What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-08 compared with 2021-04-08 · 140 added, 125 removed, 203 unchanged (57% of the section changed)

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Such risks and uncertainties include those related to our ability to sell our products.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended August 29, 2020 (“Annual Report”) and our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K/A for the fiscal year ended August 29, 2020 (“Annual Report”) and our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Report.

In addition to historical information, the following discussion contains forward-looking statements, including but not limited to, statements regarding the Company’s expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from the Company’s expectations.

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Effects of COVID-19

In December 2019, a novel coronavirus disease, or COVID-19, was reported and in January 2020, the World Health Organization, or WHO, declared it a Public Health Emergency of International Concern.

In December 2019, a novel coronavirus disease, or COVID-19, was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern.

On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

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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.

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.

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.

We believe our lean infrastructure, which allows for significant flexibility, speed-to-market and minimal capital investment, has enabled us to adjust our expenditures to maintain cash flow until the more fulsome reopening of the U.S.

economy and the associated return of shopping behavior to more normal patterns occurs.

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.

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.

There is still uncertainty related to the duration of reduced consumer mobility and when shopping trips will return to pre-pandemic levels, particularly in the mass market retail channel.

This has affected our portable and convenient on-the-go products, especially the nutrition and protein bar portion of our business for both our Atkins and Quest brands.

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.

Our consolidated results of operations for the thirteen and thirty-nine weeks ended May 29, 2021 continued to be affected by changes in consumer shopping and consumption behavior due to COVID-19.

However, for the thirteen and thirty-nine weeks ended May 29, 2021, our business improved, driven by increasing consumer mobility and improving shopper traffic in brick and mortar retailers versus the prior year period that was pressured by COVID-19 movement restrictions.

We believe there is a high correlation of consumer mobility to the consumption of our products.

As shopper traffic within brick and mortar retailers improves, particularly in the mass and convenience store channels, our business, particularly bars, performs well.

There is still uncertainty related to the duration of reduced consumer mobility and when shopping trips will fully return to pre-pandemic levels.

While our Quest brand has outperformed its portion of the nutritious snacking segment, the performance of our Atkins brand, which is part of the weight management portion of the market, has improved at a slower rate.

However, the Atkin’s performance for the thirteen weeks ended May 29, 2021 has improved sequentially, primarily due to increasing consumer mobility and improving shopper traffic in brick and mortar retailers.

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.

government approved vaccines and the easing of movement restrictions.

This uncertainty stems from the potential for, among other things, (i) the possibility 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) reversal in recently improving consumer purchasing and consumption behavior, 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 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.

For the thirteen and thirty-nine weeks ended May 29, 2021, we incurred a total of $0.2 million and $4.0 million in restructuring and restructuring-related costs, respectively, which have been included within General and administrative on the Condensed Consolidated Statements of Operations and Comprehensive Income.

As of May 29, 2021, we have incurred aggregate restructuring and restructuring-related costs of $9.5 million since May 2020.

Overall, we expect to incur a total of approximately $9.9 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.

Supply Chain Costs

As we expect higher raw material and freight costs starting in the fiscal fourth quarter of 2021 and in fiscal year 2022, in June 2021 management notified our customers of our plans to institute a price increase effective in September 2021, the first month of our fiscal year 2022.

Management believes the price increase will enable us to continue to invest in initiatives that drive growth.

Key Financial Definitions

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• Selling and marketing.

Selling and marketing expenses are comprised of broker commissions, customer marketing, media and other marketing costs.

Selling and marketing expenses comprise broker commissions, customer marketing, media and other marketing costs.

• General and administrative.

General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support our business, including employee salaries, professional services, integration costs, restructuring costs, insurance and other general corporate expenses.

General and administrative expenses comprise expenses associated with corporate and administrative functions that support our business, including employee salaries, professional services, integration costs, restructuring costs, insurance and other general corporate expenses.

• Depreciation and amortization.

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• Business transaction costs.

Business transaction costs are comprised of legal, due diligence, consulting and accounting firm expenses associated with the process of actively pursuing potential and completed business combinations, including the Acquisition of Quest.

Business transaction costs comprise legal, due diligence, consulting and accounting firm expenses associated with the process of actively pursuing potential and completed business combinations, including the Acquisition of Quest.

Results of Operations

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.

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 measure Adjusted EBITDA.

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

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

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

Sales and earnings growth improved during the third quarter, driven by increasing consumer mobility compared to the prior year which experienced COVID-19 movement restrictions.

As consumer foot traffic within brick and mortar retailers improved, particularly in the mass and convenience store channels, our business, particularly bars, did well.

Strong sales growth, cost controls around general and administrative costs, and Acquisition of Quest synergies more than offset higher marketing and employee-related costs.

