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Consolidation
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Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading symbol
Name of each exchange on which registered
iCommon Stock, par value $0.01 per share
iSMPL
iNasdaq
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As of January 5, 2021, there were i95,720,637
shares of common stock, par value $0.01 per share, issued and outstanding.
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-Q (this “Amendment” or “Form 10-Q/A”) amends The Simply Good Foods Company's Quarterly Report on Form 10-Q for the thirteen weeks ended November 28, 2020, which was originally filed with the SEC on January 7, 2021 (the “Original Filing”).
See Note 2, Restatement of Previously Issued Financial Statements, in Part I, Item 1, Financial Statements, for additional information.
On April 12, 2021, the SEC issued a statement (the “SEC Statement”) on the accounting and reporting considerations for warrants issued by special purpose acquisition companies (“SPACs”). The SEC Statement discussed certain features of warrants issued in SPAC transactions that may be common across many entities. Specifically, the SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder. The SEC Statement indicated that, because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provisions would preclude the
warrant from being classified in equity and thus the warrant should be classified as a liability. Following consideration of the guidance in the SEC Statement, The Simply Good Foods Company (the “Company”) concluded that its private warrants (“Private Warrants”) should be classified as a liability and measured at fair value, with changes in fair value each period reported in earnings in accordance with Accounting Standards Codification 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity.
On May 13, 2021, the Audit Committee of the Company’s
Board of Directors, in consultation with management, concluded that the Company’s previously issued consolidated financial statements for the fiscal years ended August 29, 2020, August 31, 2019, and August 25, 2018, and for each of the Company’s previously issued unaudited interim quarterly financial statements for fiscal years 2020 and 2019 (the “Non-Reliance Period”), should no longer be relied upon. As such, the Company resolved to restate the consolidated financial statements for the Non-Reliance Period. See Note 2, Restatement of Previously Issued Financial
Statements, in Part 1, Item 1, Financial Statements for additional information.
The Company is filing this Amendment to amend and restate the previously issued financial statements for the Company’s first fiscal quarter of 2021 to correct the misapplication of the accounting for the Private Warrants. This Amendment also amends and restates the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures made in the Original Filing as appropriate to reflect the restatement of the relevant periods (the “Restatement”).
Effect
of Restatement
As a result of the Restatement, the Private Warrants are now reflected as a liability measured at fair value on the Company’s Condensed Consolidated Balance Sheets, and the change in the fair value of this liability in each period is recognized as a gain or loss in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The effect of these adjustments on net income for the thirteen weeks ended November 28, 2020 and November 30, 2019, was a gain of $20.5 million and a gain of $13.3 million,
respectively. The adjustments increased total liabilities at November 28, 2020 by $i73.2 million with a corresponding decrease to total stockholders’ equity.
The restatement of the financial statements had no effect on the Company’s liquidity, cash, or cash equivalents, or cash flows from operating, investing and financing activities. See Note 2 to the Condensed Consolidated Financial
Statements included in Part I, Item 1, Financial Statements, of this Amendment for additional information on the restatement and the related financial statement effects.
Internal Control Considerations
As previously disclosed in our Annual Report on Form 10-K/A for the year ended August 29, 2020, we identified a material weakness in our internal controls over financial reporting related to inaccurate accounting for warrants issued in connection with our initial public offerings and private placement. As a result of the material weakness, the
Company’s disclosure controls and procedures were not effective as of August 29, 2020. Management plans to implement changes to strengthen internal controls and to remediate the material weakness. For additional information, see Part I, Item 4, Controls and Procedures, of this Form 10-Q/A.
Items Amended in this Form 10-Q/A
The following sections in the Original Filing are amended and restated in the entirety in this Form 10-Q/A to reflect the restatement:
•Part I - Item 1 - Financial Statements (Unaudited)
•Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations
•Part I - Item 4 - Controls and Procedures
•Part II - Item 6 - Exhibits
Our principal executive officer and principal financial officer have also provided new certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 dated as of the filing date of this Form 10-Q/A. The certifications are included in this Form-10Q/A as Exhibits 31.1, 31.2, and 32.1.
This Form 10-Q/A sets forth only those items from the Original Filing that have been modified and superseded to reflect the Restatement. Except as provided above, this Amendment does not reflect events occurring after the filing of the Original Filing. Accordingly, this
Form 10-Q/A should be read in conjunction with the Original Filing and filings with the SEC subsequent to the date on which the Company filed the Original Filing with the SEC.
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued
i—
i—
Common
stock, $0.01 par value, 600,000,000 shares authorized, 95,818,871 and 95,751,845 shares issued at November 28, 2020 and August 29, 2020, respectively
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
iThe Simply Good Foods Company (“Simply Good Foods” or the “Company”) was formed by Conyers Park Acquisition Corp. (“Conyers Park”) on March 30, 2017. On April 10, 2017, Conyers Park and NCP-ATK Holdings, Inc., among others,
entered into a definitive merger agreement (the “Merger Agreement”), pursuant to which on July 7, 2017, Conyers Park merged into Simply Good Foods and as a result acquired the companies which conducted the Atkins® brand business (the “Acquisition of Atkins”). The common stock of Simply Good Foods is listed on the Nasdaq Capital Market under the symbol “SMPL.”
On August 21, 2019, the Company’s wholly-owned subsidiary Simply Good Foods USA, Inc., formerly known as Atkins Nutritionals, Inc., (“Simply Good USA”) entered into a Stock and Unit Purchase Agreement (the “Purchase Agreement”) to acquire Quest Nutrition, LLC (“Quest”), a healthy lifestyle food
company (the “Acquisition of Quest”). On November 7, 2019, Simply Good USA completed the Acquisition of Quest, via Simply Good USA’s direct or indirect acquisition of 100% of the equity interests of Voyage Holdings, LLC (“Voyage Holdings”), and VMG Quest Blocker, Inc. (“Voyage Blocker” and, together with Voyage Holdings, the “Target Companies”) for a cash purchase price of approximately $i1.0 billion (subject to customary adjustments for the Target Companies’ levels of cash, indebtedness,
net working capital and transaction expenses as of the closing date).
The unaudited 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.
Description of Business
The Simply Good Foods Company is a consumer-packaged food and beverage company that aims to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great-tasting, better-for-you snacks and meal replacements. The Company’s nutritious snacking platform consists of the following core brands that specialize in providing products for consumers that follow certain nutritional philosophies, dietary approaches and/or health-and-wellness trends: Atkins® for those following a low-carb lifestyle; and Quest® for consumers seeking to partner with a brand
that makes the foods they crave work for them, not against them, through 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 Company’s platform also positions it to continue to selectively pursue acquisition opportunities of brands in the nutritious snacking category.
iThe 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 29, 2020, included in Amendment No. 1 to Form 10-K (“Form 10-K/A”) filed with the SEC on June 30, 2021. As discussed in Note 2, Restatement of Previously Issued Financial Statements, the condensed consolidated financial statements have been restated to reflect certain warrants as liabilities rather than equity.
