What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-30 compared with 2022-04-06 · 123 added, 118 removed, 212 unchanged (53% of the section changed)

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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.

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.

For the thirteen and thirty-nine weeks ended May 28, 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 in the United States and elsewhere, 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.

Overall consumer spending particularly in the United States 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 thirty-nine weeks ended May 28, 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 for the remainder of fiscal year 2022 and into fiscal year 2023.

We have also continued to see contract manufacturer and logistics challenges, largely related to availability of labor, which we believe along with the above mentioned 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 continued or expanded 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.

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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.

The improvement in consumer mobility and shopper traffic patterns experienced this fiscal year has been variable, and there continues to be uncertainty related to the sustainability and longevity of these trends.

The ultimate effect COVID-19, supply chain challenges, cost pressures discussed above, and the overall effects of the current high inflation environment on consumer purchasing patterns could have on our business continues to be not fully known.

Additionally, management is continuing to monitor the conflict in Ukraine, especially regarding the availability and cost of raw materials that are produced in this region.

Management is also monitoring for signs of any expansion of economic or supply chain disruptions or broader supply chain inflationary costs resulting either directly or indirectly from the crisis.

Factors contributing to the uncertainty described above, among other things, include (i) continued supply chain disruptions, including disruptions resulting from labor shortages and other cost pressures, (ii) changes to customer operations, (iii) a reversal in improving consumer purchasing and consumption behavior, and (iv) unforeseen business disruptions or other effects due to current global geopolitical tensions, including relating directly or indirectly to the Ukraine crisis.

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;

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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.

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

We substantially completed our restructuring activities during the third quarter of fiscal 2022.

Since the announcement of the restructuring activities in May 2020, we incurred aggregate restructuring and restructuring-related costs of $9.9 million.

As of May 28, 2022, there was no outstanding restructuring liability.

Total restructuring and restructuring-related costs incurred in the thirty-nine weeks ended May 28, 2022 were $0.1 million.

Because we substantially completed our restructuring activities during the third quarter of fiscal 2022, no such restructuring or restructuring-related costs were incurred in the thirteen weeks ended May 28, 2022.

In 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.

The effect of these restructuring activities has been included within General and administrative on the Condensed Consolidated Statements of Operations and Comprehensive Income.

Refer to Note 13, Restructuring and Related Charges, of our Notes to Unaudited Condensed Consolidated Financial Statements in this Report for additional information regarding restructuring activities.

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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.

During the thirteen weeks ended May 28, 2022, our net sales increased $32.5 million, or 11.5%, and our gross profit decreased $2.4 million, or 1.9%, compared to the thirteen weeks ended May 29, 2021.

Net sales for the thirteen weeks ended May 28, 2022 were positively affected by the price increase effective in September 2021, the first month of our fiscal year 2022, and both the Atkins® and Quest® brands experienced sales and earnings growth driven by increased retail and e-commerce sales volume.

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.

However, unfavorable effects of higher raw material costs, higher freight and logistics costs, and supply chain challenges in the thirteen weeks ended May 28, 2022 resulted in decreased gross profit and gross profit margin as compared to the thirteen weeks ended May 29, 2021.

As previously discussed above in “Business Trends,” we expect to continue to see such cost pressures and supply chain challenges for the remainder of 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.

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

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:

Comparison of Unaudited Results for the Thirteen Weeks Ended May 28, 2022 and the Thirteen Weeks Ended May 29, 2021

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 26, 2022 % of Net Sales February 27, 2021 % of Net Sales

(In thousands) May 28, 2022 % of Net Sales May 29, 2021 % of Net Sales

Net sales $ 316,531 100.0 % $ 284,001 100.0 %

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Other income (expense):

Interest income — — % 1 — %

Interest expense (4,881) (1.5) % (7,985) (2.8) %

Loss in fair value change of warrant liability — — % (35,833) (12.6) %

Gain on foreign currency transactions 780 0.3 % 975 0.4 %

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

Gain (loss) on foreign currency transactions 76 — % (272) (0.1) %

Other income 17 — % 70 — %

Total other expense (4,788) (1.5) % (39,019) (13.7) %

Income (loss) before income taxes 28,710 9.7 % (18,901) (8.2) %

Income before income taxes 50,488 16.0 % 21,303 7.5 %

Income tax expense 11,654 3.7 % 15,408 5.4 %

Net income (loss) $ 18,461 6.2 % $ (26,214) (11.4) %

Net income $ 38,834 12.3 % $ 5,895 2.1 %

Other financial data:

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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 $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.