Because not all companies use identical calculations, the presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

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

Comparison of Unaudited Results for the Thirteen Weeks Ended May 29, 2021 and the Thirteen Weeks Ended May 30, 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 Thirteen Weeks Ended

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

(In thousands) May 29, 2021 % of Sales May 30, 2020 % of Sales

Net sales $ 284,001 100.0 % $ 215,101 100.0 %

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Interest expense (7,985) (2.8) % (8,324) (3.9) %

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

(Loss) gain in fair value change of warrant liability (35,833) (12.6) % 31,703 14.7 %

Gain on legal settlement 5,000 1.8 % — — %

Loss on foreign currency transactions (272) (0.1) % (418) (0.2) %

Other income 70 — % 59 — %

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

Total other (expense) income (39,019) (13.7) % 23,049 10.7 %

Income before income taxes 21,303 7.5 % 54,157 25.2 %

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(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 $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.

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

Net sales of $284.0 million represented an increase of $68.9 million, or 32.0%, for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

The increase 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 0.9% 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.

Additionally, net sales in the thirteen weeks ended May 29, 2021 were negatively affected by higher trade promotions.

Cost of goods sold .

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.

Cost of goods sold increased $36.5 million, or 28.9%, for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

The cost of goods sold increase was driven by sales volume growth.

Gross profit.

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.

Gross profit increased $32.4 million, or 36.5%, for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

Gross profit of $121.0 million, or 42.6% of net sales, for the thirteen weeks ended May 29, 2021 increased 140 basis points from 41.2% of net sales for the thirteen weeks ended May 30, 2020.

The increase in gross profit margin was primarily the result of favorable product form and retail channel mix given higher shopper traffic in brick and mortar channels.

Operating expenses .

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:

Operating expenses increased $3.2 million, or 5.5%, for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020 due to the following:

• Selling and marketing.

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.

Selling and marketing expenses increased $6.3 million, or 25.8%, for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

The increase was primarily related to higher marketing spend that was reinstated following a decline in the prior year period due to the impact of COVID 19.

• General and administrative.

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.

General and administrative expenses decreased $3.0 million, or 10.6%, for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

The decrease was primarily attributable to a $3.9 million reduction in costs related to the integration of Quest and a decrease in restructuring charges of $1.2 million in the thirteen weeks ended May 29, 2021.

These decreases were partially offset by an increase in incentive compensation in the thirteen weeks ended May 29, 2021.

• Depreciation and amortization.

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.

Depreciation and amortization expenses remained approximately flat at $4.2 million for the thirteen weeks ended May 29, 2021 and May 30, 2020.

• Business transaction costs .

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.

Business transaction costs were nominal for the thirteen weeks ended May 30, 2020 and comprised expenses related to the Acquisition of Quest.

Interest income .

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

Interest income was nominal for each of the thirteen weeks ended May 29, 2021 and May 30, 2020.

Interest expense .

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.

Interest expense decreased $0.3 million for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020, primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to $506.5 million as of May 29, 2021 from $635.5 million as of May 30, 2020, offset by accelerated deferred financing fee amortization.

(Loss) gain in fair value change of warrant liability.

A non-cash loss of $35.8 million in fair value change of warrant liability was recorded for the thirteen weeks ended May 29, 2021 compared to a non-cash gain of $31.7 million for the thirteen weeks ended May 30, 2020.

The increase in loss relates to changes in the valuation of warrant liabilities primarily driven by changes in stock price and volatility.

Gain on legal settlement.

The Company recorded a $5.0 million gain on a legal settlement during the thirteen weeks ended May 29, 2021.

Loss on foreign currency transactions.

A loss of $0.3 million in foreign currency transactions was recorded for the thirteen weeks ended May 29, 2021 compared to a foreign currency loss of $0.4 million for the thirteen weeks ended May 30, 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.

Income tax expense increased $9.4 million for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

The increase in our income tax expense is primarily driven by higher income from operations, partially offset by permanent differences.

Net income was $5.9 million for the thirteen weeks ended May 29, 2021, a decrease of $42.2 million compared to net income of $48.1 million for the thirteen weeks ended May 30, 2020.

The decrease was primarily related to an increase in loss in fair value change of the warrant liability.

Adjusted EBITDA.

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

Adjusted EBITDA increased $24.1 million, or 55.6% for the thirteen weeks ended May 29, 2021 compared to the thirteen weeks ended May 30, 2020.

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

Comparison of Unaudited Results for the Thirty-Nine Weeks Ended May 29, 2021 and the Thirty-Nine Weeks Ended May 30, 2020

Twenty-Six Weeks Ended Twenty-Six Weeks Ended

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

Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended

(In thousands) May 29, 2021 % of Sales May 30, 2020 % of Sales

Net sales $ 745,760 100.0 % $ 594,355 100.0 %

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Interest expense (24,352) (3.3) % (23,882) (4.0) %

(Loss) gain in fair value change of warrant liability (60,714) (8.1) % 82,655 13.9 %

Gain on legal settlement 5,000 0.7 % — — %

Gain (loss) on foreign currency transactions 712 0.1 % (596) (0.1) %

Other income 229 — % 104 — %

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

Total other (expense) income (79,121) (10.6) % 59,774 10.1 %

Income before income taxes 53,729 7.2 % 113,166 19.0 %

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(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.

