Simply Good Foods Earnings 2019-05-25

ATK 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 smpl_q3x2019.htm 10-Q Document

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 May 25, 2019
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

___________________________________________________________________________________________________________

The Simply Good Foods Company

(Exact name of registrant as specified in its charter)

___________________________________________________________________________________________________________



Delaware		82-1038121
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1225 17th Street, Suite 1000

Denver, CO 80202

(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
Common Stock, par value $0.01 per share	SMPL	Nasdaq Capital Market

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.



Large accelerated filer	☐	Accelerated filer	ý
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	ý

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. ý

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 June 21, 2019, there were 81,830,306 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 MAY 25, 2019

INDEX

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)



	May 25, 2019			August 25, 2018
Assets
Current assets:
Cash and cash equivalents	$	247,618		$	111,971
Accounts receivable, net	42,809			36,622
Inventories	41,574			30,001
Prepaid expenses	3,318			2,069
Other current assets	3,870			5,077
Total current assets	339,189			185,740

Long-term assets:
Property and equipment, net	2,460			2,565
Intangible assets, net	307,765			312,643
Goodwill	471,427			471,427
Other long-term assets	3,768			2,230
Total assets	$	1,124,609		$	974,605

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	17,326		$	11,158
Accrued interest	1,478			582
Accrued expenses and other current liabilities	19,841			15,875
Current portion of TRA liability	—			2,320
Current maturities of long-term debt	655			648
Total current liabilities	39,300			30,583

Long-term liabilities:
Long-term debt, less current maturities	190,429			190,935
Long-term portion of TRA liability	—			25,148
Deferred income taxes	64,301			54,475
Other long-term liabilities	593			863
Total liabilities	294,623			302,004
See commitments and contingencies (Note 8)

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, 81,928,540 and 70,605,675 issued at May 25, 2019 and August 25, 2018, respectively	819			706
Treasury stock, 75,989 and 0 shares at cost at May 25, 2019 and August 25, 2018, respectively	(1,664		)	—
Additional paid-in-capital	732,181			614,399
Retained earnings	99,739			58,294
Accumulated other comprehensive loss	(1,089		)	(798)
Total stockholders’ equity	829,986			672,601
Total liabilities and stockholders’ equity	$	1,124,609		$	974,605

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 Operations and Comprehensive Income

(Unaudited, dollars in thousands, except share and per share data)



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	May 25, 2019			May 26, 2018			May 25, 2019			May 26, 2018
Net sales	$	139,468		$	107,233		$	384,199		$	323,167
Cost of goods sold	74,204			55,949			202,190			168,869
Gross profit	65,264			51,284			182,009			154,298

Operating expenses:
Distribution	6,246			4,656			17,327			14,864
Selling	2,802			4,972			9,191			13,850
Marketing	14,748			10,999			38,407			30,905
General and administrative	18,271			14,158			47,994			38,948
Depreciation and amortization	1,929			1,911			5,754			5,793
Business transaction costs	758			35			2,087			1,912
Loss (gain) in fair value change of contingent consideration - TRA liability	—			614			533			(2,412		)
Other expense	—			137			22			567
Total operating expenses	44,754			37,482			121,315			104,427

Income from operations	20,510			13,802			60,694			49,871

Other income (expense):
Interest income	1,066			—			2,731			—
Interest expense	(3,428		)	(3,057		)	(10,033		)	(9,169		)
Gain on settlement of TRA liability	—			—			1,534			—
(Loss) gain on foreign currency transactions	(153		)	(837		)	(421		)	119
Other income	55			77			176			475
Total other expense	(2,460		)	(3,817		)	(6,013		)	(8,575		)

Income before income taxes	18,050			9,985			54,681			41,296
Income tax expense (benefit)	4,584			2,848			13,236			(17,453		)
Net income	$	13,466		$	7,137		$	41,445		$	58,749

Other comprehensive income:
Foreign currency translation adjustments	(254		)	299			(291		)	(501		)
Comprehensive income	$	13,212		$	7,436		$	41,154		$	58,248

Earnings per share from net income:
Basic	$	0.16		$	0.10		$	0.52		$	0.83
Diluted	$	0.16		$	0.10		$	0.49		$	0.81
Weighted average shares outstanding:
Basic	81,898,276			70,582,573			80,362,978			70,578,687
Diluted	85,962,151			73,466,285			84,695,703			72,907,141

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)



	Thirty-Nine Weeks Ended
	May 25, 2019			May 26, 2018
Operating activities
Net income	$	41,445		$	58,749
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,754			5,793
Amortization of deferred financing costs and debt discount	1,001			977
Stock compensation expense	3,922			2,981
Loss (gain) on fair value change of contingent consideration - TRA liability	533			(2,412		)
Gain on settlement of TRA liability	(1,534		)	—
Unrealized loss (gain) on foreign currency transactions	421			119
Deferred income taxes	9,841			(20,876		)
Loss on disposal of property and equipment	6			77
Changes in operating assets and liabilities:
Accounts receivable, net	(6,388		)	(4,812		)
Inventories	(11,700		)	4,003
Prepaid expenses	(1,258		)	(1,296		)
Other current assets	(253		)	(2,334		)
Accounts payable	6,284			(4,676		)
Accrued interest	896			(34		)
Accrued expenses and other current liabilities	3,698			203
Other	(39		)	(239		)
Net cash provided by operating activities	52,629			36,223

Investing activities
Purchases of property and equipment	(777		)	(1,347		)
Acquisition of business, net of cash acquired	—			(1,757		)
Net cash used in investing activities	(777		)	(3,104		)