Additionally, based on the duration and severity of economic effects from the novel coronavirus (“COVID-19”) pandemic, including but not limited to stock market volatility, the potential for (i) continued increased rates of reported
cases of COVID-19 (which has been referred to as a second wave), (ii) unexpected supply chain disruptions, (iii) changes to customer operations, (iv) continued or additional changes in consumer purchasing and consumption behavior beyond those evidenced to date, and (v) the closure of customer establishments, the Company remains uncertain of the ultimate effect COVID-19 could have on its business.
2. Restatement of Previously
Issued Financial Statements
On April 12, 2021, the SEC issued a statement (the “SEC Statement”) on the accounting and reporting considerations for warrants issued by special purpose acquisition companies (“SPAC”). The SEC Statement discussed certain features of warrants issued in SPAC transactions that may be common across many entities. Specifically, the SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder. The SEC Statement indicated that, because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provisions would preclude the warrant from being classified in equity and thus the warrant should be classified as a liability. Following
consideration of the guidance in the SEC statement, the Company concluded that its private warrants should be classified as a liability and measured at fair value at each reporting period, rather than as equity awards. Management concluded the effect of this error on the Company’s previously reported consolidated financial statements is material and, as such, the accompanying condensed consolidated financial statements as of November 28, 2020 and the thirteen weeks ended November 28, 2020, and accompanying notes thereto have been restated from the amounts previously reported to give effect to the correction of this error (the “Restatement”). Effects of the Restatement on the Consolidated Balance
Sheets as of August 29, 2020, and the Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen weeks ended November 30, 2019, are presented in the Company’s Amendment No. 1 to Form 10-K (“Form 10-K/A”) for the fiscal year ended August 29, 2020 filed with the SEC on June 30, 2021. Additionally, see Note 13, Earnings Per Share, for restated earnings (loss) per share amounts.
As a result of the Restatement, the Company’s private warrants (the “Private Warrants”) are now reflected
as a liability measured at fair value on the Company’s Condensed Consolidated Balance Sheets, and the change in the fair value of this liability in each period is recognized as a gain or loss in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The effect of the Restatement on the Condensed Consolidated Balance Sheets as of November 28, 2020, and Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended November 28, 2020, are presented below. Regarding the Condensed Consolidated Statements of Cash Flows, the adjustments below to net income were offset by
adjustments to non-cash operating activities within cash flow provided by operations. The Restatement had no effect on total net cash flows from operating, investing or financing activities. The effect of the Restatement on the November 28, 2020 stockholders’ equity balances is presented in the Condensed Consolidated Statements of Stockholders’ Equity below.
As
a result of the Restatement adjustments, basic earnings per share increased $i0.21, from $i0.24 per share to $i0.45
per share, and diluted earnings per share was unchanged.
iRefer to Note 4, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s Form 10-K/A for a description of significant accounting policies.
i
Recently
Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to the accounting for income taxes. This ASU is 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 U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2021,
with early adoption permitted. The Company is currently evaluating the effects adoption of this guidance will have on the consolidated financial statements and does not expect that the adoption of this ASU will be material to its consolidated financial statements.
In March 2020, the FASB issued ASU No. 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 through December 31, 2022. The amendments of this ASU should be applied on a prospective basis. The Company will continue to monitor the effects of rate reform, if any, on its contracts and the effects of adoption of this ASU through December 31, 2022. The Company does not anticipate the amendments in this ASU to be material to its consolidated financial statements.
In October 2020, the FASB issued ASU
No. 2020-10, Codification Improvements, which provides updates for technical corrections, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements across various areas of accounting within U.S. GAAP. This ASU is effective for all entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The amendments of this ASU should be applied retrospectively. The Company is currently evaluating the effects adoption of this guidance will have on the consolidated financial statements and does not anticipate the adoption of this ASU will be material to its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which modified the measurement of expected credit losses of certain financial instruments. The Company adopted this ASU as of the first day of fiscal 2021. As a result of adopting this ASU, the Company changed its method of estimating its allowance for doubtful accounts for trade receivables to be based upon the Company’s historical credit loss experience adjusted for asset-specific risk characteristics, current economic conditions,
and reasonable forecasts. The change in estimating the allowance for doubtful accounts did not have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modified disclosure requirements on fair value measurements of Accounting Standards Codification (“ASC”) 820. The Company adopted this ASU as of the first day of fiscal 2021. The adoption of this ASU did not have a material effect on the consolidated financial statements or the related disclosures.
4.
Business Combination
iOn August 21, 2019, Simply Good USA entered into the Purchase Agreement with VMG Voyage Holdings, LLC, VMG Tax-Exempt II, L.P., Voyage Employee Holdings, LLC, and other sellers defined in the Purchase Agreement. On November 7, 2019, pursuant to the Purchase Agreement, Simply Good USA completed the Acquisition of Quest for a cash purchase price
at closing of $i988.9 million subject to customary post-closing adjustments./
Simply Good USA acquired Quest as a part of the Company’s vision 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. Quest is a healthy lifestyle food company offering a variety of bars, cookies, chips, ready-to-drink shakes and pizzas that compete in many of the attractive, fast growing sub-segments within the nutritional snacking category.
The Acquisition of Quest was funded by the Company through a combination of cash, equity and debt financing. Total consideration paid on the closing date was $i988.9
million. Cash sources of funding included $i195.3 million of cash on hand, net proceeds of approximately $i350.0 million from an underwritten
public offering of common stock, and $i443.6 million in new term loan debt. In the third fiscal quarter of 2020, the Company received a post-closing release from escrow of approximately $i2.1
million related to net working capital adjustments, resulting in a total net consideration paid of $i986.8 million as of November 28, 2020.
For the thirteen weeks ended November 30, 2019, Business transaction costs
within the Consolidated Statements of Operations and Comprehensive Income were $i26.2 million, which included $i14.5
million of transaction advisory fees related to the Acquisition of Quest, $i3.2 million of banker commitment fees, $i6.1
million of non-deferrable debt issuance costs related to the incremental term loan, and $i2.4 million of other costs, including legal, due diligence, and accounting fees. Included in the transaction advisory fees was $i12.0
million paid to Centerview Partners LLC, an investment banking firm that served as the lead financial advisor to the Company for this transaction. Three members of the Company’s Board of Directors, Messrs. Kilts, West, and Ratzan, have business relationships with certain partners of Centerview Partners LLC (including relating to Centerview Capital Consumer, a private equity firm and affiliate of Conyers Park Sponsor LLC), but they are not themselves partners, executives or employees of Centerview Partners LLC, and Centerview Partners LLC is not a related party of the Company pursuant to applicable rules and policies. The advisory fee paid to Centerview Partners LLC represented approximately i1.2%
of the total cash purchase price paid by the Company on the closing date of the Acquisition of Quest. All transaction advisory fees relating to the Acquisition of Quest were approved by the Company’s Audit Committee.
iThe
following table sets forth the final purchase price allocation of the Acquisition of Quest to the estimated fair value of the net assets acquired at the date of acquisition, in thousands:
Assets acquired:
Cash and cash equivalents
$
i4,745
Accounts
receivable, net
i25,359
Inventories
i44,032
Prepaid
assets
i1,214
Other current assets
i3,812
Property
and equipment, net(1)
i9,843
Intangible assets, net(2)
i868,375
Other
long-term assets
i20,997
Liabilities assumed:
Accounts payable
i25,200
Other
current liabilities
i11,237
Deferred income taxes(3)
i10,754
Other
long-term liabilities
i18,891
Total identifiable net assets
i912,295
Goodwill(4)
i74,525
Total
assets acquired and liabilities assumed
$
i986,820
(1) Property and equipment, net primarily consisted of leasehold improvements for the Quest headquarters of $i6.9
million, furniture and fixtures of $i2.2 million, and equipment of $i0.7
million. The Quest headquarters lease ends in April 2029. The useful lives of the leasehold improvements, furniture and fixtures, and equipment are consistent with the Company’s accounting policies.
