Simply Good Foods Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements. When used anywhere in this Report, the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These statements include, but are not limited to, the effect of the COVID-19 pandemic on our business, financial condition and results of operations, our expectations regarding our supply chain, including but not limited to, raw materials and logistics costs, the effect of price increases, and the unforeseen business disruptions or other effects due to current global geopolitical tensions, including relating to Ukraine. 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, except as required by applicable law. These statements reflect our current views with respect to future events and are based on assumptions subject to risks and uncertainties. Such risks and uncertainties include those related to our ability to sell our products. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 (“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. The Company’s actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified in Item 1A. “Risk Factors” of our Annual Report. The Company assumes no obligation to update any of these forward-looking statements. Unless the context requires otherwise in this Report, the terms “we,” “us,” “our,” the “Company” and “Simply Good Foods” refer to The Simply Good Foods Company and its subsidiaries. Overview The Simply Good Foods Company is a consumer packaged food and beverage company that aims to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great-tasting, better-for-you snacks and meal replacements. The product portfolio we develop, market and sell consists primarily of protein bars, ready-to-drink (“RTD”) shakes, sweet and salty snacks and confectionery products marketed under the Atkins®, Atkins Endulge®, and Quest® brand names. We believe Simply Good Foods is poised to expand its wellness platform through innovation and organic growth along with acquisition opportunities in the nutritional snacking space. Our nutritious snacking platform consists of brands that specialize in providing products for consumers that follow certain nutritional philosophies and health-and-wellness trends: Atkins® for those following a low-carb lifestyle and Quest® for consumers seeking a variety of protein-rich foods and beverages that also limit sugars and simple carbs. We distribute our products in major retail channels, primarily in North America, including grocery, club, and mass merchandise, as well as through e-commerce, convenience, specialty, and other channels. Our portfolio of nutritious snacking brands gives us a strong platform with which to introduce new products, expand distribution, and attract new consumers to our products. Business Trends For the thirteen and twenty-six weeks ended February 26, 2022, our business has continued to improve from the end of fiscal year 2021, driven in part by the increasing normalization of consumer mobility and shopper traffic patterns in brick-and-mortar retailers versus prior periods that were pressured by COVID-19 mitigation strategies, including movement restrictions and closures of or reduced access to customer establishments. We expect our business performance during fiscal year 2022 will continue to be affected by the dynamic macroeconomic environment, elevated levels of supply chain cost inflation, and the level of consumer mobility, which includes the rate at which consumers return to working outside the home. 20 Table of Contents The overall economy continues to recover from the effects of the COVID-19 pandemic, which has resulted in well documented industry-wide supply chain disruptions across the United States and globally. As a result, during the thirteen and twenty-six weeks ended February 26, 2022, we experienced corresponding unfavorable effects of higher raw material costs, higher freight and logistics costs, and supply chain challenges, including supply chain disruptions resulting from labor shortages as well as disruptions in ingredients. We expect to continue to see these cost pressures and supply chain challenges in fiscal year 2022 and into fiscal year 2023. We have also begun to see contract manufacturer and logistics challenges, largely related to availability of labor, which we believe along with the above ingredients shortages have contributed to lower retail and e-commerce sales of our products due to out-of-stock situations, delayed recognition of sales and higher than historical inventory levels. We could experience additional lost sale opportunities at our retail and e-commerce customers if our products are not available for purchase because of disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our contract manufacturers, or if our customers experience delays in stocking our products. We have actively engaged with our retail customers, contract manufacturers, and logistics and transportation providers, to meet demand for our products and to remain informed of any challenges within our business operations. We have also instituted