What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-08 compared with 2021-01-07 · 150 added, 109 removed, 178 unchanged (59% of the section changed)

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These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements.

These statements include, but are not limited to, the effect of the novel coronavirus ("COVID-19") on our business, financial condition and results of operations.

These statements include, but are not limited to, the effect of the COVID-19 pandemic on our business, financial condition and results of operations.

We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

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Given the unpredictable nature of the COVID-19 pandemic and the initial surge in consumption, we increased finished goods inventory of some of our key products.

In the fourth quarter of 2020 and continuing into the first quarter of 2021, consumption habits became more steady and inventory levels normalized.

In the fourth quarter of 2020 and continuing into the second quarter of 2021, consumer consumption habits became more steady and inventory levels normalized.

Based on information available to us as of the date of this Report, we believe we will be able to deliver our products to meet customer orders on a timely basis, and therefore, we expect our products will continue to be available for purchase to meet consumer meal replacement and snacking needs for the foreseeable future.

to monitor customer and consumer demand, and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 situation.

We continue to monitor customer and consumer demand, and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 situation.

We implemented remote work arrangements and restricted business travel in March 2020, and to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.

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We also believe the return of these shopping patterns along with our brand benefits of active nutrition and weight management will drive more better-for-you snacking and meal replacement usage occasions.

Our consolidated results of operations for the thirteen weeks ended November 28, 2020 continued to be affected by changes in consumer shopping and consumption behavior due to COVID-19.

During the fiscal second quarter of 2021, several vaccines were first authorized for use against COVID-19 in the United States and internationally.

As a result of distribution of the vaccines, various federal, state and local government have begun to ease the movement restrictions and initiatives while continuing to adhere to enhanced safety measures, such as physical distancing and face mask protocols.

However, the uncertainty continues to exist regarding the severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and deployment, potential mutations of COVID-19, and the effect of actions taken and that will be taken to contain COVID-19 or treat its effect, among others.

Our consolidated results of operations for the thirteen and twenty-six weeks ended February 27, 2021 continued to be affected by changes in consumer shopping and consumption behavior due to COVID-19.

The nutritional snacking category has experienced a marked decrease in shopping trips (particularly in the mass channel) and fewer usage occasions.

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While our Quest brand has outperformed its portion of the nutritious snaking segment, the performance of our Atkins brand, which is part of the weight management portion of the market, has remained slower due to what we believe is the temporary softer interest in weight management for consumers, fewer on-the-go usage occasions and weakness in the mass channel that has experienced reduced shopper traffic during the pandemic.

Based on the duration and severity of economic effects from the COVID-19 pandemic, including but not limited to stock market volatility, the potential for (i) continued increased rates of reported cases of COVID-19, (ii) unexpected supply chain disruptions, (iii) changes to customer operations, (iv) continued or additional changes in consumer purchasing and consumption behavior beyond those evidenced to date, and (v) the closure of customer establishments, we remain uncertain of the ultimate effect COVID-19 could have on our business.

We also believe the COVID-19 uncertainty will continue during our 2021 fiscal year.

We remain uncertain of the ultimate effect COVID-19 could have on our business notwithstanding the distribution of several U.S.

government approved vaccines and various federal, state and local governments having begun to ease the movement restrictions and public health initiatives while continuing to adhere to enhanced safety measures, such as physical distancing and face mask protocols.

This uncertainty as to the duration and severity of economic effects from severity of economic effects from the COVID-19 pandemic stems from the potential for, among other things, (i) continued rates of reported cases of COVID-19 and the potential for mutations of COVID-19 to result in increased rates of reported cases for which currently approved vaccines are not effective, (ii) unexpected supply chain disruptions, (iii) changes to customer operations, (iv) continued or additional changes in consumer purchasing and consumption behavior beyond those evidenced to date, and (v) the closure of customer establishments.

Restructuring and Related Charges

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These restructuring plans primarily include workforce reductions, changes in management structure, and the relocation of business activities from one location to another.

