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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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SPECIAL NOTE REGARDING FORWARD-LOOKINGFORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Annual Report”) contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
the effects of the current COVID-19 pandemic, or of other global outbreaks of pandemics or contagious diseases or fear of such outbreaks, including on our supply chain, the demand for our products, and on overall economic conditions and consumer confidence and spending levels;
our expectations regarding our revenue, expenses and other operating results;
our ability to acquire new customers and successfully retain existing customers;
our ability to attract and retain our suppliers, distributors and co-manufacturers;
our ability to maintain relationships with our existing farm networks or further expand such networks;
our expectations regarding our future growth in the foodservice channel, including commercial and non-commercial foodservice business;
real or perceived quality or food safety issues with our products or other issues that adversely affect our brand and reputation;
changes in the tastes and preferences of our consumers;
the financial condition of, and our relationships with, our farmers, suppliers, co-manufacturers, distributors, retailers and foodservice customers, as well as the health of the foodservice industry generally;
realthe effects of outbreaks of agricultural diseases, such as avian influenza, or perceived qualitythe perception that outbreaks may occur or health issues with our productsregulatory or other issues that adversely affect our brand and reputation;
the ability of our farmers, suppliers and co-manufacturers to comply with food safety, environmental or other laws or regulations;
the effects of a public health pandemic or contagious disease, or fear of such outbreaks, on our supply chain, the demand for our products, and overall economic conditions, consumer confidence and spending levels;
anticipated changes in our product offerings and our ability to innovate to offer new products;
our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;
our ability to effectively manage our growth;
the potential influence of our focus on a specific public benefit purpose and producing a positive effect for society may negatively influence our financial performance;
our environmental, sustainability and governance goals, opportunities and initiatives, as well as the standards and expectations of third parties regarding these matters;
the impact of adverse economic conditions;
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seasonality; and
the growth rates of the markets in which we compete.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report and elsewhere in this Annual Report. A summary of selected risks associated with our business areis set forth below.at the beginning of Part I, Item 1A of this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
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Our business faces significant risks and uncertainties. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected. You should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors” in Part I Item 1A of this Annual Report. Some of the more significant risks include the following:
Our recent, rapid growth may not be indicative of our future growth, and if we continue to grow rapidly, we may not be able to effectively manage our growth or evaluate our future prospects. If we fail to effectively manage our future growth or evaluate our future prospects, our business could be adversely affected.
We have incurred net losses in the past and we may not be able to maintain or increase our profitability in the future.
Failure to introduce new products may adversely affect our ability to continue to grow.
We are dependent on the market for shell eggs.
Sales of pasture-raised shell eggs contribute the vast majority of our revenue, and a reduction in these sales would have an adverse effect on our financial condition.
Fluctuations in commodity prices and in the availability of feed grains could negatively impact our results of operations and financial condition.
If we fail to effectively expand our processing, manufacturing and production capacity as we continue to grow and scale our business, our business and operating results and our brand reputation could be harmed.
All of our pasture-raised shell eggs are processed at Egg Central Station in Springfield, Missouri. Any damage or disruption at this facility may harm our business.
We are currently expanding Egg Central Station, and we may not successfully complete construction of or commence operations in this expansion, or the expanded facility may not operate in accordance with our expectations.
If we fail to effectively maintain or expand our network of small family farms, our business, operating results and brand reputation could be harmed.
Our future business, results of operations and financial condition may be adversely affected by reduced or limited availability of pasture-raised eggs and milk and other raw materials that meet our standards.
We currently have a limited number of co-manufacturers. Loss of one or more of our co-manufacturers or our failure to timely identify and establish relationships with new co-manufacturers could harm our business and impede our growth.
We could be adversely affected by a change in consumer preferences, perception and spending habits in the natural food industry and on animal-based products, in particular, and failure to develop or enrich our product offering or gain market acceptance of our new products could have a negative effect on our business.
A limited number of distributors represent the substantial majority of our sales, and the loss of one or more distributor relationships that cannot be replaced in a timely manner may adversely affect our results of operations.
We are dependent on hatcheries and pullet farms to supply our network of family farms with laying hens. Any disruption in that supply chain could materially and adversely affect our business, financial condition or results of operations.
We source substantially all of our shell egg cartons from a sole source supplier and any disruptions may impact our ability to sell our eggs.
Because we rely on a limited number of third-party vendors to manufacture and store our products, we may not be able to maintain manufacturing and storage capacity at the times and with the capacities necessary to produce and store our products or meet the demand for our products.
Our brand and reputation may be diminished due to real or perceived quality or food safety issues with our products, which could have an adverse effect on our business, reputation, operating results and financial condition.
Demand for shell eggs is subject to seasonal fluctuations and can adversely impact our results of operations in certain quarters.
The continuing COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition.
Food safety and food-borne illness incidents or advertising or product mislabeling may materially and adversely affect our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing our operating costs and reducing demand for our product offerings.
Our operations are subject to FDA and USDA federal regulation, and there is no assurance that we will be in compliance with all regulations.
As a public benefit corporation, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.
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Our Company: Bringing Ethically ProducedEthical Food to the Table
Vital Farms is an ethicalethically minded food company that is disrupting the U.S. food system. We have developed a framework that challenges the norms of the incumbentfactory food model and allows us to bring high-quality products from our network of small family farms to a national audience. This framework has enabled us to become the leading U.S. brand of pasture-raised eggs and butter and the second largestsecond-largest U.S. egg brand by retail dollar sales. Our ethics are exemplified by our focus on the humane treatment of farm animalsanimal welfare and sustainable farming practices, including regenerative agricultural practices. We believe theseour standards produce happy hens with varied diets, which produce better eggs. There is a seismic shift inAs an ethical food company, we're helping meet consumer demand for ethically produced, natural, traceable, clean-label, great-tasting and nutritious foods. Supported by a steadfast adherence to the values on which we were founded, we have designed our brand and products to appeal to this consumer movement.food.
Our purpose is rooted in a commitment to Conscious Capitalism, which prioritizes theand our belief in co-creating positive, long-term benefits of eachoutcomes with all of our stakeholders (farmers– farmers and suppliers, customers and consumers, communities and the environment, employees, who we refer to as crew members, and stockholders). Our business decisions consider the impact on all of our stakeholders, in contrast with the factory farming model, which principally emphasizes cost reduction at the expense of animals, farmers, consumers, crew members, communities and the environment. These principles guide our day-to-day operations and, we believe, help us deliver a more sustainable and successful business.stockholders. Our approach has been validated by our financial performance and our designation asimpact on the food industry. We are also a Certified B Corporation, a certificationdesignation reserved for businesses that balance profit and purpose to meet the highest verified standards of social and environmental performance, public transparency and legal accountability.
Our Ethical Decision-Making Model
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We have scaled our brand through our strong relationships with small family farms and deliberate efforts to design and build the infrastructure to bring our products to a national audience. Today, with a network of more than 200300 family farms, we believe our pasture-raised productswe have set the national standard for ethically produced food.pasture-raised eggs. We believe the success of our relationships with small family farms and the efficiency of our supply chain provide us with a competitive advantage in the approximately $45 billion U.S. natural food and beverageconsumer packaged goods industry, in which achieving reliable supply at a national scale can be challenging. In 2017, we opened Egg Central Station, a shell egg processing facility in Springfield, Missouri, which is centrally located within our network of family farms. In April 2022, we completed an expansion of Egg Central Station that nearly doubled its square footage and capacity. Egg Central Station is capable of packing threesix million eggs per day and has achieved Safe Quality Food, or SQF, Excellent rating, the highest level of such certification recognized by the Global Food Safety Initiative, or GFSI. In addition, Egg Central Station is the only egg facility, and we are one of only six companies globally to havehas received the Safe Quality Food Institute, or SQFI, Select Site certification, indicating that the site has voluntarily elected to undergo annual unannounced recertification audits by SQFI, the organization responsible for administering a global food safety and quality program known as the SQF Program. The design of Egg Central Station includes investments inthat support of each of our stakeholders, from our crew members (daylighting, climate control and slip resistant floors in the egg grading room), to the community and environment (consulting with the community before we built the facility, restoring native vegetation on the property, best-in-class storm water management)retention and stormwater management measures and the use of solar panels), to our customers and consumers (food safety and maintenance investments far beyond regulatory requirements). In November 2019, we began construction onOur efforts to build a sustainable, stakeholder-focused facility expansion that will nearly double our current square footage. This expansion will enable us to double our capacity to meet growing demand. We expectwere recognized by the expansion to be operational in early 2022.industry publication Food Processing, which named Egg Central Station as its 2022 “Green Plant of the Year.” We believe owning and operating this important element of our supply chain is a key differentiator and provides us with a competitive advantage, which we intend to continue to leverage to grow both our net revenue and gross margin. We are currently in the process of exploring potential sites for an additional egg packing facility.
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Our loyal and growing consumer base has fueled the expansion of our brand from the natural channel to the mainstream channel and has facilitated our entry intogrowth within the foodservice channel. As of December 2020,2023, we offeroffered 23 retail stock keeping units, or SKUs, through a multi-channel retail distribution network across more than 16,000approximately 24,000 stores. Our products generate stronger velocities and, we believe, greater profitability per unit for our retail customers in key traffic-generating categories as compared to products offered by our competitors. We believe we have significant room for growth within the retail and in the medium- to long-term, foodservice channels, and we believe that we can capture this opportunity by growing brand awareness and through new product innovation. We also believe there are incremental growth opportunities in additional distribution channels, including the convenience, drugstore, club, military and international markets, which we may access along with retail and foodservice growth opportunities to enable us to continue our net revenue growth.
We have built a sustainable company founded on ethically produced products that increasingly resonate with consumers. Our trusted brand and Conscious Capitalism-focused business model have resulted in significant growth. We have increased net revenue from $1.9$140.8 million in fiscal 20102019 to $214.5$471.9 million in fiscal 2020,2023, which represents a 60%35.3% compounded annual growth rate, or CAGR. From fiscal 2018 to fiscal 2020, we grew net revenue by 101% and the number of stores carrying our products increased by 52%. Going forward, we believe thethat consumer movement away from factory farming practices will continue to fuel demand for ethically produced food. We believe these demands extend toour products, and in September 2023, we announced updated long-term financial targets reflecting our continued confidence in the food industry and that consumers are recognizing the benefitspotential of pasture-raised egg and dairy products. Managementour business. Our management team is committed to ensuring our values remain aligned with those of our consumers while delivering stockholder value.
Evidence of our historical success in continuing to scale our business is shown in the graphics below. All dates refer to the year ended December 31, except for 2018, 2019 and 2020, whichDates refer to the fiscal yearyears ended December 30, 2019, December 2927, 2020, December 26, 2021, December 25, 2022, and December 27,31, 2023, respectively.
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Our History
Vital Farms was founded in 2007 on a 27-acre plot of land in Austin, Texas. Armed with a small flock of hens, the company maintained a strong belief that a varied diet and better animal welfare practices would lead to superior eggs. Our first sales came from farmers markets and restaurants around Austin and, less than a year later, our eggs were discovered by Whole Foods Market, Inc., or Whole Foods. The opportunity was identifiedFrom the beginning, we sought to do something more thannot simply sell eggs to a few stores. The opportunity wasstores, but to build a sustainable company that aligned with the family farming community and was able to profitably deliver quality products to a devoted consumer base. As our business has continued to grow, our model remains rooted in trust and mutual accountability with our farmers, who are and will remain core to our business.
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In 2014, our current presidentPresident and chief executive officer,Chief Executive Officer Russell Diez-Canseco joined Vital Farms and led the development of our large and scalable network of family farms. In 2015, recognizing the opportunity to elevate our production process and bolster long-term growth and profitability, we began the design process for Egg Central Station, which opened in 2017 in Springfield, Missouri. We meticulously designed Egg Central Station in service of all of our stakeholders by improving on the best practices we observed across numerous world-class facilities. Today, Egg Central Station is capable of packing threesix million eggs per day and has achieved an SQF Excellent rating, the highest level of such certification recognized byfrom the GFSI. In addition, Egg Central Station is the only egg facility, and we are one of only six companies globally to have received the SQFI Select Site certification.
Demand for our high-quality products has enabled us to expand our brand beyond the natural channel and into the mainstream channel through relationships with Albertsons Companies, Inc., or Albertsons, The Kroger Co., or Kroger, Publix Super Markets, Inc., or Publix, Target Corporation, or Target, Walmart Inc., or Walmart, and numerous other national and regional food retailers. As of December 2020,2023, our ethically produced pasture-raised products arewere sold in more than 16,000approximately 24,000 stores nationwide. Over the course of our journey, our founder, Matthew O’Hayer, has continued to inform our strategic vision and remains intimately involved with theour business as the Executive Chairperson of our executive chairman.Board of Directors.
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Our purpose is to improve the lives of people, animals and the planet through food. Our mission is to bring ethically producedethical food to the table. We do thiscarry out our purpose and mission by partnering with family farms that operate within our strictly defined set of ethical food productionfarming practices. We are motivated by the influence we have on rural communities through creating impactful, long-term business opportunities for small family farmers. Moreover, we are driven to stand up for sustainable production practices that have been largely cast aside under the factory farming system. In our view, thisthe factory farming system has been consistently misguided, focused on producing products at lowest cost rather than driving long-term and sustainable benefits for all stakeholders.
Since inception, our values have been rooted in the principles of Conscious Capitalism. We believe managing our business in the best interest of all of our stakeholders will result in a more successful and sustainable enterprise. A key premise of our business model is our consumer-centric approach, which focuses on identifying consumer needs and developing products that address these needs. While remaining committed to ethical decision-making, we have achieved strong financial performance and earned the Certified B Corporation designation, reflecting our role as a contributor to the global cultural shift toward redefining success in business in order to build a more inclusive and sustainable economy. We believe our consumers connect with Vital Farms because they love our products, relate to our values and trust our practices.
Industry Overview
We operate in the large and growing U.S. natural food and beverage industry. Consumer awareness of the negative health, environmental and agricultural impacts of processed food and factory farming standards has resulted in increased consumer demand for ethically produced food. We believe this trend has had a meaningful impact on the growth of the natural food industry, which is increasingly penetrating the broader U.S. food market as mainstream retailers respond to consumer demand. We believe increased demand for natural food and a willingness to pay a premium for brands focused on transparency, sustainability and ethical values will continue to be a catalyst for our growth.
According to SPINS, LLC, or SPINS, data, the U.S. shell egg market accounted for approximately $6.5$9.0 billion in retail sales for the 52 weeks ended December 27, 2020in 2023 and grew at a CAGR of 3%10.3% between 2018December 2020 and December 2020.2023. Our relatively low household penetration of 3.9%7.5%, compared to the shell egg category penetration of approximately 98%96.5%, provides a significant long-term growth opportunity for our business. According to SPINS data, the U.S. pasture-raised retail egg market accounted for approximately $256.0$531.0 million in retail sales for the 52 weeks ended December 27, 2020in 2023 and grew at a CAGR of 35%26.6% between 2018December 2020 and December 2020,2023, while the specialty egg (including pasture-raised, free-range and cage-free) market accounted for approximately $1.3$1.8 billion in retail sales for the 52 weeks ended December 27, 2020in 2023 and grew at a CAGR of 14%11.2% between 2018December 2020 and December 2020. Additionally, we estimate that the U.S. processed egg market as of December 2020 accounted for approximately $3.3 billion in retail sales.2023. According to SPINS data, the U.S. butter market accounted for approximately $4.0$4.8 billion in retail sales for the 52 weeks ended December 27, 2020in 2023 and grew at a CAGR of 10%5.3% between 2018December 2020 and December 2020.2023. We believe the strength of our platform, coupled with significant investments in our crew members and infrastructure, position us to continue to deliver industry-leading growth across new and existing categories.
Our Strengths
Trusted Brand Aligned with Consumer Demands
We believe consumers have grown to trust our brand because of our adherence to our values and a high level of transparency. We have positioned our brand to capitalize on growing consumer interest in natural, clean-label, traceable, ethical, great-tasting and nutritious foods. Growing public awareness of major issues connected to animal farming, including human health, climate change and resource conservation, is closely aligned with our ethical mission. We believe consumers are increasingly focused on the source of their food and are willing to pay a premium for brands that deliver transparency, sustainability and integrity. As a company focused on driving the success of our stakeholders, our brand resonates with consumers who seek to align themselves with companies that share their values. Through our Vital Times newsletter, andutilization of social media presence,outlets and our high-touch consumer engagement marketing campaigns, we cultivate and support our relationship with consumers by communicating our values, building trust and promoting brand loyalty.
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Strategic and Valuable Brand for Retailers
Our historical performance has demonstrated that we are a strategic and valuable partner to retailers. We have innovated and grown into adjacent food categories while reachingreached a broad set of consumers through a variety of retail partners, including Albertsons, Kroger, Publix, Target and Walmart. As of December 2020,2023, we arewere the number one or two egg brand by retail dollar sales for branded eggs with key customers such as Albertsons, Kroger, Sprouts Farmers Market, or Sprouts, Target and Whole Foods. We believe the success of our brand demonstrates that consumers are demanding premium products that meet a higher ethical standard. We have expanded into the mainstream channel while still continuing to command premium prices for our ethically produced products, which sell for as much as three times the price of commodity eggs.products. We believe that our products are more attractive to retail customers because they help generate growth, deliver strong gross profits and drive strong velocities, as represented by the natural channel velocities depicted below.velocities.
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Vital Farms Natural Channel Velocity versus All Other Competitors (1)
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Source: Refrigerated Eggs & Refrigerated Butter - SPINS, LLC, Natural Channel, 52 Weeks Ending December 27, 2020
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Supply Chain Rooted in Commitment to Our Stakeholders
Our ongoing commitment to the social and economic interests of our stakeholders guides our supply chain decisions. We carefully select and partnercollaborate with family farms in the Pasture Belt, the U.S. region where pasture-raised eggs can be produced year-round.the weather is conducive to hens being outside as much as possible. We establish supply contracts that we believe are attractive for all parties, demonstrate our commitment to our network of small family farms through educational programs that transfer critical best practice knowledge and pay farmers competitive prices for high-quality pasture-raised eggs. During fiscal year 2020, we experienced no voluntary attrition for supply contract renewals. We believe our commitment to farmers facilitates more sustainable farm operations and significantly reduces turnover. Our network of small family farms gives us a strategic advantage through a scaled and sustainable supply chain and allows us to go to market with the highest quality pasture-raised premium products.
Map of the Pasture Belt
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Experienced and Passionate Team
We have an experienced and passionate executive management team that we refer to as the “C-crew,” which has approximately 60over 100 years of combined industry experience and includes our presidentPresident and chief executive officer,Chief Executive Officer Russell Diez-Canseco, a seasoned food industry expert with over 1619 years of relevant experience, including at H-E-B, a privately held supermarket chain. Our C-crewleadership team works in partnership with Matthew O’Hayer, our founder and executive chairman,the Executive Chairperson of our Board of Directors, who continues to inform our strategic vision with the entrepreneurial perspective gained through over 40 years of building businesses. We also have a deep bench of talent with strong business and operational experience, and crew members at all levels of our organization who are passionate about addressing the needs of our stakeholders. We have leveraged the experience and passion of our C-crew,leadership team, our founder and executive chairman,Executive Chairperson, and our other crew members to grow net revenue over 234%at a CAGR of 35.3% since the beginning of 2016,2019, enter our second major food category, butter, and build and expand our first shell egg processing facility, Egg Central Station.
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Our Growth Strategies
We believe our investments in our brand, our stakeholders and our infrastructure position us to continue delivering industry-leading growth that outpaces both the natural food industry and the overall food industry.
Compete to Win in Our Current Categories
We continue to compete at the top of our current categories, which helps fuel our continued, profitable growth and we believe there is significant opportunity to further grow volume with existing retail customers by building consumer awareness and demand for our brand. Our products generate stronger velocities and, we believe, greater profitability per unit for our retail customers in the categories in which we compete. By capturing greater shelf space, driving higher product velocities and increasing our average SKU count per retail partner, we believe there is meaningful runway for further growth with existing retail customers. Beyond our existing retail footprint, we believe there are significant opportunities to gain incremental stores from existing retail customers and to add new retail customers. Additionally, we believe there is significant demand for our products in the foodservice channel since we offer versatile ingredients with high menu penetrations across commercial and non-commercial operator segments. We also believe there are significant further long-term opportunities in additional distribution channels, including the convenience, drugstore and club channels. We see considerable opportunity for medium- to long-term growth in this channel by increasing our category market share through sales to values-aligned foodservice operators and their distributors.
Expand Household Penetration through Greater Consumer AwarenessOur Portfolio
We plan to continue seeking out opportunities to expand our product offerings. We believe making strategic bets on larger-scale opportunities will help reinforce our position as an ethical food company. The successes of our core products have confirmed our belief that there is significant demand for ethically produced food products, and our proprietary consumer surveys confirm our belief that there is significant demand for our brand across a wide spectrum of food categories. We are committed to continuing to introduce consumers to our expanding range of product offerings.
Strengthen the Brand
We will compete in the marketplace by continuing to build long-term trusted relationships with our target consumer. Critical to the success of ourthis mission is our ability to share the Vital Farmsour story with a broader audience. ByWe intend to increase our household penetration by educating consumers about our brand, our values and the premium quality of our products, we intend to increase our household penetration.products. Our relatively low household penetration of 3.9%7.5% for our pasture-raised shell eggs, compared to the shell egg category penetration of approximately 98%96.5%, showsdemonstrates that expanding the national presence of our brand offers a significant runway for future growth.
We believe we are well positioned to further increase household penetration of our products given their alignment with consumer trends and approachability with consumers. We intend to increase the number of consumers who buy our products by using digitally integrated media campaigns, social media tools, earned awareness drivers like press outreach and other owned media channels. We believe these efforts will educate consumers on our ethical values and the attractive attributes of our pasture-raised products, generate further demand for our products and ultimately expand our consumer base.
Grow WithinScale a World-Class Organization
We have always believed that our most important competitive advantage is great people, operating as one high-performing team in a strong culture, with the Retail Channel
By leveraging greater consumer awarenessright tools to help us reach our potential, both individually and demand forcollectively. Our strategic and people functions are led by a single leader in order to unify our brand,organization in attracting talent that supports our growth initiatives and our culture. This effort is critical not only to our current success but the direction of our company in the future. As we continue our focus on scaling a world-class organization, we believe this tighter link between where we are going, the processes we will put in place to get there, is significant opportunity to grow volume with existing retail customers. Ourand, most importantly, how we engage, inspire, and develop our crew members will fuel our continued growth.
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Product Overview
We produce products generate stronger velocities and, we believe, greater profitability per unit for our retail customers in the categories in which we compete. By capturing greater shelf space, driving higher product velocities and increasing our SKU count, we believe there is meaningful runway for further growth with existing retail customers. Beyond our existing retail footprint, we believe there is significant opportunity to gain incremental storessourced from existing retail customers as well as to add new retail customers. We also believe there are significant further long-term opportunities in additional distribution channels,animals raised on family farms, including the convenience, drugstore, club, military and international markets.
Expand Footprint across Foodservice
We believe there is significant demand for our products in the foodservice channel. We see significant opportunity for medium- to long-term growth in this channel through sales to foodservice operators supported by joint marketing and advertising. Our brand has a differentiated value proposition with consumers, and we believe consumers are increasingly demanding ethically produced ingredients when they eat outside of the home. We are also working with Acosta Foodservice, a foodservice sales and marketing agency in the consumer-packaged goods industry, to increase our broadline distribution and presence in national and regional restaurant chains. We believe that more consumers will look for our products on menus, particularly with foodservice partners whose values are aligned with our own, and that on-menu branding of our products as ingredients in popular meals and menu items will drive traffic and purchases in the foodservice channel. An example of our recent foodservice growth initiative is our relationship with Tacodeli, which sells breakfast tacos made exclusively with our pasture-raised shell eggs, across 11 restaurant locations and approximately 90 points of distribution, such as coffee shops and farmers’ market stands, across Texas. We have launched similar regional concepts with Moe’s Broadway Bagel, an East Coast-style family-run bagel chain in the Denver/Boulder, Colorado area; Cafe Patachou, a breakfast and lunch restaurant based in the Indianapolis, Indiana area with 5 locations; Roam Artisan Burgers, a fast-casual burger restaurant dedicated to high-quality sourcing in the San Francisco, California area with 6 locations; Homegrown, a sustainability-focused brand in the Seattle, Washington area with 11 locations; and Pura Vida, a fresh all-day concept in the Miami, Florida area with 7 locations . We believe branded foodservice offerings will further drive consumer awareness of our brand and purchase rates of our products in the retail channel.
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Extend Our Product Offering through Innovation
The successes of our core products have confirmed our belief that there is significant demand for pasture-raised and ethically produced food products. We expect to continue to extend our product offerings through innovation in both new and existing categories, including with our launch of pasture-raised egg bites in August 2020. In 2018, we launched the only pasture-raisedbutter, hard-boiled eggs in the U.S. market, and in 2019, we launched both ghee and liquid whole eggs, the latter of which are the only pasture-raised liquid whole eggs in the U.S. market. The success of our product portfolio and our proprietary consumer surveys confirm our belief that there is significant demand for our brand across a wide spectrum of food categories. Within this broader market, we believe the U.S. refrigerated value-added dairy category represents a total addressable market of $34.5 billion and is the closest adjacency and best near-term opportunity for our brand. We have several products in our innovation pipeline that we believe will be successful in these adjacent markets.eggs.
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Motivated by our mission, our success and our customers’ feedback, we continue to innovate and expand our product offerings to address growing consumer demand.
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Innovation
Innovation
The successes of our core products have confirmed our belief that there is significant demand for pasture-raised and ethically produced food products. We expect to continue to extendexpand our product offerings through innovation in both existing and new categories, including with our launch of pasture-raised egg bites in August 2020.categories. We have a dedicated product development team that leverageswill continue to leverage comprehensive consumer insights and trend data to provide innovative solutions and ideas that meet new consumer needs and usage occasions. We also have a proven innovation model that utilizes a trusted network of partners to bring products to market without requiring significant upfront investment. We are committed to building on the success of our recent product launches and continuing to introduce consumers to our expanding range of ethically produced food products.product offerings.
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Marketing
Note: Store count figures as of December 27, 2020.
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Our multi-faceted,multifaceted, consumer-centric marketing strategy has been instrumental in building our brand and driving net revenue. Our marketing strategy is aimed at solidifying our brand’s positioningposition as a leading provider of ethically produced food. We execute on this strategy by advertising through digitally integrated media campaigns, social media toolstools. earned awareness drivers like press outreach and other owned media channels. Our brand’s standout packaging has been a signature communication vehicle since our inception. We maintain a presence across all major social media platforms.
Our brand has grown rapidly into the #1 U.S. pasture-raised, #1 U.S. natural channel and #2 U.S. overall egg brand by retail dollar sales, with an 82%over 85% share of the U.S. pasture-raised retail egg marketsegment for the 52-week53-week period ended December 27, 2020.31, 2023. Our brand awareness is represented by a strong social media following, with approximately 91,000140,000 Instagram followers. Building on prior success, we will continue to invest in the brand through digitally integrated national media campaigns and build customer loyalty through other media formats, including our quirky Vital Times newsletter, now in its tenthtwelfth year of print, which is placed in each egg carton. During the past two years, weWe have circulated over 78more than 150 million copies of our Vital Times newsletter. newsletter since 2021.
Building upon a landscape of shifting consumer preferences, we are focused on reaching new consumers to educate them about our ethically focused value proposition. We work continuously to understand our consumers and leverage those insights to develop impactful communication plans and messaging. We remain focused on deploying our sophisticated marketing capabilities and world-class sales team to ensure that both customers and consumers understand the Vital Farms story.
Our Customers
We market our products throughout the United States, with the majority of our net revenue coming from our pasture-raisedshell egg products. As of December 2020,2023, we currently distribute through third parties and direct to retailers to reach more than 16,000approximately 24,000 stores. With significant expansion in recent years, our retail sales are evenly distributed between the natural channel and mainstream channel. Because of our brand equity, loyal consumer base and expanding line of high-quality products, we believe there are attractive growth opportunities across these channels, in addition to a sizable opportunity in the foodservice channel in the medium- to long-term.channel. We believe there are also incremental growth opportunities in additional distribution channels, including the convenience, drugstore, club, military and international markets, which we may access along with retail growth opportunities to enable us to continue our net revenue growth.
Natural Channel
Natural channel retailers, including Whole Foods and Sprouts, represented approximately 52%42%, 51%39% and 47%39% of our retail dollar sales in fiscal years 2018, 20192021, 2022 and 2020,2023, respectively.
Mainstream Channel
Widespread consumer demand for high-quality and traceable foods has driven our expansion into the mainstream channel with national retailers, including Albertsons, Kroger, Publix, Target and Walmart. We began selling eggs in select Kroger divisions in 2014. Since that time, Kroger has grown to become our second largest customer, offering our products in over 2,100 stores. We also continue to expand our relationships with Albertsons, Publix, Target and Walmart. The mainstream channel represented approximately 48%58%, 49%61% and 53%61% of our retail dollar sales in fiscal years 2018, 20192021, 2022 and 2020,2023, respectively.
Foodservice Channel
In addition to our primary natural and mainstream channels, we have a presence insell shell and value-added eggs into the foodservice through the sale of shell eggs to select accounts.channel, which includes commercial and non-commercial foodservice operators. We expect our foodservice business to continue to grow in the medium- to long-term through expansive newour two-pronged sales approach. We anticipate growing our foodservice distribution penetration through our relationships, for example, with Dot Foods, the largest redistribution company in the country, and broad-line distributors, as well as direct accounts. including Sysco, US Foods, Performance Food Group, Gordon Food Service and Ben E. Keith. By deepening our distribution penetration, we are becoming more accessible to foodservice operators across the country. We anticipate more growth with values-aligned regional and national restaurants that want to innovate their menus with our quality, ethically produced eggs.
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In fiscal years 2018, 20192021, 2022 and 2020,2023, the foodservice channel accounted for approximately 2%1%, 2%3% and 1%6%, respectively, of our net revenue.
Our established foodservice relationships help to extend our marketing efforts through unique co-branding opportunities.opportunities, which amplify our consumer awareness and allow us to reach new households. We plan towill continue to capitalize on these opportunitiesco-marketing tactics as we work to introducebring new products through the foodservice channel.operators into our customer base.
OneA multi-unit example offrom our successful foodservice programsprogram is Tacodeli. InTrue Food Kitchen, an award-winning restaurant brand and a pioneer of wellness-driven dining with over 40 locations across the springcountry that shares our values for improving the lives of 2019, Tacodelipeople, animals and the planet. Our collaboration is a recipe for success to serve nourishing food that people know they can trust. At the start of 2023, True Food Kitchen committed to exclusively using Vital Farmsour pasture-raised eggs for its menu and calling out our brand in its marketing channels.
We have launched similar relationships with national foodservice operators, including Hopdoddy Burger Bar and Chicken N Pickles. Additionally, we have regional chain collaborations across the country. Several examples include:
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Vital Farms and Tacodeli Co-Branding
Our products can also currently be found in micro-marketsover 70 retail partners in the Austin, Texas officesNew York City area;
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Supply Chain
We have strategically designed our supply chain to ensure high-productionhigh production standards and optimal year-round operation. We are motivated by the positive impact we have on rural communities and enjoy a strong relationship and reputation with our network of more than 200 small300 family farms. In order to capitalize on this strong supply network, we built a state-of-the-art shell egg processing facility, Egg Central Station in Springfield, Missouri. Following its expansion in April 2022, Egg Central Station is approximately 82,000153,000 square feet and utilizes highly automated equipment to grade and package our shell egg products. The design of our facility includes investments in support of each of our stakeholders, from our crew members, (daylighting, climate control, slip resistant floors in the egg grading room), to the community and environment (consulting with the community before we built the facility, restoring native vegetation on the property, best-in-class storm water management),environment, to our customers and consumers (food safety and maintenance investments far beyond regulatory requirements). Today, Egg Central Station is capable of packing three million eggs per day and has achieved an SQF Excellent rating, the highest level of such certification recognized by GFSI. In addition, Egg Central Station is the only egg facility, and we are one of only six companies globally to have received the SQFI Select Site certification, indicating that the site has voluntarily elected to undergo annual unannounced recertification audits by SQFI, the organization responsible for administering a global food safety and quality program known as the SQF Program. To facilitate further growth, we have established a plan to double the capacity of Egg Central Station through a mirror-image expansion adjacent to the existing location. This expansion will enable us to double our capacity to meet growing demand. We began construction in November 2019 and expect the expansion to be operational in early 2022.consumers.
Our eggs are kept in on-farm coolers using equipment that meets our precise equipment specified by us.standards. The eggs are then collected on a regular basis by a third-party freight carrier and placed in cold storage until packing for shipment to customers. Each of our butter, ghee, hard-boiled eggs,egg and liquid whole egg products is produced by a co-manufacturer (with eggs from our network of family farms used for our hard-boiled egg and liquid whole egg bites products have a dedicated co-manufacturing partner.products). To support the growth of our business, we are focused on expanding existing co-manufacturing relationships where appropriate and establishing new co-manufacturing relationships.
Our egg packaging consists primarily of corrugated boxes and egg cartons, and we use a limited amount of recycled plastic packaging.cartons. Our corrugated boxes are sourced from a supplier in Springfield, Missouri, and our egg cartons are substantially sourced from a single-source supplier from Missouri, Canada and Europe from a sole-source supplier and our recycled plastic packaging is sourced from Mexico from a single-source supplier.Europe. Our other products are packaged in jars, bottles, film and cartons that are primarily managed by our co-manufacturing partners.co-manufacturers. In every case, we strive to find the most sustainable and environmentally considered packaging, shipping materials and inks.
Competition
We operate in a highly competitive environment across each of our product categories. We have numerous competitors of varying sizes, including producers of private-label products as well as producers of other branded egg and butter products that compete for trade merchandising support and consumer dollars. We compete with large egg companies such as Cal-Maine, Inc. and large international food companies such as Ornua Co-operative Limited (Kerrygold). We also compete directly with local and regional egg and dairy companies as well as private-label specialty egg products processed by other egg and dairy companies. In our market, competition is based on, among other things, product quality and taste, brand recognition and loyalty, product variety, product packaging and package design, shelf space, reputation, price, advertising, promotion and nutritional claims.
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ShellAcross the industry, eggs may be sourced from hens that are caged, cage free, free rangecage-free, free-range or pasture raised.pasture-raised. Large egg companies offer commodity eggs sourced from caged hens, and in an attempt to address growing consumer demand for ethically produced and higher quality eggs, they have also grown their cage-free, free-range and free-rangepasture-raised offerings.
Although we operate in competitive industries, we believe that we have a strong and sustainable competitive advantage based on an ongoing process of values-driven decisions, our fundamental commitment to producing food ethically and humanely,minded food, the trust we have developed in our brand and our ability to provide reliable supply to our distribution partners and customers. We built and operate what we believe is one of the largest sourcing and distribution networks of family farms with strong growth potential. By focusing on the interests of each of our stakeholders, we believe we have created a model that attracts the best family farm partners, produces the highest quality productproducts and creates benefits for all parties. We believe our experience in building this network will provide significant scale and execution advantages as we continue to expand.
Government Regulation
We are subject to laws and regulations administered by various federal, state and local government agencies in the United States, such as the U.S. Department of Agriculture, or USDA; the Food and Drug Administration, or FDA; the Federal Trade Commission, or FTC; the Environmental Protection Agency, or EPA; and the Occupational Safety and Health Administration, or OSHA. These laws and regulations apply to the processing, packaging, distribution, sale, marketing, labeling, quality, safety, importation and transportation of our products, as well as our occupational safety and health practices.
Under various federal statutes and implementing regulations, these agencies, among other things, prescribe the requirements and establish the standards for quality and safety and regulate our products and the manufacturing, labeling, marketing, promotion and advertising thereof. With respect to eggs in particular, the FDA and the USDA split jurisdiction depending on the type of product involved. While the FDA has primary responsibility for the regulation of shell eggs, the USDA has primary responsibility for the regulation of dried, frozen or liquid eggs and other “egg products,” subject to certain exceptions. In addition, with respect to meat products, the USDA has primary jurisdiction for the regulation of products made wholly or in part from cattle, sheep, swine, or goats, such as certain of our egg bite products which contain bacon or ham, subject to certain exceptions.
