Simply Good Foods Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements. When used anywhere in this Report, the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These statements include, but are not limited to, our expectations regarding our supply chain, including but not limited to, raw materials and logistics costs, the effect of price increases, inflationary pressure on us and our contract manufacturers, and the unforeseen business disruptions or other effects due to current global geopolitical tensions, including relating to Ukraine. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by applicable law. These statements reflect our current views with respect to future events and are based on assumptions subject to risks and uncertainties. Such risks and uncertainties include those related to our ability to sell our products. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended August 27, 2022 (“Annual Report”) and our unaudited consolidated financial statements and the related notes appearing elsewhere in this Report. In addition to historical information, the following discussion contains forward-looking statements, including, but not limited to, statements regarding the Company’s expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from the Company’s expectations. The Company’s actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified in Item 1A. “Risk Factors” of our Annual Report. The Company assumes no obligation to update any of these forward-looking statements. Unless the context requires otherwise in this Report, the terms “we,” “us,” “our,” the “Company” and “Simply Good Foods” refer to The Simply Good Foods Company and its subsidiaries. Overview The Simply Good Foods Company is a consumer packaged food and beverage company that aims to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great-tasting, better-for-you snacks and meal replacements, and other product offerings. The product portfolio we develop, market and sell consists primarily of protein bars, ready-to-drink (“RTD”) shakes, sweet and salty snacks and confectionery products marketed under the Atkins®, Atkins Endulge®, Quest® and Quest Hero TM brand names. We believe Simply Good Foods is poised to expand its wellness platform through innovation and organic growth along with acquisition opportunities in the nutritional snacking space. Our nutritious snacking platform consists of brands that specialize in providing products for consumers that follow certain nutritional philosophies and health-and-wellness trends: Atkins® for those following a low-carb lifestyle and Quest® for consumers seeking a variety of protein-rich foods and beverages that also limit sugars and simple carbs. We distribute our products in major retail channels, primarily in North America, including grocery, club, and mass merchandise, as well as through e-commerce, convenience, specialty, and other channels. Our portfolio of nutritious snacking brands gives us a strong platform with which to introduce new products, expand distribution, and attract new consumers to our products. Business Trends We continue to actively monitor the effect of the dynamic macroeconomic inflationary environment in the United States and elsewhere, elevated levels of supply chain costs, and the level of consumer mobility, which includes the rate at which consumers return to working outside the home. Current or future governmental policies may increase the risk of inflation and possible economic recession, which could further increase the costs of ingredients, packaging and finished goods for our business as well as negatively effect consumer behavior and demand for our products. 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 and Europe in general. 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 in Eastern Europe. During the thirteen and twenty-six weeks ended February 25, 2023, our business performance was affected by the corresponding unfavorable effects of higher raw material costs, higher co-manufacturing costs, and supply chain challenges, including supply chain disruptions resulting from labor shortages and disruptions in ingredients, and we expect on balance that these inflationary cost pressures and supply chain challenges to continue for the remainder of fiscal year 2023. 19 Table of Contents We continue to proactively engage 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. Additionally, we instituted price increases effective in the first and fourth quarters of fiscal year 2022. Management believes these price increases and additional cost savings initiatives will partially offset the unfavorable effects of the supply chain cost pressures discussed above. The ultimate effect the supply chain challenges, cost pressures, current high inflation environment, and the possible economic recession discussed above could have on consumer purchasing patterns and on our business continue to be not fully known. Based on information available to us as of the date of this Report, we believe we will be able to deliver products at acceptable levels to fulfill customer orders on a timely basis; therefore, we expect our products will continue to be available