a price increase effective in September 2021, the first month of our fiscal year 2022, and in April 2022 management announced our plans to institute an additional price increase effective late in our fiscal fourth quarter of 2022. Management believes these price increases and additional cost savings initiatives will enable us to continue to invest in projects that drive growth. The moderate improvement in consumer mobility and shopper traffic patterns experienced this fiscal year remains fragile, and there continues to be uncertainty related to the sustainability and longevity of these trends. The ultimate effect COVID-19, supply chain challenges, and cost pressures discussed above could have on our business continues to be not fully known. Additionally, management is monitoring the conflict in Ukraine and any broader economic effects from the crisis, especially on the availability and cost of raw materials that are produced in this region. Factors contributing to this uncertainty, among other things, include (i) continued supply chain disruptions, including disruptions resulting from labor shortages and other cost pressures, (ii) changes to customer operations, (iii) a reversal in recently improving consumer purchasing and consumption behavior, and (iv) unforeseen business disruptions or other effects due to current global geopolitical tensions, including relating to Ukraine. Based on information available to us as of the date of this Report, we believe we will be able to deliver products at acceptable levels to fulfill customer orders on a timely basis; 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 along with our supply chain and logistics capabilities and intend to adapt our plans as needed to continue to drive our business and meet our obligations. Restructuring and Related Charges In May 2020, we announced certain restructuring activities in conjunction with the implementation of our future-state organization design, which created a fully integrated organization with our completed acquisition of Quest Nutrition, LLC on November 7, 2019. The new organization design became effective on August 31, 2020. These restructuring plans primarily include workforce reductions, changes in management structure, and the relocation of business activities from one location to another. Total restructuring and restructuring-related costs incurred in the thirteen and twenty-six weeks ended February 26, 2022 were $0.1 million. We incurred a total of $1.3 million and $3.8 million in restructuring and restructuring-related costs in the thirteen and twenty-six weeks ended February 27, 2021, respectively. The effect of these restructuring activities has been included within General and administrative on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Since the restructuring activities were announced in May 2020, we have incurred aggregate restructuring and restructuring-related costs of $9.9 million. Overall, we expect to incur a total of approximately $10.1 million in restructuring and restructuring-related costs, including the $9.9 million previously incurred, and the balance of which will be paid through the third quarter of fiscal year 2022. As of February 26, 2022, there was no outstanding restructuring liability. Refer to Note 13, Restructuring and Related Charges, of our Notes to Unaudited Condensed Consolidated Financial Statements in this Report for additional information regarding restructuring activities. SimplyProtein Sale Effective September 24, 2020, we sold the assets exclusively related to our SimplyProtein® brand of products for approximately $8.8 million of consideration, including cash of $5.8 million and a note receivable for $3.0 million, to a newly formed entity led by the Company’s former Canadian-based management team who had been responsible for this brand prior to the sale transaction (the “SimplyProtein Sale”). In addition to purchasing these assets, the buyer assumed certain liabilities related to the SimplyProtein® brand’s business. There was no gain or loss recognized as a result of the SimplyProtein Sale. The transaction has enabled our management to focus its full time and resources on our core Atkins® and Quest® branded businesses and other strategic initiatives. 21 Table of Contents Key Financial Definitions Net sales. Net sales consist primarily of product sales less the cost of promotional activities, slotting fees and other sales credits and adjustments, including product returns. Cost of goods sold. Cost of goods sold consists primarily of the costs we pay to our contract manufacturing partners to produce the products sold. These costs include the purchase of raw ingredients, packaging, shipping and handling, warehousing, depreciation of warehouse equipment, and a tolling charge for the contract manufacturer. Cost of goods sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders. Operating expenses. Operating expenses consist primarily of selling and marketing, general and administrative, and depreciation and amortization expense. The following is a brief