(2) Intangible assets were recorded at fair value consistent with ASC 820 as a result of the Acquisition of Quest. Intangible assets consisted of $i750.0
million of indefinite brands and trademarks, $i115.0 million of amortizable customer relationships, and $i3.4
million of internally developed software. The useful lives of the intangible assets are disclosed in Note 6 of the consolidated financial statements. The fair value measurement of the assets and liabilities was based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows and market comparable data and companies. The fair values of the intangible assets were estimated using inputs primarily from the income approach and the with/without method, which estimates the value using the cash flow impact in a hypothetical scenario where the customer relationships are not in place. The significant assumptions used in estimating the fair value of the intangible assets include the estimated life the asset will contribute to cash flows, profitability, and the estimated discount rate.
(3)
Primarily as a result of the fair value attributable to the identifiable intangible assets, the deferred income tax liability was $i10.8 million.
(4) Goodwill was recorded at fair value consistent with ASC 820 as a result of the Acquisition of Quest. Amounts recorded for goodwill created in an acquisition structured as a stock purchase for tax are generally not expected to be deductible
for tax purposes. Amounts recorded for goodwill resulting in a tax basis step-up are generally expected to be deductible for tax purposes. Tax deductible Goodwill was estimated to be $i67.7 million. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
Since the initial preliminary
estimates reported in the first fiscal quarter of 2020, the Company has updated certain amounts reflected in the final purchase price allocation, as summarized in the fair values of assets acquired and liabilities assumed as set forth above. Specifically, the carrying amount of the intangible assets, net were increased by $i20.0 million as a result of valuation adjustments related to the
Company’s finalization of tax attributes, which also resulted in a decrease to deferred income taxes of $i3.2 million. Additionally, accounts receivable, net decreased $i4.3
million and inventories increased $i0.9 million due to fair value measurement period adjustments, and the carrying amount of property and equipment, net decreased by $i0.5
million to reflect its estimated fair value. As a result of these adjustments and the change in total net consideration paid of approximately $i2.1 million related to net working capital adjustments discussed above, goodwill has decreased $i21.5
million. Measurement period adjustments were recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date.
iThe results of Quest’s operations have been included in the Company’s Consolidated Financial Statements since November
7, 2019, the date of acquisition. The following table provides net sales from the acquired Quest business included in the Company’s results:
Pro forma financial information is not intended to represent or be indicative of the actual results of operations of the combined business that would have been reported had the Acquisition of Quest been completed at the beginning of the fiscal year 2019, nor is it representative of future operating results of the
Company. The pro forma combined financial information includes the fair value adjustments of the liability-classified Private Warrants.
iThe following unaudited pro forma financial information presents the combined results of the Company and Quest as if the Acquisition of Quest has occurred at the beginning of fiscal 2019:
iiRevenues 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 brand:/
(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 Company’s net sales are attributed or that is otherwise deemed individually material.
(2) Quest net sales are primarily in North America.
Charges related to credit loss on accounts receivables from transactions with external customers totaled approximately $i0.1 million
for the thirteen weeks ended November 28, 2020 and were nominal for the thirteen weeks ended November 30, 2019. As of November 28, 2020 and August 29, 2020, the allowance for doubtful accounts related to these accounts receivable was $i0.6 million and $i0.5 million,
respectively.
6. Goodwill and Intangibles
iiChanges
to /Goodwill during the thirteen week period ended November 28, 2020 were as follows:
The change in Goodwill attributed to the acquisition of a business during the thirteen weeks ended November 28, 2020 was the result of measurement period adjustments made to finalize the acquisition method
of accounting for the Acquisition of Quest as described in Note 4. Additionally, effective September 24, 2020, the Company sold the assets exclusively related to its SimplyProtein® brand of products for approximately $i8.8 million of consideration, including cash of $i5.8 million
and a note receivable for $i3.0 million, to a newly formed entity led by the Company’s former Canadian-based management team who had been responsible for this brand prior to the sale transaction (the “SimplyProtein Sale”). In addition to purchasing these assets, the buyer assumed certain liabilities related to the SimplyProtein brand’s business. There was ino
gain or loss recognized as a result of the SimplyProtein Sale. In conjunction with the SimplyProtein Sale, the Company disposed of $i2.8 million of goodwill associated with the SimplyProtein business.
Changes
in Intangible assets, net during the thirteen weeks ended November 28, 2020 were primarily related to the SimplyProtein Sale and recurring amortization expense. In conjunction with the SimplyProtein Sale, the Company sold its SimplyProtein brand intangible asset, which had a carrying value of approximately $i5.0
million as of the date of the sale. Amortization expense related to intangible assets during the thirteen weeks ended November 28, 2020 and November 30, 2019 was $i3.9 million and $i2.3
million, respectively. There were ino impairment charges related to intangible assets during the thirteen weeks ended November 28, 2020 and November 30, 2019.
iEstimated
future amortization for each of the next five fiscal years and thereafter is as follows:
iOn 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 provides for (i) a term facility of $i200.0
million (“Term Facility”) with a seven year maturity and (ii) a revolving credit facility of up to $i75.0 million (the “Revolving Credit Facility”) with a five year maturity. Substantially concurrent with the consummation of the Acquisition of Atkins, the full $i200.0
million of the Term Facility (the “Term Loan”) was drawn. 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 i0.50% and (c) the Euro-currency rate applicable for an interest period of one month plus i1.00%
plus (x) i3.00% margin for the Term Loan or (y) i2.00% margin for the Revolving Credit Facility, or (ii) London Interbank Offered Rate (“LIBOR”) adjusted
for statutory reserve requirements, plus (x) i4.00% margin for the Term Loan subject to a floor of i1.00% or (y) i3.00%
margin for the Revolving Credit Facility. As security for the payment or performance of its debt, the Company has pledged certain equity interests in its subsidiaries./
On March 16, 2018 (the “Amendment Date”), the Company entered into an amendment (the “Repricing Amendment”) to the Credit Agreement. As a result of the Repricing Amendment, the interest rate on the Term Loan was reduced and, as of the Amendment Date, such loans had an
interest rate equal to, at the Company’s option, either LIBOR plus an applicable margin of i3.50% or a base rate plus an applicable margin of i2.50%.