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Among other things, the facilities in which our products are manufactured or processed must register with the FDA and/or the USDA, comply with current good manufacturing practices, or cGMPs, and comply with a range of food safety and labeling requirements established by the Federal Food, Drug, and Cosmetic Act, as amended by the Food Safety Modernization Act of 2011, or FSMA, the Egg Products Inspection Act, the Federal Meat Inspection Act, the Organic Foods Production Act and the Agricultural Marketing Act of 1946, among other laws implemented by the FDA, the USDA and other regulators. The FDA and the USDA have the authority to inspect these facilities depending on the type of product involved;involved. For example, Egg Central Station, our facility in Springfield, Missouri, has been subject to periodic inspections by the USDA to evaluate compliance with certain applicable requirements, and the FDA may likewise inspect the facility. Additionally, we are subject to requirements under FSMA’s foreign supplier verification program and import tariffs, bond and other requirements by U.S. Customs and Border Protection for supply for our butter products, which we began importing from Ireland in late 2023. The FDA and the USDA also require that certain nutrition and product information appear on our product labels and, more generally, that our labels and labeling be truthful and non-misleading. Similarly, the FTC requires that our marketing and advertising be truthful, non-misleading and not deceptive to consumers. We are also restricted from making certain types of claims about our products, including nutrient content claims, health claims, organic claims and claims regarding the effects of our products on any structure or function of the body, whether express or implied, unless we satisfy certain regulatory requirements. We also participate in the USDA’s voluntary egg grading program, which requires compliance with additional labeling and facility requirements.
In addition, our suppliers are subject to numerous regulatory requirements. For example, the farmers who produce our shell eggs may be subject to requirements implemented by the FDA pertaining to pest control, salmonella enteritidis prevention and other requirements.
We are also subject to state and local food safety regulation, including registration and licensing requirements for our facilities, enforcement of standards for our products and facilities by state and local health agencies, and regulation of our trade practices in connection with selling our products.
We are also subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our co-manufacturers, distributors and suppliers, are subject to various laws and regulations relating to environmental protection and worker health and safety matters.
Certified B Corporation
While not required by Delaware law or the terms of our certificate of incorporation, we have elected to have our social and environmental performance, accountability and transparency assessed against the proprietary criteria established by B Lab, an independent non-profit organization. As a result of this assessment, we were designated as a Certified B Corporation in December 2015.
In order to be designated as a Certified B Corporation, companies are required to take a comprehensive and objective assessment of their positive impact on society and the environment. The assessment evaluates how a company’s operations and business model impact its workers, customers, suppliers, community and the environment using a 200-point scale. While the assessment varies depending on a company’s size (number of employees), sector and location, representative indicators in the assessment include payment above a living wage, employee benefits, stakeholder engagement, supporting underserved suppliers and environmental benefits from a company’s products or services. After completing the assessment, B Lab will verify the company’s score to determine if it meets the 80-point minimum bar for certification. The review process includes a phone review, a random selection of indicators for verifying documentation and a random selection of company locations for onsite reviews, including employee interviews and facility tours. Once certified, every Certified B Corporation must make its assessment score transparent on B Lab’s website.
Designation and continued certification as a Certified B Corporation is at the sole discretion of B Lab. To maintain our certification, we are required to update our assessment and verify our updated score with B Lab every three years. We were most recently recertified in January 2022. Our Certified B Corporation designation remains in good standing.
Public Benefit Corporation Status
In connection with our Certified B Corporation status and as a demonstration of our long-term commitment to our mission to bring ethical food to the table, we elected in October 2017 to be treated as a public benefit corporation under Delaware law.
Under Delaware law, a public benefit corporation is required to identify in its certificate of incorporation the public benefit or benefits it will promote, and its directors have a duty to manage the affairs of the corporation in a manner that balances the pecuniary interests of the corporation’s stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or benefits identified in the certificate of incorporation. Public benefit corporations organized in Delaware are also required to assess their benefit performance internally and to disclose to stockholders at least biennially a report detailing their success in meeting their benefit objectives.
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As provided in our amended and restated certificate of incorporation, the public benefits that we promote, and pursuant to which we manage our company, are: (i) bringing ethically produced food to the table; (ii) bringing joy to our customers through products and services; (iii) allowing crew members to thrive in an empowering, fun environment; (iv) fostering lasting partnerships with our farms and suppliers; (v) forging an enduring profitable business; and (vi) being stewards of our animals, land, air and water, and being supportive of our community.
Our Commitment to Impact
At Vital Farms, we are dedicated to creating long-term benefits through sustainable practices for our stockholders, crew members, farmers and suppliers, customers and consumers, communities and the environment. We promote sustainable practices and place an emphasis on being conscious environmental stewards. Our commitment to bringing ethical food to the table has helped us to integrate sustainable practices throughout our business. Our dedication to our stakeholders inspires us to continuously raise our standards and practices.
In 2023, we continued to make progress toward the short- and medium-term sustainability goals we first identified in December 2022. Such goals include reducing the ecological impact of our business, driving inclusion within our crew, fostering governance accountability and mitigating climate-related risks.
The Nominating and Corporate Governance Committee of our Board of Directors has been tasked with oversight of our strategy, initiatives, policies, practices and reporting relating to environmental sustainability, climate-related risks and opportunities, human capital management, social and ethical issues and our obligations as a Delaware public benefit corporation. This committee receives quarterly updates from our Head of Impact and reports out to the Board of Directors regarding its oversight responsibilities.
We are committed to building a people-first culture that embodies our values and understands the unique needs of our crew members. We will continue to hold ourselves accountable to the important role we play in helping transition the world around us to a more diverse, equitable and inclusive place through initiatives to foster crew learning, inclusion, and belonging that are grounded in our purposes to improve the lives of people, animals, and the planet through food. See the section titled “—Culture and Human Capital” below for further information about our commitment to a diverse crew and an inclusive work environment.
We acknowledge the potential threat that climate change may have on our business and are committed to taking action to mitigate our emissions and overall environmental risk. In 2021, we began to track and analyze our greenhouse gas emissions to understand and mitigate our carbon footprint, as well as water risks relative to our business and operations. We conduct an annual inventory of our greenhouse gas emissions and assessment of our climate-related risks, publishing disclosures under the Task Force on Climate-Related Financial Disclosure framework.
We believe in providing transparent disclosure regarding our commitment to impact and communicating our progress with stakeholders. We released our most recent Impact Report in March 2023 and plan to continue to provide regular updates as to our progress toward our sustainability goals. To learn more about these efforts and our relevant policies, please visit our investor relations website: investors.vitalfarms.com. Information contained on, or that can be accessed through, our website (including information in our Impact Report) is not incorporated by reference into this Annual Report or any of our other filings with the SEC. We welcome our stakeholders’ feedback and can be contacted at investors@vitalfarms.com.
Seasonality
Demand for shell eggs and butter fluctuates in response to seasonal factors. Demand tends to increase with the start of the school year, is highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter, and is lowest during the summer months. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.
Trademarks and Other Intellectual Property
We own trademarks and other proprietary rights that are important to our business, including our principal trademark, Vital Farms. All our key trademarks are registered with the U.S. Patent and Trademark Office. Our trademarks are valuable assets that reinforce the distinctiveness of our brand to our consumers. We believe the protection of our trademarks, copyrights and domain names are important to our success. We aggressively protect our intellectual property rights by relying on trademark and copyright.
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Culture and Human Capital
Our Conscious Commitment
We are committed to prioritizing long-term benefits to each of our stakeholders, including our talented and passionate crew members, our employees, who are invaluable to our business. Prioritizing Conscious Capitalism, our business decisions consider the impact on all our stakeholders, including our crew members, and we believe this helps us to create a more sustainable and successful business.
Vital Farms is committed to fostering an environment that values collaboration, trust, and respect. Furthermore, we endeavor to provide our crew members with the resources they need to be successful through culture-enhancing programs and professional development opportunities.
We believe in cultivating meaningful opportunities, from supporting the economic well-being of the family farmers in our network to fostering a collaborative and inspiring environment for our crew members across the country.
Crew Recruitment, Development and Retention
Through a thoughtful and thorough selection process, we bring crew members into the business who we believe are aligned with our values and culture. We have structured our crew member orientation and onboarding processes to help foster continued alignment, including through in-person visits to our Austin headquarters and Egg Central Station processing facility, as well as fireside chats with functional leadership and substantive introductions to each business unit. The Vital Farms crew member journey, including recruiting, onboarding and each step of the career experience, is guided by the philosophy of supporting a people-first culture. We believe in enabling our crew members to grow both professionally and personally. We cultivate leaders across every level of the business and are committed to building a culture that embodies our values and understands the unique needs of our crew members. This commitment is evidenced by our investment in two new programs in 2023. The first is our new learning management system, which houses custom internal material, hands-on learning and world-class content from top universities and companies focusing on both functional and interpersonal skills, which all crew members can access. The second is a six-month blended learning program we designed and launched for all people managers across the company. Incorporating in-person, virtual and individual learning activities, this training program focuses on building strong leadership foundations and fostered strong cross-functional connection and development across our Egg Central Station and remote people leadership teams.
We believe in a culture of transparency and ownership. We communicate regularly with our crew members across departments and position levels, including through monthly all-company meetings (which are in-person for our Egg Central Station crew members) with updates and messaging from our senior leadership team, and virtual sessions for our remote teams that include executive question-and-answer sessions. In addition, we have enhanced our internal communications programs to drive engagement by adding two inclusive platforms: an expanded company intranet and crew member newsletter. These frequent touchpoints are focused on helping crew members feel connected to our mission and empowered to make informed decisions that drive our business forward.
In 2021, we transitioned to a remote workforce for our crew members outside Egg Central Station to provide our crew members greater flexibility. We continue to believe this transition has enabled us to attract top talent across the country and has had a positive impact on crew member retention and engagement.
We plan to continue to add programs and thoughtful engagement opportunities for all crew members in service of fostering an environment where crew members can do their best work and help achieve our collective goals. We are doing this by creating a performance and development ecosystem that inspires a growth mindset and unlocks crew member potential. Through creating clarity on how to be successful at Vital Farms and providing opportunities to build relevant job skills, we believe we are empowering our crew members to own their respective career journeys.
Workplace Health and Safety
We continue to prioritize the safety and well-being of our crew and have a number of features to ensure our crew members feel safe, engaged and valued. At Egg Central Station, these features include continued identification of opportunities to automate more physically challenging processes, offering subsidies to purchase slip-resistant and safety toe shoes and partnering with a local occupational health organization for regular assessment and training of Egg Central Station crew members on ergonomics. Additionally, we continue to follow protocols and take preventative measures to protect the health and safety of our crew members, customers, and communities.
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What We Value
We have defined our company values as (1) Be Humble, (2) Act Like an Owner, (3) Lead with a Growth Mindset, (4) Practice Empathy and (5) Compete to Win. We strive to create a culture that reflects these important pillars of our business.
Our Crew Members
As of December 31, 2023, we had approximately 447 full-time crew members, including 251 in operations, 59 in sales and marketing, 26 in finance and 111 in general and administrative functions, all of whom are located in the United States. Of our full-time crew members, one is a contract worker. As of December 31, 2023, approximately 41% of our full-time crew members were women and approximately 23% were members of underrepresented minority groups. None of our crew members is represented by a labor union. We have never experienced a labor-related work stoppage, and we consider our relations with our crew members to be good.
Our Corporate Information
We were founded in 2007, originally incorporated in Texas in July 2009 and reincorporated in Delaware in June 2013, and we became a public benefit corporation in Delaware in October 2017. Our principal executive offices are located at 3601 South Congress Avenue, Suite C100, Austin, Texas 78704, and our telephone number is (877) 455-3063. Our website address is www.vitalfarms.com.www.vitalfarms.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report or any of our other filings with the Securities and Exchange Commission, or SEC. We make available on our website, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
Certified B Corporation
While not required by Delaware law or the terms of our certificate of incorporation, we have elected to have our social and environmental performance, accountability and transparency assessed against the proprietary criteria established by B Lab, an independent non-profit organization. As a result of this assessment, in December 2015, we were designated as a Certified B Corporation.
In order to be designated as a Certified B Corporation, companies are required to take a comprehensive and objective assessment of their positive impact on society and the environment. The assessment evaluates how a company’s operations and business model impacts its workers, customers, suppliers, community and the environment using a 200-point scale. While the assessment varies depending on a company’s size (number of employees), sector and location, representative indicators in the assessment include payment above a living wage, employee benefits, stakeholder engagement, supporting underserved suppliers and environmental benefits from a company’s products or services. After completing the assessment, B Lab will verify the company’s score to determine if it meets the 80-point minimum bar for certification. The review process includes a phone review, a random selection of indicators for verifying documentation and a random selection of company locations for onsite reviews, including employee interviews and facility tours. Once certified, every Certified B Corporation must make its assessment score transparent on B Lab’s website.
Designation as a Certified B Corporation and continued certification is at the sole discretion of B Lab. To maintain our certification, we are required to update our assessment and verify our updated score with B Lab every three years. We were most recently recertified in February 2018 and are in the process of recertification with B Lab. We were randomly selected for an onsite review, which is expected to occur in the second quarter of fiscal year 2021. Our Certified B Corporation designation remains in good standing while we conduct the recertification process.
Public Benefit Corporation Status
In connection with our Certified B Corporation status and as a demonstration of our long-term commitment to our mission to bring ethically produced food to the table by coordinating a network of family farms to operate with a well-defined set of organic agricultural practices that includes the humane treatment of farm animals as a central tenet, we elected in October 2017 to be treated as a public benefit corporation under Delaware law.
Under Delaware law, a public benefit corporation is required to identify in its certificate of incorporation the public benefit or benefits it will promote and its directors have a duty to manage the affairs of the corporation in a manner that balances the pecuniary interests of the corporation’s stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in the public benefit corporation’s certificate of incorporation. Public benefit corporations organized in Delaware are also required to assess their benefit performance internally and to disclose to stockholders at least biennially a report detailing their success in meeting their benefit objectives.
As provided in our certificate of incorporation, the public benefits that we promote, and pursuant to which we manage our company, are: (i) bringing ethically produced food to the table; (ii) bringing joy to our customers through products and services; (iii) allowing crew members to thrive in an empowering, fun environment; (iv) fostering lasting partnerships with our farms and suppliers; (v) forging an enduring profitable business; and (vi) being stewards of our animals, land, air and water, and being supportive of our community.
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Demand for shell eggs fluctuates in response to seasonal factors. Shell egg demand tends to increase with the start of the school year, is highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter, and is lowest during the summer months. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.
Trademarks and Other Intellectual Property
We own trademarks and other proprietary rights that are important to our business, including our principal trademark, Vital Farms. All of our trademarks are registered with the U.S. Patent and Trademark Office. Our trademarks are valuable assets that reinforce the distinctiveness of our brand to our consumers. We believe the protection of our trademarks, copyrights and domain names are important to our success. We aggressively protect our intellectual property rights by relying on trademark and copyright.
Culture and Human Capital
Our Conscious Commitment
Our commitment to prioritizing the long-term benefits of each of our stakeholders includes our talented and passionate crew members, employees who are invaluable to our business. Following the Conscious Capitalism model, our business decisions consider the impact on all of our stakeholders, which we believe helps us to deliver a more sustainable and successful business.
Vital Farms is committed to creating and maintaining an environment that fosters collaboration, trust, and respect. Furthermore, we endeavor to provide our crew members with the resources they need to be successful, along with culture-enhancing programs and professional development opportunities.
Life at Vital Farms
At Vital Farms, we believe in cultivating meaningful opportunities, from supporting economic well-being for small family farmers to fostering a collaborative and inspiring environment for our crew members across the country.
Through a thoughtful and thorough screening process, we bring crew members into the business who we believe are aligned to our values and culture. For the fiscal year ended December 27, 2020, we have received 13,733 employment applications and hired 113 new crew members. Between February 14 and December 27, 2020, we surveyed new hires within their first week of employment to gather feedback on their orientation experience, and 94% of those surveyed indicated that they had a good orientation experience. The Vital Farms’ crew member journey, including recruiting, onboarding and each step of the career experience, is guided by the philosophy of caring for our crew.
We believe in a culture of transparency and ownership, in which we communicate regularly to our crew members across departments and position levels through weekly team huddles at Egg Central Station, monthly all-company meetings and executive question and answer sessions. These frequent touchpoints are focused on helping crew members feel connected to our mission and empowered to make informed decisions that drive our business forward.
What We Value
We have defined our company values as (1) Be Humble, (2) Act Like an Owner, (3) Lead with a Growth Mindset and (4) Practice Empathy. We strive to create a culture that reflects these important pillars of our business.www.sec.gov.
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We are Humble: We recognize that we win and lose as a team, and we leave our egos at the door. We orient crew members towards common priorities by communicating priorities throughout the organization. Additionally, each quarter, crew members and their managers discuss professional development and set individual goals. We hold ourselves accountable to business objectives and know that we can all improve through continuous feedback.
We Act Like Owners: We know our crew plays a critical role in our success and want them to have a stake in the outcome that they help create. We provide all crew members generous benefits in terms of competitive compensation, including hourly pay that is at least 25% above the living wage for an individual without children in the markets in which we operate (and at least 48% above minimum wage in Springfield, Missouri, for crew at Egg Central Station), paid parental leave, retirement contributions, health insurance and complementary Vital Farms products.
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We Practice Empathy: We know that we get to better answers when we incorporate different perspectives and experiences into our work. We believe a diverse, equitable and inclusive crew is crucial to our long-term success as a business and a priority for us as our values remain rooted in Conscious Capitalism. As part of this commitment, in September 2020, we began a partnership with the National Diversity Council, a national non-profit organization committed to fostering an environment for organizations to grow in their knowledge of diversity and their ability to practice empathy for others. We understand the importance of this work to our crew and plan to keep them informed of and engaged in this work in the months ahead.
Our Crew Members
As of December 27, 2020, we had approximately 215 full-time crew members, including 147 in operations, 33 in sales and marketing, 15 in finance and 20 in general and administrative functions, all of whom are located in the United States. Of our full-time crew members, four are contract workers. None of our crew members is represented by a labor union. We have never experienced a labor-related work stoppage, and we consider our relations with our crew members to be good.
Our operations and financial results are subject to various risks and uncertainties including those described below.uncertainties. The following is a description of the known factors that may materially affect our business, results of operations or financial condition. You should carefully consider the following risk factors, as well as the other information in this Annual Report. If any of the following risks actually occurs, our business, results of operations and financial condition could be adversely affected. In this case, the trading price of our common stock would likely decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may adversely affect our business, results of operations and financial condition.
Summary of Selected Risks Related toAssociated with Our GrowthBusiness
Our business faces significant risks and Capital Requirementsuncertainties. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected. These risks include, among others, the following:
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Risks Related to Our Growth and Capital Requirements
Our recent, rapid growth may not be indicative of our future growth, and if we continue to grow rapidly, we may not be able to effectively manage our growth or evaluate our future prospects. If we fail to effectively manage our growth or evaluate our future prospects, our business could be adversely affected.
We have grown rapidly since inception and anticipate further growth. For example, our net revenue increased from $106.7$260.9 million in fiscal 20182021 to $140.7$362.1 million in fiscal 20192022 to $214.3$471.9 million in fiscal 2020.2023. This growth has placed significant demands on our management, financial, operational, technological and other resources. The anticipatedcontinued growth and expansion of our business depends on a number of factors, including our ability to:
increase awareness of our brand and successfully compete with other companies;
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expand distribution to new points of sales with new and existing customers;
continue to innovate and introduce new products;
expand our supplier, co-manufacturing, co-packing, cold storage, processing and distribution capacities; and
invest in and effectively implement information technology systems and related improvements to our processes and procedures; and
SuchThe growth and expansion of our business has placed, and will continue to place, significant demands on our management and operations teams and will require significant additional resources, financial and otherwise, to meet our needs, which may not be available in a cost-effective manner or at all. We expect to continue to expend substantial resources on:
on our current and future processing facilities;
facilities, our sales and marketing efforts, to increase brand awareness, engage our existing and prospective customers, and drive sales of our products;
product innovation and development;development and
general administration including increased finance, legal and accounting expenses associated with being a public company.
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These investments may not result in the continued growth of our business. Even if these investments do result in the growth of our business, if we do not effectively manage our growth, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, any of which could adversely affect our business, financial condition and results of operations.
We have incurred net losses in the past and we may not be able to maintain or increase our profitability in the future.
For fiscal 2018, fiscal 2019 and fiscal 2020, we generated net income of $5.6 million, $3.3 million and $9.0 million, respectively. However, we have experienced net losses in prior years, including a net loss of $2.1 million in fiscal 2017. Our ability to maintain or increase our profitability is subject to various factors, many of which are beyond our control. As we continue to expand our operations, we anticipate that our operating expenses and capital expenditures will increase substantially in the foreseeable future as we continue to invest to increase our household penetration, customer base, supplier network, marketing channels and product portfolio, expand and enhance our processing, manufacturing and distribution facilities, as needed, and hire additional crew members. Our ongoing expansion efforts may prove more expensive than we anticipate (including as a result of inflation, increases in equipment prices, which may be due to actualinput costs or threatened disruptions in our equipment supply chain relating to public health pandemics, such as COVID-19, trade wars, geopolitical tensions, or other factors), and we may not succeed in increasing our net revenue and margins sufficiently to offset the anticipated higher expenses. We have incurred significant expenses in connection with investing in our egg processing facility,capacity, our co-manufacturing and co-packing relationships, and obtaining and storing raw materials, and we will continue to incur significant expenses in developing our innovative products and marketing the products we offer.products. In addition, many of our expenses, including the costs associated with our existing and any future processing and manufacturing facilities, aremay be fixed. We also expect to continue to incur significant additional legal, accounting and other expenses as a public company that we did not incurgrow and mature as a privatepublic company. If we fail to continue to grow our revenue at a greater rate than our costs and expenses, we may be unable to maintain or increase our profitability and may incur losses in the future.
Sales of shell eggs constitute the vast majority of our net revenue, and a reduction in these sales would have an adverse effect on our financial condition.
Shell eggs accounted for approximately 92% of our net revenue in fiscal 2021, 94% of our net revenue in fiscal 2022 and 95% of our net revenue in fiscal 2023. Shell eggs are our flagship product and have been the focal point of our sales and marketing efforts, and we believe that sales of shell eggs will continue to constitute a significant portion of our net revenue, net income and cash flow for the foreseeable future. We cannot be certain that we will be able to continue to expand sales, processing and distribution of shell eggs, or that consumer and customer demand for our other existing and future products will expand to allow such products to represent a larger percentage of our revenue than they do currently. Accordingly, any factor adversely affecting sales of our shell eggs (including consumers’ election to purchase lower-priced private-label or other economy brands during times of economic uncertainty) could have only recently expandedan adverse effect on our product offerings beyond pasture-raised eggs, which makes it difficult to forecast our futurebusiness, financial condition and results of operations.
We have only recently expanded our product offerings beyond pasture-raised eggs. As a result of our limited experience managing multiple product lines, our ability to accurately forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing demand for our products, increasing competition, a decrease in the growth of our overall market, or our failure, for any reason, to continue to take advantage of growth opportunities. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.19
Failure to introduce successful new products, successfully enter into new product categories or successfully pursue growth by other means may adversely affect our ability to continue to grow.
A keyOne element of our growth strategy depends on our ability to developinvolves the development and marketmarketing of new products that meet our standards for quality and appeal to consumer preferences. The success of our innovation and product development efforts is affected by our ability to anticipate changes in consumer preferences, the technical capability of our innovation staffcrew members in developing and testing product prototypes, our ability to comply with applicable governmental regulations, and the success of our management, and sales and marketing teams in introducing and marketing new products.products, including through current and new product categories. There can be no assurance that we will successfully develop and market new products that appeal to consumers. For example, prior to our launch of egg bitesor successfully introduce products in August 2020, it took us longer than expected to finalize the packaging of this new product line, which impacted the timing of our product launch at certain retailers. Any failure to develop, market and launch future products may lead to a decrease in our growth, sales and profitability.
Additionally, thecategories. The development and introduction of new products requires substantial marketing expenditures, which we may be unable to recoup if the new products do not gain widespread market acceptance. If we are unsuccessful in meeting our objectives with respect tointroduce new or improved products that ultimately do not meet objectives for such products, it could impact our business could be harmed.
We may require additional financing to achieve our goals,growth, sales and aprofitability. Any failure to obtain this necessary capital when needed on acceptable terms,successfully develop, market and launch future products or at all,successfully enter into new product categories may forcelead to decreased growth, sales and profitability.
Further risks are presented if we elect to pursue continued growth or enter new product categories by means other than new product introductions, including by acquisitions or investments in business or technologies that we believe could offer growth opportunities. The pursuit of such opportunities may divert the attention of management. Furthermore, it may cause us to delay, limit, reduceincur various costs and expenses in identifying, investigating and pursuing such transactions, regardless of whether such opportunities are realized. Such acquisitions, transactions or terminate our product manufacturing and development, and other operations.
We have funded our operations since inception primarily through equity financings and sales of our products. We expect to expend significant resources expanding Egg Central Station. We believe that we will continue to expend substantial resources for the foreseeable future as we expand into additional markets weinvestments may choose to pursue. These expenditures are expected to include working capital, costs associated with research and development, manufacturing and supply, as well as marketing and selling existing and new products. In addition, other unanticipated costs may arise.
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We expect that our existing cash will be sufficient to fund our planned operating expenses, capital expenditure requirements and debt service payments through at least the next 12 months. However, our operating plan may change because of factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financings mayalso result in dilution to stockholders, impositionpotentially dilutive equity issuances, the incurrence of debt covenants and repayment obligations, or other restrictions that maycontingent liabilities or challenges with integration, any of which could adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.business, financial condition and results of operations.
The estimates ofWe estimate market opportunity and forecasts offorecast market growth included in this Annual Reportthat may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
MarketOur estimates of market opportunity estimates and growth forecasts included in this Annual Report and elsewhere, including thosein connection with the long-term financial goals we have generated ourselves,announced in 2023, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, particularly in light of the ongoing COVID-19 pandemic and the related economic impact.uncertainties. The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of customers covered by our market opportunity estimates will purchase our products at all or generate any particular level of revenue for us. Any expansion in our market depends on a number of factors, including the cost and perceived value associated with our productproducts and those of our competitors. Even if the market in which we compete meets the size estimates and growth forecast, our business could fail to grow at the rate we anticipate, if at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, theour forecasts of market growth included herein should not be taken as indicative of our future growth.
Changes affectingWe may require additional financing to achieve our goals, and the availability of the London Interbank Overnight Rate,failure to obtain this necessary capital when needed on acceptable terms, or LIBOR,at all, may force us to delay, limit, reduce or terminate our product manufacturing and development, and other operations.
We have consequencesfunded our operations since inception primarily through equity financings, draws on us that cannot yet reasonably be predicted.
Any amounts borrowed under our Credit Facility and sales of our products. We have incurred and expect to continue to incur significant expenses related to the expansion of our processing capacity. We believe that we will continue to expend substantial resources for the foreseeable future as we consider additional markets we may choose to pursue and other growth opportunities.
We expect that our existing cash, cash equivalents and marketable securities, together with cash provided by our operating activities and available borrowings under our existing credit facility with PNC Bank, National Association, or the Credit Facility, will be sufficient to fund our planned operating expenses and capital expenditure requirements through at least the next 12 months. However, our operating plan may change because of factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources. We may also seek financing in connection with potential new product introductions or acquisitions or investments in businesses or technologies that we believe could offer growth opportunities. Such financings may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
Our ability to access additional capital may further be affected by adverse or uncertain economic conditions. Weakness and volatility in the capital markets and the economy in general could make it more difficult to access the capital markets and could increase our cost of borrowing.
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The agreements governing our Credit Facility require us to meet certain covenants, which could restrict our operational and financial flexibility.
The Credit Facility provides for a revolving line of credit with a maximum borrowing capacity of $20.0 million. The Credit Facility contains certain restrictive covenants, in each case subject to interest rates based on LIBOR.certain exceptions. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intendsrestrictive covenants in the Credit Facility limit our ability to stop one week and two month U.S. Dollar LIBOR rates after 2021 with remaining U.S. Dollar LIBOR rates ceasing to be published on June 30, 2023. In the United States, the Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate,incur or SOFR,guarantee additional indebtedness, incur liens, enter into fundamental changes such as an alternative to LIBOR. It is not presently known whether SOFRmergers or any other alternative reference rates that have been proposed will attain market acceptance as replacements of LIBOR. In addition, the overall financial markets may be disrupted as a result of the phase-out replacement of LIBOR. Uncertainty as toconsolidations, change our fiscal year or substantially change the nature of our business. The Credit Facility also requires us to maintain three financial covenants: a fixed charge coverage ratio, a leverage ratio and a minimum tangible net worth requirement. These provisions may affect our ability to pursue business opportunities we find attractive or to maintain flexibility in reacting to changes in business conditions.
Our failure to comply with the covenants in our Credit Facility or other terms of any present or future indebtedness could result in an event of default under such phase-out and selection of an alternative reference rate,indebtedness, which, if not cured or waived, could result in the lender or lenders under such indebtedness declaring all obligations, together with disruption inaccrued and unpaid interest, immediately due and payable and taking control of any collateral securing such indebtedness. This may require us to amend or refinance our indebtedness on less favorable terms.
If we are forced to amend or refinance the Credit Facility on less favorable terms or are unable to do so at all, our business, financial markets,condition and results of operations could negatively impact the interest expenses associated withbe adversely affected. In any future borrowingssuch case, we may be unable to borrow under the Credit Facility or other indebtedness and may not be able to repay the amounts due thereunder. This could causehave an adverse effect on our available cash flow and/orbusiness, financial condition, to be adversely affected.results of operations and prospects.
Risks Related to Our Business, Our Brand, Our Products and Our Industry
A substantial amount of our shell egg processing occurs at our Egg Central Station processing facility. Any damage or disruption at this facility may harm our business.
A substantial amount of our shell egg processing occurs at our Egg Central Station shell egg processing facility. Any shutdown or period of reduced production at Egg Central Station, which may be caused by regulatory noncompliance or other issues, as well as factors beyond our control, such as natural disaster, weather, fire, power interruption, work stoppage, disease outbreaks or pandemics, equipment failure or delay in raw materials delivery, would significantly disrupt our ability to deliver our products in a timely manner, meet our contractual obligations and operate our business. Further, the processing equipment used for our shell eggs is costly to replace or repair, particularly because certain of such equipment is sourced internationally. We have at times seen pricing and capacity constraints related to internationally sourced equipment, and our equipment supply chains may be further disrupted in connection with public health pandemics, geopolitical tensions and wars (such as the ongoing war between Russia and Ukraine and the ongoing conflicts in the Middle East), inflation, trade wars or other factors. If any material amount of our machinery were damaged, we could be unable to predict when, if at all, we could replace or repair such machinery or find co-manufacturers with suitable alternative machinery, which could adversely affect our business, financial condition and operating results. The property and business disruption insurance we maintain for Egg Central Station may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms or at all.
We are dependent on the market for shell eggs.eggs, and fluctuations in this market, including the decline of commodity shell egg prices relative to the price of our shell eggs, could adversely affect our business, financial condition and results of operations.
We contract with family farms to purchase all of their egg production for the duration of our contracts. We are contractually obligated to purchase these eggs irrespective of our ability to sell such eggs. Periodically in our industry, including recently, there has been an oversupply of eggs, which has caused egg prices to contract, sometimes substantially so, and as a result we have sold or donated our excess supply at reduced prices or no cost. If we are unable to sell such eggs upon commercially reasonable terms, or at all, our gross margins, business, financial condition and operating results may be adversely affected. Conversely, there have at times in recent periods been supply shortages in the egg industry, with supply impacted by, among other things, avian influenza, increased demand for eggs and increases in feed and other input costs. Such supply shortages, together with price increases we or others in the industry have implemented or choose to implement in the future, could result in declining consumer demand for shell eggs or inability to fulfill customer demand, each of which could have a material impact on our financial condition and results and operations.
We also sell pasture-raised shell eggs to consumers at a premium price point, and when prices for commodity shell eggs fall relative to the price of our pasture-raised shell eggs (including due to price increases we may implement or supply expansions in the market for commodity shell eggs), price-sensitive consumers may choose to purchase commodity shell eggs offered by our competitors at a greater velocity than, or instead of, our pasture-raisedshell eggs. As a result, low commodity shell egg prices relative to the price of our shell eggs may adversely affect our business, financial condition and results of operations.
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We also sell a small percentage of our shell eggs to wholesalers and egg breaking plants at commodity shell egg prices, which fluctuate widely and are outside our control. Small increases in production or small decreases in demand can have a large adverse effect on the prices at which these eggs are sold.
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Sales of pasture-raised shell eggs contribute the vast majority of our net revenue, and a reduction in these sales would have an adverse effect on our financial condition.
Pasture-raised shell eggs accounted for approximately 92% of our net revenue in fiscal 2018, 90% of our net revenue in fiscal 2019 and 90% of our net revenue in fiscal 2020. Pasture-raised shell eggs are our flagship product and have been the focal point of our sales and marketing efforts, and we believe that sales of pasture-raised shell eggs will continue to constitute a significant portion of our net revenue, net income and cash flow for the foreseeable future. We cannot be certain that we will be able to continue to expand sales, processing and distribution of pasture-raised shell eggs, or that consumer and customer demand for our other existing and future products will expand to allow such products to represent a larger percentage of our revenue than they do currently. Accordingly, any factor adversely affecting sales of our pasture-raised shell eggs could have an adverse effect on our business, financial condition and results of operations.
Fluctuations in commodity prices and in the availability of feed grains could negatively impact our results of operations and financial condition.
The price we pay to purchase shell eggs from farmers fluctuates based on pallet weight and under our buy-sell contracts, which account for 98% of the laying hens in our network of family farms as of December 27, 2020, the price we pay is also indexedadjusted quarterly in arrears for changes in feed cost, which may cause our agreed-upon pricing under these contracts to fluctuate on a quarterly basis. Additionally, for our integrator contracts, which account for the remaining 2% of laying hens in our network, we are directly responsible for purchasing and providing feed supply to the farmer. Therefore, our results of operations and financial condition, including our gross margin and profitability, fluctuate based on the cost and supply of commodities, including corn, soybean meal and other feed ingredients.
Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of these ingredients, which are affected by weather, speculators, export restrictions, various supply and demand factors, geopolitical tensions, inflation, transportation and storage costs, and agricultural and energy policies in the United States and internationally. For example, the severe drought in the summer of 2012We have seen increased prices for conventional and resulting damage toorganic corn and soybean crops resultedon a global basis, including increased prices resulting from the Russia-Ukraine war and measures taken in highresponse thereto, inflation and volatilesupply chain shortages. It is possible that ongoing conflicts in the Middle East and elsewhere may have similar effects. We have entered into commodity derivative instrument contracts related to conventional feed costs.ingredients. If we are unable to successfully conduct this program to reduce the impact of commodity price fluctuations, our financial condition and results of operations may be impacted.
We may not be able to increase our product prices enough or in a timely manner to sufficiently offset increased commodity costs due to consumer price sensitivity or the pricing postures of our competitors and, in many cases, our retailers may not accept a price increase or may require price increases to occur after a specified period of time elapses. In addition, if we increase prices to offset higher costs, we could experience lower demand for our products and lower sales volumes. Over time, if we are unable to price our products to cover increased costs, are unable to offset operating cost increases with continuous improvement savings or are unsuccessful in our current or any commodity-hedgingfuture commodity derivative instrument program, then commodity price volatility or increases could adversely affect our business, financial condition and results of operations.
If we fail to effectively expand our processing, manufacturing and production capacity as we continue to grow and scale our business, our business and operating results and our brand reputation could be harmed.
While our current supply, processing and manufacturing capabilities are sufficient to meet our present business needs, we may needare planning to expand these capabilities in the future as we continue to grow and scale our business. For example, in fiscal 2022 we are in the processcompleted an expansion of expanding Egg Central Station, our shell egg processing facility in Springfield, Missouri, to increase our capacity for the distribution of pasture-raised shell eggs. However, thereAdditionally, we announced that we had begun the design and the site selection process for our next egg packing center. There is risk in our ability to effectively continue to scale production and processing and effectively manage our supply chain requirements. We must accurately forecast demand for our products in order to ensure we have adequate processing and manufacturing capacity to effectively allocate product supply across our stock keeping units, or SKUs.units.
Our forecasts are based on multiple assumptions whichthat, if inaccurate, may be inaccurate and affect our ability to obtain our ownmaintain adequate processing and manufacturing capacities (or co-processing and co-manufacturing capacities) in order to meet the demand for our products, which could prevent us from meeting increased customer demand.
Our brand and our business could be harmed if we are unable to fulfill orders in a timely manner or at all. If we fail to meet demand for our products and, as a result, consumers who have previously purchased our products may buy other brands orand our retailersretail customers may allocate shelf space to other brands, each of which could adversely affect our business, financial condition and results of operations could be adversely affected.operations.
On the other hand, if we overestimate our demand (in general or on a particular SKU) or overbuild our capacity, relative to distribution, we may have significantly underutilized supply or other assets and may experience reduced margins. If we do not accurately align our processing and manufacturing capabilities with demand, our business, financial condition and results of operations could be adversely affected.
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We are currently expanding Egg Central Station, and we may not successfully complete the construction of or commence operations in this expansion, or the expanded facility may not operate in accordance with our expectations.
In January 2019, we commenced design of an expansion of Egg Central Station, our shell egg processing facility, in order to address our rapid growth and increase our shell egg processing capacity. Constructing and opening this facility has required, and will continue to require, significant capital expenditures and the efforts and attention of our management and other personnel, which has and will continue to divert resources from our existing business or operations. In addition, we will need to hire and retain more skilled crew members to operate the expanded facility. Even if our expansion is brought up to full processing capacity, it may not provide us with all of the operational and financial benefits we expect to receive.