For the thirteen weeks ended November 28, 2020, we incurred a total of $2.5 million in restructuring and restructuring related costs which have been included within General and administrative on the Consolidated Statements of Operations and Comprehensive Income.

As of November 28, 2020, we have incurred aggregate restructuring and restructuring related costs of $8.0 million since May 2020.

For the thirteen and twenty-six weeks ended February 27, 2021, we incurred a total of $1.3 million and $3.8 million in restructuring and restructuring related costs, respectively, which have been included within General and administrative on the Consolidated Statements of Operations and Comprehensive Income.

As of February 27, 2021, we have incurred aggregate restructuring and restructuring related costs of $9.3 million since May 2020.

Overall, we expect to incur a total of approximately $10.0 million in restructuring and restructuring-related costs, which are to be paid throughout fiscal 2021 and the first quarter of fiscal 2022.

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The transaction enables our management to focus its full time and our resources on our core Atkins® and Quest® branded businesses and other strategic initiatives.

Our Reportable Segment

Following the Acquisition of Quest, our operations are organized into two operating segments, Atkins and Quest, which are aggregated into one reporting segment, due to similar financial, economic and operating characteristics.

The operating segments are also similar in the following areas:

(a) the nature of the products;

(b) the nature of the production processes;

(c) the methods used to distribute products to customers, (d) the type of customer for the products, and (e) the nature of the regulatory environment.

The recently announced restructuring and new organization design creates an efficient and fully integrated organization that will continue to support and build multi-category nutritional snacking brands.

Key Financial Definitions

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Results of Operations

Overall, the results in the first quarter of fiscal 2020 were better than expected amid the ongoing challenges of operating in the COVID-19 environment.

The Acquisition of Quest and the strong performance of the Quest brand drove the increases in net sales and net operating income for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

While we are encouraged with our start to fiscal year 2021, including the momentum of the Quest brand and the progress made against our strategic initiatives, there is still uncertainty related to when mobility, consumption behavior and shopping trips will return to pre-COVID-19 levels.

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 and Adjusted Diluted Earnings Per Share.

Because not all companies use identical calculations, this presentation of Adjusted EBITDA and Adjusted Diluted Earnings Per Share may not be comparable to other similarly titled measures of other companies.

In the second quarter of fiscal 2021, we were able to continue to drive net sales and earnings growth in a challenging operating environment.

The strong performance of the Quest brand drove the increases in net sales and net income for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

We are encouraged by our business's performance in the first half of fiscal year 2021, including the momentum of the Quest brand and the progress made against our strategic initiatives, however there is still uncertainty related to when customer mobility, consumption behavior and shopping trips will return to pre-COVID-19 levels.

However, we anticipate there will be overall marketplace trend improvements in the second half of fiscal 2021 as consumer mobility and on-the-go consumption increases.

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.

See “Reconciliation of Adjusted Diluted Earnings Per Share” below for a reconciliation of Adjusted Diluted Earnings Per Share to diluted earnings per share for each applicable period.

Comparison of Unaudited Results for the Thirteen Weeks Ended November 28, 2020 and the Thirteen Weeks Ended November 30, 2019

Comparison of Unaudited Results for the Thirteen Weeks Ended February 27, 2021 and the Thirteen Weeks Ended February 29, 2020

The following unaudited table presents, for the periods indicated, selected information from our Condensed Consolidated Statements of Operations and Comprehensive Income, including information presented as a percentage of net sales:

Thirteen Weeks Ended

(In thousands) November 28, 2020 % of Sales November 30, 2019 % of Sales

Thirteen Weeks Ended Thirteen Weeks Ended

(In thousands) February 27, 2021 % of Sales February 29, 2020 % of Sales

Net sales $ 230,607 100.0 % $ 227,101 100.0 %

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Total operating expenses 56,924 24.7 % 60,125 26.5 %

Income (loss) from operations 39,187 17.0 % (2,985) (2.0) %

Income from operations 33,341 14.5 % 25,269 11.1 %

Other income (expense):