The Repricing Amendment did not change the interest rate on the Revolving Credit Facility. The Revolving Credit Facility continued to bear interest based upon the Company’s consolidated net leverage ratio as of the last financial statements delivered to the administrative agent. No additional debt was incurred, or any proceeds received, by the Company in connection with the Repricing Amendment. The incremental fees paid to the administrative agent are reflected as additional debt discount and are amortized over the terms of the long-term financing agreements using the effective-interest method.
On November 7, 2019, the
Company entered into an amendment (the “Incremental Facility Amendment”) to the Credit Agreement to increase the principal borrowed on the Term Facility by $i460.0 million. The Term Facility together with the incremental borrowing make up the Initial Term Loans (as defined in the Incremental Facility Amendment) and as of the Amendment No. 2 Effective Date (as defined in the Incremental Facility Amendment), the Initial Term Loans bear interest at a rate equal to, at the
Company’s option, either LIBOR plus an applicable margin of i3.75% or a base rate plus an applicable margin of i2.75%. The Incremental Facility Amendment was executed
to partially finance the Acquisition of Quest. No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment.
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 i6.25:1.00
(with a reduction to i6.00:1.00 on and after the third anniversary of the closing date of the Credit Agreement) contingent on credit extensions in excess of i30%
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 November 28, 2020 and August 29, 2020, respectively.
Finance
lease liabilities (effective rate of 5.6% at November 28, 2020)
i892
i922
Less:
Deferred financing fees
i9,194
i10,272
Total
debt
i573,198
i597,150
Less:
Current finance lease liabilities
i275
i271
Long-term
debt, net of deferred financing fees
$
i572,923
$
i596,879
The
Company is not required to make principal payments on the Term Facility over the twelve months following the period ended November 28, 2020. Additionally, as of November 28, 2020 and August 29, 2020, there were no amounts drawn against the Revolving Credit Facility.
As of November 28, 2020, the Company had letters of credit in the amount of $i4.4
million outstanding. These letters of credit offset against the 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 November 28, 2020.
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 November 28, 2020 and August 29, 2020, 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.
i
8.
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 as follows:
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.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of November 28, 2020 and August 29, 2020 due to the relatively short maturity of these instruments.
Level
3 Measurements
The Company has outstanding liability-classified Private Warrants that allow holders to purchase i6,700,000 shares of the Company’s common stock. Such Private Warrants are held by Conyers Park Sponsor, LLC, a related party. The
Company utilizes the Black-Scholes valuation 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 (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 SPAC 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.
There were i6,700,000 Private Warrants outstanding as of November 28, 2020 and November 30, 2019. iThe
table below summarizes the inputs used to calculate the fair value of the warrant liability at each of the dates indicated below:
The
periodic remeasurement of the warrant liability is reflected in Gain in fair value change of warrant liability within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The adjustments for the thirteen weeks ended November 28, 2020 and November 30, 2019 were a gain of $i20.5 million and a gain of $i13.3
million, respectively. The adjustments resulted in a total warrant liability at November 28, 2020 and November 30, 2019 of $i73.2 million and $i111.3 million,
respectively.
/
18
9. Income Taxes
iiThe
tax expense and the effective tax rate resulting from operations were as follows:/
The
effective tax rate for the thirteen weeks ended November 28, 2020 was i41.8% greater than the effective tax rate for the thirteen weeks ended November 30, 2019, which was primarily driven by the non-cash change in the fair value of the warrant liability and other permanent differences.
10.
Leases
iiThe components of lease expense were as follows:/
(1) Variable
lease cost primarily consists of common area maintenance, such as cleaning and repairs.
In conjunction with the Company’s restructuring activities as discussed in Note 16, the Company incurred a $i0.4 million impairment charge related to its operating lease right-of-use asset for its lease in Toronto, Ontario
during the thirteen weeks ended November 28, 2020. Costs for these restructuring activities have been included within General and administrative on the Consolidated Statements of Operations and Comprehensive Income. Refer to Note 16, Restructuring and Related Charges, for additional information regarding restructuring activities.
iiFuture
maturities of lease liabilities as of November 28, 2020 were as follows:/
(In thousands)
Operating Leases
Finance Leases
Fiscal year ending:
Remainder
of 2021
$
i4,166
$
i235
2022
i4,722
i313
2023
i4,187
i278
2024
i4,289
i145
2025
i3,837
i—
Thereafter
i11,050
i—
Total
lease payments
i32,251
i971
Less:
Interest
(i6,014)
(i79)
Present
value of lease liabilities
$
i26,237
$
i892
As
of November 28, 2020, the Company had entered into a lease with estimated total minimum future lease payments of $i32.2 million over a i10.0-year
minimum lease term that had not yet commenced, and as a result it is not recorded on the Consolidated Balance Sheets. The Company expects the lease to commence in fiscal year 2021, and the Company has the option to renew the lease for an additional i5.0 years or i10.0
years after the minimum lease term.
iThe weighted-average remaining lease term and weighted-average discount rate for operating and finance leases were as follows:
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 result, financial condition or cash flows.
During the fiscal year ended August 31, 2019, the Company reserved $i3.5
million for the potential settlement of class action litigation concerning certain product label claims. During the thirteen weeks ended November 30, 2019, the Company reserved an additional $i0.3 million. The reserve was included within General and administrative in the Consolidated Statements of Operations and Comprehensive Income, and the reserve was fully paid into escrow and settled during the fiscal year ended August 29,
2020.
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 November 28, 2020, the Company will
be required to make payments of $i2.9 million over the next year.
/
12. Stockholders’ Equity
i
Public
Equity Offering
On October 9, 2019, the Company completed an underwritten public offering of i13,379,205 shares of common stock at a price to the public of $i26.35
per share. The Company paid underwriting discounts and commissions of $i0.19 per share resulting in net proceeds to the Company of $i26.16
per share, or approximately $i350.0 million (the “Offering”). The Company paid $i0.8
million for legal, accounting and registrations fees related to the Offering. The net proceeds were used to pay a portion of the purchase price and related fees and expenses for the Acquisition of Quest.
Warrants to Purchase Common Stock
Prior to the Acquisition of Atkins, Conyers Park issued i13,416,667 public warrants and i6,700,000 Private
Warrants. The Company assumed the Conyers Park warrants to purchase common stock in connection with the Acquisition of Atkins. As a result of the Acquisition of Atkins, the warrants issued by Conyers Park were no longer exercisable for shares of Conyers Park common stock, but were instead exercisable for common stock of the Company. All other features of the warrants were unchanged.
Each whole warrant entitles the holder to purchase one share of the Company’s common stock at a price of $i11.50
per share. The warrants became exercisable 30 days after the completion of the Acquisition of Atkins in 2017 and expire five years after that date, or earlier upon redemption or liquidation, as applicable.
From August 26, 2018 through October 5, 2018, public warrants to purchase an aggregate of i9,866,451 shares of the
Company’s common stock were exercised for cash at an exercise price of $i11.50 per share, resulting in aggregate gross proceeds to the Company of $i113.5 million.
