Simply Good Foods Co 10-Q

Item 1. Financial Statements (Unaudited) The Simply Good Foods Company and Subsidiaries Consolidated Balance Sheets (Unaudited, dollars in thousands, except share and per share data) May 27, 2023 August 27, 2022 Assets Current assets: Cash $ 68,794 $ 67,494 Accounts receivable, net 145,430 132,667 Inventories 105,437 125,479 Prepaid expenses 5,759 5,027 Other current assets 24,390 20,934 Total current assets 349,810 351,601 Long-term assets: Property and equipment, net 24,414 18,157 Intangible assets, net 1,111,865 1,123,258 Goodwill 543,134 543,134 Other long-term assets 50,778 58,099 Total assets $ 2,080,001 $ 2,094,249 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 45,867 $ 62,149 Accrued interest 43 160 Accrued expenses and other current liabilities 25,166 39,675 Current maturities of long-term debt 199 264 Total current liabilities 71,275 102,248 Long-term liabilities: Long-term debt, less current maturities 320,900 403,022 Deferred income taxes 117,281 105,676 Other long-term liabilities 39,727 44,639 Total liabilities 549,183 655,585 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, 101,912,526 and 101,322,834 shares issued at May 27, 2023 and August 27, 2022, respectively 1,019 1,013 Treasury stock, 2,365,100 shares and 1,818,754 shares at cost at May 27, 2023 and August 27, 2022, respectively ( 78,451 ) ( 62,003 ) Additional paid-in-capital 1,299,318 1,287,224 Retained earnings 311,314 214,381 Accumulated other comprehensive loss ( 2,382 ) ( 1,951 ) Total stockholders’ equity 1,530,818 1,438,664 Total liabilities and stockholders’ equity $ 2,080,001 $ 2,094,249 See accompanying notes to the unaudited consolidated financial statements. 3 Table of Contents The Simply Good Foods Company and Subsidiaries 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 27, 2023 May 28, 2022 May 27, 2023 May 28, 2022 Net sales $ 324,792 $ 316,531 $ 922,254 $ 894,514 Cost of goods sold 205,546 197,883 589,284 550,788 Gross profit 119,246 118,648 332,970 343,726 Operating expenses: Selling and marketing 30,168 32,334 88,650 94,816 General and administrative 30,510 26,721 82,085 76,711 Depreciation and amortization 4,363 4,317 13,035 12,966 Total operating expenses 65,041 63,372 183,770 184,493 Income from operations 54,205 55,276 149,200 159,233 Other income (expense): Interest income 407 — 660 1 Interest expense ( 7,649 ) ( 4,881 ) ( 23,201 ) ( 16,528 ) Loss in fair value change of warrant liability — — — ( 30,062 ) Gain on foreign currency transactions 180 76 74 503 Other income 4 17 10 26 Total other expense ( 7,058 ) ( 4,788 ) ( 22,457 ) ( 46,060 ) Income before income taxes 47,147 50,488 126,743 113,173 Income tax expense 11,716 11,654 29,810 34,726 Net income $ 35,431 $ 38,834 $ 96,933 $ 78,447 Other comprehensive income: Foreign currency translation, net of reclassification adjustments ( 262 ) ( 72 ) ( 431 ) ( 820 ) Comprehensive income $ 35,169 $ 38,762 $ 96,502 $ 77,627 Earnings per share from net income: Basic $ 0.36 $ 0.39 $ 0.98 $ 0.80 Diluted $ 0.35 $ 0.38 $ 0.96 $ 0.78 Weighted average shares outstanding: Basic 99,518,546 100,426,227 99,404,174 98,294,114 Diluted 100,909,972 102,237,457 100,847,970 100,190,068 See accompanying notes to the unaudited consolidated financial statements. 4 Table of Contents The Simply Good Foods Company and Subsidiaries Consolidated Statements of Cash Flows (Unaudited, dollars in thousands) Thirty-Nine Weeks Ended May 27, 2023 May 28, 2022 Operating activities Net income $ 96,933 $ 78,447 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,044 14,398 Amortization of deferred financing costs and debt discount 2,011 2,073 Stock compensation expense 10,456 8,691 Change in fair value change of warrant liability — 30,062 Estimated credit losses 206 148 Unrealized loss (gain) on foreign currency transactions ( 74 ) ( 503 ) Deferred income taxes 11,696 14,140 Amortization of operating lease right-of-use asset 5,018 4,955 Gain on lease termination — ( 30 ) Other 759 345 Changes in operating assets and liabilities: Accounts receivable, net ( 13,334 ) ( 35,269 ) Inventories 19,444 ( 15,006 ) Prepaid expenses ( 745 ) ( 170 ) Other current assets ( 1,595 ) ( 37,288 ) Accounts payable ( 16,115 ) 5,585 Accrued interest ( 117 ) 154 Accrued expenses and other current liabilities ( 15,030 ) 676 Other assets and liabilities ( 4,145 ) ( 4,045 ) Net cash provided by operating activities 110,412 67,363 Investing activities Purchases of property and equipment ( 10,108 ) ( 4,696 ) Issuance of note receivable — ( 2,400 ) Investments in intangible and other assets ( 338 ) ( 187 ) Net cash used in investing activities ( 10,446 ) ( 7,283 ) Financing activities Proceeds from option exercises 5,035 4,343 Tax payments related to issuance of restricted stock units and performance stock units ( 2,755 ) ( 3,536 ) Payments on finance lease obligations ( 217 ) ( 235 ) Repurchase of common stock ( 16,448 ) ( 28,504 ) Principal payments of long-term debt ( 81,500 ) ( 50,000 ) Deferred financing costs ( 2,694 ) ( 544 ) Net cash used in financing activities ( 98,579 ) ( 78,476 ) Cash and cash equivalents Net increase (decrease) in cash 1,387 ( 18,396 ) Effect of exchange rate on cash ( 87 ) ( 229 ) Cash at beginning of period 67,494 75,345 Cash and cash equivalents at end of period $ 68,794 $ 56,720 5 Table of Contents Thirty-Nine Weeks Ended May 27, 2023 May 28, 2022 Supplemental disclosures of cash flow information Cash paid for interest $ 21,295 $ 14,301 Cash paid for taxes $ 19,542 $ 43,430 Non-cash investing and financing transactions Issuance of common stock in extinguishment of warrant liabilities $ — $ 189,897 Operating lease right-of-use assets exchanged for operating lease liabilities $ — $ 6,881 Non-cash credits for repayment of note receivable $ 221 $ — Non-cash additions to intangible assets $ 120 $ — See accompanying notes to the unaudited consolidated financial statements. 6 Table of Contents The Simply Good Foods Company and Subsidiaries 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 27, 2022 101,322,834 $ 1,013 1,818,754 $ ( 62,003 ) $ 1,287,224 $ 214,381 $ ( 1,951 ) $ 1,438,664 Net income — — — — — 35,860 — 35,860 Stock-based compensation — — — — 3,237 — — 3,237 Foreign currency translation adjustments — — — — — — ( 222 ) ( 222 ) Repurchase of common stock — — 546,346 ( 16,448 ) — — — ( 16,448 ) Shares issued upon vesting of restricted stock units and performance stock units 180,342 2 — — ( 2,300 ) — — ( 2,298 ) Exercise of options and stock appreciation rights to purchase common stock 353,281 4 — — 4,559 — — 4,563 Balance at November 26, 2022 101,856,457 $ 1,019 2,365,100 $ ( 78,451 ) $ 1,292,720 $ 250,241 $ ( 2,173 ) $ 1,463,356 Net income — — — — — 25,642 — 25,642 Stock-based compensation — — — — 2,739 — — 2,739 Foreign currency translation adjustments — — — — — — 53 53 Shares issued upon vesting of restricted stock units 4,584 — — — ( 103 ) — — ( 103 ) Exercise of options to purchase common stock 12,130 — — — 228 — — 228 Balance at February 25, 2023 101,873,171 $ 1,019 2,365,100 ( 78,451 ) 1,295,584 $ 275,883 ( 2,120 ) 1,491,915 Net income — — — — — $ 35,431 — 35,431 Stock-based compensation — — — — 3,844 — — 3,844 Foreign currency translation adjustments — — — — — — ( 262 ) ( 262 ) Shares issued upon vesting of restricted stock units 18,960 1 — — ( 355 ) — — ( 354 ) Exercise of options to purchase common stock 20,395 ( 1 ) — — 245 — — 244 Balance at May 27, 2023 101,912,526 1,019 2,365,100 ( 78,451 ) 1,299,318 311,314 ( 2,382 ) 1,530,818 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 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 Warrant conversion — — — — — — — — 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 Repurchase of common stock — — 218,221 ( 8,110 ) — — — ( 8,110 ) Foreign currency translation adjustments — — — — — — ( 72 ) ( 72 ) 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 See accompanying notes to the unaudited consolidated financial statements. 8 Table of Contents Notes to Unaudited 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, and other product offerings. 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®, Quest® and Quest Hero TM 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 Consolidated Financial Statements The unaudited interim 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 consolidated financial statements and related notes of the Company and its subsidiaries are unaudited. The unaudited interim 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 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 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 27, 2022, included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the SEC on October 21, 2022. The ultimate effect the supply chain challenges, cost pressures, current high inflation environment, and the possible economic recession could have on consumer purchasing patterns and on the Company’s 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 and Europe in general. Management is also monitoring the situation in Eastern Europe for its possible supply chain and consumer consumption effects on the Company’s business. 