Simply Good Foods Co 10-Q

Item 1. Financial Statements (Unaudited) The Simply Good Foods Company and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited, dollars in thousands, except share and per share data) May 28, 2022 August 28, 2021 Assets Current assets: Cash $ 56,720 $ 75,345 Accounts receivable, net 146,377 111,456 Inventories 111,709 97,269 Prepaid expenses 5,066 4,902 Other current assets 46,852 9,694 Total current assets 366,724 298,666 Long-term assets: Property and equipment, net 17,927 16,584 Intangible assets, net 1,127,136 1,139,041 Goodwill 543,134 543,134 Other long-term assets 59,736 54,792 Total assets $ 2,114,657 $ 2,052,217 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 64,729 $ 59,713 Accrued interest 214 60 Accrued expenses and other current liabilities 55,066 53,606 Current maturities of long-term debt 278 285 Total current liabilities 120,287 113,664 Long-term liabilities: Long-term debt, less current maturities 402,594 451,269 Deferred income taxes 108,078 93,755 Warrant liability — 159,835 Other long-term liabilities 46,376 44,890 Total liabilities 677,335 863,413 See commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued — — Common stock, $0.01 par value, 600,000,000 shares authorized, 101,315,226 and 95,882,908 shares issued at May 28, 2022 and August 28, 2021, respectively 1,013 959 Treasury stock, 887,976 shares and 98,234 shares at cost at May 28, 2022 and August 28, 2021, respectively ( 30,649 ) ( 2,145 ) Additional paid-in-capital 1,284,342 1,085,001 Retained earnings 184,254 105,807 Accumulated other comprehensive loss ( 1,638 ) ( 818 ) Total stockholders’ equity 1,437,322 1,188,804 Total liabilities and stockholders’ equity $ 2,114,657 $ 2,052,217 See accompanying notes to the unaudited condensed consolidated financial statements. 3 Table of Contents The Simply Good Foods Company and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited, dollars in thousands, except share and per share data) Thirteen Weeks Ended Thirty-Nine Weeks Ended May 28, 2022 May 29, 2021 May 28, 2022 May 29, 2021 Net sales $ 316,531 $ 284,001 $ 894,514 $ 745,760 Cost of goods sold 197,883 162,998 550,788 440,451 Gross profit 118,648 121,003 343,726 305,309 Operating expenses: Selling and marketing 32,334 30,826 94,816 82,171 General and administrative 26,721 25,668 76,711 77,645 Depreciation and amortization 4,317 4,187 12,966 12,643 Total operating expenses 63,372 60,681 184,493 172,459 Income from operations 55,276 60,322 159,233 132,850 Other income (expense): Interest income — 1 1 4 Interest expense ( 4,881 ) ( 7,985 ) ( 16,528 ) ( 24,352 ) Loss in fair value change of warrant liability — ( 35,833 ) ( 30,062 ) ( 60,714 ) Gain on legal settlement — 5,000 — 5,000 Gain (loss) on foreign currency transactions 76 ( 272 ) 503 712 Other income 17 70 26 229 Total other expense ( 4,788 ) ( 39,019 ) ( 46,060 ) ( 79,121 ) Income before income taxes 50,488 21,303 113,173 53,729 Income tax expense 11,654 15,408 34,726 31,095 Net income $ 38,834 $ 5,895 $ 78,447 $ 22,634 Other comprehensive income: Foreign currency translation, net of reclassification adjustments $ ( 72 ) $ 95 $ ( 820 ) $ 293 Comprehensive income $ 38,762 $ 5,990 $ 77,627 $ 22,927 Earnings per share from net income: Basic $ 0.39 $ 0.06 $ 0.80 $ 0.24 Diluted $ 0.38 $ 0.06 $ 0.78 $ 0.23 Weighted average shares outstanding: Basic 100,426,227 95,767,629 98,294,114 95,730,581 Diluted 102,237,457 97,589,656 100,190,068 97,197,180 See accompanying notes to the unaudited condensed consolidated financial statements. 4 Table of Contents The Simply Good Foods Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited, dollars in thousands) Thirty-Nine Weeks Ended May 28, 2022 May 29, 2021 Operating activities Net income $ 78,447 $ 22,634 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,398 13,508 Amortization of deferred financing costs and debt discount 2,073 3,449 Stock compensation expense 8,691 5,766 Loss in fair value change of warrant liability 30,062 60,714 Estimated credit losses 148 — Unrealized gain on foreign currency transactions ( 503 ) ( 712 ) Deferred income taxes 14,140 13,670 Amortization of operating lease right-of-use asset 4,955 3,385 Loss on operating lease right-of-use asset impairment — 686 Gain on lease termination ( 30 ) ( 156 ) Other 345 769 Changes in operating assets and liabilities: Accounts receivable, net ( 35,269 ) ( 28,737 ) Inventories ( 15,006 ) ( 20,318 ) Prepaid expenses ( 170 ) ( 1,189 ) Other current assets ( 37,288 ) ( 5,376 ) Accounts payable 5,585 13,380 Accrued interest 154 ( 626 ) Accrued expenses and other current liabilities 676 12,745 Other assets and liabilities ( 4,045 ) ( 2,104 ) Net cash provided by operating activities 67,363 91,488 Investing activities Purchases of property and equipment ( 4,696 ) ( 3,232 ) Issuance of note receivable ( 2,400 ) — Proceeds from sale of business — 5,800 Investments in intangible and other assets ( 187 ) ( 114 ) Net cash (used in) provided by investing activities ( 7,283 ) 2,454 Financing activities Proceeds from option exercises 4,343 700 