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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
| | | | | |
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 28, 2022
| | | | | |
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 |
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 ☒ 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 ☒ 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 | ☐ |
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 ☒
As of June 25, 2022, there were 100,370,687 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 28, 2022
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 and per share data)
| | | | | | | | | | | | | | |
| | May 28, 2022 | | August 28, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash | | $ | 56,720 | | | $ | 75,345 | |
Accounts receivable, net | | 146,377 | | | 111,456 | |
Inventories | | 111,709 | | | 97,269 | |
Prepaid expenses | | 5,066 | | | 4,902 | |
Other current assets | | 46,852 | | | 9,694 | |
Total current assets | | 366,724 | | | 298,666 | |
| | | | |
Long-term assets: | | | | |
Property and equipment, net | | 17,927 | | | 16,584 | |
Intangible assets, net | | 1,127,136 | | | 1,139,041 | |
Goodwill | | 543,134 | | | 543,134 | |
Other long-term assets | | 59,736 | | | 54,792 | |
Total assets | | $ | 2,114,657 | | | $ | 2,052,217 | |
| | | | |
Liabilities and stockholders’ equity | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 64,729 | | | $ | 59,713 | |
Accrued interest | | 214 | | | 60 | |
Accrued expenses and other current liabilities | | 55,066 | | | 53,606 | |
Current maturities of long-term debt | | 278 | | | 285 | |
Total current liabilities | | 120,287 | | | 113,664 | |
| | | | |
Long-term liabilities: | | | | |
Long-term debt, less current maturities | | 402,594 | | | 451,269 | |
Deferred income taxes | | 108,078 | | | 93,755 | |
Warrant liability | | — | | | 159,835 | |
Other long-term liabilities | | 46,376 | | | 44,890 | |
Total liabilities | | 677,335 | | | 863,413 | |
See commitments and contingencies (Note 9) | | | | |
| | | | |
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, 101,315,226 and 95,882,908 shares issued at May 28, 2022 and August 28, 2021, respectively | | 1,013 | | | 959 | |
Treasury stock, 887,976 shares and 98,234 shares at cost at May 28, 2022 and August 28, 2021, respectively | | (30,649) | | | (2,145) | |
Additional paid-in-capital | | 1,284,342 | | | 1,085,001 | |
Retained earnings | | 184,254 | | | 105,807 | |
Accumulated other comprehensive loss | | (1,638) | | | (818) | |
Total stockholders’ equity | | 1,437,322 | | | 1,188,804 | |
Total liabilities and stockholders’ equity | | $ | 2,114,657 | | | $ | 2,052,217 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
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 28, 2022 | | May 29, 2021 | | May 28, 2022 | | May 29, 2021 |
Net sales | | $ | 316,531 | | | $ | 284,001 | | | $ | 894,514 | | | $ | 745,760 | |
Cost of goods sold | | 197,883 | | | 162,998 | | | 550,788 | | | 440,451 | |
Gross profit | | 118,648 | | | 121,003 | | | 343,726 | | | 305,309 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Selling and marketing | | 32,334 | | | 30,826 | | | 94,816 | | | 82,171 | |
General and administrative | | 26,721 | | | 25,668 | | | 76,711 | | | 77,645 | |
Depreciation and amortization | | 4,317 | | | 4,187 | | | 12,966 | | | 12,643 | |
| | | | | | | | |
| | | | | | | | |
Total operating expenses | | 63,372 | | | 60,681 | | | 184,493 | | | 172,459 | |
| | | | | | | | |
Income from operations | | 55,276 | | | 60,322 | | | 159,233 | | | 132,850 | |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Interest income | | — | | | 1 | | | 1 | | | 4 | |
Interest expense | | (4,881) | | | (7,985) | | | (16,528) | | | (24,352) | |
Loss in fair value change of warrant liability | | — | | | (35,833) | | | (30,062) | | | (60,714) | |
Gain on legal settlement | | — | | | 5,000 | | | — | | | 5,000 | |
Gain (loss) on foreign currency transactions | | 76 | | | (272) | | | 503 | | | 712 | |
Other income | | 17 | | | 70 | | | 26 | | | 229 | |
Total other expense | | (4,788) | | | (39,019) | | | (46,060) | | | (79,121) | |
| | | | | | | | |
Income before income taxes | | 50,488 | | | 21,303 | | | 113,173 | | | 53,729 | |
Income tax expense | | 11,654 | | | 15,408 | | | 34,726 | | | 31,095 | |