Financing activities
Proceeds from option exercises	518			—
Tax payments related to issuance of restricted stock units	(9		)	—
Cash received from warrant exercises	113,464			231
Repurchase of common stock	(1,664		)	—
Settlement of TRA liability	(26,468		)	—
Deferred financing costs	—			(319		)
Principal payments of long-term debt	(1,500		)	(1,000		)
Net cash provided by (used in) financing activities	84,341			(1,088		)

Cash and cash equivalents
Net increase in cash	136,193			32,031
Effect of exchange rate on cash	(546		)	(171		)
Cash at beginning of period	111,971			56,501
Cash and cash equivalents at end of period	$	247,618		$	88,361

Supplemental disclosures of cash flow information
Cash paid for interest	$	8,136		$	8,226
Cash paid for taxes	$	3,759		$	2,098

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			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total
Balance at August 25, 2018	70,605,675	$	706	—	$	—		$	614,399		$	58,294	$	(798	)	$	672,601
Net income	—	—		—	—			—			15,257		—			15,257
Stock-based compensation	—	—		—	—			1,061			—		—			1,061
Foreign currency translation adjustments	—	—		—	—			—			—		142			142
Shares issued upon vesting of Restricted Stock Units	67,500	1		—	—			(1		)	—		—			—
Exercise of options to purchase common stock	4,444	—		—	—			53			—		—			53
Warrant conversion	11,200,299	112		—	—			113,352			—		—			113,464
Balance at November 24, 2018	81,877,918	$	819	—	$	—		$	728,864		$	73,551	$	(656	)	$	802,578
Net income	—	—		—	—			—			12,722		—			12,722
Stock-based compensation	—	—		—	—			1,417			—		—			1,417
Repurchase of common stock	—	—		6,729	(127		)	—			—		—			(127		)
Foreign currency translation adjustments	—	—		—	—			—			—		(179		)	(179		)
Shares issued upon vesting of Restricted Stock Units	505	—		—	—			(5		)	—		—			(5		)
Exercise of options to purchase common stock	36,790	—		—	—			308			—		—			308
Balance at February 23, 2019	81,915,213	$	819	6,729	$	(127	)	$	730,584		$	86,273	$	(835	)	$	816,714
Net income	—	—		—	—			—			13,466		—			13,466
Stock-based compensation	—	—		—	—			1,444			—		—			1,444
Repurchase of common stock	—	—		69,260	(1,537		)	—			—		—			(1,537		)
Foreign currency translation adjustments	—	—		—	—			—			—		(254		)	(254		)
Shares issued upon vesting of Restricted Stock Units	210	—		—	—			(4		)	—		—			(4		)
Exercise of options to purchase common stock	13,117	—		—	—			157			—					157
Balance at May 25, 2019	81,928,540	$	819	75,989	$	(1,664	)	$	732,181		$	99,739	$	(1,089	)	$	829,986



	Common Stock			Treasury Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount		Shares	Amount		Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
Balance at August 26, 2017	70,562,477	$	706	—	$	—	$	610,138	$	(12,161	)	$	19		$	598,702
Net Income	—	—		—	—		—		10,218			—			10,218
Stock compensation	—	—		—	—		1,068		—			—			1,068
Foreign currency translation adjustments	—	—		—	—		—		—			(699		)	(699		)
Warrant Conversion	20,096	—		—	—		231		—			—			231
Balance at November 25, 2017	70,582,573	$	706	—	$	—	$	611,437	$	(1,943	)	$	(680	)	$	609,520
Net Income	—	—		—	—		—		41,394			—			41,394
Stock compensation	—	—		—	—		899		—			—			899
Foreign currency translation adjustments	—	—		—	—		—		—			(101		)	(101		)
Balance at February 24, 2018	70,582,573	$	706	—	$	—	$	612,336	$	39,451		$	(781	)	$	651,712
Net Income	—	—		—	—		—		7,137			—			7,137
Stock compensation	—	—		—	—		1,014		—			—			1,014
Foreign currency translation adjustments	—	—		—	—		—		—			299			299
Balance at May 26, 2018	70,582,573	$	706	—	$	—	$	613,350	$	46,588		$	(482	)	$	660,162

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

Conyers Park Acquisition Corp. (“Conyers Park”) was formed on April 20, 2016, as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.

The Simply Good Foods Company (“Simply Good Foods”) was formed by Conyers Park on March 30, 2017. On April 10, 2017, Conyers Park and NCP-ATK Holdings, Inc. (“Atkins”) entered into a definitive merger agreement (the “Merger Agreement”), pursuant to which on July 7, 2017, Conyers Park merged into Simply Good Foods, which also acquired Atkins pursuant to the Merger Agreement. As a result, both entities became wholly-owned subsidiaries of Simply Good Foods (the “Business Combination”). The Business Combination resulted in Conyers Park controlling the Board of Directors of the combined entity. The common stock of Simply Good Foods is listed on the Nasdaq Capital Market under the symbol “SMPL.”

The consolidated financial statements include the accounts of Simply Good Foods and its wholly-owned subsidiaries. All material 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.

Description of Business

Simply Good Foods operates in the healthy snacking category. The Atkins® brand focuses on an approach to eating that advocates reduced levels of refined carbohydrates and refined sugars, and encourages the consumption of lean protein, fiber, fruits, vegetables, and good fats. The Company sells a variety of nutrition bars, Ready to Drink (“RTD”) shakes, snacks and confectionery products designed around the nutrition principles of the Atkins eating approach. In addition to snacking products, the Company has granted a license for frozen meals sold in the United States.