If we fail to effectively maintain relationships within our existing farm network or further expand our farm network, of small family farms, our business, operating results and brand reputation could be harmed.
We source our pasture-raised eggs and milk for our products from our network of small family farms, which is the foundation of our supply chain. The cream for our butter is sourced from a network of family farms contracted by our butter supplier. If we are unable to maintain and expand this supply chain because of actions taken by farmers or other events outside of our control (including the failure of our butter supplier to maintain or expand its contracted farm network), we may be unable to timely supply distributors and customers with our products, which could lead to cancellation of purchase orders, damage to our commercial relationships and impairment of our brand. For example, we require theseour egg farmers to build and equip their farms to certain specifications, which requires a significant upfront capital investment, and any inability of farmers to obtain adequate financing on acceptable terms, including due to elevated interest rates, would impair their ability to partnercontract with us. IfThese and other factors, including economic uncertainty, may make it more difficult for us to recruit and attract new farmers to our relationship with these farmers is disrupted, we may not be ablenetwork in a number sufficient to fully recover our investments in birds and feed, which would negatively impact our operating results. meet product demand.
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There are a number of factors that could impair our relationship with farmers, many of which are outside of our control. For example, whileWhile we strive to operate our business in a manner that drives long-term and sustainable benefits for our stakeholders, including our farmers, we may make strategic decisions that theour farmers do not believe aligndisagree with their interests or values,and which could cause the farmers to terminate their relationships with us. Reputational harm resulting from impairment of our relationship with existing farmers may also make it more difficult to attract new farmers to expand our network. If our relationship with our existing or future farmers is disrupted due to these or other factors, we may not be able to sustain the supply necessary to meet customer and consumer demand for our products, which would negatively impact our operating results. Any failure to maintain or expand our farm network of small family farms would adversely affect our business, financial condition and results of operations.
If we fail to effectively price our products or implement price increases, our financial condition may be adversely affected.
The prices of our products are driven by a number of factors, including supply constraints, customer and consumer demand, inflation, input costs and market conditions. In response to such conditions, we increased prices on certain of our products at times during fiscal 2022, fiscal 2023 and fiscal 2024. While we have not yet seen significant decreases in sales volume due to such price increases, if we further increase prices, we could experience declining demand for our products, decreased ability to attract new customers and lower sales volumes. If price increases result in a greater spread between the price of our products and the price of conventional or private-label products, consumers may be less willing to pay a premium for our products, particularly in times of economic uncertainty. Additionally, our retail customers may not accept such price increases or may require increased promotional activity. If we cannot effectively price our products or carry out price increases, our business, financial condition and operating results could be adversely affected.
Increased transportation and freight costs or failure by our transportation providers to pick up raw materials or deliver our products on time, in compliance with applicable governmental regulations or at all, have adversely impact and are expected to continue to adversely impact our operating results.
We rely upon third-party transportation providers for a significant portion of our raw material transportation and product shipments. Our utilization of pickup and delivery services for shipments is subject to risks, including increases in fuel prices, driver shortages, trucking capacity limitations due to general increases in freight demand, employee and contractor strikes or unavailability (including due to disease outbreaks and pandemics) or inclement weather, any of which could increase our transportation and freight costs. For example, due in part to increased labor costs and rising fuel costs due to international tensions and wars (including due to attacks on container ships in the Red Sea), we have seen at times during recent periods increased transportation and freight costs. Further increases in transportation and freight costs could have an adverse effect on our ability to increase or to maintain production on a profitable basis and could therefore adversely affect our operating results. We may not be able to price our products in a manner that sufficiently offsets increased transportation costs due to consumer price sensitivity or the pricing postures of our competitors, and in many cases, our retail customers may not accept a price increase or may require price increases to occur after a specified period of time elapses. In addition, if we increase prices to offset higher transportation and freight costs, we could experience lower demand for our products, decreased ability to attract new customers and lower sales volumes.
Furthermore, noncompliance by our third-party transportation providers with applicable regulatory requirements may impact the ability of providers to provide delivery services that adequately meet our shipping needs. Due to increased costs or noncompliance by our transportation providers with applicable regulatory requirements, we may change shipping companies, and we could face logistical difficulties with any such change that could adversely affect deliveries. In addition, we could incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently use, which in turn would increase our costs and adversely affect our operating results.
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Our future business, results of operations and financial condition may be adversely affected by reduced or limited availability of pasture-raised eggs, and milkcream for our butter and other raw materials that meet our standards.
Our ability to ensure a continuingcontinued supply of pasture-raised eggs, and milkcream for our butter and other raw materials for our products at competitive prices depends on many factors beyond our control. In particular, we rely on the farms that supply us with pasture-raised eggs and milkcream to implement controls and procedures to manage the risk of exposing animals to harmful diseases, but outbreaks may occur despite their efforts. An outbreak of disease could result in increased government restriction on the sale and distribution of our products, and negative publicity could impact customer and consumer perception of our products, even if an outbreak does not directly impact the animals from which we source our products. Our farm network of small family farmsfor our shell eggs is in a geographic region we refer to as the Pasture Belt, which is a term we use that refers to the U.S. region including Arkansas and Georgia, and portions of Alabama, Illinois, Kansas, Kentucky, Mississippi, Missouri, Oklahoma, North Carolina, South Carolina, Tennessee and Texas, where pasture-raised eggs can be produced year-round.the weather is conducive to hens being outside as much as possible. The dairy farms that supply our cream are primarily located in Ireland. The occurrence of a natural disaster in this regionany of these regions could have a significant negative impact on us, the farmers and our supply chain. Additionally, the animals from which our products are sourced, the crops on which we rely for feed and the pastures on which theythese animals are raised are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilence. Disease, adverse weather conditions and natural disasters can adversely impact pasture quantity and quality, leading to reduced egg and milk yields and quality, which in turn could reduce the available supply of, or increase the price of, our raw materials. If we raised prices for our products to account for this increase, we could experience decreased demand for our products and lower sales volumes, thereby adversely affecting our business, financial condition and results of operations.
We also compete with other food companies in the procurement of pasture-raised eggs and milk,cream, and this competition may increase in the future if consumer demand increases for these items or products containing them or if competitors increasingly offer products in these market sectors. If supplies of pasture-raised eggs and milkcream that meet our quality standards are reduced or are in greater demand, we may not be able to obtain sufficient supply to meet our needs on favorable terms or at all. For example, as a result of the COVID-19 pandemic, there have been recent disruptions in the U.S. pasture-raised milk supply, including significant drops in prices and demand, which have resulted in the loss of suppliers. While we have worked with our co-manufacturers to mitigate these supply disruptions, and as a result there has been no impact on our ability to fill customer orders for our pasture-raised butter or ghee products, we expect that these supply disruptions will continue for the foreseeable future and that they may be further exacerbated by the ongoing effects of COVID-19, which could impact our ability to fill customer orders in the future.
Our supply may also be affected by the number and size of farms that raise chickens and cows on pasture,that meet our standards, changes in U.S. and global economic conditions and our ability to forecast our raw materials requirements. For example, the farms must meet our standards and in order to meet theseour standards, we require themour egg farms to invest in infrastructure at the outset of our relationship. The typical upfront investment for each of the farms is significant, and many of the farmers seek financing assistance from local and regional banks as well as federal government loans from the U.S. Department of Agriculture, or USDA, Farm Service Agency. Changes in U.S. and global economic conditions, elevated interest rates or anya U.S. government shutdown (including in connection with COVID-19) could significantly decreaseaffect the loans available to farmers. Many of these farmers also have alternative income opportunities and the relative financial performance of raising chickens and cows on pasturein accordance with our standards as compared to other potentially more profitable opportunities could affect their interest in working with us. Any of these factors could impact our ability to supply our products to distributors and customers and may adversely affect our business, financial condition and results of operations.
21We may not be able to compete successfully in our highly competitive market.
We compete with large egg companies such as Cal-Maine, Inc. and large international food companies such as Ornua Co-operative Limited (Kerrygold). We also compete with local and regional egg and dairy companies, as well as private-label products processed by other egg and dairy companies. These competitors may have substantially greater financial and other resources than us, and some of our competitors’ products are well accepted in the marketplace today. Such competitors may also have lower operational costs, and as a result may be able to offer comparable or substitute products to customers at lower costs. This could put pressure on us to lower our prices, resulting in lower profitability or, in the alternative, cause us to lose market share if we fail to reduce prices. Conversely, if we were to increase prices, including as a result of fluctuations in the shell egg market, increased commodity or raw material costs, increased packaging or transportation costs or otherwise, any resulting decline in consumer demand for our products may be exacerbated by the competitiveness of our market.
Generally, the food industry is dominated by multinational corporations with substantially greater resources and operations than we have. We cannot be certain that we will successfully compete with larger competitors that have greater financial, sales and technical resources. Conventional food companies may acquire our competitors or launch their own egg and butter products, and they may be able to use their resources and scale to respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities, among other things. Retailers also market competitive products under their own private labels, which are generally sold at lower prices, and may change the merchandising of our products so they have less favorable placement. Larger competitors may also be less affected by economic disruption and uncertainty, including with respect to inflation, global economic conditions or agricultural diseases such as avian influenza, than we are. These competitive pressures could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures or increase the use of discounting or promotional campaigns, each of which could adversely affect our margins and could result in a decrease in our operating results and profitability.
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Failure to leverage our brand value propositions to compete against private-label products, especially during an economic downturn, may adversely affect our profitability.
We compete not only with other well-advertised nationally branded products, but also with private-label products. Such private-label products generally are sold at lower prices than our products. Consumers are more likely to purchase our products if they believe that our products provide a higher quality and greater value than less expensive alternatives. If the difference in perceived value between our brands and private-label products narrows, or if there is a perception of such a narrowing, consumers may choose not to buy our products at prices that are profitable for us. In periods of economic uncertainty, particularly in periods of uncertainty driven by high inflation, consumers may purchase more often from lower-priced private-label or other economy brands. To the extent this occurs, we could experience a decrease in the sales volume of our higher margin products or a shift in our product mix to lower margin offerings. In addition, our foodservice product sales will be reduced if consumers reduce the amount of food that they consume away from home at our foodservice customers, including as a result of public health pandemics or economic uncertainty driven by inflation or other factors.
We currently have a limited number of co-manufacturers. Lossthird-party co-manufacturers and cold storage providers. The loss of one or more of our co-manufacturers or cold storage providers or our failure to timely identify and establish new relationships with new co-manufacturers or cold storage providers could harm our business and impede our growth.
A significant amount of our revenue is derived from products manufactured at facilities owned and operated by our co-manufacturers. We currently rely on two co-manufacturers for hard-boiled eggs, one co-manufacturer for bulk butter one co-manufacturerproduction, two co-manufacturers for ghee,stick butter, one co-manufacturer for liquid eggs, and one co-manufacturerco-packer for certain shell egg bites.processing. While we currently have a written manufacturing contract with one of our co-manufacturers for hard-boiled eggs, we do not currently have written manufacturing contracts with our other co-manufacturers for butter and egg bites, we do not have written manufacturing contractsor with our other co-manufacturers.co-packer for certain shell egg processing. Due to the absence of written contracts with a majoritycertain of our co-manufacturers, certain of ourthese co-manufacturers can generally seek to alter or terminate their relationships with us at any time, leaving us withresulting in periods during which we may have limited or no ability to manufacture certain of our products.
In addition, due to the limited number of co-manufacturers, anany interruption in, or the loss of operations at, one or more of our co-manufacturing facilities, which may be caused by work stoppages, regulatory issues or noncompliance, disease outbreaks or pandemics, (such as COVID-19), acts of war, terrorism, fire, earthquakes, flooding or other weather or natural disasters, could delay, postpone or reduce production of some of our products, which could have an adverse effect on our business, financial condition and results of operations until such time as the interruption is resolved or an alternate source of production is secured, especially in times of low inventory.
We believe there are a limited number of competent, high-quality co-manufacturers in our industry that meet our geographical requirements and our strict quality and control standards, and should we seek to obtain additional or alternative co-manufacturing arrangements in the future, there can be no assurance that we would be able to do so on satisfactory terms, in a timely manner, or at all. Therefore, the loss of one or more co-manufacturers, any disruption or delay at a co-manufacturer or any failure to identify and engage co-manufacturers for new products and product extensions could delay, postpone or reduce production of our products, which could have an adverse effect on our business, financial condition and results of operations.
Additionally, we rely on a limited number of cold storage providers to store our products. Our financial performance depends in large part on our ability to obtain adequate cold storage facilities services in a timely manner. We are not assured of continued cold storage capacities. Certain of our cold storage providers could discontinue or seek to alter their relationship with us. In addition, we are not assured of sufficient capacities of these providers commensurate with increased product demand.
Outbreaks of agricultural diseases, including avian influenza, the perception that outbreaks may occur or regulatory or market responses to outbreaks could reduce supply or demand for our products and harm our business.
Our business activities are subject to a variety of agricultural risks, including pests and diseases such as avian influenza, the occurrence of which can materially and adversely affect the quality and quantity of products, including shell eggs, that we distribute. Since the outbreak of highly pathogenic avian influenza, or HPAI, in early 2022, we have been closely following the progression of the virus. To date, we have experienced outbreaks at four of our farms, one located in Missouri, one in Tennessee and two in Kansas. While we have not experienced material disruptions to our egg supply due to such outbreaks, if a substantial portion of our farms or production facilities were affected by an outbreak of HPAI, or a disease like it, this could have a material and adverse effect on our business, financial condition and results of operations. Additionally, outbreaks of HPAI or similar diseases could limit our ability to utilize co-packers for our shell eggs due to increased biosecurity measures that may be implemented by such co-packers in the event of an outbreak.
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Even if our farms and production facilities were not directly impacted by avian disease, we may nevertheless be negatively affected by resulting governmental restrictions on our operations and the sale and distribution of our products, as well as negative publicity and impacted consumer perceptions for our industry. Such impacts could result in decreased consumer demand for our products and impact our operating results. Additionally, certain states in which our family farms are located have at times recommended or required that farms keep hens indoors to help limit exposure to avian influenza. Prolonged requirements to keep our hens indoors could adversely impact consumer perception of our egg products in comparison to those of our competitors, which could have a negative effect on our business, financial condition and operating results.
We could be adversely affected by a change in consumer preferences, perception and spending habits in the natural food industry generally and onwith respect to animal-based products, in particular, andparticular. Any failure to develop or enrich our product offeringofferings or gain market acceptance of our new products could have a negative effect on our business.
We have positioned our brand to capitalize on growing consumer interest in natural, clean-label, traceable, ethically produced, great-tasting and nutritious foods. The market in which we operate is subject to changes in consumer preference, perception and spending habits. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the U.S. natural food industry market in which we operate. Such factors include consumer preference, consumer confidence, consumer income, consumer perception of the safety and quality of our products and shifts in the perceived value for our products relative to alternatives. Media coverage regarding the safety or quality of, or diet or health issues relating to, our products or the raw materials, ingredients or processes involved in their manufacturing may damage consumer confidence in our products. A general decline in the consumption of our products could occur at any time as a result of changechanges in consumer preference, perception, confidence and spending habits, including an unwillingness to pay a premium or an inability to purchase our products due to financial hardship or increased price sensitivity, which may be exacerbated by the effects of the COVID-19 pandemic.economic uncertainty and general inflationary trends. For example, we and many of our customers face pressure from animal rights groups to require all companies that supply food products to operate their business in a manner that treats animals in conformity with certain standards developed or approved by these animal rights groups. If consumer preferences shift away from animal-based products for these reasons, because of a preference for plant-based products or otherwise, our business, financial condition and results of operations could be adversely affected.
The success of our products depends on a number of factors, including our ability to accurately anticipate changes in market demand and consumer preferences, our ability to differentiate the quality of our products from those of our competitors, and the effectiveness of our marketing and advertising campaigns for our products. We may not be successful in identifying trends in consumer preferences and developing products that respond to such trends in a timely manner. We also may not be able to effectively promote our products by our marketing and advertising campaigns and gain market acceptance. If our products fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, we may not be able to fully recover costs and expenses incurred in our operation, and our business, financial condition or results of operations could be materially and adversely affected.
A limited number of distributors represent thea substantial majorityportion of our sales, and the loss of onedisruptions affecting our significant distributors or more distributorour relationships that cannot be replaced in a timely mannerwith such distributors may adversely affect our results of operations.
Our products are distributed tothrough a broker-distributor-retailer network whereby brokers represent our products to distributors and retailers who in turn sell our products to consumers. We serve the majority of natural channel customers through food distributors, such as United Natural Foods, Inc., or UNFI, KeHE Distributors, LLC, or KeHE, and US Foods, Inc., or US Foods, which purchase, store, sell and deliver our products to retailers, including Whole Foodsretailer customers.
In fiscal years 2021, 2022 and Sprouts. In years 2018, 2019 and 2020,2023, UNFI (which was Whole Foods’ primary distributor through March 2020)other than from January to August 2021) accounted for approximately 36%18%, 35%26% and 15% of our net revenue, respectively, KeHE accounted for approximately 10%, 11% and 12% of our net revenue, respectively, and US Foods (which became Whole Foods’ distributor in April 2020) accounted for approximately 0%, 0%, and 18%25% of our net revenue, respectively. Since these distributors act as intermediaries between us and the retail grocers or foodservice providers, who generally select the distributors, we do not have short-term or long-term commitments or minimum purchase volumes in our contracts with distributors that ensure future sales of our products. These distributors are able to decide on the products carried, and they may limit the products available for retailers, such as Whole Foods and Sprouts,our retail customers to purchase. We expect that most of our sales will be made through a core number of distributors for the foreseeable future. The loss of one or more of our significant distributor relationships that cannot be replaced in a timely manner, (orunder similar terms and conditions or at all)all could adversely affect our business, financial condition and results of operations.
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We are dependent on hatcheries and pullet farms to supply our network of family farms with laying hens. Any disruption in that supply chain could materially and adversely affect our business, financial condition or results of operations.
Under the terms of our contracts with our network of family farms, while we do not own laying hens, we are generally responsible for coordinating the acquisition and delivery of laying hens to the farmers. In order to meet these obligations, we place orders for chicks directly with hatcheries intended to supply a future year’s production of eggs at least a year in advance. Once the chicks are hatched, they are delivered to a network of pullet farms, who rear the chicks to approximately 16 to 18 weeks of age, at which time they begin laying eggs. The hens are then delivered directly from the pullet farms to our network of family farms which then place the hens into egg production.
Because it would be inefficient to contract directlybegin laying eggs.
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We work primarily with several pullet farmshatcheries that deliver chicks to rear the quantity of chicks that we require, we currently work with a sole source supplier that contracts with a network of independent pullet farms.
We do not have a long-term supply contractcontracts with this third party,these suppliers, and if this suppliera substantial portion of our current hatcheries or pullet farms were to cease doing business with us for any reason, we may have a difficult time finding and contracting with alternate hatcheries or pullet farms in sufficient scale to meet our needs, if at all. Pullet farms may also be subject to capacity constraints, and if we are unable to find independent pullet farms with sufficient capacity to receive chicks from our hatcheries, we may be unable to fulfill our customer commitments. Additionally, any disruption in thesethe supply servicesof laying hens for any reason, including birdagricultural disease such as avian influenza, natural disaster, fire, power interruption, work stoppage or other calamity, could have a material adverse effect on our business, financial condition and results of operations if we cannot replace these providers in a timely manner on acceptable terms or at all.
Elevated interest rates could adversely affect our business and the ability of our family farmers to access capital.
Our business and operating results could be harmed by factors such as the availability of credit and the terms of and increases in interest rates. These changes could cause our cost of doing business to increase and limit our ability to pursue growth opportunities. Disruptions and volatility in the global financial markets may lead to a contraction in credit availability, impacting our ability to finance our operations. A significant reduction in cash flows from operations or reduction in the availability of credit could materially and adversely affect our ability to achieve planned growth and operating results.
Elevated interest rates may also adversely impact the ability of our family farmers to access capital. We require our egg farmers to build and equip their farms to certain specifications, which requires a significant upfront capital investment, and any inability of farmers to obtain adequate financing on acceptable terms, including as a result of elevated interest rates, would impair their ability to partner with us. If our relationship with these egg farmers is disrupted, we may not be able to fully recover our investments in birds and feed, which would negatively impact our operating results.
Consolidation of retail customers or the loss of a significant retail customer could negatively impact our sales and profitability.
Our retail customers include natural channel and mainstream channel stores, which have been undergoing a consolidation in recent years. This consolidation has produced larger, more sophisticated organizations with increased negotiating and buying power that are able to resist price increases, as well as operate with lower inventories, decrease the number of brands that they carry and increase their emphasis on private labelprivate-label products, all of which could negatively impact our business. During fiscal years 2018, 2019 and 2020, our largest direct retail customer accounted for approximately 14%, 14% and 13% of our net revenue, respectively.
With certain of our retail customers, like Whole Foods, and Sprouts, we sell our products through distributors. We are not able to precisely attribute our net revenue to a specific retailer for products sold through distributors. We rely on third-party data to calculate the portion of retail sales attributable to retailers, but this data is inherently imprecise because it is based on gross sales generated by our products sold at retailers, without accounting for price concessions, promotional activities or chargebacks, and because it measures retail sales for only the portion of our retailers serviced through distributors. Based on this third-party data and internal analysis, Whole Foods accounted for approximately 31%25%, 30%23% and 28%23% of our retail sales in fiscal years 2018, 20192021, 2022 and 2020, respectively, and Sprouts2023, respectively. Kroger accounted for approximately 8%12%, 8%12% and 7%11% of our retail sales in the fiscal years 2018, 20192021, 2022 and 2020,2023, respectively. The loss of Kroger, Whole Foods, SproutsKroger or any other large retail customer, or the reduction of purchasing levels or the cancellation of any business from Kroger, Whole Foods, Sprouts or any other large retailsuch customer for an extended length of time could negatively impact our sales and profitability.
A retailer may take actions that affect us for reasons that we cannot always anticipate or control, such as their financial condition, changes in their business strategy or operations, the introduction of competing products or the perceived quality of our products. Despite operating in different channel segments, our retailersretail customers sometimes compete for the same consumers. Because of actual or perceived conflicts resulting from this competition, retailers may take actions that negatively affect us. Consequently, our financial results may fluctuate significantly from period to period based on the actions of one or more significant retailers.
Failure by our transportation providers to pick up raw materials or deliver our products on time, in compliance with applicable governmental regulations or at all, could result in lost sales.27
We currently rely upon third-party transportation providers for a significant portion of our raw material transportation and product shipments. Our utilization of pickup and delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, chronic driver shortages, employee strikes or unavailability (including due to COVID-19), inclement weather and noncompliance by our third-party transportation providers with applicable regulatory requirements, which may impact the ability of providers to provide delivery services that adequately meet our shipping needs. We may change shipping companies, and we could face logistical difficulties with any such change that could adversely affect deliveries. In addition, we could incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently use, which in turn would increase our costs and thereby adversely affect our operating results.
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We source substantially all of our shell egg cartons from a sole source supplier, and any disruptions may impact our ability to sell our eggs.
We obtain substantially all of the packaging for our shell eggs from a sole-sourcesole source supplier. Any disruption in the supply of our shell egg cartons, including as a result ofdue to interruptions to global shipping, could delay our production and hinder our ability to meet our commitments to customers. If we are unable to obtain a sufficient quantity of our packaging on commercially reasonable terms or in a timely manner, or if we are unable to obtain alternative sources, sales of our products could be delayed or we may be required to redesign our products. For example, in connection with increased demand for shell eggs in relation to the COVID-19 pandemic in 2020, the supplier of substantially all of our shell egg cartons began to prioritize packaging for core egg products (such as 12-count packages), and we separately experienced certain quality issues with our 18-count egg cartons. As a result of these events, and in order to otherwise meet demand for our products, we began using recycled plastic packaging for a small numbercertain of our shell egg products. While this change in packaging did not materially impact our operations, there is no guarantee that we will not experience similar packaging issues in the future, or that any such packaging issues will not impact our ability to meet product demand for our shell eggs. For example, consumers may be less likely to accept products packaged using certain materials, or modified packaging may make it more difficult for consumers to locate our products in stores. Any of these events could result in lost sales, price increases, reduced gross margins or damage to our customer or consumer relationships, which would have a material adverse effect on our business, financial condition and results of operations.
Because we rely on a limited number of third-party vendors to manufacture and store our products, we may not be able to maintain manufacturing and storage capacity at the times and with the capacities necessary to produce and store our products or meet the demand for our products.
We rely on a limited number of co-manufacturers and cold storage providers. We currently rely on two co-manufacturers for hard-boiled eggs, one co-manufacturer for butter, one co-manufacturer for ghee, one co-manufacturer for liquid eggs and one co-manufacturer for egg bites. Our financial performance depends in large part on our ability to obtain adequate co-manufacturing and cold storage facilities services in a timely manner. We are not assured of continued co-manufacturing and cold storage capacities. Certain of our co-manufacturers or our cold storage providers could discontinue or seek to alter their relationship with us. In addition, we are not assured of sufficient capacities of these providers commensurate with increased product demand.
Any disruption in the supply of our final products from these providers would have an adverse effect on our business if we cannot replace these providers in a timely manner or at all. For example, in December 2019, our co-manufacturer for hard-boiled eggs conducted a voluntary Class I recall of all hard-boiled eggs produced at its facility, including ours, due to a potential listeria contamination at the production facility. In connection with the recall, our co-manufacturer elected to permanently close the affected production facility and move all production to a different facility, which did not have sufficient capacity to meet product demand. As a result we were unable to supply customers with hard-boiled eggs for a period of time in the first quarter of fiscal 2020. This disruption led to the loss of certain customer accounts for this product, the revenues from which were immaterial in the aggregate. Our co-manufacturers are currently able to meet our product demand for hard-boiled eggs due to the effects of COVID-19 on the foodservice industry. However, we may experience supply issues once the foodservice industry returns to full capacity, which may lead to additional loss of customers.
We may not be able to compete successfully in our highly competitive market.
We operate in a highly competitive environment across each of our product categories. We have numerous competitors of varying sizes, including producers of private-label products, as well as producers of other branded egg and butter products that compete for trade merchandising support and consumer dollars. Numerous brands and products compete for limited retailer shelf space, including in the refrigerated section, foodservice, and customers and consumers. In our market, competition is based on, among other things, product quality and taste, brand recognition and loyalty, product variety, product packaging and package design, shelf space, reputation, price, advertising, promotion and nutritional claims.
We compete with large egg companies such as Cal-Maine, Inc. and large international food companies such as Ornua (Kerrygold). We also compete directly with local and regional egg companies, as well as private-label specialty egg products processed by other egg companies. Each of these competitors may have substantially greater financial and other resources than us and some of whose products are well accepted in the marketplace today. They may also have lower operational costs, and as a result may be able to offer comparable or substitute products to customers at lower costs. This could put pressure on us to lower our prices, resulting in lower profitability or, in the alternative, cause us to lose market share if we fail to lower prices.
Generally, the food industry is dominated by multinational corporations with substantially greater resources and operations than us. We cannot be certain that we will successfully compete with larger competitors that have greater financial, sales and technical resources. Conventional food companies may acquire our competitors or launch their own egg and butter products, including ones that may be pasture-raised, and they may be able to use their resources and scale to respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities, among other things. Retailers also market competitive products under their own private labels, which are generally sold at lower prices, and may change the merchandising of our products so they have less favorable placement. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures, or increase the use of discounting or promotional campaigns, each of which would adversely affect our margins and could result in a decrease in our operating results and profitability.
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Further, competitors with substantially greater operations and resources than us may be less affected by the COVID-19 pandemic than we are. In connection with the pandemic, we have restricted employee travel, cancelled certain events with consumers, customers or partners, imposed operational safeguards at Egg Central Station and limited access to our headquarters. Although we are monitoring the situation, we cannot predict for how long, or the ultimate extent to which, the pandemic may disrupt our operations as a result of these measures or if we are required to implement other changes, such as closure of our egg processing facility. Any significant disruption resulting from this or similar events on a large scale or over a prolonged period of time could cause significant delays and disruption to our business until we would be able to resume normal business operations or shift to other third-party vendors, negatively affecting our revenue and other financial results. A prolonged disruption of our business could also damage our reputation.
In addition, our ability to compete successfully in our market depends, in large part, on our ability to implement our growth strategy of expanding supply and distribution, improving placement of our products, attracting new consumers to our brand and introducing new products and product extensions. Our ability to implement this growth strategy depends, among other things, on our ability to:
manage relationships with various suppliers, co-manufacturers, distributors, customers and other third parties, and expend time and effort to integrate new suppliers, co-manufacturers and customers into our fulfillment operations;
secure placement in stores for our products;
increase our brand recognition;
expand and maintain brand loyalty; and
develop new product lines and extensions.
Our sales and operating results will be adversely affected if we do not successfully implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
Our brand and reputation may be diminished due to real or perceived quality or food safety issues with our products, which could have an adverse effect on our business, reputation, operating results and financial condition.
We believe our consumers rely on us to provide them with high-quality pasture-raised products. Therefore, real or perceived quality or food safety concerns or failures to comply with applicable food regulations and requirements, whether or not ultimately based on fact and whether or not involving us (such as incidents involving our competitors), could cause negative publicity and reduced confidence in our company, brand or products, which could in turn harm our reputation and sales, and could adversely affect our business, financial condition and operating results.
Our products may be subject to contamination by foreign materials or disease-producing organisms or pathogens, such as salmonella and E. coli. These organisms and pathogens are found generally in the environment and there is a risk that one or more could be present in our products, either as a result of food processing or as an inherent risk based on the nature of our products. These organisms and pathogens also can be introduced to our products as a result of improper handling at the further-processing, foodservice or consumer level. These risks may be controlled, but may not be eliminated, by adherence to current good manufacturing practices, or cGMPs, and finished product testing. Shipment of contaminated products, even if inadvertent, could result in a violation of law and lead to increased risk of exposure to product liability claims, product recalls, and increased scrutiny by federal and state regulatory agencies, penalties and adverse publicity. In addition, products purchased from other producers, including co-manufacturers, could contain contaminants that we might inadvertently redistribute.
If our products become contaminated, or if there is a potential health risk associated with our products, we or our co-manufacturers might decide or need to recall a product. Any product recall could result in a loss of consumer confidence in our products and adversely affect our reputation with existing and potential customers. For example, in December 2019, our co-manufacturer for hard-boiled eggs conducted a voluntary Class I recall of all hard-boiled eggs produced at its facility, including ours, due to potential listeria contamination at the production facility. In connection with the recall, our co-manufacturer elected to permanently close the affected production facility and move all production to a different facility. As a result, we were unable to supply customers with hard-boiled eggs for a period of time in the first quarter of fiscal 2020, which led to the loss of certain customer accounts for this product, the revenues from which were immaterial in the aggregate.
We also have no control over our products once purchased by consumers. For example, consumers may store our products under conditions and for periods of time inconsistent with USDA, U.S. Food and Drug Administration, or FDA, and other governmental guidelines, which may adversely affect the quality and safety of our products.
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If consumers do not perceive our products to be of high quality or safe, then the value of our brand would be diminished, and our business, results of operations and financial condition would be adversely affected. Any loss of confidence on the part of consumers in the quality and safety of our products would be difficult and costly to overcome. Any such adverse effect could be exacerbated by our market positioning as a socially conscious purveyor of high-quality pasture-raised products and may significantly reduce our brand value. Issues regarding the safety of any of our products, regardless of the cause, may have an adverse effect on our brand, reputation and operating results. Further, the growing use of social and digital media by us, our consumers and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative publicity about us, our brands or our products on social or digital media could seriously damage our brands and reputation. If we do not maintain thea favorable perception of our brands, our business, financial condition and results of operations could be adversely affected.
All of our pasture-raised shell eggs are processed at Egg Central Station in Springfield, Missouri. Any damage or disruption at this facility may harm our business.28
All of our pasture-raised shell egg processing occurs at our facility in Springfield, Missouri. Any shutdown or period of reduced production at Egg Central Station, our shell egg processing facility, which may be caused by regulatory noncompliance or other issues, as well as other factors beyond our control, such as natural disaster, fire, power interruption, work stoppage, disease outbreaks or pandemics (such as COVID-19), equipment failure or delay in raw materials delivery, would significantly disrupt our ability to deliver our products in a timely manner, meet our contractual obligations and operate our business. Further, the processing equipment used for our pasture-raised shell eggs is costly to replace or repair, particularly because certain of our processing equipment is sourced internationally, and our equipment supply chains may be disrupted in connection with pandemics, such as COVID-19, trade wars or other factors. If any material amount of our machinery were damaged, we would be unable to predict when, if at all, we could replace or repair such machinery or find co-manufacturers with suitable alternative machinery, which could adversely affect our business, financial condition and operating results. We have property and business disruption insurance in place for Egg Central Station; however, such insurance coverage may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Failure to leverage our brand value propositions to compete against private label products, especially during economic downturn, may adversely affect our profitability.
In many product categories, we compete not only with other widely advertised branded products, but also with private label products that generally are sold at lower prices. Consumers are more likely to purchase our products if they believe that our products provide a higher quality and greater value than less expensive alternatives. If the difference in perceived value between our brands and private label products narrows, or if there is a perception of such a narrowing, consumers may choose not to buy our products at prices that are profitable for us. We believe that in periods of economic uncertainty, such as the current economic uncertainty surrounding COVID-19, consumers may purchase more lower-priced private label or other economy brands. To the extent this occurs, we could experience a reduction in the sales volume of our higher margin products or a shift in our product mix to lower margin offerings. In addition, our foodservice product sales will be reduced if consumers reduce the amount of food that they consume away from home at our foodservice customers, whether as a result of restaurant closures or government-ordered quarantines, travel restrictions or other social distancing directives in connection with the COVID-19 pandemic, or in other times of economic uncertainty.
We must expend resources to maintain consumer awareness of our brands,brand, build brand loyalty and generate interest in our products. Our marketing strategies and channels will evolve, and our programs may or may not be successful.
In order to remain competitive and expand and keep shelf placement for our products, we have increased and may needcontinue to increase our marketing and advertising spending to maintain and increase consumer awareness, protect and grow our existing market share or promote new products, which could impact our operating results. SubstantialFurther advertising and promotional expenditures may be required to maintain or improve our brand’s market position or to introduce new products to the market, and participants in our industry are increasingly engaging with non-traditional media, including consumer outreach through social media and web-based channels, which may not prove successful.
An increaseIncreases in our marketing and advertising efforts may not maintain our current reputation or lead to increased brand awareness. Further, social media platforms frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, or may increase the costs of such advertising, which can negatively affect the placement of our links and, therefore, reduce the number of visits to our website and social media channels or make such marketing cost-prohibitive.cost prohibitive. In addition, social media platforms typically require compliance with their policies and procedures, which may be subject to change or new interpretation with limited ability to negotiate, which could negatively impact our marketing capabilities. If we are unable to maintain and promote a favorable perception of our brand and products on a cost-effective basis, our business, financial condition and results of operations could be adversely affected.
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If we fail to develop and maintain our brand, our business could suffer.
We have developed a strong and trusted brand that has contributed significantly to the success of our business, and we believe our continued success depends on our ability to maintain and grow the value of the Vital Farms brand. Maintaining, promoting and positioning our brand and reputation will depend on, among other factors, the success of our product offerings, food safety, quality assurance, marketing and merchandising efforts, our continued focus on animal welfare, the environment and sustainability and our ability to provide a consistent, high-quality consumer and customer experience. Any negative publicity, regardless of its accuracy, could have an adverse effect on our business. Brand value is based on perceptions of subjective qualities, and any incident that erodes the loyalty of our consumers, customers, farmers, suppliers or co-manufacturers, including changes to our products or packaging, adverse publicity or a governmental investigation, litigation or regulatory enforcement action, could significantly reduce the value of our brand and significantly damage our business.
If we fail to cost-effectively acquire new consumers or retain our existing consumers, our business could be adversely affected.
Our success and our ability to increase revenue and operate profitably dependsdepend in part on our ability to cost-effectively acquire new consumers, retain existing consumers and keep existing consumers engaged so that they continue to purchase our products. While we intend to continue to invest significantly in sales and marketing to educate consumers about our brand, our values and our products, there is no assurance that these efforts will generate further demand for our products or expand our consumer base. Our ability to attract new consumers and retain our existing consumers will dependdepends on the perceived value and quality of our products, consumers’ desire to purchase ethically produced products at a premium, offerings of our competitors, our ability to offer new and relevant products and the effectiveness of our marketing efforts, among other items. For example, because our pasture-raised shell eggs are sold to consumers at a premium price point, when prices for commodity shell eggs fall relative to the price of our pasture-raised shell eggs, we may be unable to entice price-sensitive consumers to try our products. We may also lose loyal consumers to our competitors if we are unable to meet consumer demand in a timely manner. If we are unable to cost-effectively acquire new consumers, retain existing consumers and keep existing consumers engaged, our business, financial condition and operating results would be adversely affected.