Net income | | $ | 38,834 | | | $ | 5,895 | | | $ | 78,447 | | | $ | 22,634 | |
| | | | | | | | |
Other comprehensive income: | | | | | | | | |
Foreign currency translation, net of reclassification adjustments | | $ | (72) | | | $ | 95 | | | $ | (820) | | | $ | 293 | |
Comprehensive income | | $ | 38,762 | | | $ | 5,990 | | | $ | 77,627 | | | $ | 22,927 | |
| | | | | | | | |
Earnings per share from net income: | | | | | | | | |
Basic | | $ | 0.39 | | | $ | 0.06 | | | $ | 0.80 | | | $ | 0.24 | |
Diluted | | $ | 0.38 | | | $ | 0.06 | | | $ | 0.78 | | | $ | 0.23 | |
Weighted average shares outstanding: | | | | | | | | |
Basic | | 100,426,227 | | | 95,767,629 | | | 98,294,114 | | | 95,730,581 | |
Diluted | | 102,237,457 | | | 97,589,656 | | | 100,190,068 | | | 97,197,180 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
The Simply Good Foods Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
| | | | | | | | | | | | | | |
| | Thirty-Nine Weeks Ended |
| | May 28, 2022 | | May 29, 2021 |
Operating activities | | | | |
Net income | | $ | 78,447 | | | $ | 22,634 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 14,398 | | | 13,508 | |
Amortization of deferred financing costs and debt discount | | 2,073 | | | 3,449 | |
Stock compensation expense | | 8,691 | | | 5,766 | |
Loss in fair value change of warrant liability | | 30,062 | | | 60,714 | |
Estimated credit losses | | 148 | | | — | |
Unrealized gain on foreign currency transactions | | (503) | | | (712) | |
Deferred income taxes | | 14,140 | | | 13,670 | |
| | | | |
Amortization of operating lease right-of-use asset | | 4,955 | | | 3,385 | |
Loss on operating lease right-of-use asset impairment | | — | | | 686 | |
Gain on lease termination | | (30) | | | (156) | |
| | | | |
Other | | 345 | | | 769 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable, net | | (35,269) | | | (28,737) | |
Inventories | | (15,006) | | | (20,318) | |
Prepaid expenses | | (170) | | | (1,189) | |
Other current assets | | (37,288) | | | (5,376) | |
Accounts payable | | 5,585 | | | 13,380 | |
Accrued interest | | 154 | | | (626) | |
Accrued expenses and other current liabilities | | 676 | | | 12,745 | |
Other assets and liabilities | | (4,045) | | | (2,104) | |
Net cash provided by operating activities | | 67,363 | | | 91,488 |
| | | | |
Investing activities | | | | |
Purchases of property and equipment | | (4,696) | | | (3,232) | |
Issuance of note receivable | | (2,400) | | | — | |
| | | | |
Proceeds from sale of business | | — | | | 5,800 | |
Investments in intangible and other assets | | (187) | | | (114) | |
Net cash (used in) provided by investing activities | | (7,283) | | | 2,454 | |
| | | | |
Financing activities | | | | |
Proceeds from option exercises | | 4,343 | | | 700 | |
Tax payments related to issuance of restricted stock units and performance stock units | | (3,536) | | | (320) | |
Payments on finance lease obligations | | (235) | | | (269) | |
Repurchase of common stock | | (28,504) | | | — | |
Principal payments of long-term debt | | (50,000) | | | (100,000) | |
Deferred financing costs | | (544) | | | — | |
Net cash used in financing activities | | (78,476) | | | (99,889) | |
| | | | |
Cash and cash equivalents | | | | |
Net decrease in cash | | (18,396) | | | (5,947) | |
Effect of exchange rate on cash | | (229) | | | 273 | |
Cash at beginning of period | | 75,345 | | | 95,847 | |
Cash and cash equivalents at end of period | | $ | 56,720 | | | $ | 90,173 | |
| | | | | | | | | | | | | | |
| | Thirty-Nine Weeks Ended |
| | May 28, 2022 | | May 29, 2021 |
Supplemental disclosures of cash flow information | | | | |
Cash paid for interest | | $ | 14,301 | | | $ | 21,529 | |
Cash paid for taxes | | $ | 43,430 | | | $ | 15,282 | |
Non-cash investing and financing transactions | | | | |
Non-cash proceeds from sale of business | | $ | — | | | $ | 3,000 | |
Operating lease right-of-use assets exchanged for operating lease liabilities | | $ | 6,881 | | | $ | 316 | |
Issuance of common stock in extinguishment of warrant liabilities | | $ | 189,897 | | | $ | — | |
| | | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
