The Simply Good Foods pany(SMPL) - 2021 Q3 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes covering key accounting policies and financial details Condensed Consolidated Balance Sheets | Assets/Liabilities/Equity | May 29, 2021 (in thousands) | August 29, 2020 (in thousands) | | :------------------------ | :-------------------------- | :----------------------------- | | Assets | | | | Cash and cash equivalents | $90,173 | $95,847 | | Accounts receivable, net | $118,373 | $89,740 | | Inventories | $78,579 | $59,085 | | Total current assets | $309,621 | $260,263 | | Total assets | $2,039,123 | $2,008,445 | | Liabilities | | | | Accounts payable | $46,788 | $32,240 | | Total current liabilities | $97,960 | $71,478 | | Long-term debt, less current maturities | $500,154 | $596,879 | | Warrant liability | $154,352 | $93,638 | | Total liabilities | $870,717 | $869,112 | | Stockholders' Equity | | | | Total stockholders' equity| $1,168,406 | $1,139,333 | Condensed Consolidated Statements of Operations and Comprehensive Income | Metric (in thousands, except per share) | Thirteen Weeks Ended May 29, 2021 | Thirteen Weeks Ended May 30, 2020 | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net sales | $284,001 | $215,101 | $745,760 | $594,355 | | Gross profit | $121,003 | $88,626 | $305,309 | $236,226 | | Income from operations | $60,322 | $31,108 | $132,850 | $53,392 | | Net income | $5,895 | $48,112 | $22,634 | $104,928 | | Basic EPS | $0.06 | $0.50 | $0.24 | $1.12 | | Diluted EPS | $0.06 | $0.17 | $0.23 | $0.23 | - The company recorded a non-cash loss of $35.8 million and $60.7 million in fair value change of warrant liability for the thirteen and thirty-nine weeks ended May 29, 2021, respectively, compared to gains in the prior year periods, significantly impacting net income[13] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net cash provided by operating activities | $91,488 | $24,100 | | Net cash provided by (used in) investing activities | $2,454 | $(984,306) | | Net cash (used in) provided by financing activities | $(99,889) | $805,586 | | Cash and cash equivalents at end of period | $90,173 | $111,134 | - Operating cash flow significantly increased by $67.4 million, driven by higher operating income and reduced cash outlays related to the Quest acquisition[15][153] - Investing activities shifted from a large cash outflow in 2020 (due to Quest acquisition) to a net inflow in 2021, primarily from the SimplyProtein Sale proceeds[15][154] - Financing activities moved from a net inflow in 2020 (equity offering, debt issuance for Quest) to a net outflow in 2021, mainly due to principal payments on the Term Facility[15][155] Condensed Consolidated Statements of Stockholders' Equity | Stockholders' Equity (in thousands) | Balance at August 29, 2020 | Balance at May 29, 2021 | | :---------------------------------- | :------------------------- | :---------------------- | | Total Stockholders' Equity | $1,139,333 | $1,168,406 | | Net income (39 weeks ended) | $104,928 (May 30, 2020) | $22,634 (May 29, 2021) | | Stock-based compensation (39 weeks ended) | $5,945 (May 30, 2020) | $5,766 (May 29, 2021) | - Total stockholders' equity increased from $1,139,333 thousand at August 29, 2020, to $1,168,406 thousand at May 29, 2021[19] Notes to Unaudited Condensed Consolidated Financial Statements 1. Nature of Operations and Principles of Consolidation The company operates as a consumer-packaged food and beverage business with core brands Atkins® and Quest®, acknowledging ongoing uncertainty from COVID-19 - Core brands: Atkins® (low-carb lifestyle) and Quest® (protein-rich, low sugar/carbs)[22] - Primary distribution in North America via grocery, club, mass merchandise, e-commerce, convenience, and specialty channels[22] - Uncertainty remains regarding COVID-19's impact due to potential mutations, supply chain disruptions, customer operation changes, and consumer behavior shifts[26] 2. Summary of Significant Accounting Policies The company restated financials to reclassify warrants as a liability and adopted new accounting standards for credit losses and fair value measurements - Restatement of financial statements due to reclassification of private warrants as a liability, measured at fair value with changes reported in earnings, following SEC guidance issued April 12, 2021[27] - Adopted ASU 2016-13 (Financial Instruments—Credit Losses) in fiscal 2021, changing the allowance for doubtful accounts