Seasonality

The Company has experienced in the past, and expects to continue to experience, seasonal fluctuations in sales as a result of consumer spending patterns. Historically, sales have been greatest in the second fiscal quarter as the Company sells product to retail locations, which sell to consumers in the post-holiday resolution season. The Company has also historically experienced some seasonality in the summer and back-to-school shopping seasons each year. The period of the lowest sales has historically been in the fourth fiscal quarter. The Company believes these consumer spending patterns are driven primarily by the predisposition of consumers to adjust their approach to nutrition at certain times of the year as well as the timing of the Company’s advertising linked with key customer promotion windows.

Unaudited Interim Condensed Consolidated Financial Statements

The interim condensed consolidated financial statements and related notes of the Company and its subsidiaries are unaudited. The 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. 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 year and should be read in conjunction with our consolidated financial statements for the fiscal year ended August 25, 2018, included in our Annual Report on Form 10-K (“Annual Report”), filed with the SEC on October 24, 2018. 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.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606). The objective of ASU No. 2014-09 is to outline a new, single comprehensive model to use in accounting for revenue arising from contracts with customers. The new revenue recognition model provides a five-step analysis for determining when and how revenue is recognized, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company adopted the requirements of ASC Topic 606 and all related requirements using the modified retrospective method in the first quarter of fiscal 2019. Upon completing our assessment of ASC Topic 606, we concluded that no adjustments were required to the opening balance of retained earnings at the date of adoption and the comparative information has not been restated. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. Disclosures required by ASC Topic 606 are presented within Note 3, Revenue Recognition.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10). This new standard enhances the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted this ASU in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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 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 earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The new guidance is effective for the Company beginning in fiscal 2020. The Company is currently evaluating the effects adoption of this guidance will have on its consolidated financial statements, however, a material increase in lease-related assets and liabilities is expected.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance requires application using a retrospective transition method. The Company adopted this ASU in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies how an entity tests goodwill by eliminating Step 2 of the goodwill impairment test. The amended standard also modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The new guidance is effective for the Company beginning in fiscal 2020. The Company is currently evaluating the impact of the new guidance on its goodwill impairment testing.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. The Company adopted this ASU in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amended standard specifies the modification accounting applicable to any entity which changes the terms or conditions of a stock-based payment award. The Company adopted this ASU in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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3. 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 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 our products. We have evaluated whether the Company is the principal or agent in these relationships. We have determined that the Company is the principal in all cases, as it maintains the responsibility for fulfillment, risk of loss and establishes the price.

We recognize a minor amount of royalty income for the license of Atkins’ frozen meals. Royalty income represents less than 1% of the Company’s net sales. Royalty revenue is recognized over time as sales of licensed products occur.

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 Distribution 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 Atkins’ 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.



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
(In thousands)	May 25, 2019		May 26, 2018		May 25, 2019		May 26, 2018
Net sales
North America	$	133,873	$	101,294	$	366,425	$	303,437
International	5,595		5,939		17,774		19,730
Total	$	139,468	$	107,233	$	384,199	$	323,167

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4. Goodwill and Intangibles

There were no changes to goodwill during the thirty-nine weeks ended May 25, 2019.

Intangible assets, net in our Condensed Consolidated Balance Sheets consist of the following:



		May 25, 2019
(In thousands)	Useful life	Gross carrying amount		Accumulated amortization		Net carrying amount
Intangible assets with indefinite life:
Brands and trademarks	Indefinite life	$	232,000	$	—	$	232,000
Intangible assets with finite lives:
Customer relationships	15 years	59,000		7,398		51,602
Proprietary recipes and formulas	7 years	7,000		1,881		5,119
Licensing agreements	14 years	22,000		2,956		19,044
		$	320,000	$	12,235	$	307,765



		August 25, 2018
(In thousands)	Useful life	Gross carrying amount		Accumulated amortization		Net carrying amount
Intangible assets with indefinite life:
Brands and trademarks	Indefinite life	$	232,000	$	—	$	232,000
Intangible assets with finite lives:
Customer relationships	15 years	59,000		4,448		54,552
Proprietary recipes and formulas	7 years	7,000		1,131		5,869
Licensing agreements	14 years	22,000		1,778		20,222
		$	320,000	$	7,357	$	312,643

Intangible assets, net changed due to amortization expense. Amortization expense related to intangible assets during the thirteen weeks ended May 25, 2019 and May 26, 2018 were $1.6 million and $1.6 million, respectively. Amortization expense related to intangible assets during the thirty-nine weeks ended May 25, 2019 and May 26, 2018 were $4.9 million and $4.9 million, respectively.

Estimated future amortization for each of the next five fiscal years and thereafter is as follows:



(In thousands by fiscal year)
Remainder of 2019	$	1,627
2020	6,505
2021	6,505
2022	6,505
2023	6,505
2024 and thereafter	48,118
Total	$	75,765

5. Long-Term Debt and Line of Credit

On July 7, 2017, the Company entered into a credit agreement with Barclays Bank PLC and other parties (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 Business Combination, 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, the Company has pledged certain equity interests in its subsidiaries.

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On March 16, 2018 (the “Amendment Date”), the Company 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 bear interest at a rate equal to, at the Company’s 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 continues to bear interest based upon the Company's 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 the Company 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.

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 Agreement may result in an event of default. The Company was in compliance with all financial covenants under the Credit Agreement as of May 25, 2019 and August 25, 2018.

At May 25, 2019 and August 25, 2018, there were no amounts drawn against the Revolving Credit Facility. Long-term debt consists of the following:



(In thousands)	May 25, 2019		August 25, 2018
Term Loan	$	197,000	$	198,500
Less: Deferred financing fees	5,916		6,917
Total debt	191,084		191,583
Less: Current maturities, net of deferred financing fees of $1.3 million at May 25, 2019 and $1.4 million at August 25, 2018, respectively	655		648
Long-term debt, net of deferred financing fees	$	190,429	$	190,935

The Company will be required to make principal payments of $2.0 million over the next twelve months.