Our sales and profits are dependent upon our ability to expand existing customer relationships and acquire new customers.
Our business depends on our ability to increase our household penetration, to expand the number of products sold through existing retail customers, to grow within the foodservice channel and to strengthen our product offerings through innovation in both new and existing categories. Any strategies we employ to pursue this growth are subject to numerous factors outside of our control. For example, retailers continue to aggressively market their private labelprivate-label products, which could reduce demand for our products. The expansion of our business also depends on our ability over the long term to obtain customers in additional distribution channels, such as convenience, drugstore, club, military and international markets. Any growth in distribution channels may also affect our existing customer relationships and present additional challenges, including related to pricing strategies. Additionally, we may need to increase or reallocate spending on marketing and promotional activities, such as rebates, temporary price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities, and these expenditures are subject to risks, including related to consumer acceptance of our efforts. Our failure to obtain new customers, or expand our business with existing customers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Demand for shell eggs and butter is subject to seasonal fluctuations, andwhich can adversely impact our results of operations in certain quarters.
Demand for shell eggs and butter fluctuates in response to seasonal factors. Shell egg demandDemand tends to increase with the start of the school year and is highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter, and the lowest during the summer months. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons. If we are not correct in predicting our future shell egg demand, we may experience a supply and demand shell egg imbalance. This imbalance between supply and demand can adversely impact our results of operations at certain times of the year.
Packaging costs are volatile, have recently increased and may rise significantly,continue to increase, which may negatively impact our profitability, and any reduced availability of packaging supplies may otherwise impact our business.
We and our co-manufacturers purchase and use significant quantities of cardboard, glass, corrugated fiberboard, kraft paper, flexible plastic, flexible film and paperboard to package our products. Costs of packaging are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, weather conditions, consumer demand and changes in governmental trade. We saw higher packaging costs in fiscal year 2022, and these elevated costs continued in fiscal year 2023. Volatility in the prices of supplies we and our co-manufacturers purchase could increase our cost of sales and reduce our profitability. Moreover, although we have not seen significant decreases in volume due to previous price increases, we may not be able to implement further price increases for our products to cover any increased costs, and any price increases we do implement may result in lower consumer demand, decreased ability to attract new customers and lower sales volumes.
Additionally, if the availability of certain packaging supplies is limited due to factors beyond our control (including as a result of the COVID-19 pandemic)public health pandemics or disruptions to global supply chains), or if packaging supplies do not meet our standards, we may make changes to our product packaging, which could negatively impact the perception of our brand. For example, in connection with increased demand for shell eggs in relation to the COVID-19 pandemic in 2020, the supplier of substantially all
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of our shell egg cartons began to prioritize packaging for core egg products (such as 12-count packages), and we separately experienced certain quality issues with our 18-count egg cartons. As a result of these events, and in order to otherwise meet demand for our products, we began using recycled plastic packaging for a small numbercertain of our shell egg products. If we are not successful in managing our packaging costs or the supply of packaging that meets our standards to use for our products, if we are unable to increase our prices to cover increased costs or if such price increases reduce our sales volumes, any of these factors could adversely affect our business, financial condition, and results of operations.
Our net revenue and earnings may fluctuate as a result of price concessions,actions, promotional activities and chargebacks.
Retailers may require price concessions that would negatively impact our margins and our profitability. IfAlternatively, we are not ablemay increase our prices to loweroffset commodity inflation and potentially impact our cost structure adequately in response to customer pricing demands,margins and if we are not able to attract and retain a profitable customer mix and a profitable product mix, our profitability could continue to be adversely affected.
volume. In addition, we periodically offer sales incentives through various programs to customers and consumers, including rebates, temporary price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities. We also periodically provide chargebacks
Additionally, while we continue to work to optimize supply chain logistics, we are occasionally charged fees and/or fines by retailers for various delivery and order discrepancies. While we challenge and vet these charges, we may be subject to such charges that could be detrimental to our customers, which include creditsperformance, particularly when combined with the effects of increased freight costs or discounts to customersthe other risks outlined in the event that products do not conform to customer specifications or expire at a customer’s site.this section. The cost associated with promotions and chargebacks is estimated and recorded as a reduction in net revenue. We anticipate that theseThese price concessions, and promotional activities and chargebacks could adversely impact our net revenue and that changes in such activities could adversely impact period-over-period results. If we are not correct in predicting the performance of such promotions, or if we are not correct in estimating chargebacks, our business, financial condition and results of operations would be adversely affected.
If we fail to retain and motivate members of our management team or other key crew members or fail to attract, train, develop and retain additional qualified crew members to support our operations, our business and future growth prospects wouldmay be harmed.
Our success and future growth depend largely upon the continued services of our executive officers as well as our other key crew members. These executives and key crew members have beenare primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand, culture and the reputation we enjoy with farmers, suppliers, co-manufacturers, distributors, customers and consumers. From time to time, there may be changes in our executive management team or other key crew members resulting from the hiring or departure of these personnel. The loss of one or more of our executive officers, or the failure by our executive team to effectively work with our crew members and lead our company, could harm our business.
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In addition, our success depends in part upon our ability to attract, train, develop and retain a sufficient number of crew members who understand and appreciate our culture and can represent our brand effectively and establish credibility with our business partners and consumers. If we are unable to win in a competitive market for top talent capable of meeting our business needs and expectations, our business and brand image may be impaired. For example, in Springfield, Missouri, where Egg Central Station inis located, there is a tight labor market. As a result of this tight labor market, we may be unable to attract and retain crew members with the skills we require. Additionally, substantially all of our crew members outside of Egg Central Station are working remotely on a permanent basis. Although we believe we manage our operations to handle remote working conditions efficiently, it is possible that such remote work arrangements could adversely impact crew member cohesiveness, efficiency, professional development, operational agility and retention. Any failure to meet our staffing needs or any material increase in turnover rates of our crew members may adversely affect our business, financial condition and results of operations.
If we cannot maintain our company culture or focus on our purpose as we grow, our success and our business and competitive position may be harmed.
We believe our culture and our purpose have been key contributors to our success to date and that the critical nature of the platform that we provide promotes a sense of greater purpose and fulfillment in our crew members. Any failure to preserve our culture or focus on our purpose could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our corporate objectives. As we continue to grow and develop the infrastructure of a public company, we may find it difficult to maintain these important values. We may also have difficulty maintaining our company culture as substantially all of our crew members outside of Egg Central Station are working remotely on a permanent basis. If we fail to maintain our company culture or focus on our purpose, our business and competitive position may be harmed.
Our operations are geographically consolidated. A major tornado or other natural disaster within the region in which we operate could seriously disrupt our entire business.
Egg Central Station, our shell egg processing facility, is located in Springfield, Missouri. This facility and our network of small family farms supporting our shell egg business are concentrated in the Midwestern portion of the Pasture Belt. The pasture-raised milkmajority of cream for our butter is sourced from two separate and distinct geographical areas, one areafarms in the Midwest and one area in the Southeast. This supply encompasses a total of approximately 40 farms. Butter is manufactured in close proximity to the Midwest farm supply.Ireland. The impact of natural disasters such as tornadoes, drought or flood within these areas is difficult to predict, particularly given the potential of climate change to increase the frequency and intensity of such natural disasters, but such a natural disaster could seriously disrupt our entire business. Our insurance may not adequately cover our losses and expenses in the event of such a natural disaster. As a result, natural disasters within these areas could lead to substantial losses.
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We may be subject to significant liability that is not covered by insurance.
Although we believe that the extent of our insurance coverage is consistent with industry practice, any claim under our insurance policies may be subject to certain exceptions, may not be honored fully, in a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities or if our business operations were interrupted for a substantial period of time, we could incur costs and suffer losses. Such inventory and business interruption losses may not be covered by our insurance policies. We also expect that as a newly public company, it will be more difficult and more expensive for us to obtain director and officer liability insurance than when we operated as a private company, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations. Additionally, in the future, insurance coverage may not be available to us at commercially acceptable premiums, or at all.
Our inability to maintain our GFSI and SQF Select Site certifications may negatively affect our reputation.
The SQFISafe Quality Food Institute administers the SQF Program, which is a third-party auditing program that examines and certifies food producers with respect to certain aspects of the producer’s business, including food safety, quality control and social, environmental and occupational health and safety management systems. The SQF Select Site certification is one of a number of available SQF certifications and involves both auditing for food safety issues and unannounced inspections by SQF personnel on an annual basis.
The Global Food Safety Initiative, or GFSI, is a private organization established and managed by The Consumer Goods Forum, an international trade association, The Consumer Goods Forum.association. GFSI operates a benchmarking scheme whereby certification bodies, such as the SQF Program, are “recognized��“recognized” as meeting certain criteria maintained by GFSI. GFSI itself does not certify or accredit entities in the food industry.
SQF Select Site certification and the GFSI recognition of the SQF Program do not themselves have any independent legal significance and do not necessarily signal regulatory compliance. As a practice matter, however, certain retailers, including some of our largest customers, require SQF certification or certification by another GFSI-recognized program as a condition for doing business. Loss of SQF Select Site certification could impair our ability to do business with these customers, which could materially and adversely affect our business, financial condition and operating results.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.31
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes appearing elsewhere in this Annual Report. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates and judgments involve revenue recognition, contingent consideration and the valuation of our stock-based compensation awards, including the determination of fair value of our common stock, among others. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, including in connection with the COVID-19 pandemic, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
If our goodwill or fixed assets become impaired, we may be required to record a charge to our earnings.
We may be required to record future impairments of goodwill or fixed assets to the extent the fair value of these assets falls below their book value. Our estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value. Estimates used for the Company’s fair value, future sales growth rates, gross profit performance, and other assumptions used to estimate fair value could cause us to record material non-cash impairment charges, which could harm our results of operations and financial condition.
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Risks Related to Socioeconomic, Political and Environmental Factors
The COVID-19 pandemic could have a material adverse impact onDisruptions in the worldwide economy may adversely affect our business, results of operations and financial condition.
Adverse and uncertain economic conditions, including uncertainty related to inflation, market volatility, outbreaks of contagious disease or pandemics, geopolitical tensions and wars, including the Russia-Ukraine war and ongoing conflicts in the Middle East, or disruption in global financial and credit markets due to uncertainty in the banking system or bank failures may impact distributor, retailer, foodservice and consumer demand for our products. In connectionaddition, our ability to manage normal commercial relationships with our farmers, suppliers, co-manufacturers, distributors, retailers, foodservice consumers and creditors may suffer. Consumers may shift purchases to lower-priced or other perceived value offerings, including private-label products, during economic downturns, and an economic downturn may cause customers to be less receptive to price increases on our products.
Adverse economic conditions may also affect our farmers. For example, recent inflationary pressures have resulted in increased costs for our farmers to build, equip and operate their farms. If our relationship with our existing farmers, or our ability to attract new farmers, is disrupted due to economic conditions or otherwise, our operating results may be adversely affected. Further, our foodservice product sales will be reduced if consumers reduce the amount of food they consume away from home at our foodservice customers, including as a result of inflationary concerns or other economic uncertainty. Distributors and customers may become more conservative in response to these conditions and seek to reduce their inventories. Our results of operations depend upon, among other things, our ability to maintain and increase sales volume with our existing distributors, retailer and foodservice customers, our ability to attract new consumers, the financial condition of our consumers and our ability to provide products that appeal to consumers at the right price. Prolonged unfavorable economic conditions may have an adverse effect on our sales and profitability.
In addition, historically, our deposit accounts have held deposits in excess of the amounts insured by the Federal Deposit Insurance Corporation, or FDIC. In the event of a bank failure at any of the institutions where we maintain deposits, there can be no assurance that regulators will agree to guarantee such deposits above and beyond amounts insured by the FDIC.
Disruptions in international trade, including disruptions due to global health pandemics and geopolitical tensions, may have a material adverse impact on us, our suppliers and our network of farms, including our ability to expand our operations as planned.
The COVID-19 pandemic, governments have implemented significant measures, including closures, quarantines, travel restrictionsother global health pandemics, the Russia-Ukraine war, conflicts in the Middle East and other social distancing directives, intendedgeopolitical tensions have disrupted international trade, resulting in increased shipping costs and delays in the import and export of goods to controland from the spreadUnited States and other countries. Specifically, the increased demand for international shipping has resulted in shortages of shipping containers and delays at international ports. Currently, we import cream for our butter from a supplier in Ireland, which may result in increased costs or shipment delays due to the virus. Companies have also taken precautions, such as requiring employees to work remotely, imposing travel restrictionsrecent disruptions in the international trade markets. Additionally, we, our suppliers and temporarily closing businesses.our network of family farms are dependent on equipment and other supplies imported from Europe and other locations. To the extent that these restrictions remain in place, additional prevention and mitigation measures are implemented in the future, or there is uncertainty about the effectiveness of these or any other measures to contain or treat COVID-19, there is likely to be an adverse impact on global economic conditions and consumer confidence and spending, which could materially and adversely affect our supply chain as well as the demand for our products. While at this time we are working to manage and mitigate potential disruptions to our supply chain, and we have not experienced decreases in demandglobal shipping, including disruptions due to global health pandemics or material financial impacts as compared to prior periods, the fluid nature of the COVID-19 pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil, which could alsogeopolitical tensions or wars, negatively impact our, business, financial condition and cash flows.
The impact of COVID-19 on any of our suppliers, co-manufacturers, distributors or transportation or logistics providers may negatively affect the price and availability of our raw materials and impact our supply chain. If the disruptions caused by COVID-19, including interruptions to global shipping that may impact oursuppliers’ and our suppliers’network of family farms’ ability to access equipment and other materials, continue for an extended period of time, our ability to meet the demands of our customers ornecessary goods, we may not be able to expand our operations as planned, may be materially impacted. Additionally, while Egg Central Station, a shell egg processing facility we operate in Springfield, Missouri, remains operational, if we are forced to scale back hours of operation or close this facility in response to the pandemic, we expectand our business, financial condition and results of operations would be materially and adversely affected.
Further, COVID-19 may impact customerWe and consumer demand. Retail and grocery stores may be impacted if governments continuecertain of our vendors use overseas sourcing to implement regional business closures, quarantines, travel restrictions and other social distancing directivesvarying degrees to slow the spreadproduce certain of the virus. Further,products we sell. Any event causing a sudden disruption of manufacturing or imports from such foreign countries, including changes in the Unites States’ foreign trade policies resulting in the imposition of additional import restrictions, withdrawal from or material modifications to, the extent our customers’ operations are negatively impacted, our customers may reduce demand forinternational trade agreements, unanticipated political changes, increased customs duties or spending on our products,tariffs, labor disputes, health epidemics, adverse weather conditions, crop failure, acts of war or customersterrorism, legal or distributors may delay payments to us or request payment or other concessions. There may also be significant reductions or volatility in consumer demand for our products due to travel restrictions or social distancing directives, as well as the temporary inability of consumers to purchase our products due to illness, quarantine or financial hardship, shifts in demand away from one or more of our products, decreased consumer confidence and spending or pantry-loading activity, any of which may negatively impact our results, including as a result of an increased difficulty in planning for operations. Additionally, we may be unable to effectively modify our trade promotion and advertising activities to reflect changing consumer viewing and shopping habits due to event cancellations, reduced in-store visits and travel restrictions, among other things. Further, governmentaleconomic restrictions on the movement of people, public gatheringsoverseas suppliers’ ability to produce and businesses are likely to result in fewer people eating outdeliver products, and greater numbers of restaurant closures, both of which would negatively affectnatural disasters, could increase our foodservice business.
In addition, any healthcosts and safety concerns and/or demands on agency resources related to the COVID-19 pandemic that prevent the FDA or USDA from conducting their regular regulatory activities could significantly impact the ability of these agencies to regulate our products, which could have a material adverse effect on our business.
The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. However, if the pandemic continues to persist as a severe worldwide health crisis, the disease could have a material adverse effect onmaterially harm our business, financial condition and results of operations and cash flows, and mayoperations. Our business is also have the effectsubject to a variety of heightening many of the other risks describedgenerally associated with indirectly sourcing goods from abroad, such as political instability, disruption of imports by labor disputes, currency fluctuations and local business practices. In addition, requirements imposed by the FDA compel importers to verify that food products and ingredients produced by a foreign supplier comply with all applicable legal and regulatory requirements enforced by the FDA, which could result in this “Risk Factors” section.certain products being deemed ineligible for import. In addition, the Department of Homeland Security may at times prevent the importation or customs clearance of certain products and ingredients for reasons unrelated to food safety.
A U.S. federal government shutdown could have a material adverse impact on our results of operations and financial condition.
The partial shutdown of the U.S. federal government that began in late 2018 and continued into 2019 adversely impacted many of our family farmers’ ability to access capital, as these farmers receive funding through farm loan programs of the USDA Farm Service Agency. The partial shutdown also impacted our ability to receive governmental approvals for products and labeling of new products. Another U.S. federal government shutdown of similar or greater duration could similarly impact our business, which could have a material adverse effect on our results of operations and financial condition.
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Climate change, or legal, regulatory or market efforts to address climate change, may negatively affect our business and operations.
OurThere is scientific consensus that carbon dioxide and other greenhouse gases emissions have had, and will continue to have, an adverse impact on global temperatures, weather conditions, and the frequency and severity of natural disasters. If climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain raw materials that are necessary for our products, including corn, soybean meal and other feed ingredients. We may further be subject to unpredictable water availability due to the impact of climate change, and the lack of available water may adversely affect our business and operations.
Additionally, extreme weather and natural disasters exacerbated by climate change may impact our business. The egg farms in our network of small family farms are all geographically located in a region that provides an environment conducive to year round pastureyear-round raising chickens and cows. In addition, the concentration of these farms allows for efficient transportation of pasture-raised eggs to Egg Central Station and of pasture-raised milk to our butter and ghee co-manufacturing facilities.chickens. However, there is concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. If suchif climate change has a negative effect onnegatively impacts the year-round habitability of thethis region for chickens, and cows, we may be subject to decreased availability or less favorable pricing for pasture-raised eggs and milk. Even if eggs and milk are available from other regions, they may not be pasture-raised due to certain regionalour eggs. Adverse weather conditions not being conduciveand natural disasters, including those caused by climate change, can adversely impact pasture conditions, leading to pasture raising. Wereduced yields and quality. For example, elevated summer temperatures in the Pasture Belt have contributed to lower-than-normal shell egg yield at certain of our farms. Adverse weather conditions and natural disasters may also impact the habitability and pasture conditions of the farms where we source the cream for our butter products. Further, we may incur increased transportation, storage and processing costs if we are unable to source pasture-raised eggs and milkproducts within a certain distance from Egg Central Stationour processing and co-manufacturing facilities.facilities due to the effects of climate change.
DisruptionsGovernmental and market concern about climate change and its effects may result in additional legal or regulatory requirements to reduce or mitigate the worldwide economyeffects of greenhouse gases or water usage. Such laws or regulations, to the extent applicable to us or our farmers, suppliers, co-manufacturers or service providers, may adversely affectresult in significant increases to our business, resultscosts of operationsoperation, particularly the supply chain and financial condition.
Adverse and uncertain economic conditions may impact distributor, retailer, foodservice and consumer demand fordistribution costs associated with our products.
Failure to adequately respond to stakeholder scrutiny related to environmental, social and governance issues or failure to achieve our stated impact goals could adversely impact our reputation and brand.
Our business faces scrutiny related to environmental, social and governance (ESG) issues, including sustainable development, product packaging, renewable resources, environmental stewardship, supply chain management, climate change, diversity and inclusion, workplace conduct, human rights, philanthropy and support for local communities. In addition, our abilityDecember 2022, we announced a series of impact-related goals relating to, manage normal commercial relationships with our suppliers, co-manufacturers, distributors, retailers, foodservice consumers and creditors may suffer. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns. In particular, consumers may reduce the amount of pasture-raised products that they purchase where there are more affordable products, including caged, cage-free and free-range egg and egg product offerings, which generally have lower retail prices than our pasture-raised eggs. In addition, consumers may choose to purchase private label products rather than branded products because they are generally less expensive. Further, our foodservice product sales will be reduced if consumers reduce the amount of food they consume away from home at our foodservice customers, whether as a result of restaurant closures or government-ordered quarantines, travel restrictions and other social distancing directives in connection with the COVID-19 pandemic, or in other times of economic uncertainty. Distributors and customers may become more conservative in response to these conditions and seek to reduce their inventories. Our results of operations depend upon, among other things, ecological impacts, diversity and inclusion, governance accountability and climate change, which we refer to as our ability to maintain and increase sales volume with our existing distributors, retailer and foodservice customers, our ability to attract new consumers, the financial condition of our consumers and our ability to provide productsImpact Goals. There is no assurance that appeal to consumers at the right price. Prolonged unfavorable economic conditions may have an adverse effect on our sales and profitability.
Disruptions in international trade, including due to the ongoing COVID-19 pandemic, may have a material adverse impact on us, our suppliers and our network of farms, including our ability to expand our operations as planned.
The global COVID-19 pandemic has disrupted international trade, resulting in increased shipping costs and delays in the import and export of goods to and from the United States and other countries. Specifically, the increased demand for international shipping has resulted in shortages of shipping containers and delays at international ports. We, our suppliers and our network of farms are dependent on the import of equipment and other supplies from Europe and other locations. To the extent that disruptions to global shipping negatively impact our, our suppliers’ and our network of farms’ ability to access necessary goods, we may notwill be able to expandachieve these goals. Failure to achieve our operations as planned,Impact Goals could damage our reputation and brand image, and our business, financial condition and results of operations wouldcould be materiallyadversely impacted. Furthermore, there exists negative sentiment toward ESG measures among certain individuals and government institutions, and several states have enacted or proposed “anti-ESG” legislation. While these policies and legislation are generally targeted to investment advisory firms and mutual funds, as we continue to pursue our Impact Goals and related initiatives, we could face a negative reaction that adversely affected.impacts our business.
Implementation of our environmental and sustainability initiatives, including in connection with our Impact Goals and annual Impact Report, may require certain financial expenditures and crew member resources, and if we are unable to meet our goals or otherwise fail to meet stakeholder standards or expectations with respect to ESG issues or our Impact Goals, this could have a material adverse effect on our reputation and brand and negatively impact our relationship with our investors, crew members, farmers, suppliers, customers and consumers.
RisksRelated to Legal and Government Regulation
Food safety and food-borne illness incidents or advertising or product mislabeling may materially and adversely affect our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing our operating costs and reducing demand for our product offerings.
Selling food for human consumption involves inherent legal and other risks, and there is increasing governmental scrutiny of and public awareness regarding food safety. Illness, injury or death related to allergens, food-borne illnesses, foreign material contamination or other food safety incidents caused by our products, or involving our farmers or other suppliers, could result in the disruption or discontinuance of sales of these products or our relationships with such farmers or suppliers, or otherwise result in increased operating costs, regulatory enforcement actions or harm to our reputation. For example, in December 2019, our co-manufacturer for hard-boiled eggs conducted a voluntary Class I recall of all hard-boiled eggs produced at its facility, including ours, due to a potential listeria contamination at the production facility. Our co-manufacturer elected to permanently close the affected production facility and move all production to a different facility, which did not have sufficient capacity to meet product demand. As a result, we were unable to supply customers with hard-boiled eggs for a period of time in the first quarter of fiscal 2020. Our co-manufacturers are currently able to meet our product demand for hard-boiled eggs due to the effects of COVID-19 on the foodservice industry. However, we may experience supply issues once the foodservice industry returns to full capacity, which may lead to additional loss of customers.
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Shipment of adulterated or misbranded products, even if inadvertent, can result in criminal or civil liability. Such incidents could also expose us to product liability, negligence or other lawsuits, including consumer class action lawsuits. Any claims brought against us may exceed or be outside the scope of our existing or future insurance policy coverage or limits. Any judgment against us that is more than our policy limits or not covered by our insurance policies or not subject to insurance would have to be paid from our cash reserves, which would reduce our capital resources.
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The occurrence of food-borne illnesses or other food safety incidents could also adversely affect the price and availability of affected raw materials, resulting in higher costs, disruptions in supply and a reduction in our sales. Furthermore, any instances of food contamination or regulatory noncompliance, whether or not caused by our actions, could compel us, our farms or suppliers, our distributors or our customers, depending on the circumstances, to conduct a recall in accordance with FDA or USDA regulations and policies, and comparable state laws. Food recalls could result in significant losses due to their costs, the destruction of product inventory, lost sales due to the unavailability of the product for a period of time and potential loss of existing distributors or customers and a potential negative impact on our ability to attract new customers due to negative consumer experiences or because of an adverse impact on our brand and reputation. The costs of a recall could be outside the scope of our existing or future insurance policy coverage or limits.
In addition, food companies have been subject to targeted, large-scale tampering as well as to opportunistic, individual product tampering, and we, like any food company, could be a target for product tampering. Forms of tampering could include the introduction of foreign material, chemical contaminants and pathological organisms into food products, as well as product substitution. Governmental regulations require companies like us to analyze, prepare and implement mitigation strategies specifically to address tampering designed to inflict widespread public health harm. If we do not adequately address the possibility, or any actual instance, of product tampering, we could face possible seizure or recall of our products and the imposition of civil or criminal sanctions, which could adversely affect our business, financial condition and operating results.
Our operations are subject to FDA and USDA federal regulationregulations, as well as other state and state regulation,local regulations, and there is no assurance that we will be in compliance with all applicable regulations.
Our operations are subject to extensive regulation by the FDA, the USDA and other federal, state and local authorities. With respect to eggs in particular, the FDA and the USDA split jurisdiction depending on the type of product involved. While the FDA has primary responsibility for the regulation of shell eggs, the USDA has primary responsibility for the regulation of dried, frozen or liquid eggs and other “egg products,” subject to certain exceptions. Specifically, our shell eggs, butter and hard-boiled eggs, ghee and egg bite products are subject to the requirements of the Federal Food, Drug, and Cosmetic Act, as amended, including by the Food Safety Modernization Act of 2011, or the FDCA,FSMA, and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging, labeling and safety of most food products. The FDA requires that facilities that manufacture food products comply with a range of requirements, including but not limited to hazard analysis and preventativepreventive controls regulations, current good manufacturing practices, or cGMPs and supplier verification requirements. Our shell egg operations are further subject to FDA regulatory requirements governing the production, storage and transportation of shell eggs for the control of salmonella. FDA-inspected processing facilities are subject to periodic and “for cause” inspection by federal, state and local authorities. We are subject to requirements under FSMA’s foreign supplier verification program and import tariffs, bond and other requirements imposed by U.S. Customs and Border Protection for our butter products, which are imported from Ireland.
In addition, certain of our products, such as our liquid whole egg and certain of our egg bite products, are subject to regulation by the USDA, including facility registration, inspection, manufacturing and labeling requirements. We do not control the manufacturing processes of, and rely upon, our co-manufacturers for compliance with cGMPs and other regulatory requirements for the manufacturing of our products that is conducted by our co-manufacturers. If we or our co-manufacturers cannot successfully manufacture products that conform to our specifications and the strict regulatory requirements of the FDA, the USDA or others, we or they may be subject to adverse inspectional findings or enforcement actions, which could materially impact our ability to market our products, result in our co-manufacturers’ inability to continue manufacturing for us, result in a recall of our products that have already been distributed and result in damage to our brand and reputation. For example, in December 2019, our co-manufacturer for hard-boiled eggs conducted a voluntary Class I recall of all hard-boiled eggs produced at its facility, including ours, due to a potential listeria contamination at the production facility. We rely upon our co-manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA, the USDA or a comparable foreignanother regulatory authority determines that we or these co-manufacturers have not complied with the applicable regulatory requirements, our business may be adversely impacted.
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Our liquid whole eggs are subject to the requirements of the Egg Products Inspection Act, or EPIA, and regulations promulgated thereunder by the USDA. The USDA has comprehensive regulations in place that apply to establishments that break, dry and process shell eggs into liquid egg products. This regulatory scheme governs the manufacturing, processing, pasteurizations, packaging, labeling and safety of egg products. Under the EPIA and USDA regulations, establishments that manufacture egg products must comply with the USDA’s requirements for sanitation, temperature control, pasteurization and labeling. In addition, in September 2020, the USDA announced that it had finalized its Egg Products Inspection Rule. Pursuant to the regulatory requirements established by this rule, we anticipate that our co-manufacturers’ liquid whole egg establishment will be required to implement Hazard Analysis and Critical Control Point plans within two years after publication of the final rule in the Federal Register and will further be required to implement Sanitary Standard Operating Procedures within one year after publication in the Federal Register. Certain of our egg bite products that contain bacon and ham are also subject to USDA regulation, pursuant to the Federal Meat Inspection Act, or FMIA. The FMIA and USDA regulations establish registration, inspection, recordkeeping, labeling and other requirements governing certain products that contain meat, including our products. We do not control the manufacturing processes of, and rely upon, our co-manufacturers for compliance with USDA regulations for the manufacturing of our liquid whole egg and egg bite products, thatwhich is conducted by our co-manufacturers. If we or our co-manufacturers cannot successfully manufacture liquid whole eggs or egg bitesproducts that conform to our specifications and the strict regulatory requirements of the USDA or others, we or they may be subject to adverse inspectional findings or enforcement actions, which could materially impact our ability to market our products, could result in our co-manufacturers’ inability to continue manufacturing for us, or could result in a recall of our product that has already been distributed. In addition, we rely upon our co-manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the USDA or a comparable foreign regulatory authority determines that we or these co-manufacturers have not complied with the applicable regulatory requirements, our business may be materially impacted.
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In addition to regulation pursuant to the FDCA, EPIA and FMIA, some of our products are subject to the Agricultural Marketing Act of 1946, or the AMA. The AMA governs voluntary grade claims that appear on some of our products and are administered by the USDA Agricultural Marketing Service, or AMS. For instance, our shell eggs, including those handled by our co-manufacturers, are graded for quality by USDA AMS grading personnel. Similarly, our butter product, including those handled by our co-manufacturers, are graded for flavor, body, color and salt content. We do not control the processes in place on our contract farms or with our co-manufacturers (which can affect the assigned grade), and rely upon both to provide us quality, fresh products that meet our stringent quality standards. If we, or our network of family farms and co-manufacturers, cannot successfully manufacture products that confirm with our quality specifications or meet appropriate grading standards under the AMA, we may have difficulty marketing our products or may be required to source our products from other farms and co-manufacturers.
Our products that are labeled as “organic” are subject to the requirements of the Organic Foods Production Act, or OFPA, and the USDA’s National Organic Program, or NOP, regulations. The OFPA is a comprehensive regulatory scheme that mandates certain practices and prohibits other practices pertaining to the raising of animals and handling and processing of food products. We, and our network of family farms and co-manufacturers, contract with NOP-accredited certifying agents to ensure that our organic products are produced in compliance with the OFPA and NOP regulations. We do not control the farms where our products are raised and rely on the farms for compliance with the on-farm requirements of the OFPA and NOP regulations. Similarly, we do not control the manufacturing processes of, and we rely upon, our co-manufacturers for compliance with requirements of the OFPA and NOP regulations with respect to organic products handled and manufactured by our co-manufacturers. If we, the farms or the co-manufacturers cannot successfully raise and manufacture products that meet the strict regulatory requirements of the OFPA and the NOP, we or they may be subject to adverse inspectional findings or enforcement actions, which could materially impact our ability to market our products as “organic,” could result in the farms or co-manufacturers’ inability to continue to raise farm products or manufacture food for us, or we, the farms, or the co-manufacturer could lose the right to market products as “organic,” and subject us, the farms, or co-manufacturers to civil monetary penalties. If the USDA or a comparable foreign regulatory authority determines that we or these co-manufacturers have not complied with the applicable regulatory requirements, our business may be materially impacted.
We are also subject to state and local regulations, including product requirements, labeling requirements and import restrictions. For example, the State of Iowa requires that grocery stores which participate in the Special Supplement Nutrition Program for Women, Infants, and Children, and which sell eggs produced by chickens advertised as being housed in cage-free, free-range or enriched colony cage environments, also sell “conventional” eggs produced by chickens that are not so advertised. That regulation impacted the space allocation for non-caged eggs on the shelves of retailers in Iowa and their willingness to carry our eggs. In addition, one or more states could pass regulations that establish requirements that our products would not satisfy. If our products fail to meet such individual state standards or are restricted from being imported into a state by state regulatory requirements, our business, financial condition or results of operations could be materially and adversely affected.
We seek to comply with applicable regulations through a combination of employing internal experience and expert personnel to ensure quality-assurancequality assurance compliance (i.e., assuring that our products are not adulterated or misbranded) and contracting with third-party laboratories that conduct analyses of products to ensure compliance with nutrition labeling requirements and to identify any potential contaminants before distribution. Failure by us, the farms or the co-manufacturers to comply with applicable laws and regulations or maintain permits, licenses or registrations relating to our or our co-manufacturers’ operations could subject us to civil remedies or penalties, including fines, injunctions, recalls or seizures, warning letters, restrictions on the marketing or manufacturing of products, or refusals to permit the import or export of products, as well as potential criminal sanctions, which could result in increased operating costs resulting in a material effect on our operating results and business. See the section titled “—Government Regulation” in Part I, Item 1, “Business,” of this Annual Report for further information on the regulations to which we are subject.
Changes in existing laws or regulations, or the adoption of new laws or regulations may increase our costs and otherwise adversely affect our business, results of operations and financial condition.
The manufacture and marketing of food products is highly regulated. We, our farmers, our suppliers and our co-manufacturers are subject to a variety of laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacture, packaging, labeling, distribution, advertising, sale, quality and safety of our products, as well as the health and safety of our crew members and the protection of the environment.
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In the United States, we are subject to regulation by various government agencies, including the FDA, the USDA, the Federal Trade Commission, or FTC, the Occupational Safety and Health Administration, or OSHA, and the Environmental Protection Agency, or EPA, as well as various state and local agencies. We are also regulated outside the United States by various international regulatory bodies. In addition, we are subject to certain standards, such as GFSI standards and review by voluntary organizations, such as the Council of Better Business Bureaus’ National Advertising Division. We could incur costs, including fines, penalties and third-party claims, because of any violations of, or liabilities under, such requirements, including any competitor or consumer challenges relating to compliance with such requirements. For example, in connection with the marketing and advertisement of our products, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states.
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The regulatory environment in which we operate could change significantly and adversely in the future. Any change in manufacturing, labeling or packaging requirements for our products may lead to an increase in costs or interruptions in production, either of which could adversely affect our operations and financial condition. Changes in marketing or labeling requirements or standards related to our products could require us to revise or discontinue making certain claims or utilizing certain branding elements, which may make our products less appealing to consumers. New or revised government laws and regulations could result in additional compliance costs and, in the event of non-compliance, civil remedies, including fines, injunctions, withdrawals, recalls or seizures and confiscations, as well as potential criminal sanctions, any of which may adversely affect our business, financial condition and results of operations.
Failure by our network of family farms, suppliers of raw materials or co-manufacturers to comply with food safety, environmental or other laws and regulations, or with the specifications and requirements of our products, may disrupt our supply of products and adversely affect our business.
If any partners in our network of family farms, suppliers or co-manufacturers fail to comply with food safety, environmental, health and safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted and our reputation could be harmed. Additionally, the farms and co-manufacturers are required to maintain the quality of our products and to comply with our standards and specifications. In the event of actual or alleged non-compliance, we might be forced to find alternative farms, suppliers or co-manufacturers and we may be subject to lawsuits and/or regulatory enforcement actions related to such non-compliance by the farms, suppliers and co-manufacturers. As a result, our supply of pasture-raised eggs and other raw materials or finished inventory could be disrupted or our costs could increase, which would adversely affect our business, results of operations and financial condition. The failure of any partner farmer or co-manufacturer to produce products that conform to our standards could adversely affect our reputation in the marketplace and result in product recalls, product liability claims, government or third-party actions and economic loss. For example, in December 2019, our co-manufacturer for hard-boiled eggs conducted a voluntary Class I recall of all hard-boiled eggs produced at its facility, including ours, due to a potential listeria contamination at the production facility. Additionally, actions we may take to mitigate the impact of any disruption or potential disruption in our supply of pasture-raised eggs and other raw materials or finished inventory, including increasing inventory in anticipation of a potential supply or production interruption, may adversely affect our business, financial condition and results of operations.
We are subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings and investigations.
Our business operations and ownership and past and present operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and natural resources. Violation of these laws and regulations could lead to substantial liabilities, fines and penalties or to capital expenditures related to pollution control equipment that could have a material adverse effect on our business. We could also experience in the future significant opposition from third parties with respect to our business, including environmental non-governmental organizations, neighborhood groups and municipalities. Additionally, new matters or sites may be identified in the future, including in connection with the potential expansion of our processing capacity, that will require additional environmental investigation, assessment, or expenditures, which could cause additional capital expenditures. Future discovery of contamination of property underlying or in the vicinity of our present or future properties, or facilities and/or waste disposal sites could require us to incur additional expenses, delays to our business and to our proposed construction. The occurrence of any of these events, the implementation of new laws and regulations, or stricter interpretation of existing laws or regulations could adversely affect our business, financial condition and results of operations.