estimation method, but with no material effect[32] - Adopted ASU 2018-13 (Fair Value Measurement) in fiscal 2021, modifying disclosure requirements, with no material effect[33] - Evaluating ASU 2019-12 (Income Taxes), ASU 2020-04 (Reference Rate Reform), and ASU 2020-10 (Codification Improvements), none of which are anticipated to have a material effect[29][30][31] 3. Business Combination The company acquired Quest Nutrition, LLC in November 2019 for $986.8 million to expand its nutritious snacking platform - Acquisition of Quest Nutrition, LLC completed on November 7, 2019, for a total net consideration of $986.8 million[34][37] - Funding for Quest acquisition included $195.3 million cash on hand, $350.0 million from public stock offering, and $443.6 million in new term loan debt[36] | Quest Net Sales (in thousands) | Thirteen Weeks Ended May 29, 2021 | Thirteen Weeks Ended May 30, 2020 | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net sales | $127,097 | $87,234 | $327,891 | $192,621 | 4. Revenue Recognition The company disaggregates revenue by geography and core brands, with North America accounting for the vast majority of sales | Net Sales (in thousands) | May 29, 2021 (13 weeks) | May 30, 2020 (13 weeks) | May 29, 2021 (39 weeks) | May 30, 2020 (39 weeks) | | :----------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | North America | | | | | | Atkins | $146,082 | $121,937 | $382,998 | $381,184 | | Quest | $127,097 | $87,234 | $327,891 | $192,621 | | Total North America | $273,179 | $209,171 | $710,889 | $573,805 | | International | $10,822 | $5,930 | $34,871 | $20,550 | | Total net sales | $284,001 | $215,101 | $745,760 | $594,355 | - Allowances for doubtful accounts increased from $0.5 million at August 29, 2020, to $1.2 million at May 29, 2021[45] 5. Goodwill and Intangibles Goodwill and intangible assets were adjusted due to the Quest acquisition measurement period and the sale of the SimplyProtein® brand | Goodwill (in thousands) | Amount | | :---------------------- | :----- | | Balance as of August 29, 2020 | $544,774 | | Acquisition of business, measurement period adjustment | $1,178 | | Sale of business | $(2,818) | | Balance as of May 29, 2021 | $543,134 | - The SimplyProtein® brand was sold for approximately $8.8 million, resulting in the disposal of $2.8 million of associated goodwill[46] | Intangible Assets (in thousands) | May 29, 2021 Net Carrying Amount | | :------------------------------- | :------------------------------- | | Brands and trademarks (indefinite life) | $974,000 | | Customer relationships (15 years) | $146,797 | | Proprietary recipes and formulas (7 years) | $3,119 | | Licensing agreements (14 years) | $15,901 | | Software and website development costs (3-5 years) | $2,327 | | Intangible assets in progress (3-5 years) | $55 | | Total Intangible assets, net | $1,142,199 | - Amortization expense for intangible assets was $11.6 million for the thirty-nine weeks ended May 29, 2021, up from $10.1 million in the prior year period[49] 6. Long-Term Debt and Line of Credit The company's long-term debt consists primarily of a Term Facility used to finance the Quest acquisition, with all covenants met as of May 29, 2021 - Term Facility outstanding balance was $506.5 million as of May 29, 2021, with maturity in July 2024[55] - The Term Facility was increased by $460.0 million in November 2019 to partially finance the Quest acquisition, bearing interest at LIBOR plus 3.75% or base rate plus 2.75%[53] - The company was in compliance with all financial covenants as of May 29, 2021, and August 29, 2020[54] - No amounts were drawn against the $75.0 million Revolving Credit Facility as of May 29, 2021[55] 7. Fair Value of Financial Instruments Private warrants are classified as a Level 3 liability and measured at fair value, resulting in a significant non-cash loss in the current period - Private Warrants to purchase 6,700,000 shares are classified as a Level 3 liability, valued using the Black-Scholes model with significant unobservable inputs, primarily expected volatility[61][62] | Warrant Valuation Inputs | May 29, 2021 | May 30, 2020 | | :----------------------- | :----------- | :----------- | | Exercise Price | $11.50 | $11.50 | | Stock Price | $34.53 | $17.03 | | Expected Term (in Years) | 1.11 | 2.11 | | Risk-Free Interest Rate | 0.06 % | 0.16 % | | Expected Volatility | 23.90 % | 31.80 % | | Per Share Value of Warrants | $23.04 | $6.26 | - Non-cash