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 28, 2021 | | 95,882,908 | | | $ | 959 | | | 98,234 | | | $ | (2,145) | | | $ | 1,085,001 | | | $ | 105,807 | | | $ | (818) | | | $ | 1,188,804 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 21,152 | | | — | | | 21,152 | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 2,605 | | | — | | | — | | | 2,605 | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | (40) | | | (40) | |
Shares issued upon vesting of restricted stock units and performance stock units | | 227,729 | | | 2 | | | — | | | — | | | (3,190) | | | — | | | — | | | (3,188) | |
Exercise of options to purchase common stock | | 19,804 | | | — | | | — | | | — | | | 274 | | | — | | | — | | | 274 | |
Balance at November 27, 2021 | | 96,130,441 | | | $ | 961 | | | 98,234 | | | $ | (2,145) | | | $ | 1,084,690 | | | $ | 126,959 | | | $ | (858) | | | $ | 1,209,607 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 18,461 | | | — | | | 18,461 | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 3,092 | | | — | | | — | | | 3,092 | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | 439 | | | 439 | |
Reclassification adjustment for currency translation gains related to the liquidation of foreign entities | | — | | | — | | | — | | | — | | | — | | | — | | | (1,147) | | | (1,147) | |
Repurchase of common stock | | — | | | — | | | 571,521 | | | (20,394) | | | — | | | — | | | — | | | (20,394) | |
Warrant conversion | | 4,830,761 | | | 48 | | | — | | | — | | | 189,849 | | | — | | | — | | | 189,897 | |
Shares issued upon vesting of restricted stock units | | 9,679 | | | 1 | | | — | | | — | | | (102) | | | — | | | — | | | (101) | |
Exercise of options to purchase common stock | | 100,000 | | | 1 | | | — | | | — | | | 1,199 | | | — | | | — | | | 1,200 | |
Balance at February 26, 2022 | | 101,070,881 | | | $ | 1,011 | | | 669,755 | | | $ | (22,539) | | | $ | 1,278,728 | | | $ | 145,420 | | | $ | (1,566) | | | $ | 1,401,054 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 38,834 | | | — | | | 38,834 | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 2,994 | | | — | | | — | | | 2,994 | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | (72) | | | (72) | |
Repurchase of common stock | | — | | | — | | | 218,221 | | | (8,110) | | | — | | | — | | | — | | | (8,110) | |
Shares issued upon vesting of restricted stock units | | 11,358 | | | — | | | — | | | — | | | (247) | | | — | | | — | | | (247) | |
Exercise of options to purchase common stock | | 232,987 | | | 2 | | | — | | | — | | | 2,867 | | | — | | | — | | | 2,869 | |
Balance at May 28, 2022 | | 101,315,226 | | | $ | 1,013 | | | 887,976 | | | $ | (30,649) | | | $ | 1,284,342 | | | $ | 184,254 | | | $ | (1,638) | | | $ | 1,437,322 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total | |
| | Shares | | Amount | | Shares | | Amount | | | | | |
Balance at August 29, 2020 | | 95,751,845 | | | $ | 958 | | | 98,234 | | | $ | (2,145) | | | $ | 1,076,472 | | | $ | 64,927 | | | $ | (879) | | | $ | 1,139,333 | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 42,953 | | | — | | | 42,953 | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 1,110 | | | — | | | — | | | 1,110 | | |
| | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | (45) | | | (45) | | |
Shares issued upon vesting of restricted stock units | | 53,908 | | | — | | | — | | | — | | | (201) | | | — | | | — | | | (201) | | |
Exercise of options to purchase common stock | | 13,118 | | | — | | | — | | | — | | | 157 | | | — | | | — | | | 157 | | |
| | | | | | | | | | | | | | | | | |
Balance at November 28, 2020 | | 95,818,871 | | | $ | 958 | | | 98,234 | | | $ | (2,145) | | | $ | 1,077,538 | | | $ | 107,880 | | | $ | (924) | | | $ | 1,183,307 | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (26,214) | | | — | | | (26,214) | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 2,484 | | | — | | | — | | | 2,484 | | |
| | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | 243 | | | 243 | | |
Shares issued upon vesting of restricted stock units | | 7,034 | | | — | | | — | | | — | | | (51) | | | — | | | — | | | (51) | | |
Exercise of options to purchase common stock | | 30,810 | | | 1 | | | — | | | — | | | 369 | | | — | | | — | | | 370 | | |
Balance at February 27, 2021 | | 95,856,715 | | | $ | 959 | | | 98,234 | | | $ | (2,145) | | | $ | 1,080,340 | | | $ | 81,666 | | | $ | (681) | | | $ | 1,160,139 | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 5,895 | | | — | | | 5,895 | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 2,172 | | | — | | | — | | | 2,172 | | |
| | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | 95 | | | 95 | | |
Shares issued upon vesting of restricted stock units | | 4,683 | | | — | | | — | | | — | | | (68) | | | — | | | — | | | (68) | | |
Exercise of options to purchase common stock | | 14,380 | | | — | | | — | | | — | | | 173 | | | — | | | — | | | 173 | | |
Balance at May 29, 2021 | | 95,875,778 | | | $ | 959 | | | 98,234 | | | $ | (2,145) | | | $ | 1,082,617 | | | $ | 87,561 | | | $ | (586) | | | $ | 1,168,406 | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
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
Description of Business
The Simply Good Foods Company (“Simply Good Foods” or the “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 product portfolio the Company develops, markets and sells consists primarily of protein bars, ready-to-drink (“RTD”) shakes, sweet and salty snacks and confectionery products marketed under the Atkins®, Atkins Endulge®, and Quest® brand names. Simply Good Foods is poised to expand its wellness platform through innovation and organic growth along with acquisition opportunities in the nutritional snacking space.
The Company’s nutritious snacking platform consists of brands that specialize in providing products for consumers that follow certain nutritional philosophies and health-and-wellness trends: Atkins® for those following a low-carb lifestyle and Quest® for consumers seeking a variety of protein-rich foods and beverages that also limit sugars and simple carbs. The Company distributes its 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. The Company’s portfolio of nutritious snacking brands gives it a strong platform with which to introduce new products, expand distribution, and attract new consumers to its products.
The common stock of Simply Good Foods is listed on the Nasdaq Capital Market under the symbol “SMPL.”
Unaudited Interim Condensed Consolidated Financial Statements
The unaudited interim 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.
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 the Company’s 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 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. 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 the Company’s consolidated financial statements for the fiscal year ended August 28, 2021, included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the SEC on October 26, 2021.
While the Company’s business has continued to improve from the end of fiscal year 2021, driven in part by the increasing normalization of consumer mobility and shopper traffic patterns in brick-and-mortar retailers versus prior periods that were pressured by COVID-19 movement restrictions, the ultimate effect COVID-19, supply chain challenges, cost pressures, and the overall effects of the current high inflation environment on consumer purchasing patterns could have on our business continues to be not fully known. Additionally, management is continuing to monitor the conflict in Ukraine, especially regarding the availability and cost of raw materials that are produced in this region. Management is also monitoring for signs of any expansion of economic or supply chain disruptions or broader supply chain inflationary costs resulting either directly or indirectly from the crisis. Factors contributing to the uncertainty described above, among other things, include (i) continued supply chain disruptions, including disruptions resulting from labor shortages and other cost pressures, (ii) changes to customer operations, (iii) a reversal in improving consumer purchasing and consumption behavior, and (iv) unforeseen business disruptions or other effects due to current global geopolitical tensions, including relating directly or indirectly to the Ukraine crisis.
2. Summary of Significant Accounting Policies
Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Annual Report for a description of significant accounting policies.
Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 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 and can be applied to contract modifications due to rate reform and eligible existing and new hedging relationships entered into between March 12, 2020 and December 31, 2022. The amendments of this ASU should be applied on a prospective basis.