On
October 4, 2018, the Company delivered a notice for the redemption (the “Redemption Notice”) of all of its public warrants that remained unexercised immediately after November 5, 2018. Exercises of public warrants following the Redemption Notice were required to be done on a cashless basis. Accordingly, holders were no longer permitted to exercise public warrants in exchange for payment in cash of $i11.50 per
share. Instead, a holder exercising a public warrant was deemed to have paid the $i11.50 per share exercise price by the surrender of i0.61885 of
a share of common stock that the holder would have been entitled to receive upon a cash exercise of each public warrant. Exercising holders received i0.38115 of a share of the Company’s common stock for each public warrant surrendered for exercise. Following the Redemption Notice, i3,499,639 public
warrants were exercised on a cashless basis. An aggregate of i1,333,848 shares of the Company’s common stock were issued in connection with these exercises of the public warrants. All remaining public warrants were redeemed as of November 5, 2018 for an immaterial amount.
As of November 28, 2020, the Private Warrants to purchase i6,700,000 shares of the Company’s common stock remain outstanding, have not been transferred by Conyers Park Sponsor, LLC, a related party, and remain liability-classified. As discussed in Note 8, the liability-classified warrants are 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 remeasurement of the warrant liability is reflected in Gain in fair value change of warrant liability within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Stock Repurchase Program
On November 13, 2018, the Company announced that its Board of Directors had adopted a $i50.0
million stock repurchase program. 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.
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. In periods in which the Company has a net loss, diluted earnings 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 antidilutive.
The Company has outstanding liability-classified Private Warrants to purchase i6,700,000
shares of the Company’s common stock. During periods when the effect is dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares, calculated using the treasury stock method. During periods when the impact is antidilutive, the share settlement is excluded.
iThe
following table reconciles the numerators and denominators used in the computations of both basic and diluted earnings (loss) per share:
Diluted earnings (loss) per share calculations for the thirteen weeks ended November 28, 2020 and November 30, 2019 excluded i0.7 million and i2.7
million shares of stock options issuable upon exercise, respectively, that would have been anti-dilutive. Diluted earnings per share for the thirteen weeks ended November 28, 2020 excluded an immaterial number of non-vested shares that would have been anti-dilutive. For the thirteen weeks ended November 30, 2019, the loss per share excluded i0.3 million of non-vested shares
that would have been anti-dilutive.
14. Omnibus Incentive Plan
iStock-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.
As
of November 28, 2020, the Company had $i4.0 million of total unrecognized compensation cost related to stock option plans that will be recognized over a weighted average period of i2.1
years. During each of the thirteen weeks ended November 28, 2020 and November 30, 2019, the Company received $i0.2 million in cash from stock option exercises.
Restricted Stock Units
iThe
following table summarizes restricted stock unit activity for the thirteen weeks ended November 28, 2020:
As
of November 28, 2020, the Company had $i8.4 million of total unrecognized compensation cost related to restricted stock units that will be recognized over a weighted average period of i2.6
years.
During the thirteen weeks ended November 28, 2020, the Board of Directors granted performance stock units under the Company’s equity compensation plan. Performance stock units vest in a range between i0%
and i200% based upon certain performance criteria in a three-year period. Performance stock units were valued using a Monte-Carlo simulation.
iThe
following table summarizes performance stock unit activity for the thirteen weeks ended November 28, 2020:
As
of November 28, 2020, the Company had $i5.1 million of total unrecognized compensation cost related to performance stock units that will be recognized over a weighted average period of i1.8
years.
Stock Appreciation Rights
Stock appreciation rights (“SARs”) permit the holder to participate in the appreciation of the Company’s common stock price. The Company’s SARs settle in shares of its common stock once the applicable vesting criteria has been met. SARs cliff vest i3
years from the date of grant and must be exercised within i10 years.
iThe
following table summarizes SARs activity for the thirteen weeks ended November 28, 2020:
Shares Underlying SARs
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life
(Years)
As
of November 28, 2020, the Company had $i0.3 million of total unrecognized compensation cost related to its SARs that will be recognized over a weighted average period of i1.93
years.
15. Segment and Customer Information
iFollowing the Acquisition of Quest, the Company’s operations are organized into two operating segments, Atkins and Quest, which are aggregated into ione
reporting segment due to similar financial, economic and operating characteristics. The operating segments are also similar in the following areas: (a) the nature of the products; (b) the nature of the production processes; (c) the methods used to distribute products to customers, (d) the type of customer for the products; and, (e) the nature of the regulatory environment./
16. Restructuring and Related Charges
iIn
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. The new organization design became effective on August 31, 2020. These restructuring plans primarily include workforce reductions, changes in management structure, and the relocation of business activities from one location to another.
The one-time termination benefits and employee severance costs to be incurred in relation to these restructuring activities are accounted for in accordance with ASC Topic 420, Exit or Disposal Cost Obligations, and ASC Topic 712, Compensation-Nonretirement Postemployment Benefits, respectively. The Company recognizes a liability and the related expense for these restructuring costs when the liability is incurred and can be measured. Restructuring accruals are based upon management estimates at the time and can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded.
iChanges
to the restructuring liability during the thirteen weeks ended November 28, 2020 were as follows:
In addition to the $2.2 million restructuring costs incurred related to one-time termination benefits and employee severance as shown above, the Company incurred a $i0.4 million
restructuring-related impairment charge in the thirteen weeks ended November 28, 2020 related to its operating lease right-of-use asset for its lease in Toronto, Ontario. As a result, for the thirteen weeks ended November 28, 2020, the Company incurred a total of $i2.5 million in restructuring and restructuring related costs, which have been included within General
and administrative on the Consolidated Statements of Operations and Comprehensive Income.
As of November 28, 2020, the Company has incurred aggregate restructuring and restructuring-related costs of $i8.0 million since May 2020. Overall, the
Company expects to incur a total of approximately $i9.2 million in restructuring and restructuring related costs, which are to be paid throughout fiscal 2021 and the first quarter of fiscal 2022.
25
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q/A (this “Amendment”) contains forward-looking statements. When used anywhere in this Amendment, the words “expect,”“believe,”“anticipate,”“estimate,”“intend,”“plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These statements include, but are not limited to, the effect of the novel coronavirus (“COVID-19”) on our
business, financial condition and results of operations. 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. 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/A for the fiscal year ended August 29, 2020 and our unaudited
condensed consolidated financial statements and the related notes appearing elsewhere in this Amendment. 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 on
Form 10-K/A. The Company assumes no obligation to update any of these forward-looking statements.
Unless the context requires otherwise in this Amendment, 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. Our nutritious snacking platform consists of the following core brands that specialize in providing products for consumers that follow certain nutritional philosophies, dietary approaches and/or health-and-wellness trends: Atkins® for those following a low-carb lifestyle; and Quest® for consumers seeking to partner with a brand that makes the foods they crave work for them, not against them, through 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. Our platform also positions us to continue to selectively pursue acquisition opportunities of brands in the nutritious snacking category.
To that end, in November 2019, we completed the acquisition of Quest Nutrition, LLC (“Quest”), a healthy lifestyle food company, for a cash purchase price of approximately $1.0 billion (subject to customary adjustments) (the “Acquisition of Quest”). For more information, please see “Liquidity and Capital Resources - Acquisition of Quest.”