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Legal claims, government investigations or other regulatory enforcement actions could subject us to civil and criminal penalties.
We operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to a heightened risk of legal claims, government investigations or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our crew members, consultants, independent contractors, farmers, suppliers, co-manufacturers or distributors will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims, government investigations or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition and operating results. In addition, the costs and other effects of defending potential and pending litigation and administrative actions against us may be difficult to determine and could adversely affect our financial condition and operating results.
Litigation or legal proceedings could expose us to significant liabilities and have a negative impact on our reputation or business.
FromWe are not currently party to any material litigation. However, from time to time, we may be party to various claims and litigation proceedings. We evaluate these claims and litigation proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we may establish reserves, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. For example, we have not established a reserve against any potential losses related to a false advertising lawsuit filed in federal court in May 2021 by alleged consumers of our eggs on behalf of themselves and a putative class, as no class has yet been certified and, at this point, we cannot reasonably estimate the possible loss or range of loss, if any. Actual outcomes or losses may differ materially from ourany assessments and estimates. We are not currently party to any material litigation.estimates we may make.
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Even when not merited, the defense of these lawsuitsclaims and litigation proceedings may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. For example, we have expended both management time and monetary resources in defending the above-referenced lawsuit. The results of litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements in someany of these legal disputes may result in adverse monetary damages, penalties or injunctive relief against us, which could have a material adverse effect on our financial position, cash flows or results of operations. Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.
Furthermore, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to various exclusions as well asand caps on amounts recoverable. Even if we believe a claim is covered by insurance, insurers may dispute our entitlement to recovery for a variety of potential reasons, which may affect the timing and, if the insurers prevail, the amount of our recovery.
We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, industry standards, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions, litigation (including class claims) and mass arbitration demands, fines and penalties, disruptions of our business operations, reputational harm, loss of revenue or profits and other adverse consequences.
In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit and share (collectively, process) personal data and other sensitive information, including proprietary and confidential business data, trade secrets, intellectual property, sensitive third-party data, business plans, transactions and financial information, which we collectively refer to as “sensitive data.”
Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contractual requirements and other obligations relating to data privacy and security.
We may at times fail (or be perceived to have failed) in our efforts to comply with our data privacy and security obligations. Moreover, despite our efforts, our crew members or third parties on whom we rely may fail to comply with such obligations, which could negatively impact our business operations. If we or the third parties on which we rely fail, or are perceived to have failed, to address or comply with applicable data privacy and security obligations, we could face significant consequences, including but not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections and similar actions), litigation (including class-action claims) and mass arbitration demands, additional reporting requirements and/or oversight, bans on processing personal data and orders to destroy or not use personal data. In particular, plaintiffs have become increasingly active in bringing privacy-related claims against companies, including class claims and mass arbitration demands. Some of these claims allow for the recovery of statutory damages on a per violation basis, and, if viable, carry the potential for significant statutory damages depending on the volume of data and the number of violations. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to loss of customers, inability to process personal data or to operate in
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certain jurisdictions, limited ability to develop or commercialize our products, expenditure of time and resources to defend any claim or inquiry, adverse publicity or substantial changes to our business model or operations.
Risks Related to Our Status as a Certified B Corporation and Public Benefit Corporation
Our status as a public benefit corporation and a Certified B Corporation may not result in the benefits that we anticipate.anticipate, and we may be unable to maintain our Certified B Corporation status.
We have elected to be classified as a public benefit corporation under Delaware law. As a public benefit corporation, we are required to balance the financial interests of our stockholders with the best interests of those stakeholders materially affected by our conduct, including particularly those affected by the specific benefit purposes set forth in our amended and restated certificate of incorporation. In addition, thereThere is no assurance that the expected positive impact from being a public benefit corporation will be realized. Accordingly, beingrealized and our status as a public benefit corporation and complyingcompliance with our related obligations could negatively impact our ability to provide the highest possible return to our stockholders.
As a public benefit corporation, we are required to publicly disclose to stockholders a report at least biennially on our overall public benefit performance and on our assessment of our success in achieving our specific public benefit purpose. If we are not timely or are unable to provide this report, or if the report is not viewed favorably by parties doing business with us or regulators or others reviewing our credentials, our reputation and status as a public benefit corporation may be harmed.
While not required by Delaware law or the terms of our certificate of incorporation, we have elected to have our social and environmental performance, accountability and transparency assessed against the proprietary criteria established by B Lab, an independent non-profit organization. As a result of this assessment, we have been designated as a “Certified B Corporation,” which refers to companies that are certified as meeting certain levels of social and environmental performance, accountability and transparency. The standards for Certified B Corporation certification are set by an independent organization, B Lab and may change over time, and our continued certification is at the sole discretion of B Lab. To maintain our certification, we are required to update our assessment and verify our updated score with B Lab every three years. We were most recently recertified in February 2018 and are in the process of our second recertification with B Lab. We were randomly selected for an onsite review, which is expected to occur in the second quarter of fiscal year 2021. Ouras a Certified B Corporation designation remains in good standing while we conduct the recertification process, but there is no guarantee that we will be recertified.January 2022. Our reputation could be harmed if we lose our status as a Certified B Corporation, whether by our choice or by our failure to continue to meet the certification requirements, particularly if that failure or change were to create a perception that we are more focused on financial performance and are no longer as committed to the values shared by Certified B Corporations. Likewise, our reputation could be harmedCorporations, or if our publicly reported Certified B Corporation score declines.
As a public benefit corporation, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.
As a public benefit corporation, our boardBoard of directorsDirectors, has a duty to balance (i) the pecuniary interest of our stockholders, (ii) the best interests of those materially affected by our conduct and (iii) specific public benefits identified in our charter documents.amended and restated certificate of incorporation. While we believe our public benefit designation and obligationassociated obligations will benefit our stockholders, in balancing these interests our boardBoard of directorsDirectors may take actions that do not maximize stockholder value. Any benefits to stockholders resulting from our public benefit purposes may not materialize within the timeframe we expect or at all and may have negative effects. For example:
we may choose to revise our policies in ways that we believe will be beneficial to stakeholders other than our stakeholders,stockholders, including farmers, suppliers, crew members and local communities, even though the changes may be costly;
we may take actions, such as building state-of-the-art facilities with technology and quality control mechanisms that exceed the requirements of USDA and the FDA, even though these actions may be more costly than other alternatives;
we may be influenced to pursue programs and services to demonstrate our commitment to the communities to which we serve and bringing ethically producedethical food to the table, even though there ismay be no immediate return to our stockholders; or
in responding to a possible proposal to acquire the company, our boardBoard of directorsDirectors may be influenced by the interests of stakeholders other than our stakeholders,stockholders, including farmers, suppliers, crew members and local communities, whose interests may be different from the interests of our stockholders.
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We may be unable or slow to fully realize the benefits we expect from actions taken to benefit our stakeholders, including farmers, suppliers, crew members and local communities, which could adversely affect our business, financial condition and results of operations, which in turn could cause our stock price to decline.
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As a public benefit corporation, we may be subject to increased derivative litigation concerning our duty to balance stockholder and public benefit interests, the occurrence of which may have an adverse impact on our financial condition and results of operations.
As a Delaware public benefit corporation, our stockholders (if they, individually or collectively, own at least 2% of our outstanding capital stock or shares having at least $2 million in market value (whichever is less)) are entitled to file a derivative lawsuit claiming that our directors failed to balance stockholder and public benefit interests. This potential liability does not exist for traditional corporations. Therefore, we may be subject to the possibility of increased derivative litigation, which would require the attention of management and, as a result, may adversely impact management’s ability to effectively execute our strategy. Any such derivative litigation may be costly and have an adverse impact on our financial condition and results of operations.
Risks Related to Being a Public Company
If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting, disclosure controls and procedures. We previously identified two material weaknesses inare required, under Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, the accuracy and timingreporting. This assessment must include disclosure of our financial reporting may be adversely affected.
Prior to our initial public offering, or IPO, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. In connection with the audit of our financial statements for fiscal 2018, we identified twoany material weaknesses identified by our management in our internal control over financial reporting. A “material weakness”material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there isresults in more than a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.
We determinedOur compliance with Section 404 will require that we had two material weaknesses because (i) we didcontinue to incur substantial expense and expend significant management efforts to ensure ongoing compliance. We may not maintain a sufficient complement of personnel with an appropriate degree of technical knowledge commensurate withbe able to complete our accountingevaluation, testing and reporting requirements and (ii) we did not design our controls sufficiently to completely and accurately record our accrued liabilities and other estimates at period end. As a result, there were certain post-close adjustments that wereany required that were material to the financial statements. These material weaknesses could resultremediation in a misstatement of account balancestimely fashion. During the evaluation and testing process, if we identify one or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. In connection with the audit of our financial statements for 2019, we determined that the previously identified material weaknesses had been remediated.
To address these material weaknesses, we hired additional accounting personnel and implemented process level and management review controls. We can give no assurance that additionalmore material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be identifiedmaterial weaknesses or significant deficiencies in our internal control over financial reporting in the future. OurAny failure to implement and maintain effective internal control over financial reporting could result in errors inseverely inhibit our financial statements that could result in a restatement of our financial statements, cause usability to fail to meet our reporting obligations.
As a newly public company, we are required to further design, document and test our internal controls over financial reporting to comply with Section 404. We cannot be certain that additional material weaknesses and control deficiencies will not be discovered in the future. If material weaknesses or control deficiencies occur in the future, we may be unable toaccurately report our financial condition, results accurately on a timely basisof operations or help prevent fraud, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our common stock to decline.cash flows. If we have material weaknesses in the future, it could affect the financial results that we report or create a perception that those financial results do not fairly state our financial position or results of operations. Either of those events could have an adverse effect on the value of our common stock.
Further, even if weare unable to conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesis effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in accordance with GAAP, because of its inherent limitations,our internal control over financial reporting may not preventonce that firm conducts its Section 404 reviews, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or detect fraudinvestigations by The Nasdaq Stock Market LLC, or misstatements.Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required new or improved controls, or difficulties encountered in their implementation,of public companies, could harm our results of operations or cause us to fail to meetalso restrict our future reporting obligations.access to the capital markets.
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We are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements of Section 404, of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.standards and as a result will incur additional expenses.
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We will remain an emerging growth company until the earliest of: (1) December 28, 2025; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07$1.235 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our common stock held by non-affiliates exceededexceeds $700 million as of the last business day of the second fiscal quarter of such fiscal year.
We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future results of operations may not be as comparable to the results of operations of certain other companies in our industry that have adopted such standards. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
As a public company, we will incur significant finance, legal, accounting and other expenses, including director and officer liability insurance, that we did not incur as a private company, which we expect to further increase after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs.
Pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, we will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the fiscal year ending December 30, 2021. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the Securities and Exchange Commission, or SEC, following the date we are no longer an emerging growth company. To prepare for eventual compliance with Section 404, we will be engaged in a costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion once initiated. Our compliance with Section 404 will require that we incur substantial expenses and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.
Risks Related to Information Technology and Intellectual Property
We rely onIf our data or information technology systems, and any inadequacy, failure, interruption or security breaches of those systems may harm our ability to effectively operate our business.
We are dependent on variousthe data or information technology systems of third parties upon which we rely, were compromised, we could experience adverse consequences, including but not limited to networks, applicationsregulatory investigations or actions, litigation, fines and outsourced services in connection with the operation of our business. A failure of our information technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and loss of sales, causing our business to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, viruses and security breaches. Any such damage or interruption could have an adverse effect on our business.
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A cybersecurity incident or other technology disruptions could negatively impact our business and our relationships with customers.
We use computers in substantially all aspectspenalties, disruption of our business operations.operations, reputational harm, loss of revenue or profits and other adverse consequences.
In the ordinary course of our business, we and the third parties upon which we rely process sensitive data, and, as a result, we and the third parties upon which we rely face a variety of evolving threats that could cause security incidents. We also use mobile devices, social networking and other online activities and third parties to connect with our crew members, farmers, suppliers, co-manufacturers, distributors, customers and consumers. Cyber-attacks, malicious internet-based activity, online and offline fraud and other similar activities may threaten the confidentiality, integrity, and availability of our sensitive data and information technology systems, and those of the third parties upon which we rely. Such uses givethreats are prevalent and continue to rise, are increasingly difficult to cybersecurity risks,detect, and come from a variety of sources, including security breaches, espionage, system disruption,traditional computer “hackers,” threat actors, “hacktivists,” organized criminal threat actors, personnel (such as through theft or misuse), sophisticated nation states and inadvertent release of information. Cybersecurity incidents are increasing in their frequency, sophistication and intensity, with third-party phishing and social engineering attacks in particular increasing in connection with the COVID-19 pandemic. Our business involves sensitive information and intellectual property, including customers’, distributors’ and suppliers’ information, private information about crew members and financial and strategic information about us and our business partners.nation-state-supported actors. Further, as we pursue new initiatives that improve our operations and cost structure, we also intend to expand and improve our information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk.
Some actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyber-attacks, that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our services.
We and the third parties upon which we rely are subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through deep fakes, which may be increasingly more difficult to identify as fake, and phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks, credential stuffing, credential harvesting, personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, attacks enhanced or facilitated by AI, telecommunications failures, earthquakes, fires, floods, and other similar threats.
In particular, severe ransomware attacks are becoming increasingly prevalent and could lead to significant interruptions in our operations, ability to provide our products or services, loss of sensitive data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments.
Additionally, future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Furthermore, we may discover security issues that were not found during due diligence of such acquired or integrated entities, and it may be difficult to integrate companies into our information technology environment and security program.
In addition, our reliance on third-party service providers could introduce new cybersecurity risks and vulnerabilities, including supply-chain attacks, and other threats to our business operations. We rely on third-party service providers and technologies to operate critical business systems to process sensitive data in a variety of contexts, including, without limitation. We also rely on third-party service providers to provide other products, services, parts, or otherwise to operate our business. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. If our third-party service providers experience a security incident or other interruption, we could experience adverse consequences. While we may be entitled to damages if our third-party service providers fail to assess and identify cybersecurity risks associated with new initiatives,satisfy their privacy or security-related obligations to us, any award may be insufficient to cover our damages, or we may become increasingly vulnerablebe unable to recover such risks. Additionally, whileaward. In addition, supply-chain attacks
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have increased in frequency and severity, and we cannot guarantee that third parties’ infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised.
While we have implemented security measures designed to prevent security breachesprotect against cybersecurity incidents, there can be no assurance that these incident response measures will be effective. We take steps designed to detect, mitigate, and cyber incidents,remediate vulnerabilities in our preventativeinformation systems (such as our hardware and/or software, including that of third parties upon which we rely). We may not, however, detect and remediate all such vulnerabilities including on a timely basis. Further, we may experience delays in developing and deploying remedial measures and incident response efforts may notpatches designed to address identified vulnerabilities. Vulnerabilities could be entirely effective. exploited and result in a security incident.
The theft, destruction, loss, misappropriation or release of sensitive information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers and distributors, potential liability and competitive disadvantage all of which could have an adverse effect on our business, financial condition or results of operations.
Such risks may be increased by the fact that substantially all of our crew members outside of Egg Central Station are working remotely on a permanent basis. Technologies and security systems in place at our crew members’ homes may be less secure than those used in a physical office, and while we have implemented controls and safeguards to help protect our systems as our crew members work from home, there can be no assurance that these measures will be effective.
Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive data or our information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our services.
We may expend significant resources or modify our business activities to try to protect against security incidents. Additionally, certain data privacy and security obligations may require us to implement and maintain specific security measures or industry-standard or reasonable security measures to protect our information technology systems and sensitive data.
Applicable data privacy and security obligations may require us to notify relevant stakeholders, including affected individuals, customers, regulators, and investors, of security incidents. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to adverse consequences.
If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences, such as: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive data (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; diversion of management attention; interruptions in our operations (including availability of data); competitive disadvantage; financial loss; and other similar harms. Security incidents and attendant consequences may prevent or cause customers to stop using our services, deter new customers from using our services, and negatively impact our ability to grow and operate our business.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
In addition to experiencing a security incident, third parties may gather, collect, or infer sensitive data about us from public sources, data brokers, or other means that reveals competitively sensitive details about our organization and could be used to undermine our competitive advantage or market position. Further, use of artificial intelligence platforms by our crew members, whether authorized or unauthorized, may increase the risk that our intellectual property and other proprietary information will be unintentionally disclosed. If we fail to identify and address cybersecurity risks associated with new initiatives, we may become increasingly vulnerable to such risks.
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The implementation of a new enterprise resource planning system could cause disruption to our business, and we may not be able to effectively realize the benefits of this new system.
We are in the process of transitioning to a new enterprise resource planning, or ERP, system, in order to support our future growth and more fully optimize our existing processes. The implementation of a new ERP system may prove to be more difficult, costly or time-consuming than expected, and it is possible that the system will not yield the benefits we anticipate. Any disruptions, delays or deficiencies related to the new ERP system could materially impact our operations and adversely affect our ability to process orders, manage our inventory, fulfill obligations to customers or otherwise operate our business. In addition, implementation of a new ERP system will require significant resources, including the time and attention of our management and key crew members, in order to fully realize the anticipated benefits.
The loss of any registered trademark or other intellectual property could enable other companies to compete more effectively with us.
We utilize intellectual property in our business. Our trademarks are valuable assets that reinforce our brand and consumers’ favorable perception of our products. We have invested a significant amount of money in establishing and promoting our trademarked brands. We also rely on unpatented proprietary expertise and copyright protection to develop and maintain our competitive position. Our continued success depends, to a significant degree, upon our ability to protect and preserve our intellectual property, including our trademarks and copyrights.
We rely on confidentiality agreements and trademark and copyright law to protect our intellectual property rights. Our confidentiality agreements with our crew members and certain of our consultants, contract employees, suppliers and independent contractors, including some of our co-manufacturers who use our formulations to manufacture our products, generally require that all information made known to them be kept strictly confidential. Further, some of our formulations have been developed by or with our suppliers and co-manufacturers. As a result, we may not be able to prevent others from using similar formulations.
We cannot assure yoube certain that the steps we have taken to protect our intellectual property rights are adequate, that our intellectual property rights can be successfully defended and asserted in the future or that third parties will not infringe upon or misappropriate any such rights. In addition, our trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect our trademark rights could prevent us in the future from challenging third parties who use names and logos similar to our trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of our brand and products. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether we are successful. Such proceedings may be protracted with no certainty of success, and an adverse outcome could subject us to liabilities, force us to cease use of certain trademarks or other intellectual property or force us to enter into licenses with others. Any one of these occurrences may have an adverse effect on our business, financial condition and results of operations.
Risks Related to Ownership of Our Common Stock and Other General Risks
Our stock price may be volatile, and the value of our common stock may decline.
The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including:
actual or anticipated fluctuationsincluding those described elsewhere in our financial condition or results of operations;this “Risk Factors” section.
variance in our financial performance from expectations of securities analysts;
changes in our projected operating and financial results;
announcements by us or our competitors of significant business developments, acquisitions or new offerings;
announcements or concerns regarding real or perceived quality or health issues with our products or similar products of our competitors;
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our involvement in litigation;
sales of our common stock by us or our stockholders, as well as the anticipation of lock-up releases;
changes in senior management or key personnel;
the trading volume of our common stock; and
changes in the anticipated future size and growth rate of our market.
Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may also negatively impact the market price of our common stock, particularly in light of uncertainties surrounding the ongoing COVID-19 pandemicinflation, geopolitical tensions, disruption in global financial and thecredit markets, public health pandemics and related impacts.
An active public market for our common stock may not develop or be sustained.
Prior to the closing of our IPO on August 4, 2020, no public market for our common stock existed. An active public trading market for our common stock may not continue to develop or, if further developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies by using our shares as consideration.
Insiders have substantial control over us and will beare able to influence corporate matters.
Based on the number of shares outstanding as of December 27, 2020,31, 2023, our directors, officers and stockholders holding more than 5% of our outstanding stock, together with their affiliates, willofficers hold, in the aggregate, approximately 52.2%24.5% of our outstanding capital stock. As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit stockholders’ ability to influence corporate matters, and may have the effect ofincluding, but not limited to, delaying or preventing a third party from acquiring control over us.
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Sales of our common stock in the public market could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equityholdersequity holders have substantial unrecognized gains on the value of the equity they hold, and therefore they may take steps to sell their shares or otherwise secure the unrecognized gains on those shares. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our common stock.
In addition, as of December 27, 2020,31, 2023, there were 5,863,7814,485,861 shares of common stock issuable upon the exercise of outstanding stock options or subject to vesting of outstanding restricted stock awards. We have registered all of the shares of common stock issuable upon exercise of outstanding stock options, vesting of outstanding restricted stock awards or other equity incentives we may grant in the future, for public resale under the Securities Act of 1933, as amended, or the Securities Act. The shares of common stock will become eligible for sale in the public market to the extent such options are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.
Further, based on shares outstanding as of December 27, 2020,31, 2023, holders of approximately 20,582,63412.5 million shares of our capital stock as well as holders of 965,675and certain shares issuablethat may be issued in the future upon the exercise or vesting of outstanding vested and unvested stock options,equity awards, have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
Our issuanceWe may be subject to significant liability that is not covered by insurance.
Although we believe that the extent of additional capital stockour insurance coverage is consistent with industry practice, any claim under our insurance policies may be subject to certain exceptions, may not be honored fully, in connection with financings, acquisitions, investments,a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities or if our equity incentive plans or otherwise will dilute all other stockholders.
We expectbusiness operations were interrupted for a substantial period of time, we could incur costs and suffer losses. Such inventory and business interruption losses may not be covered by our insurance policies. Any significant uninsured liability may require us to issue additional capital stockpay substantial amounts, which would adversely affect our cash position and results of operations. Additionally, in the future, that will result in dilutioninsurance coverage may not be available to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquireus at commercially acceptable premiums, or make investments in companies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.at all.
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If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our common stock could decline.
The market price and trading volume of our common stock is heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our common stock, or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock.
We do not intend to pay dividends for the foreseeable future.
While we have previously paid cash dividends on our capital stock, we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, you may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, and provisions of Delaware law applicable to us as a public benefit corporation, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
authorize our boardBoard of directorsDirectors to issue, without further action by the stockholders, shares of undesignated preferred stock that may be senior to our common stock with terms, rights and preferences determined by our boardBoard of directors that may be senior to our common stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
specify that special meetings of our stockholders can be called only by our boardBoard of directors,Directors, the chairperson of our boardBoard of directors,Directors, or our chief executive officer;
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our boardBoard of directors;
establish that our boardBoard of directorsDirectors is divided into three classes, with each class serving three-year staggered terms;
prohibit cumulative voting in the election of directors;
provide that our directors may be removed for cause only upon the vote of at least 66 2/3% of our outstanding shares of voting stock; and
provide that vacancies on our boardBoard of directorsDirectors may be filled only by a majority of directors then in office, even though less than a quorum.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our boardBoard of directors,Directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law of the State of Delaware, or DGCL, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
Also, as a public benefit corporation, our boardBoard of directorsDirectors is required by the Delaware General Corporation LawDCGL to manage or direct our business and affairs in a manner that balances the pecuniary interests of our stockholders, the best interests of those materially affected by our conduct, and the specific public benefits identified in our certificate of incorporation. Additionally, pursuant to our amended and restated certificate of incorporation, a vote of at least 66 2/3% of our outstanding shares of voting stock is required for matters directly or indirectly amending or removing our public benefit purpose, or to effect a merger or consolidation involving stock consideration with an entity that is not a public benefit corporation with an identical public benefit to ours. We believe that our public benefit corporation status will make it more difficult for another party to obtain control of us without maintaining our public benefit corporation status and purpose. Any of the foregoingSuch provisions could also limit the price that our investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that youholders of our common stock would receive a premium for your shares of our common stock in an acquisition.
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Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware and, with respect to the extent enforceable,certain matters, the federal district courts of the United States of America as the exclusive forums for substantially all disputes between us and our stockholders, which could restrict our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following types ofcertain actions or proceedings under Delaware law, statutory or common law:law, including: any derivative action or proceeding brought on our behalf; any action asserting a breach of a fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law,DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws; any action as to which the Delaware General Corporation LawDCGL confers jurisdiction to the court of Chancery of the State of Delaware; or any action asserting a claim against us that is governed by the internal affairs doctrine. The provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act of 1934, as amended, or the Exchange Act, or any other claim for which federal courts have exclusive jurisdiction.
Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations our amended and restated certificate of incorporation provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring such a claim arising under the Securities Act against us and our directors, officers or other employees in a venue other than in the federal district courts of the United States of America. In such instance, we would expect our efforts to vigorously assertdefend the validity and enforceability of the exclusive forumsuch provisions of our amended and restated certificate of incorporation. This may require further significant additional costs associated with resolving the dispute in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions, any of which could seriously harm our business.
Item 1B. Unresolved Staff Comments.Comments
Not applicable.
Risk Management and Strategy
We have implemented and maintain various information security processes designed to identify, assess and manage material risks from cybersecurity threats to our critical computer networks, third party hosted services, communications systems, hardware and software, and our critical data, including intellectual property, confidential information that is proprietary, strategic or competitive in nature, and personal and financial data regarding our crew members and farmers, which we collectively refer to as “Information Systems and Data.”
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Our Information Technology department, under the leadership of our Vice President of Information Technology (“VP of IT”) and with cross-functional internal and third-party support, helps identify, assess and manage the Company’s cybersecurity threats and risks. The Information Technology department identifies and assesses risks from cybersecurity threats by monitoring and evaluating our threat environment and the risk profile of the Company and its industry using various methods, including regular threat assessments (including through interaction with law enforcement), internal and external audits, threat environment scans and third-party threat assessments, vulnerability assessments, external intelligence feeds and third-party-conducted tabletop training exercises.
Depending on the environment and system, we implement and maintain various technical, physical and organizational measures, processes, standards and policies designed to manage and mitigate material risks from cybersecurity threats to our Information Systems and Data, including, for example, a written incident response plan and incident response policy, business continuity plans, data encryption for certain data, implementation of certain security standards, network security and access controls, data segregation, asset tracking/disposal systems, penetration testing and required crew member training programs.
Our assessment and management of material risks from cybersecurity threats are integrated into the Company’s overall risk management processes. For example, our Information Technology department and third-party providers work with our senior leadership team to prioritize our risk management processes and mitigate cybersecurity threats that are more likely to lead to a material impact to our business. Our senior leadership team evaluates material risks from cybersecurity threats against our overall business objectives and reports to the audit committee of our Board of Directors (“Audit Committee”), which evaluates our overall enterprise risk.
We use third-party service providers to assist us from time to time to identify, assess, and manage material risks from cybersecurity threats, including professional services firms, threat intelligence service providers, penetration testing providers, dark web monitoring services, cybersecurity consultants, forensic investigators, training platforms and managed cybersecurity service providers.
We use third-party service providers to perform a variety of functions throughout our business, such as application providers, hosting services, supply chain resources (including warehousing and cold storage) and contract manufacturing organizations. We have a vendor management program to manage cybersecurity risks associated with our use of certain of these providers. The program includes, for example, completion of a cybersecurity questionnaire, internal reviews of vendor security programs and assessments, security assessment calls with vendor personnel and imposition of information security obligations in our vendor contracts. Depending on the nature of the services provided, the sensitivity of the Information Systems and Data at issue and the identity of the provider, our vendor management process may involve different levels of assessment designed to help identify cybersecurity risks associated with a provider and impose contractual obligations related to cybersecurity on the provider.
For a description of the risks from cybersecurity threats that may materially affect the Company and how they may do so, see our risk factors under Part 1. Item 1A. “Risk Factors” in this Annual Report on Form 10-K, including the section titled “Risks Related to Information Technology and Intellectual Property.”
Governance
Our Board of Directors addresses the Company’s cybersecurity risk management as part of its general oversight function. The Audit Committee is responsible under its committee charter for overseeing the Company’s cybersecurity risk management processes, including oversight and mitigation of risks from cybersecurity threats.
Our cybersecurity risk assessment and management processes are implemented and maintained by certain Company management, including our VP of IT, with the oversight of our Chief Financial Officer. Our VP of IT is responsible for hiring appropriate personnel, helping to integrate cybersecurity risk considerations into the Company’s overall risk management strategy and communicating key priorities to relevant personnel. Our VP of IT, in consultation with our Chief Financial Officer, is responsible for approving budgets, helping prepare for cybersecurity incidents, approving cybersecurity processes and reviewing security assessments and other security-related reports. Our VP of IT has nearly 25 years of relevant experience, including leadership roles in the information technology departments of public and private companies. Prior to joining the Company, he served as VP of IT for another public company in the consumer packaged goods industry.
Our cybersecurity incident response plan is designed to escalate certain cybersecurity incidents to members of management depending on the circumstances, including our internal disclosure committee and our senior leadership team. Senior leadership team members work with the Company’s incident response team to help the Company mitigate and remediate cybersecurity incidents of which they are notified. In addition, the Company’s incident response plan provides for reporting of certain cybersecurity incidents to the Audit Committee.
The Audit Committee receives regular reports from our Chief Financial Officer concerning the Company’s significant cybersecurity threats and risk and the processes the Company has implemented to address them. The Audit Committee also has access to various reports, summaries or presentations related to cybersecurity threats, risk and mitigation.
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Item 2. Properties.Properties
We lease our corporate headquarters located at 3601 South Congress Avenue, Austin, Texas, where we occupy approximately 9,0009,100 square feet of office space pursuant to a lease that expires in April 2026, with an option to extend this lease for a successive period of five years. We own an approximately 82,000 square footour shell egg processing facility in Springfield, Missouri totaling approximately 153,000 square feet, which we refer to as Egg Central Station, and are in the process of expanding this facility.Station. We also lease approximately 187,500 square feet of warehouse space in Springfield, Missouri, that covers 13,000 rentablewhich provides access to approximately 17,500 pallet spaces pursuant to a lease that expires in September 2023, andDecember 2026. While we previously leased warehouse space in Webb City, Missouri, that covered 5,000 rentable pallet spaces pursuant to a lease that was terminated by mutual agreement effective December 31, 2020. We believe that our current facilities are suitable and adequate to meet our current needs. needs, we have begun the design and site selection process for our next egg packing center.
Item 3. Legal Proceedings.Proceedings
We are subjectFrom time to varioustime, we may become involved in legal proceedings and claims that arisearising in the ordinary course of our business. AlthoughFor additional information regarding legal proceedings, if any, see Note 20 “Commitments and Contingencies—Litigation” to our audited consolidated financial statements included elsewhere in this report. We are not aware of any material pending or threatened legal proceedings, other than ordinary routine litigation incidental to the outcome of these and other claims cannot be predicted with certainty,business, against us that we do not believe the ultimate resolution of the current matters willcould have a materialan adverse effect on our business, operating results or financial condition, results of operations or cash flows.condition.
Item 4. Mine Safety Disclosures.Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Securities
Market Information
Our common stock began trading on the Nasdaq StockGlobal Market LLC on August 4,July 31, 2020, under the symbol “VITL.” Prior to that time, there was no public market for our common stock.
Holders of Record
As of March 15, 2021,4, 2024, we had approximately 2111 holders of record of our common stock. Certain shares are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We declared cash dividends on our common stock in June 2013 totaling approximately $0.3 million. We cannot provide any assurance that we will declare or pay cash dividends on our capital stock in the future. In addition, our ability to pay dividends on our capital stock ismay be subject to limitations under the terms of our credit facility agreement with PNC Bank, National Association, or the Credit Facility.Facility, or other credit facilities we may enter into from time to time. See Note 1013 “Long-Term Debt” to our consolidated financial statements included elsewhere in this Annual Report for additional information on the Credit Facility. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our boardBoard of directorsDirectors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions (including in our then-existing debt arrangements), capital requirements, business prospects and other factors our boardBoard of directorsDirectors may deem relevant.
Comparative Stock Performance Graph
The following performance graph shows a comparison from August 4,July 31, 2020 (the date our common stock commenced trading on the Nasdaq Global Market) through December 27, 2020,31, 2023, of the cumulative total return for our common stock, the Nasdaq Composite Index and the Nasdaq US Smart Food & Beverage Index.
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The graph assumes an initial investment of $100 on August 4,July 31, 2020. The comparisons in the graph are not intended to forecast or be indicative of possible future performance of our common stock. The performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act.
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Recent Sales of Unregistered Equity Securities
Between December 30, 2019 and July 31, 2020 (the date of the filing of our registration statement on Form S-8, File No. 333-240258), we granted stock options to purchase an aggregate of 873,867 shares of common stock to a total of 180 employees, consultants and directors, at exercise prices ranging from $12.43 to $22.00 per share. Between December 30, 2019 and July 31, 2020, we issued 57,280 shares upon exercise of options having a weighted-average exercise price of $2.54 per share, for proceeds of approximately $0.2 million. We have not sold any unregistered securities since July 31, 2020.None.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. Unless otherwise specified above, we believe these transactions were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act, Regulation D or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or under benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed on the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.
Use of Proceeds
Use of Proceeds from the IPO
On August 4, 2020, we completed our IPO, in which we issued and sold 5,040,323 shares of our common stock and certain of our selling stockholders offered and sold 5,659,250 shares of our common stock at a price to the public of $22.00 per share. We received net proceeds from the IPO of approximately $99.7 million, after deducting underwriting discounts and commissions of $7.8 million and offering expenses of $3.4 million. None of the expenses associated with the IPO were paid to directors, officers, persons owning 10% or more of any class of equity securities, or to their associates. Goldman Sachs & Co. LLC, Morgan Stanley and Credit Suisse Securities (USA) LLC acted as joint lead bookrunning managers for the IPO. Jefferies, BMO Capital Markets Corp. and Stifel, Nicolaus & Company, Incorporated acted as bookrunning managers for the IPO.
Shares of our common stock began trading on Thethe Nasdaq Global Market on July 31, 2020. The offer and sale of the shares were registered under the Securities Act on Registration Statement on Form S-1 (Registration No. 333-239772), which was declared effective on July 30, 2020.
There has been no material change in the planned use of proceeds from our IPO as described in thethis Annual Report. We invested the funds received in cash equivalents and other marketable securities in accordance with our investment policy. As of December 27, 2020,31, 2023, we have used $7.3an aggregate of $35.2 million of the IPO proceeds, of the IPOincluding $7.3 million to pay off our term loan, and $1.9 million to pay off our equipment loan.loan in 2020 and $26.0 million for capital expenditures. See Note 1013 “Long-Term Debt” to our consolidated financial statements included elsewhere in this Annual Report for additional information on the Credit Facility.
Issuer Purchases of Equity Securities
None.
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Item 6. Selected Financial Data[Reserved]
This item is no longer required as we have elected to early adopt the changes to Item 301 of Regulation S-K contained in SEC Release No. 33-10890
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors,” and “Note“Special Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report, as well as the information presented under “Selected Financial Data.”Report.
Vital FarmsOverview
Our mission is anto bring ethical food company that isto the table, and we are disrupting the U.S. food system by developing a framework that challenges the norms of the incumbent food model, allowing us to bring high-quality products from our network of small family farms to a national audience. This framework has enabled us to become the leading U.S. brand of pasture-raised eggs and butter and the second largestsecond-largest U.S. egg brand by retail dollar sales. Our ethics are exemplified by our focus on the humane treatment of farm animalsanimal welfare and sustainable farming practices. We believe theseour standards produce happy hens with varied diets, which produce better eggs. There is a seismic shift in consumer demand for ethically produced, natural, traceable, clean label,clean-label, great-tasting and nutritious foods. Supported by a steadfast adherence to the values on which we were founded, we have designed our brand and products to appeal to this consumer movement.
Our purpose is rooted in a commitment to Conscious Capitalism, which prioritizes the long-term benefits of each of our stakeholders (farmers and suppliers, customers and consumers, communities and the environment, crew members and stockholders). We make decisions based on what is sustainable for all our stakeholders. Our collective sustainable business decisions considerpractices will enable us to fulfill our purpose of improving the impact on alllives of our stakeholders, in contrast with the factory farming model, which principally emphasizes cost reduction at the expense ofpeople, animals, farmers, consumers, crew members, communities and the environment.planet through food, now and long into the future. For us, it is not about short-term outcomes or a trade-off between purpose and profit. We are fierce business competitors who believe that prioritizing the long-term viability of all stakeholders will produce stronger outcomes, for everyone, over time. These principles guide our day-to-day operations and, we believe, help us deliver a more sustainable and successful business. Our approach has been validated by our financial performance and our designationJanuary 2022 recertification as a Certified B Corporation, a certificationdesignation reserved for businesses that balance profit and purpose to meet the highest verified standards of social and environmental performance, public transparency and legal accountability. Vital Farms was founded in 2007, and our pasture-raised shell eggs were launched at Whole Foods Market, Inc., or Whole Foods, in 2008. Since then, we have expanded our operations and our portfolio of pasture-raised food products as illustrated below:
We source our pasture-raised productseggs from a network of more than 200 smallover 300 family farms. We have strategically designed our supply chain to ensure high-productionhigh production standards and optimal year-round operation. We are motivated by the positive impact we have on rural communities and enjoy a strong relationship and reputation with our network of farmers.