On January 21, 2022, the Company entered into a repricing amendment (the “2022 Repricing Amendment”) to its credit agreement with Barclays Bank PLC and other parties (as amended to date, the “Credit Agreement”), as described in Note 5, Long-Term Debt and Line of Credit. In addition to replacing the London Interbank Offered Rate (“LIBOR”) as the Credit Agreement’s reference rate with the Secured Overnight Financing Rate (“SOFR”), the 2022 Repricing Amendment contemporaneously modified other terms that changed, or had the potential to change, the amount or timing of contractual cash flows as contemplated by the guidance in ASU 2020-04. As such, the contract modifications related to the 2022 Repricing Amendment were outside of the scope of the optional guidance in ASU 2020-04. The Company will continue to monitor the effects of rate reform, if any, on any new or amended contracts through December 31, 2022. The Company does not anticipate the amendments in this ASU will be material to its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends existing guidance related to the accounting for income taxes. This ASU was intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The Company adopted this ASU as of the first day of fiscal year 2022. The adoption of this ASU did not have a material effect on the consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which provided updates for technical corrections, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements across various areas of accounting within GAAP. The Company adopted this ASU as of the first day of fiscal year 2022 on a prospective basis. The adoption of this ASU did not have a material effect on the consolidated financial statements.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material effect on the Company’s consolidated financial statements.
3. Revenue Recognition
Revenue from transactions with external customers for each of the Company’s products would be impracticable to disclose and management does not view its business by product line. The following is a summary of revenue disaggregated by geographic area and core brands:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
(In thousands) | | May 28, 2022 | | May 29, 2021 | | May 28, 2022 | | May 29, 2021 |
North America (1) | | | | | | | | |
Atkins | | $ | 148,163 | | | $ | 146,082 | | | $ | 417,539 | | | $ | 382,998 | |
Quest | | 160,261 | | | 127,097 | | | 451,128 | | | 327,891 | |
Total North America | | 308,424 | | | 273,179 | | | 868,667 | | | 710,889 | |
International | | 8,107 | | | 10,822 | | | 25,847 | | | 34,871 | |
Total net sales | | $ | 316,531 | | | $ | 284,001 | | | $ | 894,514 | | | $ | 745,760 | |
(1) The North America geographic area consists of net sales substantially related to the United States and there is no individual foreign country to which more than 10% of the Company’s net sales are attributed or that is otherwise deemed individually material. |
Charges related to credit loss on accounts receivables from transactions with external customers were $0.2 million and $0.1 million for the thirteen and thirty-nine weeks ended May 28, 2022, respectively, and were $0.6 million and $0.7 million for the thirteen and thirty-nine weeks ended May 29, 2021, respectively. As of May 28, 2022 and August 28, 2021, the allowances for doubtful accounts related to these accounts receivable were $1.3 million and $1.1 million, respectively.
4. Goodwill and Intangibles
As of May 28, 2022 and August 28, 2021, Goodwill in the Condensed Consolidated Balance Sheets was $543.1 million. There were no impairment charges related to goodwill during the thirteen and thirty-nine weeks ended May 28, 2022 or since the inception of the Company.
Intangible assets, net in the Condensed Consolidated Balance Sheets consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | May 28, 2022 |
(In thousands) | | Useful life | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Intangible assets with indefinite life: | | | | | | | | | | |
Brands and trademarks | | Indefinite life | | $ | 974,000 | | | $ | — | | | $ | 974,000 | |
Intangible assets with finite lives: | | | | | | | | | | |
Customer relationships | | 15 years | | 174,000 | | | 38,803 | | | 135,197 | |
Licensing agreements | | 13 years | | 22,000 | | | 8,102 | | | 13,898 | |
Proprietary recipes and formulas | | 7 years | | 7,000 | | | 4,881 | | | 2,119 | |
Software and website development costs | | 3 | - | 5 years | | 5,863 | | | 3,941 | | | 1,922 | |
| | | | | | | | | | |
| | | | | | $ | 1,182,863 | | | $ | 55,727 | | | $ | 1,127,136 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | August 28, 2021 |
(In thousands) | | Useful life | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Intangible assets with indefinite life: | | | | | | | | | | |
Brands and trademarks | | Indefinite life | | $ | 974,000 | | | $ | — | | | $ | 974,000 | |
Intangible assets with finite lives: | | | | | | | | | | |
Customer relationships | | 15 years | | 174,000 | | | 30,103 | | | 143,897 | |
Licensing agreements | | 13 years | | 22,000 | | | 6,664 | | | 15,336 | |
Proprietary recipes and formulas | | 7 years | | 7,000 | | | 4,131 | | | 2,869 | |
Software and website development costs | | 3 | - | 5 years | | 5,560 | | | 2,924 | | | 2,636 | |
Intangible assets in progress | | 3 | - | 5 years | | 303 | | | — | | | 303 | |
| | | | | | $ | 1,182,863 | | | $ | 43,822 | | | $ | 1,139,041 | |
Changes in Intangible assets, net during the thirty-nine weeks ended May 28, 2022 were primarily related to recurring amortization expense. Amortization expense related to intangible assets was $4.0 million and $3.8 million for the thirteen weeks ended May 28, 2022 and May 29, 2021, respectively, and $11.9 million and $11.6 million for the thirty-nine weeks ended May 28, 2022 and May 29, 2021, respectively. There were no impairment charges related to intangible assets during the thirteen and thirty-nine weeks ended May 28, 2022 and May 29, 2021.