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 (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. Additionally, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, which extended the period of time for which ASU 2020-04 could be applied. As a result, the amendments in ASU 2020-04 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, 2024. The amendments of these ASUs are effective for all entities and 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, 2024. The Company does not anticipate the amendments in this ASU will be material to its 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 brands: Thirteen Weeks Ended Thirty-Nine Weeks Ended (In thousands) May 27, 2023 May 28, 2022 May 27, 2023 May 28, 2022 North America (1) Atkins $ 142,057 $ 148,163 $ 408,153 $ 417,539 Quest 174,477 160,261 490,547 451,128 Total North America 316,534 308,424 898,700 868,667 International 8,258 8,107 23,554 25,847 Total net sales $ 324,792 $ 316,531 $ 922,254 $ 894,514 (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 $ 0.4 million for the thirteen and thirty-nine weeks ended May 27, 2023, respectively. 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. As of May 27, 2023 and August 27, 2022, the allowances for doubtful accounts related to these accounts receivable were $ 1.8 million and $ 1.2 million, respectively. Additionally, as of May 27, 2023, the Company had an expected credit loss reserve of $ 1.0 million on a $ 3.0 million note receivable related to the Company’s sale of its SimplyProtein® brand and related assets during its fiscal year 2021. 10 Table of Contents 4. Goodwill and Intangibles As of May 27, 2023 and August 27, 2022, Goodwill in the Consolidated Balance Sheets was $ 543.1 million. There were no impairment charges related to goodwill during the thirteen and thirty-nine weeks ended May 27, 2023 or since the inception of the Company. Intangible assets, net in the Consolidated Balance Sheets consists of the following: May 27, 2023 (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 50,403 123,597 Licensing agreements 13 years 22,000 10,019 11,981 Proprietary recipes and formulas 7 years 7,000 5,881 1,119 Software and website development costs 3 - 5 years 6,022 5,068 954 Intangible assets in progress 3 - 5 years 214 — 214 $ 1,183,236 $ 71,371 $ 1,111,865 August 27, 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 41,703 132,297 Licensing agreements 13 years 22,000 8,581 13,419 Proprietary recipes and formulas 7 years 7,000 5,131 1,869 Software and website development costs 3 - 5 years 5,863 4,190 1,673 $ 1,182,863 $ 59,605 $ 1,123,258 Changes in Intangible assets, net during the thirty-nine weeks ended May 27, 2023 were primarily related to recurring amortization expense. Amortization expense related to intangible assets was $ 3.9 million and $ 4.0 million for the thirteen weeks ended May 27, 2023 and May 28, 2022, respectively, and $ 11.8 million and $ 11.9 million for the thirty-nine weeks ended May 27, 2023 and May 28, 2022, respectively. There were no impairment charges related to intangible assets during the thirteen and thirty-nine weeks ended May 27, 2023 and May 28, 2022. Estimated future amortization for each of the next five fiscal years and thereafter is as follows: (In thousands) Amortization Remainder of 2023 $ 3,867 2024 14,846 2025 13,554 2026 13,517 2027 13,517 2028 and thereafter 78,350 Total $ 137,651 11 Table of Contents 5. Long-Term Debt and Line of Credit On July 7, 2017, the Company (through certain of its subsidiaries) entered into 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, 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 then-effective maturity date of the Initial Term Loans and (ii) December 16, 2026. On January 21, 2022, the Company entered into 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 SOFR and related replacement provisions for LIBOR. On April 25, 2023, the Company entered