description of the components of operating expenses: • Selling and marketing. Selling and marketing expenses comprise broker commissions, customer marketing, media and other marketing costs. • General and administrative. General and administrative expenses comprise expenses associated with corporate and administrative functions that support our business, including employee compensation, stock-based compensation, professional services, integration costs, restructuring costs, insurance and other general corporate expenses. • Depreciation and amortization. Depreciation and amortization costs consist of costs associated with the depreciation of fixed assets and capitalized leasehold improvements and amortization of intangible assets. Results of Operations During the thirteen weeks ended February 26, 2022, our net sales increased $66.1 million, or 28.7%, and our gross profit increased $18.3 million, or 20.2%, compared to the thirteen weeks ended February 27, 2021. Both the Atkins® and Quest® brands experienced sales and earnings growth driven by increased retail and e-commerce sales volume, due to continued moderate improvements in consumer mobility and shopper trips and the timing of shipments to support retail customer programs. Net sales were also positively affected by the price increase effective in September 2021, the first month of our fiscal year 2022. Additionally, in April 2022 management announced our plans to institute a price increase effective late in our fiscal fourth quarter of 2022. However, unfavorable effects of higher raw material costs, higher freight and logistics costs, and supply chain challenges in the thirteen weeks ended February 26, 2022 resulted in decreased gross profit margin as compared to the thirteen weeks ended February 27, 2021. As previously discussed above in “Business Trends,” we expect to continue to see such cost pressures and supply chain challenges in fiscal year 2022 as compared to fiscal year 2021. 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 EBITDA and Adjusted EBITDA. Because not all companies use identical calculations, the presentation of EBITDA and 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 EBITDA and Adjusted EBITDA to net income for each applicable period. 22 Table of Contents Comparison of Unaudited Results for the Thirteen Weeks Ended February 26, 2022 and the Thirteen Weeks Ended February 27, 2021 The following unaudited table presents, for the periods indicated, selected information from our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), including information presented as a percentage of net sales: Thirteen Weeks Ended Thirteen Weeks Ended (In thousands) February 26, 2022 % of Net Sales February 27, 2021 % of Net Sales Net sales $ 296,718 100.0 % $ 230,607 100.0 % Cost of goods sold 188,195 63.4 % 140,342 60.9 % Gross profit 108,523 36.6 % 90,265 39.1 % Operating expenses: Selling and marketing 31,955 10.8 % 26,150 11.3 % General and administrative 26,288 8.9 % 26,562 11.5 % Depreciation and amortization 4,329 1.5 % 4,212 1.8 % Total operating expenses 62,572 21.1 % 56,924 24.7 % Income from operations 45,951 15.5 % 33,341 14.5 % Other income (expense): Interest expense (5,276) (1.8) % (7,995) (3.5) % Loss in fair value change of warrant liability (12,745) (4.3) % (45,334) (19.7) % Gain on foreign currency transactions 780 0.3 % 975 0.4 % Other income — — % 112 — % Total other expense (17,241) (5.8) % (52,242) (22.7) % Income (loss) before income taxes 28,710 9.7 % (18,901) (8.2) % Income tax expense 10,249 3.5 % 7,313 3.2 % Net income (loss) $ 18,461 6.2 % $ (26,214) (11.4) % Other financial data: Adjusted EBITDA (1) $ 54,180 18.3 % $ 42,644 18.5 % (1) Adjusted EBITDA is a non-GAAP financial metric. 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 . Net sales of $296.7 million represented an increase of $66.1 million, or 28.7%, for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. The increase was primarily attributable to retail and e-commerce sales volume growth for both the Atkins® and Quest® brands, which increased our North America net sales by 31.5% in the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. Additionally, we instituted a price increase effective in September 2021, the first month of our fiscal year 2022. The increase in net sales was partially offset by a 25.1% decline in our international business due to the European exit. The European exit represented a 1.5% headwind to total net sales growth. Cost of goods sold . Cost of goods sold increased $47.9 million, or 34.1%, for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. The cost of goods sold increase was driven by the sales volume growth for both the Atkins® and Quest® brands, as discussed above. Additionally, our cost of goods sold for the thirteen weeks ended February 26, 2022 was unfavorably affected by higher raw material, freight and logistics costs, and supply chain challenges. As previously discussed above in “Business Trends,” we continue to expect to have cost pressures and supply chain challenges in fiscal year 2022 and into fiscal year 2023. 