for purchase to meet consumer meal replacement and snacking needs for the foreseeable future. We continue to monitor customer and consumer demand along with our supply chain and logistics capabilities and intend to adapt our plans as needed to continue to drive our business and meet our obligations. Key Financial Definitions Net sales. Net sales consist primarily of product sales less the cost of promotional activities, slotting fees and other sales credits and adjustments, including product returns. Cost of goods sold. Cost of goods sold consists primarily of the costs we pay to our contract manufacturing partners to produce the products sold. These costs include the purchase of raw ingredients, packaging, shipping and handling, warehousing, depreciation of warehouse equipment, and a tolling charge for the contract manufacturer. Cost of goods sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders. Operating expenses. Operating expenses consist primarily of selling and marketing, general and administrative, and depreciation and amortization expense. The following is a brief description of the components of operating expenses: • Selling and marketing. Selling and marketing expenses comprise broker commissions, customer marketing, media and other marketing costs. • General and administrative. General and administrative expenses comprise expenses associated with corporate and administrative functions that support our business, including employee compensation, stock-based compensation, professional services, integration costs, restructuring costs, insurance and other general corporate expenses. • Depreciation and amortization. Depreciation and amortization costs consist of costs associated with the depreciation of fixed assets and capitalized leasehold improvements and amortization of intangible assets. Results of Operations During the thirteen weeks ended February 25, 2023, our net sales were relatively flat at $296.6 million compared to $296.7 million for the thirteen weeks ended February 26, 2022. The positive effects of the price increase effective in the fourth quarter of fiscal year 2022, which drove a 0.3% increase in our North America net sales, were offset by a 10.8% decline in our international net sales and a 1.3% headwind to net sales growth related to our shift from direct sales to licensing the Quest® frozen pizza business in the third quarter of fiscal year 2022. Unfavorable effects of higher raw material, packaging, and co-manufacturing costs and supply chain challenges in the thirteen weeks ended February 25, 2023 resulted in decreased gross profit and gross profit margin as compared to the thirteen weeks ended February 26, 2022. As previously discussed above in “Business Trends,” we expect these inflationary cost pressures and supply chain challenges to continue for the remainder of fiscal year 2023. In assessing the performance of our business, we consider a number of key performance indicators used by management and typically used by our competitors, including the non-GAAP measures EBITDA and Adjusted EBITDA. Because not all companies use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. See “Reconciliation of EBITDA and Adjusted EBITDA” below for a reconciliation of EBITDA and Adjusted EBITDA to net income for each applicable period. 20 Table of Contents Comparison of Unaudited Results for the Thirteen Weeks Ended February 25, 2023 and the Thirteen Weeks Ended February 26, 2022 The following unaudited table presents, for the periods indicated, selected information from our 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 25, 2023 % of Net Sales February 26, 2022 % of Net Sales Net sales $ 296,584 100.0 % $ 296,718 100.0 % Cost of goods sold 193,852 65.4 % 188,195 63.4 % Gross profit 102,732 34.6 % 108,523 36.6 % Operating expenses: Selling and marketing 29,948 10.1 % 31,955 10.8 % General and administrative 25,934 8.7 % 26,288 8.9 % Depreciation and amortization 4,345 1.5 % 4,329 1.5 % Total operating expenses 60,227 20.3 % 62,572 21.1 % Income from operations 42,505 14.3 % 45,951 15.5 % Other income (expense): Interest income 246 0.1 % — — % Interest expense (8,497) (2.9) % (5,276) (1.8) % Loss in fair value change of warrant liability — — % (12,745) (4.3) % (Loss) gain on foreign currency transactions (214) (0.1) % 780 0.3 % Total other expense (8,465) (2.9) % (17,241) (5.8) % Income before income taxes 34,040 11.5 % 28,710 9.7 % Income tax expense 8,398 2.8 % 10,249 3.5 % Net income $ 25,642 8.6 % $ 18,461 6.2 % Other financial data: Adjusted EBITDA (1) $ 50,900 17.2 % $ 54,180 18.3 % (1) Adjusted EBITDA is a non-GAAP financial metric. See “Reconciliation of EBITDA and Adjusted EBITDA” below for a reconciliation of net income to EBITDA and Adjusted EBITDA for each applicable period. Net sales . Net sales were relatively flat at $296.6 million for the thirteen weeks ended February 25, 2023 compared to $296.7 million for the thirteen weeks ended February 26, 2022, representing a slight decrease of $0.1 million. The slight decrease was primarily attributable to the 10.8% decline in our international business and the 1.3% headwind to net sales growth related to our shift from