Net sales of $316.5 million represented an increase of $32.5 million, or 11.5%, for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021.

The increase in net sales was attributable to our price increase effective in September 2021, the first month of our fiscal year 2022, and retail sales and e-commerce sales volume growth for both the Atkins® and Quest® brands, which increased our North America net sales by 12.9% in the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021.

The increase in net sales was partially offset by a 25.1% decline in our international business due to the European exit.

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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.

Cost of goods sold increased $34.9 million, or 21.4%, for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021.

The cost of goods sold increase was driven by higher raw material, freight, and logistics costs and supply chain challenges for the thirteen weeks ended May 28, 2022 as well as sales volume growth for both the Atkins® and Quest® brands, as discussed above.

As previously discussed above in “Business Trends,” we continue to expect to have cost pressures and supply chain challenges for the remainder of fiscal year 2022 and into fiscal year 2023.

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.

Gross profit decreased $2.4 million, or 1.9%, for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021.

Additionally, gross profit of $118.6 million, or 37.5% of net sales, for the thirteen weeks ended May 28, 2022 decreased 510 basis points from 42.6% of net sales for the thirteen weeks ended May 29, 2021.

The decreases in gross profit and gross profit margin were primarily driven by the unfavorable effects of higher raw material, freight, and logistics costs and supply chain challenges in the thirteen weeks ended May 28, 2022 as previously discussed.

These decreases were 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:

Operating expenses increased $2.7 million, or 4.4%, for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 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®.

Selling and marketing expenses increased $1.5 million, or 4.9%, for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 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.

General and administrative expenses increased $1.1 million, or 4.1%, for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021.

The increase in general and administrative expenses was primarily attributable to an $0.8 million increase in stock-based compensation and increased corporate expenses, which was partially offset by reductions in costs related to business integration activities of $0.1 million and restructuring charges of $0.2 million in the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 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.

Depreciation and amortization expenses remained approximately flat at $4.3 million for the thirteen weeks ended May 28, 2022 and $4.2 million for the May 29, 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.

Interest expense decreased $3.1 million for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021, primarily due to principal payments reducing the outstanding balance of the Term Facility (as defined below) to $406.5 million as of May 28, 2022 from $506.5 million as of May 29, 2021.

Additionally, interest expense related to the amortization of deferred financing costs and debt discount decreased $0.6 million for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 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.

During thirteen weeks ended May 29, 2021, we recorded a non-cash loss of $35.8 million 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.

As a result, there were no outstanding liability-classified Private Warrants during the thirteen weeks ended May 28, 2022.

Gain on legal settlement .

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

Gain (loss) on foreign currency transactions.

Foreign currency transactions resulted in a gain of $0.1 million and a loss of $0.3 million for the thirteen weeks ended May 28, 2022 and May 29, 2021, respectively.

The 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.

Income tax expense decreased $3.8 million for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021.

The decrease in our income tax expense was primarily driven by lower income from operations and changes in permanent differences .

Net income was $38.8 million for the thirteen weeks ended May 28, 2022, an increase of $32.9 million compared to net income of $5.9 million for the thirteen weeks ended May 29, 2021.

The increase was primarily driven by the $35.8 million non-cash fair value loss incurred in the thirteen weeks ended May 29, 2021 related to the measurement of our liability-classified Private Warrants.

The increase in net income was partially offset by the decreased income from operations driven by the unfavorable effects of higher raw material, freight, and logistics costs and supply chain challenges in the thirteen weeks ended May 28, 2022 as well as the non-recurring $5.0 million gain on a legal settlement in the thirteen weeks ended May 29, 2021.

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.