23 Table of Contents Gross profit. Gross profit increased $18.3 million, or 20.2%, for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021, which was primarily driven by the sales volume growth for both the Quest® and Atkins® brands as discussed above. Gross profit of $108.5 million, or 36.6% of net sales, for the thirteen weeks ended February 26, 2022 decreased 250 basis points from 39.1% of net sales for the thirteen weeks ended February 27, 2021. The decrease in gross profit margin was primarily the result of the unfavorable effects of higher raw material, freight and logistics costs, and supply chain challenges in the thirteen weeks ended February 26, 2022 as previously discussed. The decrease in gross profit margin was partially offset by the favorable effects of the price increase which became effective in September 2021. Operating expenses . Operating expenses increased $5.6 million, or 9.9%, for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021 due to the following: • Selling and marketing. Selling and marketing expenses increased $5.8 million, or 22.2%, for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021, primarily related to additional brand building initiatives for both Atkins® and Quest®. • General and administrative. General and administrative expenses decreased $0.3 million, or 1.0%, for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. The decrease was primarily attributable to reductions in costs related to business integration activities of $0.7 million and restructuring charges of $1.2 million in the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. These decreases were partially offset by an increase in stock-based compensation of $0.6 million, increased professional fees, and the timing of research and development spending in the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. • Depreciation and amortization. Depreciation and amortization expenses remained approximately flat at $4.3 million for the thirteen weeks ended February 26, 2022 and $4.2 million for the February 27, 2021. Interest expense . Interest expense decreased $2.7 million for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021, primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to $431.5 million as of February 26, 2022 from $556.5 million as of February 27, 2021. Additionally, interest expense related to the amortization of deferred financing costs and debt discount decreased $0.5 million for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. Loss in fair value change of warrant liability. During thirteen weeks ended February 26, 2022 and February 27, 2021, we recorded a non-cash loss of $12.7 million and $45.3 million, respectively, related to changes in valuation of our liability-classified warrants issued through a private placement (“Private Warrants”), which is primarily driven by movements in our stock price. On January 7, 2022, the Private Warrants were exercised on a cashless basis, resulting in a net issuance of 4,830,761 shares of common stock. As a result, there were no outstanding liability-classified Private Warrants as of February 26, 2022. Gain on foreign currency transactions. Gains on foreign currency transactions of $0.8 million and $1.0 million were recorded for the thirteen weeks ended February 26, 2022 and February 27, 2021, respectively. During the thirteen weeks ended February 26, 2022, we recognized a foreign currency translation gain of $1.1 million related to the liquidation of a foreign subsidiary. The remaining variance is attributable to changes in foreign currency rates related to our international operations. Income tax expense. Income tax expense increased $2.9 million for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021. The increase in our income tax expense is primarily driven by higher income from operations, partially offset by changes in permanent differences. Net income (loss) . Net income was $18.5 million for the thirteen weeks ended February 26, 2022, an increase of $44.7 million compared to a net loss of $26.2 million for the thirteen weeks ended February 27, 2021. The increase in net income was primarily driven by the non-cash fair value loss of $12.7 million in the thirteen weeks ended February 26, 2022 compared to the non-cash fair value loss of $45.3 million in the thirteen weeks ended February 27, 2021 related to the measurement of our liability-classified Private Warrants, which was partially offset by increased income from operations driven by the Atkins® and Quest® brand sales volume growth as discussed above. Adjusted EBITDA. Adjusted EBITDA increased $11.5 million, or 27.1% for the thirteen weeks ended February 26, 2022 compared to the thirteen weeks ended February 27, 2021, driven primarily by sales volume growth for the Atkins® and Quest® brands as discussed above. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of EBITDA and Adjusted EBITDA” below. 