: | ||||||||||||||||
Brands and trademarks | Indefinite life | $ | $ | — | $ | |||||||||||
Intangible assets with finite lives: | ||||||||||||||||
Customer relationships | ||||||||||||||||
Proprietary recipes and formulas | ||||||||||||||||
Licensing agreements | ||||||||||||||||
Software and website development costs | - | |||||||||||||||
Intangible assets in progress | - | |||||||||||||||
$ | $ | |||||||||||||||