Tax payments related to issuance of restricted stock units and performance stock units ( 3,536 ) ( 320 ) Payments on finance lease obligations ( 235 ) ( 269 ) Repurchase of common stock ( 28,504 ) — Principal payments of long-term debt ( 50,000 ) ( 100,000 ) Deferred financing costs ( 544 ) — Net cash used in financing activities ( 78,476 ) ( 99,889 ) Cash and cash equivalents Net decrease in cash ( 18,396 ) ( 5,947 ) Effect of exchange rate on cash ( 229 ) 273 Cash at beginning of period 75,345 95,847 Cash and cash equivalents at end of period $ 56,720 $ 90,173 5 Table of Contents Thirty-Nine Weeks Ended May 28, 2022 May 29, 2021 Supplemental disclosures of cash flow information Cash paid for interest $ 14,301 $ 21,529 Cash paid for taxes $ 43,430 $ 15,282 Non-cash investing and financing transactions Non-cash proceeds from sale of business $ — $ 3,000 Operating lease right-of-use assets exchanged for operating lease liabilities $ 6,881 $ 316 Issuance of common stock in extinguishment of warrant liabilities $ 189,897 $ — See accompanying notes to the unaudited condensed consolidated financial statements. 6 Table of Contents The Simply Good Foods Company and Subsidiaries Condensed Consolidated Statements of Stockholders’ Equity (Unaudited, dollars in thousands, except share data) Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shares Amount Shares Amount Balance at August 28, 2021 95,882,908 $ 959 98,234 $ ( 2,145 ) $ 1,085,001 $ 105,807 $ ( 818 ) $ 1,188,804 Net income — — — — — 21,152 — 21,152 Stock-based compensation — — — — 2,605 — — 2,605 Foreign currency translation adjustments — — — — — — ( 40 ) ( 40 ) Shares issued upon vesting of restricted stock units and performance stock units 227,729 2 — — ( 3,190 ) — — ( 3,188 ) Exercise of options to purchase common stock 19,804 — — — 274 — — 274 Balance at November 27, 2021 96,130,441 $ 961 98,234 $ ( 2,145 ) $ 1,084,690 $ 126,959 $ ( 858 ) $ 1,209,607 Net income — — — — — 18,461 — 18,461 Stock-based compensation — — — — 3,092 — — 3,092 Foreign currency translation adjustments — — — — — — 439 439 Reclassification adjustment for currency translation gains related to the liquidation of foreign entities — — — — — — ( 1,147 ) ( 1,147 ) Repurchase of common stock — — 571,521 ( 20,394 ) — — — ( 20,394 ) Warrant conversion 4,830,761 48 — — 189,849 — — 189,897 Shares issued upon vesting of restricted stock units 9,679 1 — — ( 102 ) — — ( 101 ) Exercise of options to purchase common stock 100,000 1 — — 1,199 — — 1,200 Balance at February 26, 2022 101,070,881 $ 1,011 669,755 $ ( 22,539 ) $ 1,278,728 $ 145,420 $ ( 1,566 ) $ 1,401,054 Net income — — — — — 38,834 — 38,834 Stock-based compensation — — — — 2,994 — — 2,994 Foreign currency translation adjustments — — — — — — ( 72 ) ( 72 ) Repurchase of common stock — — 218,221 ( 8,110 ) — — — ( 8,110 ) Shares issued upon vesting of restricted stock units 11,358 — — — ( 247 ) — — ( 247 ) Exercise of options to purchase common stock 232,987 2 — — 2,867 — — 2,869 Balance at May 28, 2022 101,315,226 $ 1,013 887,976 $ ( 30,649 ) $ 1,284,342 $ 184,254 $ ( 1,638 ) $ 1,437,322 7 Table of Contents Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shares Amount Shares Amount Balance at August 29, 2020 95,751,845 $ 958 98,234 $ ( 2,145 ) $ 1,076,472 $ 64,927 $ ( 879 ) $ 1,139,333 Net income — — — — — 42,953 — 42,953 Stock-based compensation — — — — 1,110 — — 1,110 Foreign currency translation adjustments — — — — — — ( 45 ) ( 45 ) Shares issued upon vesting of restricted stock units 53,908 — — — ( 201 ) — — ( 201 ) Exercise of options to purchase common stock 13,118 — — — 157 — — 157 Balance at November 28, 2020 95,818,871 $ 958 98,234 $ ( 2,145 ) $ 1,077,538 $ 107,880 $ ( 924 ) $ 1,183,307 Net loss — — — — — ( 26,214 ) — ( 26,214 ) Stock-based compensation — — — — 2,484 — — 2,484 Foreign currency translation adjustments — — — — — — 243 243 Shares issued upon vesting of restricted stock units 7,034 — — — ( 51 ) — — ( 51 ) Exercise of options to purchase common stock 30,810 1 — — 369 — — 370 Balance at February 27, 2021 95,856,715 $ 959 98,234 $ ( 2,145 ) $ 1,080,340 $ 81,666 $ ( 681 ) $ 1,160,139 Net income — — — — — 5,895 — 5,895 Stock-based compensation — — — — 2,172 — — 2,172 Foreign currency translation adjustments — — — — — — 95 95 Shares issued upon vesting of restricted stock units 4,683 — — — ( 68 ) — — ( 68 ) Exercise of options to purchase common stock 14,380 — — — 173 — — 173 Balance at May 29, 2021 95,875,778 $ 959 98,234 $ ( 2,145 ) $ 1,082,617 $ 87,561 $ ( 586 ) $ 1,168,406 See accompanying notes to the unaudited condensed consolidated financial statements. 