Simply Good Foods Co current report, 07 July 2017

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Business Context and Reporting Period

Company: The Simply Good Foods Company (formerly Conyers Park Acquisition Corp.)
Date: July 7, 2017
Event: Consummation of a business combination with Atkins Nutritionals, Inc. (Atkins). Conyers Park and Atkins are now wholly-owned subsidiaries of Simply Good Foods. The company ceased to be a shell company upon closing.

Key Financial Metrics and Capital Structure

Debt Financing (New Credit Agreement):

  • Term Loans: $200,000,000 aggregate principal (fully drawn at closing).
  • Revolving Credit Facility: Up to $75,000,000 (undrawn at closing).
  • Interest Rates: Term Loans at Base Rate + 3.00% or LIBOR + 4.00%; Revolver at Base Rate + 2.00% or LIBOR + 3.00%.
  • Maturity: Term Loans mature in 7 years; Revolver matures in 5 years.
  • Use of Proceeds: Repayment of existing Atkins debt and financing the business combination.
Transaction Consideration:
  • Cash to Atkins Equity Holders: Approximately $320.4 million (subject to adjustment).
  • Stock to Atkins Equity Holders: 10,250,000 shares of New Common Stock (valued at $102.5 million).
  • PIPE Investment: $100.0 million raised from private investors.
Equity Issuance:
  • Public Shareholders: Received 40,250,000 shares of New Common Stock.
  • Founders/Sponsor: Received 10,062,500 shares of New Common Stock.
  • Total Outstanding: 70,562,500 shares of New Common Stock as of closing.
  • Warrants: 20,116,667 New Warrants outstanding.
Executive Compensation (CEO Joseph E. Scalzo):
  • Base Salary: $715,000 annually.
  • Target Bonus: 75% of base salary for 2017; 100% thereafter.
  • Equity Grant: Options to purchase 1.2 million shares.

Material Changes and Agreements

Debt Restructuring: The company entered a new first-lien senior secured credit facility, replacing Atkins' existing first and second lien credit agreements. The new facility includes mandatory prepayments based on asset sales, debt incurrence, and excess cash flow.

Tax Receivable Agreement: Simply Good Foods entered an agreement to pay selling equity holders (represented by Roark Capital Acquisition) for tax benefits realized from up to $100 million of net operating losses, transaction deductions, and depreciable tax basis, plus 75% of up to $7.6 million in alternative minimum tax credits. Payments are made on a "with and without" basis and could impact future liquidity.

Investor Rights:

  • Atkins Holdings: Granted registration rights and the right to nominate one director (or observer) while holding ~50% of its closing shares. Subject to a 180-day lock-up.
  • Conyers Park Sponsor: Granted registration rights and the right to nominate three directors (while holding >50%) or one director (while holding >25%). Subject to a 180-day lock-up.

Accounting Change: Ernst & Young LLP was appointed as the independent registered public accounting firm, replacing the prior auditor.

Outlook, Risks, and Contingencies

Forward-Looking Statements: Management anticipates benefits from the combination, including growth and profitability, but notes these are subject to integration risks, market competition, and economic factors.

Liquidity Risks: The Tax Receivable Agreement may require payments in advance of actual tax benefit realization, potentially adversely affecting working capital and growth requirements. The company does not anticipate paying cash dividends in the foreseeable future.

Covenants: The new credit agreement restricts additional indebtedness, asset sales, dividends, and acquisitions. Failure to meet leverage ratios could restrict the revolving credit facility or trigger acceleration of debt.

Legal Proceedings: Risks include potential legal proceedings following the announcement of the business combination and the ability to maintain Nasdaq listing.

Investor Verification Checklist

  • Debt Service Capacity: Verify the company's ability to service the $200M term loan and meet mandatory prepayment requirements based on excess cash flow.
  • Tax Agreement Impact: Assess the potential cash outflow from the Income Tax Receivable Agreement and its effect on future liquidity.
  • Integration Progress: Monitor the operational integration of Atkins and Conyers Park to ensure anticipated synergies are realized.
  • Equity Dilution: Track the exercise of 20.1 million outstanding warrants and potential future issuances under the 2017 Long Term Incentive Plan (9.1 million shares reserved).
  • Management Retention: Confirm the stability of the new executive team, particularly CEO Joseph E. Scalzo, under the new employment terms.