24 Table of Contents Comparison of Unaudited Results for the Twenty-Six Weeks Ended February 26, 2022 and the Twenty-Six Weeks Ended February 27, 2021 The following unaudited table presents, for the periods indicated, selected information from our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), including information presented as a percentage of net sales: Twenty-Six Weeks Ended Twenty-Six Weeks Ended (In thousands) February 26, 2022 % of Net Sales February 27, 2021 % of Net Sales Net sales $ 577,983 100.0 % $ 461,759 100.0 % Cost of goods sold 352,905 61.1 % 277,453 60.1 % Gross profit 225,078 38.9 % 184,306 39.9 % Operating expenses: Selling and marketing 62,482 10.8 % 51,345 11.1 % General and administrative 49,990 8.6 % 51,977 11.3 % Depreciation and amortization 8,649 1.5 % 8,456 1.8 % Total operating expenses 121,121 21.0 % 111,778 24.2 % Income from operations 103,957 18.0 % 72,528 15.7 % Other income (expense): Interest income 1 — % 3 — % Interest expense (11,647) (2.0) % (16,367) (3.5) % Loss in fair value change of warrant liability (30,062) (5.2) % (24,881) (5.4) % Gain on legal settlement — — % — — % Gain on foreign currency transactions 427 0.1 % 984 0.2 % Other income 9 — % 159 — % Total other expense (41,272) (7.1) % (40,102) (8.7) % Income before income taxes 62,685 10.8 % 32,426 7.0 % Income tax expense 23,072 4.0 % 15,687 3.4 % Net income $ 39,613 6.9 % $ 16,739 3.6 % Other financial data: Adjusted EBITDA (1) $ 119,795 20.7 % $ 91,341 19.8 % (1) Adjusted EBITDA is a non-GAAP financial metric. 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. Net sales of $578.0 million represented an increase of $116.2 million, or 25.2%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. The increase was primarily attributable to retail and e-commerce sales volume growth for both the Atkins® and Quest® brands, which increased our North America net sales by 28.0% in the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. Additionally, we instituted a price increase effective in September 2021, the first month of our fiscal year 2022. The increase in net sales was partially offset by a 26.2% decline in our international business due to the European exit. The European exit represented a 1.5% headwind to total net sales growth. Cost of goods sold . Cost of goods sold increased $75.5 million, or 27.2%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. The cost of goods sold increase was driven by sales volume growth for both the Atkins® and Quest® brands, as discussed above. Additionally, our cost of goods sold for the twenty-six weeks ended February 26, 2022 was unfavorably affected by higher raw material, freight and logistics costs, and supply chain challenges. As previously discussed above in “Business Trends,” we continue to expect to have cost pressures and supply chain challenges in fiscal year 2022 and into fiscal year 2023. 25 Table of Contents Gross profit. Gross profit increased $40.8 million, or 22.1%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021, which was primarily driven by the sales volume growth for both the Quest® and Atkins® brands as discussed above. Gross profit of $225.1 million, or 38.9% of net sales, for the twenty-six weeks ended February 26, 2022 decreased 100 basis points from 39.9% of net sales for the twenty-six weeks ended February 27, 2021. The decrease in gross profit margin was primarily the result of the unfavorable effects of higher raw material, freight and logistics costs, and supply chain challenges in the twenty-six weeks ended February 26, 2022 as previously discussed. The decrease in gross profit margin was partially offset by the favorable effects of the price increase which became effective in September 2021. Operating expenses . Operating expenses increased $9.3 million, or 8.4%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021 due to the following: • Selling and marketing. Selling and marketing expenses increased $11.1 million, or 21.7%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021, primarily related to additional brand building initiatives for both Atkins® and Quest®. • General and administrative. General and administrative expenses decreased $2.0 million, or 3.8%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. The decrease was primarily attributable to reductions in costs related to business integration activities of $1.9 million and restructuring charges of $3.7 million in the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. These decreases were partially offset by an increase in stock-based compensation of $2.1 million, increased professional fees, and timing of research and development spending in the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. • Depreciation and amortization. Depreciation and amortization expenses increased $0.2 million, or 2.3%, for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021, primarily due to increased depreciation expense related to the $4.3 million of purchases of property and equipment during the twenty-six weeks ended February 26, 2022. Interest income . Interest income was nominal for each of the twenty-six weeks ended February 26, 2022 and February 27, 2021. Interest