Estimated future amortization for each of the next five fiscal years and thereafter is as follows:
| | | | | | | | |
(In thousands) | | Amortization |
Remainder of 2022 | | $ | 3,935 | |
2023 | | 15,602 | |
2024 | | 14,917 | |
2025 | | 13,517 | |
2026 | | 13,517 | |
2027 and thereafter | | 91,648 | |
Total | | $ | 153,136 | |
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 (as amended to date, the “Credit Agreement”). The Credit Agreement at that time provided for (i) a term facility of $200.0 million (“Term Facility”) with a seven-year maturity and (ii) a revolving credit facility of up to $75.0 million (the “Revolving Credit Facility”) with a five-year maturity. Substantially concurrent with the consummation of the business combination between Conyers Park Acquisition Corp. and NCP-ATK Holdings, Inc. on July 7, 2017, the full $200.0 million of the Term Facility (the “Term Loan”) was drawn.
On November 7, 2019, the Company entered into a second amendment (the “Incremental Facility Amendment”) to the Credit Agreement to increase the principal borrowed on the Term Facility by $460.0 million. The Term Facility together with the incremental borrowing make up the Initial Term Loans (as defined in the Incremental Facility Amendment). The Incremental Facility Amendment was executed to partially finance the acquisition of Quest Nutrition, LLC on November 7, 2019. No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment.
Effective as of December 16, 2021, the Company entered into a third amendment (the “Extension Amendment”) to the Credit Agreement. The Extension Amendment provided for an extension of the stated maturity date of the Revolving Commitments and Revolving Loans (each as defined in the Credit Agreement) from July 7, 2022 to the earlier of (i) 91 days prior to the maturity date of the Initial Term Loans on July 7, 2024 and (ii) December 16, 2026.
On January 21, 2022, the Company entered into a repricing amendment (the “2022 Repricing Amendment”) to the Credit Agreement. The 2022 Repricing Amendment, among other things, (i) reduced the interest rate per annum applicable to the Initial Term Loans outstanding under the Credit Agreement immediately prior to the effective date of the 2022 Repricing Amendment, (ii) reset the prepayment premium for the existing Initial Term Loans to apply to Repricing Transactions (as defined in the Credit Agreement) that occur within six months after the effective date of the 2022 Repricing Amendment, and (iii) implemented the Secured Overnight Financing Rate (“SOFR”) and related replacement provisions for the London Interbank Offered Rate (“LIBOR”).
Effective as of the 2022 Repricing Amendment dated January 21, 2022, the interest rate per annum is based on either:
i.A base rate equaling the higher of (a) the “prime rate,” (b) the federal funds effective rate plus 0.50%, or (c) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) applicable for an interest period of one month plus 1.00% plus (x) 2.25% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility; or
ii.SOFR plus a credit spread adjustment equal to 0.10% for one-month SOFR, 0.15% for up to three-month SOFR and 0.25% for up to six-month SOFR, subject to a floor of 0.50%, plus (x) 3.25% margin for the Term Loan or (y) 3.00% margin for the Revolving Credit Facility.