Effects of COVID-19
In December 2019, a novel coronavirus disease, or COVID-19, was reported
and in January 2020, the World Health Organization, or WHO, declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provided a substantial stimulus and assistance package intended to address the effect of the COVID-19 pandemic, including tax relief and government loans, grants and investments. Additionally, various federal, state and local government-imposed movement restrictions and initiatives have been implemented to reduce the
global transmission of COVID-19, including reduced or eliminated food services, the closure of retailing establishments, the promotion of social distancing and the adoption of remote working policies.
Beginning in the third quarter of 2020, we actively engaged with the various elements of our value chain, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for our products and to remain informed of any challenges within our value chain. Given the unpredictable nature of the COVID-19 pandemic and the initial surge in consumption, we increased finished goods inventory of some of our key products. In the fourth quarter of 2020 and continuing into the first quarter of 2021, consumption habits became more steady and inventory levels normalized.
Based on information available to us as of the date of this Amendment, we believe we will be able to deliver our products to meet customer orders on a timely basis, and 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
26
continue to monitor customer and consumer demand, and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 situation.
We implemented remote work arrangements and restricted business travel in March 2020, and to date, these arrangements have not materially affected our ability to
maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. We believe our lean infrastructure, which allows for significant flexibility, speed-to-market and minimal capital investment, has enabled us to adjust our expenditures to maintain cash flow until the more fulsome reopening of the U.S. economy and the associated return of shopping behavior to more normal patterns occurs. We also believe the return of these shopping patterns along with our brand benefits of active nutrition and weight management will drive more better-for-you snacking and meal replacement usage occasions.
Our consolidated results of operations for the thirteen weeks ended November 28, 2020 continued to be affected by changes in consumer shopping and
consumption behavior due to COVID-19. The nutritional snacking category has experienced a marked decrease in shopping trips (particularly in the mass channel) and fewer usage occasions. There is still uncertainty related to the duration of reduced consumer mobility and when shopping trips will return to pre-pandemic levels, particularly in the mass market retail channel. This has affected our portable and convenient on-the-go products, especially the nutrition and protein bar portion of our business for both our Atkins and Quest brands. While our Quest brand has outperformed its portion of the nutritious snaking segment, the performance of our Atkins brand, which is part of the weight management portion of the market, has remained slower due to what we believe is the temporary softer interest in weight management for consumers, fewer on-the-go usage occasions and weakness in the mass channel that has experienced reduced shopper traffic during the pandemic.
Based
on the duration and severity of economic effects from the COVID-19 pandemic, including but not limited to stock market volatility, the potential for (i) continued increased rates of reported cases of COVID-19, (ii) unexpected supply chain disruptions, (iii) changes to customer operations, (iv) continued or additional changes in consumer purchasing and consumption behavior beyond those evidenced to date, and (v) the closure of customer establishments, we remain uncertain of the ultimate effect COVID-19 could have on our business. We also believe the COVID-19 uncertainty will continue during our 2021 fiscal year.
Restructuring and Related Charges
In May 2020, we announced certain restructuring activities in conjunction with the implementation of our future-state organization design, which created a fully
integrated organization with our completed Acquisition of Quest. The new organization design became effective on August 31, 2020. These restructuring plans primarily include workforce reductions, changes in management structure, and the relocation of business activities from one location to another.
For the thirteen weeks ended November 28, 2020, we incurred a total of $2.5 million in restructuring and restructuring related costs which have been included within General and administrative on the Consolidated Statements of Operations and Comprehensive Income. As of November 28, 2020, we have incurred aggregate restructuring and restructuring related costs of $8.0 million since May 2020. Overall, we expect to incur a total of approximately
$9.2 million in restructuring and restructuring-related costs, which are to be paid throughout fiscal 2021 and the first quarter of fiscal 2022. Refer to Note 16, Restructuring and Related Charges, of our Notes to Unaudited Condensed Consolidated Financial Statements in this Amendment for additional information regarding restructuring activities.
SimplyProtein Sale
Effective September 24, 2020, we sold the assets exclusively related to our SimplyProtein® brand of products for approximately $8.8 million of consideration, including cash of $5.8 million and a note receivable for $3.0 million, to a newly formed entity led by the Company’s former Canadian-based management
team who had been responsible for this brand prior to the sale transaction (the “SimplyProtein Sale”). In addition to purchasing these assets, the buyer assumed certain liabilities related to the SimplyProtein brand’s business. There was no gain or loss recognized as a result of the SimplyProtein Sale. The transaction enables our management to focus its full time and our resources on our core Atkins® and Quest® branded businesses and other strategic initiatives.
Change in Fair Value of Warrant Liability
During the thirteen weeks ended November 28, 2020 and November 30, 2019, there were fluctuations in the fair value of our liability-classified private warrants (“Private Warrants”). These fluctuations
created significant gains and losses on the remeasurement of our Private Warrants which are recognized as a liability measured at fair value on our Condensed Consolidated Balance Sheets. These remeasurements are recognized as Gain in fair value change of warrant liability on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
27
Our Reportable Segment
Following the Acquisition of Quest, our operations are
organized into two operating segments, Atkins and Quest, which are aggregated into one reporting segment, due to similar financial, economic and operating characteristics. The operating segments are also similar in the following areas: (a) the nature of the products; (b) the nature of the production processes; (c) the methods used to distribute products to customers, (d) the type of customer for the products, and (e) the nature of the regulatory environment. The recently announced restructuring and new organization design creates an efficient and fully integrated organization that will continue to support and build multi-category nutritional snacking brands.
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, depreciation and amortization, and business transaction costs. The following is a brief description of the components of operating expenses:
•Selling and marketing. Selling and marketing expenses are comprised of broker commissions, customer marketing, media and other marketing costs.
•General and administrative. General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support our business, including
employee salaries, 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.
•Business transaction costs. Business transaction costs are comprised of legal, due diligence, consulting and accounting firm expenses associated with the process of actively pursuing potential and completed business combinations, including the Acquisition of Quest.
Results
of Operations
Overall, the results in the first quarter of fiscal 2020 were better than expected amid the ongoing challenges of operating in the COVID-19 environment. The Acquisition of Quest and the strong performance of the Quest brand drove the increases in net sales and net operating income for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. While we are encouraged with our start to fiscal year 2021, including the momentum of the Quest brand and the progress made against our strategic initiatives, there is still uncertainty related to when mobility, consumption behavior and shopping trips will return to pre-COVID-19 levels.
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 of Adjusted EBITDA and Adjusted Diluted Earnings Per Share. Because not all companies use identical calculations, this presentation of Adjusted EBITDA and Adjusted Diluted Earnings Per Share may not be comparable to other similarly titled measures of other companies. See “Reconciliation of Adjusted EBITDA” below for a reconciliation of Adjusted EBITDA to net income for each applicable period. See “Reconciliation of Adjusted Diluted Earnings Per Share” below for a reconciliation of Adjusted Diluted Earnings Per Share to diluted earnings per share for each applicable period.