8 Table of Contents Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited, dollars in thousands, except for share and per share data) 1. Nature of Operations and Principles of Consolidation Description of Business The Simply Good Foods Company (“Simply Good Foods” or the “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 the Company develops, markets and sells 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. Simply Good Foods is poised to expand its wellness platform through innovation and organic growth along with acquisition opportunities in the nutritional snacking space. The Company’s 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. The Company distributes its 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. The Company’s portfolio of nutritious snacking brands gives it a strong platform with which to introduce new products, expand distribution, and attract new consumers to its products. The common stock of Simply Good Foods is listed on the Nasdaq Capital Market under the symbol “SMPL.” Unaudited Interim Condensed Consolidated Financial Statements The unaudited interim condensed consolidated financial statements include the accounts of Simply Good Foods and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to Simply Good Foods and its subsidiaries. The Company maintains its accounting records on a 52/53-week fiscal year, ending on the last Saturday in August of each year. The interim condensed consolidated financial statements and related notes of the Company and its subsidiaries are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The unaudited interim condensed consolidated financial statements reflect all adjustments and disclosures which are, in the Company’s opinion, necessary for a fair presentation of the results of operations, financial position and cash flows for the indicated periods. All such adjustments were of a normal and recurring nature unless otherwise disclosed. The year-end balance sheet data was derived from the audited financial statements and, in accordance with the instructions to Form 10-Q, certain information and footnote disclosures required by GAAP have been condensed or omitted. The results reported in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be reported for the entire fiscal year and should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended August 28, 2021, included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the SEC on October 26, 2021. While the Company’s 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 movement restrictions, the ultimate effect COVID-19, supply chain challenges, cost pressures, 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. 2. Summary of Significant Accounting Policies Refer to Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in the Annual Report for a description of significant accounting policies. 9 Table of Contents Recently Issued and Adopted Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in this ASU are effective for all entities and can be applied to contract modifications due to rate reform and eligible existing and new hedging relationships entered into between March 12, 2020 and December 31, 2022. The amendments of this ASU should be applied on a prospective basis. On January 21, 2022, the Company entered into a repricing amendment (the “2022 Repricing Amendment”) to its credit agreement with Barclays Bank PLC and other parties (as amended to date, the “Credit Agreement”), as described in Note 5, Long-Term Debt and Line of Credit. In addition to replacing the London Interbank Offered Rate (“LIBOR”) as the Credit Agreement’s reference rate with the Secured Overnight Financing Rate (“SOFR”), the 2022 Repricing Amendment contemporaneously modified other terms that changed, or had the potential to change, the amount or timing of contractual cash flows as contemplated by the guidance in ASU 2020-04. As such, the contract modifications related to the 2022 Repricing Amendment were outside of the scope of the optional guidance in ASU 2020-04. The Company will continue to monitor the effects of rate reform, if any, on any new or amended contracts through December 31, 2022. The Company does not anticipate the amendments in this ASU will be material to its consolidated financial statements. Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends existing guidance related to the accounting for income taxes. This ASU was intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The Company adopted this ASU as of the first day of fiscal year 2022. The adoption of this ASU did not have a material effect on the consolidated financial statements. In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which provided updates for technical corrections, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements across various areas of accounting within GAAP. The Company adopted this ASU as of the first day of fiscal year 2022 on a prospective basis. The adoption of this ASU did not have a material effect on the consolidated financial statements. No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material effect on the Company’s consolidated financial statements. 