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Interest expense (7,995) (3.5) % (10,589) (4.7) %

Gain on foreign currency transactions 9 — % 16 — %

Gain (loss) on foreign currency transactions 975 0.4 % (194) (0.1) %

Other income 112 — % 8 — %

Total other expense (6,908) (3.0) % (10,690) (4.7) %

Income (loss) before income taxes 30,874 13.4 % (6,522) (4.3) %

Income tax expense (benefit) 8,374 3.6 % (1,729) (1.1) %

Net income (loss) $ 22,500 9.7 % $ (4,793) (3.2) %

Income before income taxes 26,433 11.5 % 14,579 6.4 %

Income tax expense 7,313 3.2 % 3,922 1.7 %

Net income $ 19,120 8.3 % $ 10,657 4.7 %

Other financial data:

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See “Reconciliation of Adjusted EBITDA” below for a reconciliation of Adjusted EBITDA to net income for each applicable period.

Net sales of $231.2 million represented an increase of $79.0 million, or 51.9%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

The net sales increase of 51.9% was primarily attributable to the Acquisition of Quest, which drove 51.7% of the increase.

The remaining 0.2% increase in net sales attributable to the legacy Atkins business was primarily driven by international sales growth, partially offset by a 1.7% decrease in net sales due to the SimplyProtein Sale in the first quarter of fiscal year 2021 as well as reduced sales volume due to the continued effects of COVID-19 related movement restrictions and stay-at-home orders.

Net sales of $230.6 million represented an increase of $3.5 million, or 1.5%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

The net sales increase of 1.5% was primarily driven by Quest brand net sales growth and solid e-commerce growth across both the Atkins brand and Quest brand.

The increase was partially offset by a 1.2% decrease in net sales due to the SimplyProtein Sale and the restructuring related business activities in Europe in fiscal year 2021.

Additionally, net sales in the thirteen weeks ended February 27, 2021 were negatively affected by the timing of seasonal inventory shipments as well as higher trade promotions.

Cost of goods sold .

Cost of goods sold increased $47.2 million, or 52.4%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

The cost of goods sold increase was driven by sales volume growth attributable to the Acquisition of Quest.

Cost of goods sold decreased $1.4 million, or 1.0%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

The cost of goods sold decrease was driven by the effect of the $5.1 million non-cash inventory step-up related to the Acquisition of Quest in fiscal year 2020, partially offset by sales volume growth primarily attributable to the Quest brand as discussed above.

Gross profit.

Gross profit increased $31.8 million, or 51.2%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

Gross profit of $94.0 million, or 40.7% of net sales, for the thirteen weeks ended November 28, 2020 decreased 20 basis points from 40.9% of net sales for the thirteen weeks ended November 30, 2019.

The decrease in gross profit margin was primarily the result of the Acquisition of Quest's lower gross profit margins, partially offset by a non-cash $2.4 million inventory purchase accounting step-up adjustment in the first quarter of fiscal year 2020.

Gross profit increased $4.9 million, or 5.7%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

Gross profit of $90.3 million, or 39.1% of net sales, for the thirteen weeks ended February 27, 2021 increased 150 basis points from 37.6% of net sales for the thirteen weeks ended February 29, 2020.

The increase in gross profit margin was primarily the result of a $5.1 million non-cash inventory purchase accounting step-up adjustment which resulted in a 220 basis point headwind in fiscal year 2020.

This increase was partially offset by higher trade promotions in fiscal year 2021.

Operating expenses .

Operating expenses decreased $10.3 million, or 15.9%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019 due to the following:

Operating expenses decreased $3.2 million, or 5.3%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020 due to the following:

• Selling and marketing.

Selling and marketing expenses increased $6.8 million, or 36.7%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

The increase was primarily related to the Acquisition of Quest.

Selling and marketing expenses decreased $0.9 million, or 3.3%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

The decrease was primarily related to the SimplyProtein Sale and the restructuring related business activities in Europe in fiscal year 2021.