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

Net sales of $745.8 million represented an increase of $151.4 million, or 25.5%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020.

The increase was primarily attributable to the Quest brand, which increased net sales by 22.8%, 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 1.2% 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.

Cost of goods sold increased $82.3 million, or 23.0%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020.

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.

Gross profit increased $69.1 million, or 29.2%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020.

Gross profit of $305.3 million, or 40.9% of net sales, for the thirty-nine weeks ended May 29, 2021 increased 120 basis points from 39.7% of net sales for the thirty-nine weeks ended May 30, 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.

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:

Operating expenses decreased $10.4 million, or 5.7%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 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.

Selling and marketing expenses increased $12.2 million, or 17.4%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 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.

General and administrative expenses increased $2.7 million, or 3.6%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 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 $4.0 million in fiscal year 2021.

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• 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.

Depreciation and amortization expenses increased $1.7 million, or 15.1%, for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020.

The increase was primarily due to the partial inclusion of amortization expense related to intangible assets recognized as part of 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.

Business transaction costs were $26.9 million for the thirty-nine weeks ended May 30, 2020 and comprised 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 income decreased $1.5 million for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 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.

Interest expense increased $0.5 million for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 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.

(Loss) gain in fair value change of warrant liability.

A non-cash loss of $60.7 million in fair value change of warrant liability was recorded for the thirty-nine weeks ended May 29, 2021 compared to a non-cash gain of $82.7 million for the thirty-nine weeks ended May 30, 2020.

The loss relates to changes in the valuation of warrant liabilities, primarily driven by changes in stock price and volatility.

Gain on legal settlement.

The Company recorded a $5.0 million gain on a legal settlement during the thirty-nine weeks ended May 29, 2021.

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.

A gain of $0.7 million in foreign currency transactions was recorded for the thirty-nine weeks ended May 29, 2021 compared to a foreign currency loss of $0.6 million for the thirty-nine weeks ended May 30, 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

Income tax expense increased $22.9 million for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020.

The increase in our income tax expense is primarily driven by higher income from operations, partially offset by permanent differences.

Net income was $22.6 million for the thirty-nine weeks ended May 29, 2021 a decrease of $82.3 million compared to net income of $104.9 million for the thirty-nine weeks ended May 30, 2020.

The decrease was primarily related to an increase in loss in fair value change of the warrant liability.

Adjusted EBITDA.

Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net income as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP).

Simply Good Foods defines Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) as net income before interest income, interest expense, income tax expense, depreciation and amortization with further adjustments to exclude the following items:

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 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.

Adjusted EBITDA increased $41.9 million, or 35.9% for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020, driven primarily by the Acquisition of Quest.

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

Reconciliation of EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are non-GAAP financial measures commonly used in our industry and should not be construed as alternatives to net income as an indicator of operating performance or as alternatives to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP).

Simply Good Foods defines EBITDA as net income or loss before interest income, interest expense, income tax expense, depreciation and amortization, and Adjusted EBITDA as further adjusted to exclude the following items:

business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, gain or loss in fair value change of warrant liability, gain or loss due to legal settlements, and other non-core expenses.

The Company believes that EBITDA and Adjusted EBITDA, when used in conjunction with net income, are useful to provide additional information to investors.

Management of the Company uses EBITDA and Adjusted EBITDA to supplement net income because these measures reflect operating results of the on-going operations, eliminate items that are not directly attributable to the Company’s underlying operating performance, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics the Company’s management 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 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

The following unaudited tables below provide a reconciliation of EBITDA and Adjusted EBITDA to their most directly comparable GAAP measure, which is net income, for the thirteen and thirty-nine weeks ended May 29, 2021 and May 30, 2020:

(In thousands) Thirteen Weeks Ended Thirty-Nine Weeks Ended

May 29, 2021 May 30, 2020 May 29, 2021 May 30, 2020

Net income $ 5,895 $ 48,112 $ 22,634 $ 104,928

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Non-core legal costs — 48 — 603

Loss (gain) in fair value change of warrant liability 35,833 (31,703) 60,714 (82,655)

Gain on legal settlement (5,000) — (5,000) —

230 401 (715) 591

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

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

We had $90.2 million in cash and cash equivalents as of May 29, 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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Substantially concurrent with the consummation of the Acquisition of Atkins, the full $200.0 million of the Term Facility (the “Term Loan”) was drawn.