The Company utilizes market approaches to estimate the fair value of certain outstanding borrowings by discounting anticipated future cash flows derived from the contractual terms of the obligations and observable market interest and foreign exchange rates. The Company carries debt at historical cost and discloses fair value. As of May 25, 2019 and August 25, 2018, the book value of the Company’s debt approximated fair value. The estimated fair value of the Term Loan is based on observable inputs and classified as Level 2 in the fair value hierarchy.

6. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 – Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 – Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The following table sets forth the Company’s liabilities measured at fair value.

Fair value at August 25, 2018 is summarized as follows:



(In thousands)	Level 1		Level 2		Level 3		Total
Liabilities
TRA liability	$	—	$	—	$	27,468	$	27,468

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A loss of $0.6 million was charged to the Loss (gain) in fair value change of contingent consideration - TRA liability for the thirteen weeks ended May 26, 2018. A loss of $0.5 million and a gain of $2.4 million were charged to the Loss (gain) in fair value change of contingent consideration - TRA liability for the thirty-nine weeks ended May 25, 2019 and May 26, 2018, respectively. The gain recorded in the thirty-nine weeks ended May 26, 2018 is primarily due to the impacts of the change in tax law. The Company settled the Income Tax Receivable Agreement (the “TRA”) during the thirty-nine weeks ended May 25, 2019, which resulted in a $1.5 million gain. Following the settlement of the TRA liability, the Company did not have any Level 3 financial assets or liabilities. The settlement of the TRA liability is discussed in Note 7.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of May 25, 2019 and August 25, 2018 due to the relatively short maturity of these instruments.

7. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The change in the tax law was partially effective in the 2018 fiscal year and is fully effective in the 2019 fiscal year. The Tax Act, among other things, reduces the top U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.

Due to the complexities involved in accounting for the Tax Act, SEC Staff Accounting Bulletin 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. The Company is allowed a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. As of August 25, 2018, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax and recorded provisional amounts. For the items for which we were able to determine a reasonable estimate, we recognized a provisional gain of $31.0 million in fiscal year 2018.

The FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The guidance indicates that either treating taxes on GILTI inclusions as current period costs, or accounting for deferred taxes on GILTI inclusions are both acceptable subject to an accounting policy election. The Company has elected to account for GILTI as a period cost in the year incurred.

Deemed Repatriation Transition Tax: The one-time transition tax is based on our total post-1986 earnings and profits (“E&P”) that we previously deferred from U.S. income taxes. We recorded provisional amounts in the fourth quarter of fiscal 2018 for our one-time transition tax liability of our foreign subsidiaries, resulting in an immaterial increase in income tax expense. On the basis of revised E&P and cash balance computations that were completed during the reporting period we adjusted our Transition Tax estimate and recorded an immaterial increase in income tax expense in the second quarter.

Reduction of U.S. federal income tax rate: The Tax Act reduced the federal income tax rate from 35% to 21%, effective January 1, 2018. We were able to reasonably estimate the effect of the reduction in the tax rate on our U.S. deferred tax assets and liabilities and in fiscal 2018, we recorded a net provisional reduction in our deferred income tax liabilities of $31.0 million with a corresponding net adjustment of $31.0 million of deferred income tax benefit at August 25, 2018. No changes have been made to these adjustments during 2019.

Our accounting for the impact of the Tax Act is now complete.

Effective Tax Rate

The following table shows the tax expense and the effective tax rate for the thirty-nine weeks ended May 25, 2019 and May 26, 2018 resulting from operations:



	Thirty-Nine Weeks Ended
(In thousands)	May 25, 2019			May 26, 2018
Income before income taxes	$	54,681		$	41,296
Provision (benefit) for income taxes	$	13,236		$	(17,453	)
Effective tax rate	24.2		%	(42.3		)%

The effective tax rate for the thirty-nine week period ended May 25, 2019 is higher than the effective tax rate for the thirty-nine week period ended May 26, 2018 by 66.5%, which is primarily driven by the change in the tax law due to the Tax Act, and also by the one-time impact of the settlement of the TRA in the first quarter of fiscal 2019.

Tax Receivable Agreement

Concurrent with the Business Combination, the Company entered into the TRA with the historical shareholders of Atkins in consideration for the Business Combination. The TRA was valued based on the future expected payments under the terms of the agreement. The TRA provided for the payment by Simply Good Foods to the Atkins’ selling equity holders for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Simply Good Foods, Conyers Park, Atkins and Atkins’ eligible subsidiaries from the use of up to $100.0 million of the following tax attributes: (i) net operating losses available to be carried forward as of the closing of the Business Combination, (ii) certain deductions generated by the consummation of the business transaction, and (iii) remaining depreciable tax basis from the 2003 acquisition of Atkins Nutritionals, Inc.

During the thirteen weeks ended November 24, 2018, the Company entered into a termination agreement (the “Termination Agreement”) with Atkins Holdings, LLC and Roark Capital Acquisition, LLC. Pursuant to the Termination Agreement, the Company paid $26.5 million to settle the TRA in full. Under the Termination Agreement, each of the parties thereto agreed to terminate the TRA and to release any and all obligations and liabilities of the other parties thereunder effective as of the receipt of the termination payment. The Company recorded a $0.5 million loss on the fair value change in the TRA liability through the settlement on November 14, 2018 and recognized a gain of $1.5 million in connection with the execution of the Termination Agreement and final cash payment.