3. Revenue Recognition Revenue from transactions with external customers for each of the Company’s products would be impracticable to disclose and management does not view its business by product line. The following is a summary of revenue disaggregated by geographic area and core brands: Thirteen Weeks Ended Thirty-Nine Weeks Ended (In thousands) May 28, 2022 May 29, 2021 May 28, 2022 May 29, 2021 North America (1) Atkins $ 148,163 $ 146,082 $ 417,539 $ 382,998 Quest 160,261 127,097 451,128 327,891 Total North America 308,424 273,179 868,667 710,889 International 8,107 10,822 25,847 34,871 Total net sales $ 316,531 $ 284,001 $ 894,514 $ 745,760 (1) The North America geographic area consists of net sales substantially related to the United States and there is no individual foreign country to which more than 10% of the Company’s net sales are attributed or that is otherwise deemed individually material. Charges related to credit loss on accounts receivables from transactions with external customers were $ 0.2 million and $ 0.1 million for the thirteen and thirty-nine weeks ended May 28, 2022, respectively, and were $ 0.6 million and $ 0.7 million for the thirteen and thirty-nine weeks ended May 29, 2021, respectively. As of May 28, 2022 and August 28, 2021, the allowances for doubtful accounts related to these accounts receivable were $ 1.3 million and $ 1.1 million, respectively. 10 Table of Contents 4. Goodwill and Intangibles As of May 28, 2022 and August 28, 2021, Goodwill in the Condensed Consolidated Balance Sheets was $ 543.1 million. There were no impairment charges related to goodwill during the thirteen and thirty-nine weeks ended May 28, 2022 or since the inception of the Company. Intangible assets, net in the Condensed Consolidated Balance Sheets consists of the following: May 28, 2022 (In thousands) Useful life Gross carrying amount Accumulated amortization Net carrying amount Intangible assets with indefinite life: Brands and trademarks Indefinite life $ 974,000 $ — $ 974,000 Intangible assets with finite lives: Customer relationships 15 years 174,000 38,803 135,197 Licensing agreements 13 years 22,000 8,102 13,898 Proprietary recipes and formulas 7 years 7,000 4,881 2,119 Software and website development costs 3 - 5 years 5,863 3,941 1,922 $ 1,182,863 $ 55,727 $ 1,127,136 August 28, 2021 (In thousands) Useful life Gross carrying amount Accumulated amortization Net carrying amount Intangible assets with indefinite life: Brands and trademarks Indefinite life $ 974,000 $ — $ 974,000 Intangible assets with finite lives: Customer relationships 15 years 174,000 30,103 143,897 Licensing agreements 13 years 22,000 6,664 15,336 Proprietary recipes and formulas 7 years 7,000 4,131 2,869 Software and website development costs 3 - 5 years 5,560 2,924 2,636 Intangible assets in progress 3 - 5 years 303 — 303 $ 1,182,863 $ 43,822 $ 1,139,041 Changes in Intangible assets, net during the thirty-nine weeks ended May 28, 2022 were primarily related to recurring amortization expense. Amortization expense related to intangible assets was $ 4.0 million and $ 3.8 million for the thirteen weeks ended May 28, 2022 and May 29, 2021, respectively, and $ 11.9 million and $ 11.6 million for the thirty-nine weeks ended May 28, 2022 and May 29, 2021, respectively. There were no impairment charges related to intangible assets during the thirteen and thirty-nine weeks ended May 28, 2022 and May 29, 2021. Estimated future amortization for each of the next five fiscal years and thereafter is as follows: (In thousands) Amortization Remainder of 2022 $ 3,935 2023 15,602 2024 14,917 2025 13,517 2026 13,517 2027 and thereafter 91,648 Total $ 153,136 11 Table of Contents 5. Long-Term Debt and Line of Credit On July 7, 2017, the Company 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, the Company 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, the Company 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, the Company 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 the Company’s 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 the Company’s 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. The Company was in compliance with all financial covenants as of May 28, 2022 and August 28, 2021, respectively. 12 Table of Contents Long-term debt consists of the following: (In thousands) May 28, 2022 August 28, 2021 Term Facility (effective rate of 4.7% at May 28, 2022) $ 406,500 $ 456,500 Finance lease liabilities (effective rate of 5.6% at May 28, 2022) 479 690 Less: Deferred financing fees 4,107 5,636 Total debt 402,872 451,554 Less: Current finance lease liabilities 278 285 Long-term debt, net of deferred financing fees $ 402,594 $ 451,269 The Company is no t 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 May 28, 2022, the Company had letters of credit in the amount of $ 3.5 million outstanding. These letters of credit offset against the $ 75.0 million availability of the Revolving Credit Facility and exist to support three of the Company’s leased buildings and insurance programs relating to workers’ compensation. No amounts were drawn against these letters of credit at May 28, 2022. The Company utilizes market approaches to estimate the fair value of certain outstanding borrowings by discounting anticipated future cash flows derived from the contractual terms of the obligations and observable market interest and foreign exchange rates. The Company carries debt at historical cost and discloses fair value. As of May 28, 2022 and August 28, 2021, the book value of the Company’s debt approximated fair value. The estimated fair value of the Term Loan is valued based on observable inputs and classified as Level 2 in the fair value hierarchy. 6. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is used: Level 1 – Valuations based on quoted prices for identical assets and liabilities in active markets. Level 2 – Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 – Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. Level 3 Measurements As of August 28, 2021, the Company 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. 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 of Conyers Park’s election to exercise the Private Warrants, there were no outstanding liability-classified Private Warrants as of May 28, 2022. Refer to Note 10, Stockholders’ Equity, for additional details regarding the cashless exercise of the Private Warrants. The Company utilized the Black-Scholes model to estimate the fair value of the Private Warrants at each reporting date. The application of the Black-Scholes model utilizes significant assumptions, including volatility. Significant judgment is required in determining the expected volatility, historically the key assumption, of the Private Warrants. In order to determine the most accurate measure of this volatility, the Company measured expected volatility based on several inputs, including considering a peer group of publicly traded companies, the Company’s implied volatility based on traded options, the implied volatility of comparable warrants, and the implied volatility of any outstanding public warrants during the periods they were outstanding. As a result of the unobservable inputs that were used to determine the expected volatility of the Private Warrants, the fair value measurement of these warrants reflects a Level 3 measurement within the fair value measurement hierarchy. 13 Table of Contents There were no Private Warrants outstanding as of May 28, 2022. As of August 28, 2021, the Company had 6,700,000 Private Warrants outstanding with a fair value price per Private Warrant of $ 23.86 , resulting in a $ 159.8 million total warrant liability. The table below summarizes the inputs used to calculate the fair value of the warrant liability at August 28,2021: August 28, 2021 Exercise price $ 11.50 Stock price $ 35.35 Dividend yield — % Expected term (in years) 0.86 Risk-free interest rate 0.06 % Expected volatility 21.70 % Per share value of warrants $ 23.86 The periodic remeasurement of the warrant liability has been reflected in Loss in fair value change of warrant liability within the Condensed Consolidated Statements of Operations and Comprehensive Income. The adjustments for the thirty-nine weeks ended May 28, 2022 resulted in a loss of $ 30.1 million, and the adjustments for the thirteen and thirty-nine weeks ended May 29, 2021 were losses of $ 35.8 million and $ 60.7 million, respectively. 7. Income Taxes The tax expense and the effective tax rate resulting from operations were as follows: Thirty-Nine Weeks Ended (In thousands) May 28, 2022 May 29, 2021 Income before income taxes $ 113,173 $ 53,729 Income tax expense $ 34,726 $ 31,095 Effective tax rate 30.7 % 57.9 % The effective tax rate for the thirty-nine weeks ended May 28, 2022 was 27.2 % less than the effective tax rate for the thirty-nine weeks ended May 29, 2021, which was primarily driven by the non-cash change in the fair value of the warrant liability and other permanent differences. 8. Leases The components of lease expense were as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (In thousands) Statements of Operations Caption May 28, 2022 May 29, 2021 May 28, 2022 May 29, 2021 Operating lease cost: Lease cost Cost of goods sold and General and administrative $ 2,278 $ 1,486 $ 6,806 $ 4,480 Variable lease cost (1) Cost of goods sold and General and administrative 787 470 2,300 1,246 Total operating lease cost 3,065 1,956 9,106 5,726 Finance lease cost: Amortization of right-of-use assets Cost of goods sold 69 69 205 205 Interest on lease liabilities Interest expense 7 10 24 35 Total finance lease cost 76 79 229 240 Total lease cost $ 3,141 $ 2,035 $ 9,335 $ 5,966 (1) Variable lease cost primarily consists of common area maintenance, such as cleaning and repairs. 14 Table of Contents In conjunction with the Company’s restructuring activities as discussed in Note 13, Restructuring and Related Charges, the Company recorded an immaterial gain on lease termination related to its lease in the Netherlands in the thirty-nine weeks ended May 28, 2022 and a $ 0.5 million impairment charge, net of a gain on lease termination, related to its leases in Toronto, Ontario and the Netherlands in the thirty-nine weeks ended May 29, 2021. 