into the “2023 Repricing Amendment” to the Credit Agreement. The 2023 Repricing Amendment, (i) reduced the interest rate per annum applicable to the Initial Term Loans outstanding under the Credit Agreement immediately prior to April 25, 2023, and (ii) provided for an extension of the maturity date of the Initial Term Loans from July 7, 2024, to March 17, 2027. The 2023 Repricing Amendment did not change the interest rate on the Revolving Credit Facility, which continues to bear interest based upon the Company’s consolidated net leverage ratio as of the end of the fiscal quarter for which consolidated financial statements are delivered to the Administrative Agent under the Credit Agreement. No additional debt was incurred, or any proceeds received by the Company in connection with the 2023 Repricing Amendment. No amounts under the Term Facility were repaid as a result of the execution of the 2023 Repricing Amendment. Effective as of the 2023 Repricing Amendment, the interest rate per annum for the Initial Term Loans 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) 1.50 % 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) 2.50 % margin for the Term Loan or (y) 3.00 % margin for the Revolving Credit Facility. In connection with the closing of the 2023 Repricing Amendment, the Company expensed $ 2.4 million primarily for third-party fees and capitalized an additional $ 2.7 million primarily for the payment of upfront lender fees (original issue discount). 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 12 Table of Contents 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 covenants as of May 27, 2023 and August 27, 2022, respectively. Long-term debt consists of the following: (In thousands) May 27, 2023 August 27, 2022 Term Facility (effective rate of 7.7% at May 27, 2023) $ 325,000 $ 406,500 Finance lease liabilities (effective rate of 5.6% at May 27, 2023) 202 406 Less: Deferred financing fees 4,103 3,620 Total debt 321,099 403,286 Less: Current finance lease liabilities 199 264 Long-term debt, net of deferred financing fees $ 320,900 $ 403,022 The Company is no t required to make principal payments on the Term Facility over the twelve months following the period ended May 27, 2023. The outstanding balance of the Term Facility is due upon its maturity in March 2027. As of May 27, 2023, 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 27, 2023. 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 27, 2023 and August 27, 2022, 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 During the thirty-nine weeks ended May 28, 2022, 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, and were exercised on a cashless basis on January 7, 2022 resulting in a net issuance of 4,830,761 shares of the Company’s common stock. As a result, there were no outstanding liability-classified Private Warrants as of May 27, 2023 and August 27, 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 reflected a Level 3 measurement within the fair value measurement hierarchy. 13 Table of Contents The periodic remeasurement of the warrant liability has been reflected in Loss in fair value change of warrant liability within the Consolidated Statements of Operations and Comprehensive Income. The adjustment for the thirty-nine weeks ended May 28, 2022 was a gain of $ 30.1 million. 7. Income Taxes The tax expense and the effective tax rate resulting from operations were as follows: Thirty-Nine Weeks Ended (In thousands) May 27, 2023 May 28, 2022 Income before income taxes $ 126,743 $ 113,173 Provision for income taxes $ 29,810 $ 34,726 Effective tax rate 23.5 % 30.7 % The effective tax rate for the thirty-nine weeks ended May 27, 2023 was 7.2 % less than the effective tax rate for the thirty-nine weeks ended May 28, 2022, which was primarily driven by the non-cash change in the fair value of the warrant liability in the prior fiscal period 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 27, 2023 May 28, 2022 May 27, 2023 May 28, 2022 Operating lease cost: Lease cost Cost of goods sold and General and administrative $ 2,245 $ 2,278 $ 6,745 $ 6,806 Variable lease cost (1) Cost of goods sold and General and administrative 1,047 787 2,565 2,300 Total operating lease cost 3,292 3,065 9,310 9,106 Finance lease cost: Amortization of right-of-use assets Cost of goods sold 58 69 189 205 Interest on lease