The interest rate per annum is based on either (i) a base rate equaling the higher of (a) the “prime rate”, (b) the federal funds effective rate plus 0.50% and (c) the Euro-currency rate applicable for an interest period of one month plus 1.00% plus (x) 3.00% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility, or (ii) London Interbank Offered Rate (“LIBOR”) adjusted for statutory reserve requirements, plus (x) 4.00% margin for the Term Loan subject to a floor of 1.00% or (y) 3.00% margin for the Revolving Credit Facility.

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 Euro-currency rate applicable for an interest period of one month plus 1.00% plus (x) 3.00% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility, or (ii) London Interbank Offered Rate (“LIBOR”) adjusted for statutory reserve requirements, plus (x) 4.00% margin for the Term Loan subject to a floor of 1.00% or (y) 3.00% margin for the Revolving Credit Facility.

As security for the payment or performance of its debt, we have pledged certain equity interests in its subsidiaries.

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The Applicable Rate per annum applicable to the loans under the Credit Agreement Amendment is, with respect to any Initial Term Loan that is an ABR Loan (as defined in the Credit Agreement), 2.75% per annum, and with respect to any Initial Term Loan that is a Eurodollar Loan, 3.75% per annum.

The incremental term loans will mature on the maturity date applicable to the Initial Term Loans, which date is July 7, 2024.

The incremental term loans will mature on the maturity date applicable to the Initial Term Loans, which is July 7, 2024.

The Credit Agreement contains certain financial and other covenants that limit our ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders, and prepayments of material subordinated debt, in each case, subject to customary exceptions materially consistent with credit facilities of such type and size.

1 unchanged sentence

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 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.

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

At May 29, 2021, the outstanding balance of the Term Facility was $506.5 million.

We are not required to make principal payments on the Term Facility over the twelve months following the period ended May 29, 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.

As of May 29, 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 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 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 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.

1 unchanged sentence

Total consideration paid on the closing date was $988.9 million.

Cash sources of funding included $195.3 million of cash on hand, net proceeds of approximately $350.0 million from an underwritten public offering of common stock, and $443.6 million 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 February 27, 2021.

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

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

For the thirteen and thirty-nine weeks ended May 30, 2020, we incurred no business transaction costs and $26.9 million of business transaction costs, respectively.

Private Warrants to Purchase Common Stock

The Company’s private placement warrants to purchase 6,700,000 shares of the common stock remain outstanding, are held by Conyers Park Sponsor, LLC, a related party, and remain liability-classified.

If all Private Warrants are exercised at the $11.50 exercise price per warrant, our cash would increase by $77.1 million.

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

Twenty-Six Weeks Ended

February 27, 2021 February 29, 2020

Net cash provided by (used in) operating activities

Thirty-Nine Weeks Ended

May 29, 2021 May 30, 2020

Net cash provided by operating activities

$ 91,488 $ 24,100

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Operating activities.

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.

Our net cash provided by operating activities increased $67.4 million to $91.5 million for the thirty-nine weeks ended May 29, 2021 compared to cash provided by operating activities of $24.1 million for the thirty-nine weeks ended May 30, 2020.

The increase in cash provided by operating activities was primarily attributable to higher operating income driven by (i) the Quest® brand sales volume growth, which increased net sales by 22.8% 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 $7.0 million.

These increases were partially offset by $6.9 million of cash payments made for restructuring-related costs, predominately composed of termination benefits and severance payments, during the thirty-nine weeks ended May 29, 2021.

Additionally, cash paid for taxes increased $10.6 million for the thirty-nine weeks ended May 29, 2021 compared to the thirty-nine weeks ended May 30, 2020.

Investing activities .

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.

Our net cash provided by investing activities was $2.5 million for the thirty-nine weeks ended May 29, 2021, which was primarily related to the $5.8 million of cash proceeds received from the SimplyProtein Sale, partially offset by purchases of property and equipment of $3.2 million.

The net cash used in investing activities of $984.3 million for the thirty-nine weeks ended May 30, 2020 was primarily related to the cash paid for the Acquisition of Quest, net of cash acquired, of $982.1 million.

Financing activities .

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.

Our net cash used in financing activities was $99.9 million for the thirty-nine weeks ended May 29, 2021 compared to net cash provided by financing activities of $805.6 million for the thirty-nine weeks ended May 30, 2020.

Net cash used in financing activities for the thirty-nine weeks ended May 29, 2021 primarily consisted of $100.0 million in principal payments on the Term Facility.

For the thirty-nine weeks ended May 30, 2020, net cash provided by financing activities included gross proceeds of $352.5 million from the Offering partially offset by issuance costs of $3.3 million, proceeds of $460.0 million from the Term Facility

borrowing related to the Incremental Facility Amendment partially 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 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.

As of May 29, 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

For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report.

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

For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 10-K/A.

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