The Simply Good Foods Company is not a borrower under the Credit Agreement and has not provided a guarantee of the Credit Agreement. Simply Good Foods USA, Inc., is the administrative borrower and certain other subsidiary holding companies are co-borrowers under the Credit Agreement. Each of the Company’s domestic subsidiaries that is not a named borrower under the Credit Agreement has provided a guarantee on a secured basis. As security for the payment or performance of the debt under the Credit Agreement, the borrowers and the guarantors have pledged certain equity interests in their respective subsidiaries and granted the lenders a security interest in substantially all of their domestic assets. All guarantors other than Quest Nutrition, LLC are holding companies with no assets other than their investments in their respective subsidiaries.
The Credit Agreement contains certain financial and other covenants that limit the Company’s ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders, and prepayments of material subordinated debt, in each case, subject to customary exceptions materially consistent with credit facilities of such type and size. The Revolving Credit Facility has a maximum total net leverage ratio equal to or less than 6.00:1.00 contingent on credit extensions in excess of 30% of the total amount of commitments available under the Revolving Credit Facility. Any failure to comply with the restrictions of the credit facilities may result in an event of default. The Company was in compliance with all financial covenants as of May 28, 2022 and August 28, 2021, respectively.
Long-term debt consists of the following:
| | | | | | | | | | | | | | |
(In thousands) | | May 28, 2022 | | August 28, 2021 |
Term Facility (effective rate of 4.7% at May 28, 2022) | | $ | 406,500 | | | $ | 456,500 | |
| | | | |
Finance lease liabilities (effective rate of 5.6% at May 28, 2022) | | 479 | | | 690 | |
Less: Deferred financing fees | | 4,107 | | | 5,636 | |
Total debt | | 402,872 | | 451,554 |
| | | | |
Less: Current finance lease liabilities | | 278 | | 285 |
Long-term debt, net of deferred financing fees | | $ | 402,594 | | $ | 451,269 |
The Company is not required to make principal payments on the Term Facility over the twelve months following the period ended May 28, 2022. The outstanding balance of the Term Facility is due upon its maturity in July 2024.
As of May 28, 2022, the Company had letters of credit in the amount of $3.5 million outstanding. These letters of credit offset against the $75.0 million availability of the Revolving Credit Facility and exist to support three of the Company’s leased buildings and insurance programs relating to workers’ compensation. No amounts were drawn against these letters of credit at May 28, 2022.
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 28, 2022 and August 28, 2021, the book value of the Company’s debt approximated fair value. The estimated fair value of the Term Loan is valued 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 used:
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.
Level 3 Measurements
As of August 28, 2021, the Company had outstanding liability-classified Private Warrants that allowed holders to purchase 6,700,000 shares of the Company’s common stock. Such Private Warrants were held by Conyers Park Sponsor, LLC (“Conyers Park”), a related party. On January 7, 2022, Conyers Park elected to exercise the Private Warrants on a cashless basis, resulting in a net issuance of 4,830,761 shares of the Company’s common stock. As a result of Conyers Park’s election to exercise the Private Warrants, there were no outstanding liability-classified Private Warrants as of May 28, 2022. Refer to Note 10, Stockholders’ Equity, for additional details regarding the cashless exercise of the Private Warrants.
The Company utilized the Black-Scholes model to estimate the fair value of the Private Warrants at each reporting date. The application of the Black-Scholes model utilizes significant assumptions, including volatility. Significant judgment is required in determining the expected volatility, historically the key assumption, of the Private Warrants. In order to determine the most accurate measure of this volatility, the Company measured expected volatility based on several inputs, including considering a peer group of publicly traded companies, the Company’s implied volatility based on traded options, the implied volatility of comparable warrants, and the implied volatility of any outstanding public warrants during the periods they were outstanding. As a result of the unobservable inputs that were used to determine the expected volatility of the Private Warrants, the fair value measurement of these warrants reflects a Level 3 measurement within the fair value measurement hierarchy.