Adjusted EBITDA decreased $4.2 million, or 6.2% for the thirteen weeks ended May 28, 2022 compared to the thirteen weeks ended May 29, 2021, driven primarily by the decrease in income from operations as a result of the unfavorable effects of higher raw material, freight, and logistics costs and supply chain challenges in the thirteen weeks ended May 28, 2022 as discussed above.

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 Twenty-Six Weeks Ended February 26, 2022 and the Twenty-Six Weeks Ended February 27, 2021

Twenty-Six Weeks Ended Twenty-Six Weeks Ended

(In thousands) February 26, 2022 % of Net Sales February 27, 2021 % of Net Sales

Comparison of Unaudited Results for the Thirty-Nine Weeks Ended May 28, 2022 and the Thirty-Nine Weeks Ended May 29, 2021

Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended

(In thousands) May 28, 2022 % of Net Sales May 29, 2021 % of Net Sales

Net sales $ 894,514 100.0 % $ 745,760 100.0 %

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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 $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.

Net sales of $894.5 million represented an increase of $148.8 million, or 19.9%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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 22.2% in the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021.

Additionally, we instituted a price increase effective in September 2021, the first month of our fiscal year 2022.

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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.

Cost of goods sold increased $110.3 million, or 25.1%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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.

Additionally, our cost of goods sold for the thirty-nine weeks ended May 28, 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 for the remainder of fiscal year 2022 and into fiscal year 2023.

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.

Gross profit increased $38.4 million, or 12.6%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021, which was primarily driven by the sales volume growth for both the Quest® and Atkins® brands as discussed above.

Gross profit of $343.7 million, or 38.4% of net sales, for the thirty-nine weeks ended May 28, 2022 decreased 250 basis points from 40.9% of net sales for the thirty-nine weeks ended May 29, 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 thirty-nine weeks ended May 28, 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:

Operating expenses increased $12.0 million, or 7.0%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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®.

Selling and marketing expenses increased $12.6 million, or 15.4%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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.

General and administrative expenses decreased $0.9 million, or 1.2%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021.

The decrease was primarily attributable to reductions in costs related to business integration activities of $2.0 million and restructuring charges of $3.9 million in the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021.

These decreases were partially offset by an increase in stock-based compensation of $2.9 million, increased corporate expenses, and increased research and development spending in the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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.

Depreciation and amortization expenses increased $0.3 million, or 2.6%, for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021, primarily due to increased depreciation expense related to the $4.7 million of purchases of property and equipment during the thirty-nine weeks ended May 28, 2022.

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.

Interest expense decreased $7.8 million for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021, primarily due to principal payments reducing the outstanding balance of the Term Facility to $406.5 million as of May 28, 2022 from $506.5 million as of May 29, 2021.

Additionally, interest expense related to the amortization of deferred financing costs and debt discount decreased $1.4 million for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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.

During the thirty-nine weeks ended May 28, 2022 and May 29, 2021, we recorded a non-cash loss of $30.1 million and $60.7 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.

As a result, there were no outstanding liability-classified Private Warrants as of May 28, 2022.

Gain on legal settlement .

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

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.

Gains on foreign currency transactions of $0.5 million and $0.7 million were recorded for the thirty-nine weeks ended May 28, 2022 and May 29, 2021, respectively.

During the thirty-nine weeks ended May 28, 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.

Income tax expense increased $3.6 million for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021.

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

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.

Net income was $78.4 million for the thirty-nine weeks ended May 28, 2022, an increase of $55.8 million compared to net income of $22.6 million for the thirty-nine weeks ended May 29, 2021.

The increase was primarily related to the $26.4 million increase in income from operations driven by the Atkins® and Quest® brand sales volume growth as discussed above, the $30.7 million decrease in the non-cash loss in fair value change of our warrant liability, and the $7.8 million decrease in interest expense in the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021.

These increases were partially offset by the $3.6 million increase in income tax expense in the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 2021 as well as the non-recurring $5.0 million gain on a legal settlement in the thirty-nine weeks ended May 29, 2021.

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.