expense . Interest expense decreased $4.7 million for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021, primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to $431.5 million as of February 26, 2022 from $556.5 million as of February 27, 2021. Additionally, interest expense related to the amortization of deferred financing costs and debt discount decreased $0.8 million for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. Loss in fair value change of warrant liability . During the twenty-six weeks ended February 26, 2022 and February 27, 2021, we recorded a non-cash loss of $30.1 million and $24.9 million, respectively, related to changes in valuation of our Private Warrants, which was primarily driven by movements in our stock price. On January 7, 2022, the Private Warrants were exercised on a cashless basis, resulting in a net issuance of 4,830,761 shares of common stock. As a result, there were no outstanding liability-classified Private Warrants as of February 26, 2022. Gain on foreign currency transactions. Gains on foreign currency transactions of $0.4 million and $1.0 million were recorded for the twenty-six weeks ended February 26, 2022 and February 27, 2021, respectively. During the twenty-six weeks ended February 26, 2022, we recognized a foreign currency translation gain of $1.1 million related to the liquidation of a foreign subsidiary. The remaining variance is attributable to changes in foreign currency rates related to our international operations. Income tax expense. Income tax expense increased $7.4 million for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. The increase in our income tax expense is primarily driven by higher income from operations, partially offset by permanent differences. Net income . Net income was $39.6 million for the twenty-six weeks ended February 26, 2022 an increase of $22.9 million compared to net income of $16.7 million for the twenty-six weeks ended February 27, 2021. The increase was primarily related to increased income from operations driven by the Atkins® and Quest® brand sales volume growth as discussed above and the $4.7 million decrease in interest expense for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. These increases in net income were partially offset by the $7.4 million increase in income tax expense and the $5.2 million increase in the non-cash loss in fair value change of our warrant liability in the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021. 26 Table of Contents Adjusted EBITDA. Adjusted EBITDA increased $28.5 million, or 31.2% for the twenty-six weeks ended February 26, 2022 compared to the twenty-six weeks ended February 27, 2021, driven primarily by sales volume growth for the Atkins® and Quest® brands as discussed above. 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: stock-based compensation expense, integration costs, restructuring costs, gain or loss in fair value change of warrant liability, 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 table provides a reconciliation of EBITDA and Adjusted EBITDA to its most directly comparable GAAP measure, which is net income, for the thirteen and twenty-six weeks ended February 26, 2022 and February 27, 2021: (In thousands) Thirteen Weeks Ended Twenty-Six Weeks Ended February 26, 2022 February 27, 2021 February 26, 2022 February 27, 2021 Net income (loss) $ 18,461 $ (26,214) $ 39,613 $ 16,739 Interest income — — (1) (3) Interest expense 5,276 7,995 11,647 16,367 Income tax expense 10,249 7,313 23,072 15,687 Depreciation and amortization 4,831 4,508 9,572 9,021 EBITDA 38,817 (6,398) 83,903 57,811 Stock-based compensation expense 3,092 2,484 5,697 3,594 Integration of Quest 238 968 293 2,214 Restructuring 56 1,267 98 3,786 Loss in fair value change of warrant liability 12,745 45,334 30,062 24,881 Other (1) (768) (1,011) (258) (945) Adjusted EBITDA $ 54,180 $ 42,644 $ 119,795 $ 91,341 (1) Other items consist principally of exchange impact of foreign currency transactions and other expenses. Liquidity and Capital Resources Overview We have historically funded our operations with cash flow from operations and, when needed, with borrowings under our Credit Agreement (as defined below). Our principal uses of cash have been working capital, debt service, and acquisition opportunities. We had $51.5 million in cash as of February 26, 2022. 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. As circumstances warrant, we may issue debt and/or equity securities from time to time on an opportunistic basis, dependent upon market conditions and available pricing. We make no assurance that we can issue and sell such securities on acceptable terms or at all. Our material future cash requirements from contractual and other obligations relate primarily to our principal and interest payments for our Term Facility, as defined and discussed below, and our operating and finance leases. Refer to Note 5, Long-Term Debt and Line of Credit, and Note 8, Leases, of the Notes to Unaudited Condensed Consolidated Financial Statements in this Report for additional information related to the expected timing and amount of payments related to our contractual and other obligations. 