liabilities Interest expense 3 7 12 24 Total finance lease cost 61 76 201 229 Total lease cost $ 3,353 $ 3,141 $ 9,511 $ 9,335 (1) Variable lease cost primarily consists of common area maintenance, such as cleaning and repairs. The right-of-use assets and corresponding liabilities related to both operating and finance leases are as follows: (In thousands) Balance Sheets Caption May 27, 2023 August 27, 2022 Assets Operating lease right-of-use assets Other long-term assets $ 41,444 $ 46,460 Finance lease right-of-use assets Property and equipment, net 178 367 Total lease assets $ 41,622 $ 46,827 Liabilities Current: Operating lease liabilities Accrued expenses and other current liabilities $ 7,396 $ 6,249 Finance lease liabilities Current maturities of long-term debt 199 264 Long-term: Operating lease liabilities Other long-term liabilities 38,933 44,482 Finance lease liabilities Long-term debt, less current maturities 3 142 Total lease liabilities $ 46,531 $ 51,137 14 Table of Contents Future maturities of lease liabilities as of May 27, 2023 were as follows: (In thousands) Operating Leases Finance Leases Fiscal year ending: Remainder of 2023 2,321 61 2024 9,424 145 2025 8,680 — 2026 6,880 — 2027 7,036 — Thereafter 19,848 — Total lease payments 54,189 206 Less: Interest ( 7,860 ) ( 4 ) Present value of lease liabilities $ 46,329 $ 202 The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases were as follows: May 27, 2023 August 27, 2022 Weighted-average remaining lease term (in years) Operating leases 6.69 7.27 Finance leases 0.85 1.51 Weighted-average discount rate Operating leases 4.7 % 4.7 % Finance leases 5.6 % 5.6 % Supplemental and other information related to leases was as follows: Thirty-Nine Weeks Ended (In thousands) May 27, 2023 May 28, 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 7,905 $ 7,155 Operating cash flows from finance leases $ 394 $ 472 Financing cash flows from finance leases $ 217 $ 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 27, 2023, the Company will be required to make payments of $ 3.3 million over the next year. 15 Table of Contents 10. Stockholders’ Equity Stock Repurchase Program The Company adopted a $ 50.0 million stock repurchase program on November 13, 2018. On April 13, 2022, and October 21, 2022, the Company announced that its Board of Directors had approved the addition of $ 50.0 million and $ 50.0 million, respectively, to its stock repurchase program, resulting in authorized stock repurchases of up to an aggregate of $ 150.0 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. The Company did not repurchase any shares of common stock during the thirteen weeks ended May 27, 2023. During the thirty-nine weeks ended May 27, 2023, the Company repurchased 546,346 shares of common stock at an average share price of $ 30.11 per share. 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 . As of May 27, 2023, approximately $ 71.5 million remained available under the stock repurchase program. Warrants to Purchase Common Stock During the thirteen and thirty-nine weeks ended May 28, 2022, 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 27, 2023 and August 27, 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 have been reflected in Loss in fair value change of warrant liability within the 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 was 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. 16 Table of Contents The following table reconciles 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 27, 2023 May 28, 2022 May 27, 2023 May 28, 2022 Basic earnings per share computation: Numerator: Net income available to common stockholders $ 35,431 $ 38,834 $ 96,933 $ 78,447 Denominator: Weighted average common shares outstanding - basic 99,518,546 100,426,227 99,404,174 98,294,114 Basic earnings per share from net income $ 0.36 $ 0.39 $ 0.98 $ 0.80 Diluted earnings per share computation: Numerator: Net income available for common stockholders $ 35,431 $ 38,834 $ 96,933 $ 78,447 Numerator for diluted earnings per share $ 35,431 $ 38,834 $ 96,933 $ 78,447 Denominator: Weighted average common shares outstanding - basic 99,518,546 100,426,227 99,404,174 98,294,114 Employee stock options 1,228,922 1,604,847 1,256,898 1,633,278 Non-vested stock units 162,504 206,383 186,898 262,676 Weighted average common shares - diluted 100,909,972 