8. Commitments and Contingencies

Leases

The Company has non-cancellable operating leases for six buildings. For the thirteen weeks ended May 25, 2019 and May 26, 2018, rent expenses were $0.5 million and $0.6 million, respectively. For the thirty-nine weeks ended May 25, 2019 and May 26, 2018, rent expenses were $1.6 million and $1.8 million, respectively. Rent expenses are included in General and administrative in the Condensed Consolidated Statements of Operations and Comprehensive Income.

Litigation

From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any litigation that it believes to be material and the Company is not aware of any pending or threatened litigation against it that it believes could have a material adverse effect on its business, operating results, financial condition or cash flows.

Other

The Company has entered into endorsement contracts with certain celebrity figures to promote and endorse the Atkins brand and line of products. These contracts contain endorsement fees, which are expensed ratably over the life of the contract, and performance fees, that are recognized at the time of achievement. Based on the terms of the contracts in place and achievement of performance conditions as of May 25, 2019, the Company will be required to make payments of $0.5 million over the next year.

9. Stockholders’ Equity

Equity Warrants

Prior to the Business Combination, Conyers Park issued 13,416,667 public warrants and 6,700,000 private placement warrants. Simply Good Foods assumed the Conyers Park equity warrants in connection with the Business Combination. As a result of the Business Combination, the warrants issued by Conyers Park were no longer exercisable for shares of Conyers Park common stock, but were instead exercisable for common stock of Simply Good Foods. All other features of the warrants were unchanged.

From August 26, 2018 through October 5, 2018, public warrants to purchase an aggregate of 9,866,451 shares of the Company’s common stock were exercised for cash at an exercise price of $11.50 per share, resulting in aggregate gross proceeds to the Company of $113.5 million.

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On October 4, 2018, the Company delivered a notice for the redemption (the “Redemption Notice”) of all of its public warrants that remained unexercised immediately after November 5, 2018. Holders who exercised public warrants following the Redemption Notice were required to do so on a cashless basis. Accordingly, holders were no longer permitted to exercise public warrants in exchange for payment in cash of $11.50 per share. Instead, a holder exercising a public warrant was deemed to have paid the $11.50 per share exercise price by the surrender of 0.61885 of a share of common stock that the holder would have been entitled to receive upon a cash exercise of each public warrant. Exercising holders received 0.38115 of a share of the Company’s common stock for each public warrant surrendered for exercise. Following the Redemption Notice, 3,499,639 public warrants were exercised on a cashless basis. An aggregate of 1,333,848 shares of the Company’s common stock were issued in connection with these exercises of the public warrants. All remaining public warrants were redeemed as of November 5, 2018 for an immaterial amount.

The Company’s private warrants to purchase 6,700,000 shares of the Company’s common stock remain outstanding.

Stock Repurchase Program

On November 13, 2018, the Company announced that its Board of Directors had adopted a $50.0 million stock repurchase program. Under the stock repurchase program, the Company may repurchase shares from time to time in the open market or in privately negotiated transactions. The stock repurchase program does not obligate the Company to acquire any specific number of shares or acquire shares over any specific period of time. The stock repurchase program may be suspended or discontinued at any time by the Company, and does not have an expiration date.

During the thirteen weeks ended May 25, 2019, the Company repurchased 69,260 shares of common stock at an average share price of $22.19 per share. During the thirty-nine weeks ended May 25, 2019, the Company repurchased 75,989 shares of common stock at an average share price of $21.90 per share.

10. Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares issued and outstanding. Diluted earnings per share is based on the weighted average number of common shares issued and outstanding and the effect of all dilutive common stock equivalents outstanding during each period.

The following table reconciles the numerators and denominators used in the computations of both basic and diluted earnings per share:



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
(In thousands, except per share data)	May 25, 2019		May 26, 2018		May 25, 2019		May 26, 2018
Basic earnings per share computation:
Numerator:
Net income	$	13,466	$	7,137	$	41,445	$	58,749
Denominator:
Weighted average common shares - basic	81,898,276		70,582,573		80,362,978		70,578,687
Basic earnings per share from net income	$	0.16	$	0.10	$	0.52	$	0.83
Diluted earnings per share computation:
Numerator:
Net income	$	13,466	$	7,137	$	41,445	$	58,749
Denominator:
Weighted average common shares outstanding - basic	81,898,276		70,582,573		80,362,978		70,578,687
Public and Private Warrants	3,110,645		2,823,128		3,582,795		2,288,966
Employee stock options	844,937		—		689,849		—
Non-vested shares	108,293		60,584		60,081		39,488
Weighted average common shares - diluted	85,962,151		73,466,285		84,695,703		72,907,141
Diluted earnings per share from net income	$	0.16	$	0.10	$	0.49	$	0.81

Earnings per share calculations for the thirteen weeks ended May 25, 2019 and May 26, 2018 excluded 0.3 million and 2.4 million shares of stock options, respectively, that would have been anti-dilutive.

Earnings per share calculations for the thirty-nine weeks ended May 25, 2019 and May 26, 2018 excluded 0.3 million and 2.5 million shares of stock options, respectively, that would have been anti-dilutive.

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11. Stock Option Plan

Stock-based compensation includes stock options, restricted stock unit and performance stock unit awards, which are awarded to employees and directors of the Company. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award based on their grant date fair value. Stock-based compensation expense is included within General and administrative expense, which is the same financial statement caption where the recipient’s other compensation is reported.

The Company recorded $1.4 million and $1.0 million of stock-based compensation expense in the thirteen weeks ended May 25, 2019 and May 26, 2018, respectively. The Company recorded $3.9 million and $3.0 million of stock-based compensation expense in the thirty-nine weeks ended May 25, 2019 and May 26, 2018, respectively.