27 Table of Contents Debt and Credit Facilities On July 7, 2017, we entered into a credit agreement with Barclays Bank PLC and other parties (as amended to date, the “Credit Agreement”). The Credit Agreement at that time provided for (i) a term facility of $200.0 million (“Term Facility”) with a seven-year maturity and (ii) a revolving credit facility of up to $75.0 million (the “Revolving Credit Facility”) with a five-year maturity. Substantially concurrent with the consummation of the business combination between Conyers Park Acquisition Corp. and NCP-ATK Holdings, Inc. on July 7, 2017, the full $200.0 million of the Term Facility (the “Term Loan”) was drawn. On November 7, 2019, we entered into a second amendment (the “Incremental Facility Amendment”) to the Credit Agreement to increase the principal borrowed on the Term Facility by $460.0 million. The Term Facility together with the incremental borrowing make up the Initial Term Loans (as defined in the Incremental Facility Amendment). The Incremental Facility Amendment was executed to partially finance the acquisition of Quest Nutrition, LLC on November 7, 2019. No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment. Effective as of December 16, 2021, we entered into a third amendment (the “Extension Amendment”) to the Credit Agreement. The Extension Amendment provided for an extension of the stated maturity date of the Revolving Commitments and Revolving Loans (each as defined in the Credit Agreement) from July 7, 2022 to the earlier of (i) 91 days prior to the maturity date of the Initial Term Loans on July 7, 2024 and (ii) December 16, 2026. On January 21, 2022, we entered into a repricing amendment (the “2022 Repricing Amendment”) to the Credit Agreement. The 2022 Repricing Amendment, among other things, (i) reduced the interest rate per annum applicable to the Initial Term Loans outstanding under the Credit Agreement immediately prior to the effective date of the 2022 Repricing Amendment, (ii) reset the prepayment premium for the existing Initial Term Loans to apply to Repricing Transactions (as defined in the Credit Agreement) that occur within six months after the effective date of the 2022 Repricing Amendment, and (iii) implemented the Secured Overnight Financing Rate (“SOFR”) and related replacement provisions for the London Interbank Offered Rate (“LIBOR”). Effective as of the 2022 Repricing Amendment dated January 21, 2022, the interest rate per annum is based on either: i. A base rate equaling the higher of (a) the “prime rate,” (b) the federal funds effective rate plus 0.50%, or (c) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) applicable for an interest period of one month plus 1.00% plus (x) 2.25% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility; or ii. SOFR plus a credit spread adjustment equal to 0.10% for one-month SOFR, 0.15% for up to three-month SOFR and 0.25% for up to six-month SOFR, subject to a floor of 0.50%, plus (x) 3.25% margin for the Term Loan or (y) 3.00% margin for the Revolving Credit Facility. The Simply Good Foods Company is not a borrower under the Credit Agreement and has not provided a guarantee of the Credit Agreement. Simply Good Foods USA, Inc., is the administrative borrower and certain other subsidiary holding companies are co-borrowers under the Credit Agreement. Each of our domestic subsidiaries that is not a named borrower under the Credit Agreement has provided a guarantee on a secured basis. As security for the payment or performance of the debt under the Credit Agreement, the borrowers and the guarantors have pledged certain equity interests in their respective subsidiaries and granted the lenders a security interest in substantially all of their domestic assets. All guarantors other than Quest Nutrition, LLC are holding companies with no assets other than their investments in their respective subsidiaries. The Credit Agreement contains certain financial and other covenants that limit our ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders, and prepayments of material subordinated debt, in each case, subject to customary exceptions materially consistent with credit facilities of such type and size. The Revolving Credit Facility has a maximum total net leverage ratio equal to or less than 6.00:1.00 contingent on credit extensions in excess of 30% of the total amount of commitments available under the Revolving Credit Facility. Any failure to comply with the restrictions of the credit facilities may result in an event of default. We were in compliance with all financial covenants as of February 26, 2022 and August 28, 2021, respectively. At February 26, 2022, the outstanding balance of the Term Facility was $431.5 million. We are not required to make principal payments on the Term Facility over the twelve months following the period ended February 26, 2022. The outstanding balance of the Term Facility is due upon its maturity in July 2024. As of February 26, 2022, there were no amounts drawn against the Revolving Credit Facility. 