direct sales to licensing the Quest® frozen pizza business in the third quarter of fiscal year 2022. These decreases were largely offset by the effects of the price increase effective in the fourth quarter of fiscal year 2022, which drove the 0.3% increase in our North America net sales in the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022. Cost of goods sold . Cost of goods sold increased $5.7 million, or 3.0%, for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022. The cost of goods sold increase was primarily driven by higher raw material, packaging, and co-manufacturing costs and supply chain challenges in the thirteen weeks ended February 25, 2023. As previously discussed above in “Business Trends,” we expect these inflationary cost pressures and supply chain challenges to continue for the remainder of fiscal year 2023. 21 Table of Contents Gross profit. Gross profit decreased $5.8 million, or 5.3%, for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022. Additionally, gross profit of $102.7 million, or 34.6% of net sales, for the thirteen weeks ended February 25, 2023 decreased 200 basis points from 36.6% of net sales for the thirteen weeks ended February 26, 2022. The decreases in gross profit and gross profit margin were primarily driven by the unfavorable effects of higher raw material, packaging, and co-manufacturing costs and supply chain challenges in the thirteen weeks ended February 25, 2023 as previously discussed. These decreases were partially offset by the favorable effects of the price increase which became effective in the fourth quarter of fiscal year 2022. Operating expenses . Operating expenses decreased $2.3 million, or 3.7%, for the thirteen weeks ended February 25, 2023 and February 26, 2022 due to the following: • Selling and marketing. Selling and marketing expenses decreased $2.0 million, or 6.3%, for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022, primarily related to the timing of marketing spend. • General and administrative. General and administrative expenses decreased $0.4 million, or 1.3%, for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022. The decrease in general and administrative expenses was primarily attributable to a reduction in employee-related expenses and the discontinuation of costs related to business integration activities and restructuring charges in the thirteen weeks ended February 25, 2023 compared to costs totaling $0.3 million in the thirteen weeks ended February 26, 2022. These decreases were partially offset by the $0.4 million of executive officer transition costs incurred in the thirteen weeks ended February 25, 2023. • Depreciation and amortization. Depreciation and amortization expenses were $4.3 million for the thirteen weeks ended February 25, 2023 and February 26, 2022. Interest expense . Interest expense increased $3.2 million for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022, primarily due to the increase in interest rates on our Term Facility (as defined below) to 8.0% as of February 25, 2023 from 3.8% as of February 26, 2022. The increase was partially offset by the effect of principal payments reducing the outstanding balance of the Term Facility to $365.0 million as of February 25, 2023 from $431.5 million as of February 26, 2022. Additionally, interest expense related to the amortization of deferred financing costs and debt discount increased $0.2 million for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022. Loss in fair value change of warrant liability. There were no outstanding liability-classified Private Warrants during the thirteen weeks ended February 25, 2023. During thirteen weeks ended February 26, 2022, we recorded a non-cash loss of $12.7 million related to changes in valuation of our liability-classified warrants issued through a private placement (“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. (Loss) gain on foreign currency transactions. Foreign currency transactions resulted in a loss of $0.2 million and a gain of $0.8 million for the thirteen weeks ended February 25, 2023 and February 26, 2022, respectively. During the thirteen weeks ended February 26, 2022, we recognized a foreign currency translation gain of $1.1 million related to the liquidation of a foreign subsidiary. The remaining variance is attributable to changes in foreign currency rates related to our international operations. Income tax expense. Income tax expense decreased $1.9 million for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022. The decrease in our income tax expense was primarily driven by lower income from operations and changes in permanent differences. Net income . Net income was $25.6 million for the thirteen weeks ended February 25, 2023, an increase of $7.2 million compared to net income of $18.5 million for the thirteen weeks ended February 26, 2022. The increase was primarily driven by the $12.7 million non-cash fair value loss incurred in the thirteen weeks ended February 26, 2022 related to the measurement of our liability-classified Private Warrants. The increase in net income was partially offset by a $3.4 million decrease in income from operations, driven by the unfavorable effects of higher raw material and co-manufacturing costs and supply chain challenges, and the $3.2 million increase in interest expense in the thirteen weeks ended February 25, 2023 as discussed above. Adjusted EBITDA. Adjusted EBITDA decreased $3.3 million, or 6.1% for the thirteen weeks ended February 25, 2023 compared to the thirteen weeks ended February 26, 2022, driven primarily by the $3.4 million decrease in income from operations as a result of the unfavorable effects of higher raw material and co-manufacturing costs and supply chain challenges in the thirteen weeks ended February 25, 2023 as discussed above. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of EBITDA and Adjusted EBITDA” below. 22 Table of Contents Comparison of Unaudited Results for the Twenty-Six Weeks Ended February 25, 2023 and the Twenty-Six Weeks Ended February 26, 2022 The following unaudited table presents, for the periods indicated, selected information from our Consolidated Statements of Operations and Comprehensive Income, including information presented as a percentage of net sales: Twenty-Six Weeks Ended Twenty-Six Weeks Ended (In thousands) February 25, 2023 % of Net Sales February 26, 2022 % of Net Sales Net sales $ 597,462 100.0 % $ 577,983 100.0 % Cost of goods sold 383,738 64.2 % 352,905 61.1 % Gross profit 213,724 35.8 % 225,078 38.9 % Operating expenses: Selling and marketing 58,482 9.8 % 62,482 10.8 % General and administrative 51,575 8.6 % 49,990 8.6 % Depreciation and amortization 8,672 1.5 % 8,649 1.5 % Total operating expenses 118,729 19.9 % 121,121 21.0 % Income from operations 94,995 15.9 % 103,957 18.0 % Other income (expense): Interest income 253 — % 1 — % Interest expense (15,552) (2.6) % (11,647) (2.0) % Loss in fair value change of warrant liability — — % (30,062) (5.2) % (Loss) gain on foreign currency transactions (106) — % 427 0.1 % Other income 6 — % 9 — % Total other expense (15,399) (2.6) % (41,272) (7.1) % Income before income taxes 79,596 13.3 % 62,685 10.8 % Income tax expense 18,094 3.0 % 23,072 4.0 % Net income $ 61,502 10.3 % $ 39,613 6.9 % Other financial data: Adjusted EBITDA (1) $ 111,666 18.7 % $ 119,795 20.7 % (1) Adjusted EBITDA is a non-GAAP financial metric. See “Reconciliation of EBITDA and Adjusted EBITDA” below for a reconciliation of net income to EBITDA and Adjusted EBITDA for each applicable period. Net sales. Net sales of $597.5 million represented an increase of $19.5 million, or 3.4%, for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. The increase was primarily attributable to the price increase effective in the fourth quarter of fiscal year 2022, which drove the 3.9% increase in our North America net sales in the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. The increase in North America net sales was partially offset by a 13.8% decline in our international business and a 1.2% headwind to net sales growth related to our shift from direct sales to licensing the Quest® frozen pizza business in the third quarter of fiscal year 2022. Cost of goods sold . Cost of goods sold increased $30.8 million, or 8.7%, for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. The cost of goods sold increase was primarily driven by higher raw material, packaging, and co-manufacturing costs and supply chain challenges in the twenty-six weeks ended February 25, 2023. As previously discussed above in “Business Trends,” we continue to expect these inflationary cost pressures and supply chain challenges to continue for the remainder of fiscal year 2023. 23 Table of Contents Gross profit. Gross profit decreased $11.4 million, or 5.0%, for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. Additionally, gross profit of $213.7 million, or 35.8% of net sales, for the twenty-six weeks ended February 25, 2023 decreased 310 basis points from 38.9% of net sales for the twenty-six weeks ended February 26, 2022. The decreases in gross profit and gross profit margin were primarily driven by the unfavorable effects of higher raw material, packaging, and co-manufacturing costs and supply chain challenges in the twenty-six weeks ended February 25, 2023 as previously discussed. These decreases were partially offset by the favorable effects of the price increase which became effective in the fourth quarter of fiscal year 2022. Operating expenses . Operating expenses decreased $2.4 million, or 2.0%, for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022 due to the following: • Selling and marketing. Selling and marketing expenses decreased $4.0 million, or 6.4%, for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022, primarily related to the timing of marketing spend. • General and administrative. General and administrative expenses increased $1.6 million, or 3.2%, for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. The increase in general and administrative expense was primarily attributable to a $0.6 million increase in stock-based compensation, increased corporate expenses, and $0.4 million of executive officer transition costs incurred in the twenty-six weeks ended February 25, 2023. These increases were partially offset by a reduction in employee-related expenses