We primarily work with our farms pursuant to buy-sell contracts. Under these arrangements, the farmer is responsible for all of the working capital and investments required to produce the eggs and manage the farm, including purchasing the birds and feed supply. During the last quarter of fiscal 2023, as a result of increasing construction costs associated with our new farms, we incurred incremental farm recruitment costs that will be required to be paid in advance of these farms beginning to produce eggs, and we expect such incremental costs to continue into fiscal 2024. These costs are expected to be recognized over the term of the related buy-sell contracts with the new farms, which are generally four to five years in length. We believe the unfavorable impact to our working capital resulting from these upfront costs could range from $10.0 million to $12.0 million during fiscal 2024. The impact to fiscal year 2023 working capital was immaterial, and the impact to our gross margin is also expected to be immaterial during the term of these agreements. We are contractually obligated to purchase all of the eggs produced by the farmer during the term of the contract at an agreed uponagreed-upon price that depends upon pallet weight and is indexedadjusted quarterly in arrears for changes in feed cost.
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We believe we are a strategic and valuable partner to retailers. We have continued to command premium prices for our products, including our shell eggs, which sell for as much as three times the price of commodity eggs. Our loyal and growing consumer base has fueled the expansion of our brand from the natural channel to the mainstream channel. We believe the success of our brand demonstrates that consumers are demanding premium products that meet a higher ethical standard of food production. We have a strong presence at The Kroger Co., or Kroger, Sprouts Farmers Market, or Sprouts, Target Corporation and Whole Foods Market, Inc., or Whole Foods, and we also sell our pasture-raised products at Albertsons Companies, Inc., Publix Super Markets, Inc. and Walmart, Inc. We offer 23 retail stock keeping units, or SKUs, through a multi-channel retail distribution network. We believe we have significant room for growth within the retail and in the medium- to long-term, foodservice channels through growing brand awareness, gaining additional points of distribution and new product innovation.
Our shell eggs are collected from farmers by a third-party freight carrier and placed in cold storage until we pack them for shipping to our customers at our state-of-the-art shell egg processing facility, Egg Central Station. Egg Central Station is approximately 82,000153,000 square feet and utilizes highly automated equipment to grade and package our shell egg products. Egg Central Station is capable of packing threeapproximately six million eggs per day and has achieved Safe Quality Food, oran SQF Excellent rating, the highest level of such certification from the Global Food Safety Initiative. In addition, Egg Central Station is the only egg facility, and globally we are one of only six companies to have received the SQF Institute, or SQFI, Select Site certification.
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Our products are distributed through a broker-distributor-retailer network whereby brokers represent our products to distributors and retailers who will in turn sell our products to consumers. We serve the majority of natural channel customers through food distributors, such as US Foods, Inc., or US Foods, and KeHE Distributors, LLC, or KeHE, which purchase, store, sell and deliver our products to Whole Foods and Sprouts, respectively. In the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018, UNFI (which was Whole Foods’ distributor through March 2020) accounted for approximately 15%, 35%, and 36% of our net revenue, respectively, US Foods accounted for approximately 18%, 0%, and 0% of our net revenue, respectively, and KeHE accounted for approximately 12%, 11%, and 10% of our net revenue, respectively.customers. We serve mainstream retailers by arranging for delivery of our products directly through their distribution centers. We also leverage distributor relationships to fulfill orders for certain independent grocers and other customers.
We have experienced consistent sales growth. We had net revenue of $214.3$471.9 million and $140.7$362.1 million, net income of $8.8$25.6 million and $2.4$1.2 million, and Adjusted EBITDA of $16.8$48.3 million and $6.4$16.2 million in the fiscal years ended December 27, 202031, 2023 and December 29, 2019,25, 2022, respectively. Adjusted EBITDA is a non-GAAP financial measure. See the section titled “—Non-GAAP Financial Measure—Measures—Adjusted EBITDA” below for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure stated in accordance with GAAP.
On August 4, 2020,Known Trends, Events and Uncertainties
Highly Pathogenic Avian Influenza (HPAI)
Since the initial outbreaks of HPAI in early 2022, we completed our initial public offering, or IPO, of 10,699,573 shares of common stock at an offering price of $22.00 per share. We issued and sold 5,040,323 shares of common stock andhave been closely following the selling stockholders sold 5,659,250 shares of common stock, including 1,395,596 shares of common stock sold by the selling stockholders pursuant to the underwriters’ exercise in full of their option to purchase additional shares. We received gross proceeds of approximately $110.9 million before deducting underwriting discounts, commissions and offering related transaction costs; we did not receive any proceeds from the sale of shares by the selling stockholders. Upon the closingprogression of the IPO in August 2020, allvirus and working with our farmers, veterinarians, government health officials and animal welfare auditors to ensure that our flocks are kept as safe as possible. To date, we have experienced outbreaks at four of our then-outstanding sharesfarms, one located in Missouri, one in Tennessee and two in Kansas. While we have not experienced material disruptions to our egg supply due to HPAI outbreaks, if a substantial portion of redeemable convertible preferred stock automatically converted into 8,192,876 shares of common stock on a one-for-one basis. Subsequent toour farms or production facilities were affected, this could materially and negatively affect our supply chain and operating results. Additionally, HPAI has at times resulted in supply shortages and price increases across the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding.The consolidated financial statements as of December 27, 2020, including share and per share amounts, include the effects of the IPO.
In November 2020, we completed a secondary public offering of 5,000,000 shares of common stock sold by selling stockholders, from which no proceeds were received and expenses incurred totaled $0.5 million.
COVID-19 Business Update
With the global spread of the ongoing COVID-19 pandemicegg market. We are confident in the fiscal year ended December 27, 2020,measures we established a cross-functional task forcehave taken to reduce the risk of HPAI on our farms and production facilities, as well as our ability to mitigate impacts on supply. However, given continued uncertainty about future outbreaks and governmental responses to such outbreaks, we cannot predict the ultimate impact that HPAI will have implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our business.
Economic Uncertainties
The current inflationary environment may affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of materials and supplies, interest rates and overhead costs, may adversely affect our stakeholders, comprised of farmersoperating results. Elevated interest rates also present a recent challenge impacting the U.S. economy and suppliers, customers and consumers, communities andcould make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the environment, crew members and stockholders. Whilefuture. Additionally, some economic observers suggest that we are not experiencing material adverse impacts at this time, givenshould expect a higher recession risk to continue over the global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associatednext year, which, together with the pandemic,foregoing, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our business, financial condition, results of operationsoperations. Furthermore, such economic conditions have at times produced downward pressure on share prices. We have experienced and growth prospects could be materially and adversely affected. We continue to closely monitor the COVID-19 situation as we evolve our business continuity plans and response strategy. In March 2020, the majority of our crew members at our headquarters transitioned to working remotely, and such remote work continues as of the date of this Annual Report. While the rollout of vaccines has begun, the timing of vaccinations, herd immunity, and the lifting of shelter in place and similar restrictions and movement restrictions is unknown, and virus mutations and variants may continue to restrictexperience increases in our ability to return to full onsite operations.
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Egg Central Station continues to be operationaloperating costs, including our labor costs and we have implemented a number of measures to preventresearch and mitigate any outbreak of COVID-19 at that facility; however, we are managing operations through “essential” on-site staff and flexible work arrangements, and may need to further modify or reduce operationsdevelopment costs, due to the evolving effectssupply chain constraints, consequences associated with global health pandemics, geopolitical tensions, and employee availability and wage increases, all of the COVID-19 pandemic.
which may result in additional stress on our working capital resources. We are workingwork closely with our farmers, suppliers and third-party manufacturers to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic.supply chain disruptions associated with such uncertainties. We currently expect to have an adequate supply of eggs to meet anticipated demand inour products, packaging, and freight through fiscal 2021, as well as adequateyear 2024. However, while we are currently ramping up capacity for packing and processingwith our eggs.
Additionally, as a resultnew supplier of the COVID-19 pandemic, there have beenbutter, recent disruptionsvolatility in the U.S. pasture-raised milk supply, including significant drops in prices and demand, which have resulted in the loss of suppliers. While we have worked with our co-manufacturers to mitigate these supply disruptions, and as a result there has been no impact on our ability to fill customer ordersmarkets for pasture-raised butter or ghee products, we expect that these supply disruptions will continue for the foreseeable future and that they may be further exacerbated by the ongoing effects of the COVID-19 pandemic. If the COVID-19 pandemic persists for an extended period of time and further impacts egg or milk supply, or disrupts our essential distribution systems, weraw materials could experience disruptions to our supply chain and operations, and associated delays in the manufacturing andaffect supply of our butter products which would adversely impact our ability to generate sales ofin fiscal year 2024.
Liquidity and revenues from our products.Capital Resources Overview
Corporate Development
With cash, and cash equivalents and marketable securities of $29.5$116.8 million as of December 27, 202031, 2023 and access to additional funds as a result of our IPO and$20.0 million available under our credit facility agreement with PNC Bank, National Association, or the Credit Facility, we anticipate having sufficient liquidity to make investments in our business this fiscal year into support of our long-term growth strategy. Our IPO, which was completed on August 4, 2020, resulted in net proceeds to us of approximately $99.7 million, after deducting underwriting discounts, commissions and offering costs associated with the offering. We expect that our cash, and cash equivalents and marketable securities as of December 27, 2020,31, 2023, together with cash provided by our operating activities and availability of borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months and to make investments in our business in support of our long-term growth strategy.
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Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in acquisitions or other growth opportunities, our investments in partnerships and unexplored channels and theongoing costs associated with expansions of our expansion of Egg Central Station.production capacity. We may be required to seek additional equity or debt financing. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If themarkets (including a disruption persistsdue to public health pandemics, geopolitical tensions and deepens, we could experience anwars, inflation or other factors) may result in our inability to access additional capital, which could in the future negatively affect our operations. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation and product expansion, we may not be able to compete successfully, which would harm our business, operations and results of operations. For additional information, see the section titled “Liquidity and Capital Resources” below.
Other Financial and Corporate Impacts
We believe recent increases in our net revenue have been driven in part by the impact of stay at home trends associated with COVID-19, as a result of which consumers have increased their purchases of staples such as eggs and butter. The $6.7 billion retail egg category grew 18.7% in 2020 as compared to the prior year, outpaced by the specialty egg segment growth of 25.5% versus the prior year and total Vital Farms pasture-raised eggs growth of 53.1% as compared to the prior year. We believe this growth is yet another indication that consumers are shifting their preferences to premium products, even in a highly commoditized category. The total egg category benefited from the increased eat-at-home trends during the onset of the COVID-19 pandemic, growing 40.6% in the second quarter as compared to the prior year period. Despite the pandemic persisting throughout the year, the total egg category growth has decelerated to 10.0% in the fourth quarter as compared to the prior year period. The specialty egg segment grew 37.3% in the second quarter as compared to the prior year period, compared to 21.5% in the fourth quarter as compared to the prior year period. Vital Farms pasture-raised eggs grew 74.3% in the second quarter as compared to the prior year period and 37.9% in the fourth quarter as compared to the prior year period. We believe this is indicative of a shift in consumer preferences resulting from the COVID-19 pandemic.
For the 52 weeks ended December 27, 2020, five million households purchased Vital Farms shell eggs, a 50% increase over the prior year. New purchasers, defined as households who purchased Vital Farms in 2020 and not in 2019, increased 55% over the prior year. Retained households, defined as households who purchased Vital Farms in 2020 and 2019, increased 38% over the prior year. Throughout 2020, Vital Farms retained more households each quarter, with 588 thousand buyers repeating egg purchases in both the third and fourth quarters.
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Additionally, we believe that COVID-19 has accelerated the demand for e-commerce options in the retail channel. For example, our online fresh grocery sales at a key retailer have increased 266% during the 52 weeks ended December 27, 2020 compared to the prior fiscal year; our “click & collect” sales at two national brick and mortar retailers have increased 542% and 174%, respectively, over the 52 weeks ended December 27, 2020 compared to the prior fiscal year; and our last mile delivery sales at a key partner have increased 249% year to date through the week ended December 27, 2020 compared to the same time period a year ago. This growth in e-commerce demand is compared to an increase of 52% for retail dollar sales overall for that same period for the 52 weeks ended December 27, 2020. We anticipate that our performance will be affected by the duration of COVID-19’s impact on stay at home trends, and we do not have certainty that these trends will continue. Our net revenue may be more variable as a result.
The extent to which COVID-19 impacts our ability to expand our household penetration, grow within the retail channel and execute on our corporate development objectives will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease. For example, if remote work policies for certain portions of our business, or for our business partners, are extended longer than we currently expect, we may need to reassess our priorities and our corporate objectives for the fiscal year. Additionally, while the transition of the majority of our headquarters crew members to remote working in March 2020 has not materially disrupted our business operations, our financial close or reporting processes or the functioning of our internal controls, we are continuing to monitor these processes and may need to adjust them in the future as a result of the fluid nature of the COVID-19 pandemic and its impact on our operations.
Our Fiscal Year
We report on a 52-53-week52-week or 53-week fiscal year, ending on the last Sunday in December, effective beginning with the first quarter of fiscal 2018.December. In a 52-53-week52-week fiscal year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. Our first 53-week fiscal year will beas a public company occurred in fiscal 2023, which we expect to beginbegan on December 26, 2022 and endended on December 31, 2023. See “Nature of the Business and Basis of Presentation” in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report for additional details related to our fiscal calendar.
Key Factors Affecting Our Business
We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address to enable us to sustain the growth of our business and improve our results of operations.
Expand Household Penetration
We have positioned our brand to capitalize on growing consumer interest in natural, clean-label, traceable, ethical, great-tasting and nutritious foods. We believe there is substantial opportunity to grow our consumer base and increase the velocity at which households purchase our products. U.S. household penetration for the shell egg category is approximately 98%96.5%, while the household penetration for our pasture-raised shell eggs is approximately 3.9%7.5%. We intend to increase household penetration by continuing to invest significantly in sales and marketing to educate consumers about our brand, our values and the premium quality of our products. We believe these efforts will educate consumers on the ethical value and the attractive attributes of pasture-raised food,our products, generate further demand for our products and ultimately expand our consumer base. Our ability to attract new consumers will depend, among other things, on the perceived value and quality of our products, the offerings of our competitors and the effectiveness of our marketing efforts. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the U.S. natural food market in which we operate. Such factors include consumer preference, consumer confidence, consumer income, consumer perception of the safety and quality of our products and shifts in the perceived value for our products relative to alternatives.
Grow Within the Retail Channel
We believe that our ability to increase the number of customers that sell our products to consumers is an indicator of our market penetration and our future business opportunities. We define our customers as the entities that sell our products to consumers. With certain of our retail customers, like Whole Foods, and Sprouts, we sell our products through distributors. We are not able to precisely attribute our net revenue to a specific retailer for products sold through such channels. We rely on third-party data to calculate the portion of retail sales attributable to such retailers, but this data is inherently imprecise because it is based on gross sales generated by our products sold at retailers, without accounting for price concessions, promotional activities or chargebacks, and because it measures retail sales for only the portion of our retailers serviced through distributors. Based on this third-party data and internal analysis, Whole Foods accounted for approximately 28% and 30%23% of our retail sales for each of the fiscal years ended December 27, 202031, 2023 and December 29, 2019, respectively, and Sprouts accounted for approximately 7% and 8% of our retail sales for the fiscal years ended December 27, 2020 and December 29, 2019,25, 2022, respectively.
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As of December 2020,2023, there are more than 16,000were approximately 24,000 stores selling our products. We expect the retail channel to be our largest source of net revenue for the foreseeable future. By capturing greater shelf space, driving higher product velocities and increasing our SKU count, we believe there is meaningful runway for further growth with existing retail customers. Additionally, we believe there is significant opportunity to gain incremental stores from existing customers as well as by adding new retail customers. We also believe there is significant further long-term opportunity in additional distribution channels, including the convenience, drugstore, club, military and international markets. Our ability to execute on this strategy will increase our opportunities for incremental sales to consumers, and we also believe this growth will allow for margin expansion. To accomplish these objectives, we intend to continue leveraging consumer awareness of and demand for our brand, offering targeted sales incentives to our customers and utilizing customer-specific marketing tactics. Our ability to grow within the retail channel will depend on a number of factors, such as our customers’ satisfaction with the sales, product velocities and profitability of our products.
Expand Footprint Across Foodservice
We believe there is a significant opportunity to expand sales ofdemand for our products in the foodservice channel since we offer versatile ingredients with high menu penetrations across commercial and non-commercial operator segments. We see considerable opportunity to continue to grow the channel in the medium- to long-term. In fiscal year ended December 27, 2020, thelong-term with our two-pronged sales approach to values-aligned foodservice channel accounted for approximately 1% of our net revenue. Our brand hasoperators and their distributors. We are working with Acxion Foodservice, a differentiated value proposition with consumers, who we believe are increasingly demanding ethically produced ingredients when they eat outside of the home. Additionally, in January 2021, we began a partnership with Acosta Foodservice, U.S. foodservice sales and marketing agency in the consumer-packagedconsumer packaged goods industry, to increase our broadlinecategory share in broad-line distribution and presence into get on national and regional restaurant chains.menus.
We are also leveraging foodservice as a critical consumer touchpoint to drive brand awareness, and we are investing in co-marketing to reach new households. We believe that more consumers will look for our products on menus, particularly withco-branding is mutually beneficial to foodservice partners whose values are aligned with our own,operators because it helps to differentiate their brands, enhances their perceived customer value and that on-menu branding of our products as ingredients in popular meals and menu items will drive traffic and purchases in the foodservice channel. We also believe that branded foodservice offerings will further help drive consumer awareness of our brand and purchase rates of our products in the retail channel. Onedrives loyalty.
A multi-unit example offrom our successful foodservice programsprogram is True Food Kitchen, an award-winning restaurant brand and a pioneer of wellness-driven dining with Tacodeli LLC, a popular chain based in Austin, Texas, which sells breakfast tacos made exclusively withlocations across the United States that shares our pasture-raised shell eggs across 11 restaurant locationsvalues for improving the lives of people, animals, and approximately 90 points of distribution, such as coffee shops and farmers market stands, across Texas. We have launched similar regional concepts with Moe’s Broadway Bagel, an East Coast-style family-run bagel chain in the Denver/Boulder, Colorado area; Cafe Patachou, a breakfast and lunch restaurant based in the Indianapolis, Indiana area with 5 locations; Roam Artisan Burgers, a fast-casual burger restaurant dedicated to high-quality sourcing in the San Francisco, California area with 6 locations; Homegrown, a sustainability-focused brand in the Seattle, Washington area with 11 locations; and Pura Vida, a fresh all-day concept in the Miami, Florida area with 7 locations. We also believe there is significant additional opportunity in micro-markets, corporate offices, the hospitality industry, and colleges and universities in the medium- to long-term. We intend to continue to invest in relationships with foodservice operators, including to support joint marketing and advertising of our products. Expansion in this channel will depend on the health of the foodservice industry generally and on our ability to successfully partner with foodservice operators in a manner that leverages and reinforces our value proposition with consumers.planet through ethically produced food.
Expand Our Product Offerings
We intend to continue to strengthen our product offerings by investing in innovation in new and existing categories. We launched pasture-raised hard-boiled eggs in 2018, pasture-raised gheehave a history of product introductions and liquid whole eggs in 2019intend to continue to innovate by introducing new products from time to time. Eggs and egg bites in August 2020. We believe there is opportunity to expand in the future into the refrigerated value-added dairy category, among others. Eggsegg-related products generated $196.7$449.0 million, or approximately 92%95%, of net revenue in fiscal 2020.2023. We expect eggs willand egg-related products to be our largest source of net revenue for the foreseeable future. We believe that investments in innovation will contribute to our long-term growth, including by reinforcing our efforts to increase household penetration. Our ability to successfully develop, market and sell new products will depend on a variety of factors, including the availability of capital to invest in innovation, as well as changing consumer preferences and demand for food products.
Key Components of Results of Operations
Net Revenue
We generate net revenue primarily from sales of our products, including pasture-raised eggs pasture-raisedand butter, and other ethically produced food, to our customers, which include natural retailers, mainstream retailers and foodservice partners.customers. We sell our products to customers on a purchase-order basis. We serve the majority of our natural channel customers and certain independent grocers and other customers through food distributors, which purchase, store, sell and deliver our products to these customers.
We periodically offer salespromotional incentives to our customers, including rebates, temporary price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities. We record a provision for sales incentives at the later of the date at which the related revenue is recognized or when the sales incentive is offered. At the end of each accounting period, we recognize a liability for an estimated promotional allowance reserve. We periodically provide credits or discounts to our customers in the event that products do not conform to customer expectations upon delivery or expire at a customer’s site. We treat these credits and discounts when accepted by customers, as a reduction of the sales price of the related transaction.transaction at the time of sale. We anticipate that these promotional activities, credits and discounts could materially impact our net revenue and that changes in such activities could impact period-over-period results.
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Our pasture-raised shell eggs are sold to consumers at a premium price point, and when prices for commodity shell eggs fall relative to the price of our pasture-raised shell eggs (including due to any price increases we may implement), price-sensitive consumers may choose to purchase commodity shell eggs offered by our competitors instead of our pasture-raised eggs. As a result, low commodity shell egg prices may adversely affect our net revenue. We increased prices on certain of our products in each of fiscal year 2022, fiscal year 2023 and fiscal year 2024. While we have not seen significant decreases in sales volume due to previous price increases, if we further increase prices to offset higher commodity prices or other costs, we could experience lower demand for our products, decreased ability to attract new customers and lower sales volumes. Net revenue may also vary from period to period depending on the purchase orders we receive, the volume and mix of our products sold, and the channels through which our products are sold.
Cost of Goods Sold
Cost of goods sold consists of the costs directly attributable to producing our products which include labor, raw material and packaging costs as well as overhead. The labor cost is comprised of wages and related costs for our processing crew members. The raw material is comprised of those items necessary to process our finished egg and butter products and the packaging costs are the cost of the packaging materials our finished products are sold in. Overhead costs in cost of goods sold include utilities, insurance, inbound freight and storage fees related to our warehouse.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of broker and contractor fees for sales and marketing, andas well as personnel costs for sales and marketing, finance, human resources and other administrative functions, consisting ofincluding salaries, benefits, bonuses, stock-based compensation expense and sales commissions. Selling, general and administrative expenses also include advertising and digital media costs, agency fees, travel and entertainment costs, and costs associated with consumer promotions, product samples, sales aids incurred to acquire new customers, retain existing customers and build our brand awareness, overhead costs for facilities, including associated depreciation and amortization expenses, and information technology-related expenses.
Shipping and Distribution
Shipping and distribution expenses consist primarily of costs related to third-party freight for our products. WeEven though shipping and distribution expenses have decreased in absolute dollars in the short-term, we expect shipping and distribution expenses to increase in absolute dollars in the medium to longmedium-to-long term as we continue to scale our business.business, and there is a risk that such expenses could continue to increase due to economic uncertainty, geopolitical tensions or wars.
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Result of Operations
We report on a 52-week or 53-week fiscal year, ending on the last Sunday in December. In a 52-week fiscal year, each fiscal quarter consists of 13 weeks. The following table sets forth our resultsadditional week in a 53-week fiscal year is added to the fourth quarter, making such quarter consist of operations14 weeks. Fiscal year 2023 was a 53-week fiscal year as compared to a 52-week fiscal year for the periods presented (in thousands):fiscal year 2022.
Comparison of Fiscal Years Ended December 31, 2023 and December 25, 2022
|
| Fiscal Year Ended |
| |||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||
Net revenue |
| $ | 214,280 |
|
| $ | 140,733 |
|
| $ | 106,713 |
|
Cost of goods sold |
|
| 139,752 |
|
|
| 97,856 |
|
|
| 71,894 |
|
Gross profit |
|
| 74,528 |
|
|
| 42,877 |
|
|
| 34,819 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative(1) |
|
| 47,396 |
|
|
| 29,526 |
|
|
| 19,437 |
|
Shipping and distribution |
|
| 14,904 |
|
|
| 10,001 |
|
|
| 8,615 |
|
Total operating expenses |
|
| 62,300 |
|
|
| 39,527 |
|
|
| 28,052 |
|
Income from operations |
|
| 12,228 |
|
|
| 3,350 |
|
|
| 6,767 |
|
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (488 | ) |
|
| (349 | ) |
|
| (424 | ) |
Other (expense) income, net |
|
| (86 | ) |
|
| 1,417 |
|
|
| 9 |
|
Total other (expense) income, net |
|
| (574 | ) |
|
| 1,068 |
|
|
| (415 | ) |
Net income before income taxes |
|
| 11,654 |
|
|
| 4,418 |
|
|
| 6,352 |
|
Provision for income taxes |
|
| 2,770 |
|
|
| 1,106 |
|
|
| 723 |
|
Net income |
|
| 8,884 |
|
|
| 3,312 |
|
|
| 5,629 |
|
Less: Net income (loss) attributable to noncontrolling interests |
|
| 84 |
|
|
| 927 |
|
|
| (168 | ) |
Net income attributable to Vital Farms, Inc. common stockholders |
| $ | 8,800 |
|
| $ | 2,385 |
|
| $ | 5,797 |
|
|
|
50
The following table sets forth our consolidated statements of operationsincome data expressed as a percentage of net revenue for the periods presented:
|
| Fiscal Year Ended² |
| |||||||||||||
|
| December 31, |
|
| December 25, |
| ||||||||||
|
| Amount |
|
| % of |
|
| Amount |
|
| % of |
| ||||
|
| (dollars in thousands) |
| |||||||||||||
Net revenue |
| $ | 471,857 |
|
|
| 100 | % |
| $ | 362,050 |
|
|
| 100 | % |
Cost of goods sold(1) |
|
| 309,531 |
|
|
| 66 | % |
|
| 252,606 |
|
|
| 70 | % |
Gross profit |
|
| 162,326 |
|
|
| 34 | % |
|
| 109,444 |
|
|
| 30 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative(1) |
|
| 101,728 |
|
|
| 22 | % |
|
| 77,236 |
|
|
| 21 | % |
Shipping and distribution |
|
| 27,344 |
|
|
| 6 | % |
|
| 30,104 |
|
|
| 8 | % |
Total operating expenses |
|
| 129,072 |
|
|
| 27 | % |
|
| 107,340 |
|
|
| 30 | % |
Income from operations |
|
| 33,254 |
|
|
| 7 | % |
|
| 2,104 |
|
|
| 1 | % |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
| (782 | ) |
|
| — |
|
|
| (114 | ) |
|
| — |
|
Interest income |
|
| 2,542 |
|
|
| 1 | % |
|
| 992 |
|
|
| — |
|
Other expense, net |
|
| (2,813 | ) |
|
| (1 | )% |
|
| (151 | ) |
|
| — |
|
Total other income (expense), net |
|
| (1,053 | ) |
|
| — |
|
|
| 727 |
|
|
| — |
|
Net income before income taxes |
|
| 32,201 |
|
|
| 7 | % |
|
| 2,831 |
|
|
| 1 | % |
Income tax provision |
|
| 6,635 |
|
|
| 1 | % |
|
| 1,601 |
|
|
| — |
|
Net income |
|
| 25,566 |
|
|
| 5 | % |
|
| 1,230 |
|
|
| — |
|
Less: Net loss attributable to noncontrolling |
|
| — |
|
|
| — |
|
|
| (21 | ) |
|
| — |
|
Net income attributable to Vital Farms, Inc. |
| $ | 25,566 |
|
|
| 5 | % |
| $ | 1,251 |
|
|
| — |
|
|
| Fiscal Year Ended |
| |||||||||||||||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||||||||||||||
|
| Amount |
|
| % of Revenue |
|
| Amount |
|
| % of Revenue |
|
| Amount |
|
| % of Revenue |
| ||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||
Net revenue |
| $ | 214,280 |
|
|
| 100 | % |
| $ | 140,733 |
|
|
| 100 | % |
| $ | 106,713 |
|
|
| 100 | % |
Cost of goods sold |
|
| 139,752 |
|
|
| 65 | % |
|
| 97,856 |
|
|
| 70 | % |
|
| 71,894 |
|
|
| 67 | % |
Gross profit |
|
| 74,528 |
|
|
| 35 | % |
|
| 42,877 |
|
|
| 30 | % |
|
| 34,819 |
|
|
| 33 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 47,396 |
|
|
| 22 | % |
|
| 29,526 |
|
|
| 21 | % |
|
| 19,437 |
|
|
| 18 | % |
Shipping and distribution |
|
| 14,904 |
|
|
| 7 | % |
|
| 10,001 |
|
|
| 7 | % |
|
| 8,615 |
|
|
| 8 | % |
Total operating expenses |
|
| 62,300 |
|
|
| 29 | % |
|
| 39,527 |
|
|
| 28 | % |
|
| 28,052 |
|
|
| 26 | % |
Income from operations |
|
| 12,228 |
|
|
| 6 | % |
|
| 3,350 |
|
|
| 2 | % |
|
| 6,767 |
|
|
| 6 | % |
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (488 | ) |
|
| — |
|
|
| (349 | ) |
|
| — |
|
|
| (424 | ) |
|
| — |
|
Other (expense) income, net |
|
| (86 | ) |
|
| — |
|
|
| 1,417 |
|
|
| 1 | % |
|
| 9 |
|
|
| — |
|
Total other (expense) income, net |
|
| (574 | ) |
|
| — |
|
|
| 1,068 |
|
|
| 1 | % |
|
| (415 | ) |
|
| — |
|
Net income before income taxes |
|
| 11,654 |
|
|
| 5 | % |
|
| 4,418 |
|
|
| 3 | % |
|
| 6,352 |
|
|
| 6 | % |
Provision for income taxes |
|
| 2,770 |
|
|
| 1 | % |
|
| 1,106 |
|
|
| 1 | % |
|
| 723 |
|
|
| 1 | % |
Net income |
| $ | 8,884 |
|
|
| 4 | % |
| $ | 3,312 |
|
|
| 2 | % |
| $ | 5,629 |
|
|
| 5 | % |
Fiscal Year Ended December 27, 2020 Compared to Fiscal Year Ended December 29, 2019
Net Revenue
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Net revenue |
| $ | 471,857 |
|
| $ | 362,050 |
|
| $ | 109,807 |
|
|
| 30 | % |
|
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| |||||
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| |||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Net revenue |
| $ | 214,280 |
|
| $ | 140,733 |
|
| $ | 73,547 |
|
|
| 52 | % |
The increase in net revenue of $73.5$109.8 million, or 52%30%, was primarily driven by an increase in egg gross salesprice-related increases of $77.9$59.4 million and an increase in gross butter salesvolume-related increases of $4.9$50.5 million. The volume favorability was primarily driven by increases were partially offset by an increase of $7.6 million of sales incentives offered to our customers as our volume has grown. The $7.6 million of sales incentives includes a reduction of $0.6 million of incentive settled in 2020 that related to a prior year’s gross sales. The increases in egg sales and butter sales were primarily due to volume increases to our distributors, including as a result of continued trends associated with COVID-19 whereby consumers increased their purchases of staples of eggs and butter, a higher turnover rate of sales to our retail customers, and new distribution at both new and existing customers. We do not have certainty that any COVID-19 trends will continue. Net revenue from sales through our retail channel was $208.5$445.8 million and $136.5$348.9 million for fiscal 2020years ended 2023 and 2019, respectively,2022, respectively.
54
The extra week in fiscal year 2023, which was 53 weeks compared to 52 weeks in fiscal year 2022, contributed $8.5 million in net revenue, of sales through our foodservice channel was $3.1 million and $3.4 million for fiscal 2020 and 2019, andor 2.3%, to growth. Excluding the extra week, net revenue from sales to wholesalers and egg breaking plants was $2.6 million and $0.8 million forincreased 28.0% in fiscal 2020 and 2019.year 2023.
Gross Profit and Gross Margin
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Gross profit |
| $ | 162,326 |
|
| $ | 109,444 |
|
| $ | 52,882 |
|
|
| 48 | % |
Gross margin |
|
| 34 | % |
|
| 30 | % |
|
|
|
|
|
| ||
|
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| |||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Gross profit |
| $ | 74,528 |
|
| $ | 42,877 |
|
| $ | 31,651 |
|
|
| 74 | % |
Gross margin |
|
| 35 | % |
|
| 30 | % |
|
|
|
|
|
| 4 | % |
The increase in gross profit of $31.7$52.9 million, or 74%48%, was primarily driven by an increase inhigher net revenue. Gross margin increased 431 basis points inrevenue generated during the fiscal 2020 as compared to fiscal 2019.year ended December 31, 2023. The increase in gross margin during the fiscal year ended December 31, 2023 compared to the fiscal year ended December 25, 2022 was primarily driven by volume increases, in addition to pricing increases across the following:
419 basis points lower material costs for eggs and butter; and
51
These factors, which contributed toentire shell egg portfolio in January 2023. The price increases offset an increase in gross margin, were partially offset by an increase in other material costs.input costs across our shell egg business (inclusive of commodity, packaging and labor impacts).
Operating Expenses
Selling, General and Administrative
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Selling, general and administrative |
| $ | 101,728 |
|
| $ | 77,236 |
|
| $ | 24,492 |
|
|
| 32 | % |
Percentage of net revenue |
|
| 22 | % |
|
| 21 | % |
|
|
|
|
|
| ||
|
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| |||||
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| |||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Selling, general and administrative |
| $ | 47,396 |
|
| $ | 29,526 |
|
| $ | 17,870 |
|
|
| 61 | % |
Percentage of net revenue |
|
| 22 | % |
|
| 21 | % |
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses as a percent of net sales increased by $17.9 million, or 61% in fiscal 2020. Selling, general, and administrative expenses as a percentage of net sales increased to 22% in fiscal 2020. The increase in selling, general and administrative expenses of $24.5 million, or 32%, was primarily driven by:
an increase of $9.7$10.3 million in marketing-related expenses related to continued investment in brand and product marketing;
an increase of $1.8$2.4 million in volume-driven commission payments madelegal and professional service expense to third parties that sell our products to customers,support increased operations and other selling related expenses;
an increase of $2.2 million$900,000 in professional feesbrokerage-related and commercial insurance costsselling-related expenses due in part to our status as a newly public company; and
an increase of $600,000 in technology and software-related expenses to support increased corporate development costsoperations and one-time expenses of $1.7 million associated with our accounting and legal functions in connection with our IPO and the secondary offering in November 2020.
Shipping and Distribution
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Shipping and distribution |
| $ | 27,344 |
|
| $ | 30,104 |
|
| $ | (2,760 | ) |
|
| (9 | )% |
Percentage of net revenue |
|
| 6 | % |
|
| 8 | % |
|
|
|
|
|
| ||
The decrease in shipping and distribution costs of $2.8 million, or 9%, was driven by favorable freight rates and internal operational efficiency, partially offset by higher sales volumes.
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| ||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Shipping and distribution |
| $ | 14,904 |
|
| $ | 10,001 |
|
| $ | 4,903 |
|
|
| 49 | % |
Percentage of net revenue |
|
| 7 | % |
|
| 7 | % |
|
|
|
|
|
|
|
|
55
Interest Expense
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
Interest expense |
| $ | (782 | ) |
| $ | (114 | ) |
| $ | (668 | ) |
|
| 586 | % |
The increase in interest expense of $4.9$0.7 million, or 49%586%, was primarily driven by an increase in sales volume that resultedfinance leases which generated an increase in increased costsinterest expense related to third-party freight for our products.those leases.
Other (Expense)Interest Income Net
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Interest income |
| $ | 2,542 |
|
| $ | 992 |
|
| $ | 1,550 |
|
|
| 156 | % |
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| ||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Other (expense) income, net |
| $ | (86 | ) |
| $ | 1,417 |
|
| $ | (1,503 | ) |
|
| (106 | )% |
Percentage of net revenue |
|
| — |
|
|
| 1 | % |
|
|
|
|
|
|
|
|
The increase in interest income of $1.5 million in other expense, net, or 106%, was primarily due to a one-time January 2019 gain of $1.2 million in connection with the settlement of claims made pursuant to a lawsuit in which Ovabrite was the defendant and a countersuit in which Ovabrite was the plaintiff. The remaining $0.3 million increase was primarily due to a write off of implementation costs for software no longer in use.
52
|
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| |||||
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| |||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Provision for income taxes |
| $ | 2,770 |
|
| $ | 1,106 |
|
| $ | 1,664 |
|
|
| 150 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase of $1.7$1.6 million, or 150%156%, was primarily driven by an increasehigher interest income on our available-for-sale securities portfolio.
Other Expense, net
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Other expense, net |
| $ | (2,813 | ) |
| $ | (151 | ) |
| $ | (2,662 | ) |
|
| 1,763 | % |
The change in other expense, net of $2.7 million was primarily driven by losses on our commodity derivative instruments during the fiscal year ended December 31, 2023.
Income Tax Provision
|
| Fiscal Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, |
|
| December 25, |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
|
|
| |||||||
Income tax provision |
| $ | 6,635 |
|
| $ | 1,601 |
|
| $ | 5,034 |
|
|
| 314 | % |
The change in the income before taxes due to higher net revenue and improved gross margin.