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, for additional information regarding restructuring activities. The right-of-use assets and corresponding liabilities related to both operating and finance leases are as follows: (In thousands) Balance Sheets Caption May 28, 2022 August 28, 2021 Assets Operating lease right-of-use assets Other long-term assets $ 48,134 $ 46,197 Finance lease right-of-use assets Property and equipment, net 435 640 Total lease assets $ 48,569 $ 46,837 Liabilities Current: Operating lease liabilities Accrued expenses and other current liabilities $ 5,721 $ 3,788 Finance lease liabilities Current maturities of long-term debt 278 285 Long-term: Operating lease liabilities Other long-term liabilities 46,219 44,892 Finance lease liabilities Long-term debt, less current maturities 201 405 Total lease liabilities $ 52,419 $ 49,370 Future maturities of lease liabilities as of May 28, 2022 were as follows: (In thousands) Operating Leases Finance Leases Fiscal year ending: Remainder of 2022 $ 1,807 $ 78 2023 8,487 278 2024 9,425 145 2025 8,681 — 2026 6,881 — Thereafter 26,845 — Total lease payments 62,126 501 Less: Interest ( 10,186 ) ( 22 ) Present value of lease liabilities $ 51,940 $ 479 The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases were as follows: May 28, 2022 August 28, 2021 Weighted-average remaining lease term (in years) Operating leases 7.46 8.38 Finance leases 1.73 2.44 Weighted-average discount rate Operating leases 4.7 % 4.9 % Finance leases 5.6 % 5.6 % 15 Table of Contents Supplemental and other information related to leases was as follows: Thirty-Nine Weeks Ended (In thousands) May 28, 2022 May 29, 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 7,155 $ 5,619 Operating cash flows from finance leases $ 472 $ 34 Financing cash flows from finance leases $ 235 $ 235 9. Commitments and Contingencies Litigation The Company is a party to certain litigation and claims that are considered normal to the operations of the business. From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any litigation that it believes to be material, and the Company is not aware of any pending or threatened litigation against it that its management believes could have a material adverse effect on its business, operating results, financial condition or cash flows. Other The Company has entered into endorsement contracts with certain celebrity figures and social media influencers to promote and endorse the Atkins and Quest brands and product lines. These contracts contain endorsement fees, which are expensed ratably over the life of the contract, and performance fees, that are recognized at the time of achievement. Based on the terms of the contracts in place and achievement of performance conditions as of May 28, 2022, the Company will be required to make payments of $ 0.7 million over the next year. 10. Stockholders’ Equity Warrants to Purchase Common Stock As of August 28, 2021, the Company 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, 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 of the cashless exercise on January 7, 2022, there were no outstanding liability-classified Private Warrants as of May 28, 2022. As discussed in Note 6, Fair Value of Financial Instruments, the liability-classified warrants were remeasured on a recurring basis, primarily based on observable market data while the related theoretical private warrant volatility assumption within the Black-Scholes model represents a Level 3 measurement within the fair value measurement hierarchy. The periodic fair value remeasurements of the warrant liability, including the cashless exercise and the settlement of the warrant liability, have been reflected in Loss in fair value change of warrant liability within the Condensed Consolidated Statements of Operations and Comprehensive Income. Stock Repurchase Program The Company adopted a $ 50.0 million stock repurchase program on November 13, 2018. On April 13, 2022, the Company announced that its Board of Directors had approved the addition of $ 50.0 million to its stock repurchase program, resulting in authorized stock repurchases of up to an aggregate of $ 100.0 million. Under the stock repurchase program, the Company may repurchase shares from time to time in the open market or in privately negotiated transactions. The stock repurchase program does not obligate the Company to acquire any specific number of shares or acquire shares over any specific period of time. The stock repurchase program may be suspended or discontinued at any time by the Company and does not have an expiration date. During the thirteen weeks ended May 28, 2022, the Company repurchased 218,221 shares of common stock at an average share price of $ 37.16 per share. During the thirty-nine weeks ended May 28, 2022, the Company repurchased 789,742 shares of common stock at an average share price of $ 36.09 per share. The Company 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 under the stock repurchase program. 16 Table of Contents Accumulated Other Comprehensive Loss During the thirty-nine weeks ended May 28, 2022, the Company recognized a foreign currency translation gain of $1.1 million related to the liquidation of a foreign subsidiary. The gain is reflected as a component of Other income (expense) in Gain (loss) on foreign currency transactions within the Condensed Consolidated Statements of Operations and Comprehensive Income. 