Stock Options

The following table summarizes stock option activity for the thirty-nine weeks ended May 25, 2019:



	Shares		Weighted average exercise price		Weighted average remaining contractual life (in years)
Outstanding as of August 25, 2018	2,506,083		$	12.28
Granted	315,331		19.89
Exercised	(73,630	)	12.00
Forfeited	—		—
Outstanding as of May 25, 2019	2,747,784		$	13.16	8.36

Vested and expected to vest as of May 25, 2019	2,747,784		$	13.16	8.36

Exercisable as of May 25, 2019	745,502		$	12.05	8.17

As of May 25, 2019, the Company had $5.7 million of total unrecognized compensation cost related to stock option plans that will be recognized over a weighted average period of 1.43 years. During the thirty-nine week period ended May 25, 2019, the Company received $0.5 million in cash from stock option exercises.

Restricted Stock Units

The following table summarizes restricted stock unit activity for the thirty-nine weeks ended May 25, 2019:



	Units		Weighted average grant-date fair value
Non-vested as of August 25, 2018	111,085		$	12.06
Granted	76,204		18.69
Vested	(68,688	)	11.94
Forfeited	(7,573	)	15.91
Non-vested as of May 25, 2019	111,028		$	16.43

As of May 25, 2019, the Company had $1.0 million of total unrecognized compensation cost related to restricted stock units that will be recognized over a weighted average period of 1.23 years.

Performance Stock Units

During the thirty-nine weeks ended May 25, 2019, the board of directors granted performance stock units under the Company’s equity compensation plan. Performance stock units vest in a range between 0% and 100% based upon the price of the Company’s common stock at the end of a three-year period. Performance stock units were valued using a Monte-Carlo simulation.

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The following table summarizes performance stock unit activity for the thirty-nine weeks ended May 25, 2019:



	Units	Weighted average grant-date fair value
Non-vested as of August 25, 2018	—	$	—
Granted	193,512	11.93
Vested	—	—
Forfeited	—	—
Non-vested as of May 25, 2019	193,512	$	11.93

As of May 25, 2019, the Company had $1.9 million of total unrecognized compensation cost related to performance stock units that will be recognized over a weighted average period of 2.46 years.

12. Related Party Transactions

Tax Receivable Agreement

During the thirty-nine weeks ended May 25, 2019, the Company entered into the Termination Agreement, pursuant to which, the Company paid $26.5 million to settle the TRA (the “Termination Payment”), which provided former stockholders of Atkins with payments for federal, state, local and non-U.S. tax benefits deemed realized by the Company.

Under the Termination Agreement, each of the parties thereto agreed to terminate the TRA and to release and discharge any and all obligations and liabilities of the other parties thereunder effective as of the exchange agent’s receipt of the Termination Payment. Richard Laube, a former director of the Company, Joseph Scalzo, our president and Chief Executive Officer and a director of the Company, and Scott Parker, our Chief Marketing Officer, were each former stockholders of Atkins and received their respective pro rata share of the Termination Payment as additional consideration for their former stock ownership in accordance with the terms of the Merger Agreement. The TRA liability and subsequent settlement are discussed in Note 7.

Execution of the Merger Agreement

In the first quarter of fiscal 2018, per the terms of the Merger Agreement, Simply Good Foods paid a working capital adjustment of $1.8 million to the former owners of Atkins, which also resulted in a corresponding increase to the previously recognized goodwill.

13. Segment and Customer Information

The Company has organized its operations into one operating segment that sells its branded nutritional foods and snacking products designed around the nutrition principles of the Atkins eating approach. The results of the operating segment are reviewed by the Company’s chief operating decision maker to make decisions about resource expenditures and assessing financial performance. This operating segment is therefore the Company’s only reportable segment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. 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 ended August 25, 2018 (“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, such as statements regarding the Company’s expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from the Company’s expectations. The Company’s actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and 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 “Simply Good Foods” refer to The Simply Good Foods Company and its subsidiaries.

Overview

Simply Good Foods is a growing developer, marketer and seller of branded nutritional foods and snacking products. Its highly-focused product portfolio consists primarily of nutrition bars, ready-to-drink (“RTD”) shakes, snacks and confectionery products marketed under the Atkins®, SimplyProtein®, Atkins Harvest Trail and Atkins Endulge® brand names. Over the past 45 years, Atkins has become an iconic American brand that for many consumers stands for “low carb,” “low sugar” and “protein rich” nutrition. The Atkins approach focuses on a healthy nutritional approach with reduced levels of carbohydrates and sugars and encourages the consumption of lean protein, fiber, fruits, vegetables, and good fats.

In our core Atkins snacking business, we strive to offer a complete line of nutrition bars, RTD shakes and confections that satisfy hunger while providing consumers with a convenient, “better-for-you” snacking alternative. Our sales, marketing and R&D capabilities enable us to distribute products into a national customer base across the mass merchandiser, grocery and drug channels. We believe that Atkins’ broad brand recognition, depth of management talent and strong cash generation position us to continue to innovate in the Atkins brand and acquire other brands, and thereby become an industry leading snacking platform. To that end, in December 2016, Atkins completed the acquisition of Wellness Foods, Inc., a Canada-based developer, marketer and seller of the SimplyProtein® brand that is focused on protein-rich and low-sugar products, which our management believes has significant opportunity for expansion in the U.S. In addition to snacking products, Atkins entered into a license arrangement in 2014 for frozen meals sold in the U.S. by Bellisio Foods, Inc.