and the discontinuation of costs related to business integration activities and restructuring charges in the twenty-six weeks ended February 25, 2023 compared to costs totaling $0.4 million in the twenty-six weeks ended February 26, 2022. • Depreciation and amortization. Depreciation and amortization expenses were $8.7 million and $8.6 million for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022, respectively. Interest expense . Interest expense increased $3.9 million for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022, primarily due to the increase in interest rates on our Term Facility (as defined below) to 8.0% as of February 25, 2023 from 3.8% as of February 26, 2022. Interest expense related to the amortization of deferred financing costs and debt discount decreased $0.1 million for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. Loss in fair value change of warrant liability . There were no outstanding liability-classified Private Warrants during the twenty-six weeks ended February 25, 2023. During the twenty-six weeks ended February 26, 2022, we recorded a non-cash loss of $30.1 million 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. (Loss) gain on foreign currency transactions. Foreign currency transactions resulted in a loss of $0.1 million and a gain of $0.4 million for the twenty-six weeks ended February 25, 2023 and February 26, 2022, respectively. During the twenty-six weeks ended February 26, 2022, we recognized a foreign currency translation gain of $1.1 million related to the liquidation of a foreign subsidiary. The remaining variance is attributable to changes in foreign currency rates related to our international operations. Income tax expense. Income tax expense decreased $5.0 million for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022. The decrease in our income tax expense is primarily driven by lower income from operations and changes in permanent differences. Net income . Net income was $61.5 million for the twenty-six weeks ended February 25, 2023, an increase of $21.9 million compared to net income of $39.6 million for the twenty-six weeks ended February 26, 2022. The increase was primarily driven by the $30.1 million non-cash fair value loss incurred in the twenty-six weeks ended February 26, 2022 related to the measurement of our liability-classified Private Warrants. The increase in net income was partially offset by a $9.0 million decrease in income from operations, driven by the unfavorable effects of higher raw material and co-manufacturing costs and supply chain challenges in the twenty-six weeks ended February 25, 2023 as discussed above. Adjusted EBITDA. Adjusted EBITDA decreased $8.1 million, or 6.8% for the twenty-six weeks ended February 25, 2023 compared to the twenty-six weeks ended February 26, 2022, driven primarily by the $9.0 million decrease in income from operations as a result of the unfavorable effects of higher raw material and co-manufacturing costs and supply chain challenges in the twenty-six weeks ended February 25, 2023 as discussed above. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of EBITDA and Adjusted EBITDA” below. 24 Table of Contents Reconciliation of EBITDA and Adjusted EBITDA EBITDA and Adjusted EBITDA are non-GAAP financial measures commonly used in our industry and should not be construed as alternatives to net income as an indicator of operating performance or as alternatives to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). The Company 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, executive transition costs, integration costs, restructuring costs, loss in fair value change of warrant liability, and other non-core expenses. The Company believes that EBITDA and Adjusted EBITDA, when used in conjunction with net income, are useful to provide additional information to investors. Management of the Company uses EBITDA and Adjusted EBITDA to supplement net income because these measures reflect operating results of the on-going operations, eliminate items that are not directly attributable to the Company’s underlying operating performance, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics the Company’s management uses in its financial and operational decision making. The Company also believes that EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. EBITDA and 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 25, 2023 and February 26, 2022: (In thousands) Thirteen Weeks Ended Twenty-Six Weeks Ended February 25, 2023 February 26, 2022 February 25, 2023 February 26, 2022 Net income $ 25,642 $ 18,461 $ 61,502 $ 39,613 Interest income (246) — (253) (1) Interest expense 8,497 5,276 15,552 11,647 Income tax expense 8,398 10,249 18,094 23,072 Depreciation and amortization 4,952 4,831 9,904 9,572 EBITDA 47,243 38,817 104,799 83,903 Stock-based compensation expense 3,019 3,092 6,332 5,697 Executive transition costs 421 — 421 — Integration of Quest — 238 — 293 Restructuring — 56 — 98 Loss in fair value change of warrant liability — 12,745 — 30,062 Other (1) 217 (768) 114 (258) Adjusted EBITDA $ 50,900 $ 54,180 $ 111,666 $ 119,795 (1) Other items consist principally of exchange impact of foreign currency transactions and other expenses. 