Adjusted EBITDA increased $24.3 million, or 15.3% for the thirty-nine weeks ended May 28, 2022 compared to the thirty-nine weeks ended May 29, 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.

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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.

stock-based compensation expense, integration costs, restructuring 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.

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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

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 thirty-nine weeks ended May 28, 2022 and May 29, 2021:

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

May 28, 2022 May 29, 2021 May 28, 2022 May 29, 2021

Net income $ 38,834 $ 5,895 $ 78,447 $ 22,634

Interest income — (1) (1) (4)

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Loss in fair value change of warrant liability — 35,833 30,062 60,714

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

(73) 230 (331) (715)

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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 had $56.7 million in cash as of May 28, 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.

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

We were in compliance with all financial covenants as of 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.

We were in compliance with all financial covenants as of May 28, 2022 and August 28, 2021, respectively.

At May 28, 2022, the outstanding balance of the Term Facility was $406.5 million.

We are not required to make principal payments on the Term Facility over the twelve months following the period ended May 28, 2022.

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

As of February 26, 2022, there were no amounts drawn against the Revolving Credit Facility.

As of May 28, 2022, there were no amounts drawn against the Revolving Credit Facility.

Warrants to Purchase Common Stock

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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.

As a result, there were no outstanding liability-classified Private Warrants as of May 28, 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.

On April 13, 2022, we announced that our Board of Directors had approved the addition of $50.0 million to our stock repurchase program, resulting in authorized stock repurchases of up to an aggregate of $100.0 million.

During the thirteen weeks ended May 28, 2022, we repurchased 218,221 shares of common stock for $8.1 million, averaging a purchase price per share of $37.16.

During the thirty-nine weeks ended May 28, 2022, we repurchased 789,742 shares of common stock for $28.5 million, averaging a purchase price per share of $36.09.

We did not repurchase any shares of common stock during the thirty-nine weeks ended May 29, 2021.

As of May 28, 2022, approximately $69.3 million remained available for repurchases under our $100.0 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.

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

Thirty-Nine Weeks Ended

May 28, 2022 May 29, 2021

Net cash provided by operating activities

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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.

Our net cash provided by operating activities decreased $24.1 million to $67.4 million for the thirty-nine weeks ended May 28, 2022 compared to $91.5 million for the thirty-nine weeks ended May 29, 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.

Changes in working capital consumed cash of $44.2 million in the thirty-nine weeks ended May 28, 2022 compared to $24.1 million of cash consumed in thirty-nine weeks ended May 29, 2021.

Additionally, cash paid for taxes increased $28.1 million to $43.4 million for the thirty-nine weeks ended May 28, 2022 as compared to $15.3 million for the thirty-nine weeks ended May 29, 2021.

These decreases in cash provided by operating activities were partially offset by the $26.4 million increase in income from operations to $159.2 million for the thirty-nine weeks ended May 28, 2022 as compared to $132.9 million for the thirty-nine weeks ended May 29, 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 $14.3 million in the thirty-nine weeks ended May 28, 2022, which was a decrease of $7.2 million as compared to the $21.5 million paid for interest in the thirty-nine weeks ended May 29, 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.

Our net cash used in investing activities was $7.3 million for the thirty-nine weeks ended May 28, 2022 compared to net cash provided by investing activities of $2.5 million for the thirty-nine weeks ended May 29, 2021.

Our net cash used in investing activities for the thirty-nine weeks ended May 28, 2022 primarily comprised $4.7 million of purchases of property and equipment and the issuance of a $2.4 million note receivable.

The $2.5 million of net cash provided by investing activities for the thirty-nine weeks ended May 29, 2021 primarily comprised the $5.8 million of cash proceeds received from the SimplyProtein Sale partially offset by $3.2 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.

Our net cash used in financing activities was $78.5 million for the thirty-nine weeks ended May 28, 2022 compared to $99.9 million for the thirty-nine weeks ended May 29, 2021.

Net cash used in financing activities for the thirty-nine weeks ended May 28, 2022 primarily consisted of $50.0 million in principal payments on the Term Facility and $28.5 million in repurchases in common stock.

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.

New Accounting Pronouncements

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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