• General and administrative.

General and administrative expenses increased $7.3 million, or 40.1%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

The increase was primarily attributable to the Acquisition of Quest as well as restructuring charges of $2.5 million in the thirteen weeks ended November 28, 2020.

These increases were partially offset by reductions in stock-based compensation and costs related to the integration of Quest.

General and administrative expenses decreased $1.5 million, or 5.5%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

The decrease was primarily attributable to a $2.9 million reduction in costs related to the integration of Quest, partially offset by an increase in restructuring charges of $1.3 million in the thirteen weeks ended February 27, 2021.

• Depreciation and amortization.

Depreciation and amortization expenses increased $1.8 million, or 73.0%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

The increase was primarily due to amortization for the intangible assets recognized in the Acquisition of Quest of $2.2 million.

Depreciation and amortization expenses decreased slightly to $4.2 million for the thirteen weeks ended February 27, 2021 compared to $4.3 million for the thirteen weeks ended February 29, 2020.

• Business transaction costs .

Business transaction costs were $26.2 million for the thirteen weeks ended November 30, 2019 and was comprised of expenses related to the Acquisition of Quest.

Business transaction costs were $0.7 million for the thirteen weeks ended February 29, 2020 and was comprised of expenses related to the Acquisition of Quest.

Interest income .

Interest income decreased $1.4 million for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019 primarily due to $195.3 million of cash on hand being utilized for the Acquisition of Quest in the first quarter of fiscal year 2020 and lower market rates.

Interest income was nominal for each of the thirteen weeks ended February 27, 2021 and February 29, 2020.

Interest expense .

Interest expense increased $3.4 million for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019 primarily due to the first quarter of fiscal year 2020 term loan funding of $460.0 million to partially finance the Acquisition of Quest.

Gain on foreign currency transactions.

The gain in foreign currency related to our international operations was nominal for the thirteen weeks ended November 28, 2020 and November 30, 2019.

Income tax expense (benefit).

Income tax expense increased $10.1 million, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019.

The increase in our income tax expense is primarily driven by higher pre-tax book income offset by other permanent differences.

Net income (loss) .

Net income was $22.5 million for the thirteen weeks ended November 28, 2020, an increase of $27.3 million compared to the net loss of $4.8 million for the thirteen weeks ended November 30, 2019.

The increase was primarily related to increased operating income and decreased transaction costs from the Acquisition of Quest in the first quarter of fiscal year 2020.

Interest expense decreased $2.6 million for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020 primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to $556.5 million as of February 27, 2021 from $635.5 million as of February 29, 2020.

Gain (loss) on foreign currency transactions.

A gain of $1.0 million in foreign currency transactions was recorded for the thirteen weeks ended February 27, 2021 compared to a foreign currency loss of $0.2 million for the thirteen weeks ended February 29, 2020.

The change relates to changes in foreign currency rates related to international operations.

Income tax expense.

Income tax expense increased $3.4 million, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

The increase in our income tax expense is primarily driven by higher pre-tax book income offset by permanent differences.

Net income was $19.1 million for the thirteen weeks ended February 27, 2021, an increase of $8.5 million compared to net income of $10.7 million for the thirteen weeks ended February 29, 2020.

The increase was primarily related to increased gross profit as well as reductions to operating expenses and interest expense as discussed above.

Adjusted EBITDA.

Adjusted EBITDA increased $16.9 million, or 53.2%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019, driven primarily by the Acquisition of Quest.

Adjusted EBITDA increased $0.9 million, or 2.2%, for the thirteen weeks ended February 27, 2021 compared to the thirteen weeks ended February 29, 2020.

For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of Adjusted EBITDA” below.