28 Table of Contents Warrants to Purchase Common Stock As of August 28, 2021, we had outstanding liability-classified Private Warrants that allowed holders to purchase 6,700,000 shares of the Company’s common stock. Such Private Warrants were held by Conyers Park Sponsor, LLC (“Conyers Park”), a related party. Each whole warrant entitled the holder to purchase one share of the Company’s common stock at a price of $11.50 per share. On January 7, 2022, Conyers Park elected to exercise the Private Warrants on a cashless basis, resulting in a net issuance of 4,830,761 shares of the Company’s common stock. As a result, there were no outstanding liability-classified Private Warrants as of February 26, 2022. Stock Repurchase Program During the thirteen and twenty-six weeks ended February 26, 2022, we repurchased 571,521 shares of common stock for $20.4 million, averaging a purchase price per share of $35.68. We did not repurchase any shares of common stock during the twenty-six weeks ended February 27, 2021. As of February 26, 2022, approximately $27.5 million remained available under our $50.0 million stock repurchase program. Refer to Note 10, Stockholders’ Equity, of the Notes to Unaudited Condensed Consolidated Financial Statements in this Report for additional information related to our stock repurchase program. Cash Flows 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 26, 2022 February 27, 2021 Net cash provided by operating activities $ 30,323 $ 39,764 Net cash (used in) provided by investing activities $ (6,026) $ 5,237 Net cash used in financing activities $ (47,910) $ (49,893) Operating activities. Our net cash provided by operating activities decreased $9.4 million to $30.3 million for the twenty-six weeks ended February 26, 2022 compared to $39.8 million for the twenty-six weeks ended February 27, 2021. The decrease in cash provided by operating activities was primarily attributable to changes in working capital, comprised of changes in accounts receivable, net, inventories, prepaid expenses, accounts payable, and accrued expenses and other current liabilities, which are driven by the timing of payments and receipts and seasonal building of inventory. Changes in working capital consumed cash of $38.8 million in the twenty-six weeks ended February 26, 2022 compared to $24.3 million of cash consumed in twenty-six weeks ended February 27, 2021. Additionally, cash paid for taxes increased $23.1 million to $33.2 million for the twenty-six weeks ended February 26, 2022 as compared to $10.0 million for the twenty-six weeks ended February 27, 2021. These decreases in cash provided by operating activities were partially offset by the $31.4 million increase in income from operations to $104.0 million for the twenty-six weeks ended February 26, 2022 as compared to $72.5 million for the twenty-six weeks ended February 27, 2021, primarily attributable to retail and e-commerce sales volume growth for both the Atkins® and Quest® brands as discussed in “Results of Operations” above. Additionally, cash paid for interest was $10.2 million in the twenty-six weeks ended February 26, 2022, which was a decrease of $4.6 million as compared to the $14.8 million paid for interest in the twenty-six weeks ended February 27, 2021. Investing activities . Our net cash used in investing activities was $6.0 million for the twenty-six weeks ended February 26, 2022 compared to net cash provided by investing activities of $5.2 million for the twenty-six weeks ended February 27, 2021. Our net cash used in investing activities for the twenty-six weeks ended February 26, 2022 primarily comprised $4.3 million of purchases of property and equipment and the issuance of a $1.5 million note receivable. The $5.2 million of net cash provided by investing activities for the twenty-six weeks ended February 27, 2021 primarily comprised the $5.8 million of cash proceeds received from the SimplyProtein Sale partially offset by $0.4 million of purchases of property and equipment. Financing activities . Our net cash used in financing activities was $47.9 million for the twenty-six weeks ended February 26, 2022 compared to $49.9 million for the twenty-six weeks ended February 27, 2021. Net cash used in financing activities for the twenty-six weeks ended February 26, 2022 primarily consisted of $25.0 million in principal payments on the Term Facility, $20.4 million in repurchases in common stock, and $3.3 million of tax payments related to issuance of restricted stock units and performance stock units. Net cash used in financing activities for the twenty-six weeks ended February 27, 2021 primarily consisted of $50.0 million in principal payments on the Term Facility. 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. Refer to Note 2, Summary of Significant Accounting Policies , of our unaudited interim consolidated financial statements in this Report for further information regarding recently issued accounting standards. 29 Table of Contents