The following unaudited table presents, for the periods indicated, selected information from our Condensed Consolidated Statements of Operations and Comprehensive Income, including information presented as a percentage of net sales:
(1) Adjusted EBITDA is a non-GAAP financial metric. See “Reconciliation of Adjusted EBITDA” below for a reconciliation of Adjusted EBITDA to net income for each applicable period.
Net sales.
Net sales of $231.2 million represented an increase of $79.0 million, or 51.9%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. The net sales increase of 51.9% was primarily attributable to the Acquisition of Quest, which drove 51.7% of the increase. The remaining 0.2% increase in net sales attributable to the legacy Atkins business was primarily driven by international sales growth, partially offset by a 1.7% decrease in net sales due to the SimplyProtein Sale in the first quarter of fiscal year 2021 as well as reduced sales volume due to the continued effects of COVID-19 related movement restrictions and stay-at-home orders.
Cost of goods sold. Cost of goods sold increased $47.2
million, or 52.4%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. The cost of goods sold increase was driven by sales volume growth attributable to the Acquisition of Quest.
Gross profit. Gross profit increased $31.8 million, or 51.2%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. Gross profit of $94.0 million, or 40.7% of net sales, for the thirteen weeks ended November 28, 2020 decreased 20 basis points from 40.9% of net sales for the thirteen weeks ended November 30,
2019. The decrease in gross profit margin was primarily the result of the Acquisition of Quest’s lower gross profit margins, partially offset by a non-cash $2.4 million inventory purchase accounting step-up adjustment in the first quarter of fiscal year 2020.
Operating expenses. Operating expenses decreased $10.3 million, or 15.9%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019 due to the following:
•Selling
and marketing. Selling and marketingexpenses increased $6.8 million, or 36.7%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. The increase was primarily related to the Acquisition of Quest.
•General and administrative. General and administrative expenses increased $7.3 million, or 40.1%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. The increase was primarily attributable to the Acquisition of Quest as well as restructuring charges of $2.5 million in the thirteen
weeks ended November 28, 2020. These increases were partially offset by reductions in stock-based compensation and costs related to the integration of Quest.
•Depreciation and amortization. Depreciation and amortization expenses increased $1.8 million, or 73.0%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. The increase was primarily due to amortization for the intangible assets recognized in the Acquisition of Quest of $2.2 million.
•Business transaction costs. Business transaction costs were $26.2 million
for the thirteen weeks ended November 30, 2019 and was comprised of expenses related to the Acquisition of Quest.
Interest income. Interest income decreased $1.4 million for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019 primarily due to $195.3 million of cash on hand being utilized for the Acquisition of Quest in the first quarter of fiscal year 2020 and lower market rates.
Interest expense. Interest expense increased $3.4 million for the thirteen weeks ended
November 28, 2020 compared to the thirteen weeks ended November 30, 2019 primarily due to the first quarter of fiscal year 2020 term loan funding of $460.0 million to partially finance the Acquisition of Quest.
Gain in fair value change of warrant liability. During the thirteen weeks ended November 28, 2020 and the thirteen weeks ended November 30, 2019, we recorded a $20.5 million gain and a $13.3 million gain, respectively, related to the change in fair value of our liability-classified Private Warrants, primarily driven by movements in our stock price.
Gain
on foreign currency transactions. The gain in foreign currency related to our international operations was nominal for the thirteen weeks ended November 28, 2020 and November 30, 2019.
Income tax expense (benefit). Income tax expense increased $10.1 million, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019. The increase in our income tax expense is primarily driven by higher income from operations offset by other permanent differences.
Net income.
Net income was $43.0 million for the thirteen weeks ended November 28, 2020, an increase of $34.4 million compared to the net loss of $8.5 million for the thirteen weeks ended November 30, 2019. The increase was primarily related to increased operating income, decreased transaction costs from the Acquisition of Quest in the first quarter of fiscal year 2020, and favorable fair value movements in the warrant liability.
Adjusted EBITDA. Adjusted EBITDA increased $16.9 million, or 53.2%, for the thirteen weeks ended November 28, 2020 compared to the thirteen weeks ended November 30, 2019, driven primarily by the Acquisition of Quest. For a reconciliation
of Adjusted EBITDA to its most directly comparable GAAP measure, see “Reconciliation of Adjusted EBITDA” below.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net income as an indicator of operating performance or as an alternative to cash
flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). Simply Good Foods defines Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) as net income before interest income, interest expense, income tax expense, depreciation and amortization with further adjustments to exclude the following items: business transaction costs, fair value changes in mark to market warrant liability measurements, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, gain or loss in fair value change of warrant liability, and other non-core expenses. The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted EBITDA, when used in conjunction with net income, are appropriate to provide additional information to investors, and management
of the Company uses Adjusted EBITDA to supplement net income because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making. The Company also believes that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in the non-GAAP calculation.
The
following unaudited tables below provide a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, which is net income, for the thirteen weeks ended November 28, 2020 and November 30, 2019:
We have historically funded our operations with cash flow from operations and, when needed, with borrowings under our credit facilities. Our principal uses of cash have been debt service, working
capital and the Acquisition of Quest.
We had $91.5 million in cash and cash equivalents as of November 28, 2020. 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.
Debt and Credit Facilities
On July 7, 2017, we
entered into a credit agreement with Barclays Bank PLC and other parties (as amended to date, the “Credit Agreement”). The Credit Agreement provides 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 Acquisition of Atkins, the full $200.0 million of the Term Facility (the “Term Loan”) was drawn. 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% and (c) the Euro-currency rate applicable for an interest period of one month plus 1.00% plus (x) 3.00% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility, or (ii) London Interbank Offered Rate (“LIBOR”) adjusted for statutory reserve requirements,
plus (x) 4.00% margin for the Term Loan subject to a floor of 1.00% or (y) 3.00% margin for the Revolving Credit Facility. As security for the payment or performance of its debt, we have pledged certain equity interests in its subsidiaries.
On March 16, 2018 (the “Amendment Date”), we entered into an amendment (the “Repricing Amendment”) to the Credit Agreement. As a result of the Repricing Amendment, the interest rate on the Term Loan was reduced and, as of the Amendment Date, such loans had an interest rate equal to, at our option, either LIBOR plus an applicable margin of 3.50% or a base rate plus an applicable margin of 2.50%. The Repricing Amendment did not change the interest rate on the Revolving Credit Facility. The Revolving
Credit Facility continued to bear interest based upon our consolidated net leverage ratio as of the last financial statements delivered to the administrative agent. No additional debt was incurred, or any proceeds received, by us in connection with the Repricing Amendment. The incremental fees paid to the administrative agent are reflected as additional debt discount and are amortized over the terms of the long-term financing agreements using the effective-interest method.
On November 7, 2019, we entered into an 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) and as of the Amendment No. 2 Effective
Date (as defined in the Incremental Facility Amendment), the Initial Term Loans bear interest at a rate equal to, at our option, either LIBOR plus an applicable margin of 3.75% or a base rate plus an applicable margin of 2.75%. The Incremental Facility Amendment was executed to partially finance the Acquisition of Quest. No amounts under the Term Facility were repaid as a result of the execution of the Incremental Facility Amendment.