Net (Loss) Income Attributable to Noncontrolling Interests
| Fiscal Year Ended |
|
|
|
|
|
|
|
|
| ||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Net income attributable to noncontrolling interests |
| $ | 84 |
|
| $ | 927 |
|
| $ | (843 | ) |
|
| (91 | )% |
The decreasetax provision of $0.8$5.0 million, in net income attributable to noncontrolling interests, or 91%314%, was primarily driven by the non-recurring settlementincrease in net income before income taxes earned in the fiscal year ended December 31, 2023.
Comparison of the Ovabrite lawsuit in January 2019.
Fiscal YearYears Ended December 29, 2019 Compared to Fiscal Year Ended25, 2022 and December 30, 201826, 2021
For the discussion of the financial condition and results of operations for the fiscal year ended December 29, 201925, 2022 compared to the fiscal year ended December 30, 2018,26, 2021, refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Comparison of the Fiscal Years Ended December 30, 2018 and December 29, 2019”Operations” in our final prospectusAnnual Report on Form 10-K for the fiscal year ended December 25, 2022, filed with the Securities and Exchange Commission on November 12, 2020 pursuant to Rule 424(b) under the Securities Act of 1933.March 9, 2023.
56
Non-GAAP Financial Measures
Adjusted EBITDA
We report our financial results in accordance with GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance.
We calculate Adjusted EBITDA as net income, (loss), adjusted to exclude: (1) depreciation
Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with, GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of the limitations of Adjusted EBITDA include that (1) itthe following:
In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net income and other results stated in accordance with GAAP.
5357
The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure stated in accordance with GAAP, for the periods presented:
|
| Fiscal Year Ended |
| |||||
|
| December 31, |
|
| December 25, |
| ||
|
| (in thousands) |
| |||||
Net income |
| $ | 25,566 |
|
| $ | 1,230 |
|
Depreciation and amortization1 |
|
| 10,490 |
|
|
| 5,761 |
|
Stock-based compensation expense |
|
| 7,417 |
|
|
| 6,040 |
|
Costs related to our exit of the convenient breakfast product line |
|
| — |
|
|
| 2,341 |
|
Dissolution of Ovabrite, Inc. |
|
| — |
|
|
| 122 |
|
Income tax provision |
|
| 6,635 |
|
|
| 1,601 |
|
Interest expense |
|
| 782 |
|
|
| 114 |
|
Change in fair value of contingent consideration2 |
|
| — |
|
|
| 19 |
|
Interest income |
|
| (2,542 | ) |
|
| (992 | ) |
Adjusted EBITDA |
| $ | 48,348 |
|
| $ | 16,236 |
|
|
| Fiscal Year Ended |
| |||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||
|
|
|
|
|
|
|
| |||||
Net income |
| $ | 8,884 |
|
| $ | 3,312 |
|
| $ | 5,629 |
|
Depreciation and amortization |
|
| 2,550 |
|
|
| 1,921 |
|
|
| 1,437 |
|
Provision for income tax |
|
| 2,770 |
|
|
| 1,106 |
|
|
| 723 |
|
Stock-based compensation expense |
|
| 2,509 |
|
|
| 1,029 |
|
|
| 600 |
|
Interest expense |
|
| 488 |
|
|
| 349 |
|
|
| 424 |
|
Change in fair value of contingent consideration (1) |
|
| (333 | ) |
|
| 70 |
|
|
| 92 |
|
Interest income |
|
| (97 | ) |
|
| (181 | ) |
|
| (9 | ) |
Net litigation settlement gain (2) |
|
| (20 | ) |
|
| (1,200 | ) |
|
| (1,000 | ) |
Adjusted EBITDA |
| $ | 16,751 |
|
| $ | 6,406 |
|
| $ | 7,896 |
|
|
|
|
|
1 Amount also includes finance lease amortization.
Contractual Obligations and Commitments2 Amount reflects the change in fair value of a contingent consideration liability in connection with our 2014 acquisition of certain assets of Heartland Eggs.
|
|
| Payments Due by Period |
| |||||||||||||||||
|
| Total |
|
| Less than 1 Year |
|
| 1 to 3 Years |
|
| 4 to 5 Years |
|
| More than 5 Years |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Capital lease obligations |
| $ | 798 |
|
| $ | 471 |
|
| $ | 327 |
|
| $ | — |
|
| $ | — |
|
Operating lease commitments |
|
| 5,255 |
|
|
| 1,989 |
|
|
| 2,812 |
|
|
| 338 |
|
|
| 116 |
|
Total |
| $ | 6,053 |
|
| $ | 2,460 |
|
| $ | 3,139 |
|
| $ | 338 |
|
| $ | 116 |
|
We purchase our egg inventories under long-term supply contracts with farms. Purchase commitments contained in these arrangements are variable dependent upon the quantity of eggs produced by the farms. As a result, these commitments have been excluded from the contractual obligations disclosed above. In addition, substantially all of the long-term supply contracts with farms contain components that meet the definition of embedded leases under ASC Topic 840, Leases. As total purchase commitments contained under these arrangements are variable, the amount attributable to the lease component are contingent rentals, and there are no minimum lease payments associated with these long-term supply contracts. See Note 16 to our consolidated financial statements included elsewhere for additional details related to our long-term supply contracts with farms.
Liquidity and Capital Resources
Since inception, we have funded our operations with proceeds from sales of our capital stock, proceeds from borrowings and cash flows from the sale of our products. We had net income of $8.8$25.6 million for the fiscal year ended December 27, 2020,31, 2023 and retained earnings of $14.0$29.7 million as of December 27, 2020. We completed our IPO on August 4, 2020 resulting in net proceeds to us of approximately $99.7 million, after deducting underwriting discounts, commissions and offering costs associated with the offering. 31, 2023.
Funding Requirements
We expect that our cash, and cash equivalents and marketable securities, together with cash provided by our operating activities and available borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months. We further believe that we will be able to fund potential operating expenses and cash obligations beyond the next 12 months, through a combination of existing cash, cash equivalents and marketable securities, cash provided by our operating activities and available borrowings under our Credit Facility.
Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in acquisitions, partnerships and unexplored channels and the potential costs associated with future expansion of our production capacity. As of December 31, 2023, future minimum lease payments under non-cancelable operating leases totaled $9.8 million and future minimum lease payments under non-cancelable finance leases totaled $15.6 million. In addition, as a result of increasing construction costs associated with our expansionnew farms, we incurred incremental farm recruitment costs that will be required to be paid in advance of Egg Central Station. As of December 27, 2020,these farms being able to produce eggs, and we expect such incremental costs to spend $25 million on our expansioncontinue into fiscal 2024. These costs are expected to be recognized over the term of Egg Central Station. Ifthe related buy-sell contracts with the new farms, which are generally four to five years in length. Additionally, we are required to seek additional equity or debt financing, we may not be able to raise such funding on terms acceptable to us or at all. Further, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which couldcurrently in the future negatively affectprocess of exploring potential sites and designs for an additional egg packing facility. We anticipate that we will incur approximately $10.0 million in capital expenditures related to this goal in fiscal 2024 (including capital expenditures initially planned for fiscal 2023) and will incur further expenditures in the years following. Finally, we anticipate increased expenditures in marketing during fiscal 2024 to support progress toward our operations. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation and product expansion, we may not be able to compete successfully, which would harm our business, operations and financial condition.long-term marketing goals.
54
We originally entered into our Credit Facility with PNC Bank, National Association, or PNC Bank, in October 2017. The Credit Facility initially included a $7.9$4.7 million term loan, a $15.0$10.0 million revolving line of credit and an equipment loan with a maximum borrowing capacity of $3.0 million and matures in October 2022.
In April 2018, we entered into amended loan agreements with PNC Bank, which we refer to as the First Amendment Loan and the Second Amendment Loan, respectively. The First Amendment Loan amended the Credit Facility to decrease the maximum borrowings under the equipment loan from $1.5 million to $750,000, and to waive existing events of default. The Second Amendment Loan amended the Credit Facility to modify various definitions andmillion.
58
Subsequently, terms that were not significant.
In February 2019, we entered into the Third Amendment to our Credit Facility, which we refer to as the Third Amendment Loan. The Third Amendment Loan amended the Credit Facility to waive existing events of default.
In February 2020, we entered into the Fourth Amendment to our Credit Facility, which we refer to as the Fourth Amendment Loan. The Fourth Amendment Loan amended certain terms and conditions under our Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $17.7 million. In addition,were modified at various times between fiscal 2018 and fiscal 2023. Such amendments (i) amended various definitions, (ii) waived a technical default in May 2020 which was triggered by exceeding the Fourth Amendment Loancapital expenditure limit, (iii) increased our maximum borrowing capacity under the equipment loan to $3.0 million and (iv) extended the borrowing period for the equipment loan from October 2019 to October 2021.
In May 2020, we entered into the Fifthmaturity date. The Ninth Amendment to our Credit Facility, which we refer to as the Fifth Amendment Loan. The Fifth Amendment Loan amended or waived certain terms and conditions under the Credit Facility in April 2021 eliminated the term loan and increasedequipment loan. The Tenth Amendment to the maximum borrowing capacityCredit Agreement in December 2022 modified certain covenants related to commodity hedging, consented to the dissolution of immaterial subsidiaries and implemented changes related to the discontinuation of LIBOR. The Eleventh Amendment to the Credit Facility, effective July 26, 2023, extended the maturity date by one year, from April 2, 2024 to $22.7 million. In addition, the Fifth Amendment Loan increased the maximum borrowing capacity under the revolving line of credit to $15.0 million.April 2, 2025.
In June 2020, we entered into the Sixth Amendment to our Credit Facility, which we refer to as the Sixth Amendment Loan. The Sixth Amendment Loan amended certain terms and conditions under our Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $25.9 million. In addition, the Sixth Amendment Loan refinanced our term loan and provided for the borrowing of an additional $5.0 million, resulting in the issuance of an amended and restated secured term loan note in the amount of $7.9 million.
Borrowings under the amended and restated term loan are repayable in monthly installments of principal and interest, followed by a balloon payment of all unpaid principal and accrued and unpaid interest due July 2027. Interest on borrowings under the amended and restated term loan accrues at a rate, at our election at the time of borrowing, equal to (i) LIBOR plus 3.25% or (ii) 2.25% plus the sum of the Federal Funds Open Rate plus 50 basis points and the Daily LIBOR Rate plus 100 basis points. As of December 27, 2020, there was $0 outstanding under the amended and restated term loan which was fully paid off in December 2020.
The maximum borrowing capacity under the revolving line of credit is $15.0currently $20.0 million. Interest on borrowings under the revolving line of credit, as well as loan advances thereunder, accrues at a rate, at our election at the time of borrowing, equal to (i) LIBORthe secured overnight financing rate as administered by the Federal Reserve Bank of New York plus 2.25%2.00% or (ii) 1.25%1.00% plus the alternate base rate. In April 2020, all outstanding amounts under the Revolving Line of Credit were repaid and the interest rate, applicable to borrowings under the revolving line of credit was 4.5%.
The maximum borrowing capacity under the equipment loan is $3.0 million, subject to certain restrictions. Any borrowings under the equipment loan from October 2018 through October 2021 will be due and payable beginning the following month with 36 monthly installments of principal due through October 2022, and all accrued and unpaid interest due October 2022. Interest on borrowings under the equipment loan accrues at a rate, at our election at the time of borrowing, equal to (i) LIBOR plus 3.00% or (ii) 2.00% plus the alternate base rate. In September 2020, all outstanding amounts under the Equipment Loan were repaid using cash provided by operations.
In July 2020, we entered into the Seventh Amendment to our Credit Facility, which we refer to as the Seventh Amendment Loan. The Seventh Amendment Loan amendeddefined in the Credit Facility to modify various definitions and terms in anticipation of our IPO.Facility.
In October 2020, we entered into the Eighth Amendment to our Credit Facility, which we refer to as the Eighth Amendment Loan. The Eighth Amendment Loan amended the Credit Facility to modify various definitions.
The Credit Facility is secured by all of our assets (other than real property and certain other property excluded pursuant to the terms of the Credit Facility) and requires us to maintain twothree financial covenants: a fixed charge coverage ratio, a leverage ratio and a leverage ratio.minimum tangible net worth requirement. The Credit Facility also contains various covenants relating to limitations on indebtedness, investments and acquisitions, mergers, consolidations, the sale of properties and liens and capital expenditures. In addition, the Credit Facility imposes limitations on our ability to pay dividends or distributions on any equity interests, declare any stock splits or reclassifications of our stock, apply any of our funds, property or assets to purchase, redeem or retire any of our equity interests, or to purchase, redeem or retire any of our options to purchase any of our equity interests.liens. As a result of the limitations contained in the Credit Facility, allcertain of the net assets on our consolidated balance sheet as of December 27, 202031, 2023 are restricted in use. The Credit Facility contains other customary covenants, representations and events of default.
55
InAs of December 2020, the31, 2023, there was no outstanding balance ofunder the Credit Facility, was fully paid off. As of the loan pay off date,and we were in compliance with all covenants under the Credit Facility. See “Long-Term Debt” in Note 1013 to our consolidated financial statements included elsewhere in this Annual Report for additional details related to our Credit Facility.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
| Fiscal Year Ended |
| |||||
|
| December 31, |
|
| December 25, |
| ||
|
| (in thousands) |
| |||||
Net cash provided by (used in) operating activities |
| $ | 50,906 |
|
| $ | (8,098 | ) |
Net cash provided by (used in) investing activities |
|
| 22,383 |
|
|
| (10,037 | ) |
Net cash (used in) provided by financing activities |
|
| (2,054 | ) |
|
| 83 |
|
Net increase (decrease) in cash and cash equivalents |
| $ | 71,235 |
|
| $ | (18,052 | ) |
|
| Fiscal Year Ended |
| |||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||
|
| (in thousands) |
| |||||||||
Net cash provided by (used in) operating activities |
| $ | 11,702 |
|
| $ | (5,352 | ) |
| $ | 11,424 |
|
Net cash used in investing activities |
|
| (77,842 | ) |
|
| (5,623 | ) |
|
| (1,911 | ) |
Net cash provided by (used in) financing activities |
|
| 94,410 |
|
|
| 434 |
|
|
| (1,509 | ) |
Net increase (decrease) in cash and cash equivalents |
| $ | 28,270 |
|
| $ | (10,541 | ) |
| $ | 8,004 |
|
Operating Activities
In fiscal 2020,The increase in net cash provided by operating activities during the fiscal year ended December 31, 2023 compared to the fiscal year ended December 25, 2022 was $11.7 million and wasdue primarily driven byto higher net income of $8.8 million, total non-cash items of $6.7 million, and a decrease in net working capital items of $3.9 million. Non-cash items primarily consisted of depreciation and amortization of $2.6 million, non-cash stock-based compensation expense of $2.5 million and deferred income taxes of $1.8 million. The change in net working capital items was primarilythe current fiscal year due to a $1.8 million increasegross margin improvements and improving leverage our of selling, general and administrative costs. Increases in our accounts payable a $0.2 million decrease in income taxes receivable, partially offset by a $2.3 million increase in prepaids and other current assets, a $4.7 million increase in accounts receivable, and a $1.2 million increase in accrued liabilities. The increases in prepaid expenses and other current assets were primarily due to prepaid insurance offset by a reduction in prepaid transaction costs associated with our IPO. The increases in accounts payable were primarily due to an increase in amounts due to our partner farms. The increases in accrued liabilities were primarily due to increases in accrued payroll and accrued promotions, offset by lower accruals relatedalso contributed to the timing of vendor invoices.
In fiscal 2019, netimproved cash used in operating activities was $5.4 million resulting primarily from net cash used in changes in our operating assets and liabilities of $12.2 million, partially offset by noncash charges of $3.5 million and net income of $3.3 million. Net cash used in changes in our operating assets and liabilities for fiscal 2019 consisted primarily of increases in inventories, accounts receivable, income taxes receivable and prepaid expenses and other current assets of $9.2 million, $6.2 million, $1.5 million and $0.6 million, respectively, partially offset by increases in accounts payable of $3.2 million and increases in accrued and other liabilities of $2.1 million. The increases in accounts receivable were primarily due to new customers and distribution centers, in addition to increased orders from our existing customers, while the increases in inventories were primarily due to a significant increase in egg inventory and packaging inventory to support anticipated demand. The increases in prepaid expenses and other current assets were primarily due to transaction costs associated with our IPO. The increases in accounts payable were primarily due to increase in amounts due to our partner farms for lost income as a result of removing birds from current flocks ahead of schedule and additional increases in shipping and packaging costs. The increases in accrued liabilities were primarily due to timing of vendor invoices.
In fiscal 2018, net cash provided by operating activities was $11.4 million resulting primarily from net income of $5.6 million, an increase in accounts payable of $4.9 million, an increase in accrued liabilities of $2.9 million and non-cash charges of $3.1 million,operations, partially offset by an increase in accounts receivable of $3.6 million, anour inventory. Our accrued liabilities were up across nearly all categories with the largest contributor being promotions and customer deductions.
Investing Activities
The increase in inventory of $1.0 million, and an increase in prepaid expenses and other current assets of $0.5 million. The increases in accounts payable and accrued expenses werecash provided by investing activities during the fiscal year ended December 31, 2023 is primarily due to increases in a payment associated with an over recoverythe continuing maturities of promotions related to a customer and overall increase to inventory purchases and payroll related costs associated with our continued growth. The increases in accounts receivable were primarily due to new customers and distribution centers, in addition to increased orders from our existing customers. The increases in prepaid expenses and other current assets were primarily due to our gain contingency in connection with our lawsuit settlement in which we were the plaintiff.
Investing Activities
In fiscal 2020, net cash used in investing activities was $77.8 million resulting primarily from $68.4 million of purchases of available-for-saleavailable for sale securities $10.3 million of purchases of property, plant and equipment used in ongoing operations, offset by $0.8 million received from repayment of notes receivable from related parties.
56
In fiscal 2019, net cash used in investing activities was $5.6 million, resulting primarily from purchases of property, plant and equipment used in ongoing operations of $4.8 million and the issuancereinvestment of notes receivable of $0.8 million to related parties.these amounts into cash equivalents during the year ended December 31, 2023.
In fiscal 2018, net cash used in investing activities was $1.9 million, resulting primarily from purchases of property, plant and equipment used in ongoing operations.
Financing Activities
In fiscal 2020, net cash provided by financing activities was $94.4 million which primarily consisted of net proceeds of $99.7 million from the issuance of common stock from our IPO, $6.5 million from borrowings under the Credit Facility, $0.3 million from the exercise of warrants and proceeds of $0.2 million from the exercise of stock options, partially offset by $11.6 million of repayments under our Credit Facility, and $0.5 million of repayments of our capital lease obligations.
In fiscal 2019, net cash provided by financing activities was $0.4 million, which primarily consisted of $15.0 million of gross proceeds from our issuance of common stock to Manna Tree Partners, less issuance costs of $0.9 million, proceeds of $1.3 million and $0.6 million under our revolving line of credit and equipment loan, respectively, and proceeds of $0.2 million from the exercise of stock options, partially offset by our repurchase of common stock of $14.3 million, $0.7 million of principal repaymentsThe change in association with our Credit Facility, $0.4 million of deferred royalty payments related to our 2014 acquisition of certain assets of Heartland Eggs and $0.4 million of principal payments under our capital lease obligations.
In fiscal 2018, net cash used in financing activities during the fiscal year ended December 31, 2023 compared to the fiscal year ended December 25, 2022 was $1.5 million, primarily consisting of $0.4 million of deferred royalty payments relateddue to our 2014 acquisition of certain assets of Heartland Eggs, $0.7 millionan increase of principal payments underon our Credit Facility and $0.4 million of principal payments under our capitalfinance lease obligations.
59
Seasonality
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 27, 2020:
|
| Payments Due by Period |
| |||||||||||||||||
|
| Total |
|
| Less than 1 Year |
|
| 1 to 3 Years |
|
| 4 to 5 Years |
|
| More than 5 Years |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Capital lease obligations |
| $ | 798 |
|
| $ | 471 |
|
| $ | 327 |
|
| $ | — |
|
| $ | — |
|
Operating lease commitments |
|
| 5,255 |
|
|
| 1,989 |
|
|
| 2,812 |
|
|
| 338 |
|
|
| 116 |
|
Total |
| $ | 6,053 |
|
| $ | 2,460 |
|
| $ | 3,139 |
|
| $ | 338 |
|
| $ | 116 |
|
We purchase our egg inventories under long-term supply contracts with farms. Purchase commitments contained in these arrangements are variable dependent upon the quantity of eggs produced by the farms. As a result, these commitments have been excluded from the contractual obligations disclosed above. In addition, substantially all of the long-term supply contracts with farms contain components that meet the definition of embedded leases under ASC Topic 840, Leases. As total purchase commitments contained under these arrangements are variable, the amount attributable to the lease component are contingent rentals, and there are no minimum lease payments associated with these long-term supply contracts. See Note 18 to our consolidated financial statements included elsewhere in this Annual Report for additional details related to our long-term supply contracts with farms.
Long-Term Debt Obligations
In June 2020, we entered into the Sixth Amendment Loan, which amended certain terms and conditions under the Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $25.9 million. In addition, the Sixth Amendment Loan refinanced our term loan, providing for the borrowing of an additional $5.0 million, resulting in the issuance of an amended and restated secured term loan note in the amount of $7.9 million.
In December 2020, the outstanding balance of the Credit Facility was fully paid off.
Operating Lease Commitments
In May 2020, we entered into a lease agreement for warehouse space in Springfield, Missouri for 13,000 rentable pallet spaces. We have the option to exceed the 3,750 pallet spaces through September 30, 2023, the lease expiration date. The monthly lease payments, which include base rent charges of approximately $0.1 million, are subject to periodic rent increases through September 2023.
57
Demand for our products fluctuates in response to seasonal factors. Demand tends to increase with the start of the school year and is highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter, and theis lowest during the summer months. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and results of operations between different quarters within a single fiscal year are not necessarily meaningful comparisons.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting PoliciesEstimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in thosethe financial statements and related notes thereto. The future effectsCritical accounting estimates are those estimates that, in accordance with GAAP, involve a significant level of the COVID-19 pandemicestimation uncertainty and have had or are reasonably likely to have a material impact on our results of operations, cash flows and financial position are unclear. However, we believe we have used reasonable estimates and assumptions in preparing the consolidated financial statements. Management has determined that our most critical accounting estimates are those relating to revenue recognition and trade promotions, income taxes, and contingencies. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making thosethese estimates, actual results reported in future periods could differ materially from those estimates. SuchThe following is a summary of certain accounting estimates principally include revenue recognition, determination of useful lives for property and equipment, goodwill, contingent consideration, allowance for doubtful accounts, inventory obsolescence, valuation of common stock, stock option valuations, redeemable noncontrolling interest, accrual liabilities and income taxes.
The significantwe consider critical. For further discussion about our accounting policies, and estimates used in preparation of the consolidated financial statements are described in our audited consolidated financial statements as of and for the fiscal year ended December 29, 2019, and the notes thereto. Except as detailed insee Note 2 to our consolidated financial statements includedappearing elsewhere in this Annual Report,Report.
Revenue Recognition and Trade Promotions
We recognize revenue for the sale of our product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon delivery to the customer based on terms of the sale. Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which include trade promotions as well as chargebacks such as coupons, discounts, rebates, spoils, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue, at the time of sale, based on theamount we expect to incur.
The transaction price contains estimates of known or expected variable consideration. We base these estimates on current forecasted activity and historical experience. We review our expected promotional rates and volumes each period, as well as our historical experience related to customer deductions for wrong, missing, damaged or aged product and update these estimates regularly until the incentives or product returns are realized. The impact of any adjustments is recognized in the period the adjustments are identified.
We do not believe it is reasonably likely that there will be a material change in the estimates or assumptions used to recognize revenue. As noted above, estimates are made based on historical experience and other factors. Typically, programs that are offered have a short duration and historical differences between actual experience compared to estimated volumes, performance and redemptions have not been significant to the quarterly or annual financial statements. However, if the level of redemption rates, volumes or performance were to vary significantly from our estimates, we may be exposed to gains or losses that could be material. We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.
Income Taxes
We determine our effective tax rate by estimating our permanent differences resulting from differing treatment of items for financial and income tax purposes. We are periodically audited by taxing authorities and consider any adjustments made as a result of the audits in computing our income tax expense. Any audit adjustments affecting permanent differences could have an impact on our effective tax rate.
Deferred income taxes relate primarily to depreciation expense and share-based compensation programs accounted for differently for financial and income tax purposes. Changes in tax laws and rates could materially affect recorded deferred tax assets and liabilities in the future. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized for a deferred tax asset. Changes in projected future earnings could affect our recorded valuation allowances, if any, in the future.
We record unrecognized tax benefit liabilities for known or anticipated tax issues for which the benefit is more likely than not based on our analysis of whether, and the extent to which, additional taxes will be due. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. To the extent we prevail in matters for which unrecognized tax benefit liabilities have been no material changesestablished or are required to pay amounts in excess of our significant accounting policiesrecorded liability, our effective tax rate in a given financial statement period could be materially affected.
60
Contingencies
We recognize the costs of legal defense for the legal proceedings to which we are a party during the periods in which the costs are incurred. After considerable analysis of the facts and circumstances of each case, we determine the amount of reserves required, if any. We evaluate whether a loss contingency exists, and if the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the loss can be reasonably estimated, the estimated loss would be accrued.
There were no loss contingency reserves for the past three fiscal year ended December 27, 2020.years. In May 2021, the Company and certain of its current and former officers were named as defendants in a class action complaint captioned Nicholas A. Usler et al. v. Vital Farms, Inc. et al. in the United States District Court for the Western District of Texas. The plaintiffs alleged false advertising claims on behalf of themselves and a putative class of alleged consumers of the Company’s shell egg products. The named officers of the Company were subsequently dismissed as defendants in this matter. In September 2023, the parties engaged in mediation to discuss potential settlement of remaining claims, but no agreement was reached and the lawsuit is ongoing. The Company believes the claims are without merit and is vigorously defending itself in this matter. Given the uncertainty of the litigation, the stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company is unable to reasonably estimate the possible loss or range of loss, if any, that may result from the claim. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in our assumptions, the effectiveness of legal strategies, or other factors beyond our control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
Recent Accounting Pronouncements
See the sections titled “Summary of Significant Accounting Policies—Recently adopted accounting pronouncements”Adopted Accounting Pronouncements” and “—Recently issued accounting pronouncements not yet adopted”Issued Accounting Pronouncements Not Yet Adopted” in Note 2 to our consolidated financial statements included elsewhere in this Annual Report for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in raw materials, ingredients, inflationcommodity prices and interest rates.
Raw Materials PricingCommodity Price Risk
The packaging materials used for our products include cardboard, glass, corrugated fiberboard, kraft paper, flexible plastic, flexible film and paperboard. These raw materials are subject to price fluctuations that may create price risk. A hypothetical 10% increase or decrease in the weighted-average cost of these raw materials as of December 27, 2020 would have resulted in an increase or decrease to cost of sales for the year ended December 27, 2020 of approximately $1.6 million. We seek to mitigate the impact of raw materials cost increases by negotiating pricing agreements. We strive to offset the impact of raw materials cost increases with a combination of cost savings initiatives and efficiencies and price increases to our customers.
58
We source our pasture-raised eggs and milkcream for our butter products from our network of small family farms. The price we pay to purchase shell eggs from farmers fluctuates based on pallet weight, and under our buy-sell contracts, which account for 98%all of the laying hens in our network of family farms as of December 27, 2020,31, 2023, the price we pay is also indexedadjusted quarterly in arrears for changes in feed cost, which may cause our agreed-upon pricing under these contracts to fluctuate on a quarterly basis. Under the remainder of ourOur buy-sell contracts we are directly responsible for purchasing feed. Either type of contract subjectssubject us to risk of price fluctuations in feed ingredients, primarily consisting of corn and soy. We do not attemptThe price we pay for cream is subject to hedge against fluctuations in the prices of these ingredients by using future, forward, option or other derivative instruments.butter commodity fluctuations. A hypothetical 10% increase or decrease in the weighted-average cost of these ingredients across our product lines as of December 27, 202031, 2023 would have resulted in an increase or decrease to cost of sales for the fiscal year ended December 27, 202031, 2023 of approximately $3.4$8.8 million. We strive to offset the impact of ingredient cost increases with a combination of cost savings initiatives and efficiencies and price increases to our customers.
Inflation Risk
Costs of packaging are volatile and can fluctuate due to conditions that are difficult to predict creating price risk. A hypothetical 10% increase or decrease in the weighted-average cost of packaging raw materials as of December 31, 2023 would have resulted in an increase or decrease to cost of sales for the fiscal year ended December 31, 2023 of approximately $3.5 million. We do not believe that inflation has hadseek to mitigate the impact of raw materials cost increases with a material effect oncombination of negotiated pricing agreements, cost savings initiatives and efficiencies and price increases to our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.customers.
61
Interest Rate Risk
We are subject to interest rate risk in connection with our credit facility agreement with PNC Bank, National Association, or the Credit Facility. See the section titled “—Liquidity and Capital Resources—Credit Facility” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Annual Report.above for additional details related to our Credit Facility. Based on the average interest rate on the instruments under the Credit Facility during the fiscal year ended December 27, 2020,31, 2023, and to the extent that borrowings were outstanding, we do not believe that a hypothetical 10% change in the interest rate would have a material effect on our results of operations or financial condition for the fiscal year ended December 27, 2020.31, 2023.
Our interest-earning instruments also carry a degree of interest rate risk. As of December 27, 2020,31, 2023, we had cash and cash equivalents of 29.5$84.1 million and investments in available for sale securities of $68.4 million$32.7 million. As of December 31, 2023, the effective maturity of our investment securities available for sale was approximately 4 months and the composite credit rating of the holdings is Aa3 on the Moody's rating scale.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Foreign Currency Exchange Risk
All of our sales are denominated in U.S. dollars, and therefore our net revenue is not currently subject to significant foreign currency risk. We purchase certain equipment from foreign countries, and the cost related to this equipment is denominated in the currency of the applicable country. Additionally, to the extent our sourcing strategy changes or we commence generating revenue outside of the United States that is denominated in currencies other than the U.S. dollar, our results of operations could be impacted by changes in exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% change in the relative value of the U.S. dollar to other currencies would not have had a material effect on our results of operations forexposure during the fiscal year ended December 27, 2020.31, 2023.
5962
Item 8. Financial StatementsStatements and Supplementary Data
Index to Financial Statements | ||
Report of Independent Registered Accounting Firm(KPMG LLP, Austin, TX, PCAOB ID: 185) |
| |
| ||
| ||
| ||
| ||
| ||
|
63
60
Report of Independent RegisteredRegistered Public Accounting Firm
To the Stockholders and the Board of Directors
Vital Farms, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vital Farms, Inc. and subsidiaries (the Company) as of December 27, 202031, 2023 and December 29, 2019,25, 2022, the related consolidated statements of operations,income, comprehensive income, redeemable convertible preferred stock, redeemable noncontrolling interest and stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 27, 2020,31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 202031, 2023 and December 29, 2019,25, 2022, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 27, 2020,31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
Austin, Texas
March 24, 2021
64
VITAL FARMS, INC.
(Amounts in thousands, except share amounts)
|
| December 31, |
|
| December 25, |
| ||
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 84,149 |
|
| $ | 12,914 |
|
Investment securities, available-for-sale |
|
| 32,667 |
|
|
| 65,814 |
|
Accounts receivable, net of allowance for credit losses of $550 and $699 as of December 31, 2023 and December 25, 2022, respectively |
|
| 39,699 |
|
|
| 38,895 |
|
Inventories |
|
| 32,895 |
|
|
| 26,849 |
|
Prepaid expenses and other current assets, net of allowance for credit losses of $227 and $206 as of December 31, 2023 and December 25, 2022, respectively |
|
| 6,114 |
|
|
| 5,142 |
|
Total current assets |
|
| 195,524 |
|
|
| 149,614 |
|
Property, plant and equipment, net |
|
| 66,839 |
|
|
| 59,155 |
|
Operating lease right-of-use assets |
|
| 8,911 |
|
|
| 1,895 |
|
Goodwill and other assets |
|
| 3,904 |
|
|
| 4,002 |
|
Total assets |
| $ | 275,178 |
|
| $ | 214,666 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ | 33,485 |
|
| $ | 25,972 |
|
Accrued liabilities |
|
| 24,218 |
|
|
| 18,477 |
|
Operating lease liabilities, current |
|
| 3,057 |
|
|
| 1,208 |
|
Finance lease liabilities, current |
|
| 3,255 |
|
|
| 1,570 |
|
Income taxes payable |
|
| 1,206 |
|
|
| 425 |
|
Total current liabilities |
|
| 65,221 |
|
|
| 47,652 |
|
Operating lease liabilities, non-current |
|
| 5,771 |
|
|
| 892 |
|
Finance lease liabilities, non-current |
|
| 10,481 |
|
|
| 7,023 |
|
Other liabilities |
|
| 1,028 |
|
|
| 767 |
|
Total liabilities |
| $ | 82,501 |
|
| $ | 56,334 |
|
Commitments and contingencies (Note 20) |
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
|
| ||
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized as of December 31, 2023 and December 25, 2022; no shares issued and outstanding as of December 31, 2023 and December 25, 2022, respectively |
|
| — |
|
|
| — |
|
Common stock, $0.0001 par value per share, 310,000,000 shares authorized as of December 31, 2023 and December 25, 2022; 41,684,649 and 40,746,990 shares issued and outstanding as of December 31, 2023 and December 25, 2022, respectively |
|
| 4 |
|
|
| 4 |
|
Additional paid-in capital |
|
| 163,325 |
|
|
| 155,716 |
|
Retained earnings |
|
| 29,725 |
|
|
| 4,159 |
|
Accumulated other comprehensive loss |
|
| (377 | ) |
|
| (1,547 | ) |
Total stockholders’ equity |
| $ | 192,677 |
|
| $ | 158,332 |
|
Total liabilities and stockholders’ equity |
| $ | 275,178 |
|
| $ | 214,666 |
|
|
| December 27, 2020 |
|
| December 29, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 29,544 |
|
| $ | 1,274 |
|
Investment securities available-for-sale |
|
| 68,357 |
|
|
| — |
|
Accounts receivable, net |
|
| 20,934 |
|
|
| 16,108 |
|
Inventories |
|
| 12,902 |
|
|
| 12,947 |
|
Income taxes receivable |
|
| 1,554 |
|
|
| 1,615 |
|
Prepaid expenses and other current assets |
|
| 3,965 |
|
|
| 2,706 |
|
Total current assets |
|
| 137,256 |
|
|
| 34,650 |
|
Property, plant and equipment, net |
|
| 30,118 |
|
|
| 22,458 |
|
Notes receivable from related party |
|
| — |
|
|
| 831 |
|
Goodwill |
|
| 3,858 |
|
|
| 3,858 |
|
Deposits and other assets |
|
| 142 |
|
|
| 151 |
|
Total assets |
| $ | 171,374 |
|
| $ | 61,948 |
|
Liabilities, Redeemable Noncontrolling Interest, Redeemable Convertible Preferred Stock and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 15,489 |
|
| $ | 13,510 |
|
Accrued liabilities |
|
| 9,845 |
|
|
| 8,608 |
|
Current portion of long-term debt |
|
| — |
|
|
| 2,160 |
|
Lease obligation, current |
|
| 471 |
|
|
| 449 |
|
Contingent consideration, current |
|
| 109 |
|
|
| 270 |
|
Total current liabilities |
|
| 25,914 |
|
|
| 24,997 |
|
Long-term debt, net of current portion |
|
| — |
|
|
| 2,896 |
|
Lease obligation, net of current portion |
|
| 327 |
|
|
| 797 |
|
Contingent consideration, non-current |
|
| 18 |
|
|
| 382 |
|
Deferred tax liabilities, net |
|
| 2,537 |
|
|
| 755 |
|
Other liability, non-current |
|
| 192 |
|
|
| 272 |
|
Total liabilities |
|
| 28,988 |
|
|
| 30,099 |
|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest |
|
| 175 |
|
|
| 175 |
|
Redeemable convertible preferred stock (Series B, Series C and Series D), $0.0001 par value per share; 0 and 8,192,876 shares authorized, issued, and outstanding as of December 27, 2020 and December 29, 2019; aggregate liquidation preference of $0 and $40,436 as of December 27, 2020 and December 29, 2019 |
|
| — |
|
|
| 23,036 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value per share, 310,000,000 and 40,348,565 shares authorized as of December 27, 2020 and December 29, 2019; 39,444,040 and 31,429,898 shares issued as of December 27, 2020 and December 29, 2019, respectively; 39,444,040 and 25,934,980 shares outstanding as of December 27, 2020 and December 29, 2019, respectively |
|
| 5 |
|
|
| 3 |
|
Treasury stock, at cost, 5,494,918 common shares as of December 27, 2020 and December 29, 2019 |
|
| (16,276 | ) |
|
| (16,276 | ) |
Additional paid-in capital |
|
| 144,311 |
|
|
| 19,593 |
|
Retained earnings |
|
| 14,039 |
|
|
| 5,239 |
|
Accumulated other comprehensive loss |
|
| (31 | ) |
|
| — |
|
Total stockholders’ equity attributable to Vital Farms, Inc. stockholders |
|
| 142,048 |
|
|
| 8,559 |
|
Noncontrolling interests |
|
| 163 |
|
|
| 79 |
|
Total stockholders’ equity |
| $ | 142,211 |
|
| $ | 8,638 |
|
Total liabilities, redeemable noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity |
| $ | 171,374 |
|
| $ | 61,948 |
|
See accompanying notes to the consolidated financial statements.