Seasonality

We have experienced in the past, and expect to continue to experience, seasonal fluctuations in sales as a result of consumer spending patterns. Historically, sales have been greatest in the second fiscal quarter as we sell product to retail locations, which sell to consumers in the post-holiday resolution season. We have also historically experienced some seasonality in the summer and back-to-school shopping seasons each year. The period of the lowest sales has historically been in the fourth fiscal quarter. We believe these consumer spending patterns are driven primarily by the predisposition of consumers to adjust their approach to nutrition at certain times of the year as well as the timing of our advertising linked with key customer promotion windows.

Our Reportable Segment

Our business is organized around one reportable segment based on our go-to-market strategies, the objectives of the business and how our chief decision maker, our Chief Executive Officer, monitors operating performance and allocates resources.

Key Financial Definitions

Net sales. Net sales consists primarily of product sales less the cost of promotional activities, slotting fees and other sales credits and adjustments, including product returns. We also include licensing revenue from the frozen meals business in net sales.

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, 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 distribution, selling, marketing, general and administrative, depreciation and amortization, and other expenses. The following is a brief description of the components of operating expenses:


•	Distribution. Distribution is principally freight associated with shipping and handling of products to the customer.


•	Selling. Selling expenses are comprised of broker commissions and customer marketing.


•	Marketing. Marketing expenses are comprised of 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 fees for employee salaries, professional services, insurance and other general corporate expenses. We expect our general and administrative fees to increase as we incur additional legal, accounting, insurance and other expenses associated with being a public company.


•	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 and accounting firm expenses associated with process of actively pursuing a potential business combination.


•	Loss (gain) in fair value change of contingent consideration - TRA liability. Loss in fair value change of contingent consideration - TRA liability charges relate to fair value adjustments of the TRA liability.


•	Other expense. Other expense is principally costs of restructuring consisting of severance and related expenses.

Results of Operations

We delivered double-digit sales growth in both the third quarter and year-to-date periods driven by our successful marketing strategy that positions Atkins as the brand of choice for consumers seeking nutritious and delicious snacking and meal replacement products for low carb lifestyles. Net sales growth outpaced retail takeaway driven by the timing of inventory changes compared to the prior year at key retailers. Specifically, U.S. retail takeaway, as measured by IRI for the thirteen week period ended May 25, 2019, was up 19.5% versus the prior year. Gross profit and Adjusted EBITDA growth also increased double-digits in both the third quarter and year-to-date periods reflecting the strong sales growth as well as investments in marketing and capabilities that we believe will benefit the Company in the near and long term. Our supply situation has improved and we believe we are well positioned to meet consumer demand.

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 of 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.

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Comparison of Unaudited Results for the Thirteen Weeks Ended May 25, 2019 and the Thirteen Weeks Ended May 26, 2018

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 Ended					Thirteen Weeks Ended
(In thousands)	May 25, 2019			% of Sales		May 26, 2018			% of Sales
Net sales	$	139,468		100.0	%	$	107,233		100.0	%
Cost of goods sold	74,204			53.2	%	55,949			52.2	%
Gross profit	65,264			46.8	%	51,284			47.8	%

Operating expenses:
Distribution	6,246			4.5	%	4,656			4.3	%
Selling	2,802			2.0	%	4,972			4.6	%
Marketing	14,748			10.6	%	10,999			10.3	%
General and administrative	18,271			13.1	%	14,158			13.2	%
Depreciation and amortization	1,929			1.4	%	1,911			1.8	%
Business transaction costs	758			0.5	%	35			—	%
Loss in fair value change of contingent consideration - TRA liability	—			—	%	614			0.6	%
Other expense	—			—	%	137			0.1	%
Total operating expenses	44,754			32.1	%	37,482			35.0	%

Income from operations	20,510			14.7	%	13,802			12.9	%

Other income (expense):
Interest income	1,066			0.8	%	—			—	%
Interest expense	(3,428		)	(2.5	)%	(3,057		)	(2.9	)%
Loss on foreign currency transactions	(153		)	(0.1	)%	(837		)	(0.8	)%
Other income	55			—	%	77			0.1	%
Total other expense	(2,460		)	(1.8	)%	(3,817		)	(3.6	)%

Income before income taxes	18,050			12.9	%	9,985			9.3	%
Income tax expense (benefit)	4,584			3.3	%	2,848			2.7	%
Net income	$	13,466		9.7	%	$	7,137		6.7	%

Other financial data:
Adjusted EBITDA	$	24,893		17.8	%	$	17,940		16.7	%

Net sales. Net sales of $139.5 million represented an increase of $32.2 million, or 30.1%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The net sales increase of 30.1% was driven by volume growth. Net price realization was a slight benefit to the third quarter, offset by a shift in non-price related customer activity.

Cost of goods sold. Cost of goods sold increased $18.3 million, or 32.6%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The cost of goods sold increase is driven by sales volume growth.

Gross profit. Gross profit increased $14.0 million, or 27.3%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. Gross profit of $65.3 million, or 46.8% of net sales, for the thirteen weeks ended May 25, 2019 decreased 100 basis points from 47.8% of net sales for the thirteen weeks ended May 26, 2018. Gross margin is impacted by non-price related customer activity that is a shift from selling expense.

Operating expenses. Operating expenses increased $7.3 million, or 19.4%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018 due to the following:


•	Distribution. Distribution expenses increased $1.6 million, or 34.1%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The increase is primarily driven by sales volume growth.

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•	Selling. Selling expenses decreased $2.2 million, or 43.6%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The decrease is primarily due to a shift in non-price related customer activity.


•	Marketing. Marketing expenses increased $3.7 million, or 34.1%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The increase is primarily driven by an increase in television media and e-commerce investments.