There were no Private Warrants outstanding as of May 28, 2022. As of August 28, 2021, the Company had 6,700,000 Private Warrants outstanding with a fair value price per Private Warrant of $23.86, resulting in a $159.8 million total warrant liability. The table below summarizes the inputs used to calculate the fair value of the warrant liability at August 28,2021:
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| | August 28, 2021 |
Exercise price | | $ | 11.50 | |
Stock price | | $ | 35.35 | |
Dividend yield | | — | % |
Expected term (in years) | | 0.86 |
Risk-free interest rate | | 0.06 | % |
Expected volatility | | 21.70 | % |
Per share value of warrants | | $ | 23.86 | |
The periodic remeasurement of the warrant liability has been reflected in Loss in fair value change of warrant liability within the Condensed Consolidated Statements of Operations and Comprehensive Income. The adjustments for the thirty-nine weeks ended May 28, 2022 resulted in a loss of $30.1 million, and the adjustments for the thirteen and thirty-nine weeks ended May 29, 2021 were losses of $35.8 million and $60.7 million, respectively.
7. Income Taxes
The tax expense and the effective tax rate resulting from operations were as follows:
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| | Thirty-Nine Weeks Ended |
(In thousands) | | May 28, 2022 | | May 29, 2021 |
Income before income taxes | | $ | 113,173 | | | $ | 53,729 | |
Income tax expense | | $ | 34,726 | | | $ | 31,095 | |
Effective tax rate | | 30.7 | % | | 57.9 | % |
The effective tax rate for the thirty-nine weeks ended May 28, 2022 was 27.2% less than the effective tax rate for the thirty-nine weeks ended May 29, 2021, which was primarily driven by the non-cash change in the fair value of the warrant liability and other permanent differences.
8. Leases
The components of lease expense were as follows:
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| | | | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
(In thousands) | | Statements of Operations Caption | | May 28, 2022 | | May 29, 2021 | | May 28, 2022 | | May 29, 2021 |
Operating lease cost: | | | | | | | | | | |
Lease cost | | Cost of goods sold and General and administrative | | $ | 2,278 | | | $ | 1,486 | | | $ | 6,806 | | | $ | 4,480 | |
Variable lease cost (1) | | Cost of goods sold and General and administrative | | 787 | | | 470 | | | 2,300 | | | 1,246 | |
Total operating lease cost | | | | 3,065 | | | 1,956 | | | 9,106 | | | 5,726 | |
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Finance lease cost: | | | | | | | | | | |
Amortization of right-of-use assets | | Cost of goods sold | | 69 | | | 69 | | | 205 | | | 205 | |
Interest on lease liabilities | | Interest expense | | 7 | | | 10 | | | 24 | | | 35 | |
Total finance lease cost | | | | 76 | | | 79 | | | 229 | | | 240 | |
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Total lease cost | | | | $ | 3,141 | | | $ | 2,035 | | | $ | 9,335 | | | $ | 5,966 | |
(1) Variable lease cost primarily consists of common area maintenance, such as cleaning and repairs.
In conjunction with the Company’s restructuring activities as discussed in Note 13, Restructuring and Related Charges, the Company recorded an immaterial gain on lease termination related to its lease in the Netherlands in the thirty-nine weeks ended May 28, 2022 and a $0.5 million impairment charge, net of a gain on lease termination, related to its leases in Toronto, Ontario and the Netherlands in the thirty-nine weeks ended May 29, 2021. The effect of these restructuring activities has been included within General and administrative on the Condensed Consolidated Statements of Operations and Comprehensive Income. Refer to Note 13, Restructuring and Related Charges, for additional information regarding restructuring activities.
The right-of-use assets and corresponding liabilities related to both operating and finance leases are as follows:
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(In thousands) | | Balance Sheets Caption | | May 28, 2022 | | August 28, 2021 |
Assets | | | | | | |
Operating lease right-of-use assets | | Other long-term assets | | $ | 48,134 | | | $ | 46,197 | |
Finance lease right-of-use assets | | Property and equipment, net | | 435 | | | 640 | |
Total lease assets | | | | $ | 48,569 | | | $ | 46,837 | |
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Liabilities | | | | | | |
Current: | | | | | | |
Operating lease liabilities | | Accrued expenses and other current liabilities | | $ | 5,721 | | | $ | 3,788 | |
Finance lease liabilities | | Current maturities of long-term debt | | 278 | | | 285 | |
Long-term: | | | | | | |
Operating lease liabilities | | Other long-term liabilities | | 46,219 | | | 44,892 | |
Finance lease liabilities | | Long-term debt, less current maturities | | 201 | | | 405 | |
Total lease liabilities | | | | $ | |