Comparison of Unaudited Results for the Twenty-Six Weeks Ended February 27, 2021 and the Twenty-Six Weeks Ended February 29, 2020

Twenty-Six Weeks Ended Twenty-Six Weeks Ended

(In thousands) February 27, 2021 % of Sales February 29, 2020 % of Sales

Net sales $ 461,759 100.0 % $ 379,254 100.0 %

Cost of goods sold 277,453 60.1 % 231,654 61.1 %

Gross profit 184,306 39.9 % 147,600 38.9 %

Operating expenses:

Selling and marketing 51,345 11.1 % 45,475 12.0 %

General and administrative 51,977 11.3 % 46,248 12.2 %

Depreciation and amortization 8,456 1.8 % 6,740 1.8 %

Business transaction costs — — % 26,853 7.1 %

Total operating expenses 111,778 24.2 % 125,316 33.0 %

Income from operations 72,528 15.7 % 22,284 5.9 %

Other income (expense):

Interest income 3 — % 1,464 0.4 %

Interest expense (16,367) (3.5) % (15,558) (4.1) %

Gain (loss) on foreign currency transactions 984 0.2 % (178) — %

Other income 159 — % 45 — %

Total other expense (15,221) (3.3) % (14,227) (3.8) %

Income before income taxes 57,307 12.4 % 8,057 2.1 %

Income tax expense 15,687 3.4 % 2,193 0.6 %

Net income $ 41,620 9.0 % $ 5,864 1.5 %

Other financial data:

Adjusted EBITDA (1)

$ 91,341 19.8 % $ 73,526 19.4 %

(1) Adjusted EBITDA is a non-GAAP financial metric.

See “Reconciliation of Adjusted EBITDA” below for a reconciliation of Adjusted EBITDA to net income for each applicable period.

Net sales of $461.8 million represented an increase of $82.5 million, or 21.8%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

The net sales increase of 21.8% was primarily attributable to the Quest brand, which increased net sales by 25.2%, due to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021 as well as post-acquisition Quest brand sales volume growth.

These increases in net sales were partially offset by decreased sales volume of approximately 1.4% related to the SimplyProtein Sale and the restructuring related business activities in Europe in fiscal year 2021.

Additionally, the continued effects of COVID-19 related movement restrictions as well as higher trade promotions partially offset the overall increase in net sales.

Cost of goods sold .

Cost of goods sold increased $45.8 million, or 19.8%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

The cost of goods sold increase was driven by sales volume growth primarily attributable to the Quest brand as discussed above, which was partially offset by the effect of the $7.5 million non-cash inventory step-up related to the Acquisition of Quest.

Gross profit.

Gross profit increased $36.7 million, or 24.9%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

Gross profit of $184.3 million, or 39.9% of net sales, for the twenty-six weeks ended February 27, 2021 increased 100 basis points from 38.9% of net sales for the twenty-six weeks ended February 29, 2020.

The increase in gross margin was primarily the result of the $7.5 million non-cash inventory step-up related to the Acquisition of Quest in fiscal year 2020 offset by higher trade promotions in fiscal year 2021.

Operating expenses .

Operating expenses decreased $13.5 million, or 10.8%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020 due to the following:

• Selling and marketing.

Selling and marketing expenses increased $5.9 million, or 12.9%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

The increase was primarily related to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021, which was partially offset by decreased selling and marketing expenses related to the SimplyProtein Sale and the restructuring related business activities in Europe.

• General and administrative.

General and administrative expenses increased $5.7 million, or 12.4%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

The increase was primarily attributable to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021 as well as restructuring charges of $3.8 million in fiscal year 2021.

These increases were partially offset by the reductions in costs related to the integration of Quest and stock-based compensation.

• Depreciation and amortization.

Depreciation and amortization expenses increased $1.7 million, or 25.5%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

The increase was primarily due to the partial inclusion amortization expense related to intangible assets recognized in the Acquisition of Quest in fiscal year 2020 as compared to fiscal year 2021.

• Business transaction costs .

Business transaction costs were $26.9 million for the twenty-six weeks ended February 29, 2020 and was comprised of expenses related to the Acquisition of Quest.

Interest income .