•	General and administrative. General and administrative expenses increased $4.1 million, or 29.1%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The increase is due to higher incentive compensation of $3.0 million, increased distribution center costs of $0.4 million and other expenses of $0.7 million.


•	Depreciation and amortization. Depreciation and amortization expenses for the thirteen weeks ended May 25, 2019 were flat compared to the thirteen weeks ended May 26, 2018.


•	Business transaction costs. Business transaction costs increased $0.7 million for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The $0.8 million recorded in the thirteen weeks ended May 25, 2019 is comprised of expenses relating to business development activities.


•	Loss in fair value change of contingent consideration - TRA liability. The thirteen weeks ended May 26, 2018 included a loss in fair value change of contingent consideration of $0.6 million. The TRA liability was settled in the first quarter of fiscal 2019. For additional information on the settlement of the TRA, see Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest income. Interest income increased $1.1 million for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018, due to the Company’s increased cash balance resulting from warrant exercises during the first quarter of fiscal 2019 and changes in market interest rates.

Interest expense. Interest expense increased $0.4 million for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018, due to changes in market interest rates.

Loss on foreign currency transactions. A loss of $0.2 million in foreign currency transactions was recorded for the thirteen weeks ended May 25, 2019 compared to a foreign currency loss of $0.8 million for the thirteen weeks ended May 26, 2018. The change relates to changes in foreign currency rates related to international operations.

Income tax expense (benefit). Income tax expense increased $1.7 million, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. Our effective tax rate was 25.4% for the thirteen weeks ended May 25, 2019 compared to an effective tax rate of 28.5% for the thirteen weeks ended May 26, 2018. The decrease in our effective tax rate is primarily the result of the change in tax law. The change in tax law is discussed in Note 7 of the consolidated financial statements included in this Report.

Adjusted EBITDA. Adjusted EBITDA increased $7.0 million, or 38.8%, for the thirteen weeks ended May 25, 2019 compared to the thirteen weeks ended May 26, 2018. The increase is primarily due to higher gross profit, partially offset by higher operating expenses. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of Adjusted EBITDA” below.

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Comparison of Unaudited Results for the Thirty-Nine Weeks Ended May 25, 2019 and the Thirty-Nine Weeks Ended May 26, 2018

The following unaudited table presents, for the periods indicated, selected information from our condensed consolidated financial results, including information presented as a percentage of net sales:



	Thirty-Nine Weeks Ended				Thirty-Nine Weeks Ended
(In thousands)	May 25, 2019		% of Sales		May 26, 2018		% of Sales
Net sales	$	384,199	100.0	%	$	323,167	100.0	%
Cost of goods sold	202,190		52.6	%	168,869		52.3	%
Gross profit	182,009		47.4	%	154,298		47.7	%

Operating expenses:
Distribution	17,327		4.5	%	14,864		4.6	%
Selling	9,191		2.4	%	13,850		4.3	%
Marketing	38,407		10.0	%	30,905		9.6	%
General and administrative	47,994		12.5	%	38,948		12.1	%
Depreciation and amortization	5,754		1.5	%	5,793		1.8	%
Business transaction costs	2,087		0.5	%	1,912		0.6

10-Q	2019-05-25	Quarter: 2019-05-25
10-Q	2019-02-23	Quarter: 2019-02-23
10-Q	2018-11-24	Quarter: 2018-11-24
10-K	2018-08-25	Annual: 2018-08-25
10-Q	2018-05-26	Quarter: 2018-05-26
10-Q	2018-02-24	Quarter: 2018-02-24
10-Q	2017-11-25	Quarter: 2017-11-25
10-K	2017-08-26	Annual: 2017-08-26
10-Q	2017-05-27	Quarter: 2017-05-27

8-K	2019-10-09	Enter Agreement, Exhibits
8-K	2019-10-08	Regulation FD, Other Events, Exhibits
8-K	2019-10-07	Earnings, Exhibits
8-K	2019-09-30	Other Events, Exhibits
8-K	2019-08-21	Enter Agreement, Regulation FD, Other Events, Exhibits
8-K	2019-07-23	Officers
8-K	2019-07-02	Earnings, Exhibits
8-K	2019-06-13	Officers
8-K	2019-04-04	Earnings, Exhibits
8-K	2019-02-25	Accountant, Exhibits
8-K	2019-01-23	Shareholder Vote
8-K	2019-01-23	Shareholder Vote
8-K	2019-01-03	Earnings, Exhibits
8-K	2018-12-17	Officers
8-K	2018-11-14	Leave Agreement, Exhibits
8-K	2018-11-13	Other Events, Exhibits
8-K	2018-11-05	Other Events
8-K	2018-10-24	Earnings, Exhibits
8-K	2018-10-04	Other Events, Exhibits
8-K	2018-07-27	Officers, Exhibits
8-K	2018-07-10	Earnings, Exhibits
8-K	2018-03-20	Enter Agreement, Exhibits
8-K	2018-02-06	Regulation FD

NTRB	Nutriband	564
STDY	Steadymed	126
PAYM	PayMeOn	40
VKIN	Viking Energy	16
ABWN	Airborne Wireless Network	0
NPHC	Nutra Pharma	0
CNCL	Cancer Capital	0
ARGQ	Argentum 47	0
EMYB	Embassy Bancorp	0
HBUV	Hubilu Venture	0

EX-31.1	exhibit311-q319.htm
EX-31.2	exhibit312-q319.htm
EX-32.1	exhibit321-q319.htm



		Page
PART I. Financial Information
Item 1.	Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
PART II. Other Information
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
	Signatures	29