6265
VITAL FARMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(Amounts in thousands, except share and per share data)
|
| Fiscal Year Ended |
| |||||||||
|
| December 31, |
|
| December 25, |
|
| December 26, |
| |||
Net revenue |
| $ | 471,857 |
|
| $ | 362,050 |
|
| $ | 260,901 |
|
Cost of goods sold |
|
| 309,531 |
|
|
| 252,606 |
|
|
| 178,002 |
|
Gross profit |
|
| 162,326 |
|
|
| 109,444 |
|
|
| 82,899 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Selling, general and administrative |
|
| 101,728 |
|
|
| 77,236 |
|
|
| 57,868 |
|
Shipping and distribution |
|
| 27,344 |
|
|
| 30,104 |
|
|
| 24,979 |
|
Total operating expenses |
|
| 129,072 |
|
|
| 107,340 |
|
|
| 82,847 |
|
Income from operations |
|
| 33,254 |
|
|
| 2,104 |
|
|
| 52 |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| (782 | ) |
|
| (114 | ) |
|
| (52 | ) |
Interest income |
|
| 2,542 |
|
|
| 992 |
|
|
| 381 |
|
Other expense, net |
|
| (2,813 | ) |
|
| (151 | ) |
|
| (27 | ) |
Total other (expense) income, net |
|
| (1,053 | ) |
|
| 727 |
|
|
| 302 |
|
Net income before income taxes |
|
| 32,201 |
|
|
| 2,831 |
|
|
| 354 |
|
Income tax provision (benefit) |
|
| 6,635 |
|
|
| 1,601 |
|
|
| (2,028 | ) |
Net income |
|
| 25,566 |
|
|
| 1,230 |
|
|
| 2,382 |
|
Less: Net loss attributable to noncontrolling interests |
|
| — |
|
|
| (21 | ) |
|
| (47 | ) |
Net income attributable to Vital Farms, Inc. common stockholders |
| $ | 25,566 |
|
| $ | 1,251 |
|
| $ | 2,429 |
|
Net income per share attributable to Vital Farms, Inc. stockholders: |
|
|
|
|
|
|
|
|
| |||
Basic: |
| $ | 0.62 |
|
| $ | 0.03 |
|
| $ | 0.06 |
|
Diluted: |
| $ | 0.59 |
|
| $ | 0.03 |
|
| $ | 0.06 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
| |||
Basic: |
|
| 41,192,544 |
|
|
| 40,648,592 |
|
|
| 40,027,278 |
|
Diluted: |
|
| 43,312,836 |
|
|
| 43,469,586 |
|
|
| 43,321,733 |
|
See accompanying notes to the consolidated financial statements.
66
VITAL FARMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
|
| Fiscal Year Ended |
| |||||||||
|
| December 31, |
|
| December 25, |
|
| December 26, |
| |||
Net income |
| $ | 25,566 |
|
| $ | 1,230 |
|
| $ | 2,382 |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
| |||
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
| |||
Unrealized net holding gain (loss) |
|
| 1,371 |
|
|
| (1,745 | ) |
|
| (385 | ) |
Amounts reclassified for realized losses to earnings |
|
| 182 |
|
|
| 96 |
|
|
| 55 |
|
Available-for-sale debt securities, before tax |
|
| 1,553 |
|
|
| (1,649 | ) |
|
| (330 | ) |
Other comprehensive income (loss), before tax |
|
| 1,553 |
|
|
| (1,649 | ) |
|
| (330 | ) |
Income tax (expense) benefit related to items of other comprehensive income (loss) |
|
| (383 | ) |
|
| 383 |
|
|
| 80 |
|
Other comprehensive income (loss), net of tax |
|
| 1,170 |
|
|
| (1,266 | ) |
|
| (250 | ) |
Comprehensive income (loss) |
|
| 26,736 |
|
|
| (36 | ) |
|
| 2,132 |
|
Less: Comprehensive loss attributable to noncontrolling interests |
|
| — |
|
|
| (21 | ) |
|
| (47 | ) |
Comprehensive income (loss) attributable to Vital Farms, Inc. common stockholders |
| $ | 26,736 |
|
| $ | (15 | ) |
| $ | 2,179 |
|
See accompanying notes to the consolidated financial statements.
|
| Fiscal Year Ended |
| |||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||
Net revenue |
| $ | 214,280 |
|
| $ | 140,733 |
|
| $ | 106,713 |
|
Cost of goods sold |
|
| 139,752 |
|
|
| 97,856 |
|
|
| 71,894 |
|
Gross profit |
|
| 74,528 |
|
|
| 42,877 |
|
|
| 34,819 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 47,396 |
|
|
| 29,526 |
|
|
| 19,437 |
|
Shipping and distribution |
|
| 14,904 |
|
|
| 10,001 |
|
|
| 8,615 |
|
Total operating expenses |
|
| 62,300 |
|
|
| 39,527 |
|
|
| 28,052 |
|
Income from operations |
|
| 12,228 |
|
|
| 3,350 |
|
|
| 6,767 |
|
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (488 | ) |
|
| (349 | ) |
|
| (424 | ) |
Other (expense) income, net |
|
| (86 | ) |
|
| 1,417 |
|
|
| 9 |
|
Total other (expense) income, net |
|
| (574 | ) |
|
| 1,068 |
|
|
| (415 | ) |
Net income before income taxes |
|
| 11,654 |
|
|
| 4,418 |
|
|
| 6,352 |
|
Provision for income taxes |
|
| 2,770 |
|
|
| 1,106 |
|
|
| 723 |
|
Net income |
|
| 8,884 |
|
|
| 3,312 |
|
|
| 5,629 |
|
Less: Net income (loss) attributable to noncontrolling interests |
|
| 84 |
|
|
| 927 |
|
|
| (168 | ) |
Net income attributable to Vital Farms, Inc. common stockholders |
| $ | 8,800 |
|
| $ | 2,385 |
|
| $ | 5,797 |
|
Net income per share attributable to Vital Farms, Inc. stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
| $ | 0.31 |
|
| $ | 0.09 |
|
| $ | 0.22 |
|
Diluted: |
| $ | 0.27 |
|
| $ | 0.07 |
|
| $ | 0.16 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
| 28,667,264 |
|
|
| 25,897,223 |
|
|
| 25,809,665 |
|
Diluted: |
|
| 32,914,653 |
|
|
| 36,071,015 |
|
|
| 35,258,594 |
|
67
VITAL FARMS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share amounts)
|
| Redeemable |
|
| Common Stock |
|
| Treasury Stock |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
|
| Noncontrolling |
|
| Total |
| |||||||||||||||||
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Stockholders |
|
| Interests |
|
| Equity |
| |||||||||||
Balances at December 27, 2020 |
| $ | 175 |
|
|
| 44,938,958 |
|
| $ | 5 |
|
|
| (5,494,918 | ) |
| $ | (16,276 | ) |
| $ | 144,311 |
|
| $ | 14,039 |
|
| $ | (31 | ) |
| $ | 142,048 |
|
| $ | 162 |
|
| $ | 142,210 |
|
Exercise of stock options |
|
| — |
|
|
| 1,034,929 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,803 |
|
|
| — |
|
|
| — |
|
|
| 2,803 |
|
|
| — |
|
|
| 2,803 |
|
Vesting of restricted stock units |
|
| — |
|
|
| 15,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,440 |
|
|
| — |
|
|
| — |
|
|
| 4,440 |
|
|
| — |
|
|
| 4,440 |
|
Net loss attributable to noncontrolling interests - stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (47 | ) |
|
| (47 | ) |
Retirement of treasury stock |
|
| — |
|
|
| (5,494,918 | ) |
|
| — |
|
|
| 5,494,918 |
|
|
| 16,276 |
|
|
| (2,554 | ) |
|
| (13,722 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other comprehensive loss, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (250 | ) |
|
| (250 | ) |
|
| — |
|
|
| (250 | ) |
Net income attributable to Vital Farms, Inc. stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,429 |
|
|
| — |
|
|
| 2,429 |
|
|
| — |
|
|
| 2,429 |
|
Balances at December 26, 2021 |
| $ | 175 |
|
|
| 40,493,969 |
|
| $ | 5 |
|
|
| — |
|
| $ | — |
|
| $ | 149,000 |
|
| $ | 2,746 |
|
| $ | (281 | ) |
| $ | 151,470 |
|
| $ | 115 |
|
| $ | 151,585 |
|
Exercise of stock options |
|
| — |
|
|
| 180,835 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 685 |
|
|
| — |
|
|
| — |
|
|
| 685 |
|
|
| — |
|
|
| 685 |
|
Vesting of restricted stock units |
|
| — |
|
|
| 51,852 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| (9 | ) |
Shares issued under employee stock purchase plan |
|
| — |
|
|
| 20,334 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,040 |
|
|
| — |
|
|
| — |
|
|
| 6,040 |
|
|
| — |
|
|
| 6,040 |
|
Dissolution of noncontrolling interest |
|
| (175 | ) |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| 68 |
|
|
| 67 |
|
Net loss attributable to noncontrolling interests - stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 162 |
|
|
| — |
|
|
| 162 |
|
|
| (183 | ) |
|
| (21 | ) |
Other comprehensive loss, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,266 | ) |
|
| (1,266 | ) |
|
| — |
|
|
| (1,266 | ) |
Net income attributable to Vital Farms, Inc. stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,251 |
|
|
| — |
|
|
| 1,251 |
|
|
| — |
|
|
| 1,251 |
|
Balances at December 25, 2022 |
| $ | — |
|
|
| 40,746,990 |
|
| $ | 4 |
|
|
| — |
|
| $ | — |
|
| $ | 155,716 |
|
| $ | 4,159 |
|
| $ | (1,547 | ) |
| $ | 158,332 |
|
| $ | — |
|
| $ | 158,332 |
|
Exercise of stock options |
|
| — |
|
|
| 737,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 692 |
|
|
| — |
|
|
| — |
|
|
| 692 |
|
|
| — |
|
|
| 692 |
|
Vesting of restricted stock units |
|
| — |
|
|
| 217,347 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares withheld for tax liability on vested restricted stock units |
|
| — |
|
|
| (42,566 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (796 | ) |
|
| — |
|
|
| — |
|
|
| (796 | ) |
|
| — |
|
|
| (796 | ) |
Shares issued under employee stock purchase plan |
|
| — |
|
|
| 25,878 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 296 |
|
|
| — |
|
|
| — |
|
|
| 296 |
|
|
| — |
|
|
| 296 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,417 |
|
|
| — |
|
|
| — |
|
|
| 7,417 |
|
|
| — |
|
|
| 7,417 |
|
Other comprehensive income, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,170 |
|
|
| 1,170 |
|
|
| — |
|
|
| 1,170 |
|
Net income attributable to Vital Farms, Inc. stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 25,566 |
|
|
| — |
|
|
| 25,566 |
|
|
| — |
|
|
| 25,566 |
|
Balances at December 31, 2023 |
| $ | — |
|
|
| 41,684,649 |
|
| $ | 4 |
|
|
| — |
|
| $ | — |
|
| $ | 163,325 |
|
| $ | 29,725 |
|
| $ | (377 | ) |
| $ | 192,677 |
|
| $ | — |
|
| $ | 192,677 |
|
See accompanying notes to the consolidated financial statements.
68
VITAL FARMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
| Fiscal Year Ended |
| |||||||||
|
| December 31, |
|
| December 25, |
|
| December 26, |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 25,566 |
|
| $ | 1,230 |
|
| $ | 2,382 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 7,925 |
|
|
| 5,441 |
|
|
| 3,540 |
|
Reduction in the carrying amount of right-of-use assets |
|
| 4,129 |
|
|
| 1,840 |
|
|
| — |
|
Amortization of available-for-sale debt securities |
|
| 348 |
|
|
| 711 |
|
|
| 1,301 |
|
Stock-based compensation expense |
|
| 7,417 |
|
|
| 6,040 |
|
|
| 4,440 |
|
Uncertain tax positions |
|
| 58 |
|
|
| 405 |
|
|
| — |
|
Deferred taxes |
|
| (179 | ) |
|
| 227 |
|
|
| (2,536 | ) |
Net realized losses on derivative instruments |
|
| 2,711 |
|
|
| — |
|
|
| — |
|
Other |
|
| 438 |
|
|
| 184 |
|
|
| 341 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
|
| (862 | ) |
|
| (13,858 | ) |
|
| (6,078 | ) |
Inventories |
|
| (6,443 | ) |
|
| (15,574 | ) |
|
| 1,733 |
|
Income taxes receivable |
|
| — |
|
|
| 199 |
|
|
| 1,354 |
|
Prepaid expenses and other current assets |
|
| (1,151 | ) |
|
| (131 | ) |
|
| 426 |
|
Deposits and other assets |
|
| 98 |
|
|
| 45 |
|
|
| (46 | ) |
Income taxes payable |
|
| 782 |
|
|
| 425 |
|
|
| — |
|
Accounts payable |
|
| 6,671 |
|
|
| 2,352 |
|
|
| 6,796 |
|
Accrued liabilities |
|
| 5,157 |
|
|
| 3,843 |
|
|
| 4,029 |
|
Operating lease liabilities |
|
| (1,759 | ) |
|
| (1,477 | ) |
|
| — |
|
Net cash provided by (used in) operating activities |
| $ | 50,906 |
|
| $ | (8,098 | ) |
| $ | 17,682 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
|
| (11,538 | ) |
|
| (10,468 | ) |
|
| (16,711 | ) |
Purchases of leasehold improvements |
|
| — |
|
|
| (89 | ) |
|
| — |
|
Purchases of available-for-sale debt securities |
|
| (982 | ) |
|
| (33,817 | ) |
|
| (51,688 | ) |
Purchases of derivative instruments |
|
| (1,971 | ) |
|
| — |
|
|
| — |
|
Sales of available-for-sale debt securities |
|
| 2,895 |
|
|
| — |
|
|
| 1,436 |
|
Settlements of derivative instruments |
|
| 106 |
|
|
| — |
|
|
| — |
|
Maturities and call redemptions of available-for-sale debt securities |
|
| 32,265 |
|
|
| 34,345 |
|
|
| 48,523 |
|
Proceeds from the sale of property, plant and equipment |
|
| 1,056 |
|
|
| 100 |
|
|
| — |
|
Return of investment in variable interest entity |
|
| 552 |
|
|
| — |
|
|
| — |
|
Dissolution of equity investment |
|
| — |
|
|
| (108 | ) |
|
| — |
|
Net cash provided by (used in) investing activities |
| $ | 22,383 |
|
| $ | (10,037 | ) |
| $ | (18,440 | ) |
See accompanying notes to the consolidated financial statements
69
63
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
(Amounts in thousands)
|
| Fiscal Year Ended |
| |||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||
Net income |
| $ | 8,884 |
|
| $ | 3,312 |
|
| $ | 5,629 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding loss on available-for-sale securities, net of tax |
|
| (31 | ) |
|
| — |
|
|
| — |
|
Total comprehensive income |
| $ | 8,853 |
|
| $ | 3,312 |
|
| $ | 5,629 |
|
|
| Fiscal Year Ended |
| |||||||||
|
| December 31, |
|
| December 25, |
|
| December 26, |
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||
Proceeds from borrowing under revolving line of credit |
|
| 7,500 |
|
|
| — |
|
|
| — |
|
Proceeds from exercise of stock options |
|
| 692 |
|
|
| 675 |
|
|
| 2,803 |
|
Proceeds from issuance of common stock under employee stock purchase plan |
|
| 296 |
|
|
| — |
|
|
| — |
|
Repayment of revolving line of credit |
|
| (7,500 | ) |
|
| — |
|
|
| — |
|
Payment of tax withholding obligation on vested RSU shares |
|
| (796 | ) |
|
| — |
|
|
| — |
|
Principal payments under finance lease obligations |
|
| (2,246 | ) |
|
| (554 | ) |
|
| (471 | ) |
Payment of contingent consideration |
|
| — |
|
|
| (38 | ) |
|
| (152 | ) |
Net cash (used in) provided by financing activities |
| $ | (2,054 | ) |
| $ | 83 |
|
| $ | 2,180 |
|
Net increase (decrease) in cash and cash equivalents |
|
| 71,235 |
|
|
| (18,052 | ) |
|
| 1,422 |
|
Cash and cash equivalents at beginning of the period |
|
| 12,914 |
|
|
| 30,966 |
|
|
| 29,544 |
|
Cash and cash equivalents at end of the period |
| $ | 84,149 |
|
| $ | 12,914 |
|
| $ | 30,966 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| |||
Cash paid for interest |
| $ | 775 |
|
| $ | 114 |
|
| $ | 43 |
|
Cash paid for income taxes |
| $ | 5,996 |
|
| $ | 99 |
|
| $ | 102 |
|
Supplemental disclosure of non-cash investing and financing |
|
|
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment included in accounts payable and accrued liabilities |
| $ | 187 |
|
| $ | 1,143 |
|
| $ | 1,493 |
|
See accompanying notes to the consolidated financial statements.
statements
70
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share amounts)
|
| Redeemable Convertible Preferred Stock |
|
| Redeemable Noncontrolling Interest |
|
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-In |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders’ Equity Attributable to Vital Farms, Inc. |
|
| Noncontrolling |
|
| Total Stockholders’ |
| ||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Loss |
|
| Stockholders’ |
|
| Interests |
|
| Equity |
| |||||||||||||
Balances at December 31, 2017 |
|
| 8,192,876 |
|
| $ | 23,036 |
|
| $ | 150 |
|
|
| 28,449,432 |
|
| $ | 3 |
|
|
| (2,642,148 | ) |
| $ | (1,987 | ) |
| $ | 3,605 |
|
| $ | (2,943 | ) |
| $ | — |
|
| $ | (1,322 | ) |
| $ | (680 | ) |
| $ | (2,002 | ) |
Issuance of redeemable noncontrolling interest |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,546 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 40 |
|
|
| — |
|
|
| — |
|
|
| 40 |
|
|
| — |
|
|
| 40 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 600 |
|
|
| — |
|
|
| — |
|
|
| 600 |
|
|
| — |
|
|
| 600 |
|
Net loss attributable to non- controlling interests - stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (168 | ) |
|
| (168 | ) |
Net income attributable to Vital Farms, Inc. |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,797 |
|
|
| — |
|
|
| 5,797 |
|
|
| — |
|
|
| 5,797 |
|
Balances at December 30, 2018 |
|
| 8,192,876 |
|
| $ | 23,036 |
|
| $ | 175 |
|
|
| 28,461,978 |
|
| $ | 3 |
|
|
| (2,642,148 | ) |
| $ | (1,987 | ) |
| $ | 4,245 |
|
| $ | 2,854 |
|
| $ | — |
|
| $ | 5,115 |
|
| $ | (848 | ) |
| $ | 4,267 |
|
Issuance of common stock, net of issuance costs of $903 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,815,012 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,097 |
|
|
| — |
|
|
| — |
|
|
| 14,097 |
|
|
| — |
|
|
| 14,097 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 152,908 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 222 |
|
|
| — |
|
|
| — |
|
|
| 222 |
|
|
| — |
|
|
| 222 |
|
Repurchase of common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,852,770 | ) |
|
| (14,289 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,289 | ) |
|
| — |
|
|
| (14,289 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,029 |
|
|
| — |
|
|
| — |
|
|
| 1,029 |
|
|
| — |
|
|
| 1,029 |
|
Net income attributable to non- controlling interests - stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 927 |
|
|
| 927 |
|
Net income attributable to Vital Farms, Inc. |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,385 |
|
|
| — |
|
|
| 2,385 |
|
|
| — |
|
|
| 2,385 |
|
Balances at December 29, 2019 |
|
| 8,192,876 |
|
| $ | 23,036 |
|
| $ | 175 |
|
|
| 31,429,898 |
|
| $ | 3 |
|
|
| (5,494,918 | ) |
| $ | (16,276 | ) |
| $ | 19,593 |
|
| $ | 5,239 |
|
| $ | — |
|
| $ | 8,559 |
|
| $ | 79 |
|
| $ | 8,638 |
|
Issuance of common stock pursuant to initial public offering, net of issuance costs of 12,215 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,040,323 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 98,670 |
|
|
| — |
|
|
| — |
|
|
| 98,671 |
|
|
| — |
|
|
| 98,671 |
|
Issuance of common stock upon conversion of preferred stock |
|
| (8,192,876 | ) |
|
| (23,036 | ) |
|
| — |
|
|
| 8,192,876 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 23,035 |
|
|
| — |
|
|
| — |
|
|
| 23,036 |
|
|
| — |
|
|
| 23,036 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 75,964 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 221 |
|
|
| — |
|
|
| — |
|
|
| 221 |
|
|
| — |
|
|
| 221 |
|
Exercise of warrant |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 196,800 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 283 |
|
|
| — |
|
|
| — |
|
|
| 283 |
|
|
| — |
|
|
| 283 |
|
Vested restricted stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,097 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,509 |
|
|
| — |
|
|
| — |
|
|
| 2,509 |
|
|
| — |
|
|
| 2,509 |
|
Net income attributable to non- controlling interests - stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 84 |
|
|
| 84 |
|
Other comprehensive loss, net |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (31 | ) |
|
| (31 | ) |
|
| — |
|
|
| (31 | ) |
Net income attributable to Vital Farms, Inc. |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,800 |
|
|
| — |
|
|
| 8,800 |
|
|
| — |
|
|
| 8,800 |
|
Balances at December 27, 2020 |
|
| — |
|
| $ | — |
|
| $ | 175 |
|
|
| 44,938,958 |
|
| $ | 5 |
|
|
| (5,494,918 | ) |
| $ | (16,276 | ) |
| $ | 144,311 |
|
| $ | 14,039 |
|
| $ | (31 | ) |
| $ | 142,048 |
|
| $ | 163 |
|
| $ | 142,211 |
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
| Fiscal Year Ended |
| |||||||||
|
| December 27, 2020 |
|
| December 29, 2019 |
|
| December 30, 2018 |
| |||
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 8,884 |
|
| $ | 3,312 |
|
| $ | 5,629 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,550 |
|
|
| 1,921 |
|
|
| 1,437 |
|
Amortization of debt issuance costs |
|
| 68 |
|
|
| 9 |
|
|
| 71 |
|
Bad debt (recovery) expense |
|
| (108 | ) |
|
| 304 |
|
|
| — |
|
Inventory provisions |
|
| 16 |
|
|
| 189 |
|
|
| 200 |
|
Change in fair value of contingent consideration |
|
| (333 | ) |
|
| 70 |
|
|
| 92 |
|
Stock-based compensation expense |
|
| 2,509 |
|
|
| 1,029 |
|
|
| 600 |
|
Loss on write-off of construction in progress |
|
| 259 |
|
|
| — |
|
|
| — |
|
Deferred taxes |
|
| 1,782 |
|
|
| 52 |
|
|
| 703 |
|
Non-cash interest income |
|
| (33 | ) |
|
| — |
|
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (4,718 | ) |
|
| (6,182 | ) |
|
| (3,578 | ) |
Inventories |
|
| 29 |
|
|
| (9,270 | ) |
|
| (1,042 | ) |
Income taxes receivable |
|
| 61 |
|
|
| (1,563 | ) |
|
| — |
|
Prepaid expenses and other current assets |
|
| (2,255 | ) |
|
| (582 | ) |
|
| (520 | ) |
Deposits and other assets |
|
| 11 |
|
|
| 93 |
|
|
| (63 | ) |
Accounts payable |
|
| 1,807 |
|
|
| 3,192 |
|
|
| 4,946 |
|
Accrued liabilities and other liabilities |
|
| 1,173 |
|
|
| 2,074 |
|
|
| 2,949 |
|
Net cash provided by (used in) operating activities |
| $ | 11,702 |
|
| $ | (5,352 | ) |
| $ | 11,424 |
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (10,300 | ) |
|
| (4,799 | ) |
|
| (1,940 | ) |
Purchases of available-for-sale debt securities |
|
| (68,388 | ) |
|
| — |
|
|
| — |
|
Proceeds from the sale of property, plant and equipment |
|
| — |
|
|
| 7 |
|
|
| 29 |
|
Notes receivable provided to related parties |
|
| — |
|
|
| (4,031 | ) |
|
| — |
|
Repayment of notes receivable provided to related parties |
|
| 846 |
|
|
| 3,200 |
|
|
| — |
|
Net cash used in investing activities |
| $ | (77,842 | ) |
| $ | (5,623 | ) |
| $ | (1,911 | ) |
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock pursuant to the initial public offering, net of issuance costs |
|
| 99,671 |
|
|
| — |
|
|
| — |
|
Proceeds from borrowings under term loan |
|
| 5,000 |
|
|
| — |
|
|
| — |
|
Proceeds from borrowings under equipment loan |
|
| 1,461 |
|
|
| 587 |
|
|
| — |
|
Proceeds from Paycheck Protection Program loan |
|
| 2,593 |
|
|
| — |
|
|
| — |
|
Proceeds from issuance of redeemable noncontrolling interest |
|
| — |
|
|
| — |
|
|
| 25 |
|
Proceeds from issuance of common stock, net of issuance costs |
|
| — |
|
|
| 14,097 |
|
|
| — |
|
Proceeds from borrowings under revolving line of credit |
|
| — |
|
|
| 1,325 |
|
|
| — |
|
Repayment of revolving line of credit |
|
| (1,325 | ) |
|
| — |
|
|
| — |
|
Repayment of equipment loan |
|
| (2,015 | ) |
|
| — |
|
|
| — |
|
Repayment of term loan |
|
| (8,245 | ) |
|
| (671 | ) |
|
| (671 | ) |
Repayment of Paycheck Protection Program loan |
|
| (2,593 | ) |
|
| — |
|
|
| — |
|
Repurchase of common stock |
|
| — |
|
|
| (14,289 | ) |
|
| — |
|
Payment of contingent consideration |
|
| (192 | ) |
|
| (409 | ) |
|
| (494 | ) |
Principal payments under finance lease obligation |
|
| (449 | ) |
|
| (428 | ) |
|
| (409 | ) |
Proceeds from exercise of stock options |
|
| 221 |
|
|
| 222 |
|
|
| 40 |
|
Proceeds from exercise of warrant |
|
| 283 |
|
|
| — |
|
|
| — |
|
Net cash provided by (used in) financing activities |
| $ | 94,410 |
|
| $ | 434 |
|
| $ | (1,509 | ) |
Net increase (decrease) in cash and cash equivalents |
| $ | 28,270 |
|
| $ | (10,541 | ) |
| $ | 8,004 |
|
Cash and cash equivalents at beginning of the period |
|
| 1,274 |
|
|
| 11,815 |
|
|
| 3,811 |
|
Cash and cash equivalents at end of the period |
| $ | 29,544 |
|
| $ | 1,274 |
|
| $ | 11,815 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 414 |
|
| $ | 340 |
|
| $ | 356 |
|
Cash paid for income taxes |
| $ | 2,214 |
|
| $ | 2,256 |
|
| $ | 20 |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in accounts payable and accrued liabilities |
| $ | 167 |
|
| $ | 928 |
|
| $ | 199 |
|
Deferred offering costs in accounts payable and accrued liabilities |
| $ | — |
|
| $ | 1,001 |
|
| $ | — |
|
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
1. Nature of the Business and Basis of Presentation
Vital Farms, Inc. (“Vital Farms”(the “Company,” “we,” “us” or “the Company”“our”) was incorporated in Delaware on June 6, 2013 and is headquartered in Austin, Texas. Vital FarmsThe Company packages, markets and distributes pasture-raised shell eggs, pasture-raised butter and other products. These products are principally sold under the trade namesname Vital Farms Alfresco Farms, Lucky Ladies and RedHill Farms,in addition to other trade names, primarily to retail and foodservice channels in the United States.
Vital Farms of Missouri, LLC Backyard Eggs, LLC, Barn Door Farms, LLC and Sagebrush Foodservice, LLC are allis a wholly owned subsidiariessubsidiary of Vital Farms. All significant intercompany transactions and balances have been eliminated in the audited consolidated financial statements.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the included disclosures are adequate, and the accompanying consolidated financial statements contain all adjustments necessary for a fair statement of our consolidated financial position as of December 31, 2023, consolidated results of operations and the consolidated cash flows for the fiscal years ended December 31, 2023, December 25, 2022 and December 26, 2021. Such adjustments are of a normal and recurring nature and certain reclassifications of previously reported amounts have been made to conform to the current year presentation. A reclassification of $1,539 has been made from accounts receivable, net to prepaids and other current assets, net in the consolidated balance sheet as of December 25, 2022 to conform to the current year presentation of our accounts receivable from the Company's network of farms.
Fiscal Year: The Company’s fiscal year ends on the last Sunday in December and contains either 52 or 53 weeks. Therefore, the financial results of certain 53-week fiscal years will not be exactly comparable to the prior and subsequent 52-week fiscal years. The fiscal year ended December 31, 2023 contains operating results for 53 weeks, while the fiscal years ended December 27, 2020, December 29, 2019,25, 2022, and December 30, 2018 all26, 2021 contain operating results for 52 weeks.
Impact of COVID-19 Pandemic: Due to the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on the Company’s business. The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on the timelines for the Company’s product development and expansion efforts. However, the extent to which the COVID-19 pandemic impacts the Company’s business, product development and expansion efforts, corporate development objectives and the value of and market for the Company’s common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease, including the roll-out of vaccines. The global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Forward Stock Split: In July 2020, the board of directors and the stockholders of the Company approved a 2.46-for-1 forward stock split of the Company’s outstanding common stock and preferred stock, which was effected on July 22, 2020. Stockholders entitled to fractional shares as a result of the forward stock split received a cash payment in lieu of receiving fractional shares. All common stock, preferred stock, and per share information has been retroactively adjusted to give effect to this forward stock split for all periods presented. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately increased and the respective per share value and exercise prices, if applicable, were proportionately decreased in accordance with the terms of the agreements governing such securities. There were no changes in the par values of the Company’s common stock and preferred stock as a result of the forward stock split.
Initial Public Offering: In August 2020, the Company completed its initial public offering (“IPO”) of 10,699,573 shares of common stock at an offering price of $22.00 per share. The Company offered 5,040,323 shares of common stock and the selling stockholders offered an additional 5,659,250 shares of common stock, including the underwriter’s option to purchase up to an additional 1,395,596 shares of common stock from the selling stockholders. The Company received gross proceeds of approximately $110,887 before deducting underwriting discounts, commissions and offering related transaction costs; the Company did not receive any proceeds from the sale of shares by the selling stockholders. Upon the closing of the IPO in August 2020, all of the then-outstanding shares of preferred stock automatically converted into 8,192,876 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. The consolidated financial statements as of December 27, 2020, including share and per share amounts, include the effects of the IPO.
Secondary Public Offering: In November 2020, the Company completed a secondary public offering of 5,000,000 shares of common stock from selling stockholders in which no proceeds from the sale of shares were received by the Company and the Company incurred $0.5 million of expenses.
2. Summary of Significant Accounting Policies
Use of Estimates:The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates principally include revenue recognition, determination of useful lives for property and equipment, trade spend accruals, goodwill, allowance for doubtful accounts,credit losses, inventory obsolescence, valuation of common stock prior to IPO, stock option valuations, accrualaccrued liabilities, income taxes and income taxes.contingencies. Actual results could differ from those estimates.
The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on the timelines for the Company’s product developmentConcentrations of Customers and expansion efforts and the Company’s corporate development objectives. However, future COVID-19 developments are highly uncertain and unpredictableRisk: A substantial amount of our shell egg processing occurs at this time; therefore, our estimates and assumptions about future events cannot be determined with certainty and require the useEgg Central Station shell egg processing facility. Any shutdown or period of management’s judgment. As of the date of issuance of these consolidated financial statements, the Company is not aware of any specific event or circumstance related to the ongoing COVID-19 pandemic that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differencesreduced production at Egg Central Station, which may be materialcaused by regulatory noncompliance or other issues, as well as factors beyond our control, such as natural disaster, weather, fire, power interruption, work stoppage, disease outbreaks or pandemics, equipment failure or delay in raw materials delivery, would significantly disrupt our ability to the Company’s consolidated financial statements.deliver our products in a timely manner, meet our contractual obligations and operate our business.
Deferred Offering Costs: The Company capitalized certain legal, accounting and other third-party fees that are directly related to the Company’s in-process equity financings until such financings were completed.Upon closing the IPO in August 2020, all deferred offering costs were reclassified from prepaid and other current assets and recorded against the IPO proceeds reducing additional paid-in capital.
Concentrations of Credit Risk and Significant Customers: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, accounts receivable and accounts receivable.derivative instruments. The Company maintains deposits with large financial institutions that the Company believes are of high credit quality. At times the Company’s cash and cash equivalents balances with individual banking institutions are in excess of federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents balances.
As ofThe Company's customer concentration for the fiscal year ended December 27, 2020 and December 29, 2019, the Company had customers that individually represented 10% or more of the Company’s accounts receivable, net. During fiscal years 2020, 2019, and 2018 the Company also had customers that individually exceeded 10% or more of the Company’s net revenue. Significant customer information is presented below31, 2023 was as follows:
|
| Net Revenue Year Ended December 27, 2020 |
|
| Net Revenue Year Ended December 29, 2019 |
|
| Net Revenue Year Ended December 30, 2018 |
|
| Accounts Receivable, Net As Of December 27, 2020 |
|
| Accounts Receivable, Net As Of December 29, 2019 |
|
Customer A |
| 15% |
|
| 35% |
|
| 36% |
|
| 8% |
|
| 25% |
|
Customer B |
| 18% |
|
| * |
|
| * |
|
| 20% |
|
| * |
|
Customer C |
| 12% |
|
| 11% |
|
| 10% |
|
| 9% |
|
| * |
|
Customer D |
| 13% |
|
| 14% |
|
| 14% |
|
| 15% |
|
| * |
|
71
|
| Net Revenue |
| Net Revenue |
| Net Revenue |
| Accounts Receivable, Net |
| Accounts Receivable, Net |
Customer A |
| 25% |
| 26% |
| 18% |
| 18% |
| 23% |
Customer B |
| * |
| 11% |
| 12% |
| 12% |
| 12% |
Customer C |
| * |
| * |
| 14% |
| * |
| * |
Customer D |
| * |
| * |
| 10% |
| * |
| * |
Customer E |
| * |
| * |
| * |
| 11% |
| 13% |
Customer F |
| * |
| * |
| * |
| 11% |
| * |
*Revenue and/or accounts receivable was Denotes percentage less than 10%.
|
Cash and Cash Equivalents: The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. As of December 27, 2020,31, 2023 and December 25, 2022, cash and cash equivalents consisted of cash on deposit with balances denominated in U.S. dollars and investments in money market funds.
Investment Securities: The Company accounts for its investment securities in accordance with ASC Topic 320, Investments-Debt and Equity Securities. The Company considers all of its debt securities for which there is a determinable fair market value, and there are no restrictions on the Company'sCompany’s ability to sell within the next 12 months, as available-for-sale. We have classifiedThe Company classifies these securities as current, because the amounts invested are available for current operations. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, recorded in other comprehensive income until the security is settled or sold, except for changes in allowance for expected credit losses, which are reported on a gross basis in other expense.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific identification method with realized gains and losses on the sale of debt securities and declines in value due to credit-related factors, reclassified out of accumulated other comprehensive income when sold and recorded in other income. Income tax effects related to realized gains and losses on available-for-sale securities are released from accumulated other comprehensive income quarterly with the recognition of the Company’s tax provision. Interest and dividends on securities classified as a separate component of stockholders' equity.available-for-sale are recorded in interest income.
Variable Interest Entity: The Company consolidates all entities where a controlling financial interest exists. The Company has considered its relationshipsrelationship with a certain entityOvabrite, Inc. to determine whether the Company has a variable interest in that entity, and if so, whether the Company is the primary beneficiary of the relationship. GAAP requires variable interest entities (“VIEs”) to be consolidated if an entity’s interest in the VIE is a controlling financial interest. Under the variable model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The consolidation status of a VIE may change as a result of such reassessments. Changes in consolidation status are applied prospectively in accordance with GAAP.
Segment Information: The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer,Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of evaluating financial performance and allocating resources. All of the Company’s long-lived assets and customers are located in the United States.
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. The three levels of inputs that may be used to measure fair value are defined below:
| • Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| • Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • Level 3 - Unobservable inputs that are supported by little or no market activity that are significant to determining |
The carrying amounts of the Company’s long-term debt approximate the fair value based on consideration of current borrowing rates available to the Company (Level 2 input). assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.