102,237,457 100,847,970 100,190,068 Diluted earnings per share from net income $ 0.35 $ 0.38 $ 0.96 $ 0.78 Diluted earnings per share calculations for the thirteen and thirty-nine weeks ended May 27, 2023 excluded 0.7 million and 0.6 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 excluded 0.3 million and 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 27, 2023 excluded an immaterial amount of non-vested stock units that would have been anti-dilutive. Diluted earnings per share calculations for the thirteen and thirty-nine weeks ended May 28, 2022 excluded an immaterial amount of non-vested stock units that would have been anti-dilutive. The 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. 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 for equity-classified awards 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 $ 4.1 million and $ 3.0 million in the thirteen weeks ended May 27, 2023 and May 28, 2022, respectively, and $ 10.5 million and $ 8.7 million in the thirty-nine weeks ended May 27, 2023 and May 28, 2022, respectively. 17 Table of Contents Stock Options The following table summarizes stock option activity for the thirty-nine weeks ended May 27, 2023: Shares underlying options Weighted average exercise price Weighted average remaining contractual life (years) Outstanding as of August 27, 2022 2,776,551 $ 18.04 6.10 Granted 285,001 37.73 Exercised ( 346,956 ) 14.51 Forfeited ( 35,624 ) 32.04 Outstanding as of May 27, 2023 2,678,972 $ 20.41 5.86 Vested and expected to vest as of May 27, 2023 2,678,972 $ 20.41 5.86 Exercisable as of May 27, 2023 2,029,757 $ 15.60 4.93 As of May 27, 2023, the Company had $ 6.4 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 27, 2023 and May 28, 2022, the Company received $ 5.0 million and $ 4.3 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 27, 2023: Units Weighted average grant-date fair value Non-vested as of August 27, 2022 453,003 $ 30.68 Granted 289,046 37.16 Vested ( 203,880 ) 28.11 Forfeited ( 48,883 ) 33.38 Non-vested as of May 27, 2023 489,286 $ 35.31 As of May 27, 2023, the Company had $ 11.9 million of total unrecognized compensation cost related to restricted stock units that will be recognized over a weighted average period of 1.5 years. Performance Stock Units During the thirty-nine weeks ended May 27, 2023, the Company granted performance stock units under its 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. The following table summarizes performance stock unit activity for the thirty-nine weeks ended May 27, 2023: Units Weighted average grant-date fair value Non-vested as of August 27, 2022 255,023 $ 32.82 Granted 50,629 62.55 Vested ( 72,452 ) 27.39 Forfeited ( 37,241 ) 31.00 Non-vested as of May 27, 2023 195,959 $ 42.85 As of May 27, 2023, the Company had $ 4.2 million of total unrecognized compensation cost related to performance stock units that will be recognized over a weighted average period of 1.2 years. 18 Table of Contents 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 have been met. The SARs outstanding as of May 27, 2023 cliff vest two years from the date of grant and must be exercised within five years . The following table summarizes SARs activity for the thirty-nine weeks ended May 27, 2023: Shares underlying SARs Weighted average exercise price Outstanding as of August 27, 2022 150,000 $ 24.20 Granted 150,000 37.67 Exercised ( 150,000 ) 24.20 Forfeited — — Outstanding as of May 27, 2023 150,000 $ 37.67 The SARs exercised in the thirty-nine weeks ended May 27, 2023 resulted in a net issuance of 38,850 shares of the Company’s common stock. The SARs granted in the thirty-nine weeks ended May 27, 2023 are liability-classified; therefore the related stock-based compensation expense is based on the vesting provisions and the fair value of the awards. 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; therefore no restructuring or restructuring-related costs were incurred in the thirteen and thirty-nine weeks ended May 27, 2023 and the thirteen weeks ended May 28, 2022. During the thirty-nine weeks ended May 28, 2022, the Company incurred $ 0.1 million of restructuring and restructuring-related costs. Since the announcement of the restructuring activities in May 2020, the Company incurred aggregate restructuring and restructuring-related costs of $ 9.9 million. 19 Table of Contents