Interest income decreased $1.5 million for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020, primarily due to $195.3 million of cash on hand being utilized for the Acquisition of Quest in the first quarter of fiscal year 2020 and lower market rates.

Interest expense .

Interest expense increased $0.8 million for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020, primarily due to the funding of the Term Facility in the amount of $460.0 million to partially finance the Acquisition of Quest in the first quarter of fiscal 2020.

Gain (loss) on foreign currency transactions.

A gain of $1.0 million in foreign currency transactions was recorded for the twenty-six weeks ended February 27, 2021 compared to a foreign currency loss of $0.2 million for the twenty-six weeks ended February 29, 2020.

The change relates to changes in foreign currency rates related to international operations.

Income tax expense.

Income tax expense increased $13.5 million, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

The increase in our income tax expense was primarily driven by higher pre-tax book income offset by permanent difference.

Net income was $41.6 million for the twenty-six weeks ended February 27, 2021 an increase of $35.8 million compared to net income of $5.9 million for the twenty-six weeks ended February 29, 2020.

The increase was primarily related to increased gross profit as discussed above and decreased transaction costs related to the Acquisition of Quest in fiscal year 2020.

Adjusted EBITDA.

Adjusted EBITDA increased $17.8 million, or 24.2%, for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020, driven primarily by the Acquisition of Quest.

For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of Adjusted EBITDA” below.

Reconciliation of Adjusted EBITDA

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business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, and other non-core expenses.

The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted EBITDA, when used in conjunction with net income, are appropriate to provide additional information to investors, and management of the Company uses Adjusted EBITDA to supplement net income because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making.

The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted EBITDA, when used in conjunction with net income, are useful to provide additional information to investors, and management of the Company uses Adjusted EBITDA to supplement net income because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making.

The Company also believes that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry .

Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in the non-GAAP calculation.

The following unaudited tables below provide a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, which is net income, for the thirteen weeks ended November 28, 2020 and November 30, 2019:

(In thousands) Thirteen Weeks Ended

November 28, 2020 November 30, 2019

Net income (loss) $ 22,500 $ (4,793)

The following unaudited tables below provide a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, which is net income, for the thirteen and twenty-six weeks ended February 27, 2021 and February 29, 2020:

(In thousands) Thirteen Weeks Ended Twenty-Six Weeks Ended

February 27, 2021 February 29, 2020 February 27, 2021 February 29, 2020

Net income $ 19,120 $ 10,657 $ 41,620 $ 5,864

Interest income — (85) (3) (1,464)

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Non-core legal costs — 76 — 555

(1,011) 174 (945) 190

Adjusted EBITDA $ 42,644 $ 41,731 $ 91,341 $ 73,526

(1) Other items consist principally of exchange impact of foreign currency transactions and other expenses.

Reconciliation of Adjusted Diluted Earnings Per Share

Adjusted Diluted Earnings Per Share .

Adjusted Diluted Earnings Per Share is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to diluted earnings per share as an indicator of operating performance.

Simply Good Foods defines Adjusted Diluted Earnings Per Share as diluted earnings per share before depreciation and amortization, business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, and other non-core expenses, on a theoretical tax effected basis of such adjustments at an assumed statutory rate.

The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted Diluted Earnings per Share, when used in conjunction with diluted earnings per share, are appropriate to provide additional information to investors, and management of the Company uses Adjusted Diluted Earnings Per Share to supplement diluted earnings per shares because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making.

The Company also believes that Adjusted Diluted Earnings per Share is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry .

Adjusted Diluted Earnings per Share may not be comparable to other similarly titled captions of other companies due to differences in the non-GAAP calculation.