25 Table of Contents Liquidity and Capital Resources Overview We have historically funded our operations with cash flow from operations and, when needed, with borrowings under our Credit Agreement (as defined below). Our principal uses of cash have been working capital, debt service, repurchases of our common stock, and acquisition opportunities. We had $63.2 million in cash as of February 25, 2023. We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. As circumstances warrant, we may issue debt and/or equity securities from time to time on an opportunistic basis, dependent upon market conditions and available pricing. We make no assurance that we can issue and sell such securities on acceptable terms or at all. Our material future cash requirements from contractual and other obligations relate primarily to our principal and interest payments for our Term Facility, as defined and discussed below, and our operating and finance leases. Refer to Note 5, Long-Term Debt and Line of Credit, and Note 8, Leases, of the Notes to Unaudited Consolidated Financial Statements in this Report for additional information related to the expected timing and amount of payments related to our contractual and other obligations. Debt and Credit Facilities On July 7, 2017, we (through certain of our subsidiaries) 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 which formed the Company between Conyers Park Acquisition Corp. and NCP-ATK Holdings, Inc. on July 7, 2017, the full $200.0 million of the Term Facility (the “Term Loan”) was drawn. On November 7, 2019, we entered into a second amendment (the “Incremental Facility Amendment”) to the Credit Agreement to increase the principal borrowed on the Term Facility by $460.0 million. The Term Facility together with the incremental borrowing make up the Initial Term Loans (as defined in the Incremental Facility Amendment). The Incremental Facility Amendment was executed to partially finance the acquisition of Quest Nutrition, LLC on November 7, 2019. No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment. Effective as of December 16, 2021, we entered into a third amendment (the “Extension Amendment”) to the Credit Agreement. The Extension Amendment provided for an extension of the stated maturity date of the Revolving Commitments and Revolving Loans (each as defined in the Credit Agreement) from July 7, 2022 to the earlier of (i) 91 days prior to the then-effective maturity date of the Initial Term Loans and (ii) December 16, 2026. On January 21, 2022, we entered into a repricing amendment (the “2022 Repricing Amendment”) to the Credit Agreement. The 2022 Repricing Amendment, among other things, (i) reduced the interest rate per annum applicable to the Initial Term Loans outstanding under the Credit Agreement immediately prior to the effective date of the 2022 Repricing Amendment, (ii) reset the prepayment premium for the existing Initial Term Loans to apply to Repricing Transactions (as defined in the Credit Agreement) that occur within six months after the effective date of the 2022 Repricing Amendment, and (iii) implemented the Secured Overnight Financing Rate (“SOFR”) and related replacement provisions for the London Interbank Offered Rate (“LIBOR”). Effective as of the 2022 Repricing Amendment dated January 21, 2022, the interest rate per annum is based on either: i. A base rate equaling the higher of (a) the “prime rate,” (b) the federal funds effective rate plus 0.50%, or (c) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) applicable for an interest period of one month plus 1.00% plus (x) 2.25% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility; or ii. SOFR plus a credit spread adjustment equal to 0.10% for one-month SOFR, 0.15% for up to three-month SOFR and 0.25% for up to six-month SOFR, subject to a floor of 0.50%, plus (x) 3.25% margin for the Term Loan or (y) 3.00% margin for the Revolving Credit Facility. The Simply Good Foods Company is not a borrower under the Credit Agreement and has not provided a guarantee of the Credit Agreement. Simply Good Foods USA, Inc., is the administrative borrower and certain other subsidiary holding companies are co-borrowers under the Credit Agreement. Each of our domestic subsidiaries that is not a named borrower under the Credit Agreement has provided a guarantee on a secured basis. As security for the payment or performance of the debt under the Credit Agreement, the borrowers and the guarantors have pledged certain equity interests in their respective subsidiaries and granted the lenders a security interest in substantially all of their domestic assets. All guarantors other than Quest Nutrition, LLC are holding companies with no assets other than their investments in their respective subsidiaries. 