11. Earnings Per Share Basic earnings or loss per share is based on the weighted average number of common shares issued and outstanding. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all potentially dilutive securities, including the Company’s employee stock options, non-vested stock units, and Private Warrants for the periods during which they were outstanding. During periods when the effect of the outstanding Private Warrants was dilutive, the Company assumed share settlement of the instruments as of the beginning of the reporting period and adjusted the numerator to remove the change in fair value of the warrant liability and adjusted the denominator to include the dilutive shares, calculated using the treasury stock method. During periods when the effect of the outstanding Private Warrants was anti-dilutive, the share settlement is excluded. In periods in which the Company has a net loss, diluted loss per share is based on the weighted average number of common shares issued and outstanding as the effect of including common stock equivalents outstanding would be anti-dilutive. The following tables reconcile the numerators and denominators used in the computations of both basic and diluted earnings per share: Thirteen Weeks Ended Thirty-Nine Weeks Ended (In thousands, except per share data) May 28, 2022 May 29, 2021 May 28, 2022 May 29, 2021 Basic earnings per share computation: Numerator: Net income available to common stockholders $ 38,834 $ 5,895 $ 78,447 $ 22,634 Denominator: Weighted average common shares outstanding - basic 100,426,227 95,767,629 98,294,114 95,730,581 Basic earnings per share from net income $ 0.39 $ 0.06 $ 0.80 $ 0.24 Diluted earnings per share computation: Numerator: Net income available for common stockholders $ 38,834 $ 5,895 $ 78,447 $ 22,634 Numerator for diluted earnings per share $ 38,834 $ 5,895 $ 78,447 $ 22,634 Denominator: Weighted average common shares outstanding - basic 100,426,227 95,767,629 98,294,114 95,730,581 Employee stock options 1,604,847 1,465,477 1,633,278 1,191,593 Non-vested stock units 206,383 356,550 262,676 275,006 Weighted average common shares - diluted 102,237,457 97,589,656 100,190,068 97,197,180 Diluted earnings per share from net income $ 0.38 $ 0.06 $ 0.78 $ 0.23 Diluted earnings per share calculations for the thirty-nine weeks ended May 28, 2022 excluded 1.0 million shares, issuable upon exercise of Private Warrants, that would have been anti-dilutive. The diluted earnings per share calculations for the thirteen and thirty-nine weeks ended May 29, 2021 excluded 4.3 million shares and 3.9 million shares, issuable upon exercise of Private Warrants, respectively, that would have been anti-dilutive. Diluted earnings per share calculations for the thirteen and thirty-nine weeks ended May 28, 2022 excluded 0.3 million shares of common stock issuable upon exercise of stock options, respectively, that would have been anti-dilutive. Diluted earnings per share calculations for the thirteen and thirty-nine weeks ended May 29, 2021 excluded an immaterial number of shares and 0.2 million shares of common stock issuable upon exercise of stock options, respectively, that would have been anti-dilutive. Diluted earnings per share calculations for the thirteen and thirty-nine weeks ended May 28, 2022 and May 29, 2021 excluded an immaterial number of non-vested stock units that would have been anti-dilutive. 17 Table of Contents 12. Omnibus Incentive Plan Stock-based compensation includes stock options, restricted stock units, performance stock unit awards and stock appreciation rights, which are awarded to employees, directors, and consultants of the Company. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award based on their grant date fair value. Stock-based compensation expense is included within General and administrative expense, which is the same financial statement caption where the recipient’s other compensation is reported. The Company recorded stock-based compensation expense of $ 3.0 million and $ 2.2 million in the thirteen weeks ended May 28, 2022 and May 29, 2021, respectively, and $ 8.7 million and $ 5.8 million in the thirty-nine weeks ended May 28, 2022 and May 29, 2021, respectively. Stock Options The following table summarizes stock option activity for the thirty-nine weeks ended May 28, 2022: Shares underlying options Weighted average exercise price Weighted average remaining contractual life (years) Outstanding as of August 28, 2021 2,993,163 $ 16.31 Granted 138,479 40.88 Exercised ( 352,791 ) 12.31 Forfeited ( 2,300 ) 19.89 Outstanding as of May 28, 2022 2,776,551 $ 18.04 6.35 Vested and expected to vest as of May 28, 2022 2,776,551 $ 18.04 6.35 Exercisable as of May 28, 2022 2,164,158 $ 14.44 5.66 As of May 28, 2022, the Company had $ 5.0 million of total unrecognized compensation cost related to stock options that will be recognized over a weighted average period of 1.8 years. During the thirty-nine