loss in fair value change of warrant liability was $35.8 million for the thirteen weeks and $60.7 million for the thirty-nine weeks ended May 29, 2021, compared to gains in the prior year periods[62] 8. Income Taxes The effective tax rate increased significantly due to the non-cash change in fair value of the warrant liability and other permanent differences | Income Tax Data (in thousands) | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :----------------------------- | :----------------------------------- | :----------------------------------- | | Income before income taxes | $53,729 | $113,166 | | Income tax expense | $31,095 | $8,238 | | Effective tax rate | 57.9 % | 7.3 % | - The effective tax rate increased by 50.6% for the thirty-nine weeks ended May 29, 2021, primarily driven by the non-cash change in the fair value of the warrant liability and other permanent differences[63] 9. Leases The company incurred lease costs for operations and financing, with significant future liabilities including a new lease commencing in Q4 fiscal 2021 | Lease Cost (in thousands) | Thirteen Weeks Ended May 29, 2021 | Thirteen Weeks Ended May 30, 2020 | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Total operating lease cost| $1,956 | $1,927 | $5,726 | $4,910 | | Total finance lease cost | $79 | $83 | $240 | $251 | | Total lease cost | $2,035 | $2,016 | $5,966 | $5,191 | - Incurred $0.7 million in impairment charges on operating lease right-of-use assets and a $0.2 million gain on lease termination due to restructuring activities[65] | Lease Liabilities (in thousands) | May 29, 2021 | August 29, 2020 | | :------------------------------- | :----------- | :-------------- | | Operating lease liabilities | $24,005 | $27,093 | | Finance lease liabilities | $758 | $922 | | Total lease liabilities | $24,763 | $28,015 | - A new lease with estimated total minimum future payments of $32.2 million over a 10-year term is expected to commence in Q4 fiscal year 2021[67] 10. Commitments and Contingencies The company is involved in routine litigation not deemed material and has future payment obligations for endorsement contracts - No material litigation is currently pending or threatened against the company[69] - Reserved $0.7 million for potential settlements as of May 29, 2021, down from $1.3 million at August 29, 2020[71] - Required to make $2.8 million in payments over the next year for endorsement contracts with celebrity figures and social media influencers[72] 11. Stockholders' Equity The company completed a public equity offering in 2019 to fund the Quest acquisition and maintains a stock repurchase program - Completed a public equity offering on October 9, 2019, raising approximately $350.0 million, used to partially fund the Quest acquisition[73][149] - 6,700,000 Private Warrants remain outstanding, held by a related party, and are liability-classified; if exercised, they would increase cash by $77.1 million[78][152] - A $50.0 million stock repurchase program was adopted in November 2018, with $47.9 million remaining available as of May 29, 2021[79][80] 12. Earnings Per Share Basic and diluted earnings per share calculations reflect the impact of potentially dilutive securities, with private warrants being anti-dilutive this period | EPS (per share) | Thirteen Weeks Ended May 29, 2021 | Thirteen Weeks Ended May 30, 2020 | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :---------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Basic EPS | $0.06 | $0.50 | $0.24 | $1.12 | | Diluted EPS | $0.06 | $0.17 | $0.23 | $0.23 | - Diluted EPS calculations for the thirteen and thirty-nine weeks ended May 29, 2021, excluded 4.3 million and 3.9 million shares, respectively, issuable upon exercise of Private Warrants, as they were anti-dilutive[83] 13. Omnibus Incentive Plan The company recorded stock-based compensation expense and reports activity for various equity awards, with significant unrecognized costs remaining - Stock-based compensation expense was $5.8 million for the thirty-nine weeks ended May 29, 2021, compared to $5.9 million in the prior year period[87] | Stock Option Activity | Shares Outstanding (May 29, 2021) | Weighted Average Exercise Price | | :-------------------- | :-------------------------------- | :------------------------------ | | Outstanding | 2,793,163 | $14.86 | | Exercisable | 2,215,040 | $13.25 | - Unrecognized compensation cost for stock options is $2.9 million (weighted average 1.7 years), for RSUs is $9.8 million (weighted average 2.1 years), for PSUs is $3.7 million (weighted average 1.3 years), and for SARs is $0.2 million (weighted average 1.4 years)[88][89][91][93] 14. Restructuring and Related Charges The company initiated restructuring activities to integrate Quest, incurring costs with total expected charges of approximately $9.9 million - Restructuring activities, announced in May 2020, aim to integrate Quest and include workforce reductions, management structure changes, and business relocation[94] - Incurred $4.0 million in restructuring and restructuring-related costs for the thirty-nine weeks ended May 29, 2021[96] - Total expected restructuring and related costs are approximately $9.9 million, to be paid throughout fiscal 2021 and the first quarter of fiscal 2022[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, including key business events, performance comparisons, and liquidity analysis Overview - The company is a consumer-packaged food and beverage company focused on nutritious snacking with Atkins® and Quest® brands[102] - Business improved in Q3 2021 due to increasing consumer mobility and shopper traffic in brick-and-mortar retailers, particularly benefiting Quest and bar products[106] - Incurred $4.0 million in restructuring and related costs for the thirty-nine weeks ended May 29, 2021, with total expected costs of $9.9 million[109] - Sold the SimplyProtein® brand assets for approximately $8.8 million to focus on core Atkins® and Quest® businesses[110] - Management plans to institute a price increase effective September 2021 (fiscal year 2022) to offset expected higher raw material and freight costs[111] Key Financial Definitions - Net sales: Product sales less promotional activities, slotting fees, and other sales credits/adjustments[113] - Cost of goods sold: Costs paid to contract manufacturers, including raw ingredients, packaging, shipping, warehousing, depreciation, and tolling charges[114] - Operating expenses: Selling and marketing, general and administrative, depreciation and amortization, and business transaction costs[115][117] Results of Operations Comparison of Unaudited Results for the Thirteen Weeks Ended May 29, 2021 and the Thirteen Weeks Ended May 30, 2020 | Metric (in thousands) | May 29, 2021 | May 30, 2020 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $284,001 | $215,101 | $68,900 | 32.0% | | Gross profit | $121,003 | $88,626 | $32,377 | 36.5% | | Income from operations| $60,322 | $31,108 | $29,214 | 93.9% | | Net income | $5,895 | $48,112 | $(42,217) | (87.7)% | | Adjusted EBITDA | $67,459 | $43,363 | $24,096 | 55.6% | - Gross profit margin increased by 140 basis points to 42.6% due to favorable product form and retail channel mix[120] - Net income decreased significantly due to a $35.8 million non-cash loss in fair value change of warrant liability, compared to a $31.7 million gain in the prior year[123][126] - Selling and marketing expenses increased by 25.8% due to reinstated marketing spend following COVID-19 related declines[128] - General and administrative expenses decreased by 10.6% due to reduced Quest integration costs and restructuring charges, partially offset by increased incentive compensation[128] Comparison of Unaudited Results for the Thirty-Nine Weeks Ended May 29, 2021 and the Thirty-Nine Weeks Ended May 30, 2020 | Metric (in thousands) | May 29, 2021 | May 30, 2020 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $745,760 | $594,355 | $151,405 | 25.5% | | Gross profit | $305,309 | $236,226 | $69,083 | 29.2% | | Income from operations| $132,850 | $53,392 | $79,458 | 148.8% | | Net income | $22,634 | $104,928 | $(82,294) | (78.4)% | | Adjusted EBITDA | $158,800 | $116,889 | $41,911 | 35.9% | - Net sales increase primarily attributable to the Quest brand's full inclusion in fiscal year 2021 results and post-acquisition sales volume growth[129] - Gross profit margin increased by 120 basis points to 40.9%, primarily due to the absence of the $7.5 million non-cash inventory step-up related to the Quest acquisition in fiscal year 2020[131] - Net income decreased significantly due to a $60.7 million non-cash loss in fair value change of warrant liability, compared to an $82.7 million gain in the prior year[134][137] - Business transaction costs decreased by $26.9 million as the prior year included expenses related to the Quest acquisition[138] Reconciliation of EBITDA and Adjusted EBITDA - EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management and investors to assess operating performance, excluding non-operating and non-recurring items[139] | Reconciliation (in thousands) | Thirteen Weeks Ended May 29, 2021 | Thirteen Weeks Ended May 30, 2020 | Thirty-Nine Weeks Ended May 29, 2021 | Thirty-Nine Weeks Ended May 30, 2020 | | :---------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $5,895 | $48,112 | $22,634 | $104,928 | | EBITDA | $33,774 | $66,940 | $91,585 | $147,162 | | Adjusted EBITDA | $67,459 | $43,363 | $158,800 | $116,889 | - Adjustments to EBITDA include business transaction costs, stock-based compensation, inventory step-up, integration costs, restructuring costs, non-core legal costs, warrant liability fair value changes, legal settlement gains/losses, and other non-core expenses[139][140] Liquidity and Capital Resources - Cash and cash equivalents totaled $90.2 million as of May 29, 2021[142] - The company believes its liquidity and capital sources are sufficient for at least the next twelve months[142] - The Term Facility had an outstanding balance of $506.5 million as of May 29, 2021, maturing in July 2024, with no principal payments required in the next twelve months[148] - The Quest acquisition was funded by $195.3 million cash on hand, $350.0 million from a public equity offering, and $443.6 million in new term loan debt[151] - Net cash provided by operating activities increased by $67.4 million to $91.5 million for the thirty-nine weeks ended May 29, 2021, driven by higher operating income and reduced Quest acquisition-related cash outlays[153] Contractual Obligations - No material changes to contractual obligations from the Annual Report[157] Off-Balance Sheet Arrangements - No material off-balance sheet arrangements as of May 29, 2021[158] New Accounting Pronouncements - Refer to Note 2 of the unaudited interim consolidated financial statements for information regarding recently issued accounting standards[159] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company reports no material changes in market risk but plans a price increase in September 2021 to mitigate expected cost inflation - No material changes in market risk exposure during the thirteen weeks ended May 29, 2021[160] - Management notified customers of plans to institute a price increase effective September 2021 (fiscal year 2022) to address expected higher raw material and freight costs[160] Item 4. Controls and Procedures Disclosure controls were deemed effective, and while a material weakness in warrant accounting was noted, financial statements are fairly stated - Disclosure controls and procedures were effective as of May 29, 2021[163] - A material weakness in internal controls over financial reporting related to warrant accounting was previously disclosed, but management concluded financial statements are fairly stated[162] Changes in Internal Control over Financial Reporting - No material changes in internal controls over financial reporting during the quarter ended May 29, 2021[164] Inherent Limitations on Effectiveness of Controls - Internal control systems, regardless of design, have inherent limitations and can only provide reasonable assurance[164] PART II. Other Information Item 1. Legal Proceedings The company is not currently a party to any litigation expected to have a material adverse effect on its business - No material legal proceedings are currently pending or threatened against the company[166] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Form 10-K/A - No material changes in the risk factors included in the company's Form 10-K/A[167] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[168] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None to report[169] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not Applicable[170] Item 5. Other Information There is no other information to report for the period - None to report[171] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including officer certifications and XBRL-related documents - Includes certifications (302 and 906 of Sarbanes Oxley Act) from Principal Executive Officer and Principal Financial Officer[173] - Contains XBRL Instance Document and Taxonomy Extension Documents[173] Signatures The report is duly signed on behalf of The Simply Good Foods Company by its Chief Accounting Officer - Signed by Timothy A. Matthews, Vice President, Controller, and Chief Accounting Officer[176]