26 Table of Contents The Credit Agreement contains certain financial and other covenants that limit our ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders, and prepayments of material subordinated debt, in each case, subject to customary exceptions materially consistent with credit facilities of such type and size. The Revolving Credit Facility has a maximum total net leverage ratio equal to or less than 6.00:1.00 contingent on credit extensions in excess of 30% of the total amount of commitments available under the Revolving Credit Facility. Any failure to comply with the restrictions of the credit facilities may result in an event of default. We were in compliance with all covenants as of February 25, 2023 and August 27, 2022, respectively. At February 25, 2023, the outstanding balance of the Term Facility was $365.0 million. We are not required to make principal payments on the Term Facility over the twelve months following the period ended February 25, 2023. The outstanding balance of the Term Facility is due upon its maturity in July 2024. As of February 25, 2023, there were no amounts drawn against the Revolving Credit Facility. Stock Repurchase Program On October 21, 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 $150.0 million. During the twenty-six weeks ended February 25, 2023, we repurchased 546,346 shares of common stock for $16.4 million, averaging a purchase price per share of $30.11. We did not repurchase any shares of common stock during the thirteen weeks ended February 25, 2023. During the thirteen and twenty-six weeks ended February 26, 2022, we repurchased 571,271 shares of common stock for $20.4 million, averaging a purchase price per share of $35.68. As of February 25, 2023, approximately $71.5 million remained available for repurchases under our $150.0 million stock repurchase program. Refer to Note 10, Stockholders’ Equity, of the Notes to Unaudited Consolidated Financial Statements in this Report for additional information related to our stock repurchase program. Cash Flows The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands): Twenty-Six Weeks Ended February 25, 2023 February 26, 2022 Net cash provided by operating activities $ 53,346 $ 30,323 Net cash used in investing activities $ (1,933) $ (6,026) Net cash used in financing activities $ (55,709) $ (47,910) Operating activities. Our net cash provided by operating activities increased $23.0 million to $53.3 million for the twenty-six weeks ended February 25, 2023 compared to $30.3 million for the twenty-six weeks ended February 26, 2022. The increase in cash provided by operating activities was primarily attributable to the $17.4 million decrease in cash paid for taxes and changes in working capital for the twenty-six weeks ended February 25, 2023 as compared to the twenty-six weeks ended February 26, 2022. 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, consumed cash of $28.9 million in the twenty-six weeks ended February 25, 2023 compared to $38.8 million of cash consumed in the twenty-six weeks ended February 26, 2022. These increases in cash provided by operating activities were partially offset by the $9.0 million decrease in income from operations to $95.0 million for the twenty-six weeks ended February 25, 2023 as compared to $104.0 million for the twenty-six weeks ended February 26, 2022, primarily driven by the unfavorable effects of higher raw material and co-manufacturing costs and supply chain challenges as discussed in “Results of Operations” above. Additionally, cash paid for interest was $14.3 million in the twenty-six weeks ended February 25, 2023, which was an increase of $4.1 million as compared to the $10.2 million paid for interest in the twenty-six weeks ended February 26, 2022. Investing activities . Our net cash used in investing activities was $1.9 million for the twenty-six weeks ended February 25, 2023 compared to $6.0 million for the twenty-six weeks ended February 26, 2022. Our net cash used in investing activities for the twenty-six weeks ended February 25, 2023 primarily comprised $1.7 million of purchases of property and equipment. The $6.0 million of 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. 27 Table of Contents Financing activities . Our net cash used in financing activities was $55.7 million for the twenty-six weeks ended February 25, 2023 compared to $47.9 million for the twenty-six weeks ended February 26, 2022. Net cash used in financing activities for the twenty-six weeks ended February 25, 2023 primarily consisted of $16.4 million of repurchases in common stock, $41.5 million in principal payments on the Term Facility, and $2.4 million in tax payments related to issuance of restricted stock units and performance stock units, partially offset by $4.8 million of cash proceeds received from option exercises. Net cash used in financing activities for the twenty-six weeks ended February 26, 2022 primarily consisted of $20.4 million in repurchases of common stock, $25.0 million in principal payments on the Term Facility, and $3.3 million in tax payments related to issuance of restricted stock units and performance stock units, partially offset by $1.5 million of cash proceeds received from option exercises. New Accounting Pronouncements For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report. Refer to Note 2, Summary of Significant Accounting Policies , of our unaudited interim consolidated financial statements in this Report for further information regarding recently issued accounting standards. 28 Table of Contents