weeks ended May 28, 2022 and May 29, 2021, the Company received $ 4.3 million and $ 0.7 million in cash from stock option exercises, respectively. Restricted Stock Units The following table summarizes restricted stock unit activity for the thirty-nine weeks ended May 28, 2022: Units Weighted average grant-date fair value Non-vested as of August 28, 2021 496,334 $ 24.56 Granted 171,795 39.97 Vested ( 169,145 ) 23.16 Forfeited ( 22,818 ) 26.51 Non-vested as of May 28, 2022 476,166 $ 30.55 As of May 28, 2022, the Company had $ 10.3 million of total unrecognized compensation cost related to restricted stock units that will be recognized over a weighted average period of 1.7 years. Performance Stock Units During the thirty-nine weeks ended May 28, 2022, the Board of Directors granted performance stock units under the Company’s equity compensation plan. Performance stock units vest in a range between 0 % and 200 % based upon certain performance criteria in a three -year period. Performance stock units were valued using a Monte Carlo simulation. 18 Table of Contents The following table summarizes performance stock unit activity for the thirty-nine weeks ended May 28, 2022: Units Weighted average grant-date fair value Non-vested as of August 28, 2021 380,097 $ 19.31 Granted 50,212 63.42 Vested ( 166,688 ) 11.93 Forfeited ( 8,083 ) 18.82 Non-vested as of May 28, 2022 255,538 $ 32.80 As of May 28, 2022, the Company had $ 4.3 million of total unrecognized compensation cost related to performance stock units that will be recognized over a weighted average period of 1.3 years. Stock Appreciation Rights Stock appreciation rights (“SARs”) permit the holder to participate in the appreciation of the Company’s common stock price and are awarded to non-employee, consultants of the Company. The Company’s SARs settle in shares of its common stock once the applicable vesting criteria has been met. SARs cliff vest three years from the date of grant and must be exercised within ten years . The following table summarizes SARs activity for the thirty-nine weeks ended May 28, 2022: Shares underlying SARs Weighted average exercise price Weighted average remaining contractual life (years) Outstanding as of August 28, 2021 150,000 $ 24.20 Granted — — Exercised — — Forfeited — — Outstanding as of May 28, 2022 150,000 $ 24.20 7.43 Vested and expected to vest as of May 28, 2022 150,000 $ 24.20 7.43 Exercisable as of May 28, 2022 — $ — 0.00 As of May 28, 2022, the Company had $ 0.1 million of total unrecognized compensation cost related to its SARs that will be recognized over a weighted average period of 0.4 years. 13. Restructuring and Related Charges In May 2020, the Company announced certain restructuring activities in conjunction with the implementation of the Company’s future-state organization design, which created a fully integrated organization with its completed acquisition of Quest Nutrition, LLC on November 7, 2019. The new organization design became effective on August 31, 2020. These restructuring plans primarily included workforce reductions, changes in management structure, and the relocation of business activities from one location to another. The Company substantially completed its restructuring activities during the third quarter of fiscal 2022. Since the announcement of the restructuring activities in May 2020, the Company incurred aggregate restructuring and restructuring-related costs of $ 9.9 million. The one-time termination benefits and employee severance costs incurred in relation to these restructuring activities were accounted for in accordance with ASC Topic 420, Exit or Disposal Cost Obligations, and ASC Topic 712, Compensation - Nonretirement Postemployment Benefits, respectively. The Company recognized a liability and the related expense for these restructuring costs when the liability was incurred and could be measured. Restructuring accruals were based upon management estimates at the time and could change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded. The effect of these restructuring activities was included within General and administrative on the Condensed Consolidated Statements of Operations and Comprehensive Income 19 Table of Contents Changes to the restructuring liability during the thirty-nine weeks ended May 28, 2022 were as follows: (In thousands) Termination benefits and severance Other Restructuring liability Balance as of August 28, 2021 $ 851 $ — $ 851 Charges 52 76 128 Cash payments ( 903 ) ( 76 ) ( 979 ) Balance as of May 28, 2022 $ — $ — $ — The Company’s total restructuring and restructuring-related costs incurred in the thirty-nine weeks ended May 28, 2022 were $ 0.1 million, which included an immaterial gain on lease termination related to its lease in the Netherlands in addition to the restructuring costs shown above. Because the Company substantially completed its 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, the Company incurred a total of $ 0.2 million and $ 4.0 million in restructuring and restructuring-related costs, respectively. 20 Table of Contents