The following unaudited tables below provide a reconciliation of Adjusted Diluted Earnings Per Share to its most directly comparable GAAP measure, which is diluted earnings per share, for the thirteen and thirteen weeks ended November 28, 2020 and November 30, 2019:

Thirteen Weeks Ended

November 28, 2020 November 30, 2019

Diluted earnings (loss) per share $ 0.23 $ (0.05)

Depreciation and amortization 0.03 0.02

Business transaction costs — 0.22

Stock-based compensation expense 0.01 0.01

Inventory step-up — 0.02

Integration of Quest 0.01 0.01

Restructuring 0.02 —

Non-core legal costs — —

Net loss impact on diluted earnings per share — (0.01)

Adjusted diluted earnings per share $ 0.29 $ 0.22

(1) Other items consist principally of exchange impact of foreign currency transactions and other expenses.

(2) Adjusted Diluted Earnings Per Share amounts are computed independently for each quarter.

Therefore, the sum of the quarterly Adjusted Diluted Earnings Per Share amounts may not equal the year to date Adjusted Diluted Earnings Per Share amounts due to rounding.

Liquidity and Capital Resources

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Our principal uses of cash have been debt service, working capital and the Acquisition of Quest.

We had $91.5 million in cash and cash equivalents as of November 28, 2020.

We had $91.3 million in cash and cash equivalents as of February 27, 2021.

We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months.

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Any failure to comply with the restrictions of the credit facilities may result in an event of default.

We were in compliance with all financial covenants as of November 28, 2020 and August 29, 2020, respectively.

At November 28, 2020, the outstanding balance of the Term Facility was $581.5 million.

We are not required to make principal payments on the Term Facility over the twelve months following the period ended November 28, 2020.

As of November 28, 2020, there were no amounts drawn against the Revolving Credit Facility.

We were in compliance with all financial covenants as of February 27, 2021 and August 29, 2020, respectively.

At February 27, 2021, the outstanding balance of the Term Facility was $556.5 million.

We are not required to make principal payments on the Term Facility over the twelve months following the period ended February 27, 2021.

The outstanding balance of the Term Facility is due upon its maturity in July 2024.

As of February 27, 2021, there were no amounts drawn against the Revolving Credit Facility.

Public Equity Offering

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Acquisition of Quest

On August 21, 2019, our wholly-owned subsidiary Simply Good Foods USA, Inc., formerly known as Atkins Nutritionals, Inc.

(“Simply Good USA”) entered into a Stock and Unit Purchase Agreement (the "Purchase Agreement") with VMG Voyage Holdings, LLC, VMG Tax-Exempt II, L.P., Voyage Employee Holdings, LLC, and other sellers, as defined in the Purchase Agreement, to acquire Quest, a healthy lifestyle food company.

On August 21, 2019, our wholly-owned subsidiary Simply Good USA entered into the Purchase Agreement with VMG Voyage Holdings, LLC, VMG Tax-Exempt II, L.P., Voyage Employee Holdings, LLC, and other sellers, as defined in the Purchase Agreement, to acquire Quest, a healthy lifestyle food company.

On November 7, 2019, pursuant to the Purchase Agreement, Simply Good USA completed the Acquisition of Quest, for a cash purchase price of approximately $1.0 billion, subject to customary post-closing adjustments.

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Cash sources of funding included $195.3 million of cash on hand, net proceeds of approximately $350.0 million from an underwritten public offering of common stock, and $443.6 million of new term loan debt.

In the third fiscal quarter of 2020, we received a post-closing release from escrow of approximately $2.1 million related to net working capital adjustments, resulting in a total net consideration paid of $986.8 million as of November 28, 2020.

For the thirteen weeks ended November 30, 2019, we incurred business transaction costs $26.2 million.

For the thirteen and twenty-six weeks ended February 29, 2020, we incurred business transaction costs $0.7 million and $26.9 million, respectively.

Equity Warrants

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The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):

Thirteen Weeks Ended

November 28, 2020 November 30, 2019

Twenty-Six Weeks Ended

February 27, 2021 February 29, 2020

Net cash provided by (used in) operating activities

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Operating activities.

Our net cash provided by operating activities increased $23.1 million to $15.2 million for the thirteen weeks ended November 28, 2020 compared to cash used in operating activities of $7.9 million for the thirteen weeks ended November 30, 2019.