The Applicable Rate per annum applicable to the loans under the Credit Agreement Amendment is, with respect to any Initial Term Loan that is an ABR Loan (as defined in the Credit Agreement), 2.75% per annum, and with respect to any Initial Term Loan that is a Eurodollar Loan, 3.75% per annum. The incremental term loans will mature on the maturity date applicable to the Initial Term Loans, which date is July
7, 2024.
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 6.25:1.00 (with a reduction to 6.00:1.00 on and after the third anniversary of the closing date of the Credit Agreement) contingent on credit extensions in excess of 30% of the total amount of commitments available under the Revolving Credit Facility.
Any failure to comply with the restrictions of the credit facilities may result in an event of default. We were in compliance with all financial covenants as of November 28, 2020 and August 29, 2020, respectively.
At November 28, 2020, the outstanding balance of the Term Facility was $581.5 million. We are not required to make principal payments on the Term Facility over the twelve months following the period ended November 28, 2020. As of November 28, 2020, there were no amounts drawn against the Revolving Credit Facility.
On October 9, 2019, we completed an underwritten public offering of 13,379,205 shares of our common stock at a price to the public of $26.35 per share. We paid underwriting discounts and commissions of $0.19 per share resulting in net proceeds to us of $26.16 per share, or approximately $350.0 million (the “Offering”). We paid $0.8 million for legal, accounting and registrations fees related to the Offering. The net proceeds were used to pay a portion of the purchase price and related fees and expenses for the Acquisition of Quest.
Acquisition of Quest
On August
21, 2019, our wholly-owned subsidiary Simply Good Foods USA, Inc., formerly known as Atkins Nutritionals, Inc. (“Simply Good USA”) entered into a Stock and Unit Purchase Agreement (the “Purchase Agreement”) with VMG Voyage Holdings, LLC, VMG Tax-Exempt II, L.P., Voyage Employee Holdings, LLC, and other sellers, as defined in the Purchase Agreement, to acquire Quest, a healthy lifestyle food company. On November 7, 2019, pursuant to the Purchase Agreement, Simply Good USA completed the Acquisition of Quest, for a cash purchase price of approximately $1.0 billion, subject to customary post-closing adjustments.
The Acquisition of Quest was funded through a combination of cash, equity and debt financing. Total consideration paid on the closing date was $988.9 million. Cash sources of funding included $195.3 million of
cash on hand, net proceeds of approximately $350.0 million from an underwritten public offering of common stock, and $443.6 million of new term loan debt. In the third fiscal quarter of 2020, we received a post-closing release from escrow of approximately $2.1 million related to net working capital adjustments, resulting in a total net consideration paid of $986.8 million as of November 28, 2020. For the thirteen weeks ended November 30, 2019, we incurred business transaction costs $26.2 million.
Private Warrants to Purchase Common Stock
As of November 28, 2020, our Private Warrants to purchase 6,700,000 shares of common stock remain outstanding, are held
by Conyers Park Sponsor, LLC, a related party, and remain liability-classified. If all Private Warrants are exercised at the $11.50 exercise price per warrant, our cash would increase by $77.1 million.
Cash Flows
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
Net cash provided by (used in) operating activities
$
15,197
$
(7,928)
Net cash provided by (used in) investing activities
$
5,593
$
(985,731)
Net
cash (used in) provided by financing activities
$
(25,122)
$
800,071
Operating activities. Our net cash provided by operating activities increased $23.1 million to $15.2 million for the thirteen weeks ended November 28, 2020 compared to cash used in operating activities of $7.9 million for the thirteen weeks ended November 30, 2019. The increase in cash provided by operating activities in the current period compared to the prior period was primarily
driven by increased sales volumes in the current period and significant non-recurring business transactions costs and changes in working capital related to the Acquisition of Quest during the thirteen weeks ended November 30, 2019, including $26.2 million in transaction costs which were not incurred in the current period, partially offset by increased cash paid for interest on outstanding term loan balances of $4.5 million and restructuring costs of $2.5 million.
Investing activities. Our net cash provided by investing activities was $5.6 million for the thirteen weeks ended November 28, 2020, which was primarily related to the $5.8 million of cash proceeds received from the SimplyProtein Sale. The net cash used in investing activities
of $985.7 million for the thirteen weeks ended November 30, 2019 was primarily related to the cash paid for the Acquisition of Quest, net of cash acquired, of $984.2 million.
Financing activities. Our net cash used in financing activities was $25.1 million for the thirteen weeks ended November 28, 2020 compared to net cash provided by financing activities of $800.1 million for the thirteen weeks ended November 30, 2019. Net cash used in financing activities for the thirteen weeks ended November 28, 2020 primarily consisted of a $25.0 million principal payment on the Term Facility. For the thirteen weeks ended November 30,
2019, net cash provided by financing activities included gross proceeds of $352.5 million from the Offering offset by issuance costs of $3.3 million, proceeds of $460.0 million from the Term Facility borrowing related to the Incremental Facility Amendment offset by issuance costs of $8.2 million, and a $1.0 million principal payment on the Term Facility.
Our contractual obligations are related to our Credit Agreement and our finance and operating leases. There have been no material changes to our contractual obligations from our Annual Report
on Form 10-K/A.
Off-Balance Sheet Arrangements
As of November 28, 2020, we had no material off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 on Form 10-K/A. There have been no significant changes to our critical accounting policies since August 29, 2020. Refer to Note 3 of our unaudited interim condensed consolidated financial statements in this Amendment for further information regarding recently issued accounting standards.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in our market risk exposure during the thirteen week period ended
November 28, 2020. For a discussion of our market risks, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules
and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures.
Management, including the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation (pursuant to Rule 13a-15(b) under the Exchange Act) of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Amendment. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of November 28, 2020, the Company’s disclosure controls and procedures were not effective due to a material weakness in
internal control over financial reporting described below.
As previously disclosed in our Annual Report on Form 10-K/A for the year ended August 29, 2020, we identified a material weakness in our internal controls over financial reporting related to inaccurate accounting for warrants issue in connection with our initial public offering and private placement. Notwithstanding this material weakness, management has concluded that our unaudited condensed consolidated financial statements included in the Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented therein.
Remediation Plan
We have expended,
and will continue to expend, a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. Our plans at this time include acquiring enhanced access to accounting literature, increased communication among our personnel regarding the application of complex accounting transactions, hiring additional technical resources and enhanced reviews of technical analyses to ensure the proper application of GAAP. Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We can offer no assurance that these initiatives will ultimately have the intended effects.
Changes
in Internal Control over Financial Reporting
As of the first day of fiscal year 2021, the financial reporting of the Company’s U.S. operations were fully integrated onto a single enterprise resource platform. In addition, other than the change made to remediate the material weakness described above and the integration and implementation of the enterprise resource platform, there were no changes in our internal controls over financial reporting during the quarter ended November 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Except as disclosed above, there were no changes in our
internal control over financial reporting during the quarter ended November 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
35
PART II. Other Information
Item 1A. Risk Factors
Readers should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Amendment No. 1 to Form 10-K (“Form 10-K/A”),
which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in our risk factors included in our Form 10-K/A. The risks described in our Form 10-K/A are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.