The increase in cash provided by operating activities was primarily driven by higher income before taxes due to the lack of significant business transaction and integration costs, partially offset by changes in working capital.

Our net cash provided by operating activities increased $54.7 million to $39.8 million for the twenty-six weeks ended February 27, 2021 compared to cash used in operating activities of $14.9 million for the twenty-six weeks ended February 29, 2020.

The increase in cash provided by operating activities was primarily caused by higher income before taxes, which was driven by (i) the Quest brand sales volume growth, which increased net sales by 25.2%, due to Quest's partial inclusion in our results of operations in fiscal year 2020 as compared to fiscal year 2021 as well as post-acquisition Quest brand sales volume growth and (ii) significant reductions in cash outlays and changes in working capital related to the first quarter 2020 Acquisition of Quest, including decreases in business transaction costs of $26.9 million and integration costs of $3.1 million.

These increases in cash provided by operations were partially offset by $6.3 million of cash payments made for restructuring related costs, predominately composed of termination benefits and severance payments, during the twenty-six weeks ended February 27, 2021.

Additionally, cash paid for taxes increased $5.7 million for the twenty-six weeks ended February 27, 2021 compared to the twenty-six weeks ended February 29, 2020.

Investing activities.

Our net cash provided by investing activities was $5.6 million for the thirteen weeks ended November 28, 2020, which was primarily related to the $5.8 million of cash proceeds received from the SimplyProtein Sale.

The net cash used in investing activities of $985.7 million for the thirteen weeks ended November 30, 2019 was primarily related to the cash paid for the Acquisition of Quest, net of cash acquired, of $984.2 million.

Our net cash provided by investing activities was $5.2 million for the twenty-six weeks ended February 27, 2021, which was primarily related to the $5.8 million of cash proceeds received from the SimplyProtein Sale.

The net cash used in investing activities of $985.9 million for the twenty-six weeks ended February 29, 2020 was primarily related to the cash paid for the Acquisition of Quest, net of cash acquired, of $984.2 million.

Financing activities .

Our net cash used in financing activities was $25.1 million for the thirteen weeks ended November 28, 2020 compared to net cash provided by financing activities of $800.1 million for the thirteen weeks ended November 30, 2019.

Net cash used in financing activities for the thirteen weeks ended November 28, 2020 primarily consisted of a $25.0 million principal payment on the Term Facility.

For the thirteen weeks ended November 30, 2019, net cash provided by financing activities included gross proceeds of $352.5 million from the Offering offset by issuance costs of $3.3 million, proceeds of $460.0 million from the Term Facility borrowing related to the Incremental Facility Amendment offset by issuance costs of $8.2 million, and a $1.0 million principal payment on the Term Facility.

Our net cash used in financing activities was $49.9 million for the twenty-six weeks ended February 27, 2021 compared to net cash provided by financing activities of $780.7 million for the twenty-six weeks ended February 29, 2020.

Net cash used in financing activities for the twenty-six weeks ended February 27, 2021 primarily consisted of a $50.0 million principal payment on the Term Facility.

For the twenty-six weeks ended February 29, 2020, net cash provided by financing activities included gross proceeds of $352.5 million from the Offering offset by issuance costs of $3.3 million, proceeds of $460.0 million from the Term Facility borrowing related to the Incremental Facility Amendment offset by issuance costs of $8.2 million, and a $21.0 million principal payment on the Term Facility.

Contractual Obligations

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Off-Balance Sheet Arrangements

As of November 28, 2020, we had no material off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.

As of February 27, 2021, we had no material off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements

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There have been no significant changes to our critical accounting policies since August 29, 2020.

Refer to Note 2 of our unaudited interim condensed consolidated financial statements in this Report for further information regarding recently issued accounting standards.

Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in our market risk exposure during the thirteen week period ended November 28, 2020.

For a discussion of our market risks, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report.

Refer to Note 2 of our unaudited